RJR NABISCO INC, 10-K405, 1998-03-27

RJR NABISCO INC
10-K405, 1998-03-27
CIGARETTES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)

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<S> <C> <C>
DELAWARE 1-10215 13-3490602
(State or other (Commission file (I.R.S. Employer
jurisdiction of number) Identification No.)
incorporation or
organization)
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RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)

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<S> <C> <C>
DELAWARE 1-6388 56-0950247
(State or other (Commission file (I.R.S. Employer
jurisdiction of number) Identification No.)
incorporation or
organization)
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1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 258-5600
(Address, including zip code, and telephone number, including area code,
of the principal executive offices of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc.)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH
EXCHANGE ON
WHICH
TITLE OF EACH CLASS REGISTERED
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RJR NABISCO HOLDINGS CORP.
Common Stock, par value $.01 per share New York
Series B Depositary Shares New York
RJR NABISCO, INC.
8.30% Senior Notes due April 15, 1999 New York
8% Notes due January 15, 2000 New York
8% Notes due 2001 New York
8 5/8% Notes due 2002 New York
7 5/8% Notes due September 15, 2003 New York
8 1/4% Notes due 2004 New York
8.75% Senior Notes due April 15, 2004 New York
8 3/4% Notes due 2005 New York
8 1/2% Notes due 2007 New York
8 3/4% Notes due 2007 New York
9 1/4% Debentures due 2013 New York

NAME OF EACH
EXCHANGE ON
WHICH
TITLE OF EACH CLASS REGISTERED
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SUBSIDIARIES OF THE REGISTRANTS
RJR NABISCO HOLDINGS CAPITAL TRUST I
10% Trust Originated Preferred Securities New York
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE 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
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE 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 REGISTRANTS' 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 ]

THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF RJR
NABISCO HOLDINGS CORP. ON FEBRUARY 28, 1998 WAS APPROXIMATELY $11.2 BILLION.
CERTAIN DIRECTORS OF RJR NABISCO HOLDINGS CORP. ARE CONSIDERED AFFILIATES FOR
PURPOSES OF THIS CALCULATION BUT SHOULD NOT NECESSARILY BE DEEMED AFFILIATES FOR
ANY OTHER PURPOSE. NONE OF THE VOTING STOCK OF RJR NABISCO, INC. IS HELD BY ANY
NON-AFFILIATE.

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS'
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: FEBRUARY 28, 1998:

RJR NABISCO HOLDINGS CORP.: 324,752,330 SHARES OF COMMON STOCK, PAR VALUE, $.01
PER SHARE
RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER
SHARE
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RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE DEFINITIVE PROXY STATEMENT OF RJR NABISCO HOLDINGS CORP. TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A OF
THE SECURITIES EXCHANGE ACT OF 1934 ON OR PRIOR TO MARCH 30, 1998 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.

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INDEX

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PAGE
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PART I
Item 1. Business........................................................................................ 1
(a) General Development of Business......................................................... 1
(b) Financial Information about Industry Segments........................................... 2
(c) Narrative Description of Business....................................................... 2
Tobacco............................................................................... 2
Food.................................................................................. 13
Other Matters......................................................................... 17
(d) Financial Information about Foreign and Domestic Operations
and Export Sales...................................................................... 17
Item 2. Properties...................................................................................... 17
Item 3. Legal Proceedings............................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............................................. 18
Executive Officers of the Registrants........................................................... 19

PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters........................... 21
Item 6. Selected Financial Data......................................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................... 23
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................................... 36
Item 8. Financial Statements and Supplementary Data..................................................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................................... 36

PART III
Item 10. Directors and Executive Officers of the Registrants............................................. 37
Item 11. Executive Compensation.......................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 37
Item 13. Certain Relationships and Related Transactions.................................................. 37

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 38
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PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

The operating subsidiaries of RJR Nabisco Holdings Corp. ("RJRN Holdings")
and its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN") (collectively the
"Registrants"), comprise one of the largest tobacco and food companies in the
world. In the United States, the tobacco business is conducted by R. J.
Reynolds Tobacco Company ("RJRT"), a wholly-owned subsidiary of RJRN and the
second largest manufacturer of cigarettes, and the packaged food business is
conducted under Nabisco Holdings Corp. ("Nabisco Holdings") by its wholly-owned
subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and marketer of
cookies and crackers. RJRN owns 100% of the outstanding Class B Common Stock of
Nabisco Holdings, which represents approximately 80.7% of the economic interest
in Nabisco Holdings and approximately 97.7% of the total voting power of Nabisco
Holdings' outstanding common stock.

Outside the United States, tobacco operations are conducted by R.J. Reynolds
International ("Reynolds International"), and food operations are conducted by
Nabisco International, Inc. ("Nabisco International") and Nabisco Ltd (formerly
Nabisco Brands Ltd). RJRT's and Reynolds International's tobacco products are
sold around the world under a variety of brand names. Nabisco's food products
are sold in the United States, Canada, Latin America, certain European countries
and certain other international markets. No customer of RJRN's subsidiaries in
the aggregate accounted for 10% or more of RJRN's consolidated 1997 revenues.
For financial information with respect to RJRN's industry segments, lines of
business and operations in various geographic locations, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and note 15 to the consolidated financial statements, and the
related notes thereto, of RJRN Holdings and RJRN as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31, 1997
(the "Consolidated Financial Statements").

RJRN Holdings was organized as a Delaware corporation in 1988 at the
direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), a Delaware limited
partnership, to effect the acquisition of RJRN, which was completed on April 28,
1989. As a result of this acquisition, RJRN became an indirect, wholly-owned
subsidiary of RJRN Holdings. After a series of holding company mergers completed
on December 17, 1992, RJRN became a direct, wholly-owned subsidiary of RJRN
Holdings. The business of RJRN Holdings is conducted through RJRN. KKR no longer
holds an interest in RJRN Holdings.

RJRN was incorporated as a holding company in 1970 holding the stock of RJRT
and other companies that have since been sold. It acquired Nabisco Holdings
Corp. (formerly Nabisco Brands, Inc.) in 1985.

In recent years subsidiaries of RJRN Holdings and RJRN have completed a
number of acquisitions and have divested certain businesses. In 1997 these
acquisitions included the stock of Cornnuts, Inc., a manufacturer of crispy corn
kernel snacks.

In 1996, these acquisitions included the Mayco and Capri biscuit businesses
and the Vizzolini pasta business in Argentina, the Pilar biscuit business in
Brazil and the Fontanda biscuit business in Spain as well as the biscuit,
confectionery and snack food assets of a Taiwan-based manufacturer and a 50%
interest plus management control of Azerbaijan Tobacco Company.

RJRN will continue to assess its businesses to evaluate their consistency
with strategic objectives. Although RJRN may acquire and/or divest additional
businesses in the future, no other decisions have been made with respect to any
such acquisitions or divestitures. RJRN Holdings' and RJRN's credit agreements,
each dated as of April 28, 1995, as amended, prohibit the sale of all or any
substantial portion of certain assets of RJRN Holdings or its subsidiaries.

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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

During 1997, 1996 and 1995, RJRN's industry segments were tobacco and food.

For information relating to industry segments for the years ended December
31, 1997, 1996 and 1995, see note 15 to the Consolidated Financial Statements.

TOBACCO

The tobacco line of business is conducted by RJRT and Reynolds
International, which manufacture, distribute and sell cigarettes. Cigarettes are
manufactured in the United States by RJRT and in over 40 foreign countries and
territories by Reynolds International and subsidiaries, joint ventures or
licensees of RJRT and are sold throughout the United States and in more than 170
markets around the world. In 1997, approximately 59% of total tobacco segment
net sales (after deducting excise taxes) and approximately 66% of total tobacco
segment operating income on a reported basis (before amortization of trademarks
and goodwill and restructuring expenses) were attributable to domestic tobacco
operations.

DOMESTIC TOBACCO OPERATIONS

The domestic tobacco business is conducted by RJRT which is the second
largest cigarette manufacturer in the United States. RJRT's largest selling
cigarette brands in the United States include DORAL, WINSTON, CAMEL, SALEM, and
VANTAGE. RJRT's other cigarette brands, including MONARCH, MORE, NOW, CENTURY,
STERLING and MAGNA, are marketed to meet a variety of smoker preferences. All
RJRT brands are marketed in a variety of styles. Based on data collected for
RJRT by an independent market research firm, RJRT had an overall share of retail
consumer cigarette sales during 1997 of 25.4%, a decrease of approximately
one-half a share point from 1996. During 1997, RJRT and the largest domestic
cigarette manufacturer, Philip Morris Incorporated, together sold, on a shipment
basis, approximately 73% of all cigarettes sold in the United States.

In May 1996, RJRT began test marketing in Chattanooga, Tennessee, ECLIPSE, a
cigarette that primarily heats rather than burns tobacco and thereby
substantially reduces second-hand smoke. Test markets were expanded in 1997 to
include Lincoln, Nebraska and Atlanta, Georgia. ECLIPSE is also available to
adult smokers by mail in 20 states. RJRT continues to assess the test results.

A primary long-term objective of RJRT is to increase earnings and cash flow
through selective marketing investments in its key brands and continual
improvements in its cost structure and operating efficiency. Marketing programs
for full-price brands are designed to build brand awareness and add value to the
brands by building brand loyalty among current adult smokers and attracting
adult smokers of competing brands. In 1997, these efforts focused on
accelerating share of market gains of the CAMEL brand family and reestablishing
growth of the WINSTON brand through a complete marketplace repositioning
program. In the first half of the year, new CAMEL Menthol line extensions were
introduced nationally and distribution of the RED KAMEL styles was expanded to
pack-oriented retail outlets throughout the country. During the second half, the
company began the national introduction of WINSTON's new "No Bull" marketing
campaign which is designed to establish WINSTON as a brand with a "straight-up"
attitude leveraged by a unique product distinction: a 100-percent-tobacco blend
with no additives. RJRT believes it is essential to compete in all segments of
the cigarette market, and accordingly it offers a range of lower-priced brands
including DORAL, MONARCH and BEST VALUE, intended to appeal to more
cost-conscious adult smokers. For a discussion on competition in the tobacco
business, see "Business--Tobacco--Competition" in this Item 1.

RJRT's domestic manufacturing facilities, consisting principally of
factories and leaf storage facilities, are located in or near Winston-Salem,
North Carolina and are owned by RJRT. Cigarette production is conducted at the
Tobaccoville cigarette manufacturing plant (approximately two million square
feet) and the Whitaker Park cigarette manufacturing complex (approximately one
and one-half million square feet).

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RJRT believes that its cigarette manufacturing facilities are among the most
technologically advanced in the United States. RJRT also has significant
research and development facilities in Winston-Salem, North Carolina.

RJRT's cigarettes are sold in the United States primarily to chain stores,
other large retail outlets and through distributors to other retail and
wholesale outlets. Except for McLane Company, Inc., which represented
approximately 17% of RJRT's sales, no RJRT customers accounted for more than 10%
of RJRT's sales for 1997. RJRT distributes its cigarettes primarily to public
warehouses located throughout the United States that serve as local distribution
centers for RJRT's customers.

RJRT's products are sold to adult smokers primarily through retail outlets.
RJRT uses print media, billboards, point-of-sale displays and other methods of
advertising. Since 1971, television and radio advertising of cigarettes has been
prohibited in the United States.

INTERNATIONAL TOBACCO OPERATIONS

Reynolds International operates in over 170 markets around the world.
Although overall foreign cigarette sales (excluding China, in which production
data indicates an approximate 2% per annum growth rate) have increased at a rate
of only 1% per annum in recent years, Reynolds International believes that the
American-blend segment, in which Reynolds International primarily competes, is
growing significantly faster. Although Reynolds International is the second
largest of two international cigarette producers that have significant positions
in the American-blend segment, its share of sales in this segment is
approximately one-fourth of the share of Philip Morris International Inc., the
largest American-blend producer.

Reynolds International has strong brand presence in Western Europe and is
well established in its other key markets in the Middle East/Africa, Asia, the
CIS and Baltics region and Canada. Reynolds International is aggressively
pursuing development opportunities throughout the world.

Reynolds International markets nearly 100 brands of which WINSTON, CAMEL and
SALEM, all American-blend cigarettes, are its international leaders. WINSTON,
Reynolds International's largest selling international brand, has a significant
presence in Puerto Rico and has particular strength in the Western Europe and
Middle East/Africa regions. CAMEL is sold in approximately 140 markets worldwide
and is Reynolds International's second largest selling international brand.
SALEM is the world's largest selling menthol cigarette and is particularly
strong in Far East markets. Reynolds International also markets a number of
local brands in various foreign markets. None of Reynolds International's
customers accounted for more than 10% of its sales in 1997.

Approximately 18% of Reynolds International's 1997 volume was U.S.-made
product, with the remainder manufactured outside the U.S. Reynolds International
brands are manufactured in owned or joint-venture facilities in 22 locations
outside the United States, and through licensing agreements in about 20 other
countries. Reynolds International owned or joint-venture manufacturing locations
include Azerbaijan, Canada, the Canary Islands, China, the Czech Republic,
Finland, Germany, Hong Kong, Hungary, Indonesia, Kazakhstan, Malaysia, Poland,
Portugal, Romania, Russia, Switzerland, Tanzania, Turkey, Ukraine and Vietnam.

Certain of Reynolds International's foreign operations are subject to local
regulations that set import quotas, restrict financing flexibility, affect
repatriation of earnings or assets and/or limit advertising. In recent years,
certain trade barriers for cigarettes, particularly in Asia and Eastern Europe,
have been liberalized. This may provide opportunities for all international
cigarette manufacturers, including Reynolds International, to expand operations
in such markets; however, there can be no assurance that the liberalizing trends
will be maintained or extended or that Reynolds International will be successful
in pursuing such opportunities.

RAW MATERIALS

In its domestic production of cigarettes, RJRT primarily uses domestic
burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also
purchases oriental tobaccos, grown primarily in Turkey

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and Greece, and certain other non-domestic tobaccos. Reynolds International uses
a variety of tobacco leaf from both United States and international sources.
RJRT and Reynolds International believe there is a sufficient supply of tobacco
in the worldwide tobacco market to satisfy their current production
requirements. Reynolds International is actively involved in tobacco cultivation
activities with fully owned agronomy operations in Vietnam and Turkey and a
joint venture in China.

Tobacco leaf is an agricultural commodity subject in the United States to
government production controls and price supports that can affect market prices
substantially. The tobacco leaf price support program is subject to
Congressional review and may be changed at any time. In December 1994, Congress
enacted the Uruguay Round Agreements Act to replace a domestic content
requirement with a tariff rate quota system that keys tariffs to import volumes.
The tariff rate quotas have been established by the United States with overseas
tobacco producers and became effective on September 13, 1995.

COMPETITION

Generally, the markets in which RJRT and Reynolds International conduct
their businesses are highly competitive, with a number of large participants.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. For most of RJRT's and Reynolds International's brands,
substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new brand. Anti-smoking
groups have undertaken activities designed to inhibit cigarette sales, the form
and content of cigarette advertising and the testing and introduction of new
cigarette products.

Because television and radio advertising for cigarettes is prohibited in the
United States and brand loyalty has tended to be higher in the cigarette
industry than in other consumer product industries, established cigarette brands
in the United States have a competitive advantage. RJRT has repositioned or
introduced brands designed to appeal to adult smokers of the largest selling
cigarette brand in the United States, but there can be no assurance that such
efforts will be successful.

In addition, increased selling prices and taxes on cigarettes have resulted
in additional price sensitivity of cigarettes at the consumer level and in a
proliferation of discounted brands in the savings segment of the market.
Generally, sales of cigarettes in the savings segment are not as profitable as
those in other segments.

LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY

The tobacco business is subject to a wide range of laws and regulations
regarding the advertising, sale, taxation and use of tobacco products imposed by
local, state, federal and foreign governments. In addition, at present, the U.S.
Congress is considering several bills that could change the regulatory framework
within which that business is conducted and make it significantly more
restrictive. Any such legislation is likely to also result in material new costs
and reduced sales for the cigarette industry but could also limit some of the
litigation risks to which it is now subject. For a discussion of the regulatory
and legislative environment applicable to the cigarette business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tobacco--Governmental Activity" and note 10 to the consolidated
financial statements.

LITIGATION AFFECTING THE CIGARETTE INDUSTRY

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cases pending, as compared with 234 on December 31, 1996, 132 on December 31,
1995 and 54 on December 31, 1994. As of March 3, 1998, 540 active cases were
pending against RJRT and/or its affiliates or indemnitees, 534 in the United
States, two in Puerto Rico, one in the Marshall Islands, two in Canada and one
in Nigeria.

The United States cases are in 46 states and are distributed as follows: 198
in Florida, 101 in New York, 21 in Louisiana, 17 in each of Texas and
Pennsylvania, 14 in California, 12 in each of Alabama and Ohio, 11 in Tennessee,
nine in each of the District of Columbia, Illinois and Mississippi, seven in
each of Indiana, New Jersey and West Virginia, six in Georgia, five in each of
Maryland and Massachusetts, four in each of Kansas, Michigan, Minnesota and
South Dakota, three in each of Arizona, Arkansas, Colorado, Hawaii, Iowa,
Missouri, Nevada, Oklahoma and Rhode Island, two in each of Connecticut,
Montana, New Hampshire, New Mexico, Oregon, South Carolina, Utah, Washington and
Wisconsin, and one each in Alaska, Idaho, Kentucky, Maine, North Carolina and
Vermont. Of the 534 active cases in the United States, 426 are in state court
and 108 are in federal court. Most of these cases were brought by individual
plaintiffs, but an increasing number, discussed below, seek recovery on behalf
of states or large classes of claimants.

THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring
and common law public nuisance. Punitive damages, often in amounts ranging into
the hundreds of millions or even billions of dollars, are specifically pleaded
in a number of cases in addition to compensatory and other damages. Eight of the
534 active cases in the United States involve alleged non-smokers claiming
injuries purportedly resulting from exposure to environmental tobacco smoke.
Forty-seven cases purport to be class actions on behalf of thousands of
individuals. Purported classes include individuals claiming to be addicted to
cigarettes, individuals and their estates claiming illness and death from
cigarette smoking, and Blue Cross/Blue Shield subscribers seeking reimbursement
for premiums paid. One hundred two of the active cases seek, INTER ALIA,
recovery of the cost of Medicaid payments or other health-related costs paid for
treatment of individuals suffering from diseases or conditions allegedly related
to tobacco use. Four, brought by entities administering asbestos liability, seek
contribution for settlement costs.

DEFENSES. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act of some or all such claims arising after 1969; the lack of any defect in the
product; assumption of the risk; contributory or comparative fault; lack of
proximate cause; and statutes of limitations or repose; and, in the attorney
general cases (discussed below), additional statutory, equitable, constitutional
and other defenses. RJRN and RJRN Holdings have asserted additional defenses,
including jurisdictional defenses, in many of these cases in which they are
named.

Juries have found for plaintiffs in three smoking and health cases in which
RJRT was not a defendant, but in one such case, no damages were awarded and the
judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another
such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on
appeal and the case was subsequently dismissed. In the third such case, on
August 9, 1996, a Florida jury awarded damages of $750,000 to an individual
plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking
to reverse the judgment on appeal. On May 5, 1997, in an individual case filed
against RJRT, brought by the same attorney who represented plaintiffs in the
CARTER case, a Florida state court jury found no RJRT liability. On October 31,
1997, in still another case (KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY) brought
by the same attorney, another state court jury found no RJRT liability. On March
19, 1998, an Indiana state court found for RJRT, RJRN Holdings and other
defendants in an individual case, DUNN V. RJR NABISCO HOLDINGS CORP., in which
plaintiffs sought damages for the alleged harm caused to a non-smoker by
environmental tobacco smoke. In addition, during 1997 and early 1998, RJRT and
other tobacco industry defendants have settled five lawsuits. See "Interim
Agreements" below.

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CERTAIN CLASS ACTION SUITS. In May 1996, in an early class action case,
CASTANO V. AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals
overturned the certification of a purported nationwide class of persons whose
claims related to alleged addiction to tobacco. The Court ordered the case
remanded to the district court for decertification of the class on the grounds
that a class consisting of all "addicted" smokers failed to meet the standards
and requirements of Federal Rule 23 governing class actions. The class has been
decertified and the parties have agreed to move for dismissal of the remaining
individual case with a right to replead after November 15, 1998. Since this
ruling by the Fifth Circuit, most purported class action suits have sought
certification of statewide rather than nationwide classes.

Putative class action suits based on claims similar to those asserted in
CASTANO have been brought in state and, in a few instances, federal courts in
Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, South Dakota, Tennessee, Texas, Utah, West Virginia and Wisconsin.
A putative class action filed in Tennessee seeks reimbursement of Blue
Cross/Blue Shield premiums paid by subscribers throughout the United States.
Suits are also expected to be filed in additional jurisdictions and there are
also putative class action suits pending in Canada, Puerto Rico and Nigeria.
Each such suit asserts claims on behalf of residents of a particular
jurisdiction who claim to be addicted, injured, or at greater risk of injury by
the use of tobacco, or are the legal survivors of such persons.

In the class action suit pending in Florida, ENGLE V. R.J. REYNOLDS TOBACCO
COMPANY, a class consisting of Florida residents or their survivors who claim to
have diseases or medical conditions caused by their "addiction" to cigarettes
has been certified. The case was scheduled for trial in February 1998 but was
removed from the court calendar and has not yet been rescheduled. A class was
certified in another purported class action suit pending in Louisiana state
court, SCOTT V. AMERICAN TOBACCO COMPANY, on April 11, 1997. Defendants are
seeking reconsideration of the certification. Class certification was granted in
two cases pending in New York state courts, HOSKINS V. R.J. REYNOLDS TOBACCO
COMPANY and GEIGER V. AMERICAN TOBACCO COMPANY (in which certification was
conditional). The parties have briefed and argued appeals brought by defendants
in both cases. On January 28, 1998, class certification was granted by a
Maryland state court in RICHARDSON V. PHILIP MORRIS. Class certification was
denied, however, on August 18, 1997, by a District of Columbia court in the case
of REED V. PHILIP MORRIS. In October 1997, class certification was also denied
in ARCH V. AMERICAN TOBACCO COMPANY (renamed BARNES V. AMERICAN TOBACCO
COMPANY), which was pending in the United States District Court for the Eastern
District of Pennsylvania. That court had initially certified a medical
monitoring class based on the plaintiffs' amended complaint (having refused to
certify a class based on the initial complaint), but on October 17, 1997, the
judge reversed the certification and also dismissed the claims of each of the
class representatives. Plaintiffs are appealing this ruling and briefing is
scheduled to continue through April 23, 1998. In addition, in another purported
class action brought in federal court in Puerto Rico, RUIZ V. AMERICAN TOBACCO
COMPANY, the court on March 17, 1998, denied plaintiffs motion for class
certification. Another class action suit, BROIN V. PHILIP MORRIS, was settled by
an agreement dated October 9, 1997 and approved by the Florida state court on
February 3, 1998. See "Interim Agreements" below.

THE ATTORNEY GENERAL AND RELATED CASES. In June 1994, the Mississippi
attorney general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, against
various industry members including RJRT. This case was brought on behalf of the
state to recover state funds paid for healthcare and medical and other
assistance to state citizens suffering from diseases and conditions allegedly
related to tobacco use. This suit, which was brought in Chancery (non-jury)
Court, Jackson County, Mississippi, also sought an injunction against
"promoting" or "aiding and abetting" the sale of cigarettes to minors. Both
actual and punitive damages were sought in unspecified amounts. The case was
scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at
an agreement in principle settling the claims relating to the subject matter of
the litigation. A comprehensive settlement agreement, based on the agreement in
principle, was signed on October 17, 1997. See "Interim Agreements" below.

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companies, in actions to recover the costs of medical expenses incurred by the
state or its agencies in the treatment of diseases allegedly caused by cigarette
smoking. Some of these cases also seek injunctive relief and treble damages for
state and/or federal antitrust law and RICO violations. Certain of the actions
also seek statutory penalties and other forms of relief under state consumer
protection and antitrust statutes. On March 3, 1998, there were 39 such cases
pending in the following states, commonwealths, or territories: Alaska, Arizona,
California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana,
Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New
Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode
Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia
and Wisconsin. In addition to the Mississippi case mentioned above, tobacco
company defendants have settled two additional attorney general cases; one in
the State of Florida (except for certain equitable claims) and another in the
State of Texas. See "Interim Agreements" below.

One of the attorney general cases is currently on trial in Minnesota. The
trial, which began in January 1998, is expected to take approximately four
months. Plaintiffs in this case are seeking compensatory damages of $1.7 billion
and, in addition, seek disgorgement of profits, restitution, treble damages
under the State's antitrust statute, punitive damages, funding of smoking
cessation and public education programs, civil penalties of $25,000 for each
separate violation of various consumer protection statutes, civil penalties of
$50,000 for each separate violation of Minnesota's antitrust statute, attorneys'
fees and costs, various forms of non-monetary relief and such other relief as
the court deems just and equitable.

During pre-trial discovery and in the course of trial to date, the court in
this case made a number of rulings adverse to the defendants. These rulings,
among other things, limit the defenses available to the defendants and require
production by the defendants of thousands of documents for which privilege had
been asserted. The tobacco companies are defending this case vigorously, but the
court's rulings could have an adverse effect on their ability to present their
defense effectively.

In addition to the 39 pending actions brought by the various attorneys
general, 63 pending actions advancing similar theories have been brought by
private attorneys and/or local officials purportedly on behalf of the citizens
of certain states, counties and/or cities, union health and welfare funds, a
university and four native American tribes. One such union case, NORTHWEST
LABORERS V. PHILIP MORRIS, pending in the State of Washington, was certified as
a class action on December 24, 1997. A taxpayer case pending in Ohio was
dismissed for lack of standing on February 12, 1998 (COYNE V. AMERICAN TOBACCO).

Although RJRT and most other cigarette manufacturers have agreed to the
Memorandum described below, the uncertainty of its enactment into law requires
that they continue to defend these attorney general and related cases vigorously
and, except as described below (see "Interim Agreements") they continue to do so
(as do RJRN and RJRN Holdings in the cases where they are named defendants). In
addition, the tobacco company defendants filed for declaratory judgment in
several of the states in which attorney general cases were threatened.

PROPOSED RESOLUTION. Following several months of negotiations with state
attorneys general, representatives of the public health community and
plaintiffs' lawyers, on June 20, 1997, a Memorandum of Understanding and
Resolution (the "Memorandum") that sets forth concepts for federal legislation
and a contractual protocol to resolve a variety of litigation and regulatory
issues concerning tobacco was entered into. The Memorandum requires the tobacco
companies to make an initial $10 billion payment and subsequent annual
multi-billion dollar payments expected to aggregate to approximately $368.5
billion over 25 years. Discussions with other manufacturers who were
participants in the negotiations which led to the Memorandum are still in
progress, but RJRT believes that its share of the initial payment will be in the
range of $600 to $700 million and that subsequent payments will be allocated
within the industry based on market share. The proposed legislation would also,
among other things, reduce retail access for tobacco products, eliminate
cigarette vending machines and tobacco product sampling, confer authority on the
FDA to regulate the manufacture of tobacco products (with express limitations on
authority relating to nicotine) and create publicly funded smoking cessation and
education programs. The proposed legislation would grant limited litigation
protection to the tobacco industry, including a bar on class action suits, suits

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based on addiction and demands for punitive damages for past actions. It would
also cap industry payments in permitted individual lawsuits to an aggregate of
$5 billion per year. The proposal also provides a "look-back" provision which
would penalize manufacturers if youth smoking is not reduced by stated amounts
in certain years after enactment, culminating in a 60% reduction after 10 years.

There can be no assurance that legislation required to implement the
Memorandum will be enacted or that it will be enacted without modification that
is materially adverse to the tobacco industry, particularly in light of the
complex legal and factual issues involved and the need to reconcile the views of
many competing interests. A number of bills have been introduced into Congress
incorporating terms that vary in significant ways from those agreed to in the
Memorandum. It is not certain that proposed legislation, if any, that emerges
from this process will be advantageous to RJRT. If enacted, the legislation
could face challenges on the grounds, among others, that the federal government
lacks the authority to regulate the tobacco industry or limit its liability in
the manner contemplated by the Memorandum. Regardless of the legislative
outcome, the negotiation and signing of the Memorandum could adversely affect
other federal, state and local regulation of the tobacco industry, alter the
climate for pending litigation against RJRN, RJRT and other tobacco industry
defendants and their corporate parents and affect the number of new smoking and
health claims filed against the industry.

The financial effects of this legislation and the related contractual
protocol are difficult to predict. They depend, among other things, on (i) the
amount, timing and tax treatment of the payments actually required of RJRT by
the legislation; (ii) the means used to finance these payments; (iii) the impact
of increased cigarette prices and other aspects of the legislation and the
contractual protocol on domestic cigarette consumption; (iv) the effect of the
legislation and the contractual protocol on the consumption of tobacco products
and on the regulatory and litigation environment outside the United States; (v)
the effect, if any, on public attitudes toward smoking and the tobacco industry;
and (vi) the impact on RJRT's competitive position in the tobacco industry.

Despite these uncertainties, RJRN believes that implementation of the
Memorandum would increase the costs and reduce the consumption of RJRT's tobacco
products in the United States. In particular, the substantial price increases
necessary to fund payments of the magnitude contemplated by the Memorandum could
reduce domestic industry cigarette volumes by up to 45% over 10 years depending
on the assumptions used, which assumptions, by their nature, are speculative.
Such volume reduction would likely have a significant negative effect on the
business of RJRT and the stated financial position of RJRN Holdings, RJRN and
RJRT. Any significant negative effect on the financial position of any of these
entities could ultimately impact the share repurchase and dividend policies of
RJRN Holdings. On the other hand, the proposals contemplated by the Memorandum
offer a measure of relief from certain litigation that could otherwise
materially affect the results of operations or cash flows of RJRN in particular
quarterly or annual periods or its financial condition. In evaluating any
proposed legislation to resolve tobacco issues, RJRN and RJRT will continue to
weigh carefully the potential benefits, principally greater regulatory and
litigation certainty and predictability in annual aggregate contingency risk,
against the resulting monetary, regulatory and other costs.

INTERIM AGREEMENTS

Because the Memorandum, unless and until it is enacted into law, will not
resolve any pending litigation scheduled for trial in advance of such enactment,
the parties in each case must decide, on a case-by-case basis, whether to
proceed to trial or seek some other resolution. Thus far, five cases have been
settled, including three attorney general cases.

THE ATTORNEY GENERAL AGREEMENTS. In furtherance of the proposed resolution
under the Memorandum, tobacco companies have settled attorney general cases in
Mississippi, Florida and Texas as they came to trial. Each settling state has
agreed to a percentage share of the $10 billion initial and scheduled annual
payments agreed to in the Memorandum; 1.7% for Mississippi, 5.5% for Florida and
7.25% for Texas and will also be entitled to attorneys' costs as well as private
counsel fees as set by a panel of arbitrators subject to a $500 million
aggregate annual cap for payment of such fees for all settlements of similiar
litigation.

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Each agreement also provides that if the U.S. Congress enacts federal
legislation in keeping with the Memorandum, the terms of that legislation would
generally supersede the terms of the state agreement. Defendants would receive
credit for their payments under the state agreements against the obligations
arising under the federal legislation. If, instead, the defendants enter into a
number of separate settlement agreements with other individual states, these
three settling states would be entitled to payment adjustments to assure at
least as favorable a settlement as any other separately settling state.

The first attorney general case scheduled for trial after adoption of the
Memorandum was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was
agreed to on July 2, 1997, and a full settlement agreement was executed on
October 17, 1997. The agreement calls for the defendants to make an aggregate
up-front payment of $170 million to the State of Mississippi. It also provides
for continuing payments commencing December 31, 1998, and annually thereafter,
based, in 1998, on Mississippi's 1.7% share of $4 billion (the anticipated first
annual industry payment under the Memorandum) and escalating in several annual
steps to 1.7% of $8 billion in year eight and thereafter, adjusted upward by no
less than 3% per year and further adjusted upward or downward to reflect
increases or decreases in volume of domestic tobacco product sales. Mississippi
also became entitled to $61.8 million for an anti-smoking pilot program by
operation of the "most favored nation" provision of its agreement as a result of
Florida's subsequent settlement containing pilot program provisions.

The second attorney general case to come to trial, STATE OF FLORIDA V.
AMERICAN TOBACCO COMPANY, was in the jury selection phase in Florida state court
when, on August 25, 1997, the parties announced that they had entered into a
settlement agreement. The agreement called for the tobacco company participants
to make an aggregate up-front payment of $550 million. It also provides for
annual payments beginning in September 1998 of 5.5% of $4 billion and increasing
in several annual steps to 5.5% of $8 billion by 2003 and thereafter (subject to
various adjustments) all consistent with the national annual payment schedule.
The tobacco companies also agreed to fund a $200 million pilot program to
discourage youth smoking. The agreement, like the other state settlements, also
requires the tobacco companies to discontinue all billboard advertisements as
well as all advertisements that appear on vehicles and in certain public areas,
within several months.

Related to the Florida settlement, on November 18, 1997, a law firm that had
represented the State filed a suit against RJRT and others alleging tortious
interference with the plaintiff's contingency fee contract with the State as
well as conspiracy to induce the State to circumvent and negate plaintiff's
rights to recover under that contract. The case is now in discovery.

Finally, the Texas case, STATE OF TEXAS V. AMERICAN TOBACCO COMPANY, was
settled by an agreement dated January 16, 1998 providing for a pilot program
payment of $264 million and an aggregate up-front payment of $725 million. Texas
will be entitled to a 1998 annual payment of $290 million (7.25% of $4 billion)
paid in two installments ($89 million on November 1, 1998 and $201 million on
December 31, 1998) and increasing in several annual steps to $580 million (7.25%
of $8 billion) by 2003 and thereafter (subject to adjustments). RJRT's shares of
the initial payment and pilot program will total approximately $114 million,
paid or to be paid over the course of 1998 in payments of approximately $32
million by February 1, 1998; $12 million by July 1, 1998; $23 million by October
1, 1998; and $47 million by November 1, 1998.

The companies have also agreed to pay a $50 million advance on fees of the
State of Texas's private counsel prior to the arbitration decision awarding such
fees provided that the State of Texas makes an equivalent advance. RJRT's share
of the advance will be approximately $12 million. The payment of this amount,
originally scheduled for late February, has been suspended by stipulation of the
parties until March 24, 1998 as a result of a dispute raised by would-be
interveners about the scope of the settlement. Neither the Mississippi nor
Florida settlement agreement provides for payment of any advance on private
counsel fees. Therefore, under the most favored nation provisions of their
settlement agreements, provided that those states make equivalent advances, the
tobacco companies may be required to make advances to private counsel in those
states. Each tobacco company's share of advances of this type, for all settling
states, would be based on market share.

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If federal legislation in keeping with the Memorandum is enacted, the
parties expect that Mississippi, Florida and Texas, because of their
contribution to securing resolution of these matters, may apply to a panel of
arbitrators for additional compensation. The settling defendants have agreed not
to oppose applications of $75 million for Mississippi, $250 million for Florida
and $329.5 million for Texas (as well as, any increase over these amounts
necessary to offset the difference, if any, between the amounts to be paid to
these states during 1998 under the agreements and the amounts allocated to those
states for that period under the federal legislation). Payment of these amounts
would be made over a number of years and would be subject to an aggregate annual
cap of $100 million for all settling states.

Each individual state agreement provides that the related settlement is not
an admission or concession or evidence of any liability or wrongdoing on the
part of any party and was entered into by the settling defendants solely to
avoid the further expense and uncertainty of litigation.

RJRT has made certain payments under these attorney general agreements. Its
portion of the upfront payments, based on market capitalization, was $12.4
million for Mississippi and $37.4 million for Florida. Texas payments, both for
the initial amount and pilot program to discourage youth smoking are to be made
at several points in 1998 as described above. RJRT's portion of the pilot
program payments, based on market share, was $15.3 million for Mississippi and
$49 million for Florida. Additional payments, based on market share, were made
with respect to the costs and expenses of counsel in all three states which
totalled approximately $21 million.

THE BROIN SETTLEMENT. The plaintiffs' attorneys in a class action case,
BROIN V. PHILIP MORRIS, entered into a settlement agreement with participating
tobacco company defendants on October 9, 1997. This case had been brought in
Florida state court on behalf of all flight attendants of U.S. airlines alleged
to be suffering from diseases or ailments caused by second-hand smoke in
airplane cabins. This agreement requires the participating tobacco companies to
pay $300 million in three annual installments, allocated among the companies by
market share, to fund research on the early detection and cure of diseases
associated with tobacco smoke. It also calls for those companies to pay a total
of $49 million for plaintiffs' counsel's fees and expenses. The agreement bars
class members from bringing aggregate claims or obtaining punitive or exemplary
damages and also bars individual claims to the extent that they are based on
fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO,
suppression, concealment or any other alleged intentional or willful conduct.
The defendants agree that in any individual case brought by a class member, they
will bear the burden of proof regarding general causation that ordinarily would
be born by the plaintiffs. Trial court approval of the BROIN settlement was
granted on February 3, 1998, but this approval has been noticed for appeal. No
payments with respect to either the research fund or attorney's fees will be due
until final resolution of all appeals. RJRT's portion will be approximately $86
million. RJRT has already paid its market share of $3 million due to the BROIN
attorneys in respect of costs and expenses. This amount is subject to recovery
if the settlement is successfully challenged.

THE MANGINI SETTLEMENT. On September 5, 1997, a settlement agreement was
executed on behalf of the parties to MANGINI V. R.J. REYNOLDS TOBACCO COMPANY, a
case that had been scheduled for trial in San Francisco Superior Court for
December 1997. This case sought injunctive and other relief against RJRT and an
advertising agency with respect to the use of Joe Camel advertising as an unfair
business practice allegedly targeting minors. The agreement requires the
defendants to acknowledge that the lawsuit along with public controversy
surrounding Joe Camel, was a "substantial factor" in the phase-out of Joe Camel
advertising. It also requires prompt removal of Joe Camel billboards and
cessation of the use of Joe Camel in advertisements and promotional items in
California. The defendants agreed to authorize release to the public of
non-privileged and non-work product documents referring to persons under the age
of 18 and/or the Joe Camel advertising campaign that were produced during
discovery in the case. Pursuant to the agreement, RJRT has paid $10 million to
the City and County of San Francisco to cover attorneys' fees ($1 million) and
for distribution to the various state jurisdictions participating in the case
for anti-youth smoking advertisements ($9 million).

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The MANGINI settlement provides that plaintiffs' counsel will be paid in
accordance with the counsel fee arrangements ultimately arrived at for the
national legislative settlement. If there is no such arrangement, or the
arrangement does not allow plaintiffs' counsel to participate, fees will be
determined by an arbitration panel. Finally, the agreement preserves certain
claims brought by various California public entities, including claims that the
Joe Camel campaign violated certain sections of the California Business and
Professions Code.

RJRT has participated and may continue to participate in discussions with
plaintiffs in certain healthcare cost-recovery and class actions scheduled to be
tried in the coming months in order to postpone or settle those actions in light
of the pending legislative initiative. There can be no assurance that any such
postponement or settlement can be achieved, or, if achieved, as to the terms
ultimately agreed to. In the absence of postponement or settlement, these
actions would be tried as scheduled and any final judgment reached prior to
enactment of the contemplated legislation might not be affected by the passage
of that legislation.

RECENT AND SCHEDULED TRIALS. As of March 3, 1998, there were 14 cases
scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco.
Two trials are currently in process, the attorney general case in Minnesota
discussed above and an individual environmental tobacco smoke case in Indiana
state court (DUNN V. RJR NABISCO HOLDINGS). The next attorney general case
scheduled for trial is Washington's which has been scheduled for September 1998.
The State of Florida's remaining equitable claims are also scheduled for trial
in September 1998. The State of Arizona's case is scheduled for October and that
of Oklahoma for November. Cases against other tobacco company defendants are
also scheduled for trial in 1998 and thereafter. Although trial schedules are
subject to change and many cases are dismissed before trial, it is likely that
there will be an increased number of tobacco cases, involving claims for
possibly billions of dollars, against RJRT and RJRN coming to trial over the
next year as compared to prior years when trials in these cases were infrequent.

OTHER DEVELOPMENTS. On May 28, 1997, a suit was filed against RJRT in the
U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR
V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal
Pay Act on behalf of female RJRT employees and applicants for employment in the
"southeast sales region," seeking equitable relief, back pay and lost benefits,
as well as punitive damages, based on allegations that plaintiffs had been
denied employment, desirable job assignments, training, promotion and equal pay.
No motion seeking class certification has yet been filed by plaintiffs. RJRT has
filed an answer in the case and intends to defend it vigorously.

On September 15, 1997, a suit, RAYMARK INDUSTRIES V. BROWN & WILLIAMSON, was
filed against RJRT and RJRN and various other tobacco industry entities for
contribution/damages related to asbestos litigation. The suit was filed in the
United States District Court for the Northern District of Georgia. Raymark
alleged that it expended $400 million on the defense and payment of asbestos
personal injury claims in trial, verdict, appeal and settlement. Raymark alleged
that cigarette smoke inhaled by the asbestos claimants caused the cancers
complained of in the litigation in which it has been involved. Raymark seeks to
recover contribution and/or indemnity from the defendants for the share of
payments made by Raymark that were allegedly caused by tortious and otherwise
actionable conduct of defendants. Raymark's claims included counts for:
negligence, strict liability, fraud and misrepresentation, conspiracy and
damages. Three other cases making similar allegations were filed in December
1997, one in California and two in New York. RJRT and the other tobacco industry
defendants in this action dispute the claims advanced in these cases and intend
to defend all such actions vigorously.

A purported class was granted conditional class certification in a case,
MOSELY V. PHILIP MORRIS COMPANIES, brought in Alabama state court against RJRT,
RJRN and others, alleging violations of Alabama antitrust law. The complaint in
this case alleges that cigarette companies and others have conspired to raise
prices. The class consists of all Alabama residents who purchased certain
defendants' cigarettes for smoking purposes since March 1997. The plaintiffs
seek statutory damages as well as actual damages of up to $500 per class member.
The defendants have removed the case to federal court. On

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October 31, 1997, the federal court vacated the conditional class certification
pending a hearing on class certification in federal court and on February 6,
1998, the federal court denied plaintiff's motion to remand the case to state
court.

RJRT understands that a grand jury investigation is being conducted in the
Eastern District of New York examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research -- USA,
Inc., of which RJRT is a sponsor. RJRT has responded, and will continue to
respond, to document subpoenas issued by this grand jury. In addition, subpoenas
dated May 24, 1996, November 8, 1996, December 5, 1996 and January 21, 1998 were
served on RJRT by a grand jury sitting in the District of Columbia. RJRT has
responded or is in the process of responding to those subpoenas. RJRN and RJRT
are unable to predict the outcome of these investigations.

RJRT, R.J. Reynolds International ("Reynolds International") and Northern
Brands International, another subsidiary of RJRN, each received document
subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern
District of New York. RJRT understands that the grand jury is investigating
possible smuggling activities. RJRT, Reynolds International and Northern Brands
International are responding to these subpoenas but are unable to predict the
outcome of the grand jury's investigation.

For a further discussion of litigation affecting the tobacco business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tobacco--Governmental Activity."

Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, including the Memorandum referred to above.
These developments may negatively affect the outcomes of tobacco-related legal
actions and encourage the commencement of additional similar litigation.

Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.

RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.

For more detailed information about the class action and attorneys general
suits pending against RJRT and its affiliates and indemnitees, see exhibit 99 to
this Form 10-K, a copy of which will be provided free of charge to persons
requesting it in writing and addressed to Worldwide Communications, RJR

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Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019 or by
phone to 800-RJR-NAB3.

------------------------

FOOD

The food line of business is conducted by operating subsidiaries of Nabisco
Holdings. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco
Holdings, which represents approximately 80.7% of the economic interest in
Nabisco Holdings and approximately 97.7% of the total voting power of Nabisco
Holdings' outstanding common stock. Nabisco's businesses in the United States
are comprised of Nabisco Biscuit and the U.S. Foods Group (collectively, the
"Domestic Food Group"). The U.S. Foods Group is comprised of the Sales &
Integrated Logistics Group and Specialty Products, LifeSavers, Planters,
Tablespreads and Food Service. Nabisco's businesses outside the United States
are conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco
International" and together with Nabisco Ltd, the "International Food Group").

Food products are sold under trademarks owned or licensed by Nabisco and
brand recognition is considered essential to their successful marketing. None of
Nabisco's customers accounted for more than 10% of sales for 1997.

DOMESTIC FOOD GROUP OPERATIONS

NABISCO BISCUIT. Nabisco Biscuit is the largest manufacturer and marketer
in the United States cookie and cracker industry with eight of the ten top
selling brands, each of which had annual net sales of over $150 million in 1997.
Overall, in 1997, Nabisco Biscuit had a 40% share of the domestic cookie
category and a 54% share of the domestic cracker category (in the aggregate more
than two times the share of its closest competitor) compared with 41% and 56%
respectively in 1996. Leading Nabisco Biscuit cookie brands include OREO, CHIPS
AHOY!, SNACKWELL's and NEWTONS. Leading Nabisco Biscuit cracker brands include
RITZ, PREMIUM, NABISCO HONEY MAID GRAHAMS, TRISCUIT, AIR CRISPS and WHEAT THINS.

OREO and CHIPS AHOY! are the two largest selling cookies in the United
States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling
cookie brand. Line extensions such as OREO DOUBLE STUF, FUDGE COVERED OREO and
Reduced Fat OREO continue to increase the brand's appeal to targeted consumer
groups. CHIPS AHOY! is the leader in the chocolate chip cookie segment with line
extensions such as CHUNKY CHIPS AHOY! and CHEWY CHIPS AHOY! broadening its
appeal and adding incremental sales.

NEWTONS, the oldest Nabisco Biscuit cookie brand, is the fourth leading
cookie brand in the United States. In recent years, fat free and reduced calorie
varieties of NEWTONS, as well as NEWTONS COBBLERS, have been introduced.

Nabisco Biscuit's cracker business is led by RITZ, the largest selling
cracker in the United States, as well as RITZ BITS, RITZ BITS SANDWICHES, and
REDUCED FAT RITZ successful product line extensions which, together with RITZ,
accounted for 12.8% of cracker sales in the United States in 1997 compared with
13.9% in 1996. PREMIUM, the oldest Nabisco cracker brand and the leader in the
saltine cracker segment, is joined by NABISCO HONEY MAID GRAHAMS, TRISCUIT, AIR
CRISPS and WHEAT THINS to comprise, along with RITZ, six of the eight largest
selling cracker brands in the United States. AIR CRISPS, launched nationally in
1996, consists of a line of light, crispy baked snacks in Ritz, Cheese Nips,
Wheat Thins, Pretzel and Potato varieties and has achieved sales approaching
$150 million in 1997.

Nabisco Biscuit's other cookie and cracker brands, which include NILLA,
NUTTER BUTTER, STELLA D'ORO, BETTER CHEDDARS, CHEESE NIPS and BARNUM'S ANIMAL
CRACKERS,

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compete in consumer niche segments. Many are the first or second largest selling
brands in their respective segments.

In 1994, Nabisco entered the breakfast snack aisle with the launch of
SNACKWELL'S cereal bars and granola bars and the repositioning of TOASTETTES
toaster pastries. The line was expanded in 1996 and 1997 with new cereal bar
varieties. Nabisco introduced SNACKWELL'S fat free toaster pastries in 1996.

Nabisco Biscuit's products are manufactured in 14 Nabisco owned bakeries and
in 17 facilities with which Nabisco has production agreements. These facilities
are located throughout the United States. Nabisco Biscuit also operates a flour
mill in Toledo, Ohio which supplies over 85% of its flour needs.

Nabisco Biscuit's products are sold to major grocery and other large retail
chains through Nabisco Biscuit's direct store delivery system. The system is
supported by a distribution network utilizing 11 major distribution warehouses
and 111 shipping branches where shipments are consolidated for delivery to
approximately 87,000 separate delivery points.

U.S. FOODS GROUP

The U.S. Foods Group represents Nabisco's non-biscuit food operations in the
U.S. and is comprised of the following business units:

SALES & INTEGRATED LOGISTICS GROUP. The Sales & Integrated Logistics Group
handles sales and distribution for Specialty Products, LifeSavers, Planters, and
the Tablespreads companies and distribution for Food Service. It sells to retail
grocery chains and warehouse clubs through independent brokers and a direct
sales force, and to drug stores, mass merchandisers and other non-grocery retail
outlets through a direct sales force. The products are distributed from twenty
distribution centers located throughout the United States.

SPECIALTY PRODUCTS. Specialty Products manufactures and markets a broad
range of food products, with sauces and condiments, pet snacks, hot cereals,
healthy packaged egg products, dry mix desserts, and gelatins representing the
largest categories. Many of Specialty Products' products are first or second in
their product categories. Well-known brand names include A.1. steak sauces, GREY
POUPON mustards, MILK-BONE pet snacks, CREAM OF WHEAT hot cereals, EGGBEATERS
healthy packaged egg product, ROYAL desserts and KNOX gelatines.

Specialty Products' primary entries in the steak sauce and mustard segments
are A.1. and A.1. SWEET & TANGY steak sauces, the leading line of steak sauces,
and GREY POUPON mustards, which include the leading Dijon mustard.

Specialty Products is the second largest manufacturer of pet snacks in the
United States with MILK-BONE dog biscuits and dog snacks. MILK-BONE products
include MILK-BONE ORIGINAL BISCUITS, FLAVOR SNACKS, SUPER PREMIUM BISCUITS, DOG
TREATS and DOGGIE BAG TREATS.

Specialty Products is a leading manufacturer of hot cereals and participates
in the cook-on-stove and mix-in-bowl segments of the category. CREAM OF WHEAT,
the leading wheat-based hot cereal, and CREAM OF RICE participate in the
cook-on-stove segment. INSTANT CREAM OF WHEAT participates in the mix-in-bowl
segment and includes new varieties such as BANANA NUT BREAD. Quaker Oats Company
is the most significant participant in the hot cereal category.

Specialty Products manufactures products in five plants and sources products
from a number of contract manufacturers.

LIFESAVERS. LifeSavers manufactures and markets non-chocolate candy and gum
primarily for sale in the United States. LifeSavers' well-known brands include
LIFE SAVERS candy, BREATH SAVERS sugar free mints, CARE*FREE sugarless gum, ICE
BREAKERS gum, BUBBLE YUM bubble gum, GUMMI

14
<PAGE>
SAVERS fruit chewy candy, NOW & LATER fruit chewy taffy and FRUIT STRIPE gum.
LIFE SAVERS is the largest selling non-chocolate candy brand in the United
States, with a 1997 share of 5.2%, compared to 5.4% in 1996, of the
non-chocolate candy category. BREATH SAVERS is the largest selling sugar free
breath mint in the United States and BUBBLE YUM is the largest selling bubble
gum in the United States.

In 1997, LifeSavers introduced SNACKWELL'S chocolate candy, its first entry
into the sugared, reduced-fat chocolate candy segment.

LifeSavers manufactures its products in four owned plants and utilizes two
primary contract manufacturers.

PLANTERS. Planters produces and markets nuts and salty snacks largely for
sale in the United States, primarily under the PLANTERS trademark. Planters, the
only nut brand sold nationally, is the clear leader in the packaged nut
category. Planters' products are seasonally strongest in the fourth quarter.
Planters manufactures its products in four plants. In December 1997, the
CORNNUTS line of crispy corn kernel snacks was acquired and added to Planters.

FOOD SERVICE. Food Service utilizes a direct national sales force to sell a
variety of specially packaged food products of the Domestic Food Group including
cookies, crackers, confections, hot cereals, sauces and condiments to the food
service and vending machine industry.

TABLESPREADS. Tablespreads manufactures and markets various margarines and
spreads, and is the second largest margarine producer in the United States,
participating in all segments of the margarine category, with the BLUE BONNET,
FLEISCHMANN'S and MOVE OVER BUTTER brands. Tablespreads strengthened its
position in the margarine category in 1995 with the October purchase of the
Kraft Foods, Inc. margarine business which includes the PARKAY, TOUCH OF BUTTER
and CHIFFON brands. Tablespreads currently manufactures in two facilities and
also sources products from two contract manufacturers.

INTERNATIONAL FOOD GROUP OPERATIONS

NABISCO LTD. Nabisco Ltd conducts Nabisco's Canadian operations through its
Biscuit Division, Grocery Division and Food Service Division. Excluding private
label brands, the Biscuit Division produced all of the top ten cookies and nine
of the top ten crackers in Canada in 1997. Nabisco Ltd's cookie and cracker
brands in Canada include OREO, CHIPS AHOY!, SNACKWELL'S, FUDGEE-O, PEEK FREANS,
DAD'S, DAVID, PREMIUM PLUS, RITZ, AIR CRISPS, TRISCUIT and STONED WHEAT THINS.
These products are manufactured in five bakeries in Canada and are sold through
a direct store delivery system, utilizing 10 sales offices and distribution
centers and a combination of company trucks and common carriers. Nabisco Ltd
also markets a variety of single-serve cookies, crackers and salty snacks under
such brand names as MINI OREO, RITZ BITS SANDWICHES and CRISPERS.

Nabisco Ltd's Grocery Division produces and markets canned fruits and
vegetables, fruit juices and drinks, pet snacks, pasta and other Italian food
products. The Grocery Division is the leading canned fruit producer in Canada
and is the second largest canned vegetable producer in Canada. Canned fruits and
vegetables, fruit juices and drinks are marketed under the DEL MONTE trademark,
pursuant to a license from the Del Monte Corporation, and under the AYLMER
trademark. The Grocery Division also markets MILK-BONE pet snacks and MAGIC
baking powder, each a leading brand in Canada. Nabisco Ltd's Grocery Division
operated seven manufacturing facilities in 1997, five were devoted to canned
products, principally fruits and vegetables, one produced pet snacks and one
produced pasta. The Grocery Division's products are sold directly to retail
chains and are distributed through four regional warehouses. In 1995, Nabisco
Ltd acquired the PRIMO brand for dry pasta, canned tomatoes and other Italian
food products.

Nabisco Ltd's Food Service Division sells a variety of specially packaged
food products including cookies, crackers, canned fruits, vegetables, pasta and
condiments to non-grocery outlets. The Food

15
<PAGE>
Service Division has its own sales and marketing organization and sources
product from Nabisco Ltd's other divisions.

NABISCO INTERNATIONAL. Nabisco International is a leading producer of
biscuits, powdered dessert and drink mixes, baking powder, pasta, juices, milk
products and other grocery items, as well as industrial yeast and bakery
ingredients. Nabisco International also exports a variety of Domestic Food Group
products to markets in Europe, the Middle East, Latin America, Africa and Asia
from the United States. Nabisco International operates one of the largest
multinational packaged food businesses in Latin America, with operations in 17
countries.

Nabisco International manufactures and markets biscuits and crackers under
the NABISCO, TERRABUSI, ARTIACH, MARBU and LUCKY brands, yeast and bakery
ingredients under the FLEISCHMANN'S brand, desserts, drink mixes and baking
powder under the ROYAL brand, processed milk products under the GLORIA brand,
juice under the MAGUARY brand, and canned fruits and vegetables under the DEL
MONTE brand pursuant to a license from the Del Monte Corporation.

Nabisco International's largest market is Brazil, where it operates 21
facilities. In biscuits, Nabisco International is the market leader in Spain,
Argentina, Venezuela, Puerto Rico, Nicaragua, Uruguay and Taiwan, and it holds
strong number two positions in Peru, Ecuador, other Central American markets and
the three major markets in China. Nabisco International is the market leader in
powdered desserts in Spain and most of Latin America, in the yeast category in
Brazil and certain other Latin American countries, in baking powder throughout
South America, and in canned vegetables in Venezuela.

In Asia, Nabisco International continues to expand its Chinese biscuit
business through joint ventures in Beijing and a wholly-owned subsidiary in
Suzhou. The Beijing bakery was trebled in size and a greenfield plant in Suzhou
started up in 1996. In Indonesia, a greenfield plant, 70% owned by Nabisco and
30% owned by its partner and distributor, started up in 1996. Biscuit leadership
in Taiwan was gained in 1996 through the acquisition of the assets of Lucky
Enterprises Corporation Limited, the leading biscuit company in Taiwan.

Nabisco International's grocery products are sold to retail outlets through
its own local country sales forces and independent wholesalers and distributors.
Industrial yeast and bakery products are sold to the bakery trade through
Nabisco International's own local country sales forces and independent
distributors.

RAW MATERIALS

Various agricultural commodities constitute the principal raw materials used
by Nabisco in its food businesses. These raw materials are normally purchased
through supplier contracts, while the commodities market is utilized to hedge
prices for a large portion of anticipated future requirements. Prices of
agricultural commodities tend to fluctuate due to various seasonal, climatic and
economic factors which generally also affect Nabisco's competitors. Management
believes that all of the raw materials for Nabisco products are in plentiful
supply and are readily available from a variety of independent suppliers.

COMPETITION

Generally, the markets in which the Domestic Food Group and the
International Food Group conduct their business are highly competitive.
Competition consists of large domestic and international companies, local and
regional firms and generic and private label products of food retailers.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. Substantial advertising and promotional expenditures are
required to maintain or improve a brand's market position or to introduce a new
product.

The trademarks under which the Domestic Food Group and the International
Food Group market their products are generally registered in the United States
and other countries in which such products are sold and are generally renewable
indefinitely. Nabisco and certain of its subsidiaries have from time to time
granted various parties exclusive licenses to use one or more of their
trademarks in particular

16
<PAGE>
locations. Nabisco does not believe that such licensing arrangements have a
material effect on the conduct of its domestic or international business.

OTHER MATTERS

ENVIRONMENTAL MATTERS

The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the EPA and other governmental agencies under various
statutes have resulted in, and will likely continue to result in, substantial
expenditures for pollution control, waste treatment, plant modification and
similar activities.

RJRN Holdings' subsidiaries have been engaged in a continuing program to
assure compliance with U.S., state and local laws and regulations. Although it
is difficult to identify precisely the portion of capital expenditures or other
costs attributable to compliance with environmental laws and to estimate the
cost of resolving these CERCLA matters, RJRN Holdings and RJRN do not expect
such expenditures or other costs to have a material adverse effect on the
business or financial condition of the Registrants and their subsidiaries taken
as a whole.

EMPLOYEES

At December 31, 1997, RJRN Holdings together with its subsidiaries had
approximately 80,400 employees of which approximately 2,400 were part-time
employees. None of RJRT's operations is unionized. Most of the unionized workers
at Nabisco's operations are represented under a national contract with the
Bakery, Confectionery and Tobacco Workers International Union, which was
ratified in August 1996 and which will expire in August 2001. Other unions
represent the employees of a number of Nabisco's operations and several of
Reynolds International's operations are unionized. RJRN believes that its
subsidiaries' relations with these employees and with their unions are good.

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES

For information about foreign and domestic operations and export sales for
the years 1995 through 1997, see "Geographic Data" in note 15 to the
Consolidated Financial Statements.

ITEM 2. PROPERTIES

For information pertaining to the RJRN Holdings' and RJRN's assets by lines
of business and geographic areas as of December 31, 1997 and 1996, see note 15
to the Consolidated Financial Statements.

For information on properties, see Item 1.

ITEM 3. LEGAL PROCEEDINGS

In the fourth quarter of 1995, purported RJRN Holdings stockholders for
themselves and derivatively for RJRN Holdings and Nabisco Holdings filed three
putative class and derivative actions in the Court of Chancery of the State of
Delaware in and for New Castle County against members of RJRN Holdings Board of
Directors. The actions were consolidated in December 1995. The plaintiffs
allege, among other things, that the individual defendants breached their
fiduciary duty and wasted corporate assets by undertaking an exchange offer and
related consent solicitations completed by RJRN and Nabisco in

17
<PAGE>
June 1995 and by amending, in August 1995, RJRN Holdings By-Law provisions
concerning the calling of shareholder meetings and procedures for shareholder
action by written consent. The plaintiffs allege that management took these and
other actions to wrongfully obstruct a spin-off of Nabisco Holdings, to enrich
the defendants at the expense of RJRN Holdings, its shareholders and Nabisco
Holdings and to entrench the defendants in the management and control of RJRN
Holdings. By agreement of the parties, the defendants' time to respond to the
complaint in these consolidated actions has been extended, most recently, to May
22, 1998. RJRN Holdings believes that these allegations are without merit and,
if necessary, will defend these actions vigorously.

For information about other litigation and legal proceedings, see
"Business--Tobacco--Litigation Affecting the Cigarette Industry" and "Other
Matters--Environmental Matters" in Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Governmental
Activity" in Item 7.

------------------------

Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants in
similar actions, even if such rulings are not final, could adversely affect the
litigation against RJRT or its affiliates or indemnitees and increase the number
of such claims. Although it is impossible to predict the outcome of such events
or their effect on RJRT, a significant increase in litigation activities could
have an adverse effect on RJRT. RJRT believes that it has a number of valid
defenses to any such actions, including but not limited to those defenses based
on preemption under the CIPOLLONE decision, and RJRT intends to defend
vigorously all such actions.

RJRN Holdings and RJRN believe that, not withstanding the quality of
defenses available to them and RJRT in litigation matters, it is possible that
the results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of litigation or to derive a meaningful estimate of the amount or
range of any possible loss in any particular quarterly or annual period or in
the aggregate.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANTS
EXECUTIVE OFFICERS OF RJRN HOLDINGS

The executive officers of RJRN Holdings are Steven F. Goldstone (Chairman of
the Board, Chief Executive Officer and President), Gerald I. Angowitz (Senior
Vice President, Human Resources and Administration), John J. Delucca (Senior
Vice President and Treasurer), H. Colin McBride (Senior Vice President,
Associate General Counsel and Secretary), David B. Rickard (Senior Vice
President and Chief Financial Officer), William L. Rosoff (Senior Vice President
and General Counsel), and Richard G. Russell (Senior Vice President and
Controller). The following table sets forth certain information regarding such
officers.

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST
NAME AGE FIVE YEARS AND OTHER INFORMATION
- --------------------------- --------- ----------------------------------------------------------------------------
<S> <C> <C>
Steven F. Goldstone 52 Chairman since May 1996; Chief Executive Officer since December 1995;
President since October 1995; prior thereto, General Counsel, March 1995
to December 1995; previously Senior Partner with law firm of Davis, Polk &
Wardwell until October 1995 and for more than five years prior thereto.
Gerald I. Angowitz 48 Senior Vice President of Human Resources and Administration since March
1995; prior thereto, Vice President of Human Resources, January 1994 to
March 1995; Vice President of Employee Benefits, January 1992 to December
1993.
John J. Delucca 54 Senior Vice President and Treasurer since October 1993; Treasurer of Nabisco
Holdings, October 1994 to February 1995; previously, Managing Director and
Chief Financial Officer, Hascoe Associates, 1991 to 1993.
H. Colin McBride 52 Senior Vice President, Associate General Counsel and Secretary since
February 1998; prior thereto, Vice President, Assistant General Counsel
and Secretary, December 1995 to February 1998; Vice President and
Assistant General Counsel for more than five years prior thereto.
David B. Rickard 51 Senior Vice President and Chief Financial Officer since March 1997;
previously Executive Vice President, International Distillers and
Vintners, 1996 to 1997; Finance Director, International Distillers and
Vintners, 1995 to 1996; Group Controller, Grand Metropolitan PLC, 1994 to
1995; Senior Vice President and Chief Financial Officer, The Pillsbury
Company, 1991 to 1994.
William L. Rosoff 51 Senior Vice President and General Counsel since January 1998; previously
Partner with law firm of Davis Polk & Wardwell for more than five years
prior thereto.
Richard G. Russell 52 Senior Vice President and Controller since May 1995; previously Partner at
the accounting firm of Deloitte & Touche LLP for more than five years
prior thereto.
</TABLE>

19
<PAGE>
EXECUTIVE OFFICERS OF RJRN HOLDINGS OR ITS SUBSIDIARIES NOT LISTED ABOVE

Set forth below are the names, ages, positions and offices held and a brief
account of the business experience during the past five years of certain
executive officers of RJRN Holdings or its subsidiaries, other than those listed
above.

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST
NAME AGE FIVE YEARS AND OTHER INFORMATION
- --------------------------- --------- ----------------------------------------------------------------------------
<S> <C> <C>
James M. Kilts 50 President and Chief Executive Officer of Nabisco Holdings and of Nabisco
since January 1998; previously Executive Vice President--Worldwide Food of
Philip Morris Companies, 1994 to March 1997; President of Kraft USA, 1989
to 1994.
Pierre de Labouchere 44 Chief Executive Officer and President of Reynolds International since
December 1995; prior thereto, President of Eastern Europe, Middle East and
Africa Region, Reynolds International, 1994 to December 1995; Regional
Vice President--European and Special Markets, Reynolds International, 1991
to 1994.
Andrew J. Schindler 53 President and Chief Executive Officer of RJRT since July 1995; prior
thereto, President and Chief Operating Officer--U.S.A., RJRT, May 1994 to
June 1995; Executive Vice President-- Operations, RJRT, 1991 to 1994.
Jeffrey A. Kuchar 43 Senior Vice President and General Auditor since January 1998; prior thereto,
Vice President and General Auditor, 1993 to 1997; Director of Finance and
Business Development, Specialty Products Company, Nabisco, 1993; Director
of Financial Planning, Specialty Products Company, Nabisco, 1992 to 1993.
Lionel L. Nowell III 43 Senior Vice President of Strategy and Business Development since January
1998; previously Vice President--Finance, Pillsbury North America,
November 1996 to January 1998; Vice President-- Finance, Pillsbury
Bakeries & Foodservice, February 1996 to November 1996; Vice President and
Chief Financial Officer, Haagen-Dazs, November 1994 to February 1996; Vice
President and Controller, The Pillsbury Company, May 1993 to November
1994; Vice President--Food and International Retailing Audit of The
Pillsbury Company, September 1992 to May 1993.
J. Thomas Pearson 56 Senior Vice President, Taxation since 1988.
Huntley R. Whitacre 55 Senior Vice President of Investor Relations since August 1995; prior
thereto, Vice President of Investor Relations for more than five years.
Jason H. Wright 37 Senior Vice President of Worldwide Communications since February 1994; prior
thereto, Vice President of Worldwide Communications, 1993 to 1994; Vice
President of Financial Communications, 1990 to 1993.
</TABLE>

20
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of RJRN Holdings, par value $.01 per share (the "Common
Stock"), is listed and traded on the New York Stock Exchange (the "NYSE"). Since
completion of the acquisition there has been no public trading market for the
common stock of RJRN.

As of February 28, 1998, there were approximately 55,000 record holders of
the Common Stock. All of the common stock of RJRN is owned by RJRN Holdings. The
Common Stock closing price on the NYSE for February 27, 1998 was $34 9/16.

The following table sets forth, for the calendar periods indicated, the high
and low sales prices per share for the Common Stock on the NYSE Composite Tape,
as reported in the Wall Street Journal:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997:
First Quarter..................................................... $38 7/8 $30 5/8
Second Quarter.................................................... 36 1/2 27
Third Quarter..................................................... 36 1/8 29 9/16
Fourth Quarter.................................................... 37 15/16 29 7/8

HIGH LOW
-------- --------
<S> <C> <C>
1996:
First Quarter..................................................... $35 1/4 $29
Second Quarter.................................................... 34 1/2 29
Third Quarter..................................................... 32 3/8 25 1/8
Fourth Quarter.................................................... 34 5/8 25 3/4
</TABLE>

- ------------------------

The Board of Directors of RJRN Holdings declared an initial quarterly cash
dividend of $.375 per share payable on April 1, 1995. During 1995, RJRN Holdings
continued to pay such a quarterly cash dividend on the Common Stock, adjusted to
take into account a one-for-five reverse split of the Common Stock. Cash
dividends paid by RJRN to RJRN Holdings are included in the Consolidated
Statements of Cash Flows in the Consolidated Financial Statements.

On March 5, 1996, RJRN Holdings announced a 23% increase in its annual
common dividend rate from $1.50 to $1.85 per share of Common Stock and adopted
as an objective the repurchase of approximately 10 million shares of Common
Stock over the next several years based on the achievement of performance
targets. RJRN Holdings repurchased approximately $100 million of Common Stock in
1996. On February 28, 1997, the Board of Directors authorized an 11% increase in
the annual common dividend to $2.05 per share and authorized the repurchase of
up to $200 million of Common Stock in 1997. No such repurchases were made in
1997. Commencing with the July 1 payment, the quarterly dividend paid by Nabisco
was increased to $.175 per share or $.70 per share on an annual basis, from its
previous level of $.62 cents per share. As a result, the Nabisco Holdings
dividends payable to RJRN increased from approximately $132 million annually to
$141 million annually.

The operations of RJRN Holdings and RJRN are conducted through RJRN's
subsidiaries and, therefore, RJRN Holdings and RJRN are dependent on the
earnings and cash flow of RJRN's subsidiaries to satisfy their respective
obligations and other cash needs. Certain Nabisco credit facilities limit the
amount of dividends, distributions and advances by Nabisco Holdings and its
subsidiaries to RJRN Holdings and its non-Nabisco subsidiaries. Moreover, RJRN's
credit agreements and certain policies adopted by the Board of Directors of RJRN
Holdings limit the payment by RJRN Holdings of dividends on the Common Stock in
excess of certain specific amounts. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Financial Condition" and notes 6 and 9 to the Consolidated Financial Statements.
RJRN Holdings does not believe that the provisions of its credit agreements or
its adopted policies concerning distributions to stockholders will limit its
ability to pay its anticipated quarterly dividends.

21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS) 1997 1996 1995 1994 1993
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales.............................................. $ 17,057 $ 17,063 $ 16,008 $ 15,366 $ 15,104
Income (loss) before extraordinary item................ 402 611 627 764 (3)
PER SHARE DATA
Basic income (loss) per share before extraordinary
item................................................. $ 1.11 $ 1.75 $ 1.59 $ 2.07 $ (0.26)
Diluted income (loss) per share before extraordinary
item................................................. $ 1.09 $ 1.74 $ 1.58 $ 2.06 $ (0.26)
Average number of common and common equivalent shares
outstanding (in thousands):
Basic................................................ 323,787 324,917 325,476 305,142 269,839
Diluted.............................................. 325,318 325,947 326,235 306,756 269,839
Dividends per share of common stock.................... $ 2.05 $ 1.85 $ 1.50 -- --
Dividends per share of Series A convertible preferred
stock................................................ -- -- -- $ 2.92 $ 3.34
Dividends per share of Series C convertible preferred
stock................................................ $ 2.25 $ 6.01 $ 6.01 $ 3.94 --
CASH FLOW DATA
Dividends paid on common and preferred stock........... $ 755 $ 716 $ 598 $ 395 $ 241
Capital expenditures................................... 763 741 744 670 615
BALANCE SHEET DATA
(AT END OF PERIODS)
Total assets........................................... $ 30,678 $ 31,289 $ 31,518 $ 31,408 $ 31,295
Long-term debt......................................... 9,456 9,256 9,429 8,883 12,005
Mandatorily redeemable preferred securities............ 953 954 954 -- --
Stockholders' equity................................... 9,631 10,148 10,329 10,908 9,070
OTHER DATA
Number of employees
Tobacco.............................................. 26,400 25,400 22,800 21,200 21,500
Food................................................. 54,000 54,300 53,200 49,400 45,000
</TABLE>

- ------------------------

See the consolidated financial statements regarding (i) the restructuring of the
worldwide tobacco operations during 1997 and 1995; (ii) the tobacco settlement
agreements reached by RJRT with the Florida, Mississippi and Texas state
attorneys general and in certain class action cases during 1997; (iii) the
conversion during 1997 of Series C depositary shares issued during 1994; (iv)
the restructuring of the food operations during 1996 and (v) the exchange of
preferred securities by RJRN Holdings and a subsidiary and certain debt
exchanges between RJRN and Nabisco during 1995.

During 1994, the Series A depositary shares issued during 1991 converted into
42,000,000 shares of common stock and a pre-tax charge of $65 million was
recorded in connection with the realignment of corporate headquarters.

During 1993, a pre-tax restructuring charge of $730 million ($467 million
after-tax) was recorded in connection with a program to streamline both the
tobacco and food operations and to improve profitability.

Net sales and costs of products sold exclude excise taxes of $3.599 billion,
$3.852 billion, $3.832 billion, $3.578 billion and $3.757 billion for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.

See Notes to Consolidated Financial Statements.

22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJRN Holdings. The results of operations
discussion and analysis is broken into four sections. The first section includes
reported information for net sales, operating company contribution and
restructuring expenses as included in the historical consolidated financial
statements. The second section highlights items that management believes impact
the comparability of the historical financial information, including the
restructuring expenses in section one. The third section illustrates operating
company contribution on a basis consistent with how management manages the
ongoing businesses. It excludes one-time items that management believes affect
the comparability of the results of operations. This section should not be
viewed as a substitute for the historical results of operations but as a tool to
better understand underlying trends in the business. The last section includes
management's discussion and analysis of the ongoing results. The discussion and
analysis should be read in connection with the consolidated financial statements
and the related notes thereto of RJRN Holdings as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
% CHANGE FROM
PRIOR YEAR
------------------------
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996 1995 1997 1996
- ---------------------------------------------------------------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales:
R.J. Reynolds Tobacco......................................... $ 4,895 $ 4,551 $ 4,480 8% 2%
Reynolds International........................................ 3,428 3,623 3,234 (5)% 12%
--------- --------- ---------
Total Tobacco................................................. 8,323 8,174 7,714 2% 6%
--------- --------- ---------
Nabisco Biscuit............................................... 3,545 3,677 3,569 (4)% 3%
U.S. Foods Group.............................................. 2,604 2,638 2,451 (1)% 8%
--------- --------- ---------
Domestic Food Group........................................... 6,149 6,315 6,020 (3)% 5%
International Food Group...................................... 2,585 2,574 2,274 --% 13%
--------- --------- ---------
Total Nabisco................................................. 8,734 8,889 8,294 (2)% 7%
--------- --------- ---------
$ 17,057 $ 17,063 $ 16,008 --% 7%
--------- --------- ---------
--------- --------- ---------
Operating company contribution (1)(2):
R.J. Reynolds Tobacco......................................... $ 1,151 $ 1,450 $ 1,420 (21)% 2%
Reynolds International........................................ 581 803 643 (28)% 25%
--------- --------- ---------
Total Tobacco................................................. 1,732 2,253 2,063 (23)% 9%
--------- --------- ---------
Nabisco Biscuit............................................... 691 542 535 27% 1%
U.S. Foods Group.............................................. 386 346 355 12% (3)%
--------- --------- ---------
Domestic Food Group........................................... 1,077 888 890 21% --%
International Food Group...................................... 231 242 239 (5)% 1%
--------- --------- ---------
Total Nabisco................................................. 1,308 1,130 1,129 16% --%
--------- --------- ---------
Headquarters.................................................. (70) (67) (64) (4)% (5)%
--------- --------- ---------
$ 2,970 $ 3,316 $ 3,128 (10)% 6%
--------- --------- ---------
--------- --------- ---------
</TABLE>

Restructuring expenses, which are not included in operating company
contribution, are allocated by business as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
R.J. Reynolds Tobacco............................................................... $ 80 $ -- $ 100
Reynolds International.............................................................. 221 -- 54
--------- --------- ---------
Total Tobacco....................................................................... 301 -- 154
--------- --------- ---------
Nabisco Biscuit..................................................................... -- 238 --
U.S. Foods Group.................................................................... -- 115 --
--------- --------- ---------
Domestic Food Group................................................................. -- 353 --
International Food Group............................................................ -- 75 --
--------- --------- ---------
Total Nabisco....................................................................... -- 428 --
--------- --------- ---------
$ 301 $ 428 $ 154
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------------
(1) Includes restructuring-related and domestic tobacco settlement costs of $448
million for 1997, restructuring-related costs of $97 million for 1996 and
restructuring-related costs of $49 million for 1995. Restructuring-related
costs are allocated to the business units as follows: Reynolds
International--$89 million for the year ended December 31, 1997 and $49
million for the year ended December 31, 1995; Nabisco Biscuit--$58 million,
U.S. Foods Group--$33 million and the International Food Group--$6 million
for the year ended December 31, 1996.
(2) Operating company contribution represents operating income before
amortization of trademarks and goodwill and restructuring expenses.

23
<PAGE>
The following table summarizes items impacting comparability, which are
described in notes 2, 9 and 10 to the consolidated financial statements. We
believe these items are unusual and therefore are not included when evaluating
the ongoing performance of our businesses.

<TABLE>
<CAPTION>
1996 1995
1997 -------------------------- --------------------------
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS, -------------------------- PER DILUTED PER DILUTED
EXCEPT PER SHARE AMOUNTS) PRE-TAX PRE-TAX SHARE PRE-TAX SHARE
- ---------------------------------------------- ----------- ----------- ------------- ----------- -------------
PER DILUTED
SHARE
-------------
<S> <C> <C> <C> <C> <C> <C>
Operating company contribution:
Tobacco settlement expense at
R.J. Reynolds Tobacco..................... $ 359 $ .67 $ -- $ -- $ -- $ --
Restructuring-related costs................. 89 .24 97 .14 49 .10
----- ----- ----- ----- ----------- -----
448 .91 97 .14 49 .10
----- ----- ----- ----- ----------- -----
Restructuring expense......................... 301 .72 428 .74 154 .32
Other financial expense....................... -- -- -- -- 103 .21
Early extinguishment of debt, net tax......... -- .06 -- -- -- .05
----- ----- ----- ----- ----------- -----

Total....................................... $ 749 $ 1.69 $ 525 $ .88 $ 306 $ .68
----- ----- ----- ----- ----------- -----
----- ----- ----- ----- ----------- -----
</TABLE>

The following table represents operating company contribution based upon
ongoing results.

In addition to the above recorded items, another factor impacting
comparability was the decision by Reynolds International to reduce quarter-end
sales incentives in order to eliminate excess trade inventories that reduced
revenues and earnings. See the international tobacco and net income per share
discussion and analysis for the estimated impact.

24
<PAGE>
The percentage contributions of each industry segment to net sales and
operating company contribution during the last three years on an ongoing basis
were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales:
Total Tobacco.............................................................. 49% 48% 48%
Total Food................................................................. 51 52 52
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>

<TABLE>
<S> <C> <C> <C>
Operating company contribution(1):
Total Tobacco...................................................... 63% 65% 65%
Total Food......................................................... 37 35 35
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>

- --------------------------

(1) Contributions by industry segments were computed without effects of
Headquarters' expenses.

UNLESS OTHERWISE NOTED, OPERATING COMPANY CONTRIBUTION COMPARISONS WITHIN
THE FOLLOWING DISCUSSIONS ARE BASED ON ONGOING RESULTS.

TOBACCO

The tobacco business is conducted by R.J. Reynolds Tobacco ("RJRT") and
Reynolds International.

1997 VS. 1996. RJRT's net sales increased 8% over 1996 to $4.9 billion. The
increase is primarily due to pricing of $409 million, partially offset by a 2%
volume decline of $81 million. The company believes that its shipments and those
of the entire domestic tobacco industry were influenced by wholesale trading
activity in anticipation of further price increases. The industry volume
declined 1% but it is estimated that volume would have declined by approximately
2%, excluding the impact of the additional buying activity.

RJRT's retail share of market declined slightly to 25.41% from 25.90%.
RJRT's full-price share of market decreased slightly to 16.65% from 16.81%. The
company's savings share of market also decreased slightly to 8.76% from 9.09%.
Industrywide, the full-price category continues the upward momentum of recent
years growing to 73% of total shipments from 72% in 1996 and 70% in 1995. RJRT's
full-price shipments as a percentage of its total shipments has remained steady
at 63% for 1997, 1996 and 1995.

The company has made progress on several initiatives designed to strengthen
its full-price business, as demonstrated by its stable full-price share of
market in the latter half of 1997. Camel shipments grew 5% as it continues to be
one of the fastest-growing full-price brands in the United States. During the
year, Camel successfully introduced a new advertising campaign "What You're
Looking For" to replace "Joe Camel." The newest additions to the Camel family,
Camel Menthol, Red Kamel and Kamel Menthe, continued to show positive results.
In addition, Winston, another of the company's flagship brands, grew 9% in
volume in the second half of 1997 compared to the same period of the prior year
and sustained share after the company introduced its national "No Bull"
marketing campaign. "No Bull" repositions the brand as a "straight-up" attitude
leveraging its image and unique product point-of-difference; a
100-percent-tobacco blend with no additives for true tobacco taste. In November,
the company began the test marketing of a new positioning strategy for the Salem
brand. It also continues to monitor and test Eclipse, a cigarette featuring
reduced smoke that leaves practically no ashes, stains or lingering odor.

In the savings category, Doral, the industry's leading savings brand, grew
volume by 5% and its share of the savings segment was up 8%.

Operating company contribution grew 4% over 1996 to $1.5 billion primarily
due to favorable pricing and mix, partially offset by higher marketing and
litigation expenses and the overall volume decline.

On January 23, 1998, RJRT announced an average price increase of
approximately 2% across all its cigarette brands, which may have an impact on
future volume.

25
<PAGE>
Reynolds International's volume increased 1% over 1996 despite a decision to
reduce quarter-end sales incentives in order to eliminate excess trade
inventories. Excluding the estimated impact of eliminating excess trade
inventories, volume would have increased by approximately 4%. Unfavorable volume
mix (approximately $183 million) and currency translation (approximately $190
million) more than offset higher pricing (approximately $167 million), resulting
in a decrease in net sales of 5% to $3.4 billion. Excluding the estimated impact
of reducing excess trade inventories and the unfavorable currency translation,
net sales would have increased 4% to $3.8 billion.

By region, volume declines in Western Europe of 15% and export shipments of
11% were more than offset by volume increases in the CIS and Baltics of 13% and
Central Europe of 43%. In Western Europe, short-term pricing pressures in France
and Spain, a general shift from the full-flavor segments throughout Western
Europe and the decision to reduce excess trade inventories caused the 15% volume
decline. Reynolds International's new lights entries (Camel Lights and Camel
Medium) are fueling growth in the low tar and nicotine category. Camel Lights
grew 5% in Western Europe while Camel Medium grew 17%. Difficult operating
conditions affected the volume performance in the European and Middle East
export markets. Regional heritage brands such as Peter I in Russia are fueling
the growth in the CIS and Baltics region. Peter I is the largest-selling filter
cigarette in Russia, where capacity is currently being expanded to meet the
growing demand. In addition, other heritage brands have been introduced
throughout the region and are also performing well. The volume increase in
Central Europe was driven by Winston and Monte Carlo. In Asia, volume declined
approximately 3% primarily driven by the trade inventory reduction. Salem
Pianissimo, a low smoke, low smell cigarette, continues to outperform
competition in Japan.

Reynolds International's operating company contribution declined 17%,
primarily due to unfavorable volume mix, higher product costs and unfavorable
foreign currency translation, partly offset by higher pricing. Excluding the
estimated impact of the decision to reduce excess trade inventories and foreign
currency translation, Reynolds International's operating company contribution
would have increased by approximately 5%.

1996 VS. 1995. RJRT's net sales in 1996 increased 2% over 1995 to $4.6
billion primarily due to pricing ($164 million), partially offset by an overall
volume decline of 4% ($127 million). RJRT's full-price volume decreased 3% for
the full year. Given extra business days in 1996 versus 1995, total industry
shipments were up slightly versus 1995 while consumption was essentially flat.
The dynamics of the market continued to shift toward full-price brands in 1996
which comprised 72% of the total industry volume in 1996 versus 28% for savings
brands. This compares to a 70% to 30% split in 1995 and a 67% to 33% split in
1994. RJRT's full-price volume as a percentage of total volume was 63% in 1996
and 1995, and 60% in 1994.

RJRT's full-price share of market decreased 0.4 share points to 16.81% with
1996 shipments of 75 billion units. Camel performed exceedingly well, generating
a 5% growth in shipments and a 0.3 share point gain for the full year versus
1995. However, Winston and Salem volume declined 8% and 3%, respectively. The
Winston brand family declined 8% primarily due to the decision to reduce support
of Winston Select.

RJRT's savings brands shipments declined 4% to 44.1 billion units in 1996
due to planned sales reductions of lower priority brands. Offsetting the decline
on these brands was continued growth of the industry's largest savings brand,
Doral. Doral experienced a 4% volume increase over 1995, and a 2.2 share of
segment gain despite an industry savings category decline of two percentage
points from 30% to 28%. RJRT's overall volume performance reflects the decision
to focus on growth among its key full-price and savings brands.

To stabilize full-price market share, RJRT tested several initiatives.
Building on the Camel momentum, RJRT introduced Camel Menthol during the third
quarter of 1996 and began a national launch in the first quarter of 1997. Red
Kamel and Kamel Menthe were also test marketed in several cities. RJRT conducted
a Florida test market of Winston that emphasized the "No Bull" positioning of
Winston and a no-additives blend. Eclipse, a cigarette featuring 80% reduced
second-hand smoke that leaves practically

26
<PAGE>
no ashes, stain or lingering odor, was also tested in 1996. RJRT is also
continuing to test Moonlight Tobacco Company brands that feature innovative
packaging and product concepts. Test markets were New York City,
Seattle/Portland, Chicago, Cleveland, and North Carolina.

RJRT's operating company contribution was $1.45 billion, $30 million higher
than 1995 primarily due to favorable pricing and lower manufacturing costs,
partially offset by lower volume and higher marketing and merchandising
spending.

Reynolds International delivered 10% volume growth in 1996. The growth was
essentially across all regions and can be attributed to Reynolds International's
overall focus on the right brands in the right markets. Revenues increased 12%
over 1995 to $3.6 billion, primarily due to the 10% volume increase ($255
million), pricing ($200 million) and acquisitions ($58 million), partially
offset by the impact of unfavorable foreign currency translation ($150 million).

The 10% volume gain was driven by Reynolds International's three flagship
brands: Camel, Winston and Salem. The three combined to account for 8% of the
10% increase. Individually, Camel, fueled by the introduction of new Camel
Lights, grew 2%. Winston, Reynolds International's largest brand, grew 12% and
Salem, aided by the introduction of Salem Pianissimo, grew 10%. Regionally, the
major contributions to volume growth were in the CIS and Baltics, Central
Europe, Africa, Japan, and to a lesser extent, Western Europe.

In Western Europe, volume was up 2% over 1995 driven by the rollout of Camel
Lights, which helped abate the decline in the full-flavor segment. Camel Lights
became available throughout Western Europe. In the CIS and Baltics, core
brands--Camel, Winston, Salem, Magna, North Star and Peter I--grew volume by
more than 60%, with each brand recording double-digit volume growth. Total
market share grew two share points to almost 15%.

In Central Europe, volume grew 55%, mainly in Turkey and Romania. Reynolds
International became the number one international cigarette company in Romania,
having almost doubled its market share to 15%. In Turkey, market share also
almost doubled. In Asia, fueled by the successful introduction of Salem
Pianissimo and Premier Pianissimo, Reynolds International became the
fastest-growing cigarette company in Japan. Salem Pianissimo is a menthol brand
featuring less smoke and less smell and Premier is the non-menthol version. In
Africa, volume almost doubled, driven by the successful integration of the
Tanzanian business acquired in 1995.

Reynolds International's operating company contribution increased 16% or
$111 million to $803 million reflecting the volume growth and pricing, partially
offset by higher marketing spending, product costs and unfavorable foreign
currency translation.

GOVERNMENTAL ACTIVITY

If the legislation contemplated by the Memorandum discussed in note 10 of
the consolidated financial statements ("Note 10") is enacted, RJRT and other
cigarette manufacturers would be subject to certain actions taken (or to be
taken) by certain governmental regulatory agencies that could be expected to
have an adverse effect on cigarette sales. As described in Note 10, RJRT would
be prepared to support the enactment of such legislation as part of a
comprehensive resolution of a variety of tobacco issues. Nonetheless, in the
absence of such legislation, regulatory conditions such as the following remain
of significant importance to RJRT.

The advertising, sale and use of cigarettes have been under attack by
government and health officials in the United States and in other countries for
many years, principally due to health concerns about cigarette smoking and
environmental tobacco smoke. This attack has resulted in: a number of
substantial restrictions on the marketing, advertising and use of cigarettes;
diminishing social acceptability of smoking; and activities by anti-smoking
groups designed to inhibit cigarette sales, the form and content of cigarette
advertising and the testing and introduction of new cigarette products. Together
with manufacturers' price

27
<PAGE>
increases in recent years and substantial increases in state and federal excise
taxes on cigarettes, these developments have had and will likely continue to
have an adverse effect on cigarette sales.

Cigarettes are subject to substantial excise taxes in the United States and
to similar taxes in many foreign markets. The federal excise tax per pack of 20
cigarettes is currently 24 cents. On August 5, 1997, President Clinton signed
H.R. 2015 into law, which will increase the per pack federal cigarette excise
tax by 10 cents in fiscal year 2000, and an additional 5 cents in fiscal year
2002. In addition, all states and the District of Columbia impose excise taxes
at levels ranging from a low of 2.5 cents in Virginia to a high of $1.00 per
pack in Alaska. In 1997, the cigarette tax in ten states was increased by
amounts ranging from 2.5 cents to 71 cents per pack.

In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted
jurisdiction over cigarettes and certain other tobacco products by declaring
such products to be medical devices and adopting regulations, first proposed in
1995, on the advertising, promotion and sale of cigarettes. The regulations
include a phased-in schedule of effectiveness over a two-year period. The first
phase began on February 28, 1997, when regulations establishing 18 as the
national minimum age for the sale of cigarettes and requiring age identification
from purchasers who appear to be under age 26 became effective. Among other
things, the remaining regulations would prohibit or impose stringent limits on a
broad range of sales and marketing practices, including bans on sampling,
sponsorship by brand name, and distribution of non-tobacco items carrying brand
names. The FDA's rules also limit advertising in print and on billboards to
black and white text and impose new labeling language.

RJRT, together with the four other major domestic cigarette manufacturers
and an advertising agency, filed suit in the U.S. District Court for the Middle
District of North Carolina (COYNE BEAHM V. UNITED STATES FOOD & DRUG
ADMINISTRATION) challenging the regulations. Similar suits were filed in the
same court by manufacturers of smokeless tobacco products, by operators of
retail stores and by advertising interests. On April 26, 1997, the court ruled
on a motion for summary judgment, that based on the facts alleged by the FDA,
that agency was not barred from asserting jurisdiction over tobacco but lacked
authority to issue certain of the regulations bearing on marketing and
advertising. The court immediately certified its decision for appeal to the
Fourth Circuit Court of Appeals and stayed the effectiveness of that portion of
the regulations which had not yet been implemented pending appeal or further
court action. Oral argument on the appeal has been heard, but no decision has
been handed down to date. RJRT is unable to predict the ultimate outcome of this
litigation seeking to find the FDA's regulations to be unlawful. If the full
regulations do go into effect, they could be expected to have an adverse effect
on cigarette sales and RJRT.

On May 28, 1997, the Federal Trade Commission (the "FTC") issued an
unfairness complaint against RJRT, seeking to stop the use of Joe Camel
advertising, to require RJRT to undertake certain public education activities
and to monitor sales and share of sales of each of RJRT's brands to smokers
under the age of 18. On June 17, 1997, RJRT filed suit against the FTC in the
Federal District Court for the Middle District of North Carolina, challenging
the FTC's action as procedurally improper. The FTC has moved to dismiss the
action.

In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form or timing of any regulations that
may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT
expects that many employers who have not already done so would prohibit smoking
in the workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. RJRT submitted comments on the proposed
regulations during the comment period which closed in February 1996. Because
many employers currently do not permit smoking in the workplace, RJRT cannot
predict the effect of any regulations that may be adopted, but incremental
restrictions on smokers could have an adverse effect on cigarette sales and
RJRT.

28
<PAGE>
Legislation imposing various restrictions on public smoking has also been
enacted in 48 states and many local jurisdictions, and many employers have
initiated programs restricting or eliminating smoking in the workplace.
Seventeen states have enacted legislation designating a portion of increased
cigarette excise taxes to fund either anti-smoking programs, health care
programs or cancer research. Federal law prohibits smoking on all domestic
airline flights of six hours duration or less and the U.S. Interstate Commerce
Commission has banned smoking on buses transporting passengers inter-state.
Certain common carriers have imposed additional restrictions on passenger
smoking.

In July 1996, Massachusetts enacted legislation requiring manufacturers of
tobacco products sold in Massachusetts to report yearly, beginning December 15,
1997, the ingredients of each brand sold. The statute also requires the
reporting of nicotine yield ratings in accordance with procedures established by
the State. The legislation contemplates public disclosure of all ingredients in
descending order, a trade-secret disclosure that RJRT believes could damage the
competitive position of its brands. RJRT, together with other cigarette
manufacturers, filed suit in the U.S. District Court for the District of
Massachusetts seeking to have the statute declared null and void and to restrain
Massachusetts officials from enforcing it. A similar suit was filed by
manufacturers of smokeless tobacco products. The court granted a preliminary
injunction that enjoined Massachusetts officials from enforcing the law relating
to ingredient reporting. Both the manufacturers and the State are now seeking
summary judgment from the district court. Oral argument is scheduled for April
1998.

In 1997, Texas enacted legislation very similar to the Massachusetts law,
except that the Texas statute authorizes confidentiality of trade secrets and
its annual reporting requirements begin in 1998. RJRT believes that regulations
proposed by Texas, however, are inadequate to prevent inadvertent disclosure of
its trade secrets. Together with other cigarette manufacturers, RJRT has
provided comments on the regulations. Final regulations are expected from Texas
by mid-year. RJRT is unable to predict whether final regulations will provide
adequate security for its trade secrets.

The California state legislature adopted two bills removing obstacles to
product liability actions against tobacco product manufacturers. One bill
removed barriers to public entities bringing such suits based on defectiveness
of the product, fraud or misconduct. The second removed tobacco products from
the list of inherently unsafe widely-used consumer products for which
manufacturers received immunity from product liability actions. These
legislative actions could result in an increase in the cases brought against
RJRT.

In 1997, Minnesota enacted legislation that would require manufacturers of
tobacco products to report certain constituents of tobacco smoke for each brand
sold. Minnesota has not implemented the statute. RJRT is unable to predict
whether or when this statute will be enforced.

A number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. In 1997, the Canadian Parliament
passed legislation permitting their Health Department to adopt new regulations
that may substantially limit cigarette advertising and sponsorships. The
regulations are expected to be promulgated by the end of 1998. Also in 1997, the
EU Council of Health Ministers approved a directive banning all tobacco
advertising (except at retail point-of-sale) and sponsorships. The EU Parliament
may approve the directive this year, and member countries will have three years
to enact conforming legislation.

29
<PAGE>
In 1990, RJRT and other U.S. cigarette manufacturers, through The Tobacco
Institute, announced a tobacco industry initiative to assist retailers in
enforcing minimum age laws on the sale of cigarettes, to support the enactment
of state laws requiring the adult supervision of cigarette vending machines in
places frequented by minors, to seek the uniform establishment of 18 as the
minimum age for the purchase of cigarettes in all states, to distribute
informational materials to assist parents in combatting peer pressure on their
children to smoke, and to limit voluntarily certain cigarette advertising and
promotional practices. In 1995, wholesalers, retailers and the tobacco industry
including RJRT formed the Coalition for Responsible Tobacco Retailing and
launched a new program ("We Card") focused on stopping underage access to
cigarettes. In 1992, the Alcohol, Drug Abuse and Mental Health Act was signed
into law. This act requires states to adopt a minimum age of 18 for purchases of
tobacco products and to establish a system to monitor, report and reduce the
illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January 1996,
regulations implementing this legislation were announced by the Department of
Health and Human Services.

In 1964, the Report of the Advisory Committee to the Surgeon General of the
U.S. Public Health Service concluded that cigarette smoking was a health hazard
of sufficient importance to warrant appropriate remedial action. Since 1966,
federal law has required a warning statement on cigarette packaging. Since 1971,
television and radio advertising of cigarettes has been prohibited in the United
States. Cigarette advertising in other media in the United States is required to
include information with respect to the "tar" and nicotine yield content of
cigarettes, as well as a warning statement.

During the past three decades, various laws affecting the cigarette industry
have been enacted. In 1984, Congress enacted the Comprehensive Smoking Education
Act (the "Smoking Education Act"). Among other things, the Smoking Education
Act: (i) establishes an interagency committee on smoking and health that is
charged with carrying out a program to inform the public of any dangers to human
health presented by cigarette smoking; (ii) requires a series of four health
warnings to be printed on cigarette packages and advertising on a rotating
basis; (iii) increases type size and area of the warning required in cigarette
advertisements; and (iv) requires that cigarette manufacturers provide annually,
on a confidential basis, a list of ingredients used in the manufacture of
cigarettes to the Secretary of Health and Human Services. The warnings currently
required on cigarette packages and advertisements (other than billboards) are as
follows: (i) "Surgeon General's Warning: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, And May Complicate Pregnancy"; (ii) "Surgeon General's
Warning: Quitting Smoking Now Greatly Reduces Serious Risks To Your Health";
(iii) "Surgeon General's Warning: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and Low Birth Weight"; and (iv) "Surgeon General's
Warning: Cigarette Smoke Contains Carbon Monoxide." Similar warnings are
required on outdoor billboards.

Since the initial report in 1964, the Secretary of Health, Education and
Welfare (now the Secretary of Health and Human Services) and the Surgeon General
have issued a number of other reports which purport to find the nicotine in
cigarettes addictive and to link cigarette smoking and exposure to cigarette
smoke with certain health hazards, including various types of cancer, coronary
heart disease and chronic obstructive lung disease. These reports have
recommended various governmental measures to reduce the incidence of smoking.

It is not possible to determine what additional federal, state, local or
foreign legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT, Reynolds
International or the cigarette industry generally, but such legislation or
regulations could have an adverse effect on RJRT, Reynolds International or the
cigarette industry generally.

For a description of certain litigation affecting RJRT and its affiliates
(including RJRN Holdings and RJRN) and indemnitees, see note 10 to the
consolidated financial statements.

FOOD

The food business is conducted by Nabisco through its Domestic Food Group
and International Food Group. The Domestic Food Group is comprised of Nabisco
Biscuit and the U.S. Foods Group. The U.S.

30
<PAGE>
Foods Group includes the Sales & Integrated Logistics Group, Specialty Products,
LifeSavers, Planters, Tablespreads and Food Service organizations. The
International Food Group is comprised of Nabisco Ltd and Nabisco International,
Inc.

1997 VS. 1996. The Domestic Food Group reported net sales of $6.1 billion,
a decrease of 3% from the 1996 level of $6.3 billion, with Nabisco Biscuit lower
by 4% and the U.S. Foods Group lower by 1% compared with last year. Nabisco
Biscuit's net sales decline was primarily due to volume declines in SnackWell's
and breakfast snacks, which more than offset volume increases in other core
cookie and cracker brands. The U.S. Foods Group's net sales decrease was
primarily due to lower sales volume for tablespreads, condiments and certain
other products and the impact from the sale of certain domestic regional brands
in the second quarter of 1997, partially offset by higher volume for nuts and
certain confectionery products. The International Food Group reported net sales
of $2.6 billion in 1997, slightly higher compared to 1996. The increase reflects
improved results in Asia and Mexico, partially offset by volume declines in
Brazil, resulting from aggressive competitive activity in the biscuit and milk
categories, and in Argentina, due to competitive pricing pressures.

Nabisco's operating company contribution grew 7% to $1.3 billion in 1997.
Nabisco Biscuit, the largest division of Nabisco, grew operating company
contribution 15% to $691 million, primarily due to restructuring-driven margin
improvements and ongoing productivity initiatives. The U.S. Foods Group's
operating company contribution grew only 2% primarily due to reduced sales of
higher margin products which more than offset the benefits of restructuring
efficiencies. The International Food Group's operating company contribution
declined 7% for 1997 primarily as a result of lower volume in Brazil and lower
earnings in Argentina due to competitive pressures, partially offset by the
improved results in Mexico and Asia and productivity-driven earnings
improvements in Canada.

Notwithstanding the improved earnings, Nabisco's results reflected a decline
in market share in a number of core brands, less market acceptance of certain
new products and in-store performance difficulties experienced in Nabisco
Biscuit's direct delivery system. Nabisco's results also reflected economic and
competitive problems in certain international markets and underperformance at
certain units. Nabisco Holdings is undertaking a number of initiatives designed
to improve performance, including improvements in marketing, changes in
training, compensation and recruiting of personnel at Nabisco Biscuit's delivery
system, continued emphasis on increased productivity, reevaluation of how new
products are identified and developed, accelerated international marketing of
core United States brands, and consideration of disposing of underperforming
units that do not fit into Nabisco Holdings' long-term plans. Implementation of
the changes will take time and Nabisco Holdings is unable to predict the effect
of the initiatives on performance in 1998.

1996 VS. 1995. Nabisco Holdings reported net sales of $8.9 billion in 1996,
an increase of 7% from the 1995 level of $8.3 billion, with the Domestic Food
Group up 5% and the International Food Group up 13%. Within the Domestic Food
Group, Nabisco Biscuit's net sales increased 3% versus the prior year, primarily
attributable to volume increases in the Oreo, Ritz, Air Crisps and Chips Ahoy!
brands, partially offset by lower volume for SnackWell's and Fig Newtons. The
U.S. Foods Group's net sales increased 8%, primarily due to higher volumes for
Planters nuts and the net impact of the October 1995 Parkay acquisition, offset
by the impact of the 1995 product line disposals. Planters nuts volume increase
resulted from gains in the warehouse club and mass merchandising channels and a
more stable competitive environment in the nut market. The International Food
Group's net sales increase for 1996 was primarily driven by 1995 business
acquisitions, principally Primo in Canada and Royal Beech-Nut in South Africa,
and 1996 business acquisitions in Latin America.

Nabisco Holdings' operating company contribution of $1.2 billion in 1996 was
9% higher than last year's level, with the Domestic Food Group up 10% and the
International Food Group up 4%. The 1995 period includes a net gain of $11
million from the sale of the Ortega Mexican food ($18 million gain in the U.S.
Foods Group) and New York Style Bagel Chip ($7 million loss in the International
Food Group) businesses. The increase in operating company contribution for the
Domestic Food Group was primarily a result of the profit impact from higher net
sales and lower advertising expenses, partially offset by higher

31
<PAGE>
trade promotion expenses and higher fixed manufacturing and distribution
expenses. The increase in the International Food Group's operating company
contribution was primarily due to the profit impact from business acquisitions.

RESTRUCTURING EXPENSE

Restructuring charges of $301 million and $154 million were incurred during
1997 and 1995, respectively, to streamline operations and improve the
profitability of the tobacco operations. Restructuring charges of $428 million
were incurred in 1996 to streamline operations and improve the profitability of
the food operations. The programs included workforce reductions and product line
and facility rationalizations and are discussed further in note 2 to the
consolidated financial statements.

Approximately $180 million of the 1997 restructuring charge, $240 million of
the 1996 restructuring charge and substantially all of the 1995 restructuring
charge is cash-related. The 1997 restructuring is expected to generate annual
savings of approximately $155 million in the year 2000 and thereafter. The 1996
restructuring is expected to generate approximately $175 million in annual
savings beginning in 1998.

OTHER INCOME (EXPENSE), NET

Consolidated other income (expense), net for 1995 includes a pre-tax charge
of approximately $103 million ($67 million after-tax) for fees and expenses
incurred in connection with an exchange of debt between RJRN and Nabisco.

INCOME TAXES

The effective income tax rate on an ongoing basis for 1997, 1996 and 1995
was 42.4%, 43.7% and 43.4%, respectively. The lower effective income tax rate
for 1997 primarily reflects lower taxes on foreign earnings.

NET INCOME PER SHARE (DILUTED)

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reported.......................................... $ 1.03 $ 1.74 $ 1.53

Ongoing........................................... $ 2.72 $ 2.62 $ 2.21
</TABLE>

Net income per share was calculated pursuant to the provisions of Statement
of Financial Accounting Standards No. 128, Earnings per Share, which was adopted
in the fourth quarter of 1997. All prior year amounts have been restated. The
diluted net income per share amounts are essentially the same as the fully
diluted net income per share amounts as computed under Accounting Principles
Board Opinion No. 15, Earnings per Share. Excluding the estimated impact of
reducing excess trade inventories, ongoing diluted net income per share would
have been approximately $2.95, a 13% increase over 1996.

32
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION

DECEMBER 31, 1997

Net cash flows from operating activities for 1997 increased by $74 million
to $1.57 billion. The increase in net cash flows from operating activities
primarily reflects reduced working capital requirements resulting from the
decision to reduce excess trade inventories in 1997 and special leaf inventory
programs in 1996, partially offset by tobacco litigation settlement payments and
higher restructuring and related payments in 1997.

Net cash flows used in investing activities for 1997 were $686 million, a
decrease of $91 million from the 1996 level of $777 million. The decrease
reflects a reduction in acquisitions of businesses from the prior year,
partially offset by an increase in capital expenditures and a repurchase of
Nabisco Holdings' Class A common stock during 1997.

Net cash flows used in financing activities increased to $751 million in
1997 from $689 million in 1996. The increase was primarily due to an increase in
dividends paid and higher debt repayments during 1997, partially offset by the
repurchase of RJRN Holdings' common stock in 1996.

Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
certain other corporate purposes such as common stock dividends, stock
repurchases and acquisitions. It is essentially net cash flow from operating
activities and investing activities per the Consolidated Statements of Cash
Flows, adjusted for acquisitions and divestitures of businesses, less preferred
stock dividends. Free cash flow resulted in inflows of $869 million and $748
million for 1997 and 1996, respectively. The increase in free cash flow from
1996 to 1997 primarily reflects the increase in net cash flows from operating
activities and lower preferred stock dividend payments as a result of the Series
C preferred stock conversion, partially offset by a lower level of proceeds from
the disposition of certain assets compared to the prior year.

In May 1997, 26,675,000 shares of Series C preferred stock mandatorily
converted into 53,350,000 shares of common stock.

In July 1997, RJRN repaid commercial paper borrowings with proceeds from the
issuance of $150 million 8 1/4% notes due 2004 and $200 million 8 1/2% notes due
2007. In August 1997, Nabisco issued $200 million of notes due 2009. In December
1997, Nabisco refinanced $432 million of 8.3% notes due 1999 and $541 million of
8% notes due 2000 with short-term borrowings. These short-term borrowings were
refinanced in January 1998 with 6.0%-6 3/8% long-term notes due 2011-2035. Fixed
rate debt comprised approximately 77% of total consolidated debt at December 31,
1997.

For a discussion of the potential impact on the financial condition of RJRN
Holdings and RJRN of the proposed resolution of national regulatory and
litigation issues and various litigation settlements, see note 10 to the
consolidated financial statements.

RJRN maintains a three-year $2.75 billion revolving credit facility, of
which no borrowings were outstanding at December 31, 1997, and a 364-day $568
million credit facility primarily to support commercial paper issuances, of
which the entire facility was available at December 31, 1997. In June 1997, the
maturity of the revolving credit facility was extended to June 2000 and the
364-day credit facility was renewed to June 1998. The commitments under the
revolving credit facility decline to approximately $2.2 billion in the final
year. The revolving credit facility also provides for the issuance of up to $800
million of letters of credit, of which $362 million was issued at December 31,
1997. Availability under the revolving credit facility is reduced by the amount
of any borrowings outstanding and letters of credit issued under the facility
and by the amount of outstanding commercial paper in excess of $568 million.
During 1997, RJRN Holdings and RJRN also amended certain terms of these credit
agreements to accommodate the adoption of a policy of increased cash returns to
shareholders, a restructuring charge and related adjustments to streamline the
operations of the domestic and international tobacco businesses, and the
settlement of certain litigation.

33
<PAGE>
Nabisco maintains a five-year $1.5 billion revolving credit facility, of
which no borrowings were outstanding at December 31, 1997, and a 364-day $1.381
billion credit facility primarily to support commercial paper issuances, all of
which was completely utilized at December 31, 1997. At the end of the 364-day
period, any borrowings outstanding under the 364-day credit facility are
convertible into a three-year term loan at Nabisco's option. In October 1997,
the maturity under the revolving credit facility was extended to October 2002
and the 364-day credit facility was renewed to October 1998. The commitments
under the revolving credit facility decline to approximately $1.46 billion in
the final year. The revolving credit facility also provides for the issuance of
up to $300 million of letters of credit, of which none was issued at December
31, 1997. Availability under the revolving credit facility is reduced by the
amount of any borrowings outstanding and letters of credit issued under the
facility and by the amount of outstanding commercial paper in excess of $1.381
billion. At December 31, 1997, $890 million was available under the revolving
credit facility.

Distributions and the payment of dividends by RJRN Holdings are subject to
certain restrictions under certain financing agreements and debt instruments of
RJRN Holdings and RJRN and their subsidiaries. The financing agreements
generally restrict cumulative common and preferred dividends and distributions,
limit the ability to incur indebtedness, engage in transactions with
stockholders and affiliates, create liens, sell or dispose of certain assets and
certain subsidiaries' stock, issue certain equity securities and engage in
certain mergers or consolidations. RJRN Holdings and RJRN believe that they are
currently in compliance with all covenants and restrictions imposed by the terms
of their indebtedness.

Nabisco's credit agreements, among other things, generally restrict common
and preferred dividends and distributions, limit loans and advances by Nabisco
Holdings and its subsidiaries to RJRN, limit the ability to incur indebtedness,
engage in transactions with stockholders and affiliates, create liens, acquire,
sell or dispose of certain assets and securities and engage in certain mergers
or consolidations. Nabisco Holdings and Nabisco believe that they are currently
in compliance with all covenants and restrictions imposed by the terms of their
indebtedness.

Management of RJRN Holdings and its subsidiaries is continuing to review
various strategic transactions, including but not limited to, acquisitions,
divestitures, mergers and joint ventures. Management is also exploring ways to
increase efficiency and productivity, and to reduce the cost structures of its
respective businesses. No assurance may be given that any such transactions will
be announced or completed. See note 9 to the consolidated financial statements
for management's policy regarding distributions of capital stock of its
subsidiaries.

Capital expenditures were $763 million, $741 million and $744 million for
1997, 1996 and 1995, respectively. The increased level of capital expenditures
in 1997 was primarily due to increased capital investments for Reynolds
International (notably in Russia). The current level of expenditures planned for
1998 is expected to be in the range of approximately $650 million to $700
million (approximately 52% Food and 48% Tobacco), which will be funded primarily
by cash flows from operating activities. Management expects that its capital
expenditure program will continue at a level sufficient to support the strategic
and operating needs of RJRN Holdings' operating subsidiaries.

RJRN Holdings' subsidiaries have operations in many countries which utilize
many different functional currencies. Significant foreign currency net
investments are located in Canada, Spain, Argentina, Puerto Rico, Germany,
Brazil, Mexico, Malaysia, Venezuela and Hong Kong. RJRN Holdings' subsidiaries
also have significant exposure to foreign exchange transactions in currencies
other than their functional currencies. Exposures primarily include the U.S.
dollar, German mark, French franc, British pound, Italian lira, Japanese yen,
Swiss franc, Hong Kong dollar, Singapore dollar, Finnish markka, Canadian
dollar, Spanish peseta, Dutch guilder, Brazilian real, Malaysian ringgitt,
Indonesian rupiah, Russian rouble, Romanian leu, and Turkish lira. Whenever
possible, RJRN Holdings' policy is to net exposures and utilize natural offsets
to minimize the effects of foreign currency transactions on cash flows;
otherwise, consideration is given to foreign currency arrangements to protect
RJRN Holdings and its subsidiaries from risk that the eventual dollar cash flows
resulting from transactions with international parties will be adversely

34
<PAGE>
affected by changes in exchange rates. In addition, consideration is given to
foreign currency arrangements to hedge foreign currency exposures on existing
assets and liabilities, including certain international debt.

At December 31, 1997, there was $1.982 billion of accumulated and
undistributed income of foreign subsidiaries. No applicable U.S. federal
deferred income taxes have been provided because management intends to reinvest
these earnings abroad indefinitely to fund international acquisitions, new
products and other opportunities in foreign markets.

YEAR 2000

The year 2000 issue stems from computer applications that were written using
two digits rather than four digits to define the applicable year. The issue is
whether computer systems will properly interpret date-sensitive information when
the year changes to 2000. RJRN Holdings recognizes the issues associated with
the year 2000 problem and the need to ensure that its operations will not be
adversely impacted by year 2000 software failures. Comprehensive reviews of all
systems and applications, including key suppliers and vendors, are being
conducted, implementation plans to resolve any issues are being formulated and
certain corrective actions have commenced.

RJRN Holdings expects its year 2000 compliance programs, which began in
1996, to be completed in all material respects by the end of 1999. The total
cost of achieving year 2000 compliance is estimated to be approximately $90
million. All modification costs are expensed as incurred. Through December 31,
1997, approximately $19 million had been expensed. The remainder will be
incurred in 1998 and 1999.

LITIGATION

For a description of certain litigation affecting RJRT and its affiliates
(including RJRN Holdings and RJRN) and indemnitees, see note 10 to the
consolidated financial statements.

ENVIRONMENTAL MATTERS

The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the Environmental Protection Agency and other
governmental agencies under various statutes have resulted in, and will likely
continue to result in, substantial expenditures for pollution control, waste
treatment, plant modification and similar activities.

In April 1995, RJRN Holdings was named a potentially responsible party (a
"PRP") with certain third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to a superfund
site at which a former subsidiary of RJRN had operations. RJRN has also been
named in an insurance coverage suit brought by another company named as a PRP at
this site. In this lawsuit, DEL MONTE FRESH PRODUCE V. FIREMEN'S FUND INSURANCE,
filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the
plaintiff seeks declaratory judgment that it is entitled to insurance coverage
for the site or, in the alternative, that RJRN is obligated to indemnify Del
Monte under the terms of the agreement by which RJRN sold that company in 1989.

Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs
with third parties or may have indemnification obligations with respect to a
number of additional sites. Liability under CERCLA is joint and several.

RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing
program to assure compliance with U.S., state and local laws and regulations.
Although it is difficult to identify precisely the portion of capital
expenditures or other costs attributable to compliance with environmental laws
and to estimate the cost of resolving these CERCLA matters, RJRN Holdings and
RJRN do not expect such expenditures or other costs to have a material adverse
effect on the business or financial condition of RJRN Holdings and RJRN and
their subsidiaries taken as a whole.

35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of RJRN Holdings due to
adverse changes in financial and commodity market prices and rates. RJRN
Holdings is exposed to market risk in the areas of foreign currency exchange
rates, interest rates and commodity prices. These exposures are directly related
to its international operations, its use of agricultural commodities in its food
operations and its normal investing and funding activities. RJRN Holdings has
established various policies and procedures to manage its exposure to market
risks, including the use of financial and commodity derivatives, which are
highly correlated to underlying exposures. See note 11 to the consolidated
financial statements for further information regarding the use of financial
derivatives. RJRN Holdings estimates its market risk due to changes in foreign
currency rates, interest rates and commodity prices utilizing a financial model
called Value at Risk ("VaR"). VaR is a statistical measure of the potential loss
in terms of fair value, cash flows or earnings of market-risk sensitive
instruments over a one-year horizon using a 95% confidence interval for changes
in market rates and prices.

FOREIGN EXCHANGE AND INTEREST RATE EXPOSURES

Upon reviewing its derivatives and other foreign currency and interest rate
instruments, based on historical foreign currency rate movements and the fair
value of market-rate sensitive instruments at year-end, RJRN Holdings does not
believe that near term changes in foreign currency or interest rates will have a
material impact on its future earnings, fair values or cash flows.

COMMODITY PRICE EXPOSURE

Based on either Nabisco Holdings' derivative commodity instruments or its
net commodity exposure (derivatives plus physical contracts less anticipated
future consumption), a near-term change in commodity prices, based on historical
commodity price movements, would not have a material impact on future earnings,
fair values or cash flows of RJRN Holdings.

------------------------

The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, particularly with respect to capital expenditures, the year 2000
problem, market risk in the areas of foreign currency exchange rates, interest
rates and commodity prices, restructuring savings and the impact of proposed
national legislation and various litigation settlements, which reflect
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effect on financial
performance and future events of competitive pricing for products, success of
new product innovations and acquisitions, local economic conditions and the
effects of currency fluctuations in countries in which RJRN Holdings and its
subsidiaries do business, the effects of domestic and foreign government
regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in
the case of the tobacco business, litigation and related legislative and
regulatory developments. For additional information concerning factors affecting
future events and policies and RJRN Holdings' performance, see Part I, Items 1
through 3 and Part II, Item 5 of this report. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Refer to the Index to Financial Statements and Financial Statement Schedules
on page 41 for the required information.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

36
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Item 10 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998. Reference is also made regarding the executive officers
of the Registrants to "Executive Officers of the Registrants" following Item 4
of Part I of this Report.

ITEM 11. EXECUTIVE COMPENSATION

Item 11 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 12 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 13 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998.

37
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
<S> <C> <C>
(A) 1. The financial statements listed in the accompanying Index to Financial
Statements and Financial Statement Schedules are filed as part of this report.
2. The financial statement schedules listed in the accompanying Index to Financial
Statements and Financial Statement Schedules are filed as part of this report.
3. The exhibits listed in the accompanying Index to Exhibits are filed as part of
this report.
(B) REPORTS ON FORM 8-K FILED SINCE THE THIRD QUARTER 1997
Form 8-K dated January 16, 1998, reporting on the settlement of a healthcare
cost recovery suit in the State of Texas and filing as exhibits the related
settlement agreement and press release.
(C) EXHIBITS
See Exhibit Index.
(D) FINANCIAL STATEMENT SCHEDULES.
See Index to Financial Statements and Financial Statement Schedules.
</TABLE>

38
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 27, 1998.

<TABLE>
<C> <S> <C>
RJR NABISCO HOLDINGS CORP.

BY: /S/ STEVEN F. GOLDSTONE
-----------------------------------------------
(Steven F. Goldstone)
Chairman and
Chief Executive Officer
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1998.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------- --------------------------------------------------

<C> <S> <C>
/s/ STEVEN F. GOLDSTONE Chairman and Chief Executive Officer (principal
--------------------------------------- executive officer)
(Steven F. Goldstone)

/s/ DAVID B. RICKARD Senior Vice President and Chief Financial Officer
--------------------------------------- (principal financial officer)
(David B. Rickard)

/s/ RICHARD G. RUSSELL Senior Vice President and Controller (principal
--------------------------------------- accounting officer)
(Richard G. Russell)

* Director
---------------------------------------
(John T. Chain, Jr.)

* Director
---------------------------------------
(Julius L. Chambers)

* Director
---------------------------------------
(John L. Clendenin)

* Director
---------------------------------------
(L. Dennis Kozlowski)

* Director
---------------------------------------
(Ray J. Groves)

* Director
---------------------------------------
(H. Eugene Lockhart)

* Director
---------------------------------------
(Theodore E. Martin)

* Director
---------------------------------------
(John G. Medlin, Jr.)

* Director
---------------------------------------
(Rozanne L. Ridgway)
</TABLE>

<TABLE>
<C> <S> <C>
*By: /s/ WILLIAM L. ROSOFF
----------------------------------------------
William L. Rosoff
Attorney-in-Fact
</TABLE>

39
<PAGE>
SIGNATURES

<TABLE>
<C> <S> <C>
RJR NABISCO, INC.

BY: /S/ STEVEN F. GOLDSTONE
-----------------------------------------------
(Steven F. Goldstone)
Chairman and Chief
Executive Officer
</TABLE>