Universal Corporation Annual Report 2007

FY2007 Annual Report · Universal Corporation

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2007 Universal Corporation

ANNUAL REPORT

ABOUT THE COMPANY

Universal Corporation, headquartered in Richmond, Virginia, was founded in 1918. The Company,
through its subsidiaries and afﬁ liates, is one of the world’s leading leaf tobacco merchants and processors.
The Company previously had operations in lumber and building products and in agri-products, but sold
most of those businesses in ﬁ scal year 2007. The non-tobacco businesses are reported as discontinued
operations in the accompanying ﬁ nancial statements. Universal conducts business in more than 35
countries and employs over 25,000 permanent and seasonal workers. Effective in 2004, the Company
changed its ﬁ scal year end from June 30 to March 31. Financial results for 2004 are for the nine-month
transition year ended March 31, 2004.

PERFORMANCE GRAPH

$250

$200

$150

$100

$50

Universal Corporation

S & P Midcap 400 Index

Peer Group Index

2002

2003

2004

2005

2006

2007

CUMULATIVE TOTAL RETURN ON COMMON STOCK

At June 30

At March 31

2002

2003

2004

2005

2006

2007

Universal Corporation

S & P Midcap 400

Peer Group

100.00

119.76

99.29

107.97

147.53

125.85

110.54

137.32

138.97

102.14

114.75

169.02

80.97

200.07

183.30

153.77

FINANCIAL HIGHLIGHTS

Fiscal Year Ended
March 31, 2007

Fiscal Year Ended
March 31, 2006

Fiscal Year Ended
March 31, 2005

in thousands, except per share data

OPERATIONS

Sales and other operating revenues

$ 2,007,272

$ 1,781,312

$ 1,667,193

Operating income

Income (loss) from continuing operations

Net income

163,591

80,411

44,352

59,264
( )
2,973

7,940

150,232

68,556

96,013

PER COMMON SHARE

Income (loss) from continuing operations — diluted

$ 2.52

( )
$ 0.12

$ 2.66

Net income — diluted

Dividends declared

Indicated 12-month dividend rate

Market price at year-end

AT YEAR END

Working capital

Shareholders’ equity

1.13

1.74

1.76

61.35

0.31

1.70

1.72

36.77

3.73

1.62

1.68

45.77

$ 852,391

$ 877,051

$ 819,047

1,030,733

964,871

822,388

Income (Loss) From Continuing
Operations Per Diluted Share

Return on Beginning Equity

Stock Price

in dollars

percent

in dollars at end of ﬁ scal year

7
4
.
3

*
6
3
.
6 3
6
.
2

2
5
.
2

8
.
8
1

*
1
.
6
1

6
.
2
1

5
3
.
1
6

2
8
.
0
5

7
7
.
5
4

0
3
.
2
4

7
7
.
6
3

)

2
1
.
0

(

1
.
3

0
.
1

* Nine-month transition year

PERFORMANCE GRAPH

The performance graph compares the cumulative total shareholder return on Common Stock for the last
ﬁ ve ﬁ scal years with the cumulative total return for the same period of the Standard & Poor’s Midcap
400 Stock Index and the peer group index. The peer group represents Alliance One International, Inc.
Standard Commercial Corporation and DIMON Incorporated merged to form Alliance One International,
Inc. effective May 13, 2005. In prior years, the Company included Standard Commercial Corporation and
DIMON Incorporated in its peer group. Because DIMON Incorporated was the surviving company in the
merger, the information set forth in the table is based on DIMON Incorporated’s historical performance
prior to the merger. The graph assumes that $100 was invested on June 30, 2002, in Common Stock and
in each of the comparative indices, in each case with dividends reinvested.

1 | 2007 Annual Report

To Our Shareholders

Fiscal year 2007 was a very important year for your Company. Our performance was greatly

improved, but perhaps more importantly, we took numerous actions that we believe will improve our

performance in the future and enable us to capitalize on opportunities.

In ﬁ scal year 2007, we focused on the improvement and correct positioning of our core tobacco

business. We sold most of our non-tobacco businesses in September 2006, followed by smaller sales

since then, and the remainder is held for sale. We also made the difﬁ cult decision to exit our direct

involvement in growing ﬂ ue-cured tobacco in Malawi and Zambia, although we continue to purchase

ﬂ ue-cured tobacco produced in that region.

We had a good year, and our stock price rose over 66% during the twelve months. Despite the

changes and challenges we faced in ﬁ scal year 2007, our continuing operations earned $80 million,

or $2.52 per diluted share, including restructuring and impairment charges of $31 million, or $0.93

per diluted share, primarily related to the African growing projects. This is a substantial improvement

over last year’s loss from our tobacco operations of $3 million, which included nearly $58 million in

restructuring and impairment charges related to the closure of our Danville, Virginia, factory and the

deconsolidation of our Zimbabwe operations.

Each of our reporting segments contributed to the improvement. Results for the North America

segment increased by $15 million, or over 60%, due to increased exports and processing volumes,

cost savings associated with operating in one factory, sales of old stock burley tobacco, and better

pricing. Our Other Regions segment showed an increase in earnings of nearly $60 million through a

combination of strong volumes, improved pricing, and cost control, as well as the favorable resolution

of a Brazilian tax case and the absence of Zimbabwe losses in 2007. Results for this segment included

provisions for losses on supplier ﬁ nancing of $32 million, compared to $29 million in the prior year.

Over half of the charges in each year related to ﬁ nancing ﬂ ue-cured growing projects in Africa. In

addition, we recognized tobacco inventory write-downs of $13 million this year and $10 million

last year related to those growing projects. Our Other Tobacco Operations segment also showed

substantial improvement in operating income on better sales of dark air-cured wrapper and leaf, the

closure of Columbian dark air-cured operations, and lower overhead.

For several years, we have been operating in an oversupply environment, primarily in ﬂ ue-cured

leaf in Brazil where crop quality and a steadily appreciating local currency made that tobacco less

attractive. We have reduced our crop size in Brazil, and worldwide burley tobacco appears to be in

short supply. We have also been successful in reducing our operating and overhead costs.

Universal Corporation | 2

We will continue our efforts to improve results in ﬁ scal year 2008, but we have a few challenges

facing us. With the decision to exit our direct involvement in our ﬂ ue-cured growing projects in Malawi

and Zambia, we have reduced our investment in the related farming assets and do not anticipate

signiﬁ cant write downs on these projects going forward. However, ﬂ ue-cured tobacco production will be

lower, and we will have to adjust our operations to reﬂ ect reduced processing volumes.

In addition, Brazil is now almost ﬁ nished buying a smaller, better quality crop, but our local costs

are rising as the dollar continues to weaken against the Brazilian real and other local currencies. Also,

North America will not repeat its signiﬁ cant old crop burley tobacco sales this year, and it will have to

cope with another reduction in Canadian volume.

We are a much different company today than we were at the beginning of ﬁ scal year 2007. We

are leaner, and we are focused on our core business – leaf tobacco. We have eliminated unproﬁ table

activities, and our ﬁ nancial position has dramatically improved.

We believe that our future success is in large part dependent on remaining the low cost provider

of high quality products and services to manufacturers of tobacco products. To achieve our goal, we

must continue to focus on improving the efﬁ ciency of our operations, lowering our overhead costs,

and meeting the expectations of our customers.

Many of the tough decisions and actions we have taken over the past two ﬁ scal years would not

have been possible without the support of our shareholders and our many dedicated employees and

colleagues around the world. We are grateful for their efforts in 2007.

Finally, it is with great sadness that we mark the passing of Thomas R. Towers, Director Emeritus,

in January 2007. Tom was a trusted and admired colleague who took great delight in all aspects of

our business and was a key ﬁ gure in the development of our international organization. He was a true

gentleman, and his guidance and presence will be greatly missed.

Allen B. King
Chairman and Chief Executive Ofﬁ cer

George C. Freeman III
President

3 | 2007 Annual Report

Universal Corporation

Universal Leaf
Tobacco Company, Inc.

DIRECTORS

CHAIRMAN EMERITUS

DIRECTORS

Allen B. King
Chairman

Orlando Astuti

W. Keith Brewer

Theodore G. Broome

Barry F. Dillehay

Charles A.M. Graham

Clay G. Frazier

George C. Freeman, III

Robert E. Jones

Claude G. Martin, Jr.

David C. Moore

Ray M. Paul, Jr.

Hartwell H. Roper

Edward M. Schaaf, III

Jonathan R. Wertheimer

IN MEMORY OF

Thomas R. Towers
1925-2007
Director Emeritus

Henry H. Harrell

OFFICERS

Allen B. King
Chairman and
Chief Executive Ofﬁ cer

George C. Freeman, III
President

Hartwell H. Roper
Vice President and
Chief Financial Ofﬁ cer

David C. Moore
Vice President and
Chief Administrative Ofﬁ cer

Karen M. L. Whelan
Vice President and Treasurer

William J. Coronado
Vice President

Preston D. Wigner
General Counsel and Secretary

Robert M. Peebles
Controller

Joseph W. Hearington, Jr.
Corporate Director, Internal Auditing

➋

Pamela J. Kepple
Corporate Director, Taxes

➊

Karol O. Wilson
Corporate Director, Taxes

Catherine H. Claiborne
Assistant Secretary

John B. Adams, Jr. 3 4
President and Chief Executive Ofﬁ cer
Bowman Companies

Chester A. Crocker 2 3
Professor of Strategic Studies
Walsh School of Foreign Service
Georgetown University

Joseph C. Farrell 1 2 5
Retired Chairman, President,
and Chief Executive Ofﬁ cer
The Pittston Company,
now known as The Brink’s Company

Charles H. Foster, Jr. 1 3*5
Chairman Emeritus
LandAmerica Financial Group, Inc.

Thomas H. Johnson 2 4
Retired Chairman and
Chief Executive Ofﬁ cer
Chesapeake Corporation

Allen B. King 1*3
Chairman and
Chief Executive Ofﬁ cer
Universal Corporation

Eddie N. Moore, Jr. 2 4
President
Virginia State University

Jeremiah J. Sheehan 1 4 5*
Retired Chairman and
Chief Executive Ofﬁ cer
Reynolds Metals Company

Hubert R. Stallard 1 2* 5
Retired President and
Chief Executive Ofﬁ cer
Bell Atlantic-Virginia, Inc.,
now known as Verizon Virginia, Inc.

Walter A. Stosch 3 4*
Principal
Stosch, Dacey & George, P.C.

Dr. Eugene P. Trani 2 4
President
Virginia Commonwealth University

➊ Retired March 31, 2007
➋ Elected April 1, 2007

1 Executive Committee
2 Pension Investment
Committee
3 Finance Committee
4 Audit Committee
5 Executive Compensation,
Nominating and Corporate
Governance Committee
* Committee Chairman

Universal Corporation | 4

2007 Universal Corporation

REPORT ON FORM 10-K

[This page intentionally left blank.]

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2007.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .

Commission file number 1-652
UNIVERSAL CORPORATION
(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)

1501 North Hamilton Street,
Richmond, Virginia
(Address of principal executive offices)

54-0414210
(I.R.S. Employer
Identification Number)

23230
(Zip Code)

Registrant’s telephone number, including area code: 804-359-9311

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, no par value
Preferred Share Purchase Rights

Name of each exchange on
which registered
New York Stock Exchange
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [x] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
Yes [x] No [ ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [x]

Accelerated filer [ ]

Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]

The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $708 million at
September 30, 2006.

As of May 25, 2007, the total number of shares of common stock outstanding was 27,026,971.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the 2007 Proxy Statement for the Annual Meeting of Shareholders of the registrant is
incorporated by reference into Part III hereof.

UNIVERSAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

PART I

Business…………………………………………………….............…………………………………………

Risk Factors………………………………………………………………………………………….............…

Unresolved Staff Comments……………………………………………………………………………………

Properties………………………………………………………………………………………………………

Legal Proceedings………………………………………………………………………………………………

Submission of Matters to a Vote of Security Holders…………………………………………………………

Page

Market for Registrant's Common Equity, Related Stockholder Matters

PART II

and Issuer Purchases of Equity Securities…………………………………………………………............

15
Selected Financial Data………………………………………………………………………………………… 16

Management's Discussion and Analysis of Financial Condition and

Results of Operations………………………………………………………………………………………

Quantitative and Qualitative Disclosures About Market Risk…………………………………………………

Financial Statements and Supplementary Data………………………………………………………………… 33
Changes in and Disagreements With Accountants on Accounting

and Financial Disclosure……………………………………………………………………….............…… 79
Controls and Procedures………………………………………………………………………………………

Other Information………………………………………………………………………………………………

Directors, Executive Officers and Corporate Governance……………………………………………………… 80

PART III

Executive Compensation………………………………………………………………………………………

Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters…………………….............………………….............………………………

Certain Relationships and Related Transactions, and Director Independence……………………………......

Principal Accounting Fees and Services…………….…………………………………………………………

Item No.

1A.

1B.

7A.

9A.

9B.

10.

11.

12.

13.

14.

15.

Exhibits, Financial Statement Schedules…………………………..…………..............………………………

PART IV

Signatures…………………………………………….………………………………………........………..

General

PART I

This Form 10-K, which we refer to herein as our Annual Report, contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among other
things, these statements relate to Universal Corporation’s financial condition, results of operations and future business plans,
operations, opportunities, and prospects. In addition, Universal Corporation and its representatives may from time to time
make written or oral forward-looking statements, including statements contained in other filings with the Securities and
Exchange Commission and in reports to shareholders. These forward-looking statements are generally identified by the use
of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and
similar expressions or words of similar import. These forward-looking statements are based upon management’s current
knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results,
performance, or achievements to be materially different from any anticipated results, prospects, performance, or
achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include: anticipated
levels of demand for and supply of our products and services; costs incurred in providing these products and services; timing
of shipments to customers; changes in market structure; changes in exchange rates; and general economic, political, market,
and weather conditions. For a description of factors that may cause actual results to differ materially from such forward-
looking statements, see Item 1A, “Risk Factors.” We caution investors not to place undue reliance on any forward-looking
statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-
looking statements made in this report. In addition, the discussion of the impact of current trends on our business in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Information Regarding
Trends and Management’s Actions” should be read carefully in connection with evaluating our business and the forward-
looking statements contained in this Annual Report.

This Annual Report uses the terms “Universal”, “the Company”, “we”, “us”, and “our” to refer to Universal
Corporation and its subsidiaries when it is not necessary to distinguish among Universal Corporation and its various
operating subsidiaries or when any distinction is clear from context.

Item 1. Business

The Company

Overview

We are one of the world’s leading leaf tobacco merchants and processors, based on volumes handled by our
subsidiaries and affiliates. Previously, we also had lumber and building products and agri-products operations; however, we
sold the lumber and building product operations, along with a portion of our agri-products operations, on September 1, 2006.
In December 2006, we adopted a plan to sell the remaining agri-products operations. One of those agri-products businesses
was sold in January 2007, and one was sold in May 2007. The remaining agri-product operations are held for sale. We
report the assets and liabilities of the lumber and building products and agri-products businesses as discontinued operations
for all periods in the accompanying financial statements. Our worldwide tobacco business, which has been our principal
focus since our founding in 1918, now represents our continuing operations. The reportable segments for our flue-cured and
burley tobacco operations are North America and Other Regions. Our third reportable segment is Other Tobacco Operations,
which comprises our dark tobacco business, our oriental tobacco joint venture, and certain services. We generated
approximately $2.0 billion in consolidated revenues and earned approximately $208.7 million in total segment operating
income in fiscal year 2007. Universal Corporation is a holding company that operates through numerous directly and
indirectly owned subsidiaries. Universal Corporation’s primary subsidiary is Universal Leaf Tobacco Company,
Incorporated. See Exhibit 21, “Subsidiaries of the Registrant,” for additional subsidiary information.

Key Operating Principles

We believe that by following several key operating principles we will continue to produce strong results and

enhance shareholder value. These key operating principles are:

•

Low-cost quality producer. Our goal is to be the low-cost producer of quality products and services for our
customers. We focus on producing a quality product in a cost-effective manner. We sponsor programs in good
agricultural practices, reduction of non-tobacco related materials, and social responsibility, among other programs.

•

Strong local management. We operate with strong local management in major leaf tobacco markets. We believe
that by having strong local management we can react quickly to changes in market conditions to ensure that we
continue to deliver the high quality, reasonably priced products our customers expect.

Strategic alliances. We foster strategic alliances with our major customers to the benefit of all parties. These
alliances with major manufacturers are, in our opinion, especially appropriate to the leaf tobacco industry where
volume at an appropriate price is a key factor in long-term profitability. However, the need for adequate factory
volumes must be balanced with the cost of sourcing incremental volumes in markets where we provide financing to
farmers. Alliances permit the optimization of our inventory levels to reduce risk of loss during market downturns by
enabling us to target our tobacco purchases against customer purchase indications.

• Diversified sources. We strive to maintain diversified sources of leaf tobacco to minimize reliance on any one area
so long as customers are willing to support such diversity. Historically, North America, South America, and Africa
each have provided between 20% and 30% of the aggregate volume of flue-cured and burley tobacco that we handle.
However, because of the decline in Zimbabwe crops in Africa, the South American share increased to about 33% of
the aggregate volume that we handled from the 2006 crop. We are ending our direct involvement in the production
of flue-cured tobacco in Africa as we have experienced unsatisfactory results from our flue-cured growing projects.
We are taking the necessary steps to reduce our costs there.

•

Financial strength. We believe that our financial strength is important, because it enables us to fund our business
efficiently and make investments in our business when an appropriate opportunity is identified. We continually
work to improve our credit worthiness.

Additional Information

Our website address is www.universalcorp.com. We post regulatory filings and other documents on this website as
soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange
Commission. These filings include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
K, Section 16 reports on Forms 3, 4, and 5, and any amendments to those reports filed with or furnished to the Securities and
Exchange Commission. All such filings on our website are available free of charge. Information on our website is not
deemed to be incorporated by reference into this Form 10-K.

In addition, our Corporate Governance Guidelines, Business Ethics Policy, and charters for the Audit Committee,
the Executive Committee, the Executive Compensation, Nominating, and Corporate Governance Committee, the Pension
Investment Committee, and the Finance Committee are available free of charge to shareholders and the public through the
“Investors/Corporate Governance” section of our website. Printed copies of the foregoing are available to any shareholder
upon written request to our Treasurer at the address set forth on the first page of this Annual Report.

B. Description of Business

General

Our business involves selecting, buying, processing, packing, storing, shipping, and financing leaf tobacco for sale
to, or for the account of, manufacturers of consumer tobacco products throughout the world. We do not manufacture
cigarettes or other consumer tobacco products. Through various operating subsidiaries and unconsolidated affiliates located
in tobacco-growing countries around the world, we process and/or sell flue-cured and burley tobaccos, dark air-cured
tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used principally in the manufacture of
cigarettes, and dark air-cured tobaccos are used mainly in the manufacture of cigars, pipe tobacco, and smokeless tobacco
products. We generate our revenues from product sales, processing fees, and fees for other services. About 80% of our
volume is derived from sales to a limited number of large, multinational cigarette manufacturers.

Our sales consist primarily of flue-cured and burley tobaccos. For the fiscal year ended March 31, 2007, our flue-
cured and burley operations accounted for 86% of our revenues and 82% of our segment operating income. Flue-cured and
burley tobaccos, along with oriental tobaccos, are the major ingredients in American-blend cigarettes. According to industry
sources, worldwide cigarette consumption increased, on average, about 0.4% per year during the ten years that ended in 2006.
We believe that future increases in worldwide cigarette consumption will have little or no effect on demand for the tobacco
we process because of increasing efficiencies in our customers’ use of leaf. This may mean that demand for flue-cured,
burley, and oriental leaf tobacco has peaked and will not grow with current levels of growth in cigarette consumption.
Industry data also shows, on average, a 0.2% decrease per year during the ten years ended in 2006 in consumption of
American-blend cigarettes, which could indicate a further dampening of demand for burley and oriental tobacco.

Because unprocessed, or green tobacco, is a perishable product, processing of leaf tobacco is an essential service to
our customers. Our processing of leaf tobacco includes grading in the factories, blending, quality picking, separation of leaf
lamina from the stems, drying, and packing to precise moisture targets for proper aging. Accomplishing these tasks generally
requires investment in plants and machinery in areas where the tobacco is grown. Processed tobacco that has been properly
aged can be stored by customers for a number of years prior to use, but most processed tobacco is used within two to three
years.

We are a major purchaser and processor in the chief exporting regions for flue-cured and burley tobacco. We
estimate that we usually purchase between 25% and 30% of the annual production of such tobaccos in Brazil and between
35% and 45% in Africa. These percentages can change from year to year based on the size, price, and quality of the crops.
We also have a major processing facility in the United States, which normally handles between 35% and 45% of U.S. flue-
cured and burley tobacco production. In the United States, we sell processed U.S. tobacco to several cigarette manufacturers,
and we process U.S. flue-cured and burley tobacco on a fee basis, which we also refer to as “toll processing”. We participate
in the procurement, processing, and sale of oriental tobacco through ownership of a 49% equity interest in what we believe to
be the largest oriental leaf tobacco merchant in the world, Socotab, L.L.C. In addition, we maintain a presence, and in certain
cases, a leading presence, in virtually all other major tobacco growing regions in the world. We believe that our leading
position in the leaf tobacco industry is based on our operations in all of the major source areas, our development of
processing equipment and technologies, our financial position, our ability to meet customer demand, and our long-standing
relationships with customers. We also have a leading position in worldwide dark tobacco markets. Our dark tobacco
operations are located in most of the major producing countries (i.e., the United States, the Dominican Republic, Indonesia,
Italy, Nicaragua, Paraguay, the Philippines, and Brazil) as well as other markets. Dark tobaccos are typically used in the
manufacture of cigars, pipe tobacco, smokeless tobacco products, and components of certain “roll-your-own” products.

Sales are made by our sales force and, to a lesser degree, through the use of commissioned agents. Most customers

are long-established tobacco product manufacturers.

We conduct our business in varying degrees in a number of countries, including Argentina, Bangladesh, Belgium,
Brazil, Canada, the Dominican Republic, France, Germany, Guatemala, Hungary, India, Indonesia, Italy, Malawi, Mexico,
Mozambique, the Netherlands, Nicaragua, Paraguay, the People’s Republic of China, the Philippines, Poland, Russia,
Singapore, South Africa, Spain, Switzerland, Tanzania, the United States, Zambia, and Zimbabwe. In addition, Socotab,
L.L.C. has oriental tobacco operations in Bulgaria, Greece, Macedonia, and Turkey.

In the majority of countries where we operate, including Argentina, Brazil, Guatemala, Hungary, Indonesia, Italy,
Malawi, Mexico, Mozambique, Philippines, Poland, Tanzania, the United States, Zambia, and Zimbabwe, we contract
directly with tobacco farmers or tobacco farmer cooperatives, in most cases before harvest, and thereby take the risk that the
delivered quality and quantity may not meet market requirements. Outside the United States, we also provide agronomy
services and crop advances of, or for, seed, fertilizer, and other supplies. Tobacco in Canada, and to a certain extent, India,
Malawi, the United States, and Zimbabwe, is purchased under an auction system.

We have substantial capital investments in Brazil, and in southern Africa, and the performance of our operations in
these regions can materially affect our earnings. For example, in fiscal year 2006, poor crops due to adverse weather
conditions and high costs caused by the strong currency in Brazil caused a significant decline in tobacco earnings. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors that May Affect Future
Results,” and “Risk Factors.”

Our foreign operations are subject to international business risks, including unsettled political conditions,
expropriation, import and export restrictions, exchange controls, and currency fluctuations. During the tobacco season in
many of the countries listed above, we advance funds and guarantee local loans, each in substantial amounts, for the purchase
of tobacco. The preponderance of these seasonal advances and loan guarantees terminate in one year or less. Most tobacco
sales are denominated in U.S. dollars, thereby reducing our foreign currency exchange risk. See “Risk Factors.”

For a discussion of recent developments and trends in, and factors that may affect, our business, see “Management’s

Discussion and Analysis of Financial Condition and Results of Operations,” and “Risk Factors.”

Seasonality

Our operations are seasonal in nature. Tobacco in Brazil is usually purchased from January through July, while the
markets in Malawi generally open around April and continue into the fall. Farmers begin to sell U.S. flue-cured tobacco in
late July and the marketing season lasts for approximately four months. U.S. burley tobacco farmers deliver their crop from
mid-November through mid-February. These different marketing periods reduce the overall seasonality of our business.

We normally operate our processing plants for approximately seven to nine months of the year. During this period,
inventories of green tobacco, inventories of redried tobacco, and trade accounts receivable normally reach peak levels in
succession. Cash and current liabilities, particularly short-term notes payable to banks and customer advances, are means of
financing this expansion of current assets and normally reach their peak usage during this processing period. Our balance
sheet at our fiscal year end normally reflects seasonal expansions in working capital in South America, Central America, and
Western Europe. However, in recent years later crops in South America have moved South American working capital
expansion into the first quarter.

Customers

A material part of our business is dependent upon a few customers. For the year ended March 31, 2007, each of
Altria Group, Inc. and Japan Tobacco Inc., including its respective affiliates, accounted for more than 10% of our revenues
from continuing operations. The loss of, or substantial reduction in business from, either of these customers or any other
significant customer would have a material adverse effect on our results. We have long-standing relationships with these
customers.

We had orders from customers for approximately $475 million of our tobacco inventories at March 31, 2007. Based
upon historical experience, we expect that at least 90% of such orders will be delivered during the following twelve months.
Delays in the delivery of orders can result from such factors as changing customer requirements for shipment, container
availability, and port access.

We recognize sales and revenue at the time that title to the tobacco and risk of loss passes to our customer.
Individual shipments may be large, and since the customer typically specifies shipping dates, our financial results may vary
significantly between reporting periods due to timing of sales.

Competition

The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based on the ability
to satisfy customer specifications in the buying, processing, and financing of tobacco, as well as the price charged for
products and services. Competition varies depending on the market or country involved. The number of competitors varies
from country to country, but there is competition in most areas to buy the available tobacco. Our principal competitor is
Alliance One International, Inc. (“Alliance One”). Alliance One operates in many of the countries where we operate. We
believe that we hold the larger worldwide market share based on volume handled by our subsidiaries and affiliates.
However, the market shares do not differ substantially between the two companies. British American Tobacco p.l.c., a
multinational tobacco product manufacturer, has subsidiaries that also compete with us in some markets. In most major
markets, smaller competitors are very active. These competitors typically have lower overhead requirements and provide less
support to farmers. Due to their lower cost structures, they can often offer a price on products that is lower than our price.
However, we believe that we provide quality controls that are necessary for our customers and make our products highly
competitive.

Reportable Segments

We evaluate the performance of our business by geographic region, although the dark air-cured and oriental tobacco
businesses are each evaluated on the basis of their worldwide operations. Performance of the oriental tobacco operations is
evaluated based on our equity in the pretax earnings of our affiliate. Under this structure, we have the following primary
operating segments: North America, South America, Africa, Europe, Asia, Dark Air-Cured, Special Services, and Oriental.
North America, South America, Africa, Europe, and Asia are primarily involved in flue-cured and/or burley leaf tobacco
operations for supply to cigarette manufacturers. Dark Air-Cured supplies dark air-cured tobacco to manufacturers of cigar,
pipe tobacco, and smokeless tobacco products, and Oriental supplies oriental tobacco to cigarette manufacturers. From time
to time, the segments may trade in tobaccos that differ from their main varieties, but those activities are not significant to
their overall results. Special Services provides just-in-time inventory services for certain customers and laboratory services
including physical and chemical product testing for customers.

The five regional operating segments serving our cigarette manufacturer customer base share similar characteristics
in the nature of their products and services, production processes, class of customer, product distribution methods, and
regulatory environment. Based on the applicable accounting guidance, four of the regions – South America, Africa, Europe,
and Asia – are aggregated into a single reporting segment, Other Regions, because they also have similar economic
characteristics. North America is reported as an individual operating segment because its economic characteristics are
dissimilar from the other regions, as its operations do not require significant working capital investments for crop financing
and inventory, and toll processing is an important source of its operating income. The Dark Air-Cured, Special Services, and
Oriental segments, which have dissimilar characteristics in some of the categories mentioned above, are reported as Other
Tobacco Operations because each is below the measurement threshold for separate reporting.

Financial Information about Segments

Our North America and Other Regions segments, which are part of our flue-cured and burley tobacco operations,
accounted for 17% and 68% of our revenues and 19% and 63% of our segment operating income, respectively, in fiscal year
2007. Our Other Tobacco Operations segment accounted for 14% of our revenues and 18% of our segment operating income
in fiscal year 2007. Sales and other operating revenues and operating income attributable to our reportable segments for
each of the last three fiscal years along with segment assets for each reportable segment at March 31, 2007, 2006, and 2005,
are set forth in Note 14 to our consolidated financial statements, which are included in this Annual Report. Information with
respect to the geographic distribution of our revenues and long-lived assets is also set forth in Note 14 to our consolidated
financial statements.

Employees

We employed over 25,000 employees throughout the world during the fiscal year ended March 31, 2007. This

figure is estimated because the majority of our personnel are seasonal employees.

D. Research and Development

No material amounts were expended for research and development during the fiscal years ended March 31, 2007,

2006, or 2005.

Patents, etc.

We hold no material patents, licenses, franchises, or concessions.

F. Government Regulation, Environmental Matters and Other Matters

Our business is subject to general governmental regulation in the United States and in foreign jurisdictions where we
conduct business. Such regulation includes, but is not limited to, matters relating to environmental protection. To date,
governmental provisions regulating the discharge of material into the environment have not had a material effect upon our
capital expenditures, earnings, or competitive position. See ”Risk Factors” for a discussion of government regulations and
other factors that may affect our business.

Item 1A. Risk Factors

Operating Factors

The leaf tobacco industry is highly competitive, and we are heavily reliant on a few large customers.

We are one of two major independent global competitors in the highly competitive leaf tobacco industry, both of
whom are reliant upon a few large customers. The loss of one of those large customers or a significant decrease in their
respective demand for our products or services could significantly decrease our sales of products or services, which would
have a material adverse effect on our results of operations. The competition among leaf tobacco merchants is based on the
ability to meet customer specifications in the buying, processing, and financing of tobacco, as well as the price charged for
products and services. However, because we, like our competitors, rely upon a few significant customers, the consolidation or
failure of any of these large or significant customers could contribute to a significant decrease in our sales of products and
services.

Our financial results can be significantly affected by changes in the balance of supply and demand for leaf tobacco.

Because we are a leaf tobacco merchant, our financial results can be significantly affected by changes in the overall
balance of worldwide supply and demand for leaf tobacco. The demand for tobacco, which is based upon customers’
expectations of their future requirements, can change from time to time depending upon internal and external factors
affecting the demand for their products. Our customers’ expectations, and thus their demand for leaf tobacco, are influenced
by a number of factors, including:

•

trends in the global consumption of cigarettes,

trends in sales of cigars and other tobacco products, and

levels of competition among our customers.

The total supply of tobacco at any given time is a function of current tobacco production, inventories held by
manufacturers, and the volumes of uncommitted stocks of processed tobacco from prior years’ production. Production of
tobacco in a given year may be significantly affected by such factors as:

•

the amount of tobacco planted by farmers throughout the world,

• weather and natural disasters, and

•

crop disease.

Any significant change in these factors could cause a material imbalance in the supply and demand for tobacco,

which would affect our results of operations.

Our financial results will vary according to growing conditions, customer requirements, and other factors. These factors
also reduce the ability to gauge our performance and increase the risk of an investment in Universal.

Our financial results, particularly the quarterly financial results, may be significantly affected by fluctuations in
tobacco growing seasons and crop sizes. The cultivation of tobacco is dependent upon a number of factors, including
weather and other natural events, and our processing schedule and results of operations can be significantly altered by these
factors.

Further, the timing and unpredictability of customer orders and shipments may require us to keep tobacco in
inventory, increase our risk, and result in variations in quarterly and annual financial results. We base sales recognition on
the passage of ownership, usually with shipment of product. Since individual shipments may represent significant amounts
of revenue, our quarterly and annual financial results may vary significantly depending on the needs and shipping instructions
of our customers. These fluctuations result in varying volumes and sales in given periods, which also reduce the
comparability of financial results for different periods or for the same periods in different years.

Major shifts in customer requirements for tobacco supply may significantly affect our operating results.

If our customers significantly alter their requirements for tobacco volumes from certain regions, we may have to
change our production facilities and alter our fixed asset base in certain origins. Permanent or long-term reduction in demand
for tobacco from origins where we have operations may trigger restructuring and impairment charges. We may also need to
make significant capital investments in other regions to develop the needed infrastructure to meet customer supply
requirements.

In areas where we purchase leaf tobacco directly from farmers, we bear the risk that the tobacco we receive will not meet
quality and quantity requirements.

When we contract directly with tobacco farmers or tobacco farmer cooperatives, which is the method we use to
purchase tobacco in most countries, we bear the risk that the tobacco delivered may not meet customer quality and quantity
requirements. If the tobacco does not meet such market requirements, we may not be able to meet all of our customers’
orders, which would have an adverse effect on profitability and results of operations. Because in a contract market we buy all
of the farmers’ production which encompasses many styles and customer orders, we also have a risk that not all of that
production will be readily marketable. In addition, in many foreign countries, when we purchase tobacco directly from
farmers, we provide them with financing. Unless we receive marketable tobacco that meets the quality and quantity
specifications of our customers, we bear the risk that we will not be able to fully recover our crop advances or recover them
in a reasonable period of time. Although we purchase a portion of our leaf tobacco through public auction, as well as
privately-negotiated contract purchases, several countries where auction markets are used today may be moving toward direct
purchasing, thus increasing the areas subject to this risk.

Weather and other conditions can affect the marketability of our products.

Tobacco is subject to vagaries of the weather and the environment that can, in some cases, change the quality or size
of the crops. If a weather event is particularly severe, such as a major drought or hurricane, the affected crop could be
destroyed or damaged to an extent that it would be less desirable to manufacturers, which would result in a reduction in
revenues. If such an event is also widespread, it could affect our ability to acquire the quantity of products required by our
customers. In addition, other items can affect the marketability of tobacco, including, among other things, the presence of:

•

foreign matter,

genetically modified organisms, and

excess residues of pesticides, fungicides, and herbicides.

A significant event impacting the condition or quality of a large amount of any of the crops that we buy could make

it difficult for us to sell these products or to fill customers’ orders.

Regulatory and Governmental Factors

Government efforts to reduce tobacco consumption could have a significant impact on the businesses of our customers, which
would, in turn, affect our results of operations.

The U.S. federal government and certain state and local governments have taken or proposed actions that may have
the effect of reducing U.S. consumption of tobacco products and indirectly reducing demand for our products and services.
These activities have included:

•

the U.S. Environmental Protection Agency’s decision to classify environmental tobacco smoke as a “Group A”
(known human) carcinogen,

restrictions on the use of tobacco products in public places and places of employment,

proposals to have the U.S. Food and Drug Administration regulate nicotine as a drug and sharply restrict tobacco
product advertising and promotion,

proposals to increase the federal, state, and local excise taxes on cigarettes and other tobacco products,

federal and state government litigation and other actions, including the creation of the Master Settlement Agreement
(“MSA”) in the late 1990s, to recoup monies from tobacco product manufacturers to pay for the health care costs
associated with tobacco product usage and environmental tobacco smoke exposure,

efforts by states’ attorneys general to enforce and/or amend certain sections of the MSA, and

the policy of the U.S. government to link certain federal grants to the enforcement of state laws restricting the sale of
tobacco products.

Numerous other legislative and regulatory anti-smoking measures have been proposed at the federal, state, and local
levels. Excluding the effect of tobacco contained in cigarettes imported into the United States, we estimate that historically
between 12% and 15% of the flue-cured and burley tobaccos that we handle worldwide are ultimately consumed in the
United States. Flue-cured and burley tobacco operations provide 86% of our revenues.

A number of foreign governments and global non-government organizations also have taken or proposed steps to
restrict or prohibit tobacco product advertising and promotion, to increase taxes on tobacco products, and to discourage
tobacco product consumption. A number of such measures are included in the Framework Convention on Tobacco Control
(“FCTC”), which was negotiated and promoted globally under the auspices of the World Health Organization (“WHO”). We
cannot predict the extent to which the efforts of governments or non-governmental agencies to reduce tobacco consumption
might affect the business of our primary customers. However, a significant decrease in worldwide tobacco consumption
brought about by existing or future governmental laws and regulations would reduce demand for our products and services
and could have a material adverse effect on our results of operations.

Government actions can have a significant effect on the sourcing of tobacco. If some of the current efforts are successful, we
could have difficulty obtaining sufficient tobacco to provide for our customers’ requirements, which could have an adverse
effect on our performance and results of operations.

Various proposals to reform U.S. immigration laws could impact the number of legal temporary agricultural workers
entering the United States to work on tobacco producing farms. In addition, the WHO, through the FCTC, has created a
formal study group to identify and assess crop diversification initiatives and alternatives to leaf tobacco growing in countries
whose economies depend upon tobacco production. The study group began its work in February 2007. If the amount of
legal temporary agricultural workers allowed into the United States were further restricted or if certain countries were to
partner with the FCTC study group and seek to eliminate or significantly reduce leaf tobacco production, we could encounter
difficulty in sourcing leaf tobacco to fill customer requirements, which could have an adverse effect on our results of
operations.

Because we conduct a significant portion of our operations internationally, political uncertainties in certain countries could
have an adverse effect on our performance and results of operations.

Our international operations are subject to uncertainties and risks relating to the political stability of certain foreign
governments, principally in developing countries and emerging markets, and to the effects of changes in the trade policies
and economic regulations of foreign governments. These uncertainties and risks, which include, among other factors,
undeveloped or antiquated commercial law and the expropriation or nationalization of assets, may adversely impact our
ability to effectively manage our operations in those countries. For example, in the past, we have experienced significant
year-to-year fluctuations in earnings due to changes in the Brazilian government’s economic policies, and government
actions in Zimbabwe have reduced the tobacco crop there, causing us to shift sourcing of tobacco to other countries. Over the
last two years, market disruptions in Malawi have made operations there less certain. We have substantial capital
investments in South America and Africa, and the performance of our operations in those regions can materially affect our
earnings from tobacco operations. If the political situation in any of the countries where we conduct business were to
deteriorate significantly, our ability to recover assets located there could be impaired. To the extent that we do not replace
any lost volumes of tobacco with tobacco from other sources, or we incur increased costs related to such replacement, our
results of operations would suffer.

Changes in tax laws in the countries where we do business may adversely affect our results of operations.

Through our subsidiaries, we are subject to the tax laws of many jurisdictions. Changes in tax laws or the
interpretation of tax laws can affect our earnings, as can the resolution of various pending and contested tax issues. For
example, changes in tax law in the state of Rio Grande do Sul in Brazil, which limit the amount of tax credits generated on
interstate sales of tobacco in Brazil increased our cost of doing business in that country in fiscal years 2005 and 2006. See
Note 13 of “Notes to Consolidated Financial Statements” for additional information on this tax.

Financial Factors

Failure of our customers or farmers to repay extensions of credit could materially impact our results of operations.

We extend credit to both farmers and customers. A significant delay in payment or a significant bad debt provision
related to amounts due could adversely affect our results of operations. In addition, crop advances to farmers are generally
secured by the farmers’ agreement to deliver green tobacco. In the event of crop failure or permanent reductions in crop sizes,
full recovery of advances may never be realized, or otherwise could be delayed until future crops are delivered.

Fluctuations in foreign currency exchange rates may affect our results of operations.

We account for most of our tobacco operations using the U.S. dollar as the functional currency. The international
tobacco trade generally is conducted in U.S. dollars. This limits foreign exchange risk to that which is related to production
costs, overhead, and income taxes in the source country. In certain tobacco markets that are primarily domestic, we use the
local currency as the functional currency. Examples of these domestic markets are Hungary and Poland. In these domestic
markets, reported earnings are affected by the translation of the local currency into the U.S. dollar. See also “Qualitative and
Quantitative Disclosure About Market Risk.”

Our purchases of tobacco are often made in local currency, and we also provide farmer advances that are
denominated in the local currency. Currency gains or losses on those advances, which are period costs, are usually offset by
decreases or increases in the cost of tobacco, which is priced in the local currency. However, the effects of differences in the
cost of tobacco are generally not realized until the tobacco is sold, which often occurs in a subsequent quarter or fiscal year.
The difference in timing could affect our profitability in a given quarter or fiscal year.

Changes in exchange rates can also make a particular crop more or less expensive in U.S. dollar terms. If a
particular crop is viewed as expensive in U.S. dollar terms, it may be less attractive in the world market. This could
negatively affect the profitability of such crop and our results of operations.

Because there is no forward foreign exchange market in many of the major countries where we source tobacco, we
often manage our foreign exchange risk by matching funding for inventory purchases with the currency of sale and by
minimizing our net investment in these countries. To the extent that we have net monetary assets or liabilities in local
currency, we may have currency remeasurement gains or losses that will affect our results of operations.

Changes in interest rates may affect our results of operations.

In our business, customers usually pre-finance purchases or pay market rates of interest for inventory purchased on
order. We borrow long-term debt to reduce liquidity issues. Through hedging agreements, we swap the interest rates on our
existing fixed-rate debt to floating market interest rates to better match the interest rates that we charge our customers. To the
extent we are unable to match these interest rates, a decrease in short-term interest rates could increase our net financing
costs.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Except as noted, we own the following significant properties (greater than 500,000 square feet):

Location

Principal Use

Flue-Cured and Burley Leaf Tobacco Operations:
North America:
United States
Nash County, North Carolina………………………………………… Factory and storages

Canada
Simcoe………………………………….............……….……………… Factory and storages

Other Regions:

Brazil
Santa Cruz…………………………..........…………………………… Factory and storages
Joinville(1)…………………………..........……………………………
Venancio Aires………………….....................……..……………..…… Storages

Factory and storages

Malawi
Lilongwe…………………………………................……….………… Factory and storages

Mozambique
Tete…………………………………................……….……………… Factory and storages

Tanzania
Morogoro…………………………………............……….…………… Factory and storages

Area
(Square Feet)

1,244,000

569,000

2,770,000

1,075,000
860,000

673,000

762,000

779,000

Zimbabwe
Harare(2)……………………………………...............…….……………

Factory and storages

1,065,000

Other Tobacco Operations:

United States
Lancaster, Pennsylvania………………………………………….…… Factory and storages

636,000

(1) Leased from a third party
(2) Owned by an unconsolidated subsidiary.

We own the land and building located at 1501 North Hamilton Street in Richmond, Virginia, where we are

headquartered. The building contains approximately 83,000 square feet of floor space, which is adequate for our needs.

Our business involves, among other things, storing and processing green tobacco and storing processed tobacco. We
operate processing facilities in major tobacco growing areas. In addition, we require tobacco storage facilities that are in close
proximity to the processing facilities. We own most of the tobacco storage facilities, but we lease additional space, as the
need arises, and expenses related to such leases are not material. We believe that the properties currently utilized in our
tobacco operations are maintained in good operating condition and are suitable and adequate for our purposes at our current
volumes.

In addition to our significant properties listed above, we own other processing facilities in the following countries:
Germany, Hungary, Italy, the Netherlands, the Philippines, Poland, and the United States. In addition, we have ownership
interests in processing plants in Guatemala and Mexico and have access to processing facilities in other areas, such as
Argentina, India, the People’s Republic of China, Spain, and Zambia. Socotab L.L.C., a joint venture in which we own a
minority interest, owns two oriental tobacco-processing plants in both Turkey and Macedonia and one each in Greece and
Bulgaria.

Except for the Lancaster, Pennsylvania facility, the facilities described above are engaged primarily in processing
tobacco used by manufacturers in the production of cigarettes. The Lancaster facility and another facility in Virginia, as well
as facilities in Brazil, the Dominican Republic, Indonesia, Nicaragua, Paraguay, and the Philippines, process tobacco used in
making cigar, pipe, and smokeless products, as well as components of certain “roll-your-own” products.

Item 3. Legal Proceedings

European Commission Fines in Spain

In October 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw
Spanish tobacco processing market” totaling €20 million (approximately $27 million) for “colluding on the prices paid to,
and the quantities bought from, the tobacco growers in Spain.” Two of our subsidiaries, Tabacos Espanoles S.A. (“TAES”),
a purchaser and processor of raw tobacco in Spain, and Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were among the
five companies assessed fines. In its decision, the Commission imposed a fine of €108,000 on TAES, and a fine of €11.88
million on Deltafina. Deltafina did not and does not purchase or process raw tobacco in the Spanish market, but was and is a
significant buyer of tobacco from some of the Spanish processors. We recorded a charge of approximately $14.9 million in
the second quarter of fiscal year 2005 to accrue the full amount of the fines assessed against our subsidiaries.

In January 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The main
ground of appeal is that the Commission erred in imposing liability on Deltafina as a cartel participant, particularly as the
cartel leader, when Deltafina was not an actual party to the agreement and was incapable of acting in the relevant market. In
addition, Deltafina argues that (i) the Commission failed to allege that Deltafina was a member of the cartel and cartel leader
prior to issuing its decision, thereby impairing Deltafina’s right to defend itself, and (ii) that the Commission failed to try to
prove that the practices affected trade between Member States of the European Community. The appeal also argues that the
Commission incorrectly calculated the amount of the Deltafina fine. The appeal process is likely to take several years to
complete, and the ultimate outcome is uncertain. Deltafina has deposited funds in an escrow account with the Commission
in the amount of the fine in order to stay execution during the appeal process.

European Commission Fines in Italy

In 2002, we reported that we were aware that the Commission was investigating certain aspects of the tobacco leaf
markets in Italy. Deltafina buys and processes tobacco in Italy. We reported that we did not believe that the Commission
investigation in Italy would result in penalties being assessed against us or our subsidiaries that would be material to our
earnings. The reason we held this belief was that we had received conditional immunity from the Commission because
Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation.

On December 28, 2004, we received a preliminary indication that the Commission intended to revoke Deltafina’s
immunity for disclosing in April 2002 that it had applied for immunity. Neither the Commission’s Leniency Notice of
February 19, 2002, nor Deltafina’s letter of provisional immunity contains a specific requirement of confidentiality. The
potential for such disclosure was discussed with the Commission in March 2002, and the Commission never told Deltafina
that the disclosure would affect Deltafina’s immunity. On November 15, 2005, we received notification that the Commission
had imposed fines totaling €30 million (about $41 million) on Deltafina and Universal Corporation jointly for infringing
European Union antitrust law in connection with the purchase and processing of tobacco in the Italian raw tobacco market.

We do not believe that the decision can be reconciled with the Commission’s Statement of Objections and facts.
Both Deltafina and Universal Corporation have appealed the decision to the Court of First Instance of the European
Communities. Based on consultation with outside legal counsel, we believe it is probable that we will prevail in the appeals
process, and we have not accrued a charge for the fine. Deltafina has provided a bank guarantee to the Commission in the
amount of the fine in order to stay execution during the appeals process. A cash deposit of €8 million (about $11 million)
secures a portion of the bank guarantee.

U.S. Foreign Corrupt Practices Act

As a result of a posting to our Ethics Complaint hotline alleging improper activities that involved or related to
certain of our tobacco subsidiaries, the Audit Committee of our Board of Directors engaged an outside law firm to conduct an
investigation of the alleged activities. That investigation revealed that there have been payments that may have violated the
U.S. Foreign Corrupt Practices Act. At this time, the payments involved appear to have approximated $1 million over a five-
year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the competition
laws of such jurisdictions, but we believe those activities did not violate U.S. antitrust laws. We voluntarily reported these
activities to the appropriate U.S. authorities. On June 6, 2006, the Securities and Exchange Commission notified us that a
formal order of investigation has been issued.

If the U.S. authorities determine that there have been violations of the Foreign Corrupt Practices Act, or if the U.S.
authorities or the authorities in foreign jurisdictions determine there have been violations of other laws, they may seek to
impose sanctions on us or our subsidiaries that may include injunctive relief, disgorgement, fines, penalties, and
modifications to business practices. It is not possible to predict at this time whether the authorities will determine that
violations have occurred, and if they do, what sanctions they might seek to impose. It is also not possible to predict how the
government's investigation or any resulting sanctions may impact our business, financial condition, results of operations, or
financial performance, although such sanctions, if imposed, could be material to our results of operations in any quarter. We
will continue to cooperate with the authorities in these matters.

Employment Litigation Verdict

In September 2006, a California jury decided a case involving an employment matter at one of our agri-products
subsidiaries in favor of the plaintiffs and awarded them compensatory damages of approximately $0.2 million and punitive
damages of $25 million. In December 2006, the trial court granted our motion to substantially reduce the punitive damages
to approximately $1.25 million, bringing the total amount of the award to approximately $1.45 million. Universal
Corporation and the other defendants also filed a notice of appeal, as we believed there were errors in the decision of the
court despite the significant reduction in punitive damages. On May 16, 2007, the plaintiffs agreed with us and the other
defendants to a final settlement on all the issues. As part of the settlement, the parties agreed that the terms of the settlement
would be confidential.

Other Legal Matters

In addition to the above-mentioned matters, some of our subsidiaries are involved in other litigation incidental to
their business activities. While the outcome of these matters cannot be predicted with certainty, we are vigorously defending
the claims and do not currently expect that any of them will have a material adverse effect on our financial position.
However, should one or more of these matters be resolved in a manner adverse to our current expectation, the effect on the
our results of operations for a particular fiscal reporting period could be material.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended March 31, 2007.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Common Equity

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “UVV.” The following
table sets forth the high and low sales prices per share of the common stock on the NYSE Composite Tape, based upon
published financial sources, and the dividends declared on each share of common stock for the quarter indicated.

2007

Cash dividends declared………………………………
Market price range…………………..…………………

2006

Cash dividends declared………………………………
Market price range………………..……………………

2005

Cash dividends declared………………………………
Market price range…………………..…………………

High

Low

High

Low

High

Low

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$ 0.43

$ 0.44

38.41

36.02

38.63

35.02

50.05

36.14

61.35

46.70

$ 0.42

$ 0.43

48.03

43.08

47.70

38.83

43.99

36.31

48.21

36.17

$ 0.39

$ 0.42

53.01

46.20

50.14

42.25

49.80

43.31

50.57

45.77

Our current dividend policy anticipates the payment of quarterly dividends in the future. However, the declaration
and payment of dividends to holders of common stock is at the discretion of the Board of Directors and will be dependent
upon our future earnings, financial condition, and capital requirements. Under the terms of the Series B 6.75% Convertible
Perpetual Preferred Stock (the “Preferred Stock”), we may not declare or pay dividends on our common stock unless
dividends on the Preferred Stock for the four most recent consecutive dividend periods have been declared and paid. The
Preferred Stock contains provisions that prohibit the payment of cash dividends if certain income and shareholders’ equity
levels are not met. Under certain of our credit facilities, we must meet financial covenants relating to minimum tangible net
worth and maximum levels of long-term debt. If we were not in compliance with them, these financial covenants could
restrict our ability to pay dividends. We were in compliance with all such covenants at March 31, 2007. At May 25, 2007,
there were 1,781 holders of record of our common stock. See Notes 7 and 11 of Notes to Consolidated Financial Statements
for more information on debt covenants and equity securities.

Purchases of Equity Securities

Neither we nor any affiliated purchasers made any purchases of our equity during the three months ended March 31,

2007.

Item 6. Selected Financial Data

2007

Fiscal Years Ended March 31,
2006

2005
(in thousands, except per share data, ratios and number of shareholders)

Nine-Month
Transition
Year Ended
March 31,
2004

Fiscal
Year Ended
June 30,
2003

Summary of Operations
Sales and other operating revenues……........ $
Income (loss) from continuing

2,007,272

1,781,312

1,667,193

1,272,387

1,590,621

operations………………………………… $

80,411

(2,973)

Income (loss) from discontinued

operations………………………………… $
Net income…………………………............. $
Return on beginning common

(36,059)
44,352

$
$

10,913
7,940

shareholders’ equity………………………

3.1 %

1.0 %

Earnings (loss) per common share:

Basic:

From continuing operations…………… $
From discontinued operations………… $
Net income……………………………… $

Diluted:

From continuing operations…………… $
From discontinued operations………… $
Net income……………………………… $

2.53
(1.39)
1.14

2.52
(1.39)
1.13

Financial Position at Year End
Current ratio…..........………………...………
Total assets…………............………………… $
Long-term obligations……………………… $
Working capital……………………………… $
Shareholders’ equity……...………………… $

2.23
2,328,822
398,952
852,391
1,030,733

$
$
$

$
$
$
$

$
$

$
$
$

68,556

27,457
96,013

12.6 %

2.68
1.08
3.76

2.66
1.07
3.73

$
$

$
$
$

84,937

14,699
99,636

16.1 % *

3.39
0.58
3.97

3.36
0.58
3.94

$
$

$
$
$

88,545

22,049
110,594

18.8 %

3.48
0.87
4.35

3.47
0.87
4.34

(0.12)
0.43
0.31

1.94
2,892,664
762,201
877,051
964,871

1.84
2,885,324
838,687
819,047
822,388

2.05
2,498,408
770,296
789,530
759,833

$
$
$
$

1.67
2,243,074
614,994
550,716
620,278

$
$
$
$

General
Ratio of earnings to fixed charges……………
Ratio of earnings to combined fixed

charges and preference dividends…………
Number of common shareholders……………
Weighted average common

shares outstanding:

Basic……………………………………
Diluted…………………………………

Dividends per share of convertible

perpetual preferred stock, annual rate…… $
Dividends per common share……...………… $
Book value per common share…………...… $

* Based on nine-month net income.

3.32

2.36
1,807

25,935
26,051

67.50
1.74
30.34

1.34

1.34
1,951

25,707
25,707

3.59

3.59
2,042

25,553
25,717

6.14

6.14
2,126

25,072
25,277

4.54

4.54
2,267

25,420
25,499

$
$
$

—

1.70
29.96

$
$
$

—

1.62
32.04

$
$
$

—

1.14
29.86

$
$
$

—

1.42
24.89

The calculations of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and
preference dividends are shown in Exhibit 12. Fixed charges primarily represent interest expense we incurred during the
designated reporting period, and preference dividends represent the pre-tax equivalent of dividends on preferred stock.

We changed our fiscal year end from June 30 to March 31, effective for fiscal year 2004. Selected financial data for

fiscal year 2004 is presented for the nine-month transition year ended March 31, 2004.

•

Significant items included in the operating results in the above table are as follows:

Fiscal Year 2007 -- $30.9 million in impairment charges, primarily related to our review of flue-cured growing
projects in Africa and our decision to exit those projects at the end of the 2006-07 crop year. After minority interest
and income tax effects, the charges reduced income from continuing operations and net income by $24.2 million, or
$0.93 per diluted share. In addition, we recorded provisions for uncollectible farmer advances in Brazil and in
several African countries totaling $31.9 million. Over half of those provisions related to the growing projects that
we are exiting. The results also included lower of cost or market inventory provisions of $12.8 million related to
tobacco produced in those African growing projects. After minority interest and income tax effects, the provisions
reduced income from continuing operations and net income by $27.5 million, or $1.06 per diluted share. We also
recorded a net loss on the sale of a significant portion of our non-tobacco operations and an impairment charge on
the remaining non-tobacco operations held for sale. On a combined basis, those items created a loss from
discontinued operations and reduced net income by $44.5 million before income taxes, $45.0 million after tax, or
$1.74 per diluted share.

Fiscal Year 2006 – $57.5 million in restructuring and impairment charges related to our investment in our
Zimbabwe operations, the closure of our Danville, Virginia processing facility, and other cost reduction initiatives,
which reduced income from continuing operations and net income by $46.3 million, or $1.80 per diluted share.
Results also included significantly higher provisions for losses on uncollectible farmer advances in several African
countries, Brazil, and the Philippines that reduced pretax earnings by $26.2 million and lower of cost or market
inventory charges of $10.2 million related to African leaf growing projects that we decided to exit in fiscal year
2007. The total of these charges and provisions reduced income from continuing operations and net income by
$19.2 million, or $0.75 per diluted share. In addition, significant market price declines in two commodities handled
by our agri-products operations (almonds and sunflower seeds) resulted in $17.2 million in inventory valuation and
purchase commitment losses that reduced income from discontinued operations and net income by $10.9 million, or
$0.42 per diluted share.

Fiscal Year 2005 – a $14.9 million charge to recognize fines assessed by the European Commission against two of
the Company’s subsidiaries related to tobacco buying practices in Spain. The charge reduced income from
continuing operations and net income by $14.9 million, or $0.58 per diluted share.

Fiscal Year 2004 – a $7.6 million charge related to a customer’s rejection of certain shipments of tobacco by a
foreign subsidiary. This charge reduced income from continuing operations and net income by $4.9 million, or
$0.19 per diluted share. An additional $3.2 million charge was recorded for the rejection of additional shipments
that occurred in the following quarter. Results for that quarter were reported as a direct addition to retained earnings
due to the year-end change and elimination of the foreign reporting lag. The total charge related to the customer’s
rejection of these shipments was $10.8 million before taxes, or $7.0 million after taxes.

Fiscal Year 2003 – restructuring charges of $33.0 million, a charge of $12.0 million related to the settlement of a
lawsuit, a currency remeasurement gain of $20.2 million, and asset sale gains of $6.3 million. These items reduced
income from continuing operations and net income by $12.1 million, or $0.48 per diluted share.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations is provided to enhance the
understanding of, and should be read in conjunction with, Part I, Item 1, “Business” and Consolidated Financial Statements
and the related Notes. For information on risks and uncertainties related to our business that may make past performance
not indicative of future results, or cause actual results to differ materially from any forward-looking statements, see
“General,” and Part I, Item 1A, “Risk Factors.”

OVERVIEW

We are one of the world’s leading independent leaf tobacco merchants and processors. Although we also have agri-
products operations, we are holding those operations for sale and consider them to be discontinued operations. We derive
most of our revenues from sales of processed tobacco to manufacturers of tobacco products throughout the world and from
fees and commissions for specific services.

During the last three fiscal years, we have been operating in an oversupply environment. Fiscal year 2005 marked
the beginning of the oversupply in flue-cured tobacco as worldwide production, excluding China, increased by 18%, or about
275 million kgs. The excess tobacco was primarily grown in Brazil where below normal tobacco quality combined with a
stronger currency to make that growth less attractive to manufacturers. During the same time, a 16% increase in burley
crops, primarily in Malawi and Brazil, resulted in an oversupply of that type of tobacco as well. By the end of fiscal year
2007, markets are in better balance, and burley may be in short supply. Since 2005, we have been working to reduce our
crop sizes as the market recovers from the oversupply. In addition, we have reduced U.S. capacity by closing a factory,
completed the construction of a factory in Mozambique, reduced overhead, and are ending our direct involvement in the
production of flue-cured tobacco in Africa.

Our performance suffered in fiscal year 2006 as a result of weather problems in several countries, which either
reduced crop quality or yield; the weakness of the U.S. dollar against several foreign currencies in which we purchase
tobacco, which increased costs; unusually high provisions for losses on farmer advances that arose in part because of crop
quality; start-up costs related to the new Mozambique factory; and a decline in sales volumes for blended strips, which were
no longer required by our customers. In addition, we recorded restructuring and impairment charges related to the closure of
our Danville, Virginia, tobacco processing facility and an impairment charge to reduce our investment in our tobacco
operations in Zimbabwe to estimated fair value following the deconsolidation of that investment for accounting purposes.

In fiscal year 2007, we continued to work on oversupply issues and significantly reduced our growing projects in
Africa. We took several charges related to reducing our crop sizes and our growing projects. We also concentrated on
selling uncommitted inventory and improving operating margins. With the sale of most of the non-tobacco operations and the
completion of tobacco capital projects, heavy demands for capital have diminished. We have reduced our debt levels and
improved our cash flow significantly.

We will continue our efforts to improve operating results in fiscal year 2008. We have made the decision to end our
direct involvement in various flue-cured growing projects in Africa and are taking the necessary steps to right-size the
operations. Looking ahead, we expect new challenges. We have reduced our Brazilian flue-cured production and the quality
of the crop is better, but smaller burley crops in Africa along with higher costs in most of the major producing areas of the
world will present challenges for next year. The U.S. dollar continues to be weak against many currencies and although we
work with our customers to mitigate the effect of that where we can, it remains a source of higher costs in many areas. In
addition, in the current year, our North American operations benefited from the higher sales volume associated with the sale
of old-crop burley tobacco, but fiscal year 2008 will not have the same benefit. Tobacco production in Canada has fallen
severely over the last few years and is forecast to decline by about one-third for fiscal year 2008. We are continuing to work
to reduce our cost structure there. Fiscal year 2008 should not see the same level of impairment and restructuring costs that
we have recognized over the last two years. We believe that we have been taking the necessary actions to improve our
performance for the long term.

DISCONTINUED OPERATIONS

We previously had operations in lumber and building products and in agri-products. We sold the lumber and
building products businesses, along with a portion of the agri-products operations, on September 1, 2006. In December 2006,
we adopted a plan to sell the remaining agri-product operations. The lumber and building products operations and agri-
products operations are reported as discontinued operations for all periods in the accompanying financial statements, and
Management’s Discussion and Analysis of Financial Condition and Results of Operations has been revised to reflect the
discontinued operations.

Fiscal Year Ended March 31, 2007, Compared to the Fiscal Year Ended March 31, 2006

RESULTS OF OPERATIONS

For the fiscal year ended March 31, 2007, income from continuing operations was $80.4 million, or $2.52 per
diluted share, including the effect of the restructuring and impairment charges recognized throughout the fiscal year. Those
charges, which totaled about $31 million, were primarily composed of impairment charges on long-lived assets and
Company-managed farming operations in Africa and, combined with related tax effects, reduced net income by $24.2
million, or $0.93 per diluted share. For last year, we reported a loss from continuing operations of $3.0 million, or $0.12 per
share, including the effect of restructuring and impairment charges of $57.5 million, or $1.80 per diluted share. Income from
continuing operations showed a marked improvement over last year, reflecting better results in all segments. Revenues for
fiscal year 2007 increased by about 13%, to $2 billion. Net income for the fiscal year, which includes results from
discontinued operations, was $44.4 million, or $1.13 per diluted share, compared to $7.9 million, or $0.31 per diluted share,
last year.

Flue-cured and burley operations earned $172 million, up $73 million from last year. Results of the North America
segment improved by $15.2 million, and the primary factors causing that improvement were increased export and processing
volumes, cost savings related to last year’s closure of the Danville, Virginia, facility, one-time sales of tobacco purchased
from the stabilization cooperatives, and better pricing. The North America segment also benefited from carryover sales of
prior year tobacco. North America revenues increased by $92 million, or 36%, principally due to sales of old crop tobacco.
The results of the Other Regions segment increased by $57.7 million, primarily due to better pricing and sales mix.
Operating improvements were evident in African operations, in Europe, and in South America. In addition, comparisons
benefited from the absence of losses incurred in our Zimbabwe operations prior to their deconsolidation last year and lower
remeasurement losses of approximately $11 million. The reduction in remeasurement losses is partly responsible for the
reduction in selling, general, and administrative expenses as a percentage of revenues. Finally, results of the Other Regions
segment also reflected the favorable resolution of a tax case in South America that resulted in the recovery of $8.5 million in
revenue taxes and interest. The recovery was recorded as part of sales and other operating revenues. Provisions for farmer
receivables totaled $32 million for Africa and South America, compared to $28.5 million in fiscal year 2006. Of these
provisions, over half related to African leaf growing projects that we are exiting. Results also included inventory valuation
charges related to African flue-cured tobacco of approximately $13 million in fiscal year 2007 and $10 million in fiscal year
2006. Revenues of the Other Regions segment for the year increased by 9% primarily due to higher sales prices in South
America, where we experienced increased farmer prices and a strong local currency.

The Other Tobacco Operations segment also showed substantial improvement for the fiscal year. The dark air-
cured operations benefited from higher sales volumes for wrapper and increased leaf sales. The operations also benefited
from our decisions to reduce overhead and to close our Colombia dark tobacco operation. Volume attributed to our 49%-
owned Oriental tobacco joint venture was lower for the year primarily due to shipment timing. Revenues for this segment
increased by $17.7 million in the fiscal year.

Interest income increased to $10.8 million from $2.1 million last year, as we invested excess cash from operations

and from the proceeds of the Deli sale pending its use to retire debt and fund seasonal operating requirements.

The consolidated effective income tax rate for continuing operations for the twelve months ended March 31, 2007,
was approximately 45%. The rate is higher than the 35% U.S. marginal corporate tax rate due primarily to excess foreign
taxes in countries where the tax rate exceeds the U.S. tax rate, low tax benefits provided on a foreign subsidiary with an
operating loss, high state income taxes due to improved earnings in the United States, and a limited income tax benefit
provided on current year losses in Zambia.

For the fiscal year ended March 31, 2007, the loss from discontinued operations was $36 million, or $1.39 per
diluted share. Results from discontinued operations for the fiscal year reflected the operating results and the actual and
estimated effects of selling or adopting a plan to sell our non-tobacco businesses, the largest part of which was completed in
the second fiscal quarter.

Fiscal Year Ended March 31, 2006, Compared to the Fiscal Year Ended March 31, 2005

Net income for the fiscal year ended March 31, 2006, was $7.9 million, or $0.31 per diluted share, compared to $96
million, or $3.73 per diluted share for the fiscal year ended March 31, 2005. Continuing operations produced a loss after
taxes of $3 million or $0.12 per share in fiscal year 2006 compared to income of $68.6 million or $2.66 per share in fiscal
year 2005. Restructuring and impairment charges and lower operating income in our Other Regions and Other Tobacco

Operations business segments negatively impacted results for fiscal year 2006. We recorded $57.5 million ($46.3 million
after taxes or $1.80 per diluted share) in restructuring and impairment charges related to the closure of our tobacco processing
plant in Danville, Virginia, our overhead reduction program, and our investment in Zimbabwe.

We deconsolidated our operations in Zimbabwe as of January 1, 2006, under U.S. accounting requirements that
apply under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government
restrictions. After deconsolidation, we recorded a non-cash charge of $29.2 million to adjust the investment in those
operations to estimated fair value. There was no tax benefit associated with this charge. The investment is now accounted
for using the cost method and is reported on the balance sheet in investments in unconsolidated affiliates. Business
operations in Zimbabwe were not impacted by the financial reporting change or the non-cash charge, and we intend to
continue our operations there. In fiscal year 2006, we closed our Danville, Virginia, processing plant and incurred a
restructuring charge of $26.0 million. Additional charges of $2.3 million were related to other cost reduction initiatives.
Revenues were $1.8 billion for fiscal year 2006, compared to $1.7 billion in fiscal year 2005.

Other Regions segment results for fiscal year 2006 were down by $61.4 million, or about 45%, compared to fiscal
year 2005 due primarily to poor results in South America and Africa. Higher costs due to the relative strength of the
Brazilian currency and the poor quality of the crop, caused by adverse weather conditions, combined to reduce operating
margins in South America. In Africa, results were impacted by incremental currency remeasurement and exchange losses
totaling about $17 million, expenses associated with the factory start-up in Mozambique of approximately $4.2 million,
higher overhead costs, and lower margins on burley tobacco sales due to pricing pressures associated with the overhang from
the large Malawi burley crop in 2004. In addition, our flue-cured growing projects in Malawi and Zambia were negatively
impacted by low crop yields caused by inadequate rainfall. The Zambian projects also suffered higher labor and operating
costs generated by the substantial appreciation of the Zambian currency. However, African results were also impacted by
increased volume from Tanzania and from carryover shipments of the Malawi crop from fiscal year 2005. Other Regions
segment results for fiscal year 2006 also included incremental provisions of about $26.2 million for uncollectible farmer
advances, in several African countries, Brazil, and the Philippines. Fiscal year 2005 results reflected a charge of $14.9
million for European Commission fines on certain of our subsidiaries related to tobacco buying practices in Spain, which
reduced results for that period by $0.58 per diluted share. In addition, in our Other Tobacco Operations segment, sales
volumes of blended strips were lower for the year due to a sharp decline in demand for that product.

Although overall segment operating income was down, results for the North America segment were improved. U.S.
operations benefited from operating efficiencies, higher sales volumes, and savings from the closing of the Danville plant.
Tobacco revenues increased for the year by about 7% primarily because of carryover shipments of the Malawi crop from
fiscal year 2005 and an increase in prices for Brazilian tobacco related to the stronger Brazilian currency.

We did not record a charge for the European Commission fine of €30 million related to green tobacco buying
practices in Italy, which was announced in October 2005. Universal Corporation and its Italian subsidiary, Deltafina, were
jointly assessed the fine after the European Commission revoked Deltafina’s conditional immunity, which had been granted
in 2002. Based on consultation with outside counsel, we believe that the terms of the immunity agreement were not breached
and that immunity will be restored through the appeal of the decision in the courts. Universal Corporation and Deltafina each
have appealed the decision to the Court of First Instance of the European Communities.

Selling, general, and administrative expenses increased at a faster rate than revenues because currency losses and
charges for uncollectible supplier advances are included in that line item. Lower incentive compensation accruals, lower
executive benefit costs, and a currency gain on a foreign withholding tax refund generated a reduction in costs of $6.2
million. Interest expense was substantially higher for fiscal year 2006 due to higher average borrowing levels and higher
short-term interest rates.

The consolidated effective income tax rate for fiscal year 2006 was about 150% compared to 43% for fiscal year
2005. There was no tax benefit associated with the impairment charge to reduce the Company’s investment in Zimbabwe,
which significantly increased the effective income tax rate for the year. In addition, our effective tax rate remained above the
statutory U.S. rate due to excess foreign taxes recorded in countries where the tax rate exceeds the U.S. rate, and local tax
expense recorded by a foreign subsidiary with a U.S. dollar loss for fiscal year 2006.

Results for discontinued operations declined by $16.5 million due to the ongoing pricing pressure in DIY markets
for lumber and building products in the Netherlands as well as inventory writedowns in sunflower seeds and almonds.
Market conditions were favorable in the Dutch construction supply market and in rubber, cashews, and seeds.

Accounting Pronouncements

We adopted the following accounting pronouncements during the fiscal year ended March 31, 2007:

• FASB Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”),
adopted at the beginning of the fiscal year. SFAS 123R requires that share-based payments, such as grants of
stock options, stock appreciation rights, restricted shares, and restricted share units, be measured at fair value
and reported as expense in the financial statements over the requisite service period. Previously, we accounted
for stock-based compensation awards in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) and did not recognize significant amounts of
compensation expense for share-based awards since fixed stock options with an exercise price equal to the
market price at date of grant were the primary type of awards granted. We recorded approximately $4.2 million
of stock-based compensation expense under SFAS 123R in fiscal year 2007. Additional disclosures are
provided in Notes 1 and 12 to the consolidated financial statements.

• FASB Statement of Financial Accounting Standards No. 151, “Inventory Costs, and amendment of ARB No.
43, Chapter 4” (“SFAS 151”), also adopted at the beginning of the fiscal year. SFAS 151 amended Accounting
Research Bulletin No. 43 (“ARB 43”) to clarify that abnormal amounts of production-related costs, such as idle
facility expense, freight, handling costs, and wasted materials, should be recognized as current-period charges
rather than being recorded as inventory cost. SFAS 151 also requires that allocation of fixed production
overhead to inventory cost be based on the normal capacity of a company’s production facilities. The impact of
adopting SFAS 151 was not material to our financial statements.

• The recognition and disclosure provisions of FASB Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”), adopted effective March 31, 2007. The recognition
provisions of SFAS 158 require employers who sponsor defined benefit pension or postretirement plans to
recognize the overfunded or underfunded status of each plan as an asset or liability in the balance sheet and to
recognize actuarial gains and losses and prior service costs and credits that are not included in pension or
postretirement benefit expense as a component of comprehensive income. SFAS 158 also has measurement
timing provisions that require that the funded status of plans be measured as of the balance sheet date, thereby
eliminating the option allowed under the prior guidance to measure the funded status at a date up to 90 days
before the balance sheet date. The measurement timing provisions of SFAS 158 are not effective until fiscal
years ending after December 15, 2008, and we have not yet adopted them. As a result of adopting the
recognition provisions of SFAS 158, our liability for pensions and other postretirement benefits at March 31,
2007, was increased by approximately $44 million, and our balance for accumulated other comprehensive loss
was increased by approximately $29 million. Additional disclosures related to the adoption of SFAS 158 are
provided in Note 10.

In addition to the accounting pronouncements adopted in fiscal year 2007, the following pronouncements have been

issued and will become effective in future periods:

• FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 requires that positions taken or expected to be
taken in tax returns meet a “more-likely-than-not” threshold in order to be recognized in the financial
statements. It also provides guidance on measuring the amount of a tax position that meets the “more-likely-
than-not” criterion. FIN 48 is effective for fiscal years beginning after December 15, 2006, and we will adopt it
in the first quarter of the fiscal year ending March 31, 2008. We are still in the process of reviewing tax
positions throughout our worldwide organization and have not yet quantified the effect of adopting FIN 48 on
our financial statements.

• FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which
establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is applicable for fiscal years beginning after November
15, 2007. We are reviewing the guidance in SFAS 157, but currently do not expect that it will have a material
effect on our financial statements.

Overview

LIQUIDITY AND CAPITAL RESOURCES

During fiscal year 2007, we took significant steps to improve operating cash flow and reduce debt. We have begun
to see the results of those actions. On September 1, 2006, we completed the sale (the “Deli Sale”) of the non-tobacco
businesses managed by our wholly owned subsidiary Deli Universal Inc. (the “Deli Operations”). Those businesses were our
entire lumber and building products distribution segment and a portion of our agri-products segment. The total value of the
transaction was $565 million. After selling and other expenses, we realized a net value of approximately $551 million,
consisting of net proceeds of $397 million and the buyer’s assumption of $154 million in debt of the acquired businesses. In
December 2006, we approved a plan to sell the remaining non-tobacco businesses that were not part of the sale of the Deli
Operations. Two of these businesses have been sold, and we expect to sell the remainder within the next nine months. Our
financial statements now report the operating results and the assets and liabilities of the non-tobacco businesses as
discontinued operations for all periods in the accompanying consolidated financial statements.

Our liquidity and capital resource requirements are predominantly short term in nature and primarily relate to
working capital required for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The
geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements.
The marketing of the crop in each geographic area is heavily influenced by weather conditions and follows the cycle of
buying, processing, and shipping of the tobacco crop. The timing of individual customer shipping requirements may change
the level or the duration of crop financing. Despite a predominance of short-term needs, we maintain a relatively large
portion of our total debt as long-term to reduce liquidity risk.

Cash Flow

During fiscal year 2007, we generated a significant amount of cash, including $393 million from the sale of non-
tobacco businesses and other assets, $246 million from our operations, $70 million from the issuance of equity, primarily
pursuant to employee option exercises, and $18 million from discontinued operations, net of debt retired. After using $349
million to reduce debt, spending $25 million on capital projects, and returning $60 million to shareholders in the form of
dividends, we invested the remaining cash, pending its use to retire maturing debt and fund seasonal crop needs. At March
31, 2007, we had $313 million in short-term cash investments.

Working Capital

Working capital at March 31, 2007, was $852 million, nearly the same as last year’s working capital of $877
million. Accounts receivable increased by about $48 million. Much of the increase was due to late shipments of African
tobaccos, which had been delayed by heavy traffic at the port of Beira in Mozambique. Due to changes in the means of
funding African operations, accounts receivable – unconsolidated affiliates increased by about $20 million year over year.
These increases in accounts receivable were offset by reductions in tobacco inventories as we focused on selling old crop
leaf. Our uncommitted tobacco inventories increased to approximately $120 million, or about 20% of tobacco inventory due
to the weaker U.S. dollar and earlier purchases in one region, compared to $112 million at March 31, 2006, which
represented 17% of tobacco inventory. We do not consider these levels excessive. Increases in customer advances and
deposits reduced working capital by $35 million. The level of customer advances can vary from year to year as customers
review their circumstances. Accordingly, we consider such advances as borrowings when we review our balance sheet
structure. Notes payable and overdrafts decreased by $188 million as we used a portion of the proceeds from the Deli sale to
repay short-term debt and fund seasonal crop needs. That decrease was largely offset by the change in our current portion of
long-term debt, which increased because a $150 million medium-term note will mature in fiscal year 2008.

Capital Spending

Our capital expenditures are generally limited to those that add value for the customer, replace or maintain
equipment, increase efficiency, or position us for future growth. Our capital expenditures for continuing operations were
approximately $25.2 million in fiscal year 2007, $55.7 million in fiscal year 2006, and $78.9 million in fiscal year 2005. In
fiscal years 2006 and 2005, a significant portion of the capital spending was related to the construction of a new factory in
Mozambique, which cost over $50 million. That factory was completed and started operations in late summer 2005. We
have reduced capital spending to a level below depreciation. We do not foresee that major investments in tobacco processing
facilities will be necessary in the near term.

Outstanding Debt and Other Financing Arrangements

Total debt and customer advances decreased by about $360 million during fiscal year 2007, and total debt and
customer advances as a percentage of total capitalization (including total debt, customer advances, minority interests, and
shareholders’ equity) decreased to approximately 44% from 55% at March 31, 2006. Net of cash, total debt as a percentage
of total capitalization decreased to approximately 31% at March 31, 2007. Total long-term obligations, including current
maturities, decreased by $208 million to $563 million, while notes payable decreased by $188 million to $131 million. The
reduction in debt, excluding customer advances, is greater than the amounts shown for continuing operations on the statement
of cash flows because of the effect of discontinued operations.

Bank Facilities

As of March 31, 2007, we had approximately $621 million in uncommitted lines of credit, of which approximately
$490 million were unused and available to support seasonal working capital needs. We also have a five-year committed
revolving credit facility totaling $500 million. The facility will mature on January 7, 2010. As of March 31, 2007, we had
nothing outstanding under the revolving credit facility. We provide for short-term needs through bilateral bank lines and our
revolving credit facility, and we plan to use cash balances to provide for seasonal needs. Under the terms of our bank
agreements, we must maintain certain levels of tangible net worth and observe restrictions on debt levels. We were in
compliance with all such covenants at March 31, 2007. Our long-term credit ratings are Ba1 with Moody’s Investors Service
and BBB- with Standard & Poor’s.

Derivatives

From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. These
agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps are
accounted for as fair value hedges. At March 31, 2007, our outstanding interest rate swap agreements were not material.

Near the end of fiscal year 2004, we entered a foreign currency swap with a third party to mitigate our exposure to
changes in exchange rates related to a foreign currency-denominated receivable from our Dutch non-tobacco subsidiary. The
swap converted a fixed-rate, foreign currency-denominated receivable to a fixed rate receivable denominated in U.S. dollars.
It was accounted for as a cash flow hedge, and its notional amount was approximately 97.5 million euros ($118 million) at
March 31, 2006. The swap was terminated in the summer of 2006 in connection with the sale of the Dutch non-tobacco
businesses.

We also enter forward contracts from time to time to hedge certain foreign currency exposures. These contracts are

marked to current market values each quarter and were not material at March 31, 2007.

Pension Funding

Funds supporting our ERISA-regulated U.S. defined benefit pension plans increased by $11 million to $149 million
because of positive performance of the investment portfolio during the year ended December 31, 2006, the measurement date
for the plans. As of April 30, 2007, the market value of the fund was about $169 million, compared to the accumulated
benefit obligation (“ABO”) of $160 million and the projected benefit obligation (“PBO”) of $182 million. The ABO and
PBO are calculated on the basis of certain assumptions that are outlined in Note 10 of “Notes to Consolidated Financial
Statements.” We contributed $15 million to the fund in February 2007, which is more than the contribution required by
ERISA, and we expect to make a contribution during the next year. It is our policy to monitor the performance of the funds
and to review the adequacy of our funding and contributions to those funds. As of March 31, 2007, the target fund allocation
was as follows: 55% to domestic equity securities, 15% to international equity securities, and 30% to fixed income securities.

Contractual Obligations

Our contractual obligations as of March 31, 2007, were as follows:

(in millions of dollars)

Total

2008

2009-2010

2011-2012

Thereafter

Notes payable and long-term debt1...................... $
Operating lease obligations..................................
Inventory purchase obligations:

Tobacco...........................................................
Agricultural materials......................................
Capital expenditure obligations...........................
Other purchase obligations..................................
Total

823.5
38.2

565.1
20.0
5.6
5.2
1,457.6

335.8
11.9

460.8
20.0
5.6
4.4
838.5

120.6
16.0

140.3
9.7

63.7
—
—
0.3
200.6

26.4
—
—
0.3
176.7

226.8
0.6

14.2
—
—
0.2
241.8

1 Includes interest payments. Interest payments on $131 million of variable rate debt were estimated on the basis of March 31, 2007 rates.

In addition to principal and interest payments on notes payable and long-term debt, our contractual obligations
include operating lease payments, inventory purchase commitments, and capital expenditure commitments. Operating lease
obligations represent minimum payments due under leases for various production, storage, distribution, and other facilities,
as well as vehicles and equipment. Tobacco inventory purchase obligations primarily represent contracts to purchase tobacco
from farmers. The amounts shown above are estimates since actual quantities purchased will depend on crop yield and prices
will depend on the quality of the tobacco delivered. More than half of our crop year contracts to purchase tobacco are with
farmers in Brazil. Tobacco purchase obligations have been partially funded by advances to farmers, which totaled
approximately $113 million as of March 31, 2007.

We believe that our financial resources are adequate to support our capital needs. Those resources include cash from
operations, cash balances, the ability to issue debt to the public under our shelf registration statement, and committed and
uncommitted bank lines. Any excess cash flow from operations after dividends, capital expenditures, and any necessary debt
reduction will be available to fund expansion, purchase our stock, or otherwise enhance shareholder value.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

In preparing the financial statements in accordance with generally accepted accounting principles in the United
States (“GAAP”), we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue,
and expense amounts reported. These estimates can also affect our supplemental information disclosures, including
information about contingencies, risk, and financial condition. We believe, given current facts and circumstances, our
estimates and assumptions are reasonable, adhere to GAAP, and are consistently applied. However, changes in the
assumptions used could result in a material adjustment to the financial statements. Our critical accounting estimates and
assumptions are in the following areas:

Inventories

Inventories of tobacco are valued at the lower of cost or market with cost determined under the specific cost method.
Raw materials are clearly identified at the time of purchase. We track the costs associated with raw materials in the final
product lots, and maintain this identification through the time of sale. We also capitalize direct and indirect costs related to
processing raw materials. This method of cost accounting is referred to as the specific cost or specific identification method.
We write down inventory for changes in market value based upon assumptions related to future demand and market
conditions if the indicated market value is below cost. Future demand assumptions can be impacted by changes in customer
sales, changes in customers’ inventory positions and policies, competitors’ pricing policies and inventory positions, changing
customer needs, and varying crop sizes and qualities. Market conditions that differ significantly from those assumed by
management could result in additional write downs. We experience inventory write downs routinely. Inventory write downs
in fiscal years 2007, 2006, and 2005 were $17.6 million, $11.8 million, and $4.3 million, respectively.

Advances to Suppliers and Guarantees of Bank Loans to Suppliers

We provide agronomy services and seasonal crop advances of, or for, seed, fertilizer, and other supplies. These
advances are short term in nature and are customarily repaid upon delivery of tobacco to us. Primarily in Brazil and certain
African countries, we have also made long-term advances to tobacco farmers to finance curing barns and other farm
infrastructure. In Brazil, we also guarantee both short-term and long-term loans made to farmers for the same purposes. In
some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to
repay maturing advances. In that case, we may extend repayment of the advances into the following crop year or satisfy the
guarantee by acquiring the loan from the bank. In either situation, we will incur losses whenever we are unable to recover the
full amount of the loans and advances. At each reporting period, we must make estimates and assumptions in determining
the valuation allowance for advances to farmers and the liability to accrue for our obligations under bank loan guarantees.

Goodwill

We review the carrying value of goodwill as necessary, and at least annually, utilizing a discounted cash flow
model. The preparation of discounted future operating cash flow analyses requires significant management judgment with
respect to operating earnings growth rates and the selection of an appropriate discount rate. Neither a one-percentage-point
increase in the discount rate assumption nor a one-percentage-point decline in the cash flow growth rate assumption would
result in an impairment charge. However, significant changes in estimates of future cash flows, such as those caused by
unforeseen events or changes in market conditions, could result in an impairment charge.

Income Taxes

Our effective tax rate is based on our expected income, statutory tax rates, and tax planning opportunities in the
various jurisdictions in which we operate. Significant judgment is required in determining the effective tax rate and
evaluating our tax position. The effective tax rate is applied to quarterly operating results. We are subject to the tax laws of
many jurisdictions, and could be subject to a tax audit in each of these jurisdictions, which could result in adjustments to tax
expense in future periods. In the event that there is a significant, unusual, or one-time item recognized in our results, the tax
attributed to that item would be recorded at the same time as the item. For example, in fiscal year 2005, we recorded a charge
for certain fines imposed by the European Commission that will not be deductible for income tax purposes in the related
countries where assessed. No tax benefit was recognized on this charge, which increased the consolidated tax rate. In fiscal
year 2006, a similar situation arose when we recognized an impairment charge on our investment in Zimbabwe, which did
not provide a deduction for income tax purposes.

Tax regulations require items to be included in the tax return at different times than the items are reflected in the
financial statements. As a result, our effective tax rate reflected in the financial statements is different than that reported in
our tax returns. Some of these differences are permanent, such as expenses that are not tax deductible, while others are related
to timing issues, such as differences in depreciation methods. Timing differences create deferred tax assets and liabilities.
Deferred tax assets generally represent items that can be used as a tax deduction or credit in future tax returns for which we
have already recorded the tax benefit in our financial statements. We record valuation allowances for deferred tax assets
when the amount of estimated future taxable income is not likely to support the use of the deduction or credit. We had
approximately $24 million in foreign tax credit carryforwards at March 31, 2007, that are available to reduce our obligations
to pay U.S. federal income taxes on our earnings in future years. Those foreign tax credit carryforwards will expire at dates
ranging from seven to ten years in the future if our earnings and current obligations to pay U.S. federal income taxes are not
sufficient to allow their utilization before they expire. Any significant reduction in future taxable income, changes in our
sources of taxable income, or changes in U.S. or foreign tax laws could result in the expiration of foreign tax credit
carryforwards. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which
payment has been deferred or income taxes related to expenses that have not yet been recognized in the financial statements
but have been deducted in our tax return.

For additional disclosures on income taxes, see Notes 1 and 6 of “Notes to Consolidated Financial Statements.”

Pension and Other Postretirement Benefit Plans

The measurement of our pension and postretirement obligations and costs are dependent on a variety of assumptions
determined by management and used by our actuaries. These assumptions include estimating the present value of projected
future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as
salary increases and demographic experience. The assumptions we have made may have an effect on the amount and timing
of future contributions. The plan trustee conducts an independent valuation of the fair value of pension plan assets. The
significant assumptions used in the calculation of pension and postretirement obligations are:

• Discount rate – The discount rate is based on investment yields available at the measurement date on corporate long-

term bonds rated AA.

•

Salary growth – The salary growth assumption is a factor of our long-term actual experience, the near-term outlook,
and assumed inflation.

Expected return on plan assets – The expected return reflects asset allocations and investment strategy.

Retirement and mortality rates – Retirement rates are based on actual plan experience along with our near-term
outlook. Early retirement assumptions are based on our actual experience. Mortality rates are based on standard
group annuity (RP-2000) mortality tables.

• Health care cost trends – For postretirement medical plan obligations and costs, we make assumptions on future
increases in medical costs. These assumptions are based on our actual experience along with third-party forecasts of
long-term medical cost trends.

The effect of actual results differing from our assumptions are accumulated and amortized over future periods and,

therefore, generally affect our recognized expense in such future periods.

Sensitivity Analysis. The effect of the indicated decrease or increase in the selected assumptions is shown below,

assuming no change in benefit levels:

(in thousands of dollars)

Effect on

2007 Projected
Benefit Obligation
Increase
(Decrease)

Effect on
Annual Expense
Increase
(Decrease)

Changes in Assumptions for Pension Benefits
1% increase in discount rate………………………………………………………………………………………… $
1% decrease in discount rate…………………………………………………………………………………………

(25,677)

31,310

1% increase in salary scale……………………………………………………………………………………………
1% decrease in salary scale…………………………………………………………………………………………

1% increase in rate of return on assets…………………………………...…………..................…………...………
1% decrease in rate of return on assets…………………………………………...…………..................……..……

Changes in Assumptions for Other Postretirement Benefits
1% increase in discount rate…………………………………………………………………………………………
1% decrease in discount rate…………………………………..……………...…………..................………………

1% increase in medical inflation rate…………………………………………...…………..................……..………
1% decrease in medical inflation rate……………………..…………...…………..................………………………

6,517

(7,668)

N/A

(4,818)

5,736

1,926
(1,720)

(2,571)

3,231

2,205

(1,858)

(2,322)

2,323

151
(131)

See Note 10 of “Notes to Consolidated Financial Statements” for additional information on pension and

postretirement benefit plans.

Other Estimates and Assumptions

Other management estimates and assumptions are routinely required in preparing our financial statements, including
the determination of valuation allowances on accounts receivable, value-added tax credits in Brazil, and the determination of
the fair value of assets, such as assets related to tobacco growing projects in Africa and our investment in our Zimbabwe
operations. Changes in market and economic conditions, local tax laws, and other related factors are considered each
reporting period, and adjustments to the accounts are made based on management’s best judgment.

OTHER INFORMATION REGARDING TRENDS
AND MANAGEMENT’S ACTIONS

Our financial performance depends on our ability to maintain efficient operations, to receive an appropriate price for
our products, and to secure the tobacco quality and volumes desired by our customers. Worldwide flue-cured production by
exporting countries (excluding China) in fiscal year 2007 saw a decline of about 8% to 1.6 billion kilos. Flue-cured
production declines in Brazil and Greece accounted for over 70% of the overall decrease. In Brazil, in fiscal year 2007, we
reduced our farmer contracts because of the worldwide oversupply of flue-cured tobacco. European Union flue-cured
production fell as changes in tobacco subsidy levels reduced production. Flue-cured production by exporting countries
excluding China is forecast to increase by about 4% in fiscal year 2008 despite an additional decrease in production in Brazil.
Over half of the increase is expected to come from the United States. After many years of falling crop sizes in the United
States, both flue-cured and burley crops increased in fiscal year 2007 and are forecast to increase in fiscal year 2008 because
of strong customer demand. The world flue-cured tobacco market is expected to remain in oversupply in fiscal year 2008 but
with uncommitted inventories moderating. Burley crops in exporting countries (excluding China) decreased by 11% in fiscal
year 2006 and 16% in fiscal year 2007, bringing the two-year decrease to about 16%. Production is forecast to decline to
about 595 million kilos in fiscal year 2008, and uncommitted inventories of burley tobaccos are expected to decrease. During
fiscal year 2007, farmers in Malawi protested auction pricing levels, but the early market results for fiscal year 2008 indicate
much stronger pricing for a relatively smaller crop. Any disruption in the marketing of the crop in Malawi would have a
significant impact on world supply of burley tobacco and on our financial results.

We expect that near-term demand for leaf tobacco will be flat or decline slightly primarily due to the flattening trend
in world cigarette consumption and improved leaf utilization by cigarette manufacturers. The improvements in leaf
utilization by manufacturers along with a possible shift to smokeless products may mean that demand for cigarette leaf
tobacco has peaked and will not grow with any growth in consumption. On a year-to-year basis, we are susceptible to
fluctuations in leaf supply due to crop size and leaf demand as manufacturers adjust inventories or respond to changes in the
cigarette market.

We estimate that industry worldwide uncommitted flue-cured and burley inventories totaled about 145 million kilos,
excluding inventories of Asian government-owned monopolies, at March 31, 2007, nearly the same as the prior year in total.
However, flue-cured inventories increased while burley stocks fell. With the change in forecast production levels in fiscal
year 2008, it is likely that industry inventories of uncommitted stocks will decline in the coming year.

Cigar consumption continues to grow in the United States, while consumption within the main European Union
markets has remained flat. Within the smokeless segment of the dark tobacco business, consumption in the United States in
calendar year 2006 of loose-leaf chewing tobacco declined by 0.3%, while the consumption of moist snuff products grew by
about 8%. We believe that supplies of dark tobacco are generally in balance with demand, and we believe that there is an
adequate supply of suitable dark tobacco in the world market to meet the demand of the manufacturers of smokeless tobacco
products. However, supply of good quality wrapper remains tight.

We are seeing an increase in competition from small competitors in some of the markets where we conduct business.
These small competitors typically have lower overhead requirements. They provide little or no support to farmers. Due to
their lower cost structures, they often can offer a price on products that is lower than our price. We believe that the quality
controls and social responsibility programs we provide are necessary for our customers and make our products highly
competitive. For example, we have established worldwide farm programs to help to ensure that non-tobacco related materials
are kept out of the green tobacco delivered to the factories. In addition, we have established programs for good agricultural
practices and have been active in social responsibility endeavors in many of the developing countries in which we do
business. However, if our customers shift significant purchases to these smaller competitors, our financial results could be
negatively impacted.

Efforts to expand sources of African tobacco have required investments in working capital and operating facilities.
We have determined that tobacco volumes and prices are not sufficient for us to operate at a satisfactory return in those areas,
and we are taking steps to end our involvement in the African flue-cured growing projects. We have already taken
writedowns related to these operations.

An important trend in the tobacco industry has been consolidation among manufacturers of tobacco products. For
example, recently, Japan Tobacco Inc. acquired Gallaher Group Plc. This activity is expected to continue, particularly as
further privatization of state monopolies occurs, providing opportunities for acquisitions by international manufacturers. This
concentration trend could provide additional opportunities for us. A key success factor for leaf dealers is the ability to
provide customers with the quality of leaf and the level of service they desire at the lowest cost possible. In addition, the
international leaf dealers have larger historical market shares with some customers than with others. Consequently, our
potential growth will be affected by the growth of our major customers, and consolidation of customers may have at least a
short-term favorable or unfavorable impact on our business.

The European Union (“E.U.”) has taken action toward modifying the system of granting subsidies to tobacco
farmers. The E.U. subsidy makes up well over half of the revenue that a European farmer receives on a tobacco crop.
Beginning with the 2006 crop, which will affect us in fiscal year 2008, and through the 2009 crop, 40% of the subsidy has
been “decoupled” from production. The “decoupling” essentially means that a farmer can receive the subsidy granted even if
the farmer does not plant tobacco, so long as he keeps the land associated with that subsidy in good agricultural and
environmental condition. The 60% remaining portion of the subsidy remains subject to actual production of tobacco. This
means, in practical terms, that the total aid to tobacco farmers remains unchanged for those who continue; however, the
incentive to grow tobacco does change and some growers could decide to discontinue production. In the subsidy system
applicable to the interim period (crops 2006-2009) the E.U. tobacco budget allocated to each producing country for payment
of the “coupled” portion remains unchanged, even if total production drops within certain limits. The farmers who continue
to produce tobacco in countries where tobacco production declines during the interim period will receive a larger portion of
the “coupled” subsidy than they would have if the E.U. budget had not been fixed for the interim period.

Individual member states can increase the decoupled portion of the subsidy up to 100%. Three of the main tobacco
producing countries where we operate, directly or indirectly, Italy, Spain, and France, have decided not to decouple more
than the minimum 40% of the subsidy. The 2006 crop contracts between farmers and processors indicate a reduction of total
tobacco production of between 10% and 20%, mostly in the less desirable varieties and production areas, which means that
there should be an overall improvement in average quality of the crop. In Greece, where our joint venture, Socotab L.L.C.,
has oriental tobacco operations, the government opted to decouple 100% of the subsidy from the growing of tobacco. We
expect reduction in crop volumes in Greece as a result of the decoupling, and the joint venture is shifting volumes to
Macedonia. We have operations in two countries, Poland and Hungary, who joined the E.U. on May 1, 2004. In those
countries, the new subsidy system will not be implemented before the 2009 crop, and in the meantime, tobacco farmers will
receive subsidies mainly financed by the domestic budget.

Unless the subsidy system that is in place through 2009 is extended to 2013, the decoupled portion would increase to
50% in 2010, while the remaining 50% would be used to finance restructuring activities in the tobacco regions. The decline
in production will accelerate after the expiration of the interim period with the 2010 crop, unless action is taken to extend the
system through year 2013 or alternative funds are made available at the national level. We believe that customers continue to
value European tobacco and that in the interim period, the major influence on the farmers’ decisions to produce tobacco will
be the level of commercial prices for green tobaccos. Higher farm income will depend on leaf quality and on cost reduction.
In addition, confirmed support from European tobacco product manufacturers will be crucial to the long-term viability of
tobacco production in Europe.

We believe that if farmer prices do not increase or, alternatively, if the member states do not choose to implement
subsidies for tobacco production, the volume of tobacco produced in Europe will decline over time. In this case, our results
of operations could be negatively affected. The recorded value of our equity interests in long-lived assets, including both
consolidated and unconsolidated operations, that could be affected by these changes was approximately $38 million at March
31, 2007. In addition, unrealized currency losses for tobacco operations there were $16.7 million, net of taxes, $13.5 million
of which relates to Hungary.

World markets for all of the products that we handle are extremely competitive. We continue to focus on cost
reductions and efficiency improvements. In fiscal year 2006, we completed a program to eliminate $9 million in tobacco and
corporate overhead costs, some of which occurred in fiscal year 2006 and the remainder occurred in fiscal year 2007. In
addition, we eliminated additional corporate staff in fiscal year 2007 that will benefit fiscal year 2008. We are also planning
to sell aircraft based in the United States and in Africa.

Decreased social acceptance of smoking and increased pressure from anti-smoking groups have had an ongoing
adverse effect on sales of tobacco products, particularly in the United States. Also a number of foreign governments have
taken or proposed steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes, to prohibit
smoking in public areas, and to discourage cigarette consumption. A number of such measures are included in the Framework
Convention on Tobacco Control, which was negotiated under the auspices of the World Health Organization. In some cases,
such restrictions are more onerous than those proposed or in effect in the United States. We cannot predict the extent to
which government efforts to reduce tobacco consumption might affect the business of our primary customers. However, a
significant decrease in worldwide tobacco consumption brought about by existing or future governmental laws and
regulations would reduce demand for our products and services and could have a material adverse effect on our results of
operations.

We are subject to the tax laws of many jurisdictions, and from time to time contest assessments of taxes due.
Changes in tax laws or the interpretation of tax laws can affect our earnings, as can the resolution of various pending and
contested tax issues. The consolidated income tax rate is also affected by a number of factors, including, but not limited to,
the mix of domestic and foreign earnings and investments, local tax rates of subsidiaries, repatriation of foreign earnings, and
our ability to utilize foreign tax credits. In recent years, the mix of our foreign and U.S. earnings, along with other factors,
has resulted in excess foreign tax credits which are available to be carried forward to future years to reduce our obligations to
pay U.S. federal income taxes on our earnings in those years. At March 31, 2007, we had approximately $24 million in
foreign tax credit carryforwards that will expire at dates ranging from seven to ten years in the future if not utilized.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rates

After inventory is purchased, interest rate risk is limited in our business because customers usually pre-finance

purchases or pay market rates of interest for inventory purchased for their accounts.

Our customers pay interest on tobacco purchased for their order. That interest is paid at rates based on current
markets for variable rate debt. When we fund our committed tobacco inventory with fixed-rate debt, we might not be able to
recover interest at that fixed rate if current market interest rates were to fall. As of March 31, 2007, tobacco inventory of
$596 million included $476 million in inventory that was committed for sale to customers and $120 million that was not
committed. Committed inventory, after deducting about $134 million in customer deposits, represents our net exposure of
about $342 million. We normally maintain a substantial portion of our debt at variable interest rates in order to substantially
mitigate interest rate risk related to carrying fixed-rate debt. However, recently we generated a large cash balance that we
plan to use to fund seasonal purchases of tobacco, and thus, debt carried at variable interest rates was lower than normal at
$181 million at March 31, 2007. Although a hypothetical 1% change in short-term interest rates would result in a change in
annual interest expense of approximately $2 million, all of that amount could be offset with changes in charges to customers.
A hypothetical 1% change in interest rates would change interest income by $3 million. Our policy is to work toward a ratio
of floating-rate liabilities to fixed-rate liabilities that, over time, is reflective of the relationship between current and non-
current assets. Committed inventory is part of this relationship.

Currency

The international tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that
which is related to production costs, overhead, and income taxes in the source country. We also provide farmer advances that
are denominated in the local currency. Any currency gains or losses on those advances are usually offset by decreases or
increases in the cost of tobacco, which is priced in the local currency. However, the timing of the effect of the offset may not
occur until a subsequent quarter or fiscal year. Most of the tobacco operations are accounted for using the U.S. dollar as the
functional currency. Because there are no forward foreign exchange markets in many of our major countries of tobacco
origin, we often manage our foreign exchange risk by matching funding for inventory purchases with the currency of sale,
which is usually the U.S. dollar, and by minimizing its net investment in individual countries. In these countries, we are
vulnerable to currency gains and losses to the extent that monetary assets and liabilities denominated in local currency do not
offset each other. We recognized $1.4 million in net exchange gains due to remeasurement for fiscal year 2007, compared to
a $9.2 million in net exchange losses due to remeasurement for fiscal year 2006, and $1.6 million in net exchange losses due
to remeasurement for fiscal year 2005. We recognized $4.5 million in net exchange gains from foreign currency transactions
in fiscal year 2007, compared to net exchange losses of $1.8 million for the fiscal year ended March 31, 2006, and net
exchange gains of $400 thousand for the fiscal year ended March 31, 2005. In addition to foreign exchange gains and losses,
we are exposed to changes in the cost of tobacco due to changes in the value of the local currency in relation to the U.S.
dollar. For example, when we purchased the Brazilian crop in the beginning of fiscal year 2006, the local currency had

appreciated significantly against the U.S. dollar. Thus, the cost of the crop increased over that of the prior year, in U.S. dollar
terms.

In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency.
Examples of these domestic markets are Hungary and Poland. In each case, reported earnings are affected by the translation
of the local currency into the U.S. dollar.

Derivatives Policies

Hedging interest rate exposure using swaps and hedging foreign exchange exposure using forward contracts are
specifically contemplated to manage risk in keeping with management's policies. We may use derivative instruments, such
as swaps, forwards, or futures, which are based directly or indirectly upon interest rates and currencies to manage and reduce
the risks inherent in interest rate and currency fluctuations.

We do not utilize derivatives for speculative purposes, and we do not enter into market risk-sensitive instruments for
trading purposes. Derivatives are transaction specific so that a specific debt instrument, contract, or invoice determines the
amount, maturity, and other specifics of the hedge.

[THIS PAGE INTENTIONALLY LEFT BLANK]

Item 8. Financial Statements and Supplementary Data

UNIVERSAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands of dollars, except per share data)

Fiscal Year Ended March 31,
2006

2005

2007

Sales and other operating revenues………………….……………..............……………………… $

2,007,272

1,781,312

1,667,193

Costs and expenses

Cost of goods sold……………………………………………..……………………………
Selling, general and administrative expenses…………………..…………………………
Restructuring and impairment costs…………………………………………………..……
European Commission fines………………………………………..……...........…………

1,563,522
249,269
30,890
—

Operating income……………………………………………………..……………………………
Equity in pretax earnings of unconsolidated affiliates……...………………………………
Interest income……...………………………………………………………………………
Interest expense………………………………………………………………..……………

Income before income taxes and other items………………………….……………………………
Income taxes………………………………………………………...………………………
Minority interests, net of income taxes…………………………………………………....

163,591
14,235
10,845
53,794

134,877
61,126
(6,660)

1,412,209
252,376
57,463
—

59,264
14,140
2,056
60,787

14,673
21,933
(4,287)

1,284,331
217,722
—
14,908

150,232
14,967
1,123
41,599

124,723
54,198
1,969

Income (loss) from continuing operations……………………………………………….…………

80,411

(2,973)

68,556

Income (loss) from discontinued operations, net of income taxes………………………….………

(36,059)

Net income…………………………………………...……………………………………………

44,352

Dividends on convertible perpetual preferred stock………………………….……………………

(14,685)

10,913

7,940

—

27,457

96,013

—

Earnings available to common shareholders……………………………………………….……… $

29,667

7,940

96,013

Earnings (loss) per common share:

Basic:

From continuing operations……………………………………………………….…… $
From discontinued operations……………………………………………………….…
Net income………………………………………………………………….…………… $

Diluted:

2.53
(1.39)

1.14

2.52
(1.39)

1.13

(0.12)
0.43

0.31

(0.12)
0.43

0.31

2.68
1.08

3.76

2.66
1.07

3.73

See accompanying notes.

UNIVERSAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)

Current assets

ASSETS

March 31,

2007

2006

Cash and cash equivalents…………………………………………………….......................……………..…… $
Accounts receivable, net…………………………………………………………………………………………
Advances to suppliers, net…………………………………………………………………………………………
Accounts receivable—unconsolidated affiliates…………………….........................................……………..…
Inventories—at lower of cost or market:

358,236
261,106
113,396
37,290

Tobacco……………………………………………………………………………………….................
Other…………………………………………………………………………………..………...............
Prepaid income taxes………………………………………………………….…………………………………
Deferred income taxes…………………………………………………….………………………………………
Other current assets………………………………………………….……….......................……………..………
Current assets of discontinued operations………………………………………………….……………………
Total current assets………………………………………………………….......................……………

Property, plant and equipment

Land……………………………………………………………………...………………………..….……………
Buildings…………………………………………………………………………….......................……………
Machinery and equipment…………………………………………………………….......................……………

Less accumulated depreciation…………………………………………………….………....................

Other assets

Goodwill and other intangibles…………………………….……………………………………………………
Investments in unconsolidated affiliates……………………………..……………………………………………
Deferred income taxes………………………………………………………………….……….…………………
Other noncurrent assets……………………………………………………..……………………………………
Noncurrent assets of discontinued operations……………………………………………………..………………

595,901
40,577
8,760
25,182
62,480
42,437
1,545,365

16,640
241,410
512,586
770,636
(410,478)
360,158

104,284
104,316
81,003
133,696
—
423,299

62,486
212,639
119,131
16,675

666,708
42,746
7,351
22,078
47,338
609,028
1,806,180

16,796
252,148
537,343
806,287
(394,830)
411,457

105,802
95,988
85,994
170,223
217,020
675,027

Total assets………………………………………..…………………………...………………………… $

2,328,822

2,892,664

UNIVERSAL CORPORATION

CONSOLIDATED BALANCE SHEETS—(Continued)

(in thousands of dollars)

Current liabilities

LIABILITIES AND SHAREHOLDERS’ EQUITY

Notes payable and overdrafts…………………………………………………..…………………….................. $
Accounts payable………………………………………………………………………………………...………
Accounts payable—unconsolidated affiliates……………………………………………………………………
Customer advances and deposits………………………………………………………………………...............
Accrued compensation……………………………………………………..……………………………………
Income taxes payable…………………………………………………………………...………..………………
Current portion of long-term obligations……………………………………………….…………….................
Current liabilities of discontinued operations……………………………………………….……………..........
Total current liabilities……………………………………………………………………………………

Long-term obligations………………...…………………………………………………………….……………………
Pensions and other postretirement benefits…………………………………………………...………………................
Other long-term liabilities……………………………...……………………………………………...…………………
Deferred income taxes…………………………………………………..……………………………………………..…
Noncurrent liabilities of discontinued operations………………………………………………………………………..
Total liabilities………………...............….....................……………………………..............................

March 31,

2007

2006

131,159
220,181
644
133,608
18,519
11,549
164,000
13,314
692,974

398,952
100,004
70,528
29,809
—
1,292,267

318,710
194,862
2,727
98,750
16,996
3,129
8,537
285,418
929,129

762,201
100,414
68,373
31,072
18,805
1,909,994

Minority interests……………………………………………………………………………………………...…………

5,822

17,799

Shareholders’ equity

Preferred stock:

Series A Junior Participating Preferred Stock, no par value, 500,000 shares
authorized, none issued or outstanding………………………………………………………………
Series B 6.75% Convertible Perpetual Preferred Stock, no par value, 5,000,000
shares authorized, 220,000 shares issued and outstanding (200,000 at March 31, 2006)…………

Common stock, no par value, 100,000,000 shares authorized, 26,948,599 shares issued and
outstanding (25,748,306 at March 31, 2006)………………………………………………………..……..........
Retained earnings…………………………………………………………………………………………………………
Accumulated other comprehensive loss…………………………………………………………………………..………
Total shareholders' equity………………………………………………….............................................

—

213,024

193,546

176,453
682,232
(40,976)
1,030,733

120,618
697,987
(47,280)
964,871

Total liabilities and shareholders' equity………………………………………………………………… $

2,328,822

2,892,664

See accompanying notes.

UNIVERSAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

Cash Flows From Operating Activities of Continuing Operations:

Net income………………………………………………………………………………... $
Adjustments to reconcile net income to net cash provided (used) by
operating activities of continuing operations:

Net loss (income) from discontinued operations…………………………………………
Depreciation…………………………………………………………………………….
Amortization……………………………………………………………………………
Provision for losses on advances and guaranteed loans to suppliers……………………
Translation (gain) loss, net………………………………………………………………
Deferred income taxes……………………………………………………………………
Minority interests…………………………………………………………………………
Equity in net income of unconsolidated affiliates, net of dividends……………………
Restructuring and impairment costs……………………………………………………
Accrued liability for European Commission fines………………………………………
Other, net………………………………………………………………………….........
Changes in operating assets and liabilities, net:

Accounts and notes receivable………………………………………………………
Inventories and other assets……………………………………………………………
Income taxes…………………………………………………………………………
Accounts payable and other accrued liabilities………………………………………
Net cash provided (used) by operating activities of continuing operations……………

Cash Flows From Investing Activities of Continuing Operations:

Purchase of property, plant and equipment………………………………………………
Purchase of business, net of cash acquired………………………………………………
Proceeds from sale of businesses, less $21,727 cash of businesses sold…………………
Proceeds from sale of property, plant and equipment……………………..……………
Other, net……………………………………………………………………………..…
Net cash provided (used) by investing activities of continuing operations………………

Cash Flows From Financing Activities of Continuing Operations:

Issuance (repayment) of short-term debt, net……………………………………………
Issuance of long-term debt………………………………………………………………
Repayment of long-term debt……………………………………………………………
Dividends paid to minority shareholders…………………………………………………
Issuance of convertible perpetual preferred stock, net of issuance costs…………………
Issuance of common stock………………………………………………………………
Dividends paid on convertible perpetual preferred stock………………………………
Dividends paid on common stock………………………………………………………
Other……………………………………………………………………………............
Net cash provided (used) by financing activities of continuing operations……………
Net cash provided by continuing operations…………………………………………

Fiscal Year Ended March 31,
2006

2005

2007

44,352

7,940

96,013

36,059
46,423
1,882
31,822
(1,416)
(654)
(6,660)
(653)
30,890
—
7,837

(81,254)
97,115
6,474
33,717
245,934

(25,178)
—
385,545
7,302
—
367,669

(140,406)
—
(208,530)
(1,893)
19,478
50,958
(14,685)
(45,423)
826
(339,675)
273,928

(10,913)
46,925
3,386
28,486
9,235
(28,653)
(4,287)
11,665
57,463
—
(4,138)

(541)
(145,490)
1,080
67,571
39,729

(55,743)
—
—
7,988
12,199
(35,556)

52,135
—
(190,032)
(2,739)
193,546
3,098
—
(43,716)
(973)
11,319
15,492

(27,457)
51,492
4,718
2,324
1,591
(4,710)
1,970
(3,278)
—
14,908
(5,565)

(22,630)
(95,115)
(1,982)
(53,209)
(40,930)

(78,898)
(2,281)
—
2,379
(15,058)
(93,858)

47,286
294,958
(149,069)
(3,443)
—
4,867
—
(41,452)
(853)
152,294
17,506

UNIVERSAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

Cash Flows From Discontinued Operations:

Net cash provided (used) by operating activities of discontinued operations…………… $
Net cash used by investing activities of discontinued operations………………………
Net cash provided (used) by financing activities of discontinued operations……………
Net cash provided (used) by discontinued operations…………………………………
Effect of exchange rate changes on cash……………………………………………………………
Deconsolidation of Zimbabwe operations…………………………………………………………
Net increase in cash and cash equivalents…………………...……………………………………
Cash and cash equivalents of continuing operations at beginning of year…………………………
Cash and cash equivalents of discontinued operations at beginning of year………………………
Less: Cash and cash equivalents of discontinued operations at end of year………………………
Cash and Cash Equivalents at End of Year…………………………………………………… $

Supplemental information—cash paid from continuing operations:

Interest……………………………………………………….............………………… $

Income taxes, net of refunds…………………………………………………………… $

Fiscal Year Ended March 31,
2006

2005

2007

50,477
(9,589)
(23,068)
17,820
95
—
291,843
62,486
4,146
239

358,236

58,064

54,855

23,307
(28,206)
4,509
(390)
(128)
(6,967)
8,007
54,089
4,536
4,146

62,486

57,782

43,716

(46,025)
(34,495)
82,016
1,496
313
—
19,315
36,270
3,040
4,536

54,089

41,990

58,474

See accompanying notes.

UNIVERSAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands of dollars)

2007

Fiscal Year Ended March 31,
2006

2005

Preferred Stock:
Series B 6.75% Convertible Perpetual Preferred Stock:
Balance at beginning of year………………………………… $
Issuance of convertible perpetual preferred

stock, net of issuance costs………………………………

Balance at end of year………………………………………

Common Stock:
Balance at beginning of year…………………………………
Issuance of common stock and exercise of stock options……
Accrual of stock-based compensation………………………
Balance at end of year………………………………………

Retained Earnings:
Balance at beginning of year…………………………………
Net income……………………………………………………
Cash dividends declared:
Series B 6.75% convertible perpetual preferred stock

193,546

19,478
213,024

120,618
51,593
4,242
176,453

—

193,546
193,546

117,520
3,098
—
120,618

112,505
5,015
—
117,520

697,987
44,352

44,352

733,763
7,940

7,940

679,202
96,013

96,013

($66.75 per share in 2007)………………………………
Common stock ($1.74 per share in 2007;

(14,685)

$1.70 per share in 2006; $1.62 per share in 2005)……
Balance at end of year………..…………………….......……

(45,422)
682,232

Accumulated Other Comprehensive Income (Loss):
Balance at beginning of year…………………………………
From Continuing Operations:
Translation adjustments, net of income taxes……………
Foreign currency hedge adjustment, net of income taxes…
Minimum pension liability, net of income taxes…………
Adjustment for the adoption of FASB Statement No. 158

for pensions and other postretirement benefits,

(47,280)

8,858
1,615
16,140

net of income taxes…………………………...………

(28,551)

From Discontinued Operations:
Translation adjustments, net of income taxes……………
Foreign currency hedge adjustment, net of income taxes…
Minimum pension liability, net of income taxes…………
Total comprehensive income (loss)…………………………
Balance at end of year………………………………...….....
(40,976)
Shareholders’ Equity at End of Year……………………… $ 1,030,733

(4,254)
4,195
8,301

(4,254)
4,195
8,301
79,207

—

(43,716)
697,987

(28,895)

(3,065)
(292)
(9,409)

—

(5,394)
1,371
(1,596)

(3,065)
(292)
(9,409)

(5,394)
1,371
(1,596)
(10,445)

—

(41,452)
733,763

(31,874)

8,790
1,109
1,592

—

3,376
(5,143)
(6,745)

(47,280)
964,871

(28,895)
822,388

8,790
1,109
1,592

3,376
(5,143)
(6,745)
98,992

UNIVERSAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)

2007

Fiscal Year Ended March 31,
2006

2005

Preferred Shares Outstanding:
Series B 6.75% Convertible Perpetual Preferred Stock:
(in thousands of shares)
Balance at beginning of year…………………………………
Issuance of convertible perpetual preferred stock……………
Balance at end of year………………………………………

Common Shares Outstanding:
(in thousands of shares)
Balance at beginning of year……………………….…………
Issuance of common stock and exercise of

stock options………………………………………………
Balance at end of year………………………………………

200
20
220

25,748

1,201
26,949

See accompanying notes.

—
200
200

25,669

79
25,748

25,447

222
25,669

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)

NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company”, is
one of the world’s leading leaf tobacco merchants and processors. The Company conducts business in more than 30
countries, primarily in major tobacco-growing regions of the world.

Universal previously had operations in lumber and building products and in agri-products. The lumber and building
products businesses, along with a portion of the agri-products operations, were sold on September 1, 2006. In December
2006, the Company adopted a plan to sell the remaining agri-products operations. One of those agri-products businesses was
sold in January 2007, another was sold in May 2007, and the remaining business is expected to be sold during fiscal year
2008. The lumber and building products operations and the agri-products operations are reported as discontinued operations
for all periods in the accompanying financial statements. See Note 2 for additional discussion of the Company’s
discontinued operations.

Consolidation

The consolidated financial statements include the accounts of Universal Corporation and all domestic and foreign
subsidiaries in which the Company maintains a controlling financial interest. Control is generally determined based on a
voting interest of greater than 50%, such that Universal controls all significant corporate activities of the subsidiary. All
significant intercompany accounts and transactions are eliminated in consolidation. None of the Company’s investments are
considered to be variable interest entities.

The equity method of accounting is used for investments in companies where Universal Corporation has a voting
interest of 20% to 50%. The investments are accounted for under the equity method because Universal exercises significant
influence over those companies, but not control. Investments where Universal has a voting interest of less than 20% are not
significant and are accounted for under the cost method. Under the cost method, the Company recognizes earnings upon its
receipt of dividends.

As of January 1, 2006, the Company deconsolidated its operations in Zimbabwe under accounting requirements that
apply under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government
restrictions. After the deconsolidation, an impairment charge was recorded to reduce the net investment in Zimbabwe
operations to estimated fair value (see Note 3). The Company is accounting for the investment on the cost method, as
required under the accounting guidance, and has reported it in investments in unconsolidated affiliates in the March 31, 2007
and 2006, consolidated balance sheets. As a regular part of its reporting, the Company reviews the conditions that resulted in
the deconsolidation of the Zimbabwe operations to confirm that such accounting treatment is still appropriate.

Investments in Unconsolidated Affiliates

The Company’s equity method investments and its cost method investments, which include its Zimbabwe
operations, are non-marketable securities. Universal reviews such investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be recovered. For example, the Company would
test such an investment for impairment if the investee were to lose a significant customer, suffer a large reduction in sales
margins, experience a major change in its business environment, or undergo any other significant change in its normal
business. In assessing the recoverability of equity or cost method investments, the Company uses discounted cash flow
models. If the fair value of an equity investee is determined to be lower than its carrying value, an impairment loss is
recognized. The preparation of discounted future operating cash flow analyses requires significant management judgment
with respect to future operating earnings estimates and the selection of an appropriate discount rate. The use of different
assumptions could increase or decrease estimated future operating cash flows, and the discounted value of those cash flows,
and therefore could increase or decrease any impairment charge.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Earnings per Share

The Company calculates basic earnings per share from continuing operations using earnings available to common
shareholders after payment of dividends on the Company’s Series B 6.75% Convertible Perpetual Preferred Stock and the
weighted average number of common shares outstanding during each period. Diluted earnings per share from continuing
operations is computed in a similar manner using the weighted average number of common shares and dilutive potential
common shares outstanding. Dilutive potential common shares are outstanding dilutive stock options and stock appreciation
rights that are assumed to be exercised, unvested restricted share units that are assumed to be fully vested and paid out in
shares of common stock, and shares of convertible perpetual preferred stock that are assumed to be converted when the effect
is dilutive. In periods when the effect of the convertible perpetual preferred stock is dilutive and these shares are assumed to
be converted into common stock, dividends paid on the preferred stock are excluded from the calculation of diluted earnings
per share from continuing operations.

In periods when the results from discontinued operations reflect a loss, the effect of dilutive potential common
shares is antidilutive to the per-share amount of that loss. Under the applicable financial reporting guidance, that antidilutive
effect is shown if the effect on earnings per share from continuing operations for the period is dilutive.

The calculations of earnings per share for the fiscal years ended March 31, 2007, 2006, and 2005, are provided in

Note 5.

Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less at the time of purchase are classified as cash

equivalents.

Advances to Suppliers

In some regions where it operates, the Company provides agronomy services and seasonal advances of seed,
fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the
procurement of those inputs. These advances are short term, are repaid upon delivery of tobacco to the Company, and are
reported in advances to suppliers in the consolidated balance sheet. Primarily in Brazil and certain African countries, the
Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In addition,
due to low crop yields and other factors, in some years individual farmers may not deliver sufficient volumes of tobacco to
fully repay their seasonal advances, and the Company may extend repayment of those advances into the following crop year.
The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheet. Both the current
and the long-term portions of advances to suppliers are reported net of allowances recorded when the Company determines
that amounts outstanding are not likely to be collected. Total allowances were $63.4 million at March 31, 2007, and $40.4
million at March 31, 2006, and were estimated based on the Company’s historical loss information and crop projections. The
allowances were increased by provisions for estimated uncollectible amounts of approximately $27.0 million in fiscal year
2007, $27.3 million in fiscal year 2006, and $1.0 million in fiscal year 2005. These provisions are included in selling,
general, and administrative expense in the consolidated statements of income. Write-downs charged against the allowances
totaled $6.8 million in fiscal year 2007, $2.0 million in fiscal year 2006, and $0.4 million in fiscal year 2005. Recoveries of
amounts previously charged off were not material in fiscal years 2007, 2006, and 2005. Interest on advances is recognized as
earned; however, interest accrual is discontinued when an advance is not expected to be fully collected. The Company had
certain farmer loans with a total outstanding principal balance of approximately $33 million and $45 million at March 31,
2007 and 2006, respectively, that were considered impaired. Approximately $24 million of the $63.4 million in total
allowances at March 31, 2007, and $17 million of the $40.4 million in total allowances at March 31, 2006, related to those
loans.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventories

Tobacco inventories are valued at the lower of cost or market. Raw materials primarily consist of unprocessed leaf
tobacco, which is clearly identified by type and grade at the time of purchase. The Company tracks the costs associated with
this tobacco in the final product lots, and maintains this identification through the time of sale. This method of cost
accounting is referred to as the specific cost or specific identification method. The predominant cost component of the
Company’s inventories is the cost of the unprocessed tobacco. Direct and indirect processing costs related to these raw
materials are capitalized and allocated to inventory in a systematic manner. The Company does not capitalize any interest or
sales-related costs in inventory. Freight costs are recorded in cost of goods sold. Other inventories consist primarily of seed,
fertilizer, packing materials, and other supplies, and are valued principally at the lower of average cost or market. Inventory
valuation allowances for damaged or slow-moving items were $8.6 million and $6.4 million at March 31, 2007 and 2006,
respectively.

Property, Plant and Equipment

Depreciation of plant and equipment is based upon historical cost and the estimated useful lives of the assets.
Depreciation is calculated using the straight-line method. Buildings include tobacco processing and blending facilities,
offices, and warehouses. Machinery and equipment consists of processing and packing machinery and transportation, office,
and computer equipment. Estimated useful lives range as follows: buildings—15 to 40 years; processing and packing
machinery—3 to 11 years; transportation equipment—3 to 10 years; and office and computer equipment—3 to 10 years. The
Company capitalized interest of approximately $800 thousand in fiscal year 2006 and $500 thousand in fiscal year 2005 on
the construction of a tobacco processing facility in Mozambique. No interest was capitalized in fiscal year 2007.

Goodwill and Other Intangibles

Goodwill and other intangibles include principally the excess of the purchase price of acquired companies over the
net assets. Goodwill is carried at the lower of cost or fair value. The Company uses discounted cash flow models to estimate
the fair value of goodwill. The preparation of discounted future operating cash flow analyses requires significant management
judgment with respect to operating earnings estimates, and the selection of an appropriate discount rate. The use of different
assumptions could increase or decrease estimated future operating cash flows, and the discounted value of those cash flows,
and could increase or decrease any impairment charge.

Based on applicable accounting guidance, the Company reallocated goodwill to revised reporting units during fiscal
year 2007 in conjunction with redefining its operating segments. Following the reallocation, a $1.7 million pretax charge
was recorded to write off goodwill that was impaired. No charges for goodwill impairment were recorded in fiscal years
2006 or 2005.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events, changes in business conditions, or other
circumstances provide an indication that such assets may be impaired. Potential impairment is initially assessed by
comparing management’s undiscounted estimates of future cash flows from the use or disposition of the assets to their
carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge is recorded to reduce the
carrying value to the discounted value of the estimated future cash flows.

Income Taxes

The Company provides deferred income taxes on temporary differences between the book and tax basis of its assets
and liabilities. Those differences arise principally from employee benefit accruals, depreciation, deferred compensation,
undistributed earnings of unconsolidated affiliates, undistributed earnings of foreign subsidiaries not permanently reinvested,
restructuring and impairment costs, and valuation allowances on farmer advances and ICMS tax credits. At March 31, 2007,
the cumulative amount of permanently reinvested earnings of foreign subsidiaries, on which no provision for U.S. income
taxes had been made, was approximately $53 million.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is reported in the consolidated balance sheets and the consolidated

statements of changes in shareholders’ equity and consists of:

2007

March 31,
2006

2005

From continuing operations:
Translation adjustments

Before income taxes……………………….………….………………………………....… $
Allocated income taxes…………………………..…………….……………………………

(16,585)

(30,136)

2,059

6,753

(25,472)
5,154

Foreign currency hedge adjustment

Before income taxes………………………………………………....………………………
Allocated income taxes…………………………………………….....…….………………

3,741
(1,309)

1,229
(412)

1,706
(597)

Pension and other postretirement benefits:

Minimum pension liability (before the adoption of SFAS 158)

Before income taxes………………………………………………........…………….
Allocated income taxes…………………………………………….....…………….…

(509)
178

(25,341)
8,869

(10,866)
3,803

Adjustment to recognize funded status of pension and other
postretirement benefit plans upon adoption of SFAS 158

Before income taxes………………………………………………….....……………
Allocated income taxes………………………………………………......……….……

(44,153)
15,602

—
—

Total from continuing operations…………………………………………….…………………

(40,976)

(39,038)

(26,272)

From discontinued operations:
Translation adjustments

Before income taxes……………………….………………………….……………………
Allocated income taxes…………………………..……………………….…………………

—
—

6,544

(2,290)

14,843
(5,195)

Foreign currency hedge adjustment

Before income taxes……………………………………………….......………….…………
Allocated income taxes……………………………………………......……………………

—
—

(6,454)
2,259

(8,561)

2,995

Pension and other postretirement benefits:

Minimum pension liability (before the adoption of SFAS 158)

Before income taxes………………………………………………........…………….
Allocated income taxes…………………………………………….....…………….…

Total from discontinued operations………………………………………………......……….…

—
—

—

(12,771)

(10,315)

4,470

3,610

(8,242)

(2,623)

Total accumulated other comprehensive loss………………………………………………..……… $

(40,976)

(47,280)

(28,895)

During the fiscal year ended March 31, 2007, in recording the loss on the sale of most of its non-tobacco operations,
the Company recognized in loss from discontinued operations and in net income the following amounts previously recorded
in accumulated other comprehensive loss: foreign currency translation adjustment gains of $13.3 million, less $4.1 million in
allocated income taxes; minimum pension liability charges of $12.8 million, less $4.5 million in allocated income taxes; and
foreign currency hedge adjustment losses of $7.2 million, less $2.5 million in allocated income taxes.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Values of Financial Instruments

The fair values of the Company’s long-term obligations, disclosed in Note 8, have been estimated using market
prices where they are available and discounted cash flow analyses based on current incremental borrowing rates for similar
classes of borrowers and borrowing arrangements. The carrying amount of all other assets and liabilities that qualify as
financial instruments approximates fair value.

Derivative Financial Instruments

The Company recognizes all derivatives on the balance sheet at fair value. Interest rate swaps and forward foreign
currency exchange contracts are used from time to time to minimize interest rate and foreign currency risk. The Company
enters into such contracts only with financial institutions of good standing, and the total credit exposure related to non-
performance by those institutions is not material to the operations of the Company.

All interest rate swaps have been accounted for as fair value hedges. The Company recorded deferred gains on the
termination of certain interest rate swaps totaling $4.0 million in fiscal year 2005. These gains are being amortized to interest
expense over the maturities of the debt instruments that were hedged. No material amounts were recorded in net income
during 2007, 2006, or 2005 due to hedge ineffectiveness. The Company had approximately $50 million principal amount of
fixed rate debt hedged with interest rate swaps at March 31, 2007.

Translation and Remeasurement of Foreign Currencies

The financial statements of foreign subsidiaries having the local currency as the functional currency are translated
into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each
reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a
separate component of comprehensive income or loss.

The financial statements of foreign subsidiaries having the U.S. dollar as the functional currency, with certain
transactions denominated in a local currency, are remeasured into U.S. dollars. The remeasurement of local currency amounts
into U.S. dollars creates remeasurement adjustments that are included in net income. The Company recognized net exchange
gains due to remeasurement of $1.4 million in the fiscal year ended March 31, 2007, and net exchange losses due to
remeasurement of $9.4 million and $1.5 million for the fiscal years ended March 31, 2006 and 2005, respectively. The
Company recognized $4.5 million in net exchange gains from foreign currency transactions for the fiscal year ended March
31, 2007, $1.8 million in net exchange losses for the fiscal year ended March 31, 2006, and $400 thousand in net exchange
gains for the fiscal year ended March 31, 2005.

The Company’s policy is to use the U.S. dollar as the functional currency for its consolidated subsidiaries located in
countries with highly inflationary economies and to remeasure any transactions of those consolidated subsidiaries
denominated in the local currency. The Company currently operates in only one country, Zimbabwe, whose economy is
classified as highly inflationary under applicable accounting guidance. As discussed above, the operations in Zimbabwe
were deconsolidated in fiscal year 2006 and are accounted for under the cost method.

Revenue Recognition

Revenue is recognized when title and risk of loss are passed to the customer, and the earnings process is complete.
The majority of the revenue recognized is based on the physical transfer of products to customers. The products delivered to
customers can be readily inspected and approved for acceptance. Universal also processes tobacco owned by its customers,
and revenue is recognized when the processing is completed.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation

Universal adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards
No. 123R, “Share-Based Payment” (“SFAS 123R”), effective at the beginning of fiscal year 2007. Under SFAS 123R, share-
based payments, such as grants of stock options, stock appreciation rights, restricted shares, and restricted share units, are
measured at fair value and reported as expense in the financial statements over the requisite service period. The Company
adopted SFAS 123R using the modified prospective transition method. Under this method, the Company began recognizing
fair value compensation expense as of the date SFAS 123R was adopted, but did not restate prior periods. Through fiscal
year 2006, the Company accounted for stock-based compensation under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations (“APB 25”). Under APB 25, compensation expense
was not recognized on fixed stock options issued by the Company since the exercise price equaled the market price of the
underlying shares on the date of grant. Statements of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”) and No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”
(“SFAS 148”) required companies that apply APB 25 to disclose pro forma net income and basic and diluted earnings per
share as if the fair value measurement and recognition methods in SFAS 123 had been applied to all awards. Additional
disclosures related to stock-based compensation and the adoption of SFAS 123R are included in Note 12.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles in the United
States requires management to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.

Accounting Pronouncements

Universal adopted the following accounting pronouncements during the fiscal year ended March 31, 2007:

• SFAS 123R, “Share-Based Payment,” adopted at the beginning of the fiscal year and discussed above under

“Stock Based Compensation” and in Note 12;

• The recognition and disclosure provisions of FASB Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”), adopted effective March 31, 2007. The recognition
provisions of SFAS 158 require employers who sponsor defined benefit pension or postretirement plans to
recognize the overfunded or underfunded status of each plan as an asset or liability in the balance sheet and to
recognize actuarial gains and losses and prior service costs and credits that are not included in pension or
postretirement benefit expense as a component of comprehensive income. SFAS 158 also has measurement
timing provisions that require that the funded status of plans be measured as of the balance sheet date, thereby
eliminating the option allowed under the prior guidance to measure the funded status at a date up to 90 days
before the balance sheet date. The measurement timing provisions of SFAS 158 are not effective until fiscal
years ending after December 15, 2008 and have not yet been adopted by the Company. Additional disclosures
related to the adoption of SFAS 158 are provided in Note 10.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition to the accounting pronouncements adopted in fiscal year 2007, the following pronouncements have been

issued and will become effective in future periods:

• FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes.” FIN 48 requires that positions taken or expected to be
taken in tax returns meet a “more-likely-than-not” threshold in order to be recognized in the financial
statements. It also provides guidance on measuring the amount of a tax position that meets the “more-likely-
than-not” criterion. FIN 48 is effective for fiscal years beginning after December 15, 2006, and will be adopted
by Universal in the first quarter of its fiscal year ending March 31, 2008. The Company is still in the process of
reviewing tax positions throughout its worldwide organization and has not yet quantified the effect of adopting
FIN 48 on its financial statements.

• FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which
establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is applicable for fiscal years beginning after November
15, 2007. The Company is reviewing the guidance in SFAS 157, but currently does not expect that it will have
a material effect on its financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

NOTE 2. DISCONTINUED OPERATIONS

During the fiscal year ended March 31, 2007, Universal implemented the following actions to divest all of its non-

tobacco operations:

•

In the quarter ended September 30, 2006, the sale of the Company’s lumber and building products segment and
a portion of its agri-products segment (the “Deli Operations”) was approved, contractually agreed to with the
buyer, and completed.

• On December 12, 2006, a plan to sell the remaining businesses in the agri-products segment was approved and
is expected to be completed within the next nine months. Those businesses were classified as “held for sale” as
of that date. The sale of one of the agri-products businesses was completed in January 2007, and the sale of
another was completed in May 2007.

As a result of these actions, the Company’s worldwide leaf tobacco business now represents its continuing
operations. The operating results and the assets and liabilities of the non-tobacco businesses are reported as discontinued
operations for all periods presented in the accompanying consolidated financial statements.

Sale of Deli Operations

On September 1, 2006, Universal completed the sale of the non-tobacco businesses managed by its wholly-owned
subsidiary, Deli Universal, Inc. (“Deli”) to NVDU Acquisition, B.V., a newly formed entity owned by affiliates of a
Netherlands-based merchant bank, a Netherlands-based private company, and managers of the businesses that were sold. As
discussed above, those businesses comprised the Company’s entire lumber and building products segment and a portion of its
agri-products segment. The total value of the transaction was approximately $565 million. After selling and other expenses,
Universal realized a net value of $551 million, consisting of net cash proceeds of $397 million and the buyer’s assumption of
$154 million of debt with the acquired businesses. The Company recorded a net loss on the sale of $35.0 million, consisting
of a pretax loss of $34.1 million and income tax expense of $0.9 million primarily related to net deferred tax assets that will
not be realized as a result of the sale. The sales price and loss on sale are subject to adjustment based on final settlement
under the terms of the agreement with the buyer.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Plan to Sell Remaining Agri-Products Operations

In December 2006, Universal approved a plan to sell the remaining non-tobacco agri-products businesses that were
not part of the sale of the Deli Operations. The Company expects to complete the sale of these businesses in multiple
transactions within the next nine months. A pretax impairment charge of $11.1 million was recorded to reduce the
Company’s aggregate net investment in two of the businesses to estimated fair value less costs to sell. Based on its
consolidated income tax position, the Company does not expect to realize a tax benefit on the expected loss on the sale of
these businesses and did not record an income tax benefit on the impairment charge. As noted above, the sale of one agri-
products business was completed in January 2007 at a small gain that was not material to the results of operations or financial
condition of the Company. In May 2007, subsequent to year end, the sale of another agri-products business was completed at
a price approximating the net book value after impairment.

Amounts Reported as Discontinued Operations in the Accompanying Financial Statements

The consolidated statements of income reflect the following income (loss) from discontinued operations, net of

income taxes, for the fiscal years ended March 31, 2007, 2006, and 2005, as discussed in more detail herein:

Fiscal Years Ended March 31,
2006

2007

2005

Operating results of discontinued operations, net of income taxes………………………..……… $ 8,987 $ 10,913
Net loss on sale of businesses and impairment charge on businesses

$ 27,457

held for sale, net of income taxes…………………………..………………………………

Income (loss) from discontinued operations, net of income taxes…………………………..……… $

(45,046)
(36,059)

—
10,913

—
27,457

The operating results for the Company’s discontinued non-tobacco operations for the fiscal years ended March 31,

2007, 2006, and 2005, were as follows:

Fiscal Years Ended March 31,
2006

2005

2007 (a)

Sales…………………..………….……………………………….......………………………....... $
Costs and expenses…………………..………….……………………………….......……………
Income before income taxes and other items…………………………..……………………………
Income taxes…………………..………….……………………………….......……………………
Minority interests, net of income taxes…………………..………….………………………………
Operating results of discontinued operations, net of income taxes…………………………..…… $

929,835
907,656
22,179

1,727,964
1,704,314
23,650

1,607,741
1,566,511
41,230

12,346
846
8,987

12,470
267
10,913

13,999
(226)
27,457

(a) Deli Operations were sold on September 1, 2006, and one of the remaining agri-products businesses was sold in January 2007.

Results for the fiscal year ended March 31, 2007, reflect those operations for only the period prior to sale.

As required under the applicable accounting guidance, the results shown above do not reflect depreciation expense
after July 6, 2006, for the Deli Operations and December 12, 2006, for the other agri-products operations, which are the
respective dates they were classified as “held for sale.” This increased the earnings of the discontinued operations for the
fiscal year ended March 31, 2007, by approximately $3.4 million before taxes and $2.3 million after taxes. In addition, as
permitted under the accounting standards, the Company has allocated interest expense to the discontinued operations for all
periods based on the ratio of the net assets of those operations to consolidated net assets. Total interest allocated in addition
to direct third-party interest incurred was $6.9 million for the portion of fiscal year 2007 before the sale of the businesses,
$15.9 million for fiscal year 2006, and $13.0 million for fiscal year 2005.

The assets and liabilities of the discontinued non-tobacco operations reflected in the accompanying consolidated

balance sheets as of March 31, 2007 and 2006, were composed of the following:

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31,

2007 (b)

2006

Assets

Cash and cash equivalents…………………………..……………………………………........………….………… $ 240
Accounts receivable, net…………………………..……………………………………........………….……………
16,656
Inventories:

Lumber and building products…………………..………….……………………………….......………………
Agri-products…………………..………….…………………………..………………………………….......…
Other current assets…………………………..………………………..…………………………………………...
Total current assets…………………..………….……………………………….......………………………......
Property, plant and equipment, net…………………………..……………………………………........………….
Goodwill and other intangibles…………………………..……………………………………........………….……
—
Other noncurrent assets…………………………..……………………………………........………….……………
571
Total noncurrent assets…………………..………….……………………………….......………………………
2,421
Total assets…………………..………….……………………..……………………………………….......…… $ 42,437

—
22,499
621
40,016
1,850

$ 4,146
253,374

170,331
165,822
15,355
609,028
170,640
30,328
16,052
217,020

$ 826,048

Liabilities

Notes payable and overdrafts…………………………..……………………………………........………….……… $ 492
Accounts payable…………………………..………………………..………………………………………….......
11,712
Other current liabilities…………………………..……………………………………........………….……………
843
Total current liabilities…………………..………….……………………………….......………………………
13,047
Other long-term liabilities…………………………..………………………………..………………………………
267
Deferred income taxes…………………………..………………………..…………………………………………
—
Total noncurrent liabilities…………………..………….……………………………….......……………………
267
Total liabilities…………………..………….…………………………..………………………………….......… $ 13,314

$ 129,891
137,870
17,657
285,418
12,855
5,950
18,805

$ 304,223

(b) Balances for agri-products operations not yet sold, but classified as "held for sale" at March 31, 2007, are

reported as current assets and current liabilities in the consolidated balance sheet at that date.

NOTE 3. RESTRUCTURING AND IMPAIRMENT COSTS

During the fiscal years ended March 31, 2007 and 2006, Universal recorded restructuring and impairment costs

related to several different activities and components of its business operations.

Impairment Costs Recorded During the Fiscal Year Ended March 31, 2007

The Company recorded impairment costs during the fiscal year ended March 31, 2007, totaling approximately $30.9
million before tax, $24.2 million after minority interests and related tax effects, or $0.93 per share, related to flue-cured
tobacco growing projects in Zambia and Malawi, as well as certain equipment and goodwill.

Impairment Charges on Flue-Cured Tobacco Growing Projects in Zambia and Malawi

Since fiscal year 2002, Universal has invested in various tobacco growing projects in several African countries.
Some of these projects involved the establishment and operational start-up of medium or large-scale farms. The primary
objective of the projects was to replace a portion of the volumes lost in recent years from the significant decline in production
of flue-cured tobacco in Zimbabwe and thus continue to meet customer demand for African-origin flue-cured tobacco.
Normally, several crop years are required to assess whether a growing project will be able to consistently meet planned
production levels.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During fiscal year 2007, progress toward completion of the latest crop cycle allowed the Company to begin
evaluating those African flue-cured growing projects having sufficient history to make a reliable assessment of longer-term
production potential. In connection with that review, the Company reduced its estimates of expected longer-term crop yields
and related future cash flows for certain growing projects in Zambia, based on actual yields achieved since inception of the
projects and other operational factors. Carrying values of the assets were also reviewed for potential impairment using
undiscounted cash flow estimates. Based on its review, the Company determined that those growing project investments
were impaired and recorded a charge of $12.3 million in the first quarter to reduce the carrying values of the related long-
lived assets to estimated fair value based on the discounted cash flows. Based on the Company’s outlook on its overall tax
position, no income tax benefit was recorded on the charge, and therefore, it reduced the Company’s net income by $12.3
million, or $0.47 per share. Also as a result of this review, the Company recorded a valuation allowance in the quarter ended
June 30, 2006, for deferred tax assets related to prior year operating losses in Zambia that reduced net income by an
additional $4.9 million, or $0.19 per share. Additional discussion of this valuation allowance is provided in Note 6.

Also as a result of its review of African flue-cured growing projects, the Company made the decision during the
fourth quarter to discontinue crop production on a large flue-cured growing project in Malawi and pursue the sale of the
leasehold interest in the land, as well as the related farm improvements, infrastructure, and equipment, to one or more third-
party farmers who would be expected to continue growing tobacco on all or a portion of the land. Based on discussions with
interested and qualified buyers, the Company recorded an impairment charge in the fourth quarter to adjust the carrying value
of the growing project assets to estimated fair value less cost to sell. Together with some small asset impairments in Zambia
related to actions taken to exit flue-cured growing projects there, the charge totaled approximately $12.9 million before tax.
After minority interests and income tax effects, the charge totaled approximately $3.3 million, or $0.13 per share.

The impaired assets in Zambia and Malawi are included in segment assets for flue-cured and burley leaf tobacco
operations – Other Regions in Note 14. Zambia, Malawi, and other African countries remain important sources of flue-cured
tobacco, and Universal expects to continue procuring tobacco grown by farmers in those origins. However, the Company
does not expect to continue operating flue-cured growing projects or providing seasonal crop financing to commercial
farmers for flue-cured tobacco production there.

Impairment of Equipment and Goodwill

In the third and fourth quarters of fiscal year 2007, the Company recorded charges for the impairment of certain
equipment and goodwill. In the third quarter, a charge of $1.8 million was recorded for the impairment of leaf tobacco
processing equipment previously used at the Company’s Danville, Virginia processing facility, which was closed in
December 2005, as discussed in more detail below. Plans to redeploy that equipment at another Universal processing facility
changed, and it will now be sold. Also in the third quarter, in conjunction with redefining its operating segments to reflect
the continuing operations in the leaf tobacco business, the Company reallocated its goodwill to revised reporting units based
on applicable accounting guidance. Following the reallocation, a $1.7 million charge was recorded to write off goodwill that
was impaired. In the fourth quarter, a charge of $2.2 million was recorded for the impairment of an aircraft being marketed
for sale. On a combined basis, these charges totaled $5.7 million before tax, $3.7 million after tax, or $0.14 per diluted share.

Restructuring and Impairment Costs Recorded During the Fiscal Year Ended March 31, 2006

During the fiscal year ended March 31, 2006, the Company recorded restructuring and impairment costs totaling
approximately $57.5 million before tax, $46.3 million after tax, or $1.80 per share. The restructuring costs ($7.1 million) and
a portion of the impairment costs ($21.2 million) were associated with decisions to close a leaf tobacco processing facility
and to implement certain other cost reduction initiatives. The remaining impairment costs ($29.2 million) resulted from
adjusting the Company’s investment in its operations in Zimbabwe to estimated fair value following deconsolidation of that
investment.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Closure of Danville Processing Facility and Other Cost Reduction Initiatives

The components of the pretax charge related to the facility closure and other cost reduction initiatives are as follows:

Closure of
Danville

Processing
Facility

Other Cost

Reduction
Initiatives

Total

Restructuring costs:

One-time termination benefits (involuntary)…………………………………………..……… $ 1,746
Special termination benefits (voluntary)…………………………………………..…………
2,963
Other costs……………………………….……………….………………………………….
85
4,794

$ 1,095
551
611
2,257

$ 2,841
3,514
696
7,051

Impairment costs:

Land, building and equipment…………………………………………………..……………

21,240

—

21,240

Total restructuring and impairment costs…………………………………………………...……… $ 26,034

$ 2,257

$ 28,291

During the third quarter of fiscal year 2006, the Company decided to close its leaf tobacco processing facility in
Danville, Virginia, and consolidate all of its flue-cured and burley tobacco processing in the United States into its Nash
County, North Carolina factory. The closure of the Danville facility, which was effective in December 2005, was the result
of the significant decline in U.S. tobacco production since 2000. The related restructuring and impairment cots are associated
with the Company’s reportable segment for the North America region of its flue-cured and burley leaf tobacco operations;
although they are not defined as a component of segment operating income. The Company also undertook various cost
reduction initiatives, including voluntary and involuntary staff reductions in the United States and the closure of two
administrative offices outside the U.S.

The one-time termination benefits outlined above were paid to 353 employees, including 32 full-time employees and
313 hourly employees whose positions were eliminated upon closure of the Danville facility. The special termination
benefits have been or will be paid to 31 employees who accepted voluntary separation offers, the majority of which were
made to employees at the Nash County factory to reduce the workforce there following the transfer of certain employees to
that facility from the Danville factory. The other restructuring costs represented lease costs on vacated office space and
employee relocation costs associated with the above actions.

The impairment costs outlined above represented adjustments to write down the carrying value of the land, building,
and equipment at the Danville facility to fair value. The Company offered the land and building for sale and adjusted their
carrying value to estimated fair value, based on information provided by outside brokers and on the Company’s recent
experience selling other leaf tobacco facilities in the United States. The land and building were sold during fiscal year 2007
at a price approximating their adjusted carrying value. Certain equipment at the Danville facility was and is expected to be
redeployed to other locations, although, as discussed above, plans to redeploy a portion of that equipment changed in fiscal
year 2007 and an additional impairment charge was recorded as a result of that decision. Based on the Company’s
impairment review, the carrying value of the equipment to be redeployed is supported by the estimated future cash flows
associated with the use of the equipment at the new locations. The remaining equipment has been and is expected to be used
for replacement parts, or sold for alternative use or scrap, and was written down to the related values estimated by two
outside sources. Should the Company decide not to redeploy any portion of the remaining designated equipment from the
Danville facility to other locations, that equipment would likely be used for replacement parts, or sold for alternative use or
scrap, and additional impairment costs could be incurred.

The $28.3 million in pre-tax restructuring and impairment costs associated with the Danville facility closure and the
other cost reduction initiatives reduced fiscal year 2006 income from continuing operations and net income by $17.1 million,
or $0.66 per diluted share. The impaired assets that had not been sold as March 31, 2007 or 2006 are included in segment
assets for flue-cured and burley leaf tobacco operations – North America in Note 14.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a reconciliation of the Company’s liability for the above restructuring costs through March 31,

2007:

One-Time

and Special

Termination
Benefits

Other Costs

Total

Costs and payments during the fiscal year ended March 31, 2006:

Costs charged to expense……………………………………………………………………… $

6,355

696

Payments………………………………………………………………………………………

Balance at end of year…………………………………………………………………………

Payments during the fiscal year ended March 31, 2007……………………………………………

Balance at end of year………………………………………………………………………… $

(1,744)

4,611

(3,280)
1,331

(261)

435

(245)
190

7,051

(2,005)

5,046

(3,525)
1,521

The payments for termination benefits were made to 374 employees during the fiscal year ended March 31, 2006,
and 36 employees during the fiscal year ended March 31, 2007. Substantially all of the restructuring liability at March 31,
2007, will be paid during the next twelve months.

Investment in Zimbabwe Operations

As discussed in Note 1, the Company deconsolidated its operations in Zimbabwe as of January 1, 2006, under U.S.
accounting requirements that apply under certain conditions to foreign subsidiaries that are subject to foreign exchange
controls and other government restrictions. After deconsolidation, the Company recorded a non-cash impairment charge of
$29.2 million to adjust the investment in those operations to estimated fair value. No income tax benefit was recognized on
the charge. The investment is now accounted for using the cost method and is reported on the balance sheet in investments in
unconsolidated affiliates. Business operations in Zimbabwe were not impacted by the financial reporting change or the non-
cash charge, and the Company intends to continue its operations there. The impairment charge associated with the
Zimbabwe operations reduced fiscal year 2006 income from continuing operations and net income by $29.2 million, or $1.13
per diluted share. The Company’s investment in the Zimbabwe operations was approximately $5.8 million at March 31,
2007, and $8.7 million at March 31, 2006. This investment is included in segment assets for flue-cured and burley leaf
tobacco operations – Other Regions in Note 14. In addition to the investment, the Company has a net foreign currency
translation loss associated with the Zimbabwe operations of approximately $7.2 million, which remains a component of
accumulated other comprehensive loss.

NOTE 4. EUROPEAN COMMISSION FINES AND OTHER LEGAL AND TAX MATTERS

European Commission Fines in Spain

In October 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw
Spanish tobacco processing market” totaling €20 million (approximately $27 million) for “colluding on the prices paid to,
and the quantities bought from, the tobacco growers in Spain.” Two of the Company’s subsidiaries, Tabacos Espanoles S.A.
(“TAES”), a purchaser and processor of raw tobacco in Spain, and Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were
among the five companies assessed fines. In its decision, the Commission imposed a fine of €108,000 on TAES, and a fine
of €11.88 million on Deltafina. Deltafina did not and does not purchase or process raw tobacco in the Spanish market, but
was and is a significant buyer of tobacco from some of the Spanish processors. The Company recorded a charge of
approximately $14.9 million in the second quarter of fiscal year 2005 to accrue the full amount of the fines assessed against
the Company’s subsidiaries.

In January 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The appeal
process is likely to take several years to complete, and the ultimate outcome is uncertain. The Company has deposited funds
in an escrow account with the Commission in the amount of the fine in order to stay execution during the appeal process.
These funds are accounted for as non-current assets.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

European Commission Fines in Italy

In 2002, the Company reported that it was aware that the Commission was investigating certain aspects of the leaf
tobacco markets in Italy. Deltafina buys and processes tobacco in Italy. The Company reported that it did not believe that
the Commission investigation in Italy would result in penalties being assessed against it or its subsidiaries that would be
material to the Company’s earnings. The reason the Company held this belief was that it had received conditional immunity
from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the
investigation.

On December 28, 2004, the Company received a preliminary indication that the Commission intended to revoke
Deltafina’s immunity for disclosing in April 2002 that it had applied for immunity. Neither the Commission’s Leniency
Notice of February 19, 2002, nor Deltafina’s letter of provisional immunity, contains a specific requirement of
confidentiality. The potential for such disclosure was discussed with the Commission in March 2002, and the Commission
never told Deltafina that disclosure would affect Deltafina’s immunity. On November 15, 2005, the Company received
notification from the Commission that the Commission had imposed fines totaling €30 million (about $41 million) on
Deltafina and the Company jointly for infringing European Union antitrust law in connection with the purchase and
processing of tobacco in the Italian raw tobacco market.

The Company does not believe that the decision can be reconciled with the Commission’s Statement of Objections
and facts. The Company and Deltafina each have appealed the decision to the Court of First Instance of the European
Communities. Based on consultation with outside counsel, the Company believes it is probable that it will prevail in the
appeals process and has not accrued a charge for the fine. Deltafina has provided a bank guarantee to the Commission in the
amount of the fine in order to stay execution during the appeal process. A cash deposit of €8 million (about $11 million)
secures a portion of the bank guarantee and is classified in non-current assets.

U.S. Foreign Corrupt Practices Act

As a result of a posting to the Company's Ethics Complaint hotline alleging improper activities that involved or
related to certain of the Company's tobacco subsidiaries, the Audit Committee of the Company's Board of Directors engaged
an outside law firm to conduct an investigation of the alleged activities. That investigation revealed that there have been
payments that may have violated the U.S. Foreign Corrupt Practices Act. At this time, the payments involved appear to have
approximated $1 million over a five-year period. In addition, the investigation revealed activities in foreign jurisdictions that
may have violated the competition laws of such jurisdictions, but the Company believes those activities did not violate U.S.
antitrust laws. The Company voluntarily reported these activities to the appropriate U.S. authorities. On June 6, 2006, the
Securities and Exchange Commission notified the Company that a formal order of investigation has been issued.

If the U.S. authorities determine that there have been violations of the Foreign Corrupt Practices Act, or if the U.S.
authorities or the authorities in foreign jurisdictions determine there have been violations of other laws, they may seek to
impose sanctions on the Company or its subsidiaries that may include injunctive relief, disgorgement, fines, penalties, and
modifications to business practices. It is not possible to predict at this time whether the authorities will determine that
violations have occurred, and if they do, what sanctions they might seek to impose. It is also not possible to predict how the
government's investigation or any resulting sanctions may impact the Company's business, financial condition, results of
operations, or financial performance, although such sanctions, if imposed, could be material to its results of operations in any
quarter. The Company will continue to cooperate with the authorities in these matters.

Employment Litigation Verdict

In September 2006, a California jury decided a case involving an employment matter at one of the Company’s agri-
products subsidiaries in favor of the plaintiffs and awarded them compensatory damages of approximately $0.2 million and
punitive damages of $25 million. In December 2006, the trial court granted the Company’s motion to substantially reduce
the punitive damages to approximately $1.25 million, bringing the total amount of the award to approximately $1.45 million.
The Company and the other defendants also filed a notice of appeal, as the Company believed there were errors in the
decision of the court despite the significant reduction in punitive damages. On May 16, 2007, the plaintiffs agreed with the
Company and the other defendants to a final settlement on all the issues. As part of the settlement, the parties agreed that the
terms of the settlement would be confidential.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Legal and Tax Matters

In the fourth quarter of fiscal year 2007, one of the Company’s foreign subsidiaries accrued approximately $2.7
million for taxes, penalties, and interest assessed in connection with an audit of various tax filings for several prior years.
This amount was in addition to approximately $1 million previously accrued for actual or expected assessments related to
other items within the scope of the same tax audit. The amounts accrued primarily relate to assessments for value-added
taxes. Certain other potential claims raised in connection with this tax audit have not yet been fully discussed or resolved
with the tax authorities. While the subsidiary has accrued its best estimate of the ultimate liability it expects to incur with
respect to the tax audit, additional amounts would be recorded future periods if final settlement on all issues exceeds the
amounts already accrued.

In addition to the above-mentioned matters, various subsidiaries of the Company are involved in other litigation and
other tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with
certainty, management is vigorously defending the claims and does not currently expect that any of them will have a material
adverse effect on the Company’s financial position. However, should one or more of these matters be resolved in a manner
adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal
reporting period could be material.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share.

Fiscal Year Ended March 31,

2007

2006

2005

(In thousands, except per share data)

Basic Earnings (Loss) Per Share

Numerator for basic earnings (loss) per share

From continuing operations:

Income (loss) from continuing operations………………………………………………...……… $

80,411 $

(2,973) $

Less: Dividends on convertible perpetual preferred stock………………………………………

Earnings (loss) available to common shareholders from continuing operations………………

(14,685)

65,726

—

(2,973)

From discontinued operations:

Earnings (loss) available to common shareholders from discontinued operations……………

(36,059)

10,913

Net income available to common shareholders………………………………...……..………… $

29,667 $

7,940 $

68,556

—

68,556

27,457

96,013

Denominator for basic earnings (loss) per share

Weighted average shares outstanding……………..……………………………………………

25,935

25,707

25,553

Basic earnings (loss) per share:

From continuing operations……………………………………………………………………… $

2.53 $

(0.12) $

From discontinued operations……………………………………………………………….……
Net income per share……………..……………………………………………………………… $

(1.39)
1.14 $

0.43
0.31 $

Diluted Earnings (Loss) Per Share

Numerator for diluted earnings (loss) per share

From continuing operations:

Earnings (loss) available to common shareholders from continuing operations………………… $

65,726 $

(2,973) $

Add: Dividends on convertible perpetual preferred stock (if conversion assumed)……………

—

Earnings (loss) available to common shareholders from continuing operations

2.68

1.08
3.76

68,556

—

for calculation of diluted earnings (loss) per share…………………………………..…………

65,726

(2,973)

68,556

From discontinued operations:

Earnings (loss) available to common shareholders from discontinued operations………..…

(36,059)

10,913

Net income available to common shareholders……………..…………………………………… $

29,667 $

7,940 $

27,457

96,013

Denominator for diluted earnings (loss) per share:

Weighted average shares outstanding………….…………………………………………..……

25,935

25,707

25,553

Effect of dilutive securities (if conversion or exercise assumed)

Convertible perpetual preferred stock……..……………………………………………………

—

Employee share-based awards………...………………………………………………………

Denominator for diluted earnings (loss) per share………………………………………………

116

26,051

—

25,707

Diluted earnings (loss) per share:

From continuing operations……………….……………………………………………………… $

2.52 $

(0.12) $

From discontinued operations……………….……………………………………………………

(1.39)

0.43

Net income per share……………..……………………………………………………………… $

1.13 $

0.31 $

—

164

25,717

2.66

1.07

3.73

For the fiscal years ended March 31, 2007 and 2006, conversion of the Company’s outstanding Series B 6.75%
Convertible Perpetual Preferred Stock (“Preferred Stock”) was not assumed since the effect was antidilutive to earnings per
share from continuing operations. The Preferred Stock was not outstanding during the fiscal year ended March 31, 2005.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the fiscal year ended March 31, 2007, the effect of employee share-based awards is antidilutive to the per-share
effect of the loss from discontinued operations. Under the applicable financial reporting guidelines, this antidilutive effect is
shown since these securities are dilutive to earnings per share from continuing operations for that period.

For the fiscal years ended March 31, 2006 and 2005, certain stock options outstanding were not included in the
computation of diluted earnings per share since their exercise prices were greater than the average market price of the
common shares during each of those years and, accordingly, their effect was antidilutive. These shares totaled 1,698,599 at a
weighted-average exercise price of $44.97 for the fiscal year ended March 31, 2006, and 825,000 shares at a weighted-
average exercise price of $47.76 for the fiscal year ended March 31, 2005. No stock options or stock appreciation rights were
antidilutive at March 31, 2007.

NOTE 6. INCOME TAXES

Income taxes on income from continuing operations consist of the following:

Current

United States…………………………………………..………………………………….…
State and local……………………………….……………………….……………………
Foreign……………………………………………………………….………………...….

Deferred

United States………………………………………...………………………………………
State and local……………………………...……………………….………………………
Foreign…………………………………………………..……………………….…………

Total…………………………………………………..……………….……………….…………

Fiscal Year Ended March 31,
2006

2005

2007

670
1,693
59,417
61,780

(2,453)
1,157
642
(654)
61,126

1,231
2,435
46,920
50,586

(14,685)
(2,022)
(11,946)
(28,653)
21,933

5,953
998
51,957
58,908

(7,669)
(10)
2,969
(4,710)
54,198

A reconciliation of the statutory U.S. federal rate to the effective income tax rate is as follows:

Statutory tax rate……………….......………………....…………....………………....…………
State income taxes, net of federal benefit……………….......……....………………....…………
Impact of permanently reinvested earnings……………….......………………....………….......
Income taxed at other than the U.S. rate and other items………………...........……………….
Impairment of investment in Zimbabwe operations……………….......…………………....……
Tax benefits on losses in Zambia at less than the U.S. rate………………………………………
Non-deductible European Commission fines……………….......………………....…………...
Effective income tax rate……………….......………………....……………....………………..

Fiscal Year Ended March 31,
2006

35.0
4.5
54.0
(13.6)
69.6
—
—
149.5

2007

35.0
1.3
1.3
1.0
—
6.7
—
45.3

2005

35.0
0.4
4.1
(0.2)
—
—
4.2
43.5

The U.S. and foreign components of income from continuing operations before income taxes and other items were

as follows:

United States……………….......…………………...….……….....…………………………… $
Foreign……………….......………………….…….………...…………………………………

Total……………….......………………......................................………………………… $

(4,235)
139,112
134,877

(45,241)
59,914
14,673

(17,263)
141,986
124,723

Fiscal Year Ended March 31,
2006

2005

2007

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Significant components of deferred tax liabilities and assets from continuing operations were as follows:

Liabilities
Foreign withholding taxes………………………………...……….....………………....………………………………… $
Tax over book depreciation……………………………...…….......………………....……………………………………
Goodwill……………….......……………………...............………………………………………………………………
All other……………….......…………………….......…………...………………………………………………………

Total deferred tax liabilities……………………….......………….…………....…………………………………… $

Assets
Employee benefit plans……………….......…...…………...………....………………………………………………… $
Undistributed earnings……………….......……….…………..……....…………………………………………………
Foreign currency translation………………...............……….……………....……………………………………………
Deferred compensation……………….................………………..……....………………………………………………
Tax credits……………….......…………………..…………...……………………………………………………………
Restructuring and impairment costs……………………………………………..…………...……………………………
Valuation allowances on Brazilian farmer advances and ICMS tax credits……………….................………………..…
Net operating loss carryforward……………….......…………………..…………...……………………………………
All other……………….......………………....……….…….……………………………………………………………
Total deferred tax assets………………..................…………..……....……………………………………………
Valuation allowance……………….......………………..………….....…………………………………………………

Net deferred tax assets………………..................…………..……....……………………………………………… $

March 31,

2007

2006

20,204
1,513
26,289
4,170
52,176

45,646
5,659
2,012
1,290
39,598
7,732
12,647
6,706
18,205
139,495
(13,621)
125,874

16,806
2,742
23,553
11,760
54,861

40,671
26,560
6,541
499
33,849
10,437
8,381
5,806
17,901
150,645
(18,784)
131,861

Tax credits at March 31, 2007, consist of $23.8 million of foreign tax credit carryforwards and $15.8 million of
alternative minimum tax credit carryforwards. Foreign tax credit carryforwards in the amounts of $5.6 million, $6.8 million,
$8.1 million, and $3.3 million will expire at the end of fiscal years 2014, 2015, 2016, and 2017 respectively. Alternative
minimum tax credit carryforwards have an indefinite life.

NOTE 7. CREDIT FACILITIES

Five-Year Revolving Bank Credit Facility

In January 2005, the Company entered into a five-year revolving credit agreement with banks. The agreement
provides for a credit facility of $500 million, which matures in January 2010. Borrowings under the credit facility bear
interest at variable rates, based on either 1) LIBOR plus a negotiated spread (1.2% at March 31, 2007) or 2) the higher of the
federal funds rate plus 0.5% or Prime rate, each plus a negotiated spread (0.2% at March 31, 2007). The Company pays a
facility fee. Loans made under the facility may be used to provide general working capital, or for general corporate purposes.
At March 31, 2007, there were no borrowings outstanding under the revolving credit agreement. At March 31, 2006, direct
borrowings under the agreement totaled $80 million. These borrowings were reported in notes payable and overdrafts in the
consolidated balance sheet.

Certain covenants in the revolving credit agreement require the Company to maintain a minimum level of tangible
net worth and observe a restriction on debt levels. The Company was in compliance with all debt covenants at March 31,
2007.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Short-Term Credit Facilities

The Company maintains short-term lines of credit in the United States and in a number of foreign countries. Foreign
borrowings are generally in the form of overdraft facilities at rates competitive in the countries in which the Company
operates. Generally, each foreign line is available only for borrowings related to operations of a specific country. As of
March 31, 2007, approximately $131 million was outstanding under such uncommitted lines of credit and unused,
uncommitted lines of credit were approximately $490 million. The weighted average interest rates on short-term borrowings
outstanding as of March 31, 2007 and 2006, were approximately 5.2% and 5.4%, respectively.

NOTE 8. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

Notes:
Medium-term notes due from 2007 to 2013 at various rates……….............................................................................. $
Private placement notes, due May 2008, at LIBOR + 1.25%, repaid November 2006………………………….........…
Other……………………………………………………………………………………..................................……........

Less current portion…………………………………………….................................……..........................................…
Long-term obligations……………………………………………….............................................……………………… $

March 31,

2007

2006

562,952 $
—
—
562,952
(164,000)
398,952 $

570,602
200,000
136
770,738
(8,537)
762,201

Notes

The Company has $563 million in medium-term notes outstanding. These notes mature at various dates from
September 2007 to October 2013 and were all issued with fixed interest rates. At March 31, 2007, interest rates on the notes
ranged from 5.00% to 8.50%. In November 2006, the Company repaid $200 million of private placement notes prior to their
maturity with a portion of the proceeds from the sale of its non-tobacco operations. In fiscal year 2006, the Company filed a
shelf registration statement with the Securities and Exchange Commission to provide for the future issuance of an undefined
amount of additional debt or equity securities as determined by the Company and offered in one or more prospectus
supplements prior to issuance.

Other Information

The fair value of the Company’s long-term obligations, including the current portion, was approximately $550

million at March 31, 2007, and $752 million at March 31, 2006.

From time to time, the Company uses interest rate swap agreements to manage its exposure to changes in interest
rates. These agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps
are accounted for as fair value hedges. At March 31, 2007, the Company had interest rate swap agreements in place on $50
million of long-term debt. The fair value of those swap agreements was a liability of $0.5 million.

Maturities of long-term debt outstanding at March 31, 2007, by fiscal year, are as follows: 2008 - $164.0 million;

2009 - none; 2010 - $79.5 million; 2011 - $15.0 million; 2012 - $95.0 million; and 2013 and thereafter - $210.0 million.

NOTE 9. LEASES

The Company’s subsidiaries lease various production, storage, distribution, and other facilities, as well as vehicles
and equipment used in their operations. Some of the leases have options to extend the lease term at market rates. These
arrangements are classified as operating leases for accounting purposes. Rent expense on operating leases totaled $12.3
million in fiscal year 2007, $8.9 million in fiscal year 2006, and $5.9 million in fiscal year 2005. Future minimum payments
under non-cancelable operating leases total $11.9 million in 2008, $8.3 million in 2009, $7.7 million in 2010, $6.5 million in
2011, $3.3 million in 2012, and $0.6 million after 2012.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Defined Benefit Plans

Description of Plans

The Company sponsors several defined benefit pension plans covering U.S. salaried employees and certain foreign
and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of
service. Plan assets consist primarily of equity investments and fixed income securities.

The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for
eligible U.S. employees attaining specific age and service levels. The health benefits are funded by the Company as the costs
of the benefits are incurred and contain cost-sharing features such as deductibles and coinsurance. The Company funds the
life insurance benefits with deposits to a reserve account held by an insurance company. The Company has the right to amend
or discontinue these benefits at any time.

Adoption of Recognition and Disclosure Provisions of SFAS 158

As discussed in Note 2, Universal adopted the recognition and disclosure provisions of SFAS 158, effective March
31, 2007. SFAS 158 changed the manner in which the funded status of defined benefit plans was previously reported in the
consolidated balance sheet under FASB Statements No. 87, “Employers’ Accounting for Pensions” and No. 106,
“Employers’ Accounting for Postretirement Benefits Other Than Pensions,” but it did not change the manner in which the
cost of those plans is recognized as expense in the financial statements under that earlier guidance. As a result, actuarial
gains and losses and prior service costs continue to be deferred and recognized in expense ratably over appropriate future
periods. Upon adopting the recognition provisions of SFAS 158, the Company was required to report the overfunded or
underfunded status of its defined benefit plans, measured as the difference between the fair value of plan assets and the
projected benefit obligation, as an asset or liability in its balance sheet at March 31, 2007, with a corresponding adjustment to
accumulated other comprehensive loss, net of tax. The net adjustment to accumulated other comprehensive loss at adoption
of $44.2 million ($28.6 million, net of tax) includes the net unrecognized actuarial loss and unrecognized prior service costs
related to the plans. As these amounts are recognized in net periodic benefit cost in future periods, they will be reclassified
from accumulated other comprehensive loss. The effects of adopting SFAS 158 on individual lines in the Company’s
consolidated balance sheet at March 31, 2007, were as follows:

Balance Prior
to Adopting
SFAS 158

Adjustments

Balance After
Adopting
SFAS 158

Goodwill and other intangibles……………….......…………………...….……….....…………… $
Deferred income taxes (asset)……………….......………………….…….………...………………
Total assets……………….......………………….…….………...…………………………………
Pensions and other postretirement benefits……………….......………………….…….………...…
Total liabilities……………….......………………….…….………...………………………………
Accumulated other comprehensive loss……………….......………………….…….………...……
Total shareholders' equity……………….......………………….…….………...…………………

104,954
65,401
2,313,890
56,521
1,248,784
(12,425)
1,059,284

(670)
15,602
14,932
43,483
43,483
(28,551)
(28,551)

104,284
81,003
2,328,822
100,004
1,292,267
(40,976)
1,030,733

In addition to the above changes, as discussed in Note 2, SFAS 158 will also require companies to measure the
funded status of their defined benefit plans as of the balance sheet date, beginning in fiscal years ending after December 15,
2008. Universal currently measures the funded status of its plans 90 days prior to the balance sheet date and will be required
to change its measurement timing no later than the fiscal year ending March 31, 2009.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Actuarial Assumptions

Assumptions used for financial reporting purposes to compute net periodic benefit cost and benefit obligations, as

well as the components of net periodic benefit cost are as follows:

2007

Pension Benefits
2006

2005

Other
Postretirement
Benefits

13,771
21,750
13,633
12,339
13,968
74,818

4,279
4,486
4,621
4,665
4,662
23,203

Universal and several U.S. subsidiaries offer an employer-matched defined contribution savings plan. This plan
replaced an existing employer-matched stock purchase plan during fiscal year 2007 and provides substantially the same
benefits as that plan. Amounts charged to expense for these plans were approximately $1.3 million for each of the fiscal
years 2007, 2006, and 2005.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11. COMMON AND PREFERRED STOCK

Common Stock

At March 31, 2007, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and
26,948,599 shares were issued and outstanding. Holders of the common stock are entitled to one vote for each share held on
all matters requiring a vote. Holders of the common stock are also entitled to receive dividends when, as, and if declared by
the Company’s Board of Directors. The Board customarily declares and pays regular quarterly dividends on the outstanding
common shares; however, such dividends are at the Board’s full discretion, and there is no obligation to continue them. If
dividends on the Series B 6.75% Convertible Perpetual Preferred Stock (the “Preferred Stock” or “Preferred Shares”) are not
declared and paid for any dividend period, then dividends on the common stock may not be paid until the dividends on the
Preferred Stock have been paid for a period of four consecutive quarters.

In 1999, the Company distributed, as a dividend, one preferred share purchase right for each outstanding share of
common stock. Each right entitles the shareholder to purchase 1/200 of a share of Series A Junior Participating Preferred
Stock (“Series A Preferred Stock”) at an exercise price of $110, subject to adjustment. The rights will become exercisable
only if a person or group acquires or announces a tender offer for 15% or more of the Company’s outstanding shares of
common stock. Under certain circumstances, the Board of Directors may reduce this threshold percentage to not less than
10%. If a person or group acquires the threshold percentage of common stock, each right will entitle the holder, other than the
acquiring party, to buy shares of common stock or Series A Preferred Stock having a market value of twice the exercise price.
If the Company is acquired in a merger or other business combination, each right will entitle the holder, other than the
acquiring person, to purchase securities of the surviving company having a market value equal to twice the exercise price of
the rights. Following the acquisition by any person of more than the threshold percentage of the Company’s outstanding
common stock but less than 50% of such shares, the Company may exchange one share of common stock or 1/200 of a share
of Series A Preferred Stock for each right (other than rights held by such person). Until the rights become exercisable, they
may be redeemed by the Company at a price of one cent per right. The rights expire on February 13, 2009.

Convertible Perpetual Preferred Stock

The Company is also authorized to issue up to 5,000,000 shares of preferred stock. In March and April 2006,
220,000 shares of Series B 6.75% Convertible Perpetual Preferred Stock (the “Preferred Stock” or “Preferred Shares”) were
issued under this authorization. The Preferred Stock has a liquidation preference of $1,000 per share and generated
approximately $213 million in net cash proceeds, which were used to reduce short-term debt. Holders of the Preferred
Shares are entitled to receive quarterly dividends at the rate of 6.75% per annum on the liquidation preference when, as, and
if declared by the Company’s Board of Directors. Dividends are not cumulative in the event the Board does not declare a
dividend for one or more quarterly periods. Under the terms of the Preferred Stock offering, the Board is prohibited from
declaring regular dividends on the Preferred Shares in any period in which the Company fails to meet specified levels of
shareholders’ equity and net income; however, in that situation, the Board may instead declare such dividends payable in
shares of the Company’s common stock or from net proceeds of common stock issued during the ninety-day period prior to
the dividend declaration. The Preferred Shares have no voting rights, except in the event the Company fails to pay dividends
for four consecutive or non-consecutive quarterly dividend periods or fails to pay the redemption price on any date that the
Preferred Shares are called for redemption, in which case the holders of Preferred Shares will be entitled to elect two
additional directors to the Company’s Board to serve until dividends on the Preferred Stock have been fully paid for four
consecutive quarters.

The Preferred Shares are convertible, at the option of the holder, at any time into shares of the Company’s common
stock at a conversion rate that is adjusted each time the Company pays a dividend on its common stock that exceeds $0.43
per share. The conversion rate at March 31, 2007 was 21.40442 shares of common stock per preferred share, which
represents a conversion price of approximately $46.72 per common share. Upon conversion, the Company may, at its option,
satisfy all or part of the conversion value in cash.

During the period from March 15, 2013 to March 15, 2018, the Company may, at its option, convert the Preferred
Shares into shares of common stock at the prevailing conversion rate if the closing price of the common stock during a
specified period exceeds 135% of the prevailing conversion price. Upon this mandatory conversion, the Company may, at its
option, satisfy all or part of the conversion value in cash. On or after March 15, 2018, the Company may, at its option,
redeem all or part of the outstanding Preferred Shares for cash at the $1,000 per share liquidation preference.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 12. EXECUTIVE STOCK PLANS AND STOCK-BASED COMPENSATION

Executive Stock Plans

The Company’s shareholders have approved Executive Stock Plans under which officers, directors, and employees
of the Company and its subsidiaries may receive grants and awards of common stock, restricted stock, restricted stock units,
(“RSUs”), stock appreciation rights (“SARs”), incentive stock options, and non-qualified stock options. Currently, grants are
outstanding under the 1997 Executive Stock Plan and the 2002 Executive Stock Plan (together, the “Plans”). Up to 2 million
shares of the Company’s common stock may be issued under each of the Plans; however, awards of restricted stock under the
2002 Executive Stock Plan are limited to 500,000 shares.

Through the fiscal year ended March 31, 2005, non-qualified stock options were the primary form of stock-based
compensation awarded. Beginning in the fiscal year ended March 31, 2006, the compensation program was revised to
provide grants of restricted stock, RSUs, and stock-settled SARs instead of stock options. These changes represent
refinements in program design only, and the Company is still authorized to award stock options and other forms of share-
based compensation under the Plans.

Non-qualified stock options and SARs granted under the Plans have an exercise price equal to the market price of a
share of common stock on the date of grant. All stock options currently outstanding under the Plans are fully vested and
exercisable, and they expire ten years after the grant date. SARs granted under the Plans vest in equal one-third tranches one,
two, and three years after the grant date, and expire ten years after the grant date. RSUs awarded under the Plans vest five
years from the grant date and are then paid out in shares of common stock. Under the terms of the RSU awards, grantees
receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU
grant. The Company’s outside directors automatically receive shares of restricted stock following each annual meeting of
shareholders. These shares vest upon the individual’s retirement from service as a director.

The following table summarizes the Company’s stock option and SAR activity and related information for the fiscal

years ended March 31, 2007, 2006, and 2005:

2007

Weighted-
Average
Exercise
Price

Stock Option
and SAR
Shares

Fiscal Year Ended March 31,
2006

Weighted-
Average
Exercise
Price

Stock Option
Shares

2005

Weighted-
Average
Exercise
Price

Stock Option
Shares

Outstanding at beginning of year……
Granted………………………………
Exercised………………………........
Cancelled/expired...…………………
Forfeited...………………………......
Outstanding at end of year……………

Exercisable……………………….....

Available for grant……………….…

2,011,782
265,500
(1,232,967)

(17,000)
(69,500)
957,815

708,315

515,576

43.34
36.03
43.81

38.94
38.21
41.16

42.96

1,827,191
263,500
(72,000)

(6,909)
—
2,011,782

2,011,782

738,058

42.64
46.34
36.57

44.20

43.34

2,089,311
838,898
(1,101,018)

—
—
1,827,191

1,208,790

1,051,265

39.17
47.75
39.95

—
—
42.64

41.66

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information concerning currently outstanding and exercisable stock options and

SARs as of March 31, 2007:

For stock options and SARs outstanding:

March 31, 2007
Range of Exercise Prices, Per Share

$20-$30

$30-$40

$40-$50

Total

Number outstanding………………………………………………………
Weighted average remaining contractual life………………………………
Weighted average exercise price, per share……………………………… $ 25.09 $
Aggregate intrinsic value (in thousands of dollars)……………………… $

26,217
2.81

957,815
6.72
41.16
951 $ 11,573 $ 6,818 $ 19,342

466,128
6.82
46.72 $

465,470
6.83
36.49

For stock options and SARs exercisable:

Number exercisable………………………………………………………
Weighted average exercise price, per share……………………………… $ 25.09 $

26,217

215,970

37.02 $

466,128

46.72 $

708,315
42.96

The following table summarizes the Company’s RSU activity for the fiscal years ended March 31, 2007 and 2006.

No RSUs were granted prior to fiscal year 2006.

Fiscal Year Ended March 31,

2007

2006

Weighted-
Average
Grant Date
Fair Value

RSUs

Weighted-
Average
Grant Date
Fair Value

RSUs

Unvested at beginning of year…………………………………………………
Granted………………………………....………………………………………
Vested………………………..............………………………………………
Forfeited...………………………...........………………………………………
Unvested at end of year………………………………………………………

67,915
71,909
(7,503)

(8,530)
123,791

46.21
36.57
46.00

41.20
40.96

—

67,915
—

—
67,915

—
46.21
—

—
46.21

The following table summarizes the Company’s restricted stock activity for the fiscal years ended March 31, 2007

and 2006.

2007

Weighted-
Average
Grant Date
Fair Value

Restricted
Shares

Fiscal Year Ended March 31,
2006

Weighted-
Average
Grant Date
Fair Value

Restricted
Shares

2005

Weighted-
Average
Grant Date
Fair Value

Restricted
Shares

Unvested at beginning of year………
Granted……………………………
Vested...……………………….......
Unvested at end of year……………

28,900
10,000

—
38,900

38.16
35.26

18,900
10,000

—
37.42

—
28,900

33.99
46.05

—
38.16

17,500
1,400

—
18,900

32.97
46.70

—
33.99

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation Expense

Adoption of FASB Statement No. 123R

As discussed in Note 1, Universal adopted Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment” (“SFAS 123R”), effective April 1, 2006. SFAS 123R provided new rules for accounting for stock-based
compensation. Previously, the Company accounted for stock-based compensation awards in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), as permitted under SFAS 123,
“Accounting for Stock-Based Compensation,” and made required disclosures of the pro forma effect of fair value recognition
for those awards. Under SFAS 123R, the Company is required to recognize the cost of services received from employees and
outside directors in exchange for stock-based compensation based on the fair value of the awards. The Company adopted
SFAS 123R using the modified prospective transition method. Under this method, the Company began recognizing fair
value compensation expense on April 1, 2006, but did not restate prior periods. The amount of compensation expense was
based on the guidance in SFAS 123R for SARs, RSUs, and restricted stock granted after the April 1, 2006, adoption date, and
on the guidance in SFAS 123 for all unvested RSUs granted before that date.

The effect of adopting SFAS 123R on the consolidated statement of income for the fiscal year ended March 31,

2007, was as follows:

Fiscal Year Ended
March 31, 2007

Income from continuing operations before income taxes and other items………………………………………………...………………… $ (3,244)
Income from continuing operations…………………….………………………………………………...……………………………………
(2,096)
(2,096)
Net income…………………….……………………………………………….......………………………………...………………………
Basic earnings per share…………………….………………………………………………………………………………...………………
(0.08)
(0.08)
Diluted earnings per share…………………….…………………………………………………………………………...…………………
Determination of the Fair Value of Stock-Based Compensation

As noted above, the Company granted SARs, RSUs, and restricted stock during the fiscal year ended March 31,
2007, following the adoption of SFAS 123R, and stock options, RSUs and restricted stock in prior years. The grant date fair
value of the SARs awarded in fiscal year 2007 and stock options awarded in fiscal years 2006 and 2005 was estimated using
the Black-Scholes pricing model and the following assumptions:

Fiscal Year Ended March 31,
2006

2005

2007

Assumptions:

Expected term………………………………………………………………………………
Expected volatility…………………………………………………………………………
Expected dividend yield...…………………………………………………………………
Risk-free interest rate...……………………….........………………………………………

6.0 years

31.6%

4.77%
4.67%

9.0 years
28.5%

3.63%
4.06%

4.1 years
29.3%

3.48%
3.60%

Resulting fair value of SARs and stock options granted………………………………………… $

8.11

11.28

9.60

The expected term was based on the Company’s historical stock option exercise data for instruments with
comparable features and economic characteristics. The expected volatility was estimated based on historical volatility of the
Company’s common stock using weekly closing prices. The expected dividend yield was based on the annualized quarterly
dividend rate and the market price of the common stock at grant date. The risk-free interest rate was based on the U.S.
Treasury yield curve in effect at the grant date for securities with a remaining term equal to the expected term of the SARs or
stock options.

The fair value of the RSUs and restricted stock was based on the market price of the common stock on the grant

date.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recognition and Pro Forma Disclosure of Compensation Expense

Fair value expense for stock-based compensation is recognized ratably over the period from grant date to the earlier
of (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For
employees who are already eligible to retire at the date an award is granted, the total fair value of the award is recognized as
expense at the date of grant. For RSUs granted prior to the adoption of SFAS 123R, the Company is recognizing expense
based on the fair value method under SFAS 123R; however, consistent with its prior pro forma disclosures, that expense is
recognized ratably over the full vesting period of the award, with acceleration of the remaining unrecognized expense in the
event an employee elects to retire before the stated vesting date.

For the fiscal year ended March 31, 2007, the Company recorded total stock-based compensation expense of $4.2
million and recognized a related income tax benefit of $1.5 million. Prior to the adoption of SFAS 123R, the Company
recorded stock-based compensation expense of $0.7 million on RSUs for the fiscal year ended March 31, 2006, under the
intrinsic value method of APB 25 and recognized a related income tax benefit of $0.3 million. No stock-based compensation
expense was recorded during the fiscal year ended March 31, 2005.

Had the Company adopted the fair value-based recognition provisions of SFAS 123 for periods prior to the adoption
of SFAS 123R, the pro forma effect on income from continuing operations and earnings per share for the fiscal years ended
March 31, 2006 and 2005 would have been as follows:

Fiscal Year Ended March 31,

2006

2005

Income (loss) from continuing operations………………………………………………...……………………………… $
Stock-based compensation cost under fair value accounting…………………….………………………………………
Pro forma income (loss) from continuing operations under fair value method………………………………………...… $

(2,973)
3,661
(6,634)

68,556
5,545
63,011

Basic earnings (loss) per share from continuing operations………………………………………………...…………… $
Per share stock-based compensation cost under fair value accounting…………………….……………………………
Pro forma basic earnings (loss) per share from continuing operations………………………………………...………… $

Diluted earnings (loss) per share from continuing operations………………………………………………...………… $
Per share stock-based compensation cost under fair value accounting…………………….……………………………
Pro forma diluted earnings (loss) per share from continuing operations………………………………………...……… $

(0.12)
0.14
(0.26)

(0.12)
0.15
(0.27)

2.68
0.22
2.46

2.66
0.21
2.45

At March 31, 2007, the Company had $3.2 million of unrecognized compensation expense related to stock-based
awards, which will be recognized over a weighted-average period of approximately 1.5 years. During the fiscal years ended
March 31, 2007, 2006, and 2005, the Company received $51.0 million, $3.1 million, and $4.9 million, respectively, from the
exercise of stock options, and realized income tax benefits totaling $3.6 million, $0.1 million, and $3.1 million, respectively,
from those transactions. The total intrinsic value of stock options exercised was approximately $10.7 million, $0.6 million,
and $8.7 million for the fiscal years ended March 31, 2007, 2006, and 2005, respectively. Under SFAS 123R, excess tax
benefits realized from the exercise or payout of stock-based awards are reported in cash flows from financing activities in the
consolidated statement of cash flows. The Company did not derive any excess tax benefits related to stock-based awards
during the fiscal year ended March 31, 2007.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 13. COMMITMENTS AND OTHER MATTERS

Commitments

The Company enters into contracts to purchase tobacco from farmers in a number of the countries in which it
operates. The majority of these contracts are with farmers in Brazil and several African countries. Most contracts cover one
annual growing season, but some contracts with commercial farmers in Africa cover multiple years. Primarily with the
farmer contracts in Brazil, the Company provides seasonal financing to support the farmers’ production of their crops or
guarantees their financing from third-party banks. At March 31, 2007, the Company had contracts to purchase approximately
$565 million of tobacco, $460 million of which represented volumes to be delivered during the coming fiscal year. These
amounts are estimates since actual quantities purchased will depend on crop yields, and prices will depend on the quality of
the tobacco delivered. Tobacco purchase obligations have been partially funded by advances to farmers, which totaled
approximately $113 million at March 31, 2007. The Company withholds payments due to farmers on delivery of the tobacco
to satisfy repayment of the seasonal or long-term financing it provided to, or guaranteed for, the farmers. Arrangements to
guarantee bank loans to farmers exist primarily in Brazil and are discussed in more detail below. In addition to its contractual
obligations to purchase tobacco, the Company has commitments related to approved capital expenditures and various other
requirements that approximated $31 million at March 31, 2007.

Guarantees and Other Contingent Liabilities

Guarantees of bank loans to growers for crop financing and construction of curing barns or other tobacco producing
assets are industry practice in Brazil and support the farmers’ production of tobacco there. At March 31, 2007, the
Company’s total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in
that country was approximately $203 million. About 60% of these guarantees expire within one year, and nearly all of the
remainder expire within five years. The subsidiary withholds payments due to the farmers on delivery of tobacco and
forwards those payments to third-party banks. Failure of farmers to deliver sufficient quantities of tobacco to the subsidiary
to cover their obligations to third-party banks could result in a liability for the subsidiary under the related guarantee;
however, in that case, the subsidiary would have recourse against the farmers. The maximum potential amount of future
payments that the Company’s subsidiary could be required to make is the face amount, $203 million, and any unpaid accrued
interest. The accrual recorded for the value of the guarantees was approximately $10 million and $8 million at March 31,
2007 and 2006, respectively. In addition to these guarantees, the Company has contingent liabilities related to European
Commission fines in Italy and other legal matters, as discussed in Note 4.

Major Customers

A material part of the Company’s business is dependent upon a few customers. For the fiscal years ended March 31,
2007, 2006 and 2005, revenue from subsidiaries and affiliates of Altria Group, Inc. was approximately $673 million, $625
million, and $510 million, respectively. For the same periods, Japan Tobacco, Inc. accounted for revenue of approximately
$370 million, $280 million, and $310 million, respectively. The loss of, or substantial reduction in business from, either of
these customers would have a material adverse effect on the Company.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounts Receivable

The Company’s operating subsidiaries perform credit evaluations of customers’ financial condition prior to the
extension of credit. Generally, accounts receivable are unsecured and are due within 30 days. When collection terms are
extended for longer periods, interest and carrying costs are usually recovered. Credit losses are provided for in the financial
statements, and such amounts have not been material. The allowance for doubtful accounts was approximately $5.1 million
and $4.7 million at March 31, 2007 and 2006, respectively. The allowance was increased for provisions for estimated
uncollectible amounts of $1.1 million in fiscal year 2007, $0.3 million in fiscal year 2006, and $0.1 million in fiscal year
2005. Amounts charged off to the allowance totaled approximately $1.0 million in fiscal year 2007, $0.4 million in fiscal
year 2006, and $2.9 million in fiscal year 2005. At March 31, 2007 and 2006, accounts receivable by reportable operating
segment were as follows:

Flue-cured and burley leaf tobacco operations:

March 31,

2007

2006

North America………………………………………………...……………………………………………..........…… $ 24,804 $ 13,582
Other Regions…………………….………………………………………………………………….......…….………
172,644
Subtotal………………………………………...…………………………………………........….............…………
186,226
Other Tobacco Operations………………………………………...…………………………………………........…......
26,412
Consolidated accounts receivable……………………………………...…………………………………………........… $
212,638

203,198
228,002
33,104

261,106

ICMS Tax Credits in Brazil

The Company’s operating subsidiary in Brazil pays significant amounts of ICMS (“Imposto Sobre Circulacao de
Mercadorias e Servicos”) tax. ICMS is a value-added tax on the transfer of goods and services between states in Brazil and is
paid when tobacco purchased from farmers outside the state of Rio Grande do Sul is brought into that state for processing.
Payment of the ICMS tax generates tax credits that may be used to offset ICMS tax obligations generated on domestic sales
of processed tobacco and agricultural materials, or they may be sold or transferred to third parties. Since domestic sales
compose only about one-fifth of total sales, the subsidiary has historically generated excess ICMS tax credits that are offered
and sold to other companies, generally at a discount, upon approval from state tax authorities. During fiscal year 2005,
changes in the ICMS tax regulations were implemented to limit the ability of companies to use purchased ICMS tax credits
and to impose new restrictions, including consent from local governmental authorities, on the sale or transfer of those credits
to third parties. As a result of these changes, management determined that it was unlikely to realize, through use, sale, or
transfer, a substantial amount of the unused ICMS tax credits. The Brazilian operating subsidiary has recorded a valuation
allowance on its ICMS tax credits based upon management’s assumptions about the future realization of these credits. At
March 31, 2007, the subsidiary held total ICMS tax credits of approximately $46 million, and the related valuation allowance
was approximately $13 million. At March 31, 2006, ICMS tax credits totaled approximately $50 million, and the related
valuation allowance was approximately $14 million. The allowance on ICMS tax credits may be adjusted in future periods
based on market conditions and the subsidiary’s ability to use the excess tax credits or sell or transfer them to third parties.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investment in Socotab L.L.C.

Universal has a 49% ownership interest in Socotab L.L.C., a leading processor and leaf merchant of oriental
tobaccos with operations located principally in Europe. Summarized financial information for Socotab L.L.C. for its fiscal
years ended March 31, 2007, 2006, and 2005, is as follows:

Income Statement Information:

Sales…………………..………….……………………………….......…………………… $
Gross profit…………………………..………………………........………………………
Net income…………………………..……………………………………........………….

307,390

325,621

77,234
27,039

75,659
21,957

339,525
75,164
28,121

Fiscal Years Ended March 31,
2006

2007

2005

Balance Sheet Information:

March 31,

2007

2006

Current assets………………………………………………....…………………………… $ 227,187 $ 172,893
Property, plant and equipment and other assets……………………………………………
67,196
Current liabilities………………………………………………...…………………………
102,785
Long-term obligations and other liabilities………………………………………………..
21,851
Minority interests………………………………………………..…………………………

69,396
146,363
8,432

458

797

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 14. OPERATING SEGMENTS

Prior to the fiscal year ended March 31, 2007, Universal evaluated and reported performance for the following three
operating segments, which were based on product categories: tobacco, lumber and building products, and agri-products.
Following the sale of the lumber and building products segment and a portion of the agri-products in September 2006, and
the approval of a plan to sell the remaining agri-products businesses in December 2006, the Company redefined its operating
segments to reflect its continuing worldwide leaf tobacco operations. These operations involve selecting, buying, processing,
packing, storing, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco
products throughout the world. Through various operating subsidiaries located in tobacco-growing countries around the
world and significant ownership interests in unconsolidated affiliates, the Company processes and/or sells flue-cured and
burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used
principally in the manufacture of cigarettes, and dark air-cured tobaccos are used mainly in the manufacture of cigars, pipe
tobacco, and smokeless tobacco products. A substantial portion of the Company’s revenues are derived from sales to a
limited number of large, multinational cigarette manufacturers.

The principal approach used by management to evaluate the performance of the Company’s tobacco business is by
geographic region, although the dark air-cured and oriental tobacco businesses are each evaluated on the basis of their
worldwide operations. Oriental tobacco operations consist principally of a 49% interest in an affiliate, and the performance
of those operations is evaluated based on the Company’s equity in the pretax earnings of that affiliate. Under this structure,
the Company has the following primary operating segments: North America, South America, Africa, Europe, Asia, Dark
Air-Cured, Special Services, and Oriental. North America, South America, Africa, Europe, and Asia are primarily involved
in flue-cured and/or burley leaf tobacco operations for supply to cigarette manufacturers. From time to time, the segments
may trade in tobaccos that differ from their main varieties, but those activities are not significant to their overall results.

The five regional operating segments serving the Company’s cigarette manufacturer customer base share similar
characteristics in the nature of their products and services, production processes, class of customer, product distribution
methods, and regulatory environment. Based on the applicable accounting guidance, four of the regions – South America,
Africa, Europe, and Asia – are aggregated into a single reporting segment because they also have similar economic
characteristics. North America is reported as an individual operating segment because its economic characteristics are
dissimilar to the other regions, as its operations do not require significant working capital investments for crop financing and
inventory, and toll processing is an important source of its operating income. The Dark Air-Cured, Special Services and
Oriental segments, which have dissimilar characteristics in some of the categories mentioned above, are reported as “other
tobacco operations” because each is below the measurement threshold for separate reporting.

Universal incurs overhead expenses related to senior management, finance, legal, and other functions that are
centralized at its corporate headquarters, as well as functions performed at several sales and administrative offices around the
world. These overhead expenses are allocated to the various operating segments, generally on the basis of tobacco volumes
processed and/or sold. Management believes this method of allocation is representative of the value of the related services
provided to the operating segments. The Company evaluates the performance of its segments based on operating income
after allocated overhead expenses (excluding significant non-recurring charges or credits), plus equity in the pretax earnings
of unconsolidated affiliates.

Reportable segment data as of or for the fiscal years ended March 31, 2007, 2006, and 2005, is as follows:

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Sales and Other Operating Revenues
Fiscal Year Ended March 31,
2006

2007

2005

Operating Income
Fiscal Year Ended March 31,
2006

2005

2007

Flue-cured and burley leaf
tobacco operations:

North America………………………… $
Other Regions (1)………………………
Subtotal………………………………
Other Tobacco Operations (2)……………
Segment total………………………………

348,926
1,373,562
1,722,488
284,784
2,007,272

257,306
1,256,872
1,514,178
267,134
1,781,312

298,990
1,136,895
1,435,885
231,308
1,667,193

40,276
131,841
172,117
36,599
208,716

25,075
74,121
99,196
31,671
130,867

6,665
135,564
142,229
37,878
180,107

Less:

Equity in pretax earnings of

unconsolidated affiliates (3)…………

Restructuring and

impairment costs (4)…………………
European Commission fines (4)………
Consolidated total………………………… $

2,007,272

1,781,312

1,667,193

14,235

14,140

14,967

30,890
—
163,591

57,463
—
59,264

—
14,908
150,232

Segment Assets
March 31,
2006

2007

2005

2007

Goodwill
March 31,
2006

2005

Flue-cured and burley leaf
tobacco operations:

North America………………………… $
315,852
Other Regions (1)………………………
1,675,725
Subtotal………………………………
1,991,577
Other Tobacco Operations (2)……………
294,808
Segment total………………………………
2,286,385
Assets of discontinued operations…………
42,437
Consolidated total………………………… $ 2,328,822

307,013
1,459,033
1,766,046
300,570
2,066,616
826,048
$ 2,892,664

309,523
1,436,237
1,745,760
294,874
2,040,634
844,690
$ 2,885,324

— $

101,163
101,163
3,014
104,177

—

$ 104,177

—
100,603
100,603
2,219
102,822
—
$ 102,822

—
100,559
100,559
2,204
102,763
—
$ 102,763

Depreciation and Amortization
Fiscal Year Ended March 31,
2006

2005

2007

Capital Expenditures
Fiscal Year Ended March 31,
2006

2005

2007

Flue-cured and burley leaf
tobacco operations:

North America………………………… $
12,842
Other Regions (1)………………………
28,901
Subtotal………………………………
41,743
Other Tobacco Operations (2)……………
6,562
Segment and consolidated total…………… $ 48,305

15,076
32,592
47,668
2,643
$ 50,311

18,330
35,665
53,995
2,215
$ 56,210

3,043
17,780
20,823
4,355
$ 25,178

3,877
42,850
46,727
9,016
$ 55,743

3,320
73,594
76,914
1,984
$ 78,898

(1) Includes South America, Africa, Europe, and Asia regions, as well as inter-region eliminations.
(2) Includes Dark Air-Cured, Special Services and Oriental, as well as inter-company eliminations. Oriental does not contribute significantly to

the reported amounts for sales and other operating revenues, goodwill, depreciation and amortization, or capital expenditures because
its financial results consist principally of equity in the pretax earnings of an unconsolidated affiliate. The investment in the
unconsolidated affiliate is included in segment assets and was approximately $93.5 million, $80.4 million, and $84.8 million at March 31,
2007, 2006, and 2005, respectively.

(3) Item is included in segment operating income, but is not included in consolidated operating income.
(4) Item is not included in segment operating income, but is included in consolidated operating income.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As discussed in Note 3, in conjunction with redefining its operating segments to reflect the continuing operations in
the leaf tobacco business, the Company reallocated its goodwill to revised reporting units based on applicable accounting
guidance and wrote off $1.7 million of goodwill that was impaired.

Geographic data as of or for the fiscal years ended March 31, 2007, 2006, and 2005, is presented below. Sales and
other operating revenues are attributed to individual countries based on the final destination of the shipment. Long-lived
assets consist of net property, plant, and equipment, goodwill, other intangibles, and certain other non-current assets.

Geographic Data

Sales and Other Operating Revenues
Fiscal Year Ended March 31,
2006

2007

2005

United States…………………………………………………………………………………………… $
Belgium…………………………………………………………………………………………………
Germany…………………………………………………………………………………………………
All other countries………………………………………………………………………………………
Consolidated total……………………………………………………………………………………… $

364,217
347,576
219,250
1,076,229
2,007,272

365,514
280,767
171,859
963,172
1,781,312

United States…………………………………………………………………………………………… $
Brazil……………………………………………………………………………………………………
Malawi……………………………………………………………………………………………………
Mozambique……………………………………………………………………………………………
All other countries………………………………………………………………………………………
Consolidated total……………………………………………………………………………………… $

Long-Lived Assets
March 31,
2006

131,995
179,416
66,827
50,432
116,283
544,953

2007

113,427
170,388
41,748
51,233
103,060
479,856

274,272
249,519
169,962
973,440
1,667,193

2005

162,373
180,491
59,054
38,569
141,294
581,781

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 15. UNAUDITED QUARTERLY FINANCIAL DATA

Due to the seasonal nature of our business, management believes it is generally more meaningful to focus on

cumulative rather than quarterly results.

Fiscal Year Ended March 31, 2007
Sales and other operating revenues…………….…………………………… $
Gross profit……………………………..………....……………...................
Income (loss) from:

Continuing operations…………………..………...……………...............
Discontinued operations…………………..………...……………............
Net income (loss)…………………..………...…………….........................…
Earnings (loss) available to common shareholders after

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

446,917
84,275

544,164
145,761

511,706
133,358

504,485
80,356

(13,727)
11,379
(2,348)

37,238
(34,159)
3,079

35,799
(11,674)
24,105

21,121
(1,605)
19,516

dividends on convertible perpetual preferred stock…………………..……

(5,895)

(634)

20,392

15,804

Net income (loss) per common share:

Basic:

Diluted:

Continuing operations…………………..………...……………...........
Discontinued operations…………………..………...…………….......
Net income (loss)…………………..………...……………..................
Cash dividends declared per common share…………………………………
Market price range of common stock:

High…………………..………...…………….........................……………
Low…………………..………...…………….........................……………

Fiscal Year Ended March 31, 2006
Sales and other operating revenues…………….…………………………… $
Gross profit……………………………..………....……………...................
Income (loss) from:

Basic:

Diluted:

High…………………..………...…………….........................……………
Low…………………..………...…………….........................……………

(0.67)
0.44
(0.23)

(0.67)
0.44
(0.23)
0.43

38.41
36.02

1.29
(1.32)
(0.03)

1.21
(1.12)
0.09
0.43

38.63
35.02

1.24
0.45
0.79

1.17
(0.38)
0.79
0.44

50.05
36.14

0.66
(0.06)
0.60

0.65
(0.06)
0.59
0.44

61.35
46.70

394,514
75,735

503,811
114,412

475,359
98,546

407,628
80,410

898
10,921
11,819

0.03
0.43
0.46

0.03
0.43
0.46
0.42

48.03
43.08

21,737
4,777
26,514

0.85
0.18
1.03

0.85
0.18
1.03
0.42

47.70
38.83

(349)
(5,320)
(5,669)

(0.01)
(0.21)
(0.22)

(0.01)
(0.21)
(0.22)
0.43

43.99
36.31

(25,259)
535
(24,724)

(0.98)
0.02
(0.96)

(0.98)
0.02
(0.96)
0.43

48.21
36.17

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Significant items included in the quarterly results are as follows:

•

First Quarter 2007 – a $12.3 million impairment charge to reduce the carrying value of certain flue-cured tobacco
growing projects in Zambia to estimated fair value. The charge did not provide an income tax benefit and thus
reduced income from continuing operations and net income by $12.3 million, or $0.48 per diluted share. In
addition, the Company provided a valuation allowance of $4.9 million for deferred tax assets in Zambia that it no
longer expected to realize, which reduced income from continuing operations and net income by $4.9 million, or
$0.19 per diluted share.

Second Quarter 2007 – provisions for uncollectible farmer advances in Brazil and in several African countries
totaling $25.2 million. About half of those provisions related to African leaf growing projects that the Company is
exiting. The Company also recorded $12.8 million in lower-of-cost-or-market inventory charges also related to
those projects. After minority interests and income tax effects, these provisions reduced income from continuing
operations and net income by $24.9 million, or $0.81 per diluted share. In addition, the Company recorded a loss of
$32.8 million before income taxes, plus related income tax expense of $0.5 million, on the sale of a significant
portion of its non-tobacco operations. That loss increased the loss from discontinued operations and reduced net
income by $33.3 million, or $1.09 per diluted share.

Third Quarter 2007 – a charge of $3.5 million for the impairment of certain equipment and goodwill that reduced
income from continuing operations and net income by $2.3 million, or $0.08 per share. In addition, an impairment
charge of $11.1 million, with no income tax benefit, was recorded to reflect the estimated fair value, net of selling
expenses, of the Company’s remaining agri-products businesses, which were classified as “held for sale” during the
quarter. That charge increased the loss from discontinued operations and reduced net income by $11.1 million, or
$0.36 per share.

Fourth Quarter 2007 – a $12.9 million charge to reflect the impairment of certain flue-cured tobacco growing
project assets in Malawi and Zambia, based on the Company’s decision to exit those projects and sell or transfer
their operations to third parties. The Company also recorded additional provisions for losses on farmer advances in
several African countries totaling $5.8 million, as well as a $2.2 million impairment charge on an aircraft being
marketed for sale. Including income tax effects, the combined effect of the aforementioned items reduced income
from continuing operations by $6.7 million, or $0.24 per diluted share. The Company also recorded an additional
net loss on the sale of non-tobacco operations of $0.6 million, with no tax benefit. That loss increased the loss from
discontinued operations and reduced net income by $0.6 million, or $0.02 per diluted share.

Third Quarter 2006 – a $23.9 million restructuring and impairment charge associated with the closure of the
Company’s tobacco processing facility in Danville, Virginia, and other cost reduction initiatives. The charge
reduced income from continuing operations and net income by $15.5 million, or $0.60 per diluted share. In
addition, the Company recorded lower-of-cost-or-market inventory charges of $10.2 million related to African leaf
growing projects that it decided to exit in fiscal year 2007. After minority interests and income taxes, these changes
reduced income from continuing operations and net income by $6.9 million, or $0.27 per diluted share. In addition,
significant market price declines in two products handled by the Company’s agri-products segment (almonds and
sunflower seeds) resulted in $11.8 million in inventory valuation and purchase commitment losses that reduced
income from discontinued operations and net income by $7.4 million, or $0.29 per diluted share.

Fourth Quarter 2006 – a $4.4 million restructuring charge, primarily to recognize additional voluntary and
involuntary employee separation costs related to the closure of the Danville, Virginia, tobacco processing facility.
The charge reduced income from continuing operations and net income by $1.6 million, or $0.06 per diluted share.
In addition, a $29.2 million impairment charge was recorded to reduce the Company’s investment in its operating
subsidiaries in Zimbabwe to estimated fair value. That charge provided no tax benefit, and therefore reduced
income from continuing operations and net income by $29.2 million, or $1.13 per diluted share. Incremental
provisions for losses on uncollectible farmer advances in several African countries, Brazil, and the Philippines
reduced pre-tax income by $19.5 million, and income from continuing operations and net income by $9.1 million, or
$0.35 per diluted share. Further market price declines in commodities handled by the agri-products segment
(principally almonds) resulted in additional inventory valuation and purchase commitment losses of $5.4 million that
reduced income from discontinued operations and net income by $3.5 million, or $0.14 per diluted share.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Universal Corporation

We have audited the accompanying consolidated balance sheets of Universal Corporation as of March 31, 2007 and
2006, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three
years in the period ended March 31, 2007. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Universal Corporation at March 31, 2007 and 2006, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 2007, in conformity with U.S. generally accepted
accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for

employee stock compensation plans and defined pension and other postretirement plans in 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Universal Corporation’s internal control over financial reporting as of March 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated May 25, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Richmond, Virginia
May 25, 2007

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Shareholders
Universal Corporation

We have audited management’s assessment, included in the accompanying Item 9A, Management’s Report on
Internal Control Over Financial Reporting, that Universal Corporation maintained effective internal control over financial
reporting as of March 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Universal Corporation’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, management’s assessment that Universal Corporation maintained effective internal control over
financial reporting as of March 31, 2007, is fairly stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Universal Corporation maintained, in all material respects, effective internal control over financial reporting as of
March 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Universal Corporation as of March 31, 2007 and 2006, and the related
consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period
ended March 31, 2007, of Universal Corporation and our report dated May 25, 2007 expressed an unqualified opinion
thereon.

/s/ Ernst & Young LLP

Richmond, Virginia
May 25, 2007

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

For the three years ended March 31, 2007, there were no changes in or disagreements between the Company and its

independent auditors on any matter of accounting principles, practices, or financial disclosures.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to
be disclosed in reports filed by the Company under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and
that such information is accumulated and communicated to the Company’s management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. The
Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the Company’s
management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-
15(e)), as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, the Company’s
management concluded that the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining effective internal control over financial
reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is designed to provide reasonable assurance to management and the Board of Directors regarding the
preparation and fair presentation of the consolidated financial statements. Due to inherent limitations, internal control over
financial reporting may not prevent or detect all errors or misstatements in the financial statements, and even control
procedures that are determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions.

As required by Exchange Act Rule 13a-15(c), the Company’s Chief Executive Officer and Chief Financial Officer,
with the participation of other members of management, assessed the effectiveness of the Company’s internal control over
financial reporting as of March 31, 2007. The evaluation was based on the criteria set forth in “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO criteria”).
Based on its assessment, the Company’s management concluded that the Company’s internal control over financial reporting
was effective as of March 31, 2007.

Management’s assessment of the effectiveness of internal control over financial reporting as of March 31, 2007, has
been audited by the Company’s independent registered public accounting firm, Ernst & Young LLP. Their attestation report
on management’s assessment of the Company’s internal control over financial reporting appears on page 78 of this Annual
Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the
Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.

Item 9B. Other Information

None.

Item 10. Directors and Executive Officers, and Corporate Governance

PART III

Except as to the matters set forth below, information required by this Item is incorporated herein by reference to the

Company’s 2007 Proxy Statement.

The following are executive officers of the Company as of May 25, 2007.

Name

A. B. King
G. C. Freeman, III
H. H. Roper
D. C. Moore
K. M. L. Whelan
P. D. Wigner
R. M. Peebles
W. K. Brewer

Position
Chairman and Chief Executive Officer
President
Vice President and Chief Financial Officer
Vice President and Chief Administrative Officer
Vice President and Treasurer
General Counsel and Secretary
Controller
Executive Vice President, Universal Leaf

Age
60
43
58
51
60
38
49
48

There are no family relationships between any of the above officers.

H.H. Roper and K.M.L. Whelan have been employed by the Company in their listed capacities during the last five
years. A.B. King served as President and Chief Operating Officer from December 1992 until December 2002 and was
elected President and Chief Executive Officer effective January 1, 2003. G.C. Freeman, III served as General Counsel and
Secretary from February 1, 2001, until November 2005, and was elected Vice President in November 2005 and President in
December 2006. D.C. Moore was elected Vice President and Chief Administrative Officer effective April 1, 2006, and
served as Senior Vice President of Universal Leaf Tobacco Company, Incorporated (“Universal Leaf”) from September 2005
until April 2006, Managing Director of Universal Leaf International SA from April 2002 until September 2005, and Senior
Vice President of Universal Leaf Services International Ltd. from September 1999 until April 2002. P.D. Wigner was
elected General Counsel and Secretary on November 2, 2005, served as Senior Counsel of Universal Leaf from November
2004 until November 2005, Counsel of Universal Leaf from March 2003 until September 2004, and was an associate with
Williams Mullen, P.C. from November 2000 until March 2003. R.M. Peebles was elected Controller in September 2003.
Prior to that time, Mr. Peebles served as a consultant with The Gabriel Group, Inc. from June 2001 to August 2003, was the
Assistant Controller with the Pittston Company from November 2000 to March 2001, and was Assistant Controller of CSX
Corporation from June 1997 to October 2000. W.K. Brewer served as Vice President, International Processing Director of
Universal Leaf from 1993 to 2002, President of Universal Leaf North America U.S., Inc. from January 1, 2002 until March
2006 and was elected Executive Vice President of Universal Leaf on March 24, 2006.

The Company has a Business Ethics Policy that includes the New York Stock Exchange’s requirements for a “Code
of Business Conduct and Ethics” and the Securities and Exchange Commission’s requirements for a “Code of Ethics for
Senior Financial Officers.” A copy of the Business Ethics Policy is available through the “Investor/Corporate Governance”
section of the Company’s website at www.universalcorp.com. If the Company amends a provision of the Business Ethics
Policy, or grants a waiver from any such provision to a director or executive officer, the Company will disclose such
amendments and the details of such waivers on the Company’s website to the extent required by the Securities and Exchange
Commission or the New York Stock Exchange.

The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is contained under the captions
“Governance of the Company—Director Nomination Process”, “Board and Committee Membership—Audit Committee” of
the Company’s 2007 Proxy Statement and such information is incorporated by reference herein.

Item 11. Executive Compensation

Refer to the captions “Executive Compensation” and “Directors’ Compensation” in the Company’s 2007 Proxy

Statement, which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Shares of the Company’s common stock are authorized for issuance with respect to the Company’s compensation
plans. The following table sets forth information as of March 31, 2007, with respect to compensation plans under which
shares of the Company’s common stock are authorized for issuance.

Number of Securities to Be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights

Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans1

Plan Category

Equity compensation plans approved

by shareholders:

1989 Executive Stock Plan….......…………………………...……

1997 Executive Stock Plan….....…………………...……………

1994 Amended and Restated Stock

Option Plan for Non-Employee Directors………….……………

2002 Executive Stock Plan…….…………………………………

Equity compensation plans not

approved by shareholders3………….……………………………
Total…………………………………………...........…………………

17,153

113,534

31,000

796,128

—

957,815

38.20

36.02

35.57

42.17

—

41.16

515,576 2

515,576

Amounts exclude any securities to be issued upon exercise of outstanding options, warrants, and rights.

The 2002 Executive Stock Plan permits grants of stock options and stock appreciation rights, and awards of common stock, restricted stock, and
phantom stock/restricted stock units. Of the 515,576 shares of common stock remaining available for future issuance under that plan, 464,400
shares are available for awards of common stock or restricted stock.

All of the Company’s equity compensation plans have been approved by shareholders.

Refer also to the caption “Stock Ownership” in the Company’s 2007 Proxy Statement, which information is

incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Refer to the caption “Certain Transactions” in the Company’s 2007 Proxy Statement, which information is
incorporated herein by reference. The information required by Item 407(a) of Regulation S-K is contained under the caption
“Governance of the Company—Director Independence” of the Company’s 2007 Proxy Statement and such information is
incorporated by reference herein.

Item 14. Principal Accounting Fees and Services

Refer to the caption “Audit Information – Fees of Independent Auditors” and “Audit Information – Pre-Approval

Policies and Procedures” in the Company’s 2007 Proxy Statement, which information is incorporated herein by reference.

Item 15. Exhibits, Financial Statement Schedules

(a)

The following are filed as part of this Form 10-K:

PART IV

1. Financial Statements. All financial statements are set forth in Item 8.
2. Financial Statement Schedules. None.
3. Exhibits. The exhibits are listed in the Exhibit Index immediately following the signature pages to this Form

10-K.

(b)

Exhibits

The response to this portion of Item 15 is submitted as a separate section to this Form 10-K.

(c)

Financial Statement Schedules

All schedules are omitted since the required information is not present in amounts sufficient to require
submission or because the information required is included in the consolidated financial statements and notes
therein.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the

Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

May 30, 2007

UNIVERSAL CORPORATION

By: /s/ ALLEN B. KING

___________________________________________________________________________
Allen B. King
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below

by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ ALLEN B. KING

Chairman and Chief Executive Officer and

May 30, 2007

Allen B. King

Director (Principal Executive Officer)

/s/ HARTWELL H. ROPER

Vice President and Chief Financial Officer

May 30, 2007

Hartwell H. Roper

(Principal Financial Officer)

/s/ ROBERT M. PEEBLES

Controller (Principal Accounting Officer)

May 30, 2007

Robert M. Peebles

/s/ JOHN B. ADAMS, JR.

Director

John B. Adams, Jr.

/s/ CHESTER A. CROCKER

Director

Chester A. Crocker

/s/ JOSEPH C. FARRELL

Director

Joseph C. Farrell

/s/ CHARLES H. FOSTER, JR.

Director

Charles H. Foster, Jr.

/s/ THOMAS H. JOHNSON

Director

Thomas H. Johnson

May 30, 2007

/s/ EDDIE N. MOORE, JR.

Director

May 30, 2007

Eddie N. Moore, Jr.

/s/ JEREMIAH J. SHEEHAN

Director

May 30, 2007

Jeremiah J. Sheehan

/s/ HUBERT R. STALLARD

Director

May 30, 2007

Hubert R. Stallard

/s/ WALTER A. STOSCH

Director

May 30, 2007

Walter A. Stosch

/s/ DR. EUGENE P. TRANI

Director

May 30, 2007

Dr. Eugene P. Trani

Exhibit
Number Document

2.1

3.1

3.2

3.3

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

4.10

4.11

4.12

4.13

4.14

Purchase and Sale Agreement, dated July 6, 2006, by and between the Registrant, Deli Universal, Inc., NVDU
Acquisition B.V., and N.V. Deli Universal (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K filed July 11, 2006, File No. 1-652).

Amended and Restated Articles of Incorporation (incorporated herein by reference to the Registrant’s Form 8-A
Registration Statement, dated December 22, 1998, File No. 1-652).

Amendment to the Articles of Incorporation in the form of a Certificate of Designation with respect to Series B
6.75% Convertible Perpetual Preferred Stock of the Registrant (incorporated herein by reference to the Registrant’s
Annual Report on Form 10-K for the period ended March 31, 2006, File No. 1-652).

Amended and Restated Bylaws (as of March 10, 2006) (incorporated herein by reference to the Registrant’s Annual
Report on Form 10-K for the period ended March 31, 2006, File No. 1-652).

Indenture between the Registrant and Chemical Bank, as trustee (incorporated herein by reference to the
Registrant’s Current Report on Form 8-K dated February 25, 1991, File No. 1-652).

Rights Agreement, dated as of December 3, 1998, between the Registrant and Wachovia Bank, N.A., as Rights
Agent (incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated December 3, 1998,
File No. 1-652).

First Amendment to the Rights Agreement, dated as of April 23, 1999, between the Registrant, Wachovia Bank,
N.A., as Rights Agent, and Norwest Bank Minnesota, N.A., as Successor Rights Agent (incorporated herein by
reference to the Registrant’s Current Report on Form 8-K dated May 7, 1999, File No. 1-652).

Specimen Common Stock Certificate (incorporated herein by reference to the Registrant’s Amendment No. 1 to
Registrant’s Form 8-A Registration Statement, dated May 7, 1999, File No. 1-652).

Distribution Agreement dated September 6, 2000 (including forms of Terms Agreement, Pricing Supplement, Fixed
Rate Note and Floating Rate Note) (incorporated herein by reference to Registrant’s Current Report on Report 8-K
dated September 6, 2000, File No. 1-652).

Form of Fixed Rate Note due November 21, 2007 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 21, 2000, File No. 1-652).

Form of Fixed Rate Note due December 15, 2010 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated December 15, 2000, File No. 1-652).

Form of Fixed Rate Note due February 15, 2008 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated February 12, 2001, File No. 1-652).

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 3, 2002, File No. 1-652).

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 12, 2002, File No. 1-652).

Form of Fixed Rate Note due September 20, 2007 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 20, 2002, File No. 1-652).

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 24, 2002, File No. 1-652).

Form of Fixed Rate Note due September 26, 2012 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 26, 2002, File No. 1-652).

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated October 31, 2002, File No. 1-652).

Exhibit
Number Document

4.15

4.16

4.17

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 4, 2002, File No. 1-652).

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 7, 2002, File No. 1-652).

Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 8, 2002, File No. 1-652).

The Registrant, by signing this Report on Form 10-K, agrees to furnish the Securities and Exchange Commission,
upon its request, a copy of any instrument which defines the rights of holders of long-term debt of the Registrant and
its consolidated subsidiaries, and for any unconsolidated subsidiaries for which financial statements are required to
be filed, and that authorizes a total amount of securities not in excess of 10% of the total assets of the Registrant and
its subsidiaries on a consolidated basis.

Universal Corporation Restricted Stock Plan for Non-Employee Directors (incorporated herein by reference to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1991, File No. 1-652).

Universal Leaf Tobacco Company, Incorporated Supplemental Stock Purchase Plan (incorporated herein by
reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1991, File No. 1-652).

Form of Universal Leaf Tobacco Company, Incorporated Executive Life Insurance Agreement (incorporated herein
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 1-
652).

Universal Leaf Tobacco Company, Incorporated Deferred Income Plan (incorporated herein by reference to the
Registrant’s Report on Form 8, dated February 8, 1991, File No. 1-652).

Universal Leaf Tobacco Company, Incorporated Benefit Replacement Plan (incorporated herein by reference to the
Registrant’s Report on Form 8, dated February 8, 1991, File No. 1-652).

Universal Leaf Tobacco Company, Incorporated 1996 Benefit Restoration Plan (incorporated herein by reference to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998, File No. 1-652).

Universal Corporation 1989 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, File No. 1-652).

Universal Corporation 1991 Stock Option and Equity Accumulation Agreement (incorporated herein by reference to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1991, File No. 1-652).

Amendment to Universal Corporation 1991 Stock Option and Equity Accumulation Agreement (incorporated herein
by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-
652).

10.10 Universal Leaf Tobacco Company, Incorporated 1994 Deferred Income Plan, amended and restated as of September
1, 1998 (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, File No. 1-652).

10.11 Universal Corporation Outside Directors’ Deferred Income Plan, restated as of October 1, 1998 (incorporated herein
by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No.
1-652).

10.12 Universal Leaf Tobacco Company, Incorporated 1994 Benefit Replacement Plan (incorporated herein by reference

to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 1-652).

10.13 Form of Universal Corporation 1994 Stock Option and Equity Accumulation Agreement (incorporated herein by
reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, File No. 1-
652).

Exhibit
Number Document

10.14 Universal Corporation 1994 Amended and Restated Stock Option Plan for Non-Employee Directors dated October
27, 2003 (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, File No. 1-652).

10.15 Form of Universal Corporation Non-Employee Director Non-Qualified Stock Option Agreement (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, File
No. 1-652).

10.16 Universal Leaf Tobacco Company, Incorporated Benefit Restoration Plan Trust, dated June 25, 1997, among
Universal Leaf Tobacco Company, Incorporated, Universal Corporation and Wachovia Bank, N.A., as trustee
(incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
1997, File No. 1-652).

10.17 First Amendment to the Universal Leaf Tobacco Company, Incorporated Benefit Restoration Trust, dated January
12, 1999, between Universal Leaf Tobacco Company, Incorporated and Wachovia Bank, N.A., as trustee
(incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended December
31, 1998, File No. 1-652).

10.18 Form of Universal Corporation 1997 Restricted Stock Agreement with Schedule of Awards to named executive
officers (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997, File No. 1-652).

10.19 Form of Universal Corporation 1997 Stock Option and Equity Accumulation Agreement, with Schedule of Grants to
named executive officers (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997, File No. 1-652).

10.20 Form of Universal Corporation Non-Employee Director Restricted Stock Agreement (incorporated herein by
reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, File No. 1-
652).

10.21 Form of Employment Agreement dated November 17, 2006, between Universal Corporation and named executive
officers (Allen B. King, Harwell H. Roper, and George C. Freeman, III) (incorporated herein by reference to the
Registrant’s Current Report on Form 8-K filed November 24, 2006, File No. 1-652).

10.22 Universal Corporation Director’s Charitable Award Program (incorporated herein by reference to the Registrant’s

Annual Report on Form 10-K for the fiscal year ended June 30, 1998, File No. 1-652).

10.23 Universal Corporation 1997 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, File No. 1-652).

10.24 Form of Universal Corporation 1999 Stock Option and Equity Accumulation Agreement, with Schedule of Grants to
Executive Officers (incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2001, File No. 1-652).

10.25 Form of Amendment to Stock Option and Equity Accumulation Agreements dated December 31, 1999 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).

10.26 Form of Universal Corporation 2000 Special Non-Qualified Stock Option Agreement, with Schedule of Grants and
Exercise Loans to named executive officers (incorporated herein by reference to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2000, File No. 1-652).

10.27 Form of Amendment to Stock Option and Equity Accumulation Agreements dated March 15, 1999 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).

10.28 Form of Amendment to Stock Option and Equity Accumulation Agreements dated December 8, 2000 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).

Exhibit
Number Document

10.29 Form of Amendment to Stock Option and Equity Accumulation Agreements dated June 11, 2001 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).

10.30 Form of Amendment to Non-Qualified Stock Option Agreements dated June 11, 2001 (incorporated herein by

reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File No. 1-652).

10.31 Form of Amendment to 2000 Special Non-Qualified Stock Option Agreements dated June 15, 2001 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).

10.32 Form of 2001 Non-Qualified Stock Option Agreement, with Schedule of Grants to Executive Officers (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002, File
No. 1-652).

10.33 Universal Corporation 2002 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference

to the Registrant’s Annual report on Form 10-K for the fiscal year ended June 30, 2003, file no. 1-652).

10.34 Form of 2002 Stock Option and Equity Accumulation Agreement, with Schedule of Grants to Executive Officers
(incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
2003, File No. 1-652).

10.35 Form of 2002 Non-Qualified Stock Option Agreement, with Schedule of Grants to Executive Officers (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, File
No. 1-652).

10.36 Credit Agreement dated as of January 7, 2005, among the Registrant and the Registrant’s subsidiaries identified
therein as a “Guarantor” and such other entities as may from time to time become a party thereto, the lenders named
therein and such other lenders as may become a party thereto, and Wachovia Bank, National Association, as
Administrative Agent (incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed
January 13, 2005, File No. 1-652).

10.37 Form of 2005 Non-Qualified Stock Option Agreement (incorporated herein by reference to the Registrant’s Current

Report on Form 8-K filed June 9, 2005, File No. 1-652).

10.38 First Amendment to Credit Agreement, dated as of March 27, 2006, among the Registrant, as Borrower, and the
banks named therein as Lenders (incorporated herein by reference to the Registrant’s Current Report on Form 8-K
filed March 31, 2006, File No. 1-652).

10.39 Form of Restricted Stock Units Award Agreement (incorporated herein by reference to the Registrant’s Current

Report on Form 8-K filed June 1, 2006, File No. 1-652).

10.40 Form of Stock Appreciation Rights Agreement (incorporated herein by reference to the Registrant’s Current Report

on Form 8-K filed June 1, 2006, File No. 1-652).

10.41 Form of Stock Appreciation Rights Agreement.*

10.42 Form of Amended Employee Grantor Trust Enrollment Agreement dated December 29, 2006, between Universal
Leaf Tobacco Company, Incorporated and named executive officers (Allen B. King, George C. Freeman, III, and
Hartwell H. Roper) (incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January
5, 2007, File No. 1-652).

Ratio of Earnings to Fixed Charges.*

Subsidiaries of the Registrant.*

Exhibit
Number Document

Consent of Independent Registered Public Accounting Firm.*

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*

Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*

32.2
______
* Filed herewith.

[THIS PAGE INTENTIONALLY LEFT BLANK]

INFORMATION FOR SHAREHOLDERS

CERTIFICATIONS
The Company’s Chief Executive
Ofﬁ cer and Chief Financial
Ofﬁ cer have ﬁ led the certiﬁ cations
required by Section 302 of the
Sarbanes-Oxley Act of 2002
with the Securities and Exchange
Commission as exhibits to the
Annual Report on Form 10-K.
In addition, the Company’s Chief
Executive Ofﬁ cer annually ﬁ les with
the New York Stock Exchange the
corporate governance certiﬁ cation
required by Listing Standard
303A.12. The certiﬁ cation was
submitted, without qualiﬁ cation, as
required after the Company’s 2006
Annual Meeting of Shareholders.

STOCK LISTED
New York Stock Exchange

STOCK SYMBOL
UVV

DIVIDEND
REINVESTMENT PLAN
The Company offers to its
common shareholders an automatic
dividend reinvestment and
cash payment plan to purchase
additional shares. The Company
bears all brokerage and service fees.
Booklets describing the plan in
detail are available upon request.

TRANSFER AGENT AND
REGISTRAR AND DIVIDEND
REINVESTMENT PLAN AGENT
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
(800) 468-9716
or
Universal Corporation
Shareholder Services
(804) 359-9311

ANNUAL MEETING
The annual meeting will be held
at the ofﬁ ces of the Company,
1501 N. Hamilton Street,
Richmond, Virginia, on Tuesday,
August 7, 2007. A proxy statement
and request for proxies are included
in this mailing to shareholders.

INDEPENDENT AUDITORS
Ernst & Young LLP
P.O. Box 680
Richmond, Virginia 23218-0680

INVESTOR RELATIONS
Contact:
Karen M. L. Whelan
Vice President and Treasurer
(804) 359-9311
Information Requests:
(804) 254-1813 or
investor@universalleaf.com

DIVIDEND PAYMENTS
Dividend declarations are subject to
approval by the Company’s Board
of Directors. Dividends on the
Company’s common stock have
traditionally been paid quarterly
in February, May, August, and
November to shareholders of record
on the second Monday of the
previous month.

SEC FORM 10-K
Shareholders may obtain additional
copies of the Company’s report to the
Securities and Exchange Commission
on its website or by writing to the
Treasurer of the Company.

www.universalcorp.com

P.O. Box 25099
Richmond, VA. 23260