Star Scientific, Inc. Reports Profitable Third Quarter While Initiating Test Marketing of Three New, Very Low-Nitrosamine Smokeless Products Since September.

Business Editors

CHESTER, Va.--(BUSINESS WIRE)--Nov. 15, 2001

Star Scientific, Inc. (Nasdaq:STSI) announced that the company recorded its eleventh consecutive profitable quarter, despite expensing all of the research and development costs associated with the launch of its new smokeless tobacco products, Stonewall(TM) moist and dry snuff and Ariva(TM) compressed powdered tobacco cigalett(TM) pieces.

Third quarter 2001 net revenues were $57.5 million, compared to $75.6 million in the third quarter of 2000, a decrease of 24%. Third quarter 2001 pre-tax and net earnings were $1.1 million and $0.5 million, respectively, compared to pre-tax and net earnings of $7.6 million and $4.7 million, respectively, in the third quarter of 2000.

Pre-tax and net earnings for the first nine months of 2001 were $9.5 million and $5.5 million, compared to pre-tax and net earnings of $14.3 million and $8.4 million, respectively, in the first nine months of 2000, which reflect corresponding decreases in the pre-tax and net earnings of 34% each. Net revenues for the first nine months of 2001 were $138.5 million, compared to $164.4 million in the first nine months of 2000. Of the Company's net revenues during the third quarter and first nine months of 2001, approximately 60% and 83%, respectively, were attributable to sales of cigarettes by its wholly owned subsidiary, Star Tobacco, Inc. (formerly Star Tobacco & Pharmaceuticals, Inc.). During the third quarter, in addition to cigarette sales, the Company's net revenues consisted of sales of StarCured(TM) leaf tobacco to Brown & Williamson Tobacco Corporation ("B&W")1 and $1.35 million in royalty payments paid by B&W on its purchase of low-TSNA tobacco under its licensing agreement with Star. During this growing season, B&W has been purchasing StarCured(TM) tobacco leaf from Star Scientific at an average price of $2.00 per pound as compared to an average price of $2.55 per pound during the year 2000 growing season. This pricing adjustment was negotiated as part of the April 25, 2001 agreements with B&W, which provide for enhanced royalty arrangements on B&W's sale of low-TSNA products and purchase of low-TSNA tobacco and for the conversion of Star Scientific's short-term debt into long-term, non-interest bearing debt.

Third quarter 2001 diluted per share earnings were $0.01 compared with per share earnings of $0.08 in the third quarter of 2000. The diluted weighted average shares outstanding were 60,768,290 and 61,531,427 in the third quarters of 2001 and 2000, respectively. Diluted per share earnings for the first nine months of 2001 were $0.09 compared with per share earnings of $0.14 in the first nine months of 2000. The diluted weighted average shares outstanding were 60,730,511 and 61,024,855 in the first nine months of 2001 and 2000, respectively.

Christopher G. Miller, Star Scientific's Chief Financial Officer noted: "Our quarterly results reflect the R&D and product introduction costs associated with bringing our new smokeless tobacco products to market. The results also reflect the continued repositioning of our cigarette sales in Texas, Florida, Minnesota and Mississippi, which are not parties to the tobacco Master Settlement Agreement ("MSA"), restructuring of our agreements with B&W to focus on a revenue stream from royalty payments, as opposed to sales of StarCured(TM) tobacco, and the conversion of short-term debt to long-term, non-interest bearing debt." Mr. Miller added: "Since April, 2001, the Company has paid down $5.5 million or 19% of its long-term debt to B&W. Under the restructured agreements with B&W, the debt will be further reduced by, among other things, the royalty payments that Star Scientific will receive on the sale of B&W's Advance(R) cigarette that was jointly developed by Star Scientific and B&W. As reported last week, B&W has launched a broad test market of Advance(R) in Indianapolis, Indiana."

Paul L. Perito, Esquire, Star's Chairman, President and COO noted: "We are pleased that we have been able to introduce three innovative smokeless tobacco products since September and have clearly shifted the focus of our Company from smoked to smokeless tobacco products which use 100% Virginia, very low-nitrosamine (TSNA) StarCured(TM) tobacco."

Mr. Perito further noted: "Our smokeless products, particularly Ariva(TM), provide adult tobacco users with a viable alternative to cigarettes in situations when they can't smoke or are looking for an alternative to a cigarette. We were encouraged by our Scientific Advisory Board and other independent scientific and medical advisors to accelerate the development of smokeless products using 100% StarCured(TM) very low-TSNA tobacco, because smokeless products have far fewer toxins than cigarette smoke which contains more than 4,000 chemical compounds, 43 of which are carcinogenic. As we reiterated last week, the efforts to bring our innovative smokeless tobacco products to market and to reposition our Company in the smokeless segment will mean lower net income for the remainder of this year. However, we are confident that in the long run, the higher margins that we expect to achieve with Ariva(TM), whose sales are not subject to escrow payments under the MSA, and the potential to provide smokers with alternatives to traditional cigarettes, will position Star Scientific as a profitable and disruptive force in the cigarette industry."

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company has tried, whenever possible, to identify these forward-looking statements using words such as "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions. These statements reflect the Company's current beliefs and are based upon information currently available to it. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and contingencies include, without limitation, the fact that the Company may not be successful in litigation to enforce its patent rights, that tobacco companies and others potentially infringing its patent may not enter into royalty agreements to sublicense its patents, that the tobacco industry may not adopt low-TSNA tobacco as its predominant tobacco rapidly or at all, or that a non-infringing product competitive with the patents may be developed by a third party. Other risks of the business include the challenges inherent in new product development initiatives, the Company's ability to raise the capital necessary to grow its business, potential disputes concerning the Company's intellectual property, potential delays in obtaining any necessary government approvals of the Company's proposed reduced risk tobacco products, market acceptance of the Company's proposed new products, competition from companies with greater resources than the Company, the Company's decision not to join the Master Settlement Agreement ("MSA") and its decision to challenge the constitutionality of the MSA, the effect of state statutes adopted under the MSA and any subsequent modification of the MSA, the Company's dependence on key employees and on its strategic relationships with Brown & Williamson Tobacco Corporation. The impact of potential litigation, if initiated against or by individual states that have adopted the MSA, could be materially adverse to the Company. See additional discussion under "Factors That May Affect Future Results" in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, and other factors detailed from time to time in the Company's other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or advise upon any such forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

About Star Scientific

Star Scientific is a technology-oriented tobacco company with a toxicity reduction mission. It is engaged in the development of tobacco products that deliver less carcinogenic toxins (principally tobacco specific nitrosamines (TSNAs)), through the utilization of the innovative StarCured(TM) tobacco-curing technology, and in sublicensing that technology to others. Star Scientific has a Corporate and Sales office in Chester, Virginia, an Executive, Scientific and Regulatory Affairs office in Bethesda, MD, and manufacturing and processing facilities in Petersburg and Chase City, VA.

(1) Brown & Williamson Tobacco Corporation is the third largest tobacco company in the U.S., and the largest affiliate of British American Tobacco PLC ("BAT"), the second largest tobacco company in the world.