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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

(Mark
One)

x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2001

OR

o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


Commission file number: 1-6388



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R.J. Reynolds Tobacco Holdings, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                       |  |                                     
|---------------------------------------------------------------------- |  | ------------------------------------
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Delaware                                                               |  | 56-0950247                          
|(State or other jurisdiction of incorporation or
        organization) |  | (I.R.S. Employer Identification No.)

401 North Main Street

Winston-Salem, NC 27102-2866


(Address of principal executive offices) (Zip
Code)


(336) 741-5500

(Registrants telephone number, including
area code)




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

|                                       |  |                   |          |                     |  |                   |                                       |  |  |  |          | 
|-------------------------------------- |  | ----------------- | -------- | ------------------- |  | ----------------- | ------------------------------------- |  |  |  | -------- | 
|                                       |  | Name of each      |          |                     |  | Name of each     
|                                       |  | exchange on which |          |                     |  | exchange on which
|Title of each class                    |  | registered        |          | Title of each class |  | registered       
|                                       |  |                   |          |                     |  |                  
|Common Stock, par value $.01 per share |  |                   | New York |                     |  |                   | 8 3/4% Notes due August 15, 2005      |  |  |  | New York | 
|8 5/8% Notes due December 1, 2002      |  |                   | New York |                     |  |                   | 8 3/4% Notes due July 15, 2007        |  |  |  | New York | 
|7 5/8% Notes due September 15, 2003    |  |                   | New York |                     |  |                   | 9 1/4% Debentures due August 15, 2013 |  |  |  | New York | 
|8 3/4% Senior Notes due April 15, 2004 |  |                   | New York |                     |  |                   |                                       |  |  |  |          | 

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

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

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

The aggregate market value of common stock held by
non-affiliates of R.J. Reynolds Tobacco Holdings, Inc. on
January 31, 2002 was approximately $5.5 billion, based on
the closing price of $59.75. Certain directors of R.J. Reynolds
Tobacco Holdings, Inc. are considered affiliates for purposes of
this calculation but should not necessarily be deemed affiliates
for any other purpose.

Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date: January 31, 2002: 93,242,931 shares of
common stock, par value $.01 per share.



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Documents Incorporated by Reference:

Portions of the Definitive Proxy Statement of R.J. Reynolds
Tobacco Holdings, Inc. 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 15, 2002
are incorporated by reference into Part III of this report.



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INDEX

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|Part I   |  |                                                                                        |  |      |    | 
|        
|        
|        
|        
|Item 1.  |  | Business                                                                               |  |      | 3  | 
|        
|        
|        
|        
|Item 2.  |  | Properties                                                                             |  |      | 23 | 
|        
|        
|        
|        
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 23 | 
|        
|        
|        
|        
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 23 | 
|        
|        
|        
|        
|         |  | Executive Officers and Certain Significant
	Employees of the Registrant                |  |      | 23 | 
|        
|        
|        
|        
|        
|Part II  |  |                                                                                        |  |      |    | 
|        
|        
|        
|        
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 26 | 
|        
|        
|        
|        
|Item 6.  |  | Selected Financial Data                                                                |  |      | 27 | 
|        
|        
|        
|        
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 28 | 
|        
|        
|        
|        
|Item 7a. |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |  |      | 42 | 
|        
|        
|        
|        
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 43 | 
|        
|        
|        
|        
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 86 | 
|        
|        
|        
|        
|        
|Part III |  |                                                                                        |  |      |    | 
|        
|        
|        
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 86 | 
|        
|        
|        
|        
|Item 11. |  | Executive Compensation                                                                 |  |      | 86 | 
|        
|        
|        
|        
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 86 | 
|        
|        
|        
|        
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 86 | 
|        
|        
|        
|        
|        
|Part IV  |  |                                                                                        |  |      |    | 
|        
|        
|        
|        
|Item 14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 86 | 

2



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PART I

Item 1. Business

R.J. Reynolds Tobacco Holdings, Inc. was incorporated as a
holding company in 1970, and is listed on the NYSE as RJR.
RJRs wholly owned subsidiaries include its operating
subsidiaries, R. J. Reynolds Tobacco Company, referred to as RJR
Tobacco, and Santa Fe Natural Tobacco Company, Inc. RJR also
wholly owns RJR Acquisition Corp.

RJR has one reportable operating segment, RJR Tobacco, which is
the second largest cigarette manufacturer in the United States.
RJR Tobaccos largest selling cigarette brands, CAMEL,
WINSTON, SALEM and DORAL, were four of the top ten best-selling
brands of cigarettes in the United States in 2001. Those brands,
and its other brands, including VANTAGE, MORE, NOW, MONARCH and
BEST VALUE, are manufactured in a variety of styles and marketed
in the United States to meet a range of adult smoker preferences.

During 1999, RJR and Nabisco Group Holdings Corp., referred to
as NGH, completed a series of transactions to reorganize their
businesses and capital structures. In May 1999, RJR and RJR
Tobacco sold the international tobacco business to Japan Tobacco
Inc. As a result of this sale, RJR Tobaccos business
consists exclusively of the manufacture and sale of cigarettes
in the United States and its territories, commonwealths,
protectorates and possessions. A portion of the proceeds from
the sale of the international tobacco business was used by RJR
to repurchase $4 billion of its debt. Additionally, RJR
transferred $1.6 billion in cash proceeds, together with its
80.5% interest in Nabisco Holdings Corp., referred to as
Nabisco, to NGH through a merger transaction. In June 1999, NGH
distributed all of the outstanding shares of RJR common stock to
NGH common stockholders of record as of May 27, 1999.
Shares of RJR began trading separately on June 15, 1999.

On December 11, 2000, RJR acquired its former parent, NGH,
a non-operating public shell company with no material assets or
liabilities other than $11.8 billion in cash. RJR Acquisition
Corp. paid $30 for each outstanding share of NGH, or $9.8
billion in the aggregate, and was merged into NGH, with NGH
being the surviving corporation. After the merger, NGH changed
its name to RJR Acquisition Corp. Net cash proceeds to RJR
Acquisition Corp. were $1.5 billion, after transaction costs and
payments to NGH stockholders.

On January 16, 2002, RJR acquired 100% of the voting stock
of privately held Santa Fe for $340 million in cash, subject to
post-closing adjustments. Fiesta Acquisition Corp., a wholly
owned subsidiary of RJR, merged with and into Santa Fe, and
Santa Fe, being the surviving corporation, became a wholly owned
operating subsidiary of RJR.

Santa Fe manufactures cigarettes, under the NATURAL AMERICAN
SPIRIT brand, and other tobacco products in the United States
and currently markets its products primarily in the United
States. The financial condition and results of operations of
Santa Fe do not meet the criteria as a reportable operating
segment. As a result, information related to Santa Fe is not
disclosed separately in this document.

Industry Overview

U.S. cigarette shipments decreased at a compound annual rate of
1.6% from 1987 through 1997. After declining 4.6% in 1998 and 9%
in 1999, shipments remained relatively stable in 2000 and
declined 3.2%, to 406.4 billion units in 2001. From December
1999 to December 2001, wholesale cigarette prices of the major
manufacturers increased $.52 per pack overall.

Competition

RJRs operating subsidiaries primarily conduct business in
the highly competitive U.S. market with several large
participants. Based on data collected by Information Resources
Inc./Capstone, during 2001, 2000 and 1999, Philip Morris
Incorporated had an overall retail share of market of 50.45%,
50.37% and 49.58%, respectively. During these same years, RJR
Tobacco had an overall share of 23.42%, 23.58% and 23.92%,
respectively, and the remaining participants held lesser shares.

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Competition is primarily based on a brands products,
positioning, consumer loyalty, retail display and promotion and
price. Substantial marketing support, merchandising display and
competitive pricing generally are required to maintain or
improve a brands market position or to introduce a new
brand. Increased selling prices and higher cigarette taxes have
resulted in increased competitive discounting and the
proliferation of deep-discount brands. The cost structures of
manufacturers of these brands are less impacted by the Master
Settlement Agreement and other states settlement agreements than
larger manufacturers.

Anti-smoking groups have attempted to restrict cigarette sales,
cigarette advertising and the testing and introduction of new
cigarette products. The MSA, signed in late 1998, contains
provisions restricting the marketing of cigarettes. See
Litigation Affecting the Cigarette Industry
for more discussion of the MSA.

Established cigarette brands usually have a competitive
advantage in the United States because of significant cigarette
marketing restrictions. RJR Tobacco has repositioned or
introduced brands designed to appeal to adult smokers of
competing brands in the United States, but there can be no
assurance that such efforts will be successful. See
Marketing for more discussion of RJR
Tobaccos marketing efforts.

Strategy

RJRs goals are to:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | stabilize, then grow earnings and cash flow;                                                             
|
| |  | deliver an attractive return to stockholders; and                                                        
|
| |  | stabilize, then grow share of market for RJR Tobaccos four
	key brands: CAMEL, WINSTON, SALEM and DORAL.

Marketing

RJRs operating subsidiaries are committed to providing
unique products and increased value to adult smokers. RJR
Tobaccos marketing programs are designed to strengthen
each brands image, build brand awareness and loyalty and
attract adult smokers of competing brands, primarily in an
effort to stabilize, then grow share of market on RJR
Tobaccos four key brands. These brands retail share
of market on a combined basis has been relatively stable since
1999. RJR Tobacco utilizes a two-fold approach to market its key
brands: build strong brand equity while maintaining a
competitive price. In 2001, RJR Tobacco introduced many new
programs and products to build each brands equity and
attract adult smokers of competitive brands.

CAMEL, RJR Tobaccos largest brand, continued to deliver
strong retail share of market growth in 2001. The brands
Pleasure to Burn positioning and new equity programs
like the Seven Pleasures of the Exotic continued to
appeal to competitive adult smokers. New products also enhanced
CAMELs performance in 2001. Following the successful
launch of Turkish Gold in 2000, the brand introduced Turkish
Jade, a menthol line extension, in the third quarter of 2001.

WINSTONs share performance in 2001 benefited from the
launch of new programs and products to modernize the
brands positioning. Contributing to WINSTONs share
increase was the introduction of the No Boundaries, No
Bull promotion offering adult smokers the chance to win a
unique adventure. Beginning in the second quarter, WINSTON
introduced two new styles, S2 and S200s, that feature a
new blend and high impact silver packaging. Silver highlights
were added to the packaging on the brands other styles,
extending the modernization of WINSTONs image.

SALEMs marketing efforts have been concentrated in its
emphasis markets. In these markets, SALEM offers unique programs
and products like the Slide Box styles, which are blended to
offer a richer tobacco taste than other SALEM products. Although
the results in the ten emphasis markets have been better than in
the balance of the country, the brand is evaluating
opportunities to strengthen its performance.

DORALs marketing program continues to focus on exceeding
adult smokers expectations with its Imagine Getting
More positioning. DORAL, the largest savings brand in the
country, offers savings-conscious adult smokers added value at a
competitive price. Due to pricing pressure and the growth of
deep-

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In addition to its marketing programs discussed above, RJR
Tobacco utilizes a defensive retail pricing strategy, including
discounting at retail, to defend its brands share of
market against competitive pricing pressure. RJR Tobacco
continued to enhance its retail strategy during 2001, gaining
increased promotional coverage, broader retail presence and more
competitive pricing.

On a combined basis, RJR Tobaccos four key brands
represent over 80% of its volume and share of market. Additional
RJR Tobacco full-price and savings products are offered to meet
the diverse preferences of adult smokers. Other full-price
brands include VANTAGE, MORE and NOW. In the savings category,
MONARCH, BEST VALUE and various private label brands are
available for cost-conscious adult smokers.

RJR Tobacco also is committed to finding ways to develop and
market consumer-acceptable cigarettes that may present less risk
associated with smoking. In April 2000, RJR Tobacco launched a
new test market of ECLIPSE in the Dallas/Fort Worth area through
direct mail and Internet sales to age-verified, adult smokers.
The Dallas/Fort Worth test market was expanded to include retail
sales in January 2001. ECLIPSE is a cigarette that primarily
heats rather than burns tobacco. Although RJR Tobacco does not
claim that ECLIPSE presents smokers with less risk of
cardiovascular disease or complications with pregnancy, ECLIPSE
may present less risk of cancer, chronic bronchitis and possibly
emphysema when compared with tobacco-burning cigarettes.

RJR Tobacco continues to use advertisements in magazines read
primarily by adults, direct mailings to age-verified adult
smokers and other means to market its brands and enhance their
appeal among adult smokers. RJR Tobacco continues to advertise
and promote at retail cigarette locations and in other adult
venues where permitted. As a result of the MSA and other
federal, state and local legislative and regulatory
restrictions, RJR Tobacco does not utilize television, radio or
billboard advertising or certain other marketing and promotional
tools for cigarettes.

Manufacturing and Distribution

RJR Tobacco owns both of its cigarette manufacturing facilities,
which are located in the Winston-Salem, North Carolina area:
Tobaccoville, a two-million-square-foot facility constructed in
1985; and the Whitaker Park complex, which includes a
one-and-one-half-million-square-foot plant, RJR Tobaccos
Central Distribution Center and a pilot plant for trial
manufacturing of new products. RJR Tobacco has a combined
production capacity of approximately 150 billion cigarettes per
year, and believes its cigarette manufacturing facilities are
among the most technologically advanced in the United States.

RJR Tobacco sells its cigarettes primarily to distributors and
wholesalers and to certain large retail stores, which buy on a
spot basis. RJR Tobacco distributes its cigarettes primarily to
public warehouses located throughout the United States that
serve as local distribution centers for its customers. No
significant backlog of orders existed at December 31, 2001
or 2000.

During 2001, 2000 and 1999, sales made by RJR Tobacco to McLane
Company, Inc. and its affiliate, Wal-Mart Stores, Inc.,
comprised 20%, 19% and 17%, respectively, of RJRs
consolidated revenue. No other customer accounted for 10% or
more of RJRs revenue during those years.

Raw Materials

In its production of cigarettes, RJR Tobacco uses domestic
burley and flue-cured leaf tobaccos, as well as oriental
tobaccos grown primarily in Turkey and Greece, and certain other
non-domestic tobaccos. RJR Tobacco believes there is a
sufficient supply in the worldwide tobacco market to satisfy its
current and anticipated production requirements.

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During 2001, RJR Tobacco primarily contracted directly with U.S.
tobacco growers to purchase flue-cured and burley leaf. The cost
of tobacco purchased by contract from growers has not differed
materially from that purchased through the auction process.

RJR Tobacco has developed a simple, practical way to reduce
tobacco-specific nitrosamines, or TSNAs, by approximately 90% in
flue-cured tobacco, and is converting to the use of low-TSNA
flue-cured tobacco in its cigarette blends.

Tobacco leaf is an agricultural product 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 bases tariffs
on import volumes. The tariff rate quotas have been established
by the United States with overseas tobacco producers and became
effective on September 13, 1995.

Research and Development

RJR Tobaccos research and development activities are
located in its technologically advanced Bowman Gray Technical
Center in Whitaker Park. Scientists and engineers continue to
create more efficient methods of preparing tobacco blends and
new products, as well as develop product enhancements and
packaging that differentiate CAMEL, WINSTON, SALEM, DORAL and
other RJR Tobacco brands from competitive brands. A major focus
for research and development activity is the development of
products that may present less risk associated with smoking. RJR
Tobaccos research and development expense for the years
ended December 31, 2001, 2000 and 1999 was $64 million, $58
million and $59 million, respectively.

Intellectual Property

RJRs operating subsidiaries own numerous trademarks,
including the brand names of their cigarettes and the
distinctive elements of their packaging and displays. RJRs
operating subsidiaries material trademarks are registered
with the U.S. Patent and Trademark Office. Rights in these
trademarks in the United States will last as long as they
continue to use the trademarks. The operating subsidiaries
consider the blends and recipes used to make each of their
brands distinctive to be trade secrets. These trade secrets are
not patented.

RJR Tobacco sold most of its trademarks and patents outside the
United States in connection with the sale of the international
tobacco business to Japan Tobacco Inc.

Legislation and Other Matters Affecting the Cigarette
Industry

The tobacco industry 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. Various state governments have adopted or are
considering, among other things, legislation and regulations
increasing their excise taxes on cigarettes, restricting
displays and advertising of tobacco products, establishing fire
safety standards for cigarettes, raising the minimum age to
possess or purchase tobacco products, requiring the disclosure
of ingredients used in the manufacture of tobacco products,
imposing restrictions on public smoking and restricting the sale
of tobacco products directly to consumers or other unlicensed
recipients or over the Internet. In addition, in 2002, the U.S.
Congress may consider legislation regarding further increases in
the federal excise tax, regulation of cigarette manufacturing
and sale by the U.S. Food and Drug Administration,
implementation of a national standard for fire-safe
cigarettes and changes to the tobacco price support program.
Together with manufacturers price 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. For
further 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  Governmental
Activity in Item 7.

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Litigation Affecting the Cigarette Industry

Overview.Various tobacco-related legal actions and
proceedings are pending or may be instituted against RJR or its
affiliates, including RJR Tobacco, or indemnitees. These actions
and proceedings raise a variety of claims, including product
liability, health-care cost recovery, consumer protection,
smuggling, RICO, tax, antitrust and trade regulation claims.
During 2001, 129 new tobacco-related actions were served against
RJR Tobacco and/or its affiliates or indemnitees, and 154
actions were dismissed or otherwise resolved in favor of RJR
Tobacco and/or its affiliates or indemnitees without trial. On
December 31, 2001, there were 1,639 active cases pending,
including approximately 1,237 individual smoker cases pending in
West Virginia state court as a consolidated action, as compared
with 1,664 on December 31, 2000, and 541 on
December 31, 1999. As of February 7, 2002, 1,657
active cases were pending against RJR Tobacco and/or its
affiliates or indemnitees: 1,652 in the United States; two in
Puerto Rico and one in each of Canada, Israel and the Marshall
Islands. The U.S. case number does not include the 2,852
Broin II cases pending as of February 7, 2002,
discussed below.

The U.S. cases, exclusive of the Broin IIcases, are
pending in 35 states and the District of Columbia. The breakdown
is as follows: 1,237 in West Virginia; 77 in New York; 58 in
Florida; 52 in California; 29 in Maryland; 28 in the District of
Columbia; 27 in Louisiana; 23 in Mississippi; 12 in Iowa; 11 in
Massachusetts; 10 in each of Missouri and New Jersey; 9 in
Alabama; 8 in Texas; 7 in Georgia; 6 in each of Illinois and
Tennessee; 4 in each of New Hampshire, Nevada and Pennsylvania;
3 in each of Arizona, Connecticut, Michigan, New Mexico and
Ohio; 2 in each of Kansas, North Carolina, North Dakota and
South Dakota; and 1 in each of Indiana, Maine, Minnesota,
Oklahoma, Utah, Washington and Wisconsin. Of the 1,652 active
U.S. cases, 130 are pending in federal court, 1,518 in state
court and 4 in tribal court. Most of these cases were brought by
individual plaintiffs, but many of these cases seek recovery on
behalf of third parties or large classes of claimants.

Theories of Recovery.The plaintiffs seek recovery on a
variety of legal theories, including 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, indemnity, medical monitoring, public nuisance and
violations of state and federal antitrust and RICO laws.
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. Of the 1,652 active cases in the United States, eight
cases, plus the 2,852 Broin IIcases, involve alleged
nonsmokers claiming injuries resulting from exposure to
environmental tobacco smoke. Twenty-nine 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, persons making claims based on
alleged exposure to environmental tobacco smoke,
African-American smokers claiming their civil rights have been
violated by the sale of menthol cigarettes, current smokers who
have no tobacco-related disease but are seeking to recover the
costs of medical monitoring, purchasers of light and
ultra light cigarettes claiming to have been
defrauded and seeking to recover the costs of their cigarette
purchases, and Blue Cross and Blue Shield subscribers seeking
reimbursement for premiums paid. Approximately 59 cases seek
recovery of the cost of Medicaid/Medicare payments or other
health-related costs paid for treatment of individuals suffering
from diseases or conditions allegedly related to tobacco use.
Eleven cases, brought by entities administering asbestos
liability, seek contribution for the costs of settlements and
judgments.

Defenses.The defenses raised by RJR Tobacco and/or its
affiliates, including RJR, include, where applicable, 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. RJR has asserted additional defenses, including
jurisdictional defenses, in many of the cases in which it is
named.

Industry Trial Results in Individual Smoker Cases.The
tobacco industry in general, and RJR Tobacco in particular,
continue to win most individual smoking and health cases. In
Anderson v. Fortune Brands, Inc., a Brooklyn, New York
jury found in favor of the industry, including RJR Tobacco, on
June 27, 2000. The plaintiff failed to perfect his appeal
by submitting his brief and record by June 22, 2001. The
Appellate

7



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Nunnally v. R. J. Reynolds Tobacco Co. Apostolou v. American Tobacco Co. Little v. Brown & Williamson Tobacco Corp. Grinnell v. Brown & Williamson
Tobacco Corp. Mehlman v. Philip Morris,
Inc. Tompkin v. American Tobacco
Co. DuJack v. Brown &
Williamson Tobacco Co.


RJR Tobacco has prevailed in virtually all individual smoker
cases that have gone to trial. However, in Whiteley v.
Raybestos-Manhattan, Inc., a tobacco-asbestos synergy case
brought in San Francisco Superior Court, the jury found against
RJR Tobacco and Philip Morris on March 20, 2000, and
awarded $1.7 million in compensatory damages. On March 27,
2000, the same jury awarded $20 million in punitive damages, $10
million against RJR Tobacco and $10 million against Philip
Morris. RJR Tobacco and Philip Morris have appealed. In Jones
v. R. J. Reynolds Tobacco Co., a wrongful death case, a
Tampa state court jury found against RJR Tobacco on
October 12, 2000. Although the jury found that RJR Tobacco
was negligent and liable, it refused to find that RJR Tobacco
was part of a conspiracy to defraud. The jury awarded
approximately $200,000 in compensatory damages; however, the
jury refused to award punitive damages. On December 28,
2000, the trial judge granted RJR Tobaccos motion for a
new trial. The plaintiff has appealed the new trial ruling to
the Florida Second District Court of Appeal. Most recently, in
Kenyon v. R. J. Reynolds Tobacco Co., on
December 12, 2001, a Tampa jury determined that Floyd
Kenyon had been adequately warned about the risks of smoking and
that RJR Tobacco was not negligent in designing its products.
The jury did find that some of RJR Tobaccos products were
defective and awarded the plaintiff $165,000 in compensatory
damages. RJR Tobacco believes that the jurys findings were
not supported by the evidence in the case. Accordingly, on
December 26, 2001, RJR Tobacco asked the court to set aside
the verdict or to grant a new trial. A hearing on RJR
Tobaccos motion has been scheduled for February 27,
2002.

Juries have found for plaintiffs in six smoking and health cases
in which RJR Tobacco was not a defendant. Two of the verdicts
were overturned on appeal and have been dismissed; three others
are on appeal; and damages have been paid in one case. In
February 1999, in Henley v. Philip Morris, Inc., a San
Francisco state court jury awarded an individual smoker $1.5
million in compensatory damages and $50 million in punitive
damages. In April 1999, the trial judge reduced the punitive
damages award to $25 million, but otherwise denied Philip
Morris post-trial motions challenging the verdict. On
November 7, 2001, a California appellate court upheld the
jurys 1999 verdict against Philip Morris.Philip
Morris has appealed that decision to the California Supreme
Court, which accepted the appeal on a grant and hold
basis (another appeal has to be decided prior to ruling on the
Henleypetition). In Williams v. Philip Morris,
Inc., an Oregon state court jury awarded the plaintiff
$800,000 in actual damages, $21,500 in medical expenses and $79
million in punitive damages. The judge reduced the punitive
damages to $32 million. Philip Morris appeal is pending.
On June 6, 2001, in Boeken v. Philip Morris, Inc., a
California state court jury found in favor of the plaintiff and
awarded approximately $5.5 million in compensatory damages and
$3 billion in punitive damages. Philip Morris filed motions to
reduce the damages, for judgment notwithstanding the verdict or
for a new trial. On August 9, 2001, plaintiff agreed to the
courts recommendation that the $3 billion punitive damages
award be reduced to $100 million. On September 7, 2001,
Philip Morris filed its notice of appeal to the California Court

8



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Carter v. American Tobacco Co.


Broin II Cases.As of February 7, 2002,
approximately 2,852 lawsuits brought by individual flight
attendants for personal injury as a result of illness allegedly
caused by exposure to secondhand tobacco smoke in airplane
cabins, referred to as the Broin IIcases, are pending in
Florida. In these lawsuits, filed pursuant to the terms of the
settlement of the Broin v. Philip Morris, Inc.class
action, discussed below, each individual flight attendant will
be required to prove that he or she has a disease caused by
exposure to secondhand smoke in airplane cabins.

On October 5, 2000, Judge Robert Kaye entered an order
applicable to all Broin IIcases that the terms of the
Broinsettlement agreement do not require the individual
Broin IIplaintiffs to prove the elements of strict
liability, breach of warranty or negligence. Under this order,
there is a rebuttable presumption in plaintiffs favor on
those elements, and plaintiffs bear the burden of proving that
their alleged adverse health effects actually were caused by
exposure to environmental tobacco smoke. Although defendants
still may prevail on causation and other theories, RJR Tobacco
does not believe that the order is correct under Florida law or
that it accurately reflects the intent of the Broinsettlement agreement. Accordingly, defendants appealed Judge
Kayes ruling to the Third District Court of Appeal on
November 3, 2000. Plaintiffs moved to dismiss the appeal on
November 28, 2000. On January 12, 2001, the Third
District Court of Appeal denied plaintiffs motion and
ordered oral argument. On October 10, 2001, a different
panel of the Third District Court of Appeal dismissed the
appeal, finding that Judge Kayes order is not an
appealable order at this time, but noted that the ruling is
without prejudice to the defendants ability to appeal the
issue at the appropriate time. On January 16, 2002,
defendants filed a writ to invoke the discretionary jurisdiction
of the Florida Supreme Court.

On April 5, 2001, in the first Broin IIflight
attendant case to go to trial, Fontana v. Philip Morris,
Inc., a Florida state court jury returned a verdict in favor
of the defendants, including RJR Tobacco. On April 16,
2001, plaintiff filed motions for a mistrial, judgment
notwithstanding the verdict, or for a new trial. On
October 1, 2001, the trial judge denied plaintiffs
post-trial motions. Plaintiff appealed to the Florida Third
District Court of Appeal. Defendants cross-appealed on
November 8, 2001.

Class Action Suits.In May 1996, in Castano v.
American Tobacco Co., the Fifth Circuit Court of Appeals
overturned the certification of a nationwide class of persons
whose claims related to alleged addiction to tobacco. Since this
ruling by the Fifth Circuit, most class-action suits have sought
certification of statewide, rather than nationwide, classes.

Class action suits based on claims similar to those asserted in
Castano have been brought against RJR Tobacco, and in
some cases RJR, in state or federal courts in Alabama, Arkansas,
California, the District of Columbia, Florida, Georgia, Hawaii,
Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Nevada, New
Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma,
Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia,
West Virginia and Wisconsin. In addition, a class action filed
in Tennessee seeks reimbursement of Blue Cross and Blue Shield
premiums paid by subscribers throughout the United States and
class-action suits in Illinois, Missouri and New Jersey claim
that the marketing of light and
ultralight cigarettes is deceptive. Plaintiffs have
made similar claims in other lawsuits elsewhere. Other types of
class-action suits also have been filed in additional
jurisdictions. Most of these suits assert claims on behalf of
classes of individuals who claim to be addicted, injured or at
greater risk of injury by the use of tobacco or exposure to
environmental tobacco smoke, or the legal survivors of such
persons. A number of unions and other third-party payors have
filed health-care cost recovery actions in the form of class
actions. These cases are discussed separately below. Class
certification motions are pending in several state and federal
courts.

Few smoker class-action complaints have been certified or, if
certified, have survived on appeal. All 16 federal courts that
have considered the issue, including two courts of appeals, have
rejected class certification in smoker cases. On March 19,
2001, in Guillory v. American Tobacco Co., Inc., the
United States District Court for the Northern District of
Illinois refused to certify a class defined as all
Illinois residents who smoke

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Brown v. Philip Morris, Inc. Badillo v. American Tobacco
Co., Inc. Christensen v. Philip Morris Cos.,
Inc. Dienno v. Liggett Group, Inc. Selcer v. R. J. Reynolds Tobacco Co. Mahoney v. R. J. Reynolds Tobacco Co. Davis
v. R. J. Reynolds Tobacco Co.,


Similarly, most state courts have refused to certify smoker
class actions. On December 8, 2000, in Geiger v.
American Tobacco Co., the Appellate Division of the Supreme
Court of New York, Second Judicial Department, affirmed the
trial courts denial of class action status to a purported
class defined as all New York residents, including their heirs,
representatives and estates, who contracted lung and/or throat
cancer as a result of smoking cigarettes. Plaintiffs filed a
motion for leave to appeal the order denying certification to
the New York Court of Appeals, the highest court in the state.
The New York Court of Appeals dismissed plaintiffs appeal
on February 13, 2001.

Classes have been certified thus far in several state court
class-action cases in which RJR Tobacco is a defendant. On
November 5, 1998, in Scott v. American Tobacco Co.,
a Louisiana state appeals court affirmed the certification of a
medical monitoring and/or smoking cessation class of Louisiana
residents who were smokers on or before May 24, 1996. On
February 26, 1999, the Louisiana Supreme Court denied the
defendants petition for writ of certiorari and/or review.
Jury selection began on June 18, 2001. Defendants appealed
the jury selection process to the Louisiana Fourth Circuit Court
of Appeal on July 18, 2001. On September 4, 2001, the
Court of Appeal dismissed two jurors because of bias, but
declined to dismiss jurors with immediate family members who
were members of the class. On September 5, 2001, defendants
sought review by the Louisiana State Supreme Court. On September
25, 2001, the Louisiana State Supreme Court dismissed seven
additional jurors because they have immediate family members who
are members of the class and the seven jurors expressed a desire
that those family members receive medical monitoring or smoking
cessation assistance. On October 9, 2001, the defendants
asked the Louisiana Supreme Court to declare a mistrial because
of the irregularities in the jury selection process. This
petition was denied on October 15, 2001. Jury selection
resumed again on October 22, 2001, and a full complement of
12 jurors and 10 alternates was selected. On December 26,
2001, defendants filed an application for supervisory writ
to the Fourth District of the Louisiana Court of Appeals
challenging certain aspects of the second round of jury
selection. Opening statements will not occur until that writ is
decided.

Trial began on January 4, 2001, in Blankenship v. Philip
Morris, Inc., a West Virginia state court medical monitoring
class action. The trial of this case ended on January 25,
2001, when the judge declared a mistrial. Argument on
decertification of the class, among other things, was held on
February 19, 2001. On March 23, 2001, the judge denied
the defendants motion to decertify the class. The retrial
of this case began on September 5, 2001, and ended on
November 14, 2001, when the jury returned a verdict in
favor of RJR Tobacco and other cigarette manufacturers.

On November 30, 2000, in Daniels v. Philip Morris Cos.,
Inc., a San Diego Superior Court judge reversed a prior
ruling and, based on a California unfair business practices
statute, certified a class consisting of all persons who, as
California resident minors, smoked one or more cigarettes in
California between April 2, 1994 and December 1, 1999.
Trial has been scheduled for July 1, 2002.

On April 11, 2001, in Brown v. American Tobacco Co.,
Inc., the same judge granted in part plaintiffs motion
for class certification. The class is composed of adult
residents of California who smoked at least one of
defendants cigarettes during the applicable time
period, and who were exposed to defendants marketing

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Most recently, on November 14, 2001, in Turner v. R. J.
Reynolds Tobacco Co., an Illinois state court judge
certified a class defined as [a]ll persons who purchased
defendants Doral Lights, Winston Lights, Salem Lights and
Camel Lights, in Illinois, for personal consumption, between the
first date that defendants sold Doral Lights, Winston Lights,
Salem Lights and Camel Lights through the date the court
certifies this suit as a class action . . . . Trial is
scheduled for March 17, 2003. This case currently includes
both RJR and RJR Tobacco as defendants.

Defendants, including RJR Tobacco, settled one class-action
suit, Broin v. Philip Morris, Inc., in October 1997. The
Florida Court of Appeal denied challenges to this settlement on
March 24, 1999, and subsequently denied motions to
reconsider. On September 7, 1999, the Florida Supreme Court
dismissed all proceedings, and the settlement and judgment
became final. The Broin IIcases, discussed above, arose
out of the settlement of this case.

Trial began in July 1998 in Florida state court in Engle v.
R. J. Reynolds Tobacco Co., in which a class consisting of
Florida residents, or their survivors on their behalf, claim to
have diseases or medical conditions caused by their alleged
addiction to cigarettes. On July 7, 1999, the
jury found against RJR Tobacco and the other cigarette
manufacturer defendants in the initial phase, which included
common issues related to certain elements of liability, general
causation and a potential award of or entitlement to punitive
damages.

The second phase of the trial, which consisted of the claims of
three of the named class representatives, began on
November 1, 1999. On April 7, 2000, the jury returned
a verdict against all defendants. They awarded plaintiff Mary
Farnan $2.85 million, the estate of plaintiff Angie Della
Vecchia $4.023 million and plaintiff Frank Amodeo $5.831
million. The jury also found, however, that Frank Amodeo knew or
should have known of his claim prior to May 5, 1990. The legal
effect of that finding should be to bar his claim based on the
applicable statute of limitations.

The trial court also ordered the jury in the second phase of the
trial to determine punitive damages, if any, on a class-wide
basis. On July 14, 2000, the jury returned a punitive
damages verdict in favor of the Florida class of
approximately $145 billion against all the defendants, with
approximately $36.3 billion being assigned to RJR Tobacco.

On July 24, 2000, the defendants, including RJR Tobacco,
filed numerous post-verdict motions, including motions for a new
trial and to reduce the amount of the punitive damages verdict.
On November 6, 2000, the trial judge denied the post-trial
motions and entered judgment. On November 7, 2000, RJR
Tobacco posted an appeal bond in the amount of $100 million,
pursuant to a Florida statute enacted on May 9, 2000, and
intended to apply to the Engle case, and initiated the
appeals process. The opening appellate brief of certain
defendants, including RJR Tobacco, was filed on
November 26, 2001. RJR Tobacco believes it has numerous
bases for a successful appeal, although it cannot predict the
outcome of the appellate process.

On May 7, 2001, three of the defendants entered into
agreements with the Engleclass to deposit an additional
$1.86 billion into separate escrow accounts to ensure that the
stay of execution that is in effect pursuant to the Florida bond
statute will remain in effect as to these three defendants
throughout the appellate process, regardless of the results of a
challenge, if any, to the Florida bond statute. Approximately
$700 million of the total amount deposited by these three
defendants is non-refundable and will go to the trial court to
be distributed, regardless of the result of the appeal. RJR
Tobacco has not entered into a similar agreement with the
Engleclass. Although RJR Tobacco cannot predict the
outcome of any possible challenges to the Florida bond statute,
RJR Tobacco remains confident of the applicability and validity
of the statute in the Englecase. In addition, nine other
states, Georgia, Kentucky, Louisiana, Nevada, North Carolina,
Oklahoma, South

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Governmental Health-Care Cost Recovery Cases.In June
1994, the Mississippi attorney general brought an action,
Moore v. American Tobacco Co., against various industry
members, including RJR Tobacco. This case was brought on behalf
of the state to recover state funds paid for health care and
medical and other assistance to state citizens suffering from
diseases and conditions allegedly related to tobacco use. By
making the state the plaintiff in the case and basing its claims
on economic loss rather than personal injury, the state sought
to avoid the defenses otherwise available against an individual
plaintiff. Most other states, through their attorneys general or
other state agencies, sued RJR Tobacco and other U.S. cigarette
manufacturers based on similar theories. The cigarette
manufacturer defendants, including RJR Tobacco, settled the
first four of these cases scheduled to come to trial, those of
Mississippi, Florida, Texas and Minnesota, by separate
agreements between each state and those manufacturers in each
case.

On November 23, 1998, the major U.S. cigarette
manufacturers, including RJR Tobacco, entered into the Master
Settlement Agreement with attorneys general representing the
remaining 46 states, the District of Columbia, Puerto Rico,
Guam, the Virgin Islands, American Samoa and the Northern
Marianas. The MSA became effective on November 12, 1999,
when final approval of the settlement was achieved in 80% of the
settling jurisdictions. As of October 17, 2000, final
approval had been achieved in all settling jurisdictions. The
MSA settled all the health-care cost recovery actions brought
by, or on behalf of, the settling jurisdictions and contains
releases of various additional present and future claims.

In the settling jurisdictions, the MSA released RJR Tobacco,
indemnitees and RJR from: (1) all claims of the settling
states and their respective political subdivisions and other
recipients of state health-care funds, relating to past conduct
arising out of the use, sale, distribution, manufacture,
development, advertising, marketing or health effects of, the
exposure to, or research, statements or warnings about, tobacco
products and (2) all monetary claims relating to future
conduct arising out of the use of, or exposure to, tobacco
products that have been manufactured in the ordinary course of
business.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  Monetary Liabilities.In addition to payments
	already made, the MSA calls for additional initial industry
	payments of approximately $2.6 billion and $2.7 billion in 2002
	and 2003, respectively. A substantial portion of the payment due
	in 2002 was prepaid in 2001 to obtain the tax benefit of the
	early payment. The MSA also requires perpetual annual industry
	payments, which started in 2000. The unadjusted annual payment
	currently is $6.5 billion and increases to $8 billion in 2004,
	to $8.14 billion in 2008 and finally to $9 billion in 2018 and
	thereafter. Ten additional payments of $861 million are due
	annually beginning in April 2008. All payments are to be
	allocated among the companies on the basis of relative market
	share and most are subject to adjustments for changes in sales
	volume, inflation and other factors. RJR Tobacco records its
	allocation of charges in cost of goods sold as products are
	shipped.                                                                                                                                          
|
| | The tobacco companies also agreed to (1) make a one-time
	payment of $50 million on March 31, 1999, to establish a
	fund for enforcement of the MSA and laws relating to tobacco
	products and (2) fund activities of the National
	Association of Attorneys General relating to the MSA at the cost
	of $150,000 per year for ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | In addition, the MSA calls for the creation of a national
	foundation to support the study of, and programs to reduce,
	youth tobacco product usage and youth substance abuse, and the
	study of educational programs to prevent diseases associated
	with tobacco product use. The tobacco companies agreed to fund
	the foundation with (1) ten annual payments of $25 million,
	which began on March 31, 1999, (2) further payments of
	$250 million, which began on March 31, 1999, and $300
	million annually thereafter for four years, and
	(3) additional annual payments of $300 million beginning in
	2004 if, during the year preceding the year when payment is due,
	participating manufacturers collectively accounted for at least
	99.05% of the cigarette market. Each of these payments is to be
	allocated among the companies on the basis of relative market
	share. Other than the $25 million annual payments and the $250
	million payment made on March 31, 1999, the payments for
	the foundation are subject to adjustments for changes in sales
	volume, inflation and other factors.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The manufacturers also agreed to pay the litigation costs,
	including government attorneys fees, of the offices of the
	attorneys general relating to the settled cases and, subject to
	certain quarterly and annual payment caps, the costs and fees of
	outside counsel to the jurisdictions. Outside counsel fees have
	been determined either by arbitration or in accordance with a
	negotiated fee procedure. Awards determined by arbitration will
	be paid subject to an aggregate annual cap on arbitrated
	attorneys fees for all these and certain other settled
	cases of $500 million. Fees set by the negotiated fee procedure
	are subject to an annual cap of $250 million, and will not
	exceed a total of $1.25 billion. As of February 7, 2002,
	publicly announced awards determined by arbitration totaled
	approximately $11.7 billion, and awards determined in accordance
	with a negotiated fee procedure totaled approximately $626
	million. Reimbursement of costs is capped at $150 million for
	litigation costs, including government attorneys fees, of
	the attorneys general offices and at $75 million annually
	for outside counsels costs. Payments for attorneys
	fees and costs are to be allocated on a relative market share
	basis.
|
| |  Growers Trust.As part of the MSA, the
	tobacco companies agreed to work with U.S. tobacco growers to
	address the possible adverse economic impact of the MSA on
	growers. As a result, RJR Tobacco and the three other major
	manufacturers agreed to participate in funding a $5.2 billion
	trust fund to be administered by a trustee, in conjunction with
	a certification entity from each of the tobacco growing states.
	The trust agreement provides for a schedule of aggregate annual
	payments, subject to various adjustments, that are payable in
	quarterly installments each year from 1999 through 2010. The
	aggregate annual payment by all participating manufacturers is
	adjusted each year for inflation and any change in the total
	domestic cigarette volume of all participating manufacturers. In
	general, the annual payment by each participating manufacturer,
	including RJR Tobacco, is based on each manufacturers
	relative market share of total domestic cigarette shipments
	during the preceding calendar year. Each manufacturers
	annual payment is also subject to a tax offset adjustment.                                                                                                                                          
|
| |  Other MSA Obligations.The MSA also contains
	provisions restricting the marketing of cigarettes. Among these
	are restrictions or prohibitions on the use of cartoon
	characters, brand name sponsorships, brand name non-tobacco
	products, outdoor and transit brand advertising, payments for
	product placement, free sampling and lobbying. The MSA also
	required the dissolution of three industry-sponsored research
	and advocacy organizations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

RJR Tobaccos settlement expenses under these agreements
were $2.6 billion, $2.3 billion and $2.2 billion in 2001, 2000
and 1999, respectively. The cash payments made by RJR Tobacco
under the MSA and other existing settlement agreements were $2.4
billion, $2.2 billion and $1.6 billion in 2001, 2000 and 1999,
respectively. RJR Tobacco estimates these payments to be $2.4
billion in 2002 and to exceed $2 billion per year thereafter.
However, these payments will be subject to adjustments based
upon, among other things, the volume of cigarettes sold by RJR
Tobacco, RJR Tobaccos market share and inflation.

Certain litigation has arisen challenging the validity of the
MSA, including cases with claims that the MSA violates antitrust
laws. On January 5, 2001, the United States District Court for
the Northern District of California dismissed one of those
cases, Forces Action Project v. California. On
August 15, 2001, the United States Court of Appeals for the
Ninth Circuit remanded the antitrust claim, but affirmed the
district courts dismissal of the remaining claims. On
January 15, 2002, the United States District Court judge
denied plaintiffs motion to amend the complaint which
effectively dismissed the case.

Six actions are pending against RJR Tobacco alleging various
violations of the MSA. RJR Tobacco believes it has meritorious
defenses to each of these actions.

Arizona, California, New York and Washington have alleged that
the posting of signage advertising RJR Tobaccos brand name
sponsorships violates a provision of the MSA governing the times
during which such signs may be posted. On November 16,
2001, in the Arizona signage action, the trial court granted
summary judgment in favor of the state. On November 27,
2001, the trial court ruled similarly in the California signage
matter. However, on February 1, 2002, a New York trial
court upheld RJR Tobaccos position. Appeals of all of
these decisions are pending or anticipated. Trial in the
Washington matter is scheduled for August 5, 2002.

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The State of Ohio has alleged that RJR Tobaccos purchase
of advertising space on matchbooks distributed by an independent
third party violates a provision of the MSA governing brand name
merchandise. In November 2001, the trial court heard arguments
on the parties cross-motions for summary judgment and took
the motions under advisement.

Finally, the State of California has alleged that the
publications in which RJR Tobacco places advertising evidences
direct or indirect targeting of youth which is prohibited by the
MSA. Pretrial discovery is proceeding, and the trial is
scheduled for April 19, 2002.

On June 8, 2001, the Attorney General of the State of
California filed a lawsuit against RJR Tobacco in California
state court alleging that RJR Tobacco violated California state
law by distributing free cigarettes and free coupons for
discounts on cigarettes on public grounds, even
though the promotions occurred in an adult-only
facility at a race track. RJR Tobacco answered the
complaint on July 19, 2001, asserting that its promotions
complied with all laws, including California state law. The
trial is scheduled for April 30, 2002.

On April 20, 1999, the Canadian Province of British
Columbia brought a case in British Columbia Provincial Court,
similar to the U.S. attorneys general cases discussed
above, against RJR Tobacco and certain other Canadian and U.S.
tobacco companies and their parent companies, including RJR.
This lawsuit relied heavily upon special legislation enacted in
British Columbia that was separately challenged by various
Canadian tobacco companies. An agreement was reached with the
government in British Columbia to litigate the separate
constitutional challenges prior to the health-care cost recovery
action. On February 21, 2000, the British Columbia Supreme
Court declared the Cost Recovery Act unconstitutional and
dismissed the action. This decision was not appealed by the
government. On January 24, 2001, the Canadian Province of
British Columbia brought a second action in British Columbia
Provincial Court. A trial is likely to occur in October 2002.

On September 22, 1999, the U.S. Department of Justice
brought an action in the United States District Court for the
District of Columbia against various industry members, including
RJR Tobacco. The government sought to recover federal funds
expended in providing health care to smokers who have developed
diseases and injuries alleged to be smoking-related, and, in
addition, seeks, pursuant to the federal RICO statute,
disgorgement of profits the government contends were earned as a
consequence of a RICO racketeering enterprise. On
December 27, 1999, defendants filed a motion to dismiss
challenging all counts included in the action brought by the
DOJ. On June 6, 2000, the trial court heard oral argument
on the motion. On September 28, 2000, federal court Judge
Gladys Kessler of the United States District Court for the
District of Columbia granted the non-Liggett defendants
motion to dismiss the following counts of plaintiffs
complaint: (1) Medical Care Recovery Act claim, and
(2) Medicare Secondary Payer claim. The court, however,
denied the motion with respect to the RICO claims. On
October 13, 2000, the United States filed a motion to limit
Judge Kesslers September 28, 2000 order to claims for
payments under Medicare and the Federal Employee Health Benefits
Act.

Discovery in the DOJ lawsuit is ongoing, and trial has been
scheduled for July 15, 2003. RJR Tobacco believes it has
meritorious factual and legal defenses to that lawsuit. In June
2001, the United States Attorney General assembled a team of
three DOJ lawyers to work on a possible settlement of the
federal lawsuit. The DOJ lawyers met with representatives of the
tobacco industry, including RJR Tobacco, on July 18, 2001.
No settlement was reached and no further meetings are planned.

Union Cases.Although the MSA settled some of the most
potentially burdensome health-care cost recovery actions, many
other such cases have been brought by other types of plaintiffs.
As of February 7, 2002, approximately 14 lawsuits by union
trust funds against cigarette manufacturers and others are
pending. The funds seek recovery of payments made by them for
medical expenses of their participant union members and their
dependents allegedly injured by cigarettes. The claims in these
cases are almost identical, and several of these cases purport
to be class actions on behalf of all union trust funds in a
particular state.

The defendants in these actions argue, among other things, that
one who pays an injured persons medical expenses is
legally too remote to maintain an action against the person
allegedly responsible for the injury. In addition, they argue
that the traditional subrogation remedy cannot be supplanted by
a direct right of action

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On March 29, 1999, in the first of these cases to be
considered by a federal court of appeals, Steamfitters Local
Union 420 v. Philip Morris, Inc., the United States Court of
Appeals for the Third Circuit affirmed a district court ruling
dismissing the case on remoteness grounds. Since then, the U.S.
Courts of Appeals for the Second, Third, Fifth, Seventh, Eighth,
Ninth and Eleventh Circuits have all ruled in favor of the
industry in similar union cases. On January 10, 2000, the
United States Supreme Court denied petitions for certiorari
filed in cases from the Second, Third and Ninth Circuits.

Numerous trial court judges also have dismissed union trust fund
cases on remoteness grounds. Nonetheless, some union, or other
third-party payor, cases have survived motions to dismiss and
have proceeded or may proceed to trial. On August 2, 1999,
a federal district court in New York denied defendants
motions to dismiss in two separate cases heard together,
National Asbestos Workers Medical Fund v. Philip Morris, Inc.and Blue Cross and Blue Shield of New Jersey, Inc. v.
Philip Morris, Inc., discussed below. On December 21,
1999, the federal district court in the District of Columbia
denied defendants motions to dismiss in three cases
consolidated for pretrial purposes: Service Employees
International Union Health and Welfare Fund v. Philip Morris,
Inc., S.E.I.U. Local 74 Welfare Fund v. Philip Morris,
Inc.and Holland v. Philip Morris, Inc.On
May 22, 2001, the United States Court of Appeals for the
District of Columbia reversed the federal district courts
ruling that denied in part defendants motion to dismiss,
and affirmed the portion of the ruling that dismissed the bulk
of plaintiffs claims in these cases. In the same opinion,
the court reversed the district courts ruling that denied
defendants motion to dismiss the RICO and fraud claims in
Sheet Metal Workers Trust Fund v. Philip Morris, Inc.,
which had been consolidated with the first three cases for
purposes of pretrial discovery. The result of the D.C.
Circuits ruling is that all claims in these four cases, as
well as several additional union trust fund cases that had also
been consolidated for purposes of the appeal, were dismissed. On
June 21, 2001, plaintiffs filed a petition for rehearing
before the entire D.C. circuit with respect to these cases,
which was denied on July 13, 2001. On August 20, 2001,
plaintiffs filed a petition for writ of certiorari with the U.S.
Supreme Court, which was denied on October 29, 2001.

On March 3, 2000, a New York state court granted motions to
dismiss ten union cases, Eastern States Health & Welfare
Fund v. Philip Morris, Inc., brought by 14 union trust funds
seeking to recover money paid for medical bills incurred by
their participants and beneficiaries who suffer from alleged
tobacco-caused diseases. This group of cases is on appeal to the
Appellate Division of the Supreme Court of New York. On
September 26, 2000, in Steamfitters Local Union
No. 614 Health and Welfare Fund v. Philip Morris, Inc.,
the Tennessee Court of Appeals affirmed a trial courts
dismissal of an antitrust claim and found that the remaining
claims in the plaintiffs complaint were too remote to
permit recovery. On March 21, 2001, a federal district
court in Connecticut granted defendants motion to dismiss
in Connecticut Pipe Trades Health Fund v. Philip Morris, Inc.Most recently, on January 25, 2002, in Motion
Picture Industry Health Plan v. Philip Morris, Inc., the
California Supreme Court granted plaintiffs petition for
review and deferred further action pending consideration and
disposition of a related issue in Naegele v.
Raybestos-Manhattan, Inc.(pending in San Francisco County
Superior Court), or pending further order of the court. On
October 25, 2001, the California Court of Appeals affirmed
the April 10, 2000, order granting voluntary dismissal of
the case with prejudice as to all defendants.

The first and only union case to go to trial to date was Iron
Workers Local No. 17 v. Philip Morris, Inc., which was
tried in federal court in Ohio. On March 18, 1999, the jury
returned a unanimous verdict for the defendants, including RJR
Tobacco. The plaintiffs dismissed their appeal of the verdict.

Other Health-Care Cost Recovery and Aggregated Claims
Plaintiffs.Groups of health-care insurers, as well as a
private entity that purported to self-insure its employee
health-care programs, have also advanced claims similar to those
found in the union health-care cost recovery actions.

Two insurer cases, Williams & Drake v.
American Tobacco Co.and Regence Blueshield v. Philip
Morris, Inc., were dismissed in their entirety on remoteness
grounds by federal district courts in Pennsylvania and
Washington. These rulings were then upheld on appeal to the
Third and Ninth Circuits, respectively.

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In Group Health Plan, Inc. v. Philip Morris, Inc.and
Medica v. Philip Morris, Inc.,two cases consolidated for
opinion, a federal district judge in Minnesota dismissed all
claims, except a state antitrust claim and a state conspiracy
claim. The federal court certified to the Minnesota Supreme
Court the question of whether these two claims could be pursued
under Minnesota law by Group Health Plan. On January 11,
2001, the Minnesota Supreme Court ruled that the plaintiff could
pursue these claims. Certain defendants, including RJR Tobacco,
filed motions for summary judgment based on (1) the
statutes of limitation on June 15, 2001; and
(2) causation, injury and damages on June 20, 2001. On
January 31, 2002, summary judgment was granted in favor of
certain defendants, including RJR Tobacco, on all causes of
action. Plaintiffs have not yet filed an appeal.

On June 6, 2001, in Blue Cross and Blue Shield of New
Jersey, Inc. v. Philip Morris, Inc., a federal court jury in
Brooklyn returned a verdict in favor of RJR Tobacco and other
tobacco defendants on common law fraud and civil RICO claims,
but found for the plaintiff, Empire Blue Cross and Blue Shield,
on a claim under a New York state deceptive business practices
statute. Empire pursued its claims against the defendants on
behalf of itself directly, as well as on the behalf of its
insureds, under a theory of subrogation. The jury verdict on the
direct claim was approximately $17.8 million, and the verdict on
the subrogated claim was approximately $11.8 million. RJR
Tobaccos portion of these amounts is $6.6 million and $4.4
million, respectively. Empire is not entitled to recover under
both direct and subrogated claims; thus, Empire must elect one
claim, and thus one jury verdict. The New York statute under
which Empire recovered does not provide for punitive damages,
but does allow for recovery of reasonable attorneys fees.
Plaintiff filed a motion for attorneys fees. On
October 4, 2001, the court denied defendants
post-trial motions, entered final judgment in favor of Empire,
yet retained jurisdiction to decide the attorneys fees
issue. RJR Tobacco and the other tobacco defendants appealed the
final judgment to the United States Court of Appeals for the
Second Circuit. All remaining claims of Blue Cross Blue Shield
plans pending before the court are stayed pending the appeal.

On August 8, 2001, in County of Cook v. Philip Morris,
Inc., the Circuit Court of Cook County granted
defendants motion for judgment on the pleadings based on
remoteness grounds and dismissed plaintiffs complaint in
its entirety. Plaintiffs appealed the dismissal to the Illinois
Appellate Court, First District, on September 5, 2001.
Defendants noticed a cross-appeal to the appellate court on
September 17, 2001, from the trial courts prior
adverse rulings on defendants motions to dismiss on the
grounds of MSA release and lack of standing. The appellate court
has not yet ruled.

Native American tribes have filed similar health-care cost
recovery cases. On December 8, 2000, in Utu Utu Gwaitu
Paiute Tribe v. Philip Morris, Inc., the San Diego Superior
Court denied plaintiffs motion for class certification. On
January 10, 2001, the plaintiffs voluntarily dismissed the
action. On November 12, 1999, in Table Bluff Reservation v.
Philip Morris, Inc., a California federal district court
dismissed plaintiffs lawsuit. On July 16, 2001, the
United States Court of Appeals for the Ninth Circuit affirmed
the federal district courts dismissal. On July 30,
2001, in Acoma Pueblo v. American Tobacco Co., a federal
district court in New Mexico granted defendants motion to
dismiss plaintiffs complaint for failure to state a claim.
The ruling was based on a number of grounds, including
remoteness. On September 17, 2001, plaintiff filed a motion
for reconsideration which was denied on November 1, 2001.
The dismissal was modified to a dismissal with prejudice in
order to facilitate plaintiffs appeal. On August 31,
2001, in Alabama Coushatta Tribe of Texas v. American Tobacco
Co., the United States District Court for the Eastern
District of Texas (Beaumont Division) dismissed plaintiffs
complaint. Plaintiffs appealed to the United States Court of
Appeals for the Fifth Circuit on October 1, 2001. Most
recently, on January 25, 2002, in the Navajo Nation v.
Philip Morris, Inc., the District Court of Navajo Nation
granted in part defendants motion to dismiss the complaint
with respect to the conspiracy, deceptive acts and restraints of
trade claims. The court refused to dismiss plaintiffs
product liability claim. Four such cases remain pending, all
before tribal courts.

Other cost recovery suits have been brought by local
governmental jurisdictions, taxpayers on behalf of a government
jurisdiction, a university and hospitals. On December 14,
1999, a federal district court in Washington dismissed one such
case, Association of Washington Public Hospital Districts v.
Philip Morris, Inc.Plaintiffs appealed this ruling to the
United States Court of Appeals for the Ninth Circuit, which
affirmed the dismissal by the trial court on February 22,
2001. Plaintiffs filed a petition to the U.S. Supreme Court
asking it to review the case on July 16, 2001, but the
court declined plaintiffs petition October 1, 2001. On

16



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A.O. Fox Memorial Hospital v. American
Tobacco Co., Inc.


A number of foreign countries have filed suit in state and
federal courts in the United States against RJR Tobacco and
other tobacco industry defendants to recover funds for health
care, medical and other assistance paid by those foreign
governments to their citizens. Of the 33 cases currently
pending, 6 are pending in state court and 27 are pending in
federal court. Eleven of these cases have been transferred to,
and are still pending before, the Judicial Panel on
Multi-District Litigation in the United States District Court
for the District of Columbia. Other foreign governments and
entities have stated that they are considering filing such
actions in the United States. In addition, in the Marshall
Islands v. American Tobacco Co., the Republic of the
Marshall Islands brought a health-care cost recovery lawsuit in
the Marshall Islands against RJR Tobacco and other cigarette
manufacturers. On February 22, 2001, the High Court of the
Marshall Islands granted defendants motions for summary
judgment on all counts except the Consumer Protection Act. The
parties stipulated to a dismissal of the remaining claim on
May 18, 2001. Final judgment was entered on June 4,
2001. Thereafter, on June 27, 2001, plaintiff noticed an
appeal to the Supreme Court of the Republic of the Marshall
Islands. On July 3, 2001, defendants filed a notice of
cross appeal. Oral argument on the appeal is scheduled for
April 17-19, 2002.

On August 7, 2000, a federal district court in Washington,
D.C. dismissed an international health-care cost recovery action
entitled Ontario v. Imperial Tobacco, Ltd.Plaintiffs
appealed to the United States Court of Appeals for the District
of Columbia. However, on November 29, 2001, the D.C. Court
of Appeals granted plaintiffs motion for a voluntary
dismissal of the appeal, thereby dismissing the case. In Obra
Social de Empleados de la Marina Mercante v. American Tobacco
Co., Inc., the Superior Court in Washington, D.C. granted
defendants motion to dismiss on January 13, 2001.
Plaintiffs appealed the dismissal to the D.C. Court of Appeals;
however, the parties agreed to dismiss the appeal on
October 22, 2001. Additionally, plaintiffs filed a separate
action in the same court on March 23, 2001; that case was
voluntarily dismissed on August 30, 2001. On May 22,
2001, the United States Court of Appeals for the District of
Columbia affirmed the federal district courts dismissal in
the following three matters: (1) Guatemala v. Tobacco
Institute, Inc.(a non-RJR Tobacco action); (2) Nicaragua
v. Liggett Group, Inc.(another non-RJR Tobacco case); and
(3) Ukraine v. American Brands, Inc.(a case involving
RJR Tobacco). Plaintiffs in each of these cases filed a petition
for writ of certiorari to the U.S. Supreme Court on
August 20, 2001. The Supreme Court, on October 29,
2001, denied the petitions. Most recently, on November 20,
2001, in Venezuela v. Philip Morris Cos., Inc.and
Espirito Santo, Brazil v. Brooke Group Ltd., a Florida
state court judge granted defendants motions to dismiss
these matters because the claims were too remote, indirect and
derivative to survive. Plaintiff appealed each case to the Third
District Court of Appeal of Florida on December 19, 2001.

Pursuant to the terms of the 1999 sale of RJRs
international tobacco business, Japan Tobacco Inc. assumed RJR
Tobaccos liability, if any, in the health-care cost
recovery cases brought by foreign countries.

Finally, 11 lawsuits are pending against RJR Tobacco in which
asbestos companies and/or asbestos-related trust funds allege
that they overpaid claims brought against them to
the extent that tobacco use, not asbestos exposure, was the
cause of the alleged personal injuries for which they paid
compensation. One of these lawsuits, Falise v. American
Tobacco Co., was dismissed by the United States District
Court for the Eastern District of New York (Weinstein, J.) on
November 2, 1999, due to a lack of subject matter
jurisdiction. This case was refiled on November 11, 1999.
Trial began on November 27, 2000. On January 22, 2001,
the judge declared a mistrial. The case was dismissed with
prejudice on June 29, 2001 after the plaintiff announced
that it would not retry the case. On May 24, 2001, a
Mississippi state court judge dismissed all claims by
Owens-Corning in a lawsuit similar to Falise.Owens-Corning appealed the dismissal to the Mississippi
Supreme Court on August 15, 2001. A similar case, H. K.
Porter Co., Inc. v. American Tobacco Co., is pending in the
United States District Court for the Eastern District of New
York (Weinstein, J.). In Fibreboard Corp. v. R. J. Reynolds
Tobacco Co., a case pending in state court in California,
Owens-Corning

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Antitrust Cases. A number of tobacco wholesalers, or
indirect purchasers, have sued United States cigarette
manufacturers, including RJR Tobacco, and its parent company,
RJR, alleging that cigarette manufacturers combined and
conspired to set the price of cigarettes, in violation of
antitrust statutes and various state unfair business practices
statutes, as a result of which plaintiffs suffered economic
injury. Of the 39 cases currently pending, 30 are pending in
state court and 9 are pending in federal court. Plaintiffs are
asking the court to certify the lawsuits as class actions and to
allow the respective plaintiffs to pursue the lawsuits as
representatives of other persons in individual states or
throughout the United States that purchased cigarettes directly
from one or more of the defendants. The federal cases have been
consolidated and sent by the Judicial Panel on Multidistrict
Litigation for pretrial proceedings in the United States
District Court for the Northern District of Georgia. On
November 30, 2000, the court dismissed plaintiffs
claims of fraudulent concealment, claims concerning conduct
outside the United States and allegations relating to non-price
conduct. A class of direct purchasers was certified by the court
on January 27, 2001. On February 22, 2001, plaintiffs
repleaded their fraudulent concealment allegations. These
allegations were dismissed on June 19, 2001. State court
cases on behalf of indirect purchasers have been dismissed in
Arizona, currently on appeal, and New York. A Minnesota court
denied class certification on November 21, 2001. A Kansas
court granted class certification on November 15, 2001.

On March 2, 2000, Liggett Group Inc. filed an antitrust
action against RJR Tobacco in the U.S. District Court for the
District of New Jersey. Subsequently, the court granted RJR
Tobaccos motion to transfer this action to the United
States District Court for the Middle District of North Carolina.
On May 3, 2001, the case, which alleged that RJR
Tobaccos Every-Day-Low-Price merchandising program is a
violation of the Sherman Antitrust Act and New Jersey antitrust
laws, was voluntarily dismissed.

In A.D. Bedell Wholesale Co. v. Philip Morris, Inc.,
filed on April 13, 1999, in the United States District
Court for the Western District of Pennsylvania, a cigarette
wholesaler alleged that the MSA restricts cigarette output and
otherwise restrains trade in violation of the Sherman Act. On
March 22, 2000, the district court entered an order granting
defendants motion to dismiss counts I and II of the
complaint, denying defendants motion to dismiss count III,
and denying as moot plaintiffs motion for partial summary
judgment. On April 11, 2000, the plaintiffs and defendant
Philip Morris, the only defendant to which count III applied,
filed a consent order dismissing count III of the amended
complaint. On April 18, 2000, plaintiffs appealed the
dismissal of counts I and II to the United States Court of
Appeals for the Third Circuit. On June 19, 2001, the Third
Circuit affirmed the district courts dismissal of counts I
and II, ruling that tobacco companies that entered into the MSA,
including RJR Tobacco, were immune from potential antitrust
liability that was alleged to arise out of the MSA. The finding
of antitrust immunity is consistent with that of all other
federal courts that have considered antitrust challenges to the
MSA. The plaintiffs filed a petition for rehearing and
suggestion for rehearing before the entire Third Circuit on
July 2, 2001. This petition was denied on July 24,
2001. On October 19, 2001, the plaintiffs filed a petition
for a writ of certiorari with the U.S. Supreme Court, which
denied the petition on January 7, 2002.

On July 30, 1999, Cigarettes Cheaper!, a retailer, filed an
antitrust counterclaim against RJR Tobacco in a gray market
trademark suit originally brought by RJR Tobacco in the United
States District Court for the Northern District of Illinois.
Cigarettes Cheaper! alleges that it was denied promotional
resources in violation of the Robinson-Patman Act. The district
court declined to dismiss the counterclaim. On January 23,
2001, the court granted Cigarettes Cheaper!s motion to
amend its counterclaim to include a violation of the Sherman Act
§1, claiming that RJR Tobacco conspired with other
retailers to deny promotions to Cigarettes Cheaper!, an
allegation that RJR Tobacco denies. On March 21, 2001, RJR
Tobaccos motion to add a trademark dilution claim against
Cigarettes Cheaper! was granted. On June 28, 2001, the
court granted RJR Tobaccos motion to strike with prejudice
several of Cigarettes Cheaper!s affirmative defenses.
These defenses related to: (1) alleged misrepresentations caused
by the packaging of cigarettes manufactured by RJR Tobacco for
export; (2) RJR Tobaccos No Bull
advertising campaign for its WINSTON cigarettes;
(3) antitrust trademark misuse; (4) nominative fair
use; and (5) the first sale doctrine. Fact discovery closed

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On May 10, 2000, the Customer Company, a retailer
affiliated with Cigarettes Cheaper!, filed a similar antitrust
claim against RJR Tobacco in the United States District Court
for the Northern District of California. This case has now been
settled. The settlement terms are confidential; however, the
settlement is not material to RJR Tobacco.

Tobacco Growers Case. On February 16, 2000, a
class action complaint, Deloach v. Philip Morris Cos.,
Inc., was brought against RJR Tobacco, other cigarette
manufacturers and others, in the United States District Court
for the District of Columbia on behalf of a putative class of
all tobacco growers and tobacco allotment holders, some 5,930 of
which are actually named in the first amended complaint.
Plaintiffs current theory, as reflected in their second
amended complaint, which was filed on September 2, 2000, is
that the defendants, Philip Morris, Inc., RJR Tobacco, Brown
& Williamson Tobacco Corp. and Lorillard Tobacco Co.,
engaged in bid-rigging of American burley and flue-cured tobacco
auctions beginning at least by 1996 and continuing to present.
Defendants actions are alleged to have held the auction
prices of tobacco at artificially low prices resulting in damage
to tobacco growers and allotment holders. In addition,
plaintiffs allege that defendants have engaged in a conspiracy
to force the elimination or destruction of the federal
governments tobacco quota and price support program
through an alleged illegal group boycott. On October 9,
2000, defendants filed a motion to dismiss the second amended
complaint and a motion to transfer venue to the United States
District Court for the Middle District of North Carolina. On
November 30, 2000, the court granted the motion to transfer
the case. On December 20, 2000, plaintiffs moved to amend
the complaint to add leaf-buying companies as defendants.
Plaintiffs motion to certify the class remains pending.

Scheduled Trials. As of February 7, 2002, RJR
Tobacco is a defendant in two cases currently being tried:
Burton v. R. J. Reynolds Tobacco Co., an
individual case being tried in federal court in Kansas, and
Scott v. American Tobacco Co., a medical monitoring class
action. Jury selection began in the Scott case on
June 18, 2001. After the jury was impaneled, various
rulings required the dismissal of several members of the
original jury (nine jurors and/or alternates). Jury selection
began again on October 22, 2001. On December 26, 2001,
defendants filed an application for supervisory writ to
the Fourth District of the Louisiana Court of Appeals
challenging certain aspects of the second round of jury
selection. Opening statements will not occur until that
application is decided.

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, some involving claims for
possibly billions of dollars, against RJR and RJR Tobacco,
coming to trial during 2002. As of February 7, 2002, there
are 18 cases scheduled for trial. Fourteen Broin IIcases
also are scheduled to be tried in 2002.

Other Developments.RJR Tobacco is aware of a grand jury
investigation being conducted in North Carolina that relates to
the cigarette business of certain of its former affiliates. In
connection with this investigation, RJR Tobacco responded to
document subpoenas dated July 7, 1999 and June 1,
2000, respectively.

On December 22, 1998, Northern Brands International, Inc.
entered into a plea agreement with the United States Attorney
for the Northern District of New York. Northern Brands is a
now-inactive tobacco subsidiary that was part of the business of
R. J. Reynolds International B.V., a former Netherlands
subsidiary of RJR Tobacco which was managed by a former
affiliate, RJR-MacDonald, Inc. On May 12, 1999,
RJR-MacDonald, Inc. was sold to Japan Tobacco Inc. and
subsequently changed its name to JT-MacDonald, Inc. Northern
Brands was charged with aiding and abetting certain customers
who brought merchandise into the United States by means of
false and fraudulent practices . . . . It is understood
that JT-MacDonald, Inc., Japan Tobaccos international
operating company in Canada, is cooperating with an
investigation now being conducted by the Royal Canadian Mounted
Police relating to the same events that gave rise to the
Northern Brands investigation.

On December 21, 1999, the government of Canada filed a
lawsuit in the United States District Court for the Northern
District of New York against RJR Tobacco, RJR, several currently
and formerly related

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Similar lawsuits have been filed against RJR Tobacco and its
affiliates, along with other cigarette manufacturers, by the
European Community and ten of its member states (Belgium,
Finland, France, Greece, Germany, Italy, Luxembourg, the
Netherlands, Portugal and Spain), Ecuador, Belize and Honduras.
These suits contend that RJR Tobacco and other tobacco companies
in the United States may be held responsible for damages caused
by cigarette smugglers under common law and under the federal
RICO statute. Each of these actions seeks compensatory, punitive
and treble damages. On July 17, 2001, the action brought by
the European Community was dismissed by the United States
District Court for the Eastern District of New York. However,
the European Community and its member states filed a similar
complaint in the same jurisdiction on August 6, 2001. On
October 25, 2001, the court denied the European
Communitys request of August 10, 2001, to reinstate
its original complaint. On November 9, 2001, the European
Community and the ten member states amended their complaint
filed on August 6, 2001, to change the name of defendant
Nabisco Group Holdings Corp. to RJR Acquisition, Inc. RJR
Tobacco and the other defendants filed motions to dismiss that
complaint on November 14, 2001, and the court heard oral
argument on those motions on January 11, 2002. As of
February 7, 2002, a decision is still pending. RJR Tobacco
and other defendants filed in the United States District Court
for the Southern District of Florida motions to dismiss the
actions brought by Ecuador, Belize and Honduras. These motions
have been briefed and argued, and have been taken under
advisement.

On May 23, 2001, Star Scientific, Inc. filed a patent
infringement action against RJR Tobacco in the United States
District Court for the District of Maryland. The suit alleges
infringement of U.S. Patent No. 6,202,649 entitled
Method of Treating Tobacco to Reduce Nitrosamine Content,
and Products Produced Thereby. RJR Tobacco denies that it
has infringed any valid claim of the Star patent. On
June 13, 2001, RJR Tobacco filed a declaratory judgment
action against Star Scientific in the United States District
Court for the Middle District of North Carolina, seeking a
declaration that the patent is invalid and not infringed by RJR
Tobacco. On October 3, 2001, the North Carolina federal
court granted Star Scientifics motion to stay, but denied
its motions to dismiss or transfer the case.

On or about October 30, 1998, a boat manufacturer, American
Marine Holdings, Inc., filed suit against RJR Tobacco claiming
that one of its boats was not properly identified in RJR Tobacco
cigarette advertising. The plaintiff claimed, among other
things, violations of the Lanham Act and breach of an alleged
oral contract. On April 12, 2001, the parties reached an
agreement to settle the matter. The related provision for
settlement is included in the accompanying consolidated
financial statements.

For further discussion of litigation and legal proceedings
pending against RJR, its affiliates, including RJR Tobacco, or
indemnitees, see  Environmental Matters
and Managements Discussion and Analysis of Financial
Condition and Results of Operations  Governmental
Activity in Item 7. For more detailed information
about the class action and other aggregated claims suits pending
against RJR, its affiliates, including RJR Tobacco, or
indemnitees, see Exhibit 99.1 to this report.



---

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 RJR Tobacco or its affiliates,
including RJR, 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 RJR Tobacco
or its affiliates or indemnitees and could encourage an increase
in the number of such claims. A

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

RJR believes that, notwithstanding the quality of defenses
available to it and RJR Tobacco in litigation matters, it is
possible that the results of operations or cash flows of RJR in
particular quarterly or annual periods or RJRs financial
condition could be materially affected by the ultimate outcome
of certain pending litigation matters, including bonding and
litigation costs. RJRs 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. Accordingly, no
liability for tobacco-related litigation is currently recorded
in the consolidated financial statements.

Environmental Matters

RJR and its subsidiaries are subject to federal, state and local
environmental laws and regulations concerning the discharge,
storage, handling and disposal of hazardous or toxic substances.
Such laws and regulations provide for significant fines,
penalties and liabilities, sometimes without regard to whether
the owner or operator of the property knew of, or was
responsible for, the release or presence of hazardous or toxic
substances. In addition, third parties may make claims against
owners or operators of properties for personal injuries and
property damage associated with releases of hazardous or toxic
substances. In the past, RJR Tobacco has been named a
potentially responsible party with third parties under the
Comprehensive Environmental Response, Compensation and Liability
Act with respect to several superfund sites. Regulations
promulgated by the U.S. Environmental Protection Agency and
other governmental agencies under various statutes have resulted
in, and likely will continue to result in, substantial
expenditures for pollution control, waste treatment, plant
modification and similar activities. RJR and its subsidiaries
monitor their environmental matters and, dependent upon the
probability of occurrence and reasonable estimation of cost,
accrue or disclose any material liability.

RJR was named in an insurance coverage suit filed
August 13, 1997, by another company named as a potentially
responsible party under CERCLA with respect to a superfund site
in Hawaii at which a former subsidiary of RJR had operations. In
this lawsuit, Del Monte Fresh Produce v. Firemans Fund
Insurance, filed in the First Circuit Court of the State of
Hawaii, the plaintiff sought a declaratory judgment that it is
entitled to insurance coverage for the site or, in the
alternative, that RJR is obligated to indemnify the plaintiff
under the terms of the agreement by which RJR sold that company
in 1989. On June 26, 2001, the plaintiff filed for
dismissal without prejudice as to all claims against RJR. A
motion for summary judgment filed by Firemans Fund
Insurance Company was denied by the court on August 6, 2001.

Del Monte Corporation has been named a defendant in two lawsuits
related to the same Hawaii superfund site, Board of Water
Supply of the City and County of Honolulu v. Shell Oil Companyand Akee v. The Dow Chemical Co., filed in the First
Circuit Court of the State of Hawaii on September 27, 1999,
and October 7, 1999, respectively. Also, Del Monte Corporation
has received a demand for indemnity from an entity that was a
chemical supplier to Del Monte Corporation and is named a
defendant in one of these lawsuits. Del Monte Corporation has
sought indemnity from RJR under the terms of the agreement by
which RJR sold Del Monte Corporation in 1989. RJR, in turn, has
provided notice of these claims to the buyers of the Del Monte
fresh fruit business, asserting the right to be indemnified by
the buyers for any liability arising out of such claims under
the terms of the agreement by which RJR sold the Del Monte fresh
fruit business in 1989.

Pursuant to an agreement dated June 12, 2001, among RJR,
the buyers of the Del Monte fresh fruit business, Del Monte
Corporation and others, the buyers of the Del Monte fresh fruit
business agreed, from the

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Board of Water Supply Akee Board of Water Supply Akee Board of Water Supply Board of Water Supply.


On June 1, 2001, RJR received notice from Del Monte
Corporation of a claim made against it by a Hawaii landowner who
has been sued by a lessee of its land, claiming injuries due to
pesticide contamination of the soil, allegedly caused by Del
Monte Corporation as a prior lessee of the land. The
landowner-defendant has tendered the claim to Del Monte
Corporation for defense and indemnity. Del Monte Corporation has
in turn tendered the claim to RJR for defense and indemnity,
claiming it is entitled to be indemnified under the terms of the
agreement by which RJR sold Del Monte Corporation. Based on the
plaintiffs failure to provide any factual information in
support of its claim that Del Monte Corporation was a prior
lessee of the subject land, Del Monte Corporation has agreed to
extend indefinitely the period during which RJR must respond to
the Del Monte Corporations tender of the claim to RJR for
defense and indemnity, subject to the right to terminate the
indefinite extension on fifteen days notice to RJR.

RJR Tobacco was notified by the EPA on June 11, 2000 of its
potential liability under CERCLA for a superfund site in Greer,
South Carolina. The notice and demand for reimbursement of costs
incurred by the EPA were sent to a group of companies previously
involved as potentially responsible parties in another superfund
site, which includes RJR Tobacco. The EPA alleges that some
waste from the cleanup of the other site was transported to the
site in question. RJR Tobacco has executed a tolling agreement
with the EPA. This tolling agreement provides for entry into
good faith negotiations with the EPA, and is not an admission of
fact or liability. The tolling agreement also should have no
impact on any defense RJR Tobacco may assert, other than a
defense based on the running of the statute of limitations.
Information is still being gathered from other potentially
responsible parties recently notified by the EPA.

RJR and its subsidiaries have been engaged in a continuing
program to assure compliance with federal, state and local
environmental 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
regulations and to estimate the cost of resolving these CERCLA
matters, RJR does not expect such expenditures or other costs to
have a material adverse effect on the business, results of
operations or financial condition of RJR or its subsidiaries.

Employees

At December 31, 2001, RJR and its subsidiaries had
approximately 8,200 employees and 1,100 part-time employees.
None of these employees is unionized. Employee relations are
believed to be good. In January 2001 and 2002, RJR Tobacco was
included in FORTUNE Magazines annual list of the 100
Best Companies to Work For.

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Item 2. Properties

RJRs executive offices are located in two buildings in
downtown Winston-Salem, North Carolina, which are owned by RJR
Tobacco. For information about RJR Tobaccos operating
facilities see Business  Manufacturing
and Business  Research and Development in
Item 1.

Item 3. Legal Proceedings

Various legal actions, proceedings and claims, including legal
actions claiming that lung cancer and other diseases, as well as
addiction, have resulted from the use of, or exposure to,
RJRs operating subsidiaries products, are pending or
may be instituted against RJR or its affiliates, including RJR
Tobacco, or indemnitees. For a further discussion of litigation
and legal proceedings pending against RJR or its affiliates or
indemnitees, see Business  Litigation Affecting
the Cigarette Industry and Business 
Environmental Matters in Item 1;
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical
Accounting Policies and Recent Accounting Developments and
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Governmental
Activity in Item 7; note 14 to the consolidated
financial statements; and Exhibit 99.1 to this report. You
may request a copy of Exhibit 99.1, free of charge, by
writing to the Corporate Secretary, R.J. Reynolds Tobacco
Holdings, Inc., P.O. Box 2866, 401 N. Main
Street, Winston-Salem, NC 27402-2866, or by phoning
336-741-5162.

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

None.

Executive Officers and Certain Significant Employees of
the Registrant

The executive officers and certain significant employees are:

Andrew J. Schindler.Mr. Schindler, 57, has served
as Chief Executive Officer of RJR Tobacco since 1995 and as
President and Chief Executive Officer of RJR since June 1999.
Mr. Schindler has served as Director of RJR Tobacco since
1989, and as Chairman of the Board of RJR and RJR Tobacco since
July 1999. Mr. Schindler joined RJR in 1974. He became
Senior Vice President  Operations of RJR Tobacco in
1989 and was elected Executive Vice President 
Operations of RJR Tobacco in 1991. Mr. Schindler served as
Chief Operating Officer of RJR Tobacco from 1994 until 1995 and
as its President from 1994 until January 2002. He is a member of
the North Carolina School of the Arts Foundation Board, the Wake
Forest University Baptist Medical Center Board of Visitors, and
the boards of directors of the R. J. Reynolds Foundation,
Winston-Salem Business, Inc. and !dealliance (formerly the North
Carolina Emerging Technology Alliance). Mr. Schindler is
Chairman of the Winston-Salem Alliance.

Thomas R. Adams.Mr. Adams, 51, has been Senior Vice
President and Controller of RJR and RJR Tobacco since June 1999.
From 1985 until 1999, he was Partner at the accounting firm of
Deloitte & Touche LLP. Mr. Adams is a member of the
board of directors of Technology Concepts & Design, Inc., an
affiliate of RJR.

Lynn J. Beasley.In January 2002, Ms. Beasley, 44,
was promoted to President and Chief Operating Officer of RJR
Tobacco, after serving as Executive Vice President 
Marketing since 1997, and has been Director of RJR Tobacco since
March 2000. Ms. Beasley joined RJR Tobacco in 1982 as a
marketing assistant. After holding a number of positions at RJR
Tobacco, she became Senior Vice President of the Winston/Camel
business unit in 1993. From 1995 until 1997, she was Senior Vice
President of brand marketing for WINSTON, CAMEL and SALEM.
Ms. Beasley is a member of the Senior Services Board and
the Tanglewood Park Foundation Board.

Charles A. Blixt.Mr. Blixt, 50, has been Executive
Vice President and General Counsel of RJR Tobacco since 1995 and
Executive Vice President, General Counsel and Assistant
Secretary of RJR since June 1999. Mr. Blixt served as
Director of RJR Tobacco from 1995 until March 2000. He joined
RJR Tobacco as Associate Counsel  Litigation in 1985.
Mr. Blixt is a member of the board of directors of
Technology Concepts & Design, Inc. and Targacept, Inc., both
of which are affiliates of RJR. He also serves

23



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##### 





Frances V. Creighton.In January 2002,
Ms. Creighton, 50, was promoted to Senior Vice
President  Marketing of RJR Tobacco, after serving as
Vice President of RJR Tobaccos Camel business unit since
1997. She joined RJR Tobacco in 1981 as a marketing research
analyst. Through a series of promotions, she became senior
marketing manager in 1990 and marketing director in 1994.
Ms. Creighton serves as Secretary of the board of directors
of the American Red Cross and is a member of the board of
directors for the United Way of Forsyth County.

McDara P. Folan, III.Mr. Folan, 43, joined RJR in
June 1999 as Vice President, Deputy General Counsel and
Secretary. He also was Vice President, Deputy General Counsel
and Secretary of RJR Tobacco from June 1999 to March 2000, and
currently serves as Assistant Secretary of RJR Tobacco. From
1992 until 1999, Mr. Folan served as Vice President,
Secretary and General Counsel for Allen Telecom Inc., a
manufacturer and distributor of wireless communications
equipment, in Cleveland, Ohio.

Ann A. Johnston.In January 2002, Ms. Johnston, 48,
was promoted to Executive Vice President  Human
Resources of RJR and of RJR Tobacco after serving as Vice
President  Human Resources of RJR Tobacco since 1998.
She joined RJR Tobacco in 1988 as a compensation manager, was
promoted to personnel manager in 1989, and to director of
compensation/benefits/HRIS in 1993. Ms. Johnston also serves as
Chairman of the board of directors for Allegacy Federal Credit
Union and is a member of the Alumni Council for the Babcock
Graduate School of Management of Wake Forest University and the
board of directors of the American Benefits Council.

Lynn L. Lane.In June 1999, Ms. Lane, 50, rejoined
RJR as Senior Vice President and Treasurer and was named Senior
Vice President and Treasurer of RJR Tobacco. She joined RJR in
1973 and was promoted to Vice President and Assistant Treasurer
of RJR in 1991. In 1995, she was named Vice President and
Treasurer of R.J. Reynolds Tobacco Worldwide. From 1996 until
1999, Ms. Lane was Vice President  Treasurer and
Investor Relations of Burlington Industries, a manufacturer and
distributor of fabrics and other textile products. She also
serves on the board of directors of the R. J. Reynolds
Foundation, the board of trustees of Greensboro College, the
East Carolina University Board of Visitors and is Chair-Elect of
the East Carolina University Foundation Board.

Kenneth J. Lapiejko.Mr. Lapiejko, 53, has served as
Executive Vice President and Chief Financial Officer of RJR
Tobacco and of RJR since June 1999. He served as Director of RJR
Tobacco from 1996 until March 2000. From 1995 until 1999, he
served as Senior Vice President, Chief Financial Officer and
Treasurer of RJR Tobacco. Mr. Lapiejko joined R.J. Reynolds
Tobacco International as a senior financial analyst in 1977.
After holding a number of positions with RJR Tobacco, in 1991 he
was promoted to Vice President of Finance and Accounting.
Mr. Lapiejko is a member of the board of directors of
Targacept, Inc., an affiliate of RJR.

James V. Maguire.In July 1999, Mr. Maguire, 50, was
promoted to Executive Vice President  Sales of RJR
Tobacco, after serving as Senior Vice President 
Sales of RJR Tobacco since 1994, and has been Director of RJR
Tobacco since March 2000. He joined RJR Tobacco in 1973 as a
sales representative, and after holding a number of positions at
RJR Tobacco and RJR, he became Vice President of Sales and
Marketing Development of RJR Tobacco in 1993.

Tommy J. Payne.Mr. Payne, 44, assumed his current
positions as Executive Vice President  External
Relations of RJR Tobacco and of RJR in July 1999, after serving
as Senior Vice President  External Relations of RJR
Tobacco since 1998 and of RJR since June 1999. He joined RJR in
1988 and was promoted to Director of Federal Government Affairs
in 1995. From 1995 until 1998, he was Vice President 
Federal Government Affairs of RJR Tobacco in Washington, D.C.
Mr. Payne serves on the boards of trustees of Winston-Salem
State University and the Southeast Center for Contemporary Art,
the North Carolina Community Colleges Foundation Board of
Advisors, the board of directors of the R. J. Reynolds
Foundation and the East Carolina University Board of Visitors.

24



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##### 



Richard M. Sanders. In connection with RJRs
acquisition of Santa Fe in January 2002, Mr. Sanders, 48,
was named President and Chief Executive Officer of Santa Fe.
From December 1999 until January 2002, he served as Senior Vice
President  Marketing of RJR Tobacco, while continuing
his role as President  Sports Marketing Enterprises,
a division of RJR Tobacco. Mr. Sanders joined RJR Tobacco
in 1977 and, after holding a number of positions, was promoted
to Vice President of Marketing Operations and
President  Sports Marketing Enterprises in July 1999.
He is a member of the boards of directors of the Speedway
Childrens Charity, T. Wayne Robertson Memorial Fund and
Minnesota Resources.

David E. Townsend.In October 2000, Dr. Townsend,
54, was promoted to Executive Vice President 
Research and Development of RJR Tobacco after serving as Vice
President of the Research and Development Product Development
and Assessment Group of RJR Tobacco since 1997. He joined RJR
Tobacco in 1977 and, after holding a number of positions at RJR
Tobacco, was promoted to Senior Principal Scientist of RJR
Tobacco in 1995, and to Director of Product Development and
Assessment of RJR Tobacco in 1996.

James H. Wilson.In July 1999, Mr. Wilson, 59, was
promoted to Executive Vice President  Operations of
RJR Tobacco after serving as Senior Vice President 
Operations of RJR Tobacco since 1994. He has served as Director
of RJR Tobacco since 1997. Mr. Wilson joined RJR Tobacco in
1962 and was promoted to Vice President of Manufacturing of RJR
Tobacco in 1991.

25



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##### 



PART II



|        |                                                                       
|------- | ----------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
	Stockholder Matters

RJRs common stock, par value $.01 per share, is listed on
the NYSE as RJR and began trading on June 15, 1999. On
January 31, 2002, there were approximately 38,000 holders
of record of RJRs common stock. Stockholders whose shares
are held of record by a broker or clearing agency are not
included in this amount; however, each of those brokers or
clearing agencies is included as one holder of record. The
closing price of RJRs common stock on January 31,
2002 was $59.75.

The high and low sales prices per share for RJRs common
stock on the NYSE Composite Tape, as reported by the NYSE, was:

|      |                |      |   |       |  |  |   |       | 
|----- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|      |                | High |   | Low  
|      |                |      |   |      
|2001: |                |      |   |       |  |  |   |      
|     
|     
|     
|     
|      | First Quarter  |      | $ | 60.42 |  |  | $ | 44.19 | 
|     
|     
|     
|     
|      | Second Quarter |      |   | 62.70 |  |  |   | 52.33 | 
|     
|     
|     
|     
|      | Third Quarter  |      |   | 59.65 |  |  |   | 47.90 | 
|     
|     
|     
|     
|      | Fourth Quarter |      |   | 61.23 |  |  |   | 54.72 | 
|     
|     
|     
|     
|2000: |                |      |   |       |  |  |   |      
|     
|     
|     
|     
|      | First Quarter  |      |   | 20.50 |  |  |   | 15.75 | 
|     
|     
|     
|     
|      | Second Quarter |      |   | 31.94 |  |  |   | 16.94 | 
|     
|     
|     
|     
|      | Third Quarter  |      |   | 37.25 |  |  |   | 24.88 | 
|     
|     
|     
|     
|      | Fourth Quarter |      |   | 50.25 |  |  |   | 30.81 | 

From the third quarter of 1999 through the second quarter of
2001, RJRs board of directors declared a quarterly cash
dividend of $.775 per common share, or $3.10 on an annualized
basis. Beginning with the third quarter of 2001, RJRs
board of directors has declared a quarterly cash dividend of
$.875 per common share, or $3.50 on an annualized basis, an
increase of 12.9% from $.775.

RJR conducts its business through its subsidiaries and is
dependent on the earnings and cash flow of its subsidiaries to
satisfy its obligations and other cash needs. RJRs credit
facility limits the payment of dividends on its common stock in
excess of specific amounts. For more information see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and
Financial Condition in Item 7 and note 10 to the
consolidated financial statements. RJR believes that the
provisions of its credit facility will not impair its payment of
quarterly dividends.

26



---



##### 



Item 6. Selected Financial Data

The selected historical consolidated financial data as of
December 31, 2001 and 2000 and for each of the years in the
three-year period ended December 31, 2001 are derived from the
consolidated financial statements and accompanying notes, which
have been audited by RJRs independent auditors. The
selected historical consolidated financial data as of
December 31, 1999, 1998 and 1997 and for the years ended
December 31, 1998 and 1997 are derived from audited
consolidated financial statements not presented or incorporated
by reference. The financial statements prior to 2000 segregate
the account balances and activities of the international tobacco
business and Nabisco and report those account balances and
activities as discontinued operations. You should read this
table in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 and the consolidated financial statements.

|                                                                                  |  |                                                 |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|--------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                                                                  |  |                                                
|                                                                                  |  | For the Years Ended December 31,               
|                                                                                  |  |                                                
|                                                                                  |  | 2001                                            |        | 2000 |  | 1999 |         | 1998 |  | 1997
|                                                                                  |  |                                                 |        |      |  |      |         |      |  |     
|                                                                                  |  |                                                
|                                                                                  |  | (Dollars in Millions, Except Per Share Amounts)
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Results of Operations:                                                            |  |                                                 |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net sales (1)                                                                     |  | $                                               | 8,585  |      |  | $    | 8,058   |      |  | $    | 7,468   |   |  | $ | 5,685   |   |  | $ | 4,975   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Income (loss) from continuing operations                                          |  |                                                 | 444    |      |  |      | 352     |      |  |      | 195     |   |  |   | (519    | ) |  |   | 19      | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Income (loss) from discontinued operations                                        |  |                                                 | (9     | )    |  |      |        |      |  |      | 2,398   |   |  |   | 3       |   |  |   | 414     | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Extraordinary items  gain (loss)                                                 |  |                                                 |       |      |  |      | 1,475   |      |  |      | (250    | ) |  |   |        |   |  |   |        | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income (loss)                                                                 |  |                                                 | 435    |      |  |      | 1,827   |      |  |      | 2,343   |   |  |   | (516    | ) |  |   | 433     | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Per Share Data:                                                                   |  |                                                 |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Basic income (loss) from continuing
	operations                                   |  |                                                 | 4.57   |      |  |      | 3.48    |      |  |      | 1.80    |   |  |   | (4.77   | ) |  |   | .17     | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Diluted income (loss) from continuing
	operations                                 |  |                                                 | 4.48   |      |  |      | 3.46    |      |  |      | 1.80    |   |  |   | (4.77   | ) |  |   | .17     | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Basic income (loss) from discontinued
	operations                                 |  |                                                 | (.09   | )    |  |      |        |      |  |      | 22.10   |   |  |   | .03     |   |  |   | 3.81    | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Diluted income (loss) from discontinued
	operations                               |  |                                                 | (.09   | )    |  |      |        |      |  |      | 22.08   |   |  |   | .03     |   |  |   | 3.81    | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Basic income (loss) from extraordinary items                                      |  |                                                 |       |      |  |      | 14.56   |      |  |      | (2.30   | ) |  |   |        |   |  |   |        | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Diluted income (loss) from extraordinary
	items                                   |  |                                                 |       |      |  |      | 14.48   |      |  |      | (2.30   | ) |  |   |        |   |  |   |        | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Basic net income (loss)                                                           |  |                                                 | 4.48   |      |  |      | 18.04   |      |  |      | 21.60   |   |  |   | (4.74   | ) |  |   | 3.98    | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Diluted net income (loss)                                                         |  |                                                 | 4.39   |      |  |      | 17.94   |      |  |      | 21.58   |   |  |   | (4.74   | ) |  |   | 3.98    | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Basic weighted average shares, in thousands                                       |  |                                                 | 97,043 |      |  |      | 101,264 |      |  |      | 108,495 |   |  |   | 108,691 |   |  |   | 108,691 | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Diluted weighted average shares, in thousands                                     |  |                                                 | 98,986 |      |  |      | 101,857 |      |  |      | 108,570 |   |  |   | 108,691 |   |  |   | 108,691 | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash dividends declared per share of common stock
	(2)                            |  | $                                               | 3.30   |      |  | $    | 3.10    |      |  | $    | 1.55    |   |  | $ |        |   |  | $ |        | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Balance Sheet Data (at end of
	periods):                                          |  |                                                 |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Total assets                                                                      |  |                                                 | 15,050 |      |  |      | 15,554  |      |  |      | 14,377  |   |  |   | 19,310  |   |  |   | 20,251  | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Long-term debt                                                                    |  |                                                 | 1,631  |      |  |      | 1,674   |      |  |      | 1,653   |   |  |   | 4,861   |   |  |   | 4,944   | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Stockholders equity                                                              |  |                                                 | 8,026  |      |  |      | 8,436   |      |  |      | 7,064   |   |  |   | 9,886   |   |  |   | 11,079  | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other Data:                                                                       |  |                                                 |        |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Ratio of earnings to fixed charges (3)                                            |  |                                                 | 6.4    |      |  |      | 5.1     |      |  |      | 2.8     |   |  |   |        |   |  |   | 1.5     | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Deficiency in the coverage of fixed charges by
	earnings before fixed charges (3) |  | $                                               |       |      |  | $    |        |      |  | $    |        |   |  | $ | (679    | ) |  | $ |        | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net sales and costs of products sold exclude excise taxes of
	$1.529 billion, $1.631 billion, $1.173 billion, $1.292 billion
	and $1.369 billion for the years ended December 31, 2001,
	2000, 1999, 1998 and 1997, respectively.                                                                                                                                                                                                                               
|(2) | RJR began trading as a separate company on June 15, 1999.
	From the third quarter of 1999 through the second quarter of
	2001, RJRs board of directors declared a quarterly cash
	dividend of $.775 per common share, or $3.10 on an annualized
	basis. Beginning with the third quarter of 2001, the board of
	directors has declared a quarterly cash dividend of $.875 per
	common share, or $3.50 on an annualized basis, an increase of
	12.9% from $.775.
|(3) | Earnings consist of income before income taxes and fixed
	charges. Fixed charges consist of interest on indebtedness,
	amortization of debt issuance costs and one-third of operating
	rental expense, representative of the interest factor.                                                                                                                                                                                                                   

27



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##### 





|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
	Condition and Results of Operations

You should read this discussion and analysis of RJRs
consolidated financial condition and results of operations in
conjunction with the consolidated financial statements and the
related notes as of December 31, 2001 and 2000 and for each
of the years in the three-year period ended December 31,
2001.

Critical Accounting Policies and Recent Accounting
Developments

Accounting principles generally accepted in the United States of
America require estimates and assumptions to be made that affect
the reported amounts in RJRs consolidated financial
statements and accompanying notes. Some of these estimates
require difficult, subjective and/or complex judgments about
matters that are inherently uncertain, and as a result, actual
results could differ from those estimates. Due to the estimation
processes involved, the following summarized accounting policies
and their application are considered to be critical to
understanding the business operations, financial condition and
results of operations of RJR and its subsidiaries.

Litigation

As discussed in Business  Litigation Affecting
the Cigarette Industry in Item 1 and note 14 to the
consolidated financial statements, RJR Tobacco and its
affiliates have been named in a number of tobacco-related legal
actions, proceedings or claims seeking damages in amounts
ranging into the hundreds of millions or even billions of
dollars. Unfavorable verdicts have been returned in the Englesmoking and health class action and in three individual
smoking and health cases that are in the post-verdict stage or
are on appeal. RJR Tobacco and RJR each believe that they have a
number of valid defenses to all actions and intend to defend
those actions vigorously. However, 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 them. RJR and RJR Tobacco are 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. Accordingly, no
liability is currently recorded in the consolidated financial
statements for tobacco-related litigation. However, at such time
a material loss, including bonding and litigation costs, becomes
probable and the amount can be reasonably estimated, its
recognition could have a material adverse effect on the
financial condition, results of operations or cash flows of RJR
or its subsidiaries.

Goodwill and Trademarks

Goodwill is continually reviewed for impairment. Trademarks are
reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not
be recoverable. The carrying value of goodwill and trademarks
would be impaired if the best estimate of future undiscounted
cash flows over their remaining amortization period is less than
their carrying value. If an asset is impaired, the loss is
measured using estimated fair value.

In the fourth quarter of 2000, impairment occurred on two of RJR
Tobaccos non-key brands, MAGNA and CENTURY, based on their
estimated undiscounted net future cash flows. Accordingly, RJR
Tobacco recorded an impairment charge of $89 million, based on
the excess of the brands carrying value over fair value.

Factors that may impact the valuation of goodwill and trademarks
include, among other things, the level of brand support,
consumer demand, governmental regulation and the ability to
raise prices. At December 31, 2001, there were no factors
that indicated that the book value of goodwill and trademarks
might not be recoverable.

In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which is
effective as of January 1, 2002. SFAS No. 142
substantially changes the accounting for goodwill and
trademarks. SFAS No. 142 requires that goodwill and other
intangible assets with indefinite useful lives no longer be
amortized. This statement also requires that within the first
interim period of adoption, the intangible assets with
indefinite lives should be

28



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##### 





Other intangible assets consist of RJR Tobaccos trademarks
acquired through business combinations, which have indefinite
useful lives. A national appraisal firm has been engaged to
assist in the valuation of the trademarks as of January 1,
2002. No later than March 31, 2002, the existence and
amount, if any, of trademark impairment will be determined by
comparing the fair values of those assets with their carrying
values.

RJRs goodwill as of January 1, 2002 is attributable
to one reporting unit, RJR Tobacco, which comprises
substantially all of RJRs consolidated results of
operations and financial condition. A national appraisal firm
has been engaged to assist in the determination of the fair
value of RJR. Before June 30, 2002, any indication of
goodwill will be determined by comparing RJRs fair value
with its carrying value as of January 1, 2002.

As of December 31, 2001, the carrying values of RJR
Tobaccos goodwill and trademarks were $6.9 billion and
$2.8 billion, respectively. RJR Tobacco recorded goodwill and
trademark amortization expense of $362 million and $366 million
during 2001 and 2000, respectively. As of January 1, 2002,
RJR Tobaccos goodwill and trademarks will no longer be
amortized. Because of the extensive effort needed to comply with
the application of SFAS No. 142, the impairment loss, if
any, related to RJR Tobaccos trademarks or goodwill upon
adoption of this statement cannot be estimated.

Settlement Agreements

As discussed in Business  Litigation Affecting
the Cigarette Industry in Item 1 and note 14 to the
consolidated financial statements, RJRs operating
subsidiaries are participants in a number of settlement
agreements related to governmental health-care cost recovery
actions. Their obligations and the related expense charges under
the MSA and other settlement agreements are subject to
adjustments based upon, among other things, the volume of
cigarettes sold by the operating subsidiaries, their relative
market share and inflation. Since relative market share is based
on cigarette shipments, the best estimate of the allocation of
charges under these agreements is recorded in costs of products
sold as products are shipped. Settlement expenses under these
MSA and other settlement agreements recorded in the accompanying
consolidated statements of income were $2.6 billion in 2001,
$2.3 billion in 2000 and $2.2 billion in 1999. Adjustments to
these estimates, which historically have not been significant,
are recorded in the period that the change becomes probable and
the amount can be reasonably estimated.

RJR Tobacco estimates that its settlement charges will
approximate $2.4 billion in 2002 and $2.1 billion in each of
2003, 2004 and 2005, subject to adjustments, including those
discussed above.

Recent Accounting Developments

Effective January 1, 2001, RJRs operating
subsidiaries adopted the Emerging Issues Task Forces Issue
No. 00-14, Accounting for Certain Sales
Incentives, which addresses the recognition, measurement
and income statement classification for certain sales
incentives, including rebates, coupons and free products or
services. EITF No. 00-14 requires that in the accompanying
consolidated income statements, certain costs that historically
were included in selling, general and administrative expenses
now be classified in cost of products sold or as reductions of
net sales. Those costs have been reclassified in prior periods
for comparative purposes. The adoption of EITF No. 00-14
did not impact consolidated annual net income or cumulative
earnings.

As of January 1, 2001, RJR and its subsidiaries adopted
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137
and SFAS No. 138. SFAS No. 133

29



---



##### 





As of December 31, 2001, RJR Tobacco held a forward
currency exchange contract to purchase seven million Euros with
a term of less than 12 months as a hedge of an unrecognized
firm commitment for the purchase of equipment. As of
December 31, 2001, the foreign currency cash flow hedge was
effective and, accordingly, no gain or loss was realized. The
unrealized gain resulting from the increase in the hedges
fair value was insignificant.

Effective January 1, 2002, EITF No. 00-25,
Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendors Products, requires
that consideration paid to a distributor or retailer to promote
the vendors products, such as slotting fees or buydowns,
generally be characterized as a reduction of revenue when
recognized in the vendors income statement. Upon adoption,
RJRs operating subsidiaries will characterize the
applicable costs as a reduction of net sales rather than as
selling, general and administrative expense. Had EITF
No. 00-25 been adopted for 2001 and 2000, selling, general
and administrative expense would have been reduced by $2.3
billion and $2 billion, respectively. The respective amounts
would have been classified as reductions to net sales. The
adoption of EITF No. 00-25 will not impact RJRs
consolidated financial position, operating income or net income.

Results of Operations

|                                             |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                             |  | 2001 |       | 2000 |  | 1999
|                                             |  |      |       |      |  |     
|Net sales                                    |  | $    | 8,585 |      |  | $    | 8,058 |  |  | $ | 7,468 | 
|                                            
|                                            
|                                            
|                                            
|Cost of products sold (*)                    |  |      | 3,560 |      |  |      | 3,436 |  |  |   | 3,292 | 
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |      | 3,745 |      |  |      | 3,342 |  |  |   | 2,924 | 
|                                             |  |      |       |      |  |      |       |  |  |   |       | 
|Ongoing operating company contribution       |  | $    | 1,280 |      |  | $    | 1,280 |  |  | $ | 1,252 | 
|                                             |  |      |       |      |  |      |       |  |  |   |       | 






|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*) | $2,584 million, $2,329 million and $2,178 million of ongoing
	settlement expense was recorded in cost of products sold for the
	years ended 2001, 2000 and 1999, respectively.

2001 Compared with 2000

Net salesof $8.6 billion for the year ended
December 31, 2001 increased 6.5% over 2000. This increase
was primarily driven by favorable pricing of $1 billion, as a
result of price increases in 2001 and the last half of 2000,
partially offset by volume declines of $0.5 billion.

RJR Tobaccos total shipment volume for the year ended
December 31, 2001 of 90.7 billion units, excluding Puerto
Rico and certain other U.S. territories volume of 1.3
billion units, decreased 5.9% from the year ended
December 31, 2000. RJR Tobaccos shipment volume
during the year ended December 31, 2001 was adversely impacted
by estimated declines in trade inventory levels and decreased
consumption. Consumption of RJR Tobaccos products,
representing retail sales to consumers, declined approximately
2.8% during 2001 when compared with 2000. Consumption is
expected to continue to decline. For the year ended
December 31, 2001, RJR Tobaccos full-price and
savings shipments decreased 5.7% and 6.2%, respectively, when
compared with the prior year. RJR Tobaccos full-price
shipments represented 63.3% and 63.2% of total shipments for the
years ended December 31, 2001 and 2000, respectively.

CAMEL shipment volume, excluding the non-filter style, for 2001
was up 1.6% versus 2000. WINSTONs base styles decreased
3.7% during 2001 from 2000, and SALEM shipments decreased 13.7%.
DORAL shipments decreased 10.1% when compared with the prior
year.

Industry volume decreased 3.2% for the year ended
December 31, 2001 when compared with 2000. Full-price and
savings shipments for the industry for the year ended
December 31, 2001 decreased 2.7% and 4.4%,

30



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RJR Tobaccos retail share of market, according to data
from Information Resources Inc./Capstone, averaged 23.42% for
the year ended December 31, 2001, a decrease of .16 share
points when compared with the prior year.

CAMEL, RJR Tobaccos largest brand, continued its growth
trend. CAMELs share of market, excluding the non-filtered
style, was 5.52% in 2001, compared with 5.14% in 2000.
CAMELs growth can be attributed to its strong
Pleasure to Burn positioning, which was enhanced by
unique programs such as the Seven Pleasures of the
Exotic consumer events, and the strength of its Turkish
line extensions. Following the successful launch of CAMEL
Turkish Gold in 2000, the brand launched CAMEL Turkish Jade, a
menthol line extension, during the third quarter of 2001.

Base WINSTONs retail share averaged 4.84% in 2001, up from
4.76% in 2000. During 2001, WINSTON modernized its No
Boundaries, No Bull positioning by launching WINSTON S2, a
line extension that features a new blend and high-impact silver
embossed packaging. Additionally, the base WINSTON family was
enhanced to incorporate the same silver highlights.

SALEMs share averaged 2.73% in 2001 compared with 3.01% in
2000. SALEMs decline was due to increased competitive
activity in the menthol category coupled with reduced marketing
support in SALEMs ten emphasis markets in the latter
portion of 2001. While the trend in the ten emphasis markets has
been better than in the balance of the country, the brand is
currently evaluating opportunities to strengthen its performance.

Since the second quarter of 2001, DORALs share of market
has declined after holding relatively steady at 6.1 to 6.2 share
points for several quarters. The retail share of market of
DORAL, the nations best-selling savings brand, was 5.92%
for 2001, down from 6.16% in 2000. To strengthen DORALs
performance, the brand recently launched a comprehensive upgrade
across all categories of DORALs Imagine Getting
More positioning. This upgrade includes a new blend with
higher-quality tobaccos, new bold packaging, new advertising to
support the changes and a new website to enhance DORALs
existing relationship marketing program.

RJR Tobacco also is committed to finding ways to develop and
market consumer-acceptable cigarettes that may present less risk
associated with smoking. In April 2000, RJR Tobacco launched a
new test market of ECLIPSE in the Dallas/Fort Worth area through
direct mail and Internet sales to age-verified, adult smokers.
The Dallas/Fort Worth test market was expanded to include retail
sales in January 2001. ECLIPSE is a cigarette that primarily
heats rather than burns tobacco. Although RJR Tobacco does not
claim that ECLIPSE presents smokers with less risk of
cardiovascular disease or complications with pregnancy, ECLIPSE
may present less risk of cancer, chronic bronchitis and possibly
emphysema when compared with tobacco-burning cigarettes.

Cost of products soldof $3.6 billion increased $124
million from 2000, primarily due to an increase in ongoing
settlement costs partially offset by decreased volume and lower
raw material costs.

Selling, general and administrative expensesof $3.7
billion in 2001 increased $403 million from the prior year. This
change over the prior year was primarily due to increased retail
discounting.

Ongoing operating company contribution was unchanged at $1.28
billion for 2001 when compared with the prior year, primarily
due to the factors discussed above. This performance measure
omits up-front, initial tobacco charges, goodwill and trademark
amortization expense and certain other adjustments from
operating income.

Amortization expenseof $362 million during 2001
decreased $4 million, reflecting the impact of trademark
impairment during 2000. Beginning with the adoption of SFAS
No. 142 on January 1, 2002, no amortization expense
will be recorded related to goodwill or trademarks.

31



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An impairment chargeof $89 million, or $54 million after
tax, was incurred during the fourth quarter of 2000 on two of
RJR Tobaccos non-key brands, MAGNA and CENTURY, measured
as the excess of carrying value over fair value.

Other operating expenseincludes activity related to a
$1.4 billion pre-tax tobacco settlement and related charge
recorded in 1998 by RJR Tobacco. At December 31, 1998, $1.3
billion had been utilized. Since December 31, 1998, the
remaining liability for employee severance and related benefits
for workforce reductions totaling approximately 1,300 employees
was utilized through cash expenditures of $76 million and the
reversal of $21 million, due to a less-than-expected workforce
reduction.

Interest and debt expensewas $150 million and $168
million in 2001 and 2000, respectively. This decrease primarily
resulted from lower debt balances.

Interest incomeduring 2001 increased $18 million when
compared with the prior year, primarily reflecting a higher
average cash balance during 2001 when compared with 2000,
partially offset by declining interest rates. Lower interest
rates and lower cash balances are expected to cause
significantly lower interest income during 2002, when compared
with 2001.

Other expense, netdecreased $18 million for the year
ended December 31, 2001 from the prior year. This decrease
was primarily due to foreign exchange losses realized during
2000 on debt denominated in foreign currencies. All debt
denominated in foreign currencies was retired in 2000.

Provision for income taxeswas $448 million, or an
effective rate of 50.2%, in 2001 compared with $396 million, or
an effective rate of 52.9%, in 2000. The effective tax rates
exceed the federal statutory rate of 35% primarily due to the
impact of certain nondeductible items, including goodwill
amortization, and to a lesser extent, state taxes. The effective
tax rate during 2002 is expected to be approximately 39% after
the elimination of goodwill amortization expense.

Discontinued operationsin 2001 included a $14 million,
$9 million after tax, purchase price adjustment of the 1999 gain
on the sale of the international tobacco business to Japan
Tobacco Inc. Including this adjustment, the net after-tax gain
on the sale of the international tobacco business was $2.3
billion.

Extraordinary itemincluded a gain of $1.5 billion
realized during the fourth quarter of 2000 in connection with
RJRs acquisition of NGH. See note 3 to the consolidated
financial statements.

2000 Compared with 1999

Net salesof $8.1 billion for the year ended
December 31, 2000 increased 7.9% over 1999. This increase
was driven by favorable pricing of $626 million, as a result of
price increases in 2000 and the last half of 1999, partially
offset by a $38 million unfavorable volume shift in the branded
savings price tier to private label. RJR Tobaccos shipment
volume for the year of 96.4 billion units, excluding Puerto Rico
and certain other U.S. territories volume of 1.4 billion
units, was level with the prior year, while industry volume
increased 0.1% to 419.8 billion units. RJR Tobacco believes that
its shipment volume benefited from an increase in trade
inventory levels. RJR Tobaccos consumption volume declined
3.5%, and the industry consumption volume declined 2.5% during
2000 compared with 1999.

RJR Tobaccos full-price shipments represented 63.2% and
62.6% of its total shipments for the years ended
December 31, 2000 and 1999, respectively. Industry-wide,
full-price shipments represented 73.5% and 73.4% of total
shipments for the years ended December 31, 2000 and 1999,
respectively. RJR Tobaccos full-price shipments increased
0.9%, while the industry full-price increase was 0.2%. CAMEL
shipments, excluding the non-filter style, for 2000 were up
10.2% versus 1999, and WINSTONs base styles increased 0.6%
during 2000 from 1999. SALEM shipments were down 3.9% compared
with the prior year. Shipments for DORAL decreased 1.6% compared
with the prior year, while the industry savings decline was 0.2%.

RJR Tobaccos retail share of market averaged 23.58% for
the year ended December 31, 2000, a decrease of .34 share
points compared with the prior year.

32



---



##### 



CAMEL, RJR Tobaccos largest full-price brand, continued to
show strong growth. Its share of market, excluding the
non-filtered style, grew .42 share points to 5.14% in 2000.
CAMELs growth was supported by its Pleasure to
Burn positioning, its successful launch of Turkish Gold
and its creative and integrated marketing programs.

Base WINSTONs retail share of 4.76% for the year ended
December 31, 2000 was down slightly from its 1999 share of
4.83%; however, its share increased .16 share points in the
second half compared with the first half of 2000. WINSTONs
No Bull positioning and a more competitive retail
plan contributed to the brands performance.

SALEMs share averaged 3.01% in 2000 compared with 3.17% in
1999, reflecting increased competitive activity in the menthol
category. However, SALEMs share grew in latter 2000 in its
emphasis markets where the brands full marketing support
had a positive impact among adult menthol smokers. These
initiatives include SALEMs Its not what you
expect positioning, unique packaging, promotions and adult
smoker events.

DORALs retail share of market was 6.16% in 2000, down .14
share points compared with the prior year. Competitive pricing
pressure from deep-discount brands impacted DORALs
performance, particularly in the second quarter of 2000. To more
effectively compete against these brands, refined retail pricing
promotions were begun in mid-2000. These promotions, along with
its Imagine Getting More positioning, contributed to
consecutive share gains in the third and fourth quarters of 2000.

Cost of products soldof $3.4 billion increased $144
million from 1999, primarily due to an increase in ongoing
settlement costs of $151 million and higher promotional costs,
partially offset by lower raw material cost.

Selling, general and administrative expensesof $3.3
billion in 2000 increased $418 million from the prior year. This
change over the prior-year period was primarily due to increased
retail discounting.

Ongoing operating company contribution increased 2.2% to $1.28
billion for 2000 when compared with the prior year. This
increase is primarily due to the factors discussed above.

An impairment chargeof $89 million, $54 million after
tax, was incurred during the fourth quarter of 2000 on two of
RJR Tobaccos non-key brands, MAGNA and CENTURY.

Headquarters close-down and related chargesrecorded by
RJR in the second quarter of 1999 of $143 million, $93 million
after tax, reflected the elimination of its New York corporate
headquarters. Total cash expenditures related to this charge
were $122 million. The elimination of the headquarters resulted
from reorganization transactions described in note 2 to the
consolidated financial statements. Approximately $127 million of
the charge was for severance and related benefits for
approximately 100 employees whose employment was terminated. The
remainder of the charge was primarily related to contractual
lease termination payments and the write-off of leasehold
improvements and abandoned equipment.

Other operating expenseduring 2000 and 1999 includes a
reversal of $3 million and $17 million, respectively, from the
liability for employee severance and related benefits to the
$1.4 billion tobacco settlement and related charge recorded in
1998 by RJR Tobacco. The reversal reflected a less-than-expected
workforce reduction. During 1999, RJR Tobacco recorded a charge
of $40 million for initial, up-front costs related to the
tobacco growers settlement.

Interest and debt expensewas $168 million and $268
million in 2000 and 1999, respectively. This decrease resulted
from the repurchase of approximately $4 billion of debt,
partially offset by the issuance of $1.25 billion of debt,
during the second quarter of 1999.

Interest incomeincreased $5 million during 2000 when
compared with the prior year, primarily reflecting higher cash
balances and higher interest rates.

Other expense, netdecreased $27 million for the year
ended December 31, 2000 from the prior year. This decrease
was primarily the result of higher 1999 charges related to the
spin-off. See note 2 to the consolidated financial statements.

33



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##### 



Provision for income taxeswas $396 million, or an
effective rate of 52.9%, in 2000 compared with $315 million, or
an effective rate of 61.8%, in 1999. The effective tax rates
exceed the federal statutory rate of 35% primarily due to the
impact of certain nondeductible items, including goodwill
amortization, and to a lesser extent, state taxes.

Discontinued operationsfor the year ended
December 31, 1999 included after-tax income of $76 million
related to the operations of the international tobacco business
and Nabisco. Additionally, discontinued operations included a
$2.3 billion gain on the sale of the international tobacco
business, net of a $322 million loss on the recognition of
Nabiscos cumulative translation adjustment account. See
note 2 to the consolidated financial statements.

Extraordinary itemincluded a gain of $1.5 billion
realized during the fourth quarter of 2000 in connection with
RJRs acquisition of NGH. See note 3 to the consolidated
financial statements. An extraordinary loss of $384 million,
$250 million after tax, was incurred during 1999 in connection
with the repurchase of approximately $4 billion of debt
securities. See note 2 to the consolidated financial statements.

Liquidity and Financial Condition

Liquidity

At present, the principal sources of liquidity for RJRs
operating subsidiaries businesses and operating needs are
internally generated funds from their operations and borrowings
through RJR. Cash flows from operating activities are believed
to be sufficient for the foreseeable future to enable the
operating subsidiaries to meet their obligations under the MSA,
to fund their capital expenditures and to make payments to RJR
that will enable RJR to make its required debt-service payments
and to pay dividends to its stockholders. Additionally, the
acquisition of NGH in December 2000 provided $1.5 billion cash
proceeds to RJR Acquisition Corp., a portion of which is funding
RJRs share repurchase programs. While demand for tobacco
products is not materially impacted in the short term by
consumers, the negative impact, if any, on the sources of
liquidity that could result from a decrease in demand for
products due to short-term trade inventory adjustments cannot be
predicted. Additionally, RJR cannot predict its cash
requirements or those of its subsidiaries related to any future
settlements or judgments, including cash required to bond any
appeals, if necessary, and make no assurance that RJR or its
subsidiaries will be able to meet all of those requirements.

Contractual obligations as of December 31, 2001 were:

Payments Due by Period

|                 |                        |       |       |           |  |       |    |       |  |            |     |     |  |   |     |     |  |   |     |     | 
|---------------- | ---------------------- | ----- | ----- | --------- |  | ----- | -- | ----- |  | ---------- | --- | --- |  | - | --- | --- |  | - | --- | --- | 
|                 |                        |       |       | Less than |  | 1-3   |    | 4-5   |  |           
|                 |                        | Total |       | 1 Year    |  | Years |    | Years |  | Thereafter
|                 |                        |       |       |           |  |       |    |       |  |           
|Long-term debt   |                        | $     | 1,674 |           |  | $     | 43 |       |  | $          | 846 |     |  | $ | 527 |     |  | $ | 258 |    
|                
|                
|                
|                
|Operating leases |                        |       | 35    |           |  |       | 19 |       |  |            | 14  |     |  |   | 2   |     |  |   |    |    
|                 |                        |       |       |           |  |       |    |       |  |            |     |     |  |   |     |     |  |   |     |    
|                 | Total cash obligations |       | $     | 1,709     |  |       | $  | 62    |  |            | $   | 860 |  |   | $   | 529 |  |   | $   | 258 | 
|                 |                        |       |       |           |  |       |    |       |  |            |     |     |  |   |     |     |  |   |     |    

For more information about RJRs long-term debt, see
Debt below. RJR Tobacco estimates that its
settlement charges will approximate $2.4 billion in 2002 and
will exceed $2 billion each year thereafter. For more
information about RJR Tobaccos settlement payments, see
Business  Litigation Affecting the Cigarette
Industry in Item 1 and note 14 to the consolidated
financial statements.

Commitments as of December 31, 2001 were:

Commitment Expiration Per Period

|                                                               |                   |       |     |           |  |   |     |     | 
|-------------------------------------------------------------- | ----------------- | ----- | --- | --------- |  | - | --- | --- | 
|                                                               |                   |       |     | Less than
|                                                               |                   | Total |     | 1 Year   
|                                                               |                   |       |     |          
|Standby letters of credit backed by revolving
	credit facility |                   | $     | 132 |           |  | $ | 132 |    
|                                                              
|                                                              
|                                                              
|                                                              
|Trade letter of credit                                         |                   |       | 1   |           |  |   | 1   |    
|                                                               |                   |       |     |           |  |   |     |    
|                                                               | Total commitments |       | $   | 133       |  |   | $   | 133 | 
|                                                               |                   |       |     |           |  |   |     |    

34



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Cash Flows

Net cash flows from operating activities of $626 million in 2001
increased $36 million from 2000. This change primarily reflects
increased revenues from higher pricing and increased interest
income, partially offset by increased tobacco settlement
expenses, raw material purchases and promotional expenses. Net
cash flows from operating activities of $590 million in 2000
decreased $339 million from 1999. This decrease primarily
reflects an increase in cash payments for tobacco settlements
and the posting of a $100 million bond related to the appeal of
the Engleverdict, partially offset by increased revenues
from higher pricing.

Net cash flows used in investing activities were $307 million in
2001 compared with net cash inflows of $1.6 billion in 2000.
This change is primarily due to investments in short-term
securities in 2001, compared with $1.5 billion net proceeds from
the NGH acquisition in 2000 and $110 million proceeds received
from the maturity of short-term investments in 2000. Net cash
flows used in investing activities included a $14 million, $9
million after tax, purchase price adjustment of the 1999 gain on
the sale of the international tobacco business. Net cash flows
from investing activities in 2000 decreased $6 billion from
1999. Net cash flows from 1999 investing activities included the
net proceeds from the sale of the international tobacco business.

Net cash flows used in financing activities of $842 million in
2001, compared with $881 million in 2000, included $494 million
repurchase of common stock, $320 million of dividends paid and
$73 million repayment of long-term debt. Net cash flows used in
financing activities in 2000, compared with $5.4 billion in
1999, included $387 million repayment of long-term debt, $322
million of dividends paid and $231 million repurchase of common
stock.

Net cash flows related to discontinued operations in 1999
primarily resulted from $2.1 billion of income taxes paid on the
gain on the sale of the international tobacco business,
partially offset by net cash flows provided by discontinued
operations of $116 million, and in 2000, an $84 million refund
of these taxes.

In connection with the spin-off from NGH in 1999, RJR has
assumed, subject to specified exceptions, all U.S. pension
liabilities and related assets for current and former tobacco
employees. The additional cash required, compared with 1998, to
fund these liabilities was $58 million in each of 2001, 2000 and
1999. In January 2002, RJR contributed the expected additional
cash requirement of $58 million for each of 2002 and 2003. As a
result, the Pension Benefit Guaranty Corporation cancelled the
related $116 million letter of credit.

During 2001, RJR repurchased 8,727,600 shares of its common
stock with an aggregate cost of $494 million. Of these amounts,
5,100,100 shares with an aggregate cost of $289 million
completed a $350 million repurchase program authorized by
RJRs board of directors on December 12, 2000. The
remaining 3,627,500 shares with an aggregate cost of $205
million were repurchased under an authorization by RJRs
board of directors on July 18, 2001. This program
authorizes the repurchase of shares of RJRs common stock
over time in the open market, with a maximum aggregate cost of
$300 million, to enhance stockholder value. The stock
repurchases are funded by dividends from RJR Acquisition Corp.
utilizing the cash proceeds of the NGH acquisition. The timing
of repurchases and the number of shares repurchased will depend
upon market conditions. As of January 31, 2002, RJR
repurchased 1,030,000 additional shares at a cost of $60 million
under this authorization.

From November 1999 through December 31, 2001, cumulative
repurchases under all programs were 19,970,739 shares with an
aggregate cost of $780 million. Shares held through repurchase,
in addition to 144,683 shares cancelled, less 304,590 shares
granted, pursuant to employee benefit plans, are included in
treasury stock in the consolidated balance sheets.

On February 6, 2002, RJRs board of directors
authorized the repurchase of up to $1 billion of RJRs
common stock over time in the open market, to enhance
stockholder value. The program will be funded by dividends from
RJR Acquisition Corp. utilizing the cash proceeds of the NGH
acquisition and from cash provided by operating activities.
Although RJR expects to complete this authorization within two
years, the timing of repurchases and the number of shares
repurchased under this authorization will depend upon market
conditions.

35



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Debt

On May 18, 1999, RJR completed tender offers to purchase
substantially all of its outstanding debt securities, which
resulted in RJR repurchasing $4 billion of its debt with a
portion of the proceeds from the sale of the international
tobacco business. As a result, RJR recognized an extraordinary
loss from the early extinguishment of debt of $384 million, $250
million after tax.

RJRs revolving credit facility with a syndicate of banks
was amended and restated on November 17, 2000. Under the
amendment and restatement, the committed amount of $1.235
billion was reduced to $622 million as of November 2001 and will
remain at this amount through May 2003. RJR can use the full
facility to obtain loans or letters of credit, at its option.
RJR Tobacco and RJR Acquisition Corp. have guaranteed RJRs
obligations under this revolving credit facility. If RJRs
guaranteed unsecured notes are rated below BBB- by S&P or
Baa3 by Moodys, RJRs other material subsidiaries
will be required to guarantee the facility. If RJR falls below
these thresholds for both of these rating agencies, or two
levels below these thresholds for either of these rating
agencies, RJR and the guarantors will be required to pledge
their assets to secure their obligations. RJR is not required to
maintain compensating balances; however, commitment fees of 1%
of the committed amount are payable quarterly. The credit
facility also limits RJRs ability to pay dividends,
repurchase stock, incur indebtedness, engage in transactions
with affiliates, create liens, acquire, sell or dispose of
specific assets and engage in specified mergers or
consolidations. Borrowings under the revolving credit facility
bear interest at rates that vary with the prime rate or LIBOR.
At December 31, 2001, RJR had $132 million in letters of
credit and no borrowings outstanding under the facility, with
the remaining $490 million of the facility available for
borrowing. In January 2002, a $116 million letter of credit was
cancelled resulting in $606 million of the facility available
for borrowing.

Additionally, as of December 31, 2001, RJR had a trade
letter of credit outstanding of $1 million. RJR also has a $30
million uncommitted, unsecured line of credit with one bank. No
borrowings were outstanding on this line of credit at
December 31, 2001.

RJR filed a registration statement, effective October 8,
1999, in order to issue publicly registered notes of $550
million in principal amount at 7.375% due 2003, $500 million in
principal amount at 7.75% due 2006 and $200 million in principal
amount at 7.875% due 2009 in exchange for an aggregate $1.25
billion of private placement debt securities. The net proceeds
received from the private placement were used for general
corporate purposes. These notes are unsecured obligations and,
unlike RJRs other non-bank debt, are guaranteed by RJR
Tobacco and RJR Acquisition Corp. In addition, any other
subsidiaries of RJR that in the future guarantee the $622
million revolving credit facility, as amended and restated, will
also be required to guarantee these notes. In addition, if RJR
and the guarantors are required to pledge their assets to secure
their obligations under the revolving credit facility, as
amended and restated, they will also be required to pledge their
assets to secure these notes. Generally, the terms of the notes
restrict the issuance of guarantees by subsidiaries, the pledge
of collateral, sale/leaseback transactions and the transfer of
all or substantially all of the assets of RJR and its
subsidiaries.

RJR was in compliance with all covenants and restrictions
imposed by its indebtedness at December 31, 2001.

RJR filed a shelf registration statement, effective
December 22, 1999, for $1.876 billion of debt securities,
guaranteed by RJR Tobacco. On April 19, 2001, a
registration statement became effective to add RJR Acquisition
Corp. as a guarantor of these debt securities. As of the date of
this filing, no debt securities have been issued from this
registration.

On December 11, 2000, related to the acquisition of NGH,
RJR acquired $98 million of 9.5% junior subordinated debentures,
due in 2047, redeemable on September 30, 2003. Interest on
these debentures is paid quarterly in arrears. These debentures
are effectively defeased by an irrevocable trust, which is
included in other assets and deferred charges in the
accompanying consolidated balance sheets as of December 31,
2001 and 2000. The trust holds certain U.S. government
obligations maturing at such times and in such amounts
sufficient to pay interest and principal.

36



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##### 



As of December 31, 2001, RJR also had $330 million of
public notes, at fixed interest rates of 7.625% through 9.25%,
due in 2002 through 2013. See note 13 to the consolidated
financial statements.

Dividends

On February 6, 2002, RJRs board of directors declared
a quarterly cash dividend of $.875 per common share payable on
April 1, 2002 to stockholders of record as of
March 11, 2002.

Capital Expenditures

RJR Tobaccos capital expenditures were $74 million in
2001, $60 million in 2000 and $55 million in 1999. RJR
Tobaccos capital expenditure program is expected to
continue at a level sufficient to support its strategic and
operating needs. RJR Tobacco plans to spend $115 million to $125
million for capital expenditures during 2002, funded primarily
by cash flows from operations. This increase over recent years
is primarily due to increased equipment replacements. There were
no material long-term commitments for capital expenditures as of
December 31, 2001.

Litigation and Settlements

Various legal actions, proceedings and claims, including legal
actions claiming that lung cancer and other diseases, as well as
addiction, have resulted from the use of, or exposure to,
RJRs operating subsidiaries products, are pending or
may be instituted against RJR or its affiliates, including RJR
Tobacco, or indemnitees. For further discussion of litigation
and legal proceedings pending against RJR or its affiliates or
indemnitees, see Business  Litigation Affecting
the Cigarette Industry and Business 
Environmental Matters in Item 1;
 Governmental Activity; note 14 to the
consolidated financial statements; and Exhibit 99.1 to this
report. RJR believes that, notwithstanding the quality of
defenses available to it and its affiliates in litigation
matters, it is possible that its results of operations or cash
flows in particular quarterly or annual periods could be
materially affected by the ultimate outcome of various pending
or future litigation matters, including litigation costs. RJR 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.

In November 1998, RJR Tobacco and the other major U.S. cigarette
manufacturers entered into the MSA with attorneys general
representing most U.S. states, territories and possessions. As
described under Business  Litigation Affecting
the Cigarette Industry in Item 1, the MSA imposes a
stream of future payment obligations on RJR Tobacco and the
other major U.S. cigarette manufacturers and places significant
restrictions on their ability to market and sell cigarettes in
the future. The cash payments made by RJR Tobacco under the MSA
and other existing settlement agreements were $2.4 billion, $2.2
billion and $1.6 billion in 2001, 2000 and 1999, respectively.
RJR Tobacco estimates these payments to be $2.4 billion in 2002
and to exceed $2 billion per year thereafter. However, these
payments will be subject to adjustments for, among other things,
the volume of cigarettes sold by RJR Tobacco, RJR Tobaccos
market share and inflation. RJR Tobacco cannot predict the
impact on its business, competitive position or results of
operations of the MSA and the other existing settlement
agreements, the business activity restrictions to which it is
subject under these agreements or the price increases that it
may be required to make as a result of these agreements.

Governmental Activity

The advertising, sale, taxation and use of cigarettes have been
subject to substantial regulation by government and health
officials for many years. Various state governments have adopted
or are considering, among other things, legislation and
regulations increasing their excise taxes on cigarettes,
restricting displays and advertising of tobacco products,
establishing fire safety standards for cigarettes, raising the
minimum age to possess or purchase tobacco products, requiring
the disclosure of ingredients used in the manufacture of tobacco
products, imposing restrictions on public smoking and
restricting the sale of tobacco products directly to consumers
or other unlicensed recipients or over the Internet. In
addition, in 2002, the U.S. Congress may

37



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##### 





Cigarettes are subject to substantial excise taxes in the United
States. The federal excise tax per pack of 20 cigarettes is $.39
as of January 1, 2002. All states and the District of
Columbia currently impose excise taxes at levels ranging from
$.025 per pack in Virginia to $1.425 per pack in Washington. The
excise tax in New York will increase to $1.50 per pack on
April 13, 2002.

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 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. Among other things, the
Smoking Education Act:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;              
|
| |  | requires a series of four health warnings to be printed on
	cigarette packages and advertising on a rotating basis;                                                                                       
|
| |  | increases type size and area of the warning required in
	cigarette advertisements; and                                                                                                                    
|
| |  | requires that cigarette manufacturers provide annually, on a
	confidential basis, a list of ingredients added to tobacco in
	the manufacture of cigarettes to the Secretary of Health and
	Human Services.

The warnings currently required on cigarette packages and
advertisements are:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | SURGEON GENERALS WARNING: Smoking Causes Lung
	Cancer, Heart Disease, Emphysema, And May Complicate
	Pregnancy;             
|
| |  | SURGEON GENERALS WARNING: Quitting Smoking Now
	Greatly Reduces Serious Risks To Your Health;                               
|
| |  | SURGEON GENERALS WARNING: Smoking By Pregnant Women
	May Result in Fetal Injury, Premature Birth, and Low Birth
	Weight; and
|
| |  | SURGEON GENERALS WARNING: Cigarette Smoke Contains
	Carbon Monoxide.                                                        

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. In
1992, the federal 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, the U.S. Department of Health and Human Services announced
regulations implementing this legislation.

In December 1992, the U.S. Environmental Protection Agency
issued a report that classified environmental tobacco smoke as a
Group A (known human) carcinogen. RJR Tobacco and others filed
suit to challenge the validity of the EPA report. On
July 17, 1998, a U.S. District Court judge held that the
EPAs

38



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##### 





In March 1994, the U.S. Occupational Safety and Health
Administration announced proposed regulations that would
restrict smoking in the workplace to designated smoking rooms
that are separately exhausted to the outside. RJR Tobacco
submitted comments on the proposed regulations during the
comment period that closed in February 1996. In December 2001,
OSHA announced the withdrawal of its proposed regulations,
stating that most of the activity on workplace smoking
restrictions was taking place on the state and local levels.
OSHA further stated that the announcement did not preclude
future agency action, but claimed that 70 percent of
employees now work where smoke-free workplace policies exist.

Legislation imposing various restrictions on public smoking also
has been enacted in 48 states and many local jurisdictions, and
many employers have initiated programs restricting or
eliminating smoking in the workplace. A number of states have
enacted legislation designating a portion of increased cigarette
excise taxes to fund either anti-smoking programs, health care
programs or cancer research. In addition, educational and
research programs addressing health care issues related to
smoking are being funded from industry payments made or to be
made under settlements with state attorneys general. Federal law
prohibits smoking in scheduled passenger aircraft, 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 quantitative order, a trade-secret
disclosure that RJR Tobacco believes could damage the
competitive position of its brands. RJR Tobacco, together with
other cigarette manufacturers, filed suit in the U.S. District
Court for the District of Massachusetts seeking to have the
statute declared invalid. In September 2000, the district court
permanently enjoined enforcement of provisions of the law
relating to ingredient reporting and issued a judgment in favor
of the cigarette manufacturers. On October 16, 2001, a
panel of the United States Court of Appeals for the First
Circuit reversed the district courts decision, ruling that
the ingredients disclosure provisions were valid. The entire
court, however, agreed to re-hear the appeal, reinstating the
district courts injunction in the meantime. Oral argument
before the full court took place on January 7, 2002, and
RJR Tobacco is awaiting the decision.

In August 1998, the Massachusetts Department of Public Health
issued proposed regulations for public comment that would
require annual reporting, beginning July 1, 2000, on a
brand-by-brand basis of 43 smoke constituents in both mainstream
smoke and sidestream smoke. RJR Tobacco, together with other
cigarette manufacturers, filed comments with the MDPH on
October 9, 1998. RJR Tobacco and the other manufacturers
believe that the MDPH lacks legal authority to promulgate these
regulations. Nevertheless, RJR Tobacco and the other
manufacturers have conducted a cooperative benchmarking study to
address certain MDPH concerns. The benchmarking study obtained
smoke constituent information on a representative number of
cigarette brand styles. The final report, including all data,
was presented to the MDPH. The MDPH has drafted additional
proposed regulations requiring further extensive testing of
cigarette brands. The MDPH has engaged in discussions about
these additional proposed regulations with representatives of
the cigarette manufacturers and others, but has not formally
issued them for public comment. Although the MDPH has stated its
intention to promulgate additional reporting requirements, RJR
Tobacco cannot predict the form they will take or the effect
they will have on RJR Tobaccos business or operations.

On May 21, 1999, RJR Tobacco, Lorillard Tobacco Company,
Brown & Williamson Tobacco Corporation and Philip Morris,
Inc. filed lawsuits in the U.S. District Court for the District
of Massachusetts to enjoin implementation of certain
Massachusetts Attorney General regulations concerning the
advertisement and display of tobacco products. The regulations
went beyond those required by the MSA, and banned outdoor
advertising of tobacco products within 1,000 feet of any school
or playground, as well as any indoor tobacco advertising placed
lower than five feet in stores within the 1,000-foot zone. The
district court ruled against the

39



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##### 





In June 2000, the New York state legislature passed legislation
charging the states Office of Fire Prevention and Control
with developing standards for fire-safe or
self-extinguishing cigarettes. The OFPC has until
January 1, 2003 to issue final regulations. Six months from
the issuance of the standards, but no later than July 1,
2003, all cigarettes offered for sale in New York state will be
required to be manufactured to those standards. RJR Tobacco is
unable to predict what design or manufacturing changes will be
necessary for cigarettes manufactured for sale in New York until
the standards are published. Similar legislation is being
considered by other state legislatures.

On September 11, 2001, RJR Tobacco, together with several
retailers who sell RJR Tobaccos products, filed a Petition
for Declaratory Judgment and Injunctive Relief in the District
Court of Lancaster County, Nebraska, challenging the validity of
the Nebraska Department of Revenues interpretation of 316
N.A.C. §§ 57-012, 57-015 and 57-016. The
Department of Revenue maintains that this regulation prohibits
the advertisement of RJR Tobaccos manufacturers
promotion known as a buy down to consumers. The
plaintiffs have challenged the Department of Revenues
interpretation of this regulation on the grounds that such
action exceeded the Departments statutory authority,
constituted an unlawful rulemaking, violated the United States
and Nebraska constitutions and is preempted by federal law. On
October 15, 2001, the defendants filed a Demurrer to the
plaintiffs Petition for Declaratory Judgment and
Injunctive Relief. The Court has not yet ruled on the
parties motions.

A price differential exists between cigarettes manufactured for
sale abroad and cigarettes manufactured for U.S. sale;
consequently, a domestic gray market has developed
in cigarettes manufactured for sale abroad. These cigarettes
compete with the cigarettes RJR Tobacco manufactures for
domestic sale. The U.S. federal government and 49 states have
enacted legislation prohibiting the sale and distribution of
gray market cigarettes. In addition, RJR Tobacco has taken legal
action against certain distributors and retailers who engage in
such practices.

Two states have passed and various states are considering
legislation to ensure nonparticipating manufacturers
under the MSA are making required escrow payments under the MSA.
Failure to make escrow payments could result in the loss of a
nonparticipating manufacturers ability to sell tobacco
products in a respective state.

Tobacco leaf is an agricultural product subject to U.S.
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 bases tariffs
on import volumes. The tariff rate quotas have been established
by the United States with overseas tobacco producers and became
effective on September 13, 1995. Because of the importance
of tobacco leaf as a raw material for RJR Tobaccos
products, substantial changes in the legislative or regulatory
environment applicable to tobacco leaf could have a material
effect on RJR Tobaccos results of operations and cash
flows.

It is not possible to determine what additional federal, state
or local legislation or regulations relating to smoking or
cigarettes will be enacted or to predict the effect of new
legislation or regulations on RJR Tobacco or the cigarette
industry in general, but any new legislation or regulations
could have an adverse effect on RJR Tobacco or the cigarette
industry in general.

For further discussion of litigation and legal proceedings
pending against RJR, its affiliates, including RJR Tobacco, or
indemnitees, see Business  Litigation Affecting
the Cigarette Industry and Business 
Environmental Matters in Item 1; note 14 to the
consolidated financial statements; and Exhibit 99.1 to this
report.

40



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##### 



Environmental Matters

RJR and its subsidiaries are subject to federal, state and local
environmental laws and regulations concerning the discharge,
storage, handling and disposal of hazardous or toxic substances.
RJR and its subsidiaries have been engaged in a continuing
program to assure compliance with these environmental 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 regulations, RJR does not
expect such expenditures or other costs to have a material
adverse effect on the business or financial condition of RJR or
its subsidiaries.

For further discussion of environmental matters, see
Business  Environmental Matters in
Item 1 and note 14 to the consolidated financial statements.

Other Contingencies

Until the acquisition by merger by Philip Morris Companies, Inc.
of Nabisco from NGH on December 11, 2000, NGH and Nabisco
were members of the consolidated group of NGH for U.S. federal
income tax purposes. Each member of a consolidated group is
jointly and severally liable for the U.S. federal income tax
liability of other members of the group as well as for pension
and funding liabilities of the other group members. NGH, now
known as RJR Acquisition Corp., continues to be jointly and
severally liable for these Nabisco liabilities prior to
December 11, 2000.

In connection with Philip Morris acquisition by merger of
Nabisco and RJRs subsequent acquisition by merger of NGH,
Philip Morris, Nabisco and NGH entered into a voting and
indemnity agreement that generally seeks to allocate tax
liabilities ratably based upon NGHs taxable income and
that of Nabisco, had the parties been separate taxpayers. If
Philip Morris and Nabisco are unable to satisfy their
obligations under this agreement, NGH, now known as RJR
Acquisition Corp., would be responsible for satisfying them.

In connection with the sale of the international tobacco
business to Japan Tobacco Inc. on May 12, 1999, RJR and RJR
Tobacco agreed to indemnify Japan Tobacco against (1) any
liabilities, costs and expenses arising out of the imposition or
assessment of any tax with respect to the international tobacco
business arising prior to the sale, other than as reflected on
the closing balance sheet, (2) any liabilities, costs and
expenses that Japan Tobacco or any of its affiliates, including
the acquired entities, may incur after the sale in respect of
any of RJRs or RJR Tobaccos employee benefit and
welfare plans and (3) any liabilities, costs and expenses
incurred by Japan Tobacco or any of its affiliates arising out
of certain activities of Northern Brands. See
Business  Litigation Affecting the Cigarette
Industry in Item 1 and note 14 to the consolidated
financial statements for a description of the Northern Brands
litigation. Although it is impossible to predict the outcome of
the Northern Brands litigation or the amount of liabilities,
costs and expenses, a significant adverse outcome regarding any
of these items could have an adverse effect on either or both of
RJR and RJR Tobacco.

Acquisition

On January 16, 2002, RJR acquired 100% of the voting stock
of privately held Santa Fe for $340 million in cash, subject to
post-closing adjustments. Fiesta Acquisition Corp., a wholly
owned subsidiary of RJR, merged with and into Santa Fe, and
Santa Fe, being the surviving corporation, became a wholly owned
subsidiary of RJR. The acquisition was accounted for as a
purchase, with its cost allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed.

RJR believes that Santa Fe will enhance RJRs consolidated
earnings, and that its approach to building brand equity is
consistent with RJR Tobaccos strategy for its key brands.
Santa Fes sales have tripled over the past five years,
based on the success of cigarettes and pouch tobaccos sold under
the NATURAL AMERICAN SPIRIT brand name. NATURAL AMERICAN SPIRIT
cigarettes are made with no-additive tobacco blends and are
marketed in distinctive packages bearing the silhouette of an
American Indian in a feathered headdress. The NATURAL AMERICAN
SPIRIT retail share of market during 2001 was .21% in the United
States. Santa Fe also has a small, but growing international
tobacco business.



---

41



---



##### 



Statements included in Managements Discussion and
Analysis of Financial Condition and Results of Operations
which are not historical in nature are forward-looking
statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements regarding our future performance and
financial results include certain risks and uncertainties that
could cause actual results to differ materially from those
described in the forward-looking statements. These risks include
the substantial and increasing regulation and taxation of the
cigarette industry; various legal actions, proceedings and
claims arising out of the tobacco business and claimed health
effects of cigarettes that are pending or may be instituted
against RJR or its subsidiaries; the substantial payment
obligations and limitations on the advertising and marketing of
cigarettes, under various litigation settlement agreements; the
continuing decline in volume in the domestic cigarette industry;
competition from other cigarette manufacturers; the success of
new product innovations and acquisitions; the effect of market
conditions on the performance of pension assets and the return
on corporate cash; and the ratings of RJRs securities. Due
to these uncertainties and risks, you are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this report.



|         |                                                           
|-------- | ----------------------------------------------------------
|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 due to adverse changes in financial market prices and
rates. RJR and its subsidiaries are exposed to interest rate
risk directly related to their normal investing and funding
activities. In addition, since the second quarter of 2001, RJR
Tobacco has been exposed to insignificant foreign currency
exchange rate risk related to an unrecognized firm commitment
for the purchase of equipment denominated in Euros. See notes 8,
10, 13 and 15 to the consolidated financial statements for more
information. RJR and its subsidiaries have established various
policies and procedures to manage their exposure to market risks
and use major institutions with high credit ratings to minimize
their investment and credit risk. Derivative financial
instruments are not used for trading or speculative purposes.

The value-at-risk model is used to statistically measure the
maximum fair value, cash flows or earnings loss over one year
from adverse changes in interest rates and foreign currency
rates. The computation assumes a 95% confidence level under
normal market conditions. This model indicates that near term
changes in interest rates and foreign currency rates will not
have a material impact on the future earnings, fair values or
cash flows, based on the historical movements in interest rates,
foreign currency rates and the fair value of market-rate
sensitive instruments at December 31, 2001.

42



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##### 



Item 8. Financial Statements and Supplementary Data

Independent Auditors Report

The Board of Directors



We have audited the accompanying consolidated balance sheets of
R.J. Reynolds Tobacco Holdings, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders equity and
comprehensive income, and cash flows for the years then ended.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of R.J. Reynolds Tobacco Holdings, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America.

/s/ KPMG LLP

Greensboro, North Carolina



43



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##### 



Independent Auditors Report

R.J. Reynolds Tobacco Holdings, Inc.:

We have audited the accompanying consolidated statements of
income, cash flows and stockholders equity and
comprehensive income of R.J. Reynolds Tobacco Holdings, Inc. and
subsidiaries (RJR) for the year ended
December 31, 1999. These financial statements are the
responsibility of RJRs management. Our responsibility is
to express an opinion on these financial statements based on our
audit.

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

In our opinion, the consolidated financial statements present
fairly, in all material respects, the results of operations and
cash flows of RJR for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the
United States of America.

/s/ Deloitte & Touche LLP

Raleigh, North Carolina





44



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##### 



Report of Managements Responsibility for Financial
Statements

The financial statements presented in this report are the
responsibility of management, and have been prepared in
accordance with generally accepted accounting principles using,
where appropriate, managements best estimates and
judgment. Management maintains a system of internal controls to
provide reasonable assurance that RJRs assets are
safeguarded and transactions are executed as authorized and
properly recorded. The system includes established policies and
procedures, a program of internal audits, management reviews and
careful selection and training of qualified personnel.

The audit committee of RJRs board of directors is composed
solely of outside directors. It meets periodically with
management, the internal auditors and the independent auditors,
to discuss and address internal accounting control, auditing and
financial reporting matters. Both independent and internal
auditors have unrestricted access to the audit committee.

/s/ Andrew J. Schindler




Chairman of the Board, President and


Chief Executive Officer


/s/ Kenneth J. Lapiejko




Executive Vice President and


Chief Financial Officer


45



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##### 



CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Millions, Except Per Share Amounts)


|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |       |       | 
|----------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------ | ----- | ----- | ---- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                                              |                                                                         |                                                       
|                                                                              |                                                                         | For the Years Ended December 31,                      
|                                                                              |                                                                         |                                                       
|                                                                              |                                                                         | 2001                                                   |       | 2000  |      | 1999
|                                                                              |                                                                         |                                                        |       |       |      |     
|Net sales*                                                                    |                                                                         | $                                                      | 8,585 |       |      | $    | 8,058 |       |       | $ | 7,468 |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Costs and expenses:                                                           |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Cost of products sold*                                                  |                                                        |       | 3,560 |      |      |       | 3,436 |       |   |       | 3,292 |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Selling, general and administrative expenses                            |                                                        |       | 3,745 |      |      |       | 3,342 |       |   |       | 2,924 |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Amortization of trademarks and goodwill                                 |                                                        |       | 362   |      |      |       | 366   |       |   |       | 366   |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Impairment charge                                                       |                                                        |       |      |      |      |       | 89    |       |   |       |      |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Headquarters close-down and related charges                             |                                                        |       |      |      |      |       |      |       |   |       | 143   |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Other operating expense                                                 |                                                        |       |      |      |      |       | (3    | )     |   |       | 21    |      
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Operating income                                       |       |       | 918  |      |       |       | 828   |   |       |       | 722   | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Interest and debt expense                                                     |                                                                         |                                                        | 150   |       |      |      | 168   |       |       |   | 268   |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Interest income                                                               |                                                                         |                                                        | (137  | )     |      |      | (119  | )     |       |   | (114  | )    
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Other expense, net                                                            |                                                                         |                                                        | 13    |       |      |      | 31    |       |       |   | 58    |      
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Income from continuing operations before
	income taxes |       |       | 892  |      |       |       | 748   |   |       |       | 510   | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Provision for income taxes                                                    |                                                                         |                                                        | 448   |       |      |      | 396   |       |       |   | 315   |      
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Income from continuing operations                      |       |       | 444  |      |       |       | 352   |   |       |       | 195   | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Discontinued operations:                                                      |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income from operations of discontinued
	businesses, net of income taxes |                                                        |       |      |      |      |       |      |       |   |       | 76    |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Gain (loss) on discontinued businesses, net
	of income taxes            |                                                        |       | (9    | )    |      |       |      |       |   |       | 2,322 |      
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Income before extraordinary items                      |       |       | 435  |      |       |       | 352   |   |       |       | 2,593 | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Extraordinary itemgain on acquisition, net
	of income taxes                  |                                                                         |                                                        |      |       |      |      | 1,475 |       |       |   |      |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Extraordinary itemloss on early
	extinguishment of debt, net of income taxes |                                                                         |                                                        |      |       |      |      |      |       |       |   | (250  | )    
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Net income                                             |       | $     | 435  |      |       | $     | 1,827 |   |       | $     | 2,343 | 
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|Basic income (loss) per share:                                                |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income from continuing operations                                       |                                                        | $     | 4.57  |      |      | $     | 3.48  |       |   | $     | 1.80  |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income (loss) from discontinued operations                              |                                                        |       | (.09  | )    |      |       |      |       |   |       | 22.10 |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Extraordinary itemsgain (loss)                                         |                                                        |       |      |      |      |       | 14.56 |       |   |       | (2.30 | )    
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Net income                                             |       | $     | 4.48 |      |       | $     | 18.04 |   |       | $     | 21.60 | 
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|Diluted income (loss) per
	share:                                             |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income from continuing operations                                       |                                                        | $     | 4.48  |      |      | $     | 3.46  |       |   | $     | 1.80  |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income (loss) from discontinued operations                              |                                                        |       | (.09  | )    |      |       |      |       |   |       | 22.08 |      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Extraordinary itemsgain (loss)                                         |                                                        |       |      |      |      |       | 14.48 |       |   |       | (2.30 | )    
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|                                                                              |                                                                         | Net income                                             |       | $     | 4.39 |      |       | $     | 17.94 |   |       | $     | 21.58 | 
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      
|Dividends declared per share                                                  |                                                                         | $                                                      | 3.30  |       |      | $    | 3.10  |       |       | $ | 1.55  |      
|                                                                              |                                                                         |                                                        |       |       |      |      |       |       |       |   |       |      






|  |                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes excise taxes of $1,529 million, $1,631 million and
	$1,173 million for the years ended December 31, 2001, 2000
	and 1999, respectively.

See Notes to Consolidated Financial Statements

46



---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Millions)


|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |        |        |     |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------------------------- | ---- | ---- | ---- | ----- | ----- | ------ | ---- | ------ | ------ | ------ | --- | -
|                                                                                                                                                          |                                                                                             |                                                                       
|                                                                                                                                                          |                                                                                             | For the Years Ended December 31,                                      
|                                                                                                                                                          |                                                                                             |                                                                       
|                                                                                                                                                          |                                                                                             | 2001                                                                   |                                                                  | 2000 |      | 1999
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |     
|Cash flows from (used in) operating
	activities:                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Net income                                                                                  |                                                                        | $                                                                | 435  |      |      | $     | 1,827 |        |      | $      | 2,343  |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Less income (loss) from discontinued
	operations                                            |                                                                        |                                                                  | (9   | )    |      |       |      |        |      |        | 2,398  |       
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                          | Subtotal                                                                                    |                                                                        |                                                                  | 444  |      |      |       | 1,827 |        |      |        | (55    | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Adjustments to reconcile to net cash flows from
	(used in) continuing operating activities: |                                                                        |                                                                  |      |      |      |       |       |        |      |        |        |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Depreciation and amortization                                          |                                                                  |      | 491  |      |       |       | 485    |      |        |        | 482    |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Impairment charge                                                      |                                                                  |      |     |      |       |       | 89     |      |        |        |       |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Deferred income tax benefit                                            |                                                                  |      | (43  | )    |       |       | (31    | )    |        |        | (307   | )  
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Extraordinary gain on acquisition                                      |                                                                  |      |     |      |       |       | (1,475 | )    |        |        |       |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Extraordinary loss on early extinguishment of debt                     |                                                                  |      |     |      |       |       |       |      |        |        | 384    |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Other changes, net of acquisition effects, that
	provided (used) cash: |                                                                  |      |      |      |       |       |        |      |        |        |        |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             |                                                                        | Accounts and notes receivable                                    |      |      | (6   | )     |       |        | (12  | )      |        |        | (32 | )
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             |                                                                        | Inventories                                                      |      |      | (141 | )     |       |        | (23  | )      |        |        | (41 | )
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             |                                                                        | Accounts payable and accrued liabilities
	including income taxes |      |      | (211 | )     |       |        | (194 | )      |        |        | (50 | )
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Litigation bonds                                                       |                                                                  |      |     |      |       |       | (118   | )    |        |        |       |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Tobacco settlement and related expenses                                |                                                                  |      | 123  |      |       |       | 82     |      |        |        | 564    |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Restructuring and related expenses, net of cash                        |                                                                  |      |     |      |       |       |       |      |        |        | (8     | )  
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Headquarters close-down and related charges, net
	of cash              |                                                                  |      |     |      |       |       |       |      |        |        | 21     |    
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          |                                                                                             | Other, net                                                             |                                                                  |      | (31  | )    |       |       | (40    | )    |        |        | (29    | )  
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                          |                                                                                             | Net cash flows from operating activities                               |                                                                  |      | 626  |      |       |       | 590    |      |        |        | 929    |    
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|Cash flows from (used in) investing
	activities:                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Short-term investments                                                                      |                                                                        |                                                                  | (207 | )    |      |       | 110   |        |      |        | (110   | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Capital expenditures                                                                        |                                                                        |                                                                  | (74  | )    |      |       | (60   | )      |      |        | (55    | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Net proceeds from acquisition                                                               |                                                                        |                                                                  |     |      |      |       | 1,519 |        |      |        |       |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Net proceeds from the sale of the international
	tobacco business                           |                                                                        |                                                                  | (14  | )    |      |       |      |        |      |        | 7,760  |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Other, net                                                                                  |                                                                        |                                                                  | (12  | )    |      |       | 4     |        |      |        | (19    | )     
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                          |                                                                                             | Net cash flows from (used in) investing activities                     |                                                                  |      | (307 | )    |       |       | 1,573  |      |        |        | 7,576  |    
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|Cash flows from (used in) financing
	activities:                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Repurchase of common stock                                                                  |                                                                        |                                                                  | (494 | )    |      |       | (231  | )      |      |        | (55    | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Dividends paid on common stock                                                              |                                                                        |                                                                  | (320 | )    |      |       | (322  | )      |      |        | (85    | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Repayments of long-term debt                                                                |                                                                        |                                                                  | (73  | )    |      |       | (387  | )      |      |        | (4,450 | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Proceeds from exercise of stock options                                                     |                                                                        |                                                                  | 45   |      |      |       | 59    |        |      |        |       |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Proceeds from issuance of long-term debt                                                    |                                                                        |                                                                  |     |      |      |       |      |        |      |        | 1,244  |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Transfers and payments to former parent                                                     |                                                                        |                                                                  |     |      |      |       |      |        |      |        | (1,968 | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Decrease in short-term borrowing                                                            |                                                                        |                                                                  |     |      |      |       |      |        |      |        | (62    | )     
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                          | Other, net                                                                                  |                                                                        |                                                                  |     |      |      |       |      |        |      |        | 17     |       
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|                                                                                                                                                          |                                                                                             | Net cash flows used in financing activities                            |                                                                  |      | (842 | )    |       |       | (881   | )    |        |        | (5,359 | )  
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|Net cash flows related to discontinued operations
	(including income taxes paid on gain on sale of the
	international tobacco business of $2,085 in 1999) |                                                                                             |                                                                        |                                                                 |      |      |      | 84    |       |        |      | (1,969 | )     
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|Net change in cash and cash equivalents                                                                                                                   |                                                                                             |                                                                        | (523                                                             | )    |      |      | 1,366 |       |        |      | 1,177  |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Cash and cash equivalents at beginning of year                                                                                                            |                                                                                             |                                                                        | 2,543                                                            |      |      |      | 1,177 |       |        |      |       |       
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|Cash and cash equivalents at end of year                                                                                                                  |                                                                                             | $                                                                      | 2,020                                                            |      |      | $    | 2,543 |       |        | $    | 1,177  |       
|                                                                                                                                                          |                                                                                             |                                                                        |                                                                  |      |      |      |       |       |        |      |        |       
|Income taxes paid, net of refunds                                                                                                                         |                                                                                             | $                                                                      | 457                                                              |      |      | $    | 309   |       |        | $    | 2,605  |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Interest paid                                                                                                                                             |                                                                                             | $                                                                      | 141                                                              |      |      | $    | 153   |       |        | $    | 341    |       
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|                                                                                                                                                         
|Tobacco settlement and related expense payments                                                                                                           |                                                                                             | $                                                                      | 2,393                                                            |      |      | $    | 2,247 |       |        | $    | 1,636  |       

See Notes to Consolidated Financial Statements

47



---



##### 



CONSOLIDATED BALANCE SHEETS

(Dollars in Millions)


|                                                                            |                                                                                         |                               |                                    |       |       |       |        |       |       |       | 
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------- | ----- | ----- | ----- | ------ | ----- | ----- | ----- | 
|                                                                            |                                                                                         |                              
|                                                                            |                                                                                         | December 31,                 
|                                                                            |                                                                                         |                              
|                                                                            |                                                                                         | 2001                          |                                    | 2000 
|                                                                            |                                                                                         |                               |                                    |      
|Assets                                                                      |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Current assets:                                                             |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cash and cash equivalents                                                               |                               | $                                  | 2,020 |       |       | $      | 2,543 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Short-term investments                                                                  |                               |                                    | 207   |       |       |        |      |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accounts and notes receivable, net of allowance
	(2001  $13; 2000  $11)               |                               |                                    | 106   |       |       |        | 100   |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Inventories                                                                             |                               |                                    | 730   |       |       |        | 588   |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Deferred income taxes                                                                   |                               |                                    | 538   |       |       |        | 459   |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Prepaid excise taxes and other                                                          |                               |                                    | 255   |       |       |        | 181   |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         | Total current assets          |                                    |       | 3,856 |       |        |       | 3,871 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Property, plant and equipment, at cost:                                     |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Land and land improvements                                                              |                               |                                    | 94    |       |       |        | 94    |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Buildings and leasehold improvements                                                    |                               |                                    | 668   |       |       |        | 666   |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Machinery and equipment                                                                 |                               |                                    | 1,557 |       |       |        | 1,531 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Construction-in-process                                                                 |                               |                                    | 61    |       |       |        | 34    |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            | Total property, plant and equipment                                                     |                               |                                    | 2,380 |       |       |        | 2,325 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Less accumulated depreciation |                                    |       | 1,330 |       |        |       | 1,277 |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         |                               | Property, plant and equipment, net |       |       | 1,050 |        |       |       | 1,048 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Trademarks, net of accumulated amortization
	(2001  $1,450; 2000  $1,348) |                                                                                         |                               | 2,773                              |       |       |       | 2,875  |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Goodwill, net of accumulated amortization
	(2001  $3,359; 2000  $3,099)   |                                                                                         |                               | 6,875                              |       |       |       | 7,303  |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other assets and deferred charges                                           |                                                                                         |                               | 496                                |       |       |       | 457    |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         | $                             | 15,050                             |       |       | $     | 15,554 |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|Liabilities and stockholders
	equity                                       |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Current liabilities:                                                        |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accounts payable                                                                        |                               | $                                  | 74    |       |       | $      | 80    |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Tobacco settlement and related accruals                                                 |                               |                                    | 1,520 |       |       |        | 1,394 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accrued liabilities                                                                     |                               |                                    | 1,155 |       |       |        | 1,229 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Current maturities of long-term debt                                                    |                               |                                    | 43    |       |       |        | 73    |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         | Total current liabilities     |                                    |       | 2,792 |       |        |       | 2,776 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Long-term debt (less current maturities)                                    |                                                                                         |                               | 1,631                              |       |       |       | 1,674  |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Deferred income taxes                                                       |                                                                                         |                               | 1,726                              |       |       |       | 1,856  |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Long-term retirement benefits                                               |                                                                                         |                               | 514                                |       |       |       | 543    |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other noncurrent liabilities                                                |                                                                                         |                               | 361                                |       |       |       | 269    |      
|Commitments and contingencies                                               |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Stockholders equity:                                                       |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Common stock (shares issued: 2001 
	114,046,712; 2000  112,563,918)                   |                               |                                    | 1     |       |       |        | 1     |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Paid-in capital                                                                         |                               |                                    | 7,371 |       |       |        | 7,291 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Retained earnings                                                                       |                               |                                    | 1,593 |       |       |        | 1,481 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Accumulated other comprehensive loss 
	cumulative minimum pension liability adjustment |                               |                                    | (121  | )     |       |        | (8    | )    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Unamortized restricted stock                                                            |                               |                                    | (42   | )     |       |        | (41   | )    
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         |                               | 8,802                              |       |       |       | 8,724  |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Less treasury stock (shares: 2001 
	19,810,832; 2000  11,299,092), at cost            |                               |                                    | (776  | )     |       |        | (288  | )    
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         |                               | Total stockholders equity         |       |       | 8,026 |        |       |       | 8,436 | 
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      
|                                                                            |                                                                                         | $                             | 15,050                             |       |       | $     | 15,554 |      
|                                                                            |                                                                                         |                               |                                    |       |       |       |        |      

See Notes to Consolidated Financial Statements

48



---



##### 



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME


(Dollars in Millions)


|                                                                 |  |        |   |         |  |              |        |               |  |             |        |          |  |               |      |   |  |   |     |   |  |   |      |   |  |   |        |  
|---------------------------------------------------------------- |  | ------ | - | ------- |  | ------------ | ------ | ------------- |  | ----------- | ------ | -------- |  | ------------- | ---- | - |  | - | --- | - |  | - | ---- | - |  | - | ------ | -
|                                                                 |  |        |   |         |  | Retained     |        | Accumulated   |  |             |        |          |  |              
|                                                                 |  |        |   |         |  | Earnings     |        | Other         |  | Unamortized |        |          |  | Total        
|                                                                 |  | Common |   | Paid-in |  | (Accumulated |        | Comprehensive |  | Restricted  |        | Treasury |  | Stockholders
|                                                                 |  | Stock  |   | Capital |  | Deficit)     |        | Income (Loss) |  | Stock       |        | Stock    |  | Equity       
|                                                                 |  |        |   |         |  |              |        |               |  |             |        |          |  |              
|Balance at December 31, 1998                                     |  | $      | 1 |         |  | $            | 10,861 |               |  | $           | (516   | )        |  | $             | (460 | ) |  | $ |    |   |  | $ |     |   |  | $ | 9,886  |  
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |  |        |  |         |  |              |       |               |  |             | 2,343  |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 2,343  |  
|                                                                
|                                                                
|                                                                
|                                                                
|Foreign currency translation, net of tax benefit
	of $11 million |  |        |  |         |  |              |       |               |  |             |       |          |  |               | (86  | ) |  |   |    |   |  |   |     |   |  |   | (86    | )
|                                                                
|                                                                
|                                                                
|                                                                
|Minimum pension liability, net of tax benefit of
	$4 million     |  |        |  |         |  |              |       |               |  |             |       |          |  |               | (7   | ) |  |   |    |   |  |   |     |   |  |   | (7     | )
|                                                                
|                                                                
|                                                                
|                                                                
|Total comprehensive income                                       |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Dividends                                                        |  |        |  |         |  |              | (169   | )             |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | (169   | )
|                                                                
|                                                                
|                                                                
|                                                                
|Items related to international tobacco business
	(see note 2)    |  |        |  |         |  |              |       |               |  |             |       |          |  |               | 218  |   |  |   |    |   |  |   |     |   |  |   | 218    |  
|                                                                
|                                                                
|                                                                
|                                                                
|Merger transaction*                                              |  |        |  |         |  |              | (3,435 | )             |  |             | (1,958 | )        |  |               | 322  |   |  |   |    |   |  |   |     |   |  |   | (5,071 | )
|                                                                
|                                                                
|                                                                
|                                                                
|Stock options exercised                                          |  |        |  |         |  |              | 4      |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 4      |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock awarded                                         |  |        |  |         |  |              | 23     |               |  |             |       |          |  |               |     |   |  |   | (32 | ) |  |   |     |   |  |   | (9     | )
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock amortization                                    |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   | 7   |   |  |   |     |   |  |   | 7      |  
|                                                                
|                                                                
|                                                                
|                                                                
|Common stock repurchased                                         |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   | (55  | ) |  |   | (55    | )
|                                                                
|                                                                
|                                                                
|                                                                
|Other                                                            |  |        |  |         |  |              | 3      |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 3      |  
|                                                                 |  |        |   |         |  |              |        |               |  |             |        |          |  |               |      |   |  |   |     |   |  |   |      |   |  |   |        |  
|Balance at December 31, 1999                                     |  |        | 1 |         |  |              | 7,287  |               |  |             | (131   | )        |  |               | (13  | ) |  |   | (25 | ) |  |   | (55  | ) |  |   | 7,064  |  
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |  |        |  |         |  |              |       |               |  |             | 1,827  |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 1,827  |  
|                                                                
|                                                                
|                                                                
|                                                                
|Minimum pension liability, net of tax expense of
	$3 million     |  |        |  |         |  |              |       |               |  |             |       |          |  |               | 5    |   |  |   |    |   |  |   |     |   |  |   | 5      |  
|                                                                
|                                                                
|                                                                
|                                                                
|Total comprehensive income                                       |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Dividends                                                        |  |        |  |         |  |              | (102   | )             |  |             | (215   | )        |  |               |     |   |  |   |    |   |  |   |     |   |  |   | (317   | )
|                                                                
|                                                                
|                                                                
|                                                                
|Stock options exercised                                          |  |        |  |         |  |              | 62     |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 62     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Tax benefit on stock options exercised                           |  |        |  |         |  |              | 7      |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 7      |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock awarded                                         |  |        |  |         |  |              | 37     |               |  |             |       |          |  |               |     |   |  |   | (37 | ) |  |   |     |   |  |   |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock amortization                                    |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   | 19  |   |  |   |     |   |  |   | 19     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock forfeited                                       |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   | 2   |   |  |   | (2   | ) |  |   |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Common stock repurchased                                         |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   | (231 | ) |  |   | (231   | )
|                                                                 |  |        |   |         |  |              |        |               |  |             |        |          |  |               |      |   |  |   |     |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2000                                     |  |        | 1 |         |  |              | 7,291  |               |  |             | 1,481  |          |  |               | (8   | ) |  |   | (41 | ) |  |   | (288 | ) |  |   | 8,436  |  
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |  |        |  |         |  |              |       |               |  |             | 435    |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 435    |  
|                                                                
|                                                                
|                                                                
|                                                                
|Minimum pension liability, net of tax benefit of
	$61 million    |  |        |  |         |  |              |       |               |  |             |       |          |  |               | (113 | ) |  |   |    |   |  |   |     |   |  |   | (113   | )
|                                                                
|                                                                
|                                                                
|                                                                
|Total comprehensive income                                       |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Dividends                                                        |  |        |  |         |  |              |       |               |  |             | (324   | )        |  |               |     |   |  |   |    |   |  |   |     |   |  |   | (324   | )
|                                                                
|                                                                
|                                                                
|                                                                
|Stock options exercised                                          |  |        |  |         |  |              | 42     |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 42     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Tax benefit on stock options exercised                           |  |        |  |         |  |              | 20     |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   |     |   |  |   | 20     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock awarded                                         |  |        |  |         |  |              | 18     |               |  |             |       |          |  |               |     |   |  |   | (26 | ) |  |   | 8    |   |  |   |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock amortization                                    |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   | 23  |   |  |   |     |   |  |   | 23     |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock forfeited                                       |  |        |  |         |  |              |       |               |  |             | 1      |          |  |               |     |   |  |   | 2   |   |  |   | (2   | ) |  |   | 1      |  
|                                                                
|                                                                
|                                                                
|                                                                
|Common stock repurchased                                         |  |        |  |         |  |              |       |               |  |             |       |          |  |               |     |   |  |   |    |   |  |   | (494 | ) |  |   | (494   | )
|                                                                 |  |        |   |         |  |              |        |               |  |             |        |          |  |               |      |   |  |   |     |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2001                                     |  | $      | 1 |         |  | $            | 7,371  |               |  | $           | 1,593  |          |  | $             | (121 | ) |  | $ | (42 | ) |  | $ | (776 | ) |  | $ | 8,026  |  
|                                                                 |  |        |   |         |  |              |        |               |  |             |        |          |  |               |      |   |  |   |     |   |  |   |      |   |  |   |        |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                 |  |               |       |  
|---------------------------------------------------------------- |  | ------------- | ----- | -
|                                                                 |  | Comprehensive
|                                                                 |  | Income       
|                                                                 |  |              
|Balance at December 31, 1998                                     |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |  | $             | 2,343 |  
|                                                                
|                                                                
|                                                                
|                                                                
|Foreign currency translation, net of tax benefit
	of $11 million |  |               | (86   | )
|                                                                
|                                                                
|                                                                
|                                                                
|Minimum pension liability, net of tax benefit of
	$4 million     |  |               | (7    | )
|                                                                 |  |               |       |  
|Total comprehensive income                                       |  | $             | 2,250 |  
|                                                                 |  |               |       |  
|Dividends                                                        |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Items related to international tobacco business
	(see note 2)    |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Merger transaction*                                              |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Stock options exercised                                          |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock awarded                                         |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock amortization                                    |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Common stock repurchased                                         |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Other                                                            |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Balance at December 31, 1999                                     |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |  | $             | 1,827 |  
|                                                                
|                                                                
|                                                                
|                                                                
|Minimum pension liability, net of tax expense of
	$3 million     |  |               | 5     |  
|                                                                 |  |               |       |  
|Total comprehensive income                                       |  | $             | 1,832 |  
|                                                                 |  |               |       |  
|Dividends                                                        |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Stock options exercised                                          |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Tax benefit on stock options exercised                           |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock awarded                                         |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock amortization                                    |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock forfeited                                       |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Common stock repurchased                                         |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Balance at December 31, 2000                                     |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |  | $             | 435   |  
|                                                                
|                                                                
|                                                                
|                                                                
|Minimum pension liability, net of tax benefit of
	$61 million    |  |               | (113  | )
|                                                                 |  |               |       |  
|Total comprehensive income                                       |  | $             | 322   |  
|                                                                 |  |               |       |  
|Dividends                                                        |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Stock options exercised                                          |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Tax benefit on stock options exercised                           |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock awarded                                         |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock amortization                                    |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Restricted stock forfeited                                       |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Common stock repurchased                                         |  |               |       |  
|                                                                
|                                                                
|                                                                
|                                                                
|Balance at December 31, 2001                                     |  |               |       |  






|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Transfer of RJRs 80.5% interest in Nabisco, together with
	a portion of the proceeds from the sale of the international
	tobacco business, to NGH. See note 2.

See Notes to Consolidated Financial Statements

49



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting
Policies

Basis of Presentation

The consolidated financial statements include the accounts of
R.J. Reynolds Tobacco Holdings, Inc., referred to as RJR, and
its wholly owned subsidiaries, including R. J. Reynolds Tobacco
Company, referred to as RJR Tobacco, and RJR Acquisition Corp.

The equity method is used to account for investments in
businesses that RJR does not control, but have the ability to
significantly influence operating and financial policies. The
cost method is used to account for investments in which RJR does
not have the ability to significantly influence operating and
financial policies. All material intercompany balances have been
eliminated.

The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires estimates and assumptions to
be made that affect the reported amounts in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates. Certain reclassifications
were made to conform prior years financial statements to
the current presentation.

Discontinued operations for the year ended December 31,
2001 included a $14 million, $9 million after tax, purchase
price adjustment of the 1999 gain on the sale of the
international tobacco business to Japan Tobacco Inc. Including
this adjustment, the net after-tax gain on the sale of the
international tobacco business was $2.3 billion.

For 1999, the account balances and activities of the
international tobacco business and Nabisco Holdings Corp.,
referred to as Nabisco, are segregated and reported as
discontinued operations in RJRs consolidated financial
statements. See note 2 for more discussion.

All dollar amounts are presented in millions, unless noted
otherwise.

Cash Equivalents and Short-Term Investments

Cash equivalents include money market funds, commercial paper
and time deposits in major institutions with high credit ratings
to minimize investment risk. As short-term, highly liquid
investments readily convertible to known amounts of cash, with
remaining maturities of three months or less at the time of
purchase, cash equivalents have carrying values that approximate
fair values. Debt securities included in cash equivalents are
classified and accounted for as held-to-maturity or, in certain
instances, available-for-sale securities. The appropriate
classification of cash equivalents and short-term investments
are determined at the time of purchase and the classification is
reassessed at each reporting date. Short-term investments
include investment pools that are classified and accounted for
as available-for-sale securities.

Investment securities classified as available-for-sale are
reported at fair value based on current market quotes with
unrealized gains and losses, net of any tax effect, recorded as
a separate component of comprehensive income in
stockholders equity until realized. Interest income and
amortization of premiums and discounts are included in interest
income. Gains and losses on investment securities sold are
determined based on the specific identification method and are
included in other expense, net. Unrealized losses that are other
than temporary are recognized in net income. No securities are
held for speculative or trading purposes.

Inventories

Inventories are stated at the lower of cost or market. The cost
of tobacco inventories is determined principally under the
last-in, first-out, or LIFO, method. The cost of work in process
and finished goods includes materials, direct labor, and
variable and full absorption of fixed manufacturing overhead.
Stocks of tobacco, which must be cured for more than one year,
are classified as current assets in accordance with recognized
industry practice.

50



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Property, Plant and Equipment

Property, plant and equipment are recorded at cost and
depreciated using the straight-line method of depreciation over
the estimated useful lives of the assets. Useful lives range
from 20 to 50 years for buildings and improvements and from
3 to 30 years for machinery and equipment. The cost and
related accumulated depreciation of assets sold or retired are
removed from the accounts and the gain or loss on disposition is
recognized in income.

Intangibles

Intangibles include primarily goodwill and trademarks and, for
the periods presented through December 31, 2001, have been
amortized using the straight-line method, principally over
40 years.

Software Costs

Certain computer software and software development costs
incurred in connection with developing or obtaining computer
software for internal use that has a useful life of greater than
one year are capitalized. These costs are amortized over five
years or less. During 2001 and 2000, costs of $12 million and
$19 million, respectively, were capitalized and at
December 31, 2001, the unamortized balance was $28 million.
Related amortization expense was $8 million, $4 million and $1
million for the years ended December 31, 2001, 2000 and
1999, respectively.

Long-Lived Assets

Goodwill is continually reviewed for impairment, and for other
long-lived assets held for use, including trademarks and
property, plant and equipment, whenever events or changes in
circumstances indicate that the book value of the asset may not
be recoverable. The carrying value of long-lived assets would be
impaired if the best estimate of future undiscounted cash flows
over the remaining amortization period is less than the carrying
value. If an asset is impaired, the loss is measured using
estimated fair value. Assets to be disposed of are reported at
the lower of their carrying value or estimated net realizable
value.

Revenue Recognition

Revenue from product sales is recognized upon shipment, when
title and risk of loss passes to the customer. Shipping and
handling costs are classified as cost of products sold.

Advertising and Research and Development

Advertising costs, which are expensed as incurred, were $73
million, $137 million and $168 million in the years ended
December 31, 2001, 2000 and 1999, respectively. Research
and development costs, which are expensed as incurred, were $64
million, $58 million and $59 million in the years ended
December 31, 2001, 2000 and 1999, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. Income taxes for RJR, RJR Tobacco and RJR
Acquisition Corp. are calculated on a separate return basis.

51



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Pension and Postretirement

Unrecognized prior service costs are amortized over the
estimated remaining service lives of employees. If the changes
experienced in the projected benefit obligation or plan assets
differ from those assumed, the unrecognized net gain or loss is
amortized over five years.

Recently Adopted Accounting Pronouncements

Effective January 1, 2001, RJRs operating
subsidiaries adopted the Emerging Issues Task Forces Issue
No. 00-14, Accounting for Certain Sales
Incentives, which addresses the recognition, measurement
and income statement classification for certain sales
incentives, including rebates, coupons and free products or
services. EITF No. 00-14 requires that in the accompanying
consolidated income statements, certain costs that historically
were included in selling, general and administrative expenses
now be classified in cost of products sold or as reductions of
net sales. Those costs have been reclassified in prior periods
for comparative purposes. The adoption of EITF No. 00-14
did not impact consolidated annual net income or cumulative
earnings.

As of January 1, 2001, RJR and its subsidiaries adopted the
Financial Accounting Standards Boards Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137 and SFAS No. 138. SFAS
No. 133 requires that all derivative instruments be
recorded on the consolidated balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each
period in earnings or other comprehensive income, depending on
whether a derivative is designated and effective as part of a
hedge transaction. If it is, the type of hedge transaction must
be disclosed. The adoption of SFAS No. 133, as amended, did
not impact RJRs consolidated financial position or results
of operations.

As of December 31, 2001, RJR Tobacco held a forward
currency exchange contract to purchase seven million Euros with
a term of less than 12 months as a hedge of an unrecognized
firm commitment for the purchase of equipment. As of
December 31, 2001, the foreign currency cash flow hedge was
effective and, accordingly, no gain or loss was realized. The
unrealized gain resulting from the increase in the hedges
fair value was insignificant.

Recently Issued Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, Business
Combinations, which prohibits the pooling-of-interests
method accounting for business combinations initiated after
June 30, 2001 and addresses the accounting for purchase
method business combinations completed after June 30, 2001.
Also in June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which is
effective as of January 1, 2002. SFAS No. 142 requires
that goodwill and other intangible assets with indefinite useful
lives no longer be amortized. This statement also requires that
within the first interim period of adoption, the intangible
assets with indefinite lives should be tested for impairment as
of the date of adoption, and that if any impairment results, it
should be recognized as a change in accounting principle.
Additionally, SFAS No. 142 requires that within six months
of adoption, goodwill be tested for impairment at the reporting
unit level as of the date of adoption. If any impairment is
indicated to have existed upon adoption, it should be measured
and recorded before the end of the year of adoption. SFAS
No. 142 requires that any goodwill impairment loss
recognized as a result of initial application be reported in the
first interim period of adoption as a change in accounting
principle, and that the income per share effects of the
accounting change be separately disclosed.

Other intangible assets consist of RJR Tobaccos trademarks
acquired through business combinations, which have indefinite
useful lives. A national appraisal firm has been engaged to
assist in the valuation of the trademarks as of January 1,
2002. No later than March 31, 2002, the existence and
amount, if any, of trademark impairment will be determined by
comparing the fair value of those assets with their carrying
values.

52



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


RJRs goodwill as of January 1, 2002 is attributable
to one reporting unit, RJR Tobacco, which comprises
substantially all of RJRs consolidated results of
operations and financial condition. A national appraisal firm
has been engaged to assist in the determination of the fair
value of RJR. Before June 30, 2002, any indication of
goodwill impairment will be determined by comparing RJRs
fair value with its carrying value as of January 1, 2002.

As of December 31, 2001, the carrying values of RJR
Tobaccos goodwill and trademarks were $6.9 billion and
$2.8 billion, respectively. RJR Tobacco recorded goodwill and
trademark amortization expense of $362 million and $366 million
during 2001 and 2000, respectively. As of January 1, 2002,
RJR Tobaccos goodwill and trademarks will no longer be
amortized. Because of the extensive effort needed to comply with
the application of SFAS No. 142, the impairment loss, if
any, related to RJR Tobaccos trademarks or goodwill upon
adoption of this statement cannot be estimated.

Effective January 1, 2002, EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendors Products, requires
that consideration paid to a distributor or retailer to promote
the vendors products, such as slotting fees or buydowns,
generally be characterized as a reduction of revenue when
recognized in the vendors income statement. Upon adoption,
the operating subsidiaries will characterize the applicable
costs as a reduction of net sales rather than as selling,
general and administrative expenses. Had EITF No. 00-25
been adopted for 2001 and 2000, selling, general and
administrative expenses would have been reduced by $2.3 billion
and $2 billion, respectively. The respective amounts would have
been classified as reductions to net sales. The adoption of EITF
No. 00-25 will not impact RJRs consolidated financial
position, operating income or net income.

Note 2  Reorganization

During 1999, RJR and Nabisco Group Holdings Corp., referred to
as NGH, completed a series of transactions to reorganize their
businesses and capital structures. In May 1999, RJR and RJR
Tobacco sold the international tobacco business to Japan Tobacco
Inc. As a result of this sale, RJR Tobaccos business
consists exclusively of the manufacture and sale of cigarettes
in the United States and its territories, commonwealths,
protectorates and possessions. A portion of the proceeds from
the sale of the international tobacco business was used by RJR
to repurchase $4 billion of its debt, which resulted in a $384
million, $250 million after-tax, extraordinary loss from the
early extinguishment of debt. Additionally, RJR transferred $1.6
billion in cash proceeds, together with its 80.5% interest in
Nabisco to NGH through a merger transaction. In June 1999, NGH
distributed all of the outstanding shares of RJR common stock to
NGH common stockholders of record as of May 27, 1999.
Shares of RJR began trading separately on June 15, 1999.

The operating results of the international tobacco business
until May 12, 1999, the date of sale, are segregated and
reported as discontinued operations in the 1999 consolidated
statement of income. Nabiscos operating results through
May 18, 1999, the date of the merger transaction, are
segregated and reported as discontinued operations in the 1999
consolidated statement of income. Summarized operating results
of the discontinued operations include net sales and a provision
for income taxes of $3,827 million and $34 million,
respectively, for the year ended December 31, 1999.

Note 3  Acquisition

On December 11, 2000, RJR acquired its former parent, NGH.
Pursuant to an agreement and plan of merger dated June 25,
2000, as amended, RJR Acquisition Corp. was merged into NGH,
with NGH being the surviving corporation. After the merger, NGH
changed its name to RJR Acquisition Corp. At the time of the
acquisition, NGH was a non-operating public shell company with
no material assets or liabilities other than $11.8 billion in
cash. RJR accounted for the acquisition as a purchase, and
accordingly, the cost of the acquisition was allocated on the
basis of the estimated fair market value of the assets acquired
and liabilities assumed. As consideration, RJR Acquisition Corp.
paid $30 for each outstanding share of NGH, or $9.8 billion in
the aggregate. The $1.5 billion net cash proceeds, after costs
related to the transaction, were

53



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


recognized as an extraordinary gain on acquisition in the fourth
quarter of 2000. Presentation of pro forma results of operations
would not be meaningful as NGH was a non-operating public shell
company.

Note 4  Impairment Charge

In the fourth quarter of 2000, impairment occurred on two of RJR
Tobaccos non-key brands, MAGNA and CENTURY, based on their
estimated undiscounted net future cash flows. Accordingly, RJR
Tobacco recorded an impairment charge of $89 million, $54
million after tax, or $0.53 per diluted share, based on the
excess of the brands carrying value over fair value,
determined using the present value of estimated future cash
flows assuming a discount rate of 12.0%. This impairment charge
is reflected as an increase in accumulated amortization in the
consolidated balance sheets, as an impairment charge in the 2000
consolidated income statement and had no impact on cash flows.
As a result of this charge, amortization expense related to
trademarks was $4 million lower in 2001 than in 2000.

Note 5  Headquarters Close-Down and Related
Charges

During 1999, RJR recorded a charge of $143 million, $93 million
after tax, to reflect the elimination of its New York corporate
headquarters. Total cash expenditures related to this charge
were $122 million. The elimination of the headquarters resulted
from reorganization transactions, described in note 2, that
fundamentally changed RJRs business and capital structure.
Approximately $127 million of the charge was for severance and
related benefits for approximately 100 employees whose
employment was terminated. The remainder of the charge was
primarily related to contractual lease termination payments and
the write-off of leasehold improvements and abandoned equipment.

Note 6  Other Operating Expense

During 1998, RJR Tobacco recorded pre-tax charges totaling $1.4
billion for the following tobacco settlement and related
expenses: MSA, $620 million; Minnesota Settlement Agreement,
$312 million; Most Favored Nation adjustment of
previously settled states, $145 million; rationalization of
manufacturing operations, $214 million; and employee severance
and related benefits, $151 million. The employee severance and
related benefits portion of this charge was for workforce
reductions totaling approximately 1,300 employees in response to
the changing business conditions expected to result from the MSA
signed in November 1998. At December 31, 1998, $1.3 billion
had been utilized. Since December 31, 1998, the remaining
liability for employee severance and related benefits was
utilized through cash expenditures of $76 million and the
reversal of $21 million, due to a less-than-expected workforce
reduction.

During 1999, RJR Tobacco recorded a charge of $40 million for
initial, up-front costs related to the tobacco growers
settlement.

For more information about the MSA and other state settlement
agreements, see note 14.

In 1997, RJR Tobacco recorded a restructuring expense of $80
million related to a restructuring program that was implemented
to enhance its competitive position and improve its long-term
earnings growth prospects. The $80 million charge included $30
million for the rationalization of manufacturing operations, $20
million for contract termination and other costs and $30 million
for employee severance and related benefits associated with the
closure of a facility resulting in the reduction of 192
full-time positions and 217 seasonal positions. As of
December 31, 1999, the charge was substantially utilized
after a reduction of $2 million reflecting lower-than-expected
expenses. Total cash expenditures were $43 million.

54



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 7  Income Per Share

The components of the calculation of income per share were:

|                                              |                                      |                                  |        |      |       |      |         |  |     |   |         |   |    | 
|--------------------------------------------- | ------------------------------------ | -------------------------------- | ------ | ---- | ----- | ---- | ------- |  | --- | - | ------- | - | -- | 
|                                              |                                      |                                 
|                                              |                                      | For the Years Ended December 31,
|                                              |                                      |                                 
|                                              |                                      | 2001                             |        | 2000 |       | 1999
|                                              |                                      |                                  |        |      |       |     
|Income from continuing operations             |                                      | $                                | 444    |      |       | $    | 352     |  |     | $ | 195     |  
|                                             
|                                             
|                                             
|                                             
|Income (loss) from discontinued operations    |                                      |                                  | (9     | )    |       |      |        |  |     |   | 2,398   |  
|                                             
|                                             
|                                             
|                                             
|Extraordinary itemsgain (loss)               |                                      |                                  |       |      |       |      | 1,475   |  |     |   | (250    | )
|                                              |                                      |                                  |        |      |       |      |         |  |     |   |         |  
|Net income                                    |                                      | $                                | 435    |      |       | $    | 1,827   |  |     | $ | 2,343   |  
|                                              |                                      |                                  |        |      |       |      |         |  |     |   |         |  
|Basic weighted average shares, in thousands   |                                      |                                  | 97,043 |      |       |      | 101,264 |  |     |   | 108,495 |  
|                                             
|                                             
|                                             
|                                             
|                                              | Effect of dilutive potential shares: |                                  |        |      |       |      |         |  |     |   |         |   |   
|                                             
|                                             
|                                             
|                                             
|                                              |                                      | Options                          |        |      | 1,472 |      |         |  | 371 |   |         |   | 66 | 
|                                             
|                                             
|                                             
|                                             
|                                              |                                      | Restricted stock                 |        |      | 471   |      |         |  | 222 |   |         |   | 9  | 
|                                              |                                      |                                  |        |      |       |      |         |  |     |   |         |  
|Diluted weighted average shares, in thousands |                                      |                                  | 98,986 |      |       |      | 101,857 |  |     |   | 108,570 |  
|                                              |                                      |                                  |        |      |       |      |         |  |     |   |         |  

Outstanding shares of restricted stock of 1.7 million, 1.6
million and .8 million were excluded from the share calculation
for the years ended December 31, 2001, 2000 and 1999,
respectively, as the related vesting provisions had not been met.

Note 8  Short-Term Investments

At December 31, 2001, short-term investments classified as
available-for-sale included $146 million of U.S. government
treasury bills and $61 million of federal agency securities.
Contractual maturities of these securities averaged less than
one year. Realized and unrealized holding gains and losses of
available-for-sale securities for the year ended
December 31, 2001 were not significant and, accordingly,
the amortized cost of these securities approximated fair value.
There were no available-for-sale securities for the years ended
December 31, 2000 and 1999.

Note 9  Inventories

The major components of inventories at December 31 were:

|                    |  |      |     |      |  |   |     | 
|------------------- |  | ---- | --- | ---- |  | - | --- | 
|                    |  | 2001 |     | 2000
|                    |  |      |     |     
|Leaf tobacco        |  | $    | 550 |      |  | $ | 509 | 
|                   
|                   
|                   
|                   
|Raw materials       |  |      | 25  |      |  |   | 26  | 
|                   
|                   
|                   
|                   
|Work in process     |  |      | 49  |      |  |   | 49  | 
|                   
|                   
|                   
|                   
|Finished products   |  |      | 118 |      |  |   | 103 | 
|                   
|                   
|                   
|                   
|Other               |  |      | 26  |      |  |   | 26  | 
|                    |  |      |     |      |  |   |     | 
|Total               |  |      | 768 |      |  |   | 713 | 
|                   
|                   
|                   
|                   
|Less LIFO allowance |  |      | 38  |      |  |   | 125 | 
|                    |  |      |     |      |  |   |     | 
|                    |  | $    | 730 |      |  | $ | 588 | 
|                    |  |      |     |      |  |   |     | 

Inventories valued under the LIFO method were approximately $682
million and $543 million at December 31, 2001 and 2000,
respectively. The LIFO allowance reflects the excess of the
current cost of LIFO inventories at December 31, 2001 and
2000 over the amount at which these inventories were carried on
the consolidated balance sheets. During 2001, 2000 and 1999,
there was no impact on net income from LIFO inventory
liquidations.

55



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 10  Short-Term Borrowings and Borrowing
Arrangements

RJRs revolving credit facility with a syndicate of banks
was amended and restated on November 17, 2000. Under the
amendment and restatement, the committed amount of $1.235
billion was reduced to $622 million as of November 2001 and will
remain at this amount through May 2003. RJR can use the full
facility to obtain loans or letters of credit, at its option.
RJR Tobacco and RJR Acquisition Corp. have guaranteed RJRs
obligations under this revolving credit facility. If RJRs
guaranteed unsecured notes are rated below BBB- by S&P or
Baa3 by Moodys, RJRs other material subsidiaries
will be required to guarantee the facility. If RJR falls below
these thresholds for both of these rating agencies, or two
levels below these thresholds for either of these rating
agencies, RJR and the guarantors will be required to pledge
their assets to secure their obligations. RJR is not required to
maintain compensating balances; however, commitment fees of 1%
of the committed amount are payable quarterly. The credit
facility also limits RJRs ability to pay dividends,
repurchase stock, incur indebtedness, engage in transactions
with affiliates, create liens, acquire, sell or dispose of
specific assets and engage in specified mergers or
consolidations. Borrowings under the revolving credit facility
bear interest at rates that vary with the prime rate or LIBOR.
At December 31, 2001, RJR had $132 million in letters of
credit and no borrowings outstanding under the facility, with
the remaining $490 million of the facility available for
borrowing. RJR was in compliance with all covenants and
restrictions imposed by this facility at December 31, 2001.

Additionally, as of December 31, 2001, RJR had a trade
letter of credit outstanding of $1 million. RJR also has a $30
million uncommitted, unsecured line of credit with one bank. No
borrowings were outstanding on this line of credit at
December 31, 2001.

Note 11  Accrued Liabilities

Accrued liabilities at December 31 included:

|                              |  |      |       |      |  |   |       | 
|----------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                              |  | 2001 |       | 2000
|                              |  |      |       |     
|Payroll and employee benefits |  | $    | 398   |      |  | $ | 293   | 
|                             
|                             
|                             
|                             
|Marketing and advertising     |  |      | 378   |      |  |   | 406   | 
|                             
|                             
|                             
|                             
|Accrued interest              |  |      | 20    |      |  |   | 24    | 
|                             
|                             
|                             
|                             
|Other                         |  |      | 359   |      |  |   | 506   | 
|                              |  |      |       |      |  |   |       | 
|                              |  | $    | 1,155 |      |  | $ | 1,229 | 
|                              |  |      |       |      |  |   |       | 

Note 12  Income Taxes

The components of the provision for income taxes from continuing
operations were:

|                           |                 |                     |     |      |   |      |     |     |   |   |      |      |  
|-------------------------- | --------------- | ------------------- | --- | ---- | - | ---- | --- | --- | - | - | ---- | ---- | -
|                           |                 |                    
|                           |                 | For the Years Ended
|                           |                 | December 31,       
|                           |                 |                    
|                           |                 | 2001                |     | 2000 |   | 1999
|                           |                 |                     |     |      |   |     
|Current:                   |                 |                     |     |      |   |      |     |     |   |   |      |     
|                          
|                          
|                          
|                          
|                           | Federal         |                     | $   | 426  |   |      | $   | 368 |   |   | $    | 530  |  
|                          
|                          
|                          
|                          
|                           | State and other |                     |     | 65   |   |      |     | 59  |   |   |      | 92   |  
|                           |                 |                     |     |      |   |      |     |     |   |   |      |     
|                           |                 |                     | 491 |      |   |      | 427 |     |   |   | 622  |     
|                           |                 |                     |     |      |   |      |     |     |   |   |      |     
|Deferred:                  |                 |                     |     |      |   |      |     |     |   |   |      |     
|                          
|                          
|                          
|                          
|                           | Federal         |                     |     | (36  | ) |      |     | (30 | ) |   |      | (265 | )
|                          
|                          
|                          
|                          
|                           | State and other |                     |     | (7   | ) |      |     | (1  | ) |   |      | (42  | )
|                           |                 |                     |     |      |   |      |     |     |   |   |      |     
|                           |                 |                     | (43 | )    |   |      | (31 | )   |   |   | (307 | )   
|                           |                 |                     |     |      |   |      |     |     |   |   |      |     
|Provision for income taxes |                 | $                   | 448 |      |   | $    | 396 |     |   | $ | 315  |     
|                           |                 |                     |     |      |   |      |     |     |   |   |      |     

56



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


The current deferred income tax asset shown on the consolidated
balance sheets at December 31 included:

|                     |                                                                    |      |     |      |   |   |     |      |  
|-------------------- | ------------------------------------------------------------------ | ---- | --- | ---- | - | - | --- | ---- | -
|                     |                                                                    | 2001 |     | 2000
|                     |                                                                    |      |     |     
|Deferred tax assets: |                                                                    |      |     |      |   |   |     |     
|                    
|                    
|                    
|                    
|                     | LIFO inventories                                                   |      | $   | (131 | ) |   | $   | (136 | )
|                    
|                    
|                    
|                    
|                     | Pension and other postretirement liabilities                       |      |     | 62   |   |   |     | 31   |  
|                    
|                    
|                    
|                    
|                     | Tobacco settlement related accruals and other
	accrued liabilities |      |     | 607  |   |   |     | 564  |  
|                     |                                                                    |      |     |      |   |   |     |     
|                     |                                                                    | $    | 538 |      |   | $ | 459 |     
|                     |                                                                    |      |     |      |   |   |     |     

The non-current deferred income tax liability shown on the
consolidated balance sheets at December 31 included:

|                          |                                                                    |      |       |       |   |   |       |       |  
|------------------------- | ------------------------------------------------------------------ | ---- | ----- | ----- | - | - | ----- | ----- | -
|                          |                                                                    | 2001 |       | 2000 
|                          |                                                                    |      |       |      
|Deferred tax assets:      |                                                                    |      |       |       |   |   |       |      
|                         
|                         
|                         
|                         
|                          | Pension and other postretirement liabilities                       |      | $     | (191  | ) |   | $     | (208  | )
|                         
|                         
|                         
|                         
|                          | Tobacco settlement related accruals and other
	accrued liabilities |      |       | (119  | ) |   |       | (109  | )
|                          |                                                                    |      |       |       |   |   |       |      
|                          |                                                                    |      | (310  | )     |   |   | (317  | )    
|                          |                                                                    |      |       |       |   |   |       |      
|Deferred tax liabilities: |                                                                    |      |       |       |   |   |       |      
|                         
|                         
|                         
|                         
|                          | Property and equipment                                             |      |       | 300   |   |   |       | 310   |  
|                         
|                         
|                         
|                         
|                          | Trademarks                                                         |      |       | 1,080 |   |   |       | 1,121 |  
|                         
|                         
|                         
|                         
|                          | Other                                                              |      |       | 656   |   |   |       | 742   |  
|                          |                                                                    |      |       |       |   |   |       |      
|                          |                                                                    |      | 2,036 |       |   |   | 2,173 |      
|                          |                                                                    |      |       |       |   |   |       |      
|                          |                                                                    | $    | 1,726 |       |   | $ | 1,856 |      
|                          |                                                                    |      |       |       |   |   |       |      

The differences between the provision for income taxes and
income taxes computed at statutory U.S. federal income tax rates
were:

|                                                                  |  |                     |       |      |  |      |       |  |  |   |       | 
|----------------------------------------------------------------- |  | ------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                  |  |                    
|                                                                  |  | For the Years Ended
|                                                                  |  | December 31,       
|                                                                  |  |                    
|                                                                  |  | 2001                |       | 2000 |  | 1999
|                                                                  |  |                     |       |      |  |     
|Income taxes computed at statutory U.S. federal
	income tax rates |  | $                   | 312   |      |  | $    | 262   |  |  | $ | 178   | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|State and local income taxes, net of federal tax
	benefits        |  |                     | 37    |      |  |      | 33    |  |  |   | 30    | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Goodwill amortization                                             |  |                     | 91    |      |  |      | 91    |  |  |   | 91    | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Other items, net                                                  |  |                     | 8     |      |  |      | 10    |  |  |   | 16    | 
|                                                                  |  |                     |       |      |  |      |       |  |  |   |       | 
|Provision for income taxes                                        |  | $                   | 448   |      |  | $    | 396   |  |  | $ | 315   | 
|                                                                  |  |                     |       |      |  |      |       |  |  |   |       | 
|Effective tax rate                                                |  |                     | 50.2% |      |  |      | 52.9% |  |  |   | 61.8% | 
|                                                                  |  |                     |       |      |  |      |       |  |  |   |       | 

Note 13  Long-Term Debt

Long-term debt at December 31 included:

|                                                            |  |      |       |      |  |   |       |  
|----------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                            |  | 2001 |       | 2000
|                                                            |  |      |       |     
|7.625%-9.25% unsecured notes, due 2002 to 2013              |  | $    | 330   |      |  | $ | 404   |  
|                                                           
|                                                           
|                                                           
|                                                           
|7.375%-7.875% guaranteed unsecured notes, due
	2003 to 2009 |  |      | 1,246 |      |  |   | 1,245 |  
|                                                           
|                                                           
|                                                           
|                                                           
|9.5% junior subordinated debentures, due 2047               |  |      | 98    |      |  |   | 98    |  
|                                                           
|                                                           
|                                                           
|                                                           
|Current maturities of long-term debt                        |  |      | (43   | )    |  |   | (73   | )
|                                                            |  |      |       |      |  |   |       |  
|                                                            |  | $    | 1,631 |      |  | $ | 1,674 |  
|                                                            |  |      |       |      |  |   |       |  

57



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


The payment of long-term debt is due as follows:

|           |  |        |       | 
|---------- |  | ------ | ----- | 
|Year       |  | Amount
|           |  |       
|2003       |  | $      | 740   | 
|          
|          
|          
|          
|2004       |  |        | 56    | 
|          
|          
|          
|          
|2005       |  |        | 50    | 
|          
|          
|          
|          
|2006       |  |        | 498   | 
|          
|          
|          
|          
|Thereafter |  |        | 287   | 
|           |  |        |       | 
|           |  | $      | 1,631 | 
|           |  |        |       | 

On May 18, 1999, RJR completed tender offers to purchase
substantially all of its outstanding debt securities, which
resulted in RJR repurchasing $4 billion of its debt with a
portion of the proceeds from the sale of the international
tobacco business. As a result, RJR recognized an extraordinary
loss from the early extinguishment of debt of $384 million, $250
million after tax.

RJR filed a registration statement, effective October 8,
1999, in order to issue publicly registered notes of $550
million in principal amount at 7.375% due 2003, $500 million in
principal amount at 7.75% due 2006 and $200 million in principal
amount at 7.875% due 2009 in exchange for an aggregate $1.25
billion of private placement debt securities. The net proceeds
received from the private placement were used for general
corporate purposes. These notes are unsecured obligations and,
unlike RJRs other non-bank debt, are guaranteed by RJR
Tobacco and RJR Acquisition Corp. In addition, any other
subsidiaries of RJR that in the future guarantee the $622
million revolving credit facility, as amended and restated, will
also be required to guarantee these notes. In addition, if RJR
and the guarantors are required to pledge their assets to secure
their obligations under the revolving credit facility, as
amended and restated, they will also be required to pledge their
assets to secure these notes. Generally, the terms of the notes
restrict the issuance of guarantees by subsidiaries, the pledge
of collateral, sale/leaseback transactions and the transfer of
all or substantially all of the assets of RJR and its
subsidiaries. RJR was in compliance with all covenants and
restrictions imposed by its indebtedness at December 31,
2001. See note 21 for condensed consolidating financial
information, which separates the account balances and activities
of the issuer, the guarantors and the subsidiaries of RJR and
RJR Tobacco that are not guarantors of the notes.

RJR filed a shelf registration statement, effective
December 22, 1999, for $1.876 billion of debt securities,
guaranteed by RJR Tobacco. On April 19, 2001, a
registration statement became effective to add RJR Acquisition
Corp. as a guarantor of these debt securities. As of
December 31, 2001, no debt securities had been issued from
this registration.

On December 11, 2000, related to the acquisition of NGH,
RJR acquired $98 million of 9.5% junior subordinated debentures,
due in 2047, redeemable on September 30, 2003. Interest on
these debentures is paid quarterly in arrears. These debentures
are effectively defeased by an irrevocable trust, which is
included in other assets and deferred charges in the
accompanying consolidated balance sheets as of December 31,
2001 and 2000. The trust holds certain U.S. government
obligations maturing at such times and in such amounts
sufficient to pay interest and principal.

The estimated fair value of RJRs long-term debt was $1.8
billion as of December 31, 2001 and $1.7 billion as of
December 31, 2000. The fair values are based on available
market quotes, discounted cash flows and book values, as
appropriate.

Note 14  Commitments and Contingencies

Tobacco Litigation

Overview.Various tobacco-related legal actions and
proceedings are pending or may be instituted against RJR or its
affiliates, including RJR Tobacco, or indemnitees. These actions
and proceedings raise a variety of claims, including product
liability, health-care cost recovery, consumer protection,
smuggling,

58



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


RICO, tax, antitrust and trade regulation claims. During 2001,
129 new tobacco-related actions were served against RJR Tobacco
and/or its affiliates or indemnitees, and 154 actions were
dismissed or otherwise resolved in favor of RJR Tobacco and/or
its affiliates or indemnitees without trial. On
December 31, 2001, there were 1,639 active cases pending,
including approximately 1,237 individual smoker cases pending in
West Virginia state court as a consolidated action, as compared
with 1,664 on December 31, 2000, and 541 on
December 31, 1999. As of February 7, 2002, 1,657
active cases were pending against RJR Tobacco and/or its
affiliates or indemnitees: 1,652 in the United States; two in
Puerto Rico and one in each of Canada, Israel and the Marshall
Islands. The U.S. case number does not include the 2,852
Broin II cases pending as of February 7, 2002,
discussed below.

The U.S. cases, exclusive of the Broin IIcases, are
pending in 35 states and the District of Columbia. The breakdown
is as follows: 1,237 in West Virginia; 77 in New York; 58 in
Florida; 52 in California; 29 in Maryland; 28 in the District of
Columbia; 27 in Louisiana; 23 in Mississippi; 12 in Iowa; 11 in
Massachusetts; 10 in each of Missouri and New Jersey; 9 in
Alabama; 8 in Texas; 7 in Georgia; 6 in each of Illinois and
Tennessee; 4 in each of New Hampshire, Nevada and Pennsylvania;
3 in each of Arizona, Connecticut, Michigan, New Mexico and
Ohio; 2 in each of Kansas, North Carolina, North Dakota and
South Dakota; and 1 in each of Indiana, Maine, Minnesota,
Oklahoma, Utah, Washington and Wisconsin. Of the 1,652 active
U.S. cases, 130 are pending in federal court, 1,518 in state
court and 4 in tribal court. Most of these cases were brought by
individual plaintiffs, but many of these cases seek recovery on
behalf of third parties or large classes of claimants.

Theories of Recovery.The plaintiffs seek recovery on a
variety of legal theories, including 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, indemnity, medical monitoring, public nuisance and
violations of state and federal antitrust and RICO laws.
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. Of the 1,652 active cases in the United States, eight
cases, plus the 2,852 Broin IIcases, involve alleged
nonsmokers claiming injuries resulting from exposure to
environmental tobacco smoke. Twenty-nine 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, persons making claims based on
alleged exposure to environmental tobacco smoke,
African-American smokers claiming their civil rights have been
violated by the sale of menthol cigarettes, current smokers who
have no tobacco-related disease but are seeking to recover the
costs of medical monitoring, purchasers of light and
ultra light cigarettes claiming to have been
defrauded and seeking to recover the costs of their cigarette
purchases, and Blue Cross and Blue Shield subscribers seeking
reimbursement for premiums paid. Approximately 59 cases seek
recovery of the cost of Medicaid/Medicare payments or other
health-related costs paid for treatment of individuals suffering
from diseases or conditions allegedly related to tobacco use.
Eleven cases, brought by entities administering asbestos
liability, seek contribution for the costs of settlements and
judgments.

Defenses.The defenses raised by RJR Tobacco and/or its
affiliates, including RJR, include, where applicable, 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. RJR has asserted additional defenses, including
jurisdictional defenses, in many of the cases in which it is
named.

Industry Trial Results in Individual Smoker Cases.The
tobacco industry in general, and RJR Tobacco in particular,
continue to win most individual smoking and health cases. In
Anderson v. Fortune Brands, Inc., a Brooklyn, New York
jury found in favor of the industry, including RJR Tobacco, on
June 27, 2000. The plaintiff failed to perfect his appeal
by submitting his brief and record by June 22, 2001. The
Appellate Division dismissed the appeal on September 18,
2001. In Nunnally v. R. J. Reynolds Tobacco Co., a
Mississippi state court jury found RJR Tobacco not liable on
July 12, 2000. Plaintiffs motion for judgment
notwithstanding the verdict, or in the alternative, for a new
trial, was denied, and plaintiffs appeal to the

59



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Mississippi Supreme Court is pending. On January 16, 2001,
a Brooklyn, New York state court jury returned a verdict in
favor of RJR Tobacco and other cigarette manufacturers in
Apostolou v. American Tobacco Co.On September 7,
2001, the plaintiff appealed the final judgment to the Appellate
Division of the New York Supreme Court. In Little v. Brown
& Williamson Tobacco Corp., a South Carolina federal
district court judge granted a directed verdict in favor of RJR
Tobacco on January 30, 2001. The jury rendered a verdict in
favor of the remaining defendant, Brown & Williamson, on
February 6, 2001. The plaintiff voluntarily dismissed her
appeal to the United States Court of Appeals for the Fourth
Circuit on April 19, 2001. On March 7, 2001, in Grinnell
v. Brown & Williamson Tobacco Corp., a Texas state court
jury returned a verdict in favor of Brown & Williamson. On
May 16, 2001, a state court jury in New Jersey returned a
verdict in favor of RJR Tobacco and Philip Morris in Mehlman
v. Philip Morris, Inc.On October 5, 2001, an Ohio
federal court jury returned a unanimous verdict in favor of
Philip Morris, Brown & Williamson and Lorillard in
Tompkin v. American Tobacco Co.On October 23, 2001,
plaintiff filed a motion for a new trial. The judge in this case
referred the parties to mediation in order to avoid the
transaction costs associated with an appeal. The mediation
failed and the case was returned to the presiding judge who then
denied plaintiffs motion for a new trial. Finally, on
November 13, 2001, a state court judge in Connecticut
granted Brown & Williamsons motion for a directed
verdict in DuJack v. Brown & Williamson Tobacco Co.

RJR Tobacco has prevailed in virtually all individual smoker
cases that have gone to trial. However, in Whiteley v.
Raybestos-Manhattan, Inc., a tobacco-asbestos synergy case
brought in San Francisco Superior Court, the jury found against
RJR Tobacco and Philip Morris on March 20, 2000, and
awarded $1.7 million in compensatory damages. On March 27,
2000, the same jury awarded $20 million in punitive damages, $10
million against RJR Tobacco and $10 million against Philip
Morris. RJR Tobacco and Philip Morris have appealed. In Jones
v. R. J. Reynolds Tobacco Co., a wrongful death case, a
Tampa state court jury found against RJR Tobacco on
October 12, 2000. Although the jury found that RJR Tobacco
was negligent and liable, it refused to find that RJR Tobacco
was part of a conspiracy to defraud. The jury awarded
approximately $200,000 in compensatory damages; however, the
jury refused to award punitive damages. On December 28,
2000, the trial judge granted RJR Tobaccos motion for a
new trial. The plaintiff has appealed the new trial ruling to
the Florida Second District Court of Appeal. Most recently, in
Kenyon v. R. J. Reynolds Tobacco Co., on
December 12, 2001, a Tampa jury determined that Floyd
Kenyon had been adequately warned about the risks of smoking and
that RJR Tobacco was not negligent in designing its products.
The jury did find that some of RJR Tobaccos products were
defective and awarded the plaintiff $165,000 in compensatory
damages. RJR Tobacco believes that the jurys findings were
not supported by the evidence in the case. Accordingly, on
December 26, 2001, RJR Tobacco asked the court to set aside
the verdict or to grant a new trial. A hearing on RJR
Tobaccos motion has been scheduled for February 27,
2002.

Juries have found for plaintiffs in six smoking and health cases
in which RJR Tobacco was not a defendant. Two of the verdicts
were overturned on appeal and have been dismissed; three others
are on appeal; and damages have been paid in one case. In
February 1999, in Henley v. Philip Morris, Inc., a San
Francisco state court jury awarded an individual smoker $1.5
million in compensatory damages and $50 million in punitive
damages. In April 1999, the trial judge reduced the punitive
damages award to $25 million, but otherwise denied Philip
Morris post-trial motions challenging the verdict. On
November 7, 2001, a California appellate court upheld the
jurys 1999 verdict against Philip Morris.Philip
Morris has appealed that decision to the California Supreme
Court, which accepted the appeal on a grant and hold
basis (another appeal has to be decided prior to ruling on the
Henleypetition). In Williams v. Philip Morris,
Inc., an Oregon state court jury awarded the plaintiff
$800,000 in actual damages, $21,500 in medical expenses and $79
million in punitive damages. The judge reduced the punitive
damages to $32 million. Philip Morris appeal is pending.
On June 6, 2001, in Boeken v. Philip Morris, Inc., a
California state court jury found in favor of the plaintiff and
awarded approximately $5.5 million in compensatory damages and
$3 billion in punitive damages. Philip Morris filed motions to
reduce the damages, for judgment notwithstanding the verdict or
for a new trial. On August 9, 2001, plaintiff agreed to the
courts recommendation that the $3 billion punitive damages
award be reduced to $100 million. On September 7, 2001,
Philip Morris filed its notice of appeal to the California Court
of Appeals. In Carter v. American Tobacco Co., the
Florida Supreme Court, on November 22, 2000,

60



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


reinstated the jury verdict against Brown & Williamson.
According to press reports, Brown & Williamson paid
approximately $1.09 million to the plaintiff on February 8,
2001. On June 29, 2001, the U.S. Supreme Court declined to
review the case, thus leaving the jury verdict intact.

Broin II Cases.As of February 7, 2002,
approximately 2,852 lawsuits brought by individual flight
attendants for personal injury as a result of illness allegedly
caused by exposure to secondhand tobacco smoke in airplane
cabins, referred to as the Broin IIcases, are pending in
Florida. In these lawsuits, filed pursuant to the terms of the
settlement of the Broin v. Philip Morris, Inc.class
action, discussed below, each individual flight attendant will
be required to prove that he or she has a disease caused by
exposure to secondhand smoke in airplane cabins.

On October 5, 2000, Judge Robert Kaye entered an order
applicable to all Broin IIcases that the terms of the
Broinsettlement agreement do not require the individual
Broin IIplaintiffs to prove the elements of strict
liability, breach of warranty or negligence. Under this order,
there is a rebuttable presumption in plaintiffs favor on
those elements, and plaintiffs bear the burden of proving that
their alleged adverse health effects actually were caused by
exposure to environmental tobacco smoke. Although defendants
still may prevail on causation and other theories, RJR Tobacco
does not believe that the order is correct under Florida law or
that it accurately reflects the intent of the Broinsettlement agreement. Accordingly, defendants appealed Judge
Kayes ruling to the Third District Court of Appeal on
November 3, 2000. Plaintiffs moved to dismiss the appeal on
November 28, 2000. On January 12, 2001, the Third
District Court of Appeal denied plaintiffs motion and
ordered oral argument. On October 10, 2001, a different
panel of the Third District Court of Appeal dismissed the
appeal, finding that Judge Kayes order is not an
appealable order at this time, but noted that the ruling is
without prejudice to the defendants ability to appeal the
issue at the appropriate time. On January 16, 2002,
defendants filed a writ to invoke the discretionary jurisdiction
of the Florida Supreme Court.

On April 5, 2001, in the first Broin IIflight
attendant case to go to trial, Fontana v. Philip Morris,
Inc., a Florida state court jury returned a verdict in favor
of the defendants, including RJR Tobacco. On April 16,
2001, plaintiff filed motions for a mistrial, judgment
notwithstanding the verdict, or for a new trial. On
October 1, 2001, the trial judge denied plaintiffs
post-trial motions. Plaintiff appealed to the Florida Third
District Court of Appeal. Defendants cross-appealed on
November 8, 2001.

Class Action Suits.In May 1996, in Castano v.
American Tobacco Co., the Fifth Circuit Court of Appeals
overturned the certification of a nationwide class of persons
whose claims related to alleged addiction to tobacco. Since this
ruling by the Fifth Circuit, most class-action suits have sought
certification of statewide, rather than nationwide, classes.

Class action suits based on claims similar to those asserted in
Castano have been brought against RJR Tobacco, and in
some cases RJR, in state or federal courts in Alabama, Arkansas,
California, the District of Columbia, Florida, Georgia, Hawaii,
Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Nevada, New
Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma,
Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia,
West Virginia and Wisconsin. In addition, a class action filed
in Tennessee seeks reimbursement of Blue Cross and Blue Shield
premiums paid by subscribers throughout the United States and
class-action suits in Illinois, Missouri and New Jersey claim
that the marketing of light and
ultralight cigarettes is deceptive. Plaintiffs have
made similar claims in other lawsuits elsewhere. Other types of
class-action suits also have been filed in additional
jurisdictions. Most of these suits assert claims on behalf of
classes of individuals who claim to be addicted, injured or at
greater risk of injury by the use of tobacco or exposure to
environmental tobacco smoke, or the legal survivors of such
persons. A number of unions and other third-party payors have
filed health-care cost recovery actions in the form of class
actions. These cases are discussed separately below. Class
certification motions are pending in several state and federal
courts.

Few smoker class-action complaints have been certified or, if
certified, have survived on appeal. All 16 federal courts that
have considered the issue, including two courts of appeals, have
rejected class certification in smoker cases. On March 19,
2001, in Guillory v. American Tobacco Co., Inc., the
United States District

61



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Court for the Northern District of Illinois refused to certify a
class defined as all Illinois residents who smoke or
smoked cigarettes manufactured by defendants, who started
smoking while a minor, who purchase or purchased cigarettes in
Illinois and who desire to participate in a program designed to
assist them in the cessation of smoking and/or monitor their
medical condition to promote early detection of disease caused
by, contributed, or exacerbated by cigarette smoking. On
May 17, 2001, in Brown v. Philip Morris, Inc., the
United States Court of Appeals for the Third Circuit affirmed
the trial courts dismissal of a proposed class action
alleging the violation of civil rights by the targeting of
African-American smokers. On June 29, 2001, the
United States District Court for the District of Nevada denied
plaintiffs motions for class certification in three cases
involving casino workers exposed to environmental tobacco smoke
and one case involving smokers with injuries allegedly caused by
smoking. These four cases, which were consolidated for class
certification purposes, are: (1) Badillo v. American Tobacco
Co., Inc.; (2) Christensen v. Philip Morris Cos.,
Inc.; (3) Dienno v. Liggett Group, Inc.; and (4)
Selcer v. R. J. Reynolds Tobacco Co. Most recently, two
cases, Mahoney v. R. J. Reynolds Tobacco Co.and Davis
v. R. J. Reynolds Tobacco Co.,were denied class
certification by the United States District Court for the
Southern District of Iowa.

Similarly, most state courts have refused to certify smoker
class actions. On December 8, 2000, in Geiger v.
American Tobacco Co., the Appellate Division of the Supreme
Court of New York, Second Judicial Department, affirmed the
trial courts denial of class action status to a purported
class defined as all New York residents, including their heirs,
representatives and estates, who contracted lung and/or throat
cancer as a result of smoking cigarettes. Plaintiffs filed a
motion for leave to appeal the order denying certification to
the New York Court of Appeals, the highest court in the state.
The New York Court of Appeals dismissed plaintiffs appeal
on February 13, 2001.

Classes have been certified thus far in several state court
class-action cases in which RJR Tobacco is a defendant. On
November 5, 1998, in Scott v. American Tobacco Co.,
a Louisiana state appeals court affirmed the certification of a
medical monitoring and/or smoking cessation class of Louisiana
residents who were smokers on or before May 24, 1996. On
February 26, 1999, the Louisiana Supreme Court denied the
defendants petition for writ of certiorari and/or review.
Jury selection began on June 18, 2001. Defendants appealed
the jury selection process to the Louisiana Fourth Circuit Court
of Appeal on July 18, 2001. On September 4, 2001, the
Court of Appeal dismissed two jurors because of bias, but
declined to dismiss jurors with immediate family members who
were members of the class. On September 5, 2001, defendants
sought review by the Louisiana State Supreme Court. On September
25, 2001, the Louisiana State Supreme Court dismissed seven
additional jurors because they have immediate family members who
are members of the class and the seven jurors expressed a desire
that those family members receive medical monitoring or smoking
cessation assistance. On October 9, 2001, the defendants
asked the Louisiana Supreme Court to declare a mistrial because
of the irregularities in the jury selection process. This
petition was denied on October 15, 2001. Jury selection
resumed again on October 22, 2001, and a full complement of
12 jurors and 10 alternates was selected. On December 26,
2001, defendants filed an application for supervisory writ
to the Fourth District of the Louisiana Court of Appeals
challenging certain aspects of the second round of jury
selection. Opening statements will not occur until that writ is
decided.

Trial began on January 4, 2001, in Blankenship v. Philip
Morris, Inc., a West Virginia state court medical monitoring
class action. The trial of this case ended on January 25,
2001, when the judge declared a mistrial. Argument on
decertification of the class, among other things, was held on
February 19, 2001. On March 23, 2001, the judge denied
the defendants motion to decertify the class. The retrial
of this case began on September 5, 2001, and ended on
November 14, 2001, when the jury returned a verdict in
favor of RJR Tobacco and other cigarette manufacturers.

On November 30, 2000, in Daniels v. Philip Morris Cos.,
Inc., a San Diego Superior Court judge reversed a prior
ruling and, based on a California unfair business practices
statute, certified a class consisting of all persons who, as
California resident minors, smoked one or more cigarettes in
California between April 2, 1994 and December 1, 1999.
Trial has been scheduled for July 1, 2002.

62



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


On April 11, 2001, in Brown v. American Tobacco Co.,
Inc., the same judge granted in part plaintiffs motion
for class certification. The class is composed of adult
residents of California who smoked at least one of
defendants cigarettes during the applicable time
period, and who were exposed to defendants marketing
and advertising activities in California. Certification was
granted as to plaintiffs claims that defendants violated
§17200 of the California Business and Professions Code. The
court, however, refused to certify the class under the
California Legal Remedies Act. Class certification on
plaintiffs common law claims was denied on April 10,
2000. Defendants petitioned the California Supreme Court to
review the trial courts class certification ruling, but
the Supreme Court denied the petition on January 16, 2002.
The trial has been scheduled for October 11, 2002.

Most recently, on November 14, 2001, in Turner v. R. J.
Reynolds Tobacco Co., an Illinois state court judge
certified a class defined as [a]ll persons who purchased
defendants Doral Lights, Winston Lights, Salem Lights and
Camel Lights, in Illinois, for personal consumption, between the
first date that defendants sold Doral Lights, Winston Lights,
Salem Lights and Camel Lights through the date the court
certifies this suit as a class action . . . . Trial is
scheduled for March 17, 2003. This case currently includes
both RJR and RJR Tobacco as defendants.

Defendants, including RJR Tobacco, settled one class-action
suit, Broin v. Philip Morris, Inc., in October 1997. The
Florida Court of Appeal denied challenges to this settlement on
March 24, 1999, and subsequently denied motions to
reconsider. On September 7, 1999, the Florida Supreme Court
dismissed all proceedings, and the settlement and judgment
became final. The Broin IIcases, discussed above, arose
out of the settlement of this case.

Trial began in July 1998 in Florida state court in Engle v.
R. J. Reynolds Tobacco Co., in which a class consisting of
Florida residents, or their survivors on their behalf, claim to
have diseases or medical conditions caused by their alleged
addiction to cigarettes. On July 7, 1999, the
jury found against RJR Tobacco and the other cigarette
manufacturer defendants in the initial phase, which included
common issues related to certain elements of liability, general
causation and a potential award of or entitlement to punitive
damages.

The second phase of the trial, which consisted of the claims of
three of the named class representatives, began on
November 1, 1999. On April 7, 2000, the jury returned
a verdict against all defendants. They awarded plaintiff Mary
Farnan $2.85 million, the estate of plaintiff Angie Della
Vecchia $4.023 million and plaintiff Frank Amodeo $5.831
million. The jury also found, however, that Frank Amodeo knew or
should have known of his claim prior to May 5, 1990. The legal
effect of that finding should be to bar his claim based on the
applicable statute of limitations.

The trial court also ordered the jury in the second phase of the
trial to determine punitive damages, if any, on a class-wide
basis. On July 14, 2000, the jury returned a punitive
damages verdict in favor of the Florida class of
approximately $145 billion against all the defendants, with
approximately $36.3 billion being assigned to RJR Tobacco.

On July 24, 2000, the defendants, including RJR Tobacco,
filed numerous post-verdict motions, including motions for a new
trial and to reduce the amount of the punitive damages verdict.
On November 6, 2000, the trial judge denied the post-trial
motions and entered judgment. On November 7, 2000, RJR
Tobacco posted an appeal bond in the amount of $100 million,
pursuant to a Florida statute enacted on May 9, 2000, and
intended to apply to the Engle case, and initiated the
appeals process. The opening appellate brief of certain
defendants, including RJR Tobacco, was filed on
November 26, 2001. RJR Tobacco believes it has numerous
bases for a successful appeal, although it cannot predict the
outcome of the appellate process.

On May 7, 2001, three of the defendants entered into
agreements with the Engleclass to deposit an additional
$1.86 billion into separate escrow accounts to ensure that the
stay of execution that is in effect pursuant to the Florida bond
statute will remain in effect as to these three defendants
throughout the appellate process, regardless of the results of a
challenge, if any, to the Florida bond statute. Approximately
$700 million of the total amount deposited by these three
defendants is non-refundable and will go to the trial court to be

63



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


distributed, regardless of the result of the appeal. RJR Tobacco
has not entered into a similar agreement with the Engleclass. Although RJR Tobacco cannot predict the outcome of
any possible challenges to the Florida bond statute, RJR Tobacco
remains confident of the applicability and validity of the
statute in the Englecase. In addition, nine other
states, Georgia, Kentucky, Louisiana, Nevada, North Carolina,
Oklahoma, South Carolina, Virginia and West Virginia, have
enacted legislation similar to the Florida bond statute. The
Mississippi Supreme Court also has placed limits on appeal bonds
by court rule.

Governmental Health-Care Cost Recovery Cases.In June
1994, the Mississippi attorney general brought an action,
Moore v. American Tobacco Co., against various industry
members, including RJR Tobacco. This case was brought on behalf
of the state to recover state funds paid for health care and
medical and other assistance to state citizens suffering from
diseases and conditions allegedly related to tobacco use. By
making the state the plaintiff in the case and basing its claims
on economic loss rather than personal injury, the state sought
to avoid the defenses otherwise available against an individual
plaintiff. Most other states, through their attorneys general or
other state agencies, sued RJR Tobacco and other U.S. cigarette
manufacturers based on similar theories. The cigarette
manufacturer defendants, including RJR Tobacco, settled the
first four of these cases scheduled to come to trial, those of
Mississippi, Florida, Texas and Minnesota, by separate
agreements between each state and those manufacturers in each
case.

On November 23, 1998, the major U.S. cigarette
manufacturers, including RJR Tobacco, entered into the Master
Settlement Agreement with attorneys general representing the
remaining 46 states, the District of Columbia, Puerto Rico,
Guam, the Virgin Islands, American Samoa and the Northern
Marianas. The MSA became effective on November 12, 1999,
when final approval of the settlement was achieved in 80% of the
settling jurisdictions. As of October 17, 2000, final
approval had been achieved in all settling jurisdictions. The
MSA settled all the health-care cost recovery actions brought
by, or on behalf of, the settling jurisdictions and contains
releases of various additional present and future claims.

In the settling jurisdictions, the MSA released RJR Tobacco,
indemnitees and RJR from: (1) all claims of the settling
states and their respective political subdivisions and other
recipients of state health-care funds, relating to past conduct
arising out of the use, sale, distribution, manufacture,
development, advertising, marketing or health effects of, the
exposure to, or research, statements or warnings about, tobacco
products and (2) all monetary claims relating to future
conduct arising out of the use of, or exposure to, tobacco
products that have been manufactured in the ordinary course of
business.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  Monetary Liabilities.In addition to payments
	already made, the MSA calls for additional initial industry
	payments of approximately $2.6 billion and $2.7 billion in 2002
	and 2003, respectively. A substantial portion of the payment due
	in 2002 was prepaid in 2001 to obtain the tax benefit of the
	early payment. The MSA also requires perpetual annual industry
	payments, which started in 2000. The unadjusted annual payment
	currently is $6.5 billion and increases to $8 billion in 2004,
	to $8.14 billion in 2008 and finally to $9 billion in 2018 and
	thereafter. Ten additional payments of $861 million are due
	annually beginning in April 2008. All payments are to be
	allocated among the companies on the basis of relative market
	share and most are subject to adjustments for changes in sales
	volume, inflation and other factors. RJR Tobacco records its
	allocation of charges in cost of goods sold as products are
	shipped.
|
| | The tobacco companies also agreed to (1) make a one-time
	payment of $50 million on March 31, 1999, to establish a
	fund for enforcement of the MSA and laws relating to tobacco
	products and (2) fund activities of the National
	Association of Attorneys General relating to the MSA at the cost
	of $150,000 per year for ten years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | In addition, the MSA calls for the creation of a national
	foundation to support the study of, and programs to reduce,
	youth tobacco product usage and youth substance abuse, and the
	study of educational programs to prevent diseases associated
	with tobacco product use. The tobacco companies agreed to fund
	the foundation with (1) ten annual payments of $25 million,
	which began on March 31, 1999, (2) further payments of
	$250 million, which began on March 31, 1999, and $300
	million annually thereafter for four years, and
	(3) additional annual payments of $300 million beginning in
	2004 if, during                                                                                                                                                                                                                                                                                                                                        

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the year preceding the year when payment is due, participating
	manufacturers collectively accounted for at least 99.05% of the
	cigarette market. Each of these payments is to be allocated
	among the companies on the basis of relative market share. Other
	than the $25 million annual payments and the $250 million
	payment made on March 31, 1999, the payments for the
	foundation are subject to adjustments for changes in sales
	volume, inflation and other factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | The manufacturers also agreed to pay the litigation costs,
	including government attorneys fees, of the offices of the
	attorneys general relating to the settled cases and, subject to
	certain quarterly and annual payment caps, the costs and fees of
	outside counsel to the jurisdictions. Outside counsel fees have
	been determined either by arbitration or in accordance with a
	negotiated fee procedure. Awards determined by arbitration will
	be paid subject to an aggregate annual cap on arbitrated
	attorneys fees for all these and certain other settled
	cases of $500 million. Fees set by the negotiated fee procedure
	are subject to an annual cap of $250 million, and will not
	exceed a total of $1.25 billion. As of February 7, 2002,
	publicly announced awards determined by arbitration totaled
	approximately $11.7 billion, and awards determined in accordance
	with a negotiated fee procedure totaled approximately $626
	million. Reimbursement of costs is capped at $150 million for
	litigation costs, including government attorneys fees, of
	the attorneys general offices and at $75 million annually
	for outside counsels costs. Payments for attorneys
	fees and costs are to be allocated on a relative market share
	basis.
|
| |  Growers Trust.As part of the MSA, the
	tobacco companies agreed to work with U.S. tobacco growers to
	address the possible adverse economic impact of the MSA on
	growers. As a result, RJR Tobacco and the three other major
	manufacturers agreed to participate in funding a $5.2 billion
	trust fund to be administered by a trustee, in conjunction with
	a certification entity from each of the tobacco growing states.
	The trust agreement provides for a schedule of aggregate annual
	payments, subject to various adjustments, that are payable in
	quarterly installments each year from 1999 through 2010. The
	aggregate annual payment by all participating manufacturers is
	adjusted each year for inflation and any change in the total
	domestic cigarette volume of all participating manufacturers. In
	general, the annual payment by each participating manufacturer,
	including RJR Tobacco, is based on each manufacturers
	relative market share of total domestic cigarette shipments
	during the preceding calendar year. Each manufacturers
	annual payment is also subject to a tax offset adjustment.                                                                                                                                          
|
| |  Other MSA Obligations.The MSA also contains
	provisions restricting the marketing of cigarettes. Among these
	are restrictions or prohibitions on the use of cartoon
	characters, brand name sponsorships, brand name non-tobacco
	products, outdoor and transit brand advertising, payments for
	product placement, free sampling and lobbying. The MSA also
	required the dissolution of three industry-sponsored research
	and advocacy organizations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

RJR Tobaccos settlement expenses under these agreements
were $2.6 billion, $2.3 billion and $2.2 billion in 2001, 2000
and 1999, respectively. The cash payments made by RJR Tobacco
under the MSA and other existing settlement agreements were $2.4
billion, $2.2 billion and $1.6 billion in 2001, 2000 and 1999,
respectively. RJR Tobacco estimates these payments to be $2.4
billion in 2002 and to exceed $2 billion per year thereafter.
However, these payments will be subject to adjustments based
upon, among other things, the volume of cigarettes sold by RJR
Tobacco, RJR Tobaccos market share and inflation.

Certain litigation has arisen challenging the validity of the
MSA, including cases with claims that the MSA violates antitrust
laws. On January 5, 2001, the United States District Court for
the Northern District of California dismissed one of those
cases, Forces Action Project v. California. On
August 15, 2001, the United States Court of Appeals for the
Ninth Circuit remanded the antitrust claim, but affirmed the
district courts dismissal of the remaining claims. On
January 15, 2002, the United States District Court judge
denied plaintiffs motion to amend the complaint which
effectively dismissed the case.

Six actions are pending against RJR Tobacco alleging various
violations of the MSA. RJR Tobacco believes it has meritorious
defenses to each of these actions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Arizona, California, New York and Washington have alleged that
the posting of signage advertising RJR Tobaccos brand name
sponsorships violates a provision of the MSA governing the times
during which such signs may be posted. On November 16,
2001, in the Arizona signage action, the trial court granted
summary judgment in favor of the state. On November 27,
2001, the trial court ruled similarly in the California signage
matter. However, on February 1, 2002, a New York trial
court upheld RJR Tobaccos position. Appeals of all of
these decisions are pending or anticipated. Trial in the
Washington matter is scheduled for August 5, 2002.

The State of Ohio has alleged that RJR Tobaccos purchase
of advertising space on matchbooks distributed by an independent
third party violates a provision of the MSA governing brand name
merchandise. In November 2001, the trial court heard arguments
on the parties cross-motions for summary judgment and took
the motions under advisement.

Finally, the State of California has alleged that the
publications in which RJR Tobacco places advertising evidences
direct or indirect targeting of youth which is prohibited by the
MSA. Pretrial discovery is proceeding, and the trial is
scheduled for April 19, 2002.

On June 8, 2001, the Attorney General of the State of
California filed a lawsuit against RJR Tobacco in California
state court alleging that RJR Tobacco violated California state
law by distributing free cigarettes and free coupons for
discounts on cigarettes on public grounds, even
though the promotions occurred in an adult-only
facility at a race track. RJR Tobacco answered the
complaint on July 19, 2001, asserting that its promotions
complied with all laws, including California state law. The
trial is scheduled for April 30, 2002.

On April 20, 1999, the Canadian Province of British
Columbia brought a case in British Columbia Provincial Court,
similar to the U.S. attorneys general cases discussed
above, against RJR Tobacco and certain other Canadian and U.S.
tobacco companies and their parent companies, including RJR.
This lawsuit relied heavily upon special legislation enacted in
British Columbia that was separately challenged by various
Canadian tobacco companies. An agreement was reached with the
government in British Columbia to litigate the separate
constitutional challenges prior to the health-care cost recovery
action. On February 21, 2000, the British Columbia Supreme
Court declared the Cost Recovery Act unconstitutional and
dismissed the action. This decision was not appealed by the
government. On January 24, 2001, the Canadian Province of
British Columbia brought a second action in British Columbia
Provincial Court. A trial is likely to occur in October 2002.

On September 22, 1999, the U.S. Department of Justice
brought an action in the United States District Court for the
District of Columbia against various industry members, including
RJR Tobacco. The government sought to recover federal funds
expended in providing health care to smokers who have developed
diseases and injuries alleged to be smoking-related, and, in
addition, seeks, pursuant to the federal RICO statute,
disgorgement of profits the government contends were earned as a
consequence of a RICO racketeering enterprise. On
December 27, 1999, defendants filed a motion to dismiss
challenging all counts included in the action brought by the
DOJ. On June 6, 2000, the trial court heard oral argument
on the motion. On September 28, 2000, federal court Judge
Gladys Kessler of the United States District Court for the
District of Columbia granted the non-Liggett defendants
motion to dismiss the following counts of plaintiffs
complaint: (1) Medical Care Recovery Act claim, and
(2) Medicare Secondary Payer claim. The court, however,
denied the motion with respect to the RICO claims. On
October 13, 2000, the United States filed a motion to limit
Judge Kesslers September 28, 2000 order to claims for
payments under Medicare and the Federal Employee Health Benefits
Act.

Discovery in the DOJ lawsuit is ongoing, and trial has been
scheduled for July 15, 2003. RJR Tobacco believes it has
meritorious factual and legal defenses to that lawsuit. In June
2001, the United States Attorney General assembled a team of
three DOJ lawyers to work on a possible settlement of the
federal lawsuit. The DOJ lawyers met with representatives of the
tobacco industry, including RJR Tobacco, on July 18, 2001.
No settlement was reached and no further meetings are planned.

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(Continued)


Union Cases.Although the MSA settled some of the most
potentially burdensome health-care cost recovery actions, many
other such cases have been brought by other types of plaintiffs.
As of February 7, 2002, approximately 14 lawsuits by union
trust funds against cigarette manufacturers and others are
pending. The funds seek recovery of payments made by them for
medical expenses of their participant union members and their
dependents allegedly injured by cigarettes. The claims in these
cases are almost identical, and several of these cases purport
to be class actions on behalf of all union trust funds in a
particular state.

The defendants in these actions argue, among other things, that
one who pays an injured persons medical expenses is
legally too remote to maintain an action against the person
allegedly responsible for the injury. In addition, they argue
that the traditional subrogation remedy cannot be supplanted by
a direct right of action for the trust fund that strips
defendants of the defenses they would ordinarily have against
the allegedly injured individual.

On March 29, 1999, in the first of these cases to be
considered by a federal court of appeals, Steamfitters Local
Union 420 v. Philip Morris, Inc., the United States Court of
Appeals for the Third Circuit affirmed a district court ruling
dismissing the case on remoteness grounds. Since then, the U.S.
Courts of Appeals for the Second, Third, Fifth, Seventh, Eighth,
Ninth and Eleventh Circuits have all ruled in favor of the
industry in similar union cases. On January 10, 2000, the
United States Supreme Court denied petitions for certiorari
filed in cases from the Second, Third and Ninth Circuits.

Numerous trial court judges also have dismissed union trust fund
cases on remoteness grounds. Nonetheless, some union, or other
third-party payor, cases have survived motions to dismiss and
have proceeded or may proceed to trial. On August 2, 1999,
a federal district court in New York denied defendants
motions to dismiss in two separate cases heard together,
National Asbestos Workers Medical Fund v. Philip Morris, Inc.and Blue Cross and Blue Shield of New Jersey, Inc. v.
Philip Morris, Inc., discussed below. On December 21,
1999, the federal district court in the District of Columbia
denied defendants motions to dismiss in three cases
consolidated for pretrial purposes: Service Employees
International Union Health and Welfare Fund v. Philip Morris,
Inc., S.E.I.U. Local 74 Welfare Fund v. Philip Morris,
Inc.and Holland v. Philip Morris, Inc.On
May 22, 2001, the United States Court of Appeals for the
District of Columbia reversed the federal district courts
ruling that denied in part defendants motion to dismiss,
and affirmed the portion of the ruling that dismissed the bulk
of plaintiffs claims in these cases. In the same opinion,
the court reversed the district courts ruling that denied
defendants motion to dismiss the RICO and fraud claims in
Sheet Metal Workers Trust Fund v. Philip Morris, Inc.,
which had been consolidated with the first three cases for
purposes of pretrial discovery. The result of the D.C.
Circuits ruling is that all claims in these four cases, as
well as several additional union trust fund cases that had also
been consolidated for purposes of the appeal, were dismissed. On
June 21, 2001, plaintiffs filed a petition for rehearing
before the entire D.C. circuit with respect to these cases,
which was denied on July 13, 2001. On August 20, 2001,
plaintiffs filed a petition for writ of certiorari with the U.S.
Supreme Court, which was denied on October 29, 2001.

On March 3, 2000, a New York state court granted motions to
dismiss ten union cases, Eastern States Health & Welfare
Fund v. Philip Morris, Inc., brought by 14 union trust funds
seeking to recover money paid for medical bills incurred by
their participants and beneficiaries who suffer from alleged
tobacco-caused diseases. This group of cases is on appeal to the
Appellate Division of the Supreme Court of New York. On
September 26, 2000, in Steamfitters Local Union
No. 614 Health and Welfare Fund v. Philip Morris, Inc.,
the Tennessee Court of Appeals affirmed a trial courts
dismissal of an antitrust claim and found that the remaining
claims in the plaintiffs complaint were too remote to
permit recovery. On March 21, 2001, a federal district
court in Connecticut granted defendants motion to dismiss
in Connecticut Pipe Trades Health Fund v. Philip Morris, Inc.Most recently, on January 25, 2002, in Motion
Picture Industry Health Plan v. Philip Morris, Inc., the
California Supreme Court granted plaintiffs petition for
review and deferred further action pending consideration and
disposition of a related issue in Naegele v.
Raybestos-Manhattan, Inc.(pending in San Francisco County
Superior Court), or pending further order of the court. On
October 25, 2001, the California Court of Appeals affirmed
the April 10, 2000, order granting voluntary dismissal of
the case with prejudice as to all defendants.

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(Continued)


The first and only union case to go to trial to date was Iron
Workers Local No. 17 v. Philip Morris, Inc., which was
tried in federal court in Ohio. On March 18, 1999, the jury
returned a unanimous verdict for the defendants, including RJR
Tobacco. The plaintiffs dismissed their appeal of the verdict.

Other Health-Care Cost Recovery and Aggregated Claims
Plaintiffs.Groups of health-care insurers, as well as a
private entity that purported to self-insure its employee
health-care programs, have also advanced claims similar to those
found in the union health-care cost recovery actions.

Two insurer cases, Williams & Drake v.
American Tobacco Co.and Regence Blueshield v. Philip
Morris, Inc., were dismissed in their entirety on remoteness
grounds by federal district courts in Pennsylvania and
Washington. These rulings were then upheld on appeal to the
Third and Ninth Circuits, respectively.

In Group Health Plan, Inc. v. Philip Morris, Inc.and
Medica v. Philip Morris, Inc.,two cases consolidated for
opinion, a federal district judge in Minnesota dismissed all
claims, except a state antitrust claim and a state conspiracy
claim. The federal court certified to the Minnesota Supreme
Court the question of whether these two claims could be pursued
under Minnesota law by Group Health Plan. On January 11,
2001, the Minnesota Supreme Court ruled that the plaintiff could
pursue these claims. Certain defendants, including RJR Tobacco,
filed motions for summary judgment based on (1) the
statutes of limitation on June 15, 2001; and
(2) causation, injury and damages on June 20, 2001. On
January 31, 2002, summary judgment was granted in favor of
certain defendants, including RJR Tobacco, on all causes of
action. Plaintiffs have not yet filed an appeal.

On June 6, 2001, in Blue Cross and Blue Shield of New
Jersey, Inc. v. Philip Morris, Inc., a federal court jury in
Brooklyn returned a verdict in favor of RJR Tobacco and other
tobacco defendants on common law fraud and civil RICO claims,
but found for the plaintiff, Empire Blue Cross and Blue Shield,
on a claim under a New York state deceptive business practices
statute. Empire pursued its claims against the defendants on
behalf of itself directly, as well as on the behalf of its
insureds, under a theory of subrogation. The jury verdict on the
direct claim was approximately $17.8 million, and the verdict on
the subrogated claim was approximately $11.8 million. RJR
Tobaccos portion of these amounts is $6.6 million and $4.4
million, respectively. Empire is not entitled to recover under
both direct and subrogated claims; thus, Empire must elect one
claim, and thus one jury verdict. The New York statute under
which Empire recovered does not provide for punitive damages,
but does allow for recovery of reasonable attorneys fees.
Plaintiff filed a motion for attorneys fees. On
October 4, 2001, the court denied defendants
post-trial motions, entered final judgment in favor of Empire,
yet retained jurisdiction to decide the attorneys fees
issue. RJR Tobacco and the other tobacco defendants appealed the
final judgment to the United States Court of Appeals for the
Second Circuit. All remaining claims of Blue Cross Blue Shield
plans pending before the court are stayed pending the appeal.

On August 8, 2001, in County of Cook v. Philip Morris,
Inc., the Circuit Court of Cook County granted
defendants motion for judgment on the pleadings based on
remoteness grounds and dismissed plaintiffs complaint in
its entirety. Plaintiffs appealed the dismissal to the Illinois
Appellate Court, First District, on September 5, 2001.
Defendants noticed a cross-appeal to the appellate court on
September 17, 2001, from the trial courts prior
adverse rulings on defendants motions to dismiss on the
grounds of MSA release and lack of standing. The appellate court
has not yet ruled.

Native American tribes have filed similar health-care cost
recovery cases. On December 8, 2000, in Utu Utu Gwaitu
Paiute Tribe v. Philip Morris, Inc., the San Diego Superior
Court denied plaintiffs motion for class certification. On
January 10, 2001, the plaintiffs voluntarily dismissed the
action. On November 12, 1999, in Table Bluff Reservation v.
Philip Morris, Inc., a California federal district court
dismissed plaintiffs lawsuit. On July 16, 2001, the
United States Court of Appeals for the Ninth Circuit affirmed
the federal district courts dismissal. On July 30,
2001, in Acoma Pueblo v. American Tobacco Co., a federal
district court in New Mexico granted defendants motion to
dismiss plaintiffs complaint for failure to state a claim.
The ruling was based on a number of grounds, including
remoteness. On September 17, 2001, plaintiff filed a motion
for reconsideration which was denied on November 1, 2001.
The dismissal was modified to a dismissal with prejudice in
order to facilitate plaintiffs appeal. On August 31,
2001, in Alabama Coushatta Tribe of

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(Continued)


Texas v. American Tobacco Co., the United States District
Court for the Eastern District of Texas (Beaumont Division)
dismissed plaintiffs complaint. Plaintiffs appealed to the
United States Court of Appeals for the Fifth Circuit on
October 1, 2001. Most recently, on January 25, 2002,
in the Navajo Nation v. Philip Morris, Inc., the District
Court of Navajo Nation granted in part defendants motion
to dismiss the complaint with respect to the conspiracy,
deceptive acts and restraints of trade claims. The court refused
to dismiss plaintiffs product liability claim. Four such
cases remain pending, all before tribal courts.

Other cost recovery suits have been brought by local
governmental jurisdictions, taxpayers on behalf of a government
jurisdiction, a university and hospitals. On December 14,
1999, a federal district court in Washington dismissed one such
case, Association of Washington Public Hospital Districts v.
Philip Morris, Inc.Plaintiffs appealed this ruling to the
United States Court of Appeals for the Ninth Circuit, which
affirmed the dismissal by the trial court on February 22,
2001. Plaintiffs filed a petition to the U.S. Supreme Court
asking it to review the case on July 16, 2001, but the
court declined plaintiffs petition October 1, 2001.
On May 30, 2000, in A.O. Fox Memorial Hospital v.
American Tobacco Co., Inc., pending in state court in Nassau
County, New York, a group of approximately 175 hospitals filed
suit against the tobacco industry seeking repayment from
cigarette companies for costs expended to treat smoking-related
illnesses. Plaintiffs seek at least $3.6 billion in damages.
Defendants filed a motion to dismiss which was granted on
December 14, 2001. On January 17, 2002, plaintiffs appealed
the dismissal to the Appellate Division of the Supreme Court,
Second Judicial Department.

A number of foreign countries have filed suit in state and
federal courts in the United States against RJR Tobacco and
other tobacco industry defendants to recover funds for health
care, medical and other assistance paid by those foreign
governments to their citizens. Of the 33 cases currently
pending, 6 are pending in state court and 27 are pending in
federal court. Eleven of these cases have been transferred to,
and are still pending before, the Judicial Panel on
Multi-District Litigation in the United States District Court
for the District of Columbia. Other foreign governments and
entities have stated that they are considering filing such
actions in the United States. In addition, in the Marshall
Islands v. American Tobacco Co., the Republic of the
Marshall Islands brought a health-care cost recovery lawsuit in
the Marshall Islands against RJR Tobacco and other cigarette
manufacturers. On February 22, 2001, the High Court of the
Marshall Islands granted defendants motions for summary
judgment on all counts except the Consumer Protection Act. The
parties stipulated to a dismissal of the remaining claim on
May 18, 2001. Final judgment was entered on June 4,
2001. Thereafter, on June 27, 2001, plaintiff noticed an
appeal to the Supreme Court of the Republic of the Marshall
Islands. On July 3, 2001, defendants filed a notice of
cross appeal. Oral argument on the appeal is scheduled for
April 17-19, 2002.

On August 7, 2000, a federal district court in Washington,
D.C. dismissed an international health-care cost recovery action
entitled Ontario v. Imperial Tobacco, Ltd.Plaintiffs
appealed to the United States Court of Appeals for the District
of Columbia. However, on November 29, 2001, the D.C. Court
of Appeals granted plaintiffs motion for a voluntary
dismissal of the appeal, thereby dismissing the case. In Obra
Social de Empleados de la Marina Mercante v. American Tobacco
Co., Inc., the Superior Court in Washington, D.C. granted
defendants motion to dismiss on January 13, 2001.
Plaintiffs appealed the dismissal to the D.C. Court of Appeals;
however, the parties agreed to dismiss the appeal on
October 22, 2001. Additionally, plaintiffs filed a separate
action in the same court on March 23, 2001; that case was
voluntarily dismissed on August 30, 2001. On May 22,
2001, the United States Court of Appeals for the District of
Columbia affirmed the federal district courts dismissal in
the following three matters: (1) Guatemala v. Tobacco
Institute, Inc.(a non-RJR Tobacco action); (2) Nicaragua
v. Liggett Group, Inc.(another non-RJR Tobacco case); and
(3) Ukraine v. American Brands, Inc.(a case involving
RJR Tobacco). Plaintiffs in each of these cases filed a petition
for writ of certiorari to the U.S. Supreme Court on
August 20, 2001. The Supreme Court, on October 29,
2001, denied the petitions. Most recently, on November 20,
2001, in Venezuela v. Philip Morris Cos., Inc.and
Espirito Santo, Brazil v. Brooke Group Ltd., a Florida
state court judge granted defendants motions to dismiss
these matters because the claims were too remote, indirect and
derivative to survive. Plaintiff appealed each case to the Third
District Court of Appeal of Florida on December 19, 2001.

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(Continued)


Pursuant to the terms of the 1999 sale of RJRs
international tobacco business, Japan Tobacco Inc. assumed RJR
Tobaccos liability, if any, in the health-care cost
recovery cases brought by foreign countries.

Finally, 11 lawsuits are pending against RJR Tobacco in which
asbestos companies and/or asbestos-related trust funds allege
that they overpaid claims brought against them to
the extent that tobacco use, not asbestos exposure, was the
cause of the alleged personal injuries for which they paid
compensation. One of these lawsuits, Falise v. American
Tobacco Co., was dismissed by the United States District
Court for the Eastern District of New York (Weinstein, J.) on
November 2, 1999, due to a lack of subject matter
jurisdiction. This case was refiled on November 11, 1999.
Trial began on November 27, 2000. On January 22, 2001,
the judge declared a mistrial. The case was dismissed with
prejudice on June 29, 2001 after the plaintiff announced
that it would not retry the case. On May 24, 2001, a
Mississippi state court judge dismissed all claims by
Owens-Corning in a lawsuit similar to Falise.Owens-Corning appealed the dismissal to the Mississippi
Supreme Court on August 15, 2001. A similar case, H. K.
Porter Co., Inc. v. American Tobacco Co., is pending in the
United States District Court for the Eastern District of New
York (Weinstein, J.). In Fibreboard Corp. v. R. J. Reynolds
Tobacco Co., a case pending in state court in California,
Owens-Corning and Fibreboard asserted the same claims as those
asserted in the Mississippi case. Motions to dismiss those
claims have been held in abeyance pending the final
determination of the Mississippi case.

Antitrust Cases. A number of tobacco wholesalers, or
indirect purchasers, have sued United States cigarette
manufacturers, including RJR Tobacco, and its parent company,
RJR, alleging that cigarette manufacturers combined and
conspired to set the price of cigarettes, in violation of
antitrust statutes and various state unfair business practices
statutes, as a result of which plaintiffs suffered economic
injury. Of the 39 cases currently pending, 30 are pending in
state court and 9 are pending in federal court. Plaintiffs are
asking the court to certify the lawsuits as class actions and to
allow the respective plaintiffs to pursue the lawsuits as
representatives of other persons in individual states or
throughout the United States that purchased cigarettes directly
from one or more of the defendants. The federal cases have been
consolidated and sent by the Judicial Panel on Multidistrict
Litigation for pretrial proceedings in the United States
District Court for the Northern District of Georgia. On
November 30, 2000, the court dismissed plaintiffs
claims of fraudulent concealment, claims concerning conduct
outside the United States and allegations relating to non-price
conduct. A class of direct purchasers was certified by the court
on January 27, 2001. On February 22, 2001, plaintiffs
repleaded their fraudulent concealment allegations. These
allegations were dismissed on June 19, 2001. State court
cases on behalf of indirect purchasers have been dismissed in
Arizona, currently on appeal, and New York. A Minnesota court
denied class certification on November 21, 2001. A Kansas
court granted class certification on November 15, 2001.

On March 2, 2000, Liggett Group Inc. filed an antitrust
action against RJR Tobacco in the U.S. District Court for the
District of New Jersey. Subsequently, the court granted RJR
Tobaccos motion to transfer this action to the United
States District Court for the Middle District of North Carolina.
On May 3, 2001, the case, which alleged that RJR
Tobaccos Every-Day-Low-Price merchandising program is a
violation of the Sherman Antitrust Act and New Jersey antitrust
laws, was voluntarily dismissed.

In A.D. Bedell Wholesale Co. v. Philip Morris, Inc.,
filed on April 13, 1999, in the United States District
Court for the Western District of Pennsylvania, a cigarette
wholesaler alleged that the MSA restricts cigarette output and
otherwise restrains trade in violation of the Sherman Act. On
March 22, 2000, the district court entered an order granting
defendants motion to dismiss counts I and II of the
complaint, denying defendants motion to dismiss count III,
and denying as moot plaintiffs motion for partial summary
judgment. On April 11, 2000, the plaintiffs and defendant
Philip Morris, the only defendant to which count III applied,
filed a consent order dismissing count III of the amended
complaint. On April 18, 2000, plaintiffs appealed the
dismissal of counts I and II to the United States Court of
Appeals for the Third Circuit. On June 19, 2001, the Third
Circuit affirmed the district courts dismissal of counts I
and II, ruling that tobacco companies that entered into the MSA,
including RJR Tobacco, were immune from potential antitrust
liability that was alleged to arise out of the MSA. The finding
of antitrust immunity is consistent with that of all other
federal courts that have considered antitrust challenges to the
MSA. The plaintiffs filed a petition for rehearing and

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(Continued)


suggestion for rehearing before the entire Third Circuit on
July 2, 2001. This petition was denied on July 24,
2001. On October 19, 2001, the plaintiffs filed a petition
for a writ of certiorari with the U.S. Supreme Court, which
denied the petition on January 7, 2002.

On July 30, 1999, Cigarettes Cheaper!, a retailer, filed an
antitrust counterclaim against RJR Tobacco in a gray market
trademark suit originally brought by RJR Tobacco in the United
States District Court for the Northern District of Illinois.
Cigarettes Cheaper! alleges that it was denied promotional
resources in violation of the Robinson-Patman Act. The district
court declined to dismiss the counterclaim. On January 23,
2001, the court granted Cigarettes Cheaper!s motion to
amend its counterclaim to include a violation of the Sherman Act
§1, claiming that RJR Tobacco conspired with other
retailers to deny promotions to Cigarettes Cheaper!, an
allegation that RJR Tobacco denies. On March 21, 2001, RJR
Tobaccos motion to add a trademark dilution claim against
Cigarettes Cheaper! was granted. On June 28, 2001, the
court granted RJR Tobaccos motion to strike with prejudice
several of Cigarettes Cheaper!s affirmative defenses.
These defenses related to: (1) alleged misrepresentations caused
by the packaging of cigarettes manufactured by RJR Tobacco for
export; (2) RJR Tobaccos No Bull
advertising campaign for its WINSTON cigarettes;
(3) antitrust trademark misuse; (4) nominative fair
use; and (5) the first sale doctrine. Fact discovery closed
on October 18, 2001. Expert discovery is presently underway
and dispositive motions likely will be filed this spring or
summer. No trial date is yet set.

On May 10, 2000, the Customer Company, a retailer
affiliated with Cigarettes Cheaper!, filed a similar antitrust
claim against RJR Tobacco in the United States District Court
for the Northern District of California. This case has now been
settled. The settlement terms are confidential; however, the
settlement is not material to RJR Tobacco.

Tobacco Growers Case. On February 16, 2000, a
class action complaint, Deloach v. Philip Morris Cos.,
Inc., was brought against RJR Tobacco, other cigarette
manufacturers and others, in the United States District Court
for the District of Columbia on behalf of a putative class of
all tobacco growers and tobacco allotment holders, some 5,930 of
which are actually named in the first amended complaint.
Plaintiffs current theory, as reflected in their second
amended complaint, which was filed on September 2, 2000, is
that the defendants, Philip Morris, Inc., RJR Tobacco, Brown
& Williamson Tobacco Corp. and Lorillard Tobacco Co.,
engaged in bid-rigging of American burley and flue-cured tobacco
auctions beginning at least by 1996 and continuing to present.
Defendants actions are alleged to have held the auction
prices of tobacco at artificially low prices resulting in damage
to tobacco growers and allotment holders. In addition,
plaintiffs allege that defendants have engaged in a conspiracy
to force the elimination or destruction of the federal
governments tobacco quota and price support program
through an alleged illegal group boycott. On October 9,
2000, defendants filed a motion to dismiss the second amended
complaint and a motion to transfer venue to the United States
District Court for the Middle District of North Carolina. On
November 30, 2000, the court granted the motion to transfer
the case. On December 20, 2000, plaintiffs moved to amend
the complaint to add leaf-buying companies as defendants.
Plaintiffs motion to certify the class remains pending.

Scheduled Trials. As of February 7, 2002, RJR
Tobacco is a defendant in two cases currently being tried:
Burton v. R. J. Reynolds Tobacco Co., an individual case
being tried in federal court in Kansas, and Scott v. American
Tobacco Co., a medical monitoring class action. Jury
selection began in the Scott case on June 18, 2001.
After the jury was impaneled, various rulings required the
dismissal of several members of the original jury (nine jurors
and/or alternates). Jury selection began again on
October 22, 2001. On December 26, 2001,
defendants filed an application for supervisory writ to
the Fourth District of the Louisiana Court of Appeals
challenging certain aspects of the second round of jury
selection. Opening statements will not occur until that
application is decided.

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, some involving claims for
possibly billions of dollars, against RJR and RJR Tobacco,
coming to trial during 2002. As of February 7, 2002, there
are 18 cases scheduled for trial. Fourteen Broin IIcases
also are scheduled to be tried in 2002.

71



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Other Developments.RJR Tobacco is aware of a grand jury
investigation being conducted in North Carolina that relates to
the cigarette business of certain of its former affiliates. In
connection with this investigation, RJR Tobacco responded to
document subpoenas dated July 7, 1999 and June 1,
2000, respectively.

On December 22, 1998, Northern Brands International, Inc.
entered into a plea agreement with the United States Attorney
for the Northern District of New York. Northern Brands is a
now-inactive tobacco subsidiary that was part of the business of
R. J. Reynolds International B.V., a former Netherlands
subsidiary of RJR Tobacco which was managed by a former
affiliate, RJR-MacDonald, Inc. On May 12, 1999,
RJR-MacDonald, Inc. was sold to Japan Tobacco Inc. and
subsequently changed its name to JT-MacDonald, Inc. Northern
Brands was charged with aiding and abetting certain customers
who brought merchandise into the United States by means of
false and fraudulent practices . . . . It is understood
that JT-MacDonald, Inc., Japan Tobaccos international
operating company in Canada, is cooperating with an
investigation now being conducted by the Royal Canadian Mounted
Police relating to the same events that gave rise to the
Northern Brands investigation.

On December 21, 1999, the government of Canada filed a
lawsuit in the United States District Court for the Northern
District of New York against RJR Tobacco, RJR, several currently
and formerly related companies, including Northern Brands, and
the Canadian Tobacco Manufacturers Council. The lawsuit alleges
that, beginning in 1991, the defendants conspired with known
distributors and smugglers to illegally import into Canada
tobacco products originally earmarked for export from Canada, in
a fashion that avoided the imposition of certain excise and
retail taxes and duty payments. On June 30, 2000, this case
was dismissed by the United States District Court for the
Northern District of New York. Plaintiff appealed the dismissal
to the United States Court of Appeals for the Second Circuit,
which, on October 12, 2001, affirmed the district
courts dismissal. On December 12, 2001, the Court of
Appeals denied Canadas petition for rehearing. Although
the international tobacco business was sold, RJR Tobacco
retained certain liabilities relating to the events disclosed
above.

Similar lawsuits have been filed against RJR Tobacco and its
affiliates, along with other cigarette manufacturers, by the
European Community and ten of its member states (Belgium,
Finland, France, Greece, Germany, Italy, Luxembourg, the
Netherlands, Portugal and Spain), Ecuador, Belize and Honduras.
These suits contend that RJR Tobacco and other tobacco companies
in the United States may be held responsible for damages caused
by cigarette smugglers under common law and under the federal
RICO statute. Each of these actions seeks compensatory, punitive
and treble damages. On July 17, 2001, the action brought by
the European Community was dismissed by the United States
District Court for the Eastern District of New York. However,
the European Community and its member states filed a similar
complaint in the same jurisdiction on August 6, 2001. On
October 25, 2001, the court denied the European
Communitys request of August 10, 2001, to reinstate
its original complaint. On November 9, 2001, the European
Community and the ten member states amended their complaint
filed on August 6, 2001, to change the name of defendant
Nabisco Group Holdings Corp. to RJR Acquisition, Inc. RJR
Tobacco and the other defendants filed motions to dismiss that
complaint on November 14, 2001, and the court heard oral
argument on those motions on January 11, 2002. As of
February 7, 2002, a decision is still pending. RJR Tobacco
and other defendants filed in the United States District Court
for the Southern District of Florida motions to dismiss the
actions brought by Ecuador, Belize and Honduras. These motions
have been briefed and argued, and have been taken under
advisement.

On May 23, 2001, Star Scientific, Inc. filed a patent
infringement action against RJR Tobacco in the United States
District Court for the District of Maryland. The suit alleges
infringement of U.S. Patent No. 6,202,649 entitled
Method of Treating Tobacco to Reduce Nitrosamine Content,
and Products Produced Thereby. RJR Tobacco denies that it
has infringed any valid claim of the Star patent. On
June 13, 2001, RJR Tobacco filed a declaratory judgment
action against Star Scientific in the United States District
Court for the Middle District of North Carolina, seeking a
declaration that the patent is invalid and not infringed by RJR

72



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Tobacco. On October 3, 2001, the North Carolina federal
court granted Star Scientifics motion to stay, but denied
its motions to dismiss or transfer the case.

On or about October 30, 1998, a boat manufacturer, American
Marine Holdings, Inc., filed suit against RJR Tobacco claiming
that one of its boats was not properly identified in RJR Tobacco
cigarette advertising. The plaintiff claimed, among other
things, violations of the Lanham Act and breach of an alleged
oral contract. On April 12, 2001, the parties reached an
agreement to settle the matter. The related provision for
settlement is included in the accompanying consolidated
financial statements.



---

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 RJR Tobacco or its affiliates,
including RJR, 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 RJR Tobacco
or its affiliates or indemnitees and could encourage an increase
in the number of such claims. A number of political,
legislative, regulatory and other developments relating to the
tobacco industry and cigarette smoking have received wide media
attention. 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 RJR Tobacco and RJR, a significant increase in
litigation and/or in adverse outcomes for tobacco defendants
could have an adverse effect on either or both of these
entities. RJR Tobacco and RJR each believe that they have a
number of valid defenses to any of those actions and intend to
defend those actions vigorously.

RJR believes that, notwithstanding the quality of defenses
available to it and RJR Tobacco in litigation matters, it is
possible that the results of operations or cash flows of RJR in
particular quarterly or annual periods or RJRs financial
condition could be materially affected by the ultimate outcome
of certain pending litigation matters, including bonding and
litigation costs. RJRs 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. Accordingly, no
liability for tobacco-related litigation is currently recorded
in the consolidated financial statements.

Environmental Matters

RJR and its subsidiaries are subject to federal, state and local
environmental laws and regulations concerning the discharge,
storage, handling and disposal of hazardous or toxic substances.
Such laws and regulations provide for significant fines,
penalties and liabilities, sometimes without regard to whether
the owner or operator of the property knew of, or was
responsible for, the release or presence of hazardous or toxic
substances. In addition, third parties may make claims against
owners or operators of properties for personal injuries and
property damage associated with releases of hazardous or toxic
substances. In the past, RJR Tobacco has been named a
potentially responsible party with third parties under the
Comprehensive Environmental Response, Compensation and Liability
Act with respect to several superfund sites. Regulations
promulgated by the U.S. Environmental Protection Agency and
other governmental agencies under various statutes have resulted
in, and likely will continue to result in, substantial
expenditures for pollution control, waste treatment, plant
modification and similar activities. RJR and its subsidiaries
monitor their environmental matters and, dependent upon the
probability of occurrence and reasonable estimation of cost,
accrue or disclose any material liability.

RJR was named in an insurance coverage suit filed
August 13, 1997, by another company named as a potentially
responsible party under CERCLA with respect to a superfund site
in Hawaii at which a former subsidiary of RJR had operations. In
this lawsuit, Del Monte Fresh Produce v. Firemans Fund
Insurance, filed in the First Circuit Court of the State of
Hawaii, the plaintiff sought a declaratory judgment that it is
entitled to insurance coverage for the site or, in the
alternative, that RJR is obligated to indemnify the plaintiff
under

73



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


the terms of the agreement by which RJR sold that company in
1989. On June 26, 2001, the plaintiff filed for dismissal
without prejudice as to all claims against RJR. A motion for
summary judgment filed by Firemans Fund Insurance Company
was denied by the court on August 6, 2001.

Del Monte Corporation has been named a defendant in two lawsuits
related to the same Hawaii superfund site, Board of Water
Supply of the City and County of Honolulu v. Shell Oil Companyand Akee v. The Dow Chemical Co., filed in the First
Circuit Court of the State of Hawaii on September 27, 1999,
and October 7, 1999, respectively. Also, Del Monte Corporation
has received a demand for indemnity from an entity that was a
chemical supplier to Del Monte Corporation and is named a
defendant in one of these lawsuits. Del Monte Corporation has
sought indemnity from RJR under the terms of the agreement by
which RJR sold Del Monte Corporation in 1989. RJR, in turn, has
provided notice of these claims to the buyers of the Del Monte
fresh fruit business, asserting the right to be indemnified by
the buyers for any liability arising out of such claims under
the terms of the agreement by which RJR sold the Del Monte fresh
fruit business in 1989.

Pursuant to an agreement dated June 12, 2001, among RJR,
the buyers of the Del Monte fresh fruit business, Del Monte
Corporation and others, the buyers of the Del Monte fresh fruit
business agreed, from the date of the agreement forward, to
indemnify RJR for any liabilities imposed in either Board of
Water Supplyor Akeeand with respect to the
environmental investigation and remediation of the superfund
site in Hawaii currently being required by the EPA. RJR and the
buyers of the Del Monte fresh fruit business also agreed to
engage in good faith negotiations regarding RJRs asserted
right to be indemnified with respect to any liability, cost or
expense related to such matters that was incurred prior to the
date of the agreement. Based on an agreement reached between RJR
and the buyers of the Del Monte fresh fruit business on
December 3, 2001, the buyers have reimbursed RJR for the
amount of legal expenses claimed by RJR in defending the
Board of Water Supplyand Akee cases prior to the
parties agreement of June 12, 2001. Additionally,
pursuant to a settlement agreement executed in December 2001,
among the plaintiff and certain defendants, including the buyers
of the Del Monte fresh fruit business, the Board of Water
Supplycase, including all pending claims and cross-claims,
has been dismissed with prejudice. In accordance with the terms
of the settlement agreement, the plaintiff released the buyers
of the Del Monte fresh fruit business and all of their
predecessors, including RJR, from all claims asserted in
Board of Water Supply.

On June 1, 2001, RJR received notice from Del Monte
Corporation of a claim made against it by a Hawaii landowner who
has been sued by a lessee of its land, claiming injuries due to
pesticide contamination of the soil, allegedly caused by Del
Monte Corporation as a prior lessee of the land. The
landowner-defendant has tendered the claim to Del Monte
Corporation for defense and indemnity. Del Monte Corporation has
in turn tendered the claim to RJR for defense and indemnity,
claiming it is entitled to be indemnified under the terms of the
agreement by which RJR sold Del Monte Corporation. Based on the
plaintiffs failure to provide any factual information in
support of its claim that Del Monte Corporation was a prior
lessee of the subject land, Del Monte Corporation has agreed to
extend indefinitely the period during which RJR must respond to
the Del Monte Corporations tender of the claim to RJR for
defense and indemnity, subject to the right to terminate the
indefinite extension on fifteen days notice to RJR.

RJR Tobacco was notified by the EPA on June 11, 2000 of its
potential liability under CERCLA for a superfund site in Greer,
South Carolina. The notice and demand for reimbursement of costs
incurred by the EPA were sent to a group of companies previously
involved as potentially responsible parties in another superfund
site, which includes RJR Tobacco. The EPA alleges that some
waste from the cleanup of the other site was transported to the
site in question. RJR Tobacco has executed a tolling agreement
with the EPA. This tolling agreement provides for entry into
good faith negotiations with the EPA, and is not an admission of
fact or liability. The tolling agreement also should have no
impact on any defense RJR Tobacco may assert, other than a
defense based on the running of the statute of limitations.
Information is still being gathered from other potentially
responsible parties recently notified by the EPA.

74



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


RJR and its subsidiaries have been engaged in a continuing
program to assure compliance with federal, state and local
environmental 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
regulations and to estimate the cost of resolving these CERCLA
matters, RJR does not expect such expenditures or other costs to
have a material adverse effect on the business, results of
operations or financial condition of RJR or its subsidiaries.

Other Contingencies

Until the acquisition by merger by Philip Morris Companies, Inc.
of Nabisco from NGH on December 11, 2000, NGH and Nabisco
were members of the consolidated group of NGH for U.S. federal
income tax purposes. Each member of a consolidated group is
jointly and severally liable for the U.S. federal income tax
liability of other members of the group as well as for pension
and funding liabilities of the other group members. NGH, now
known as RJR Acquisition Corp., continues to be jointly and
severally liable for these Nabisco liabilities prior to
December 11, 2000.

In connection with Philip Morris acquisition by merger of
Nabisco and RJRs subsequent acquisition by merger of NGH,
Philip Morris, Nabisco and NGH entered into a voting and
indemnity agreement that generally seeks to allocate tax
liabilities ratably based upon NGHs taxable income and
that of Nabisco, had the parties been separate taxpayers. If
Philip Morris and Nabisco are unable to satisfy their
obligations under this agreement, NGH, now known as RJR
Acquisition Corp., would be responsible for satisfying them.

In connection with the sale of the international tobacco
business to Japan Tobacco Inc. on May 12, 1999, RJR and RJR
Tobacco agreed to indemnify Japan Tobacco against (1) any
liabilities, costs and expenses arising out of the imposition or
assessment of any tax with respect to the international tobacco
business arising prior to the sale, other than as reflected on
the closing balance sheet, (2) any liabilities, costs and
expenses that Japan Tobacco or any of its affiliates, including
the acquired entities, may incur after the sale in respect of
any of RJRs or RJR Tobaccos employee benefit and
welfare plans and (3) any liabilities, costs and expenses
incurred by Japan Tobacco or any of its affiliates arising out
of certain activities of Northern Brands. Although it is
impossible to predict the outcome of the Northern Brands
litigation or the amount of liabilities, costs and expenses, a
significant adverse outcome regarding any of these items could
have an adverse effect on either or both of RJR and RJR Tobacco.

Commitments

At December 31, 2001, commitments totaled $245 million,
primarily for marketing-related activities and operating lease
commitments. The operating lease amounts for each of the next
five years are: 2002  $19 million; 2003 
$10 million; 2004  $3 million; 2005  $1
million; and 2006  $1 million. Rent expense was $43
million during 2001 and $44 million during each of 2000 and 1999.

Note 15  Financial Instruments

Foreign Currency Arrangements

At December 31, 2001, RJR Tobacco held a forward currency
exchange contract to purchase seven million Euros with a term of
less than 12 months as a hedge of an unrecognized firm
commitment for the purchase of equipment. As of
December 31, 2001, the foreign currency cash flow hedge was
effective and, accordingly, no gain or loss was realized. The
unrealized gain resulting from the increase in its fair value
was insignificant. There were no forward currency exchange
contracts outstanding at December 31, 2000.

Credit Risk

RJR and its subsidiaries minimize counterparty credit risk
related to their financial instruments by using major
institutions with high credit ratings.

75



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 16  Stockholders Equity

RJRs authorized capital stock at December 31, 2001
consisted of 50 million shares of preferred stock, par value
$.01 per share, and 290 million shares of common stock, par
value $.01 per share. The preferred stock, none of which is
issued or outstanding, ranks senior to common stock as to
dividends and liquidation preferences.

During 2001, RJR repurchased 8,727,600 shares of its common
stock with an aggregate cost of $494 million. Of these amounts,
5,100,100 shares with an aggregate cost of $289 million
completed a $350 million repurchase program authorized by
RJRs board of directors on December 12, 2000. The
remaining 3,627,500 shares with an aggregate cost of $205
million were repurchased under an authorization by RJRs
board of directors on July 18, 2001. This program
authorizes the repurchase of shares of RJRs common stock
over time in the open market, with a maximum aggregate cost of
$300 million, to enhance stockholder value. The stock
repurchases are funded by dividends from RJR Acquisition Corp.
utilizing the cash proceeds of the NGH acquisition. The timing
of repurchases and the number of shares repurchased will depend
upon market conditions.

From November 1999 through December 31, 2001, cumulative
repurchases under all programs were 19,970,739 shares with an
aggregate cost of $780 million. Shares held through repurchase,
in addition to 144,683 shares cancelled, less 304,590 shares
granted, pursuant to employee benefit plans, are included in
treasury stock in the consolidated balance sheets.

Note 17  Stock Plans

As of December 31, 2001, RJR had two stock plans, the
Amended and Restated Equity Incentive Award Plan for Directors
and the 1999 Long Term Incentive Plan, as amended on
December 5, 2001.

The EIAP provides for grants of stock options and deferred stock
units to outside directors. Under certain circumstances,
directors may elect to receive shares of common stock in lieu of
deferred stock units. A maximum of 500,000 shares of common
stock may be issued under this plan, of which 381,527 shares
were available for grant as of December 31, 2001. Options
granted upon becoming a director may be exercised between six
months and ten years at a price that is the market value of the
stock on the grant date. Prior to April 2000, each outside
director was awarded an annual grant of stock options that
vested in three years and was exercisable for ten years.
Effective in April 2000, the annual grant of stock options was
amended to provide annual awards of deferred stock units and
quarterly grants of deferred stock units. Deferred stock units
granted under the EIAP have a value equal to, and bear dividends
at the same rate as, one share of RJRs common stock. The
dividends are paid as units in an amount equal to the number of
common shares that could be purchased with the dividends on the
date of payment. As soon as practicable following his or her
last year of service on the board, the director is paid in cash
for the units in the quarterly grants and in common stock, or in
cash if the director elects, for the units in the annual grants.
Cash payments are based on the average closing price of
RJRs common stock during December of the year preceding
payment.

The 1999 LTIP provides for grants of incentive stock options,
other stock options, stock appreciation rights, restricted
stock, performance units and performance shares to key
employees. The total number of shares of common stock authorized
for grant under the plan is 8,000,000 shares, plus 5,772,814
shares issuable under the NGH Long Term Incentive Plan awards
that, in connection with the spin-off, were converted into RJR
options or shares of restricted common stock. Of this
authorization, 4,304,076 shares were available for grant as of
December 31, 2001.

On June 15, 1999, as a result of the spin-off, 17,065,066
options held by employees to purchase common stock of NGH,
formerly known as RJR Nabisco Holdings Corp., were equitably
adjusted into 18,354,932 options for NGH shares and 5,456,114
options for RJR shares. The spin-off did not change the value of
the option grant, ratio of exercise price to market value,
vesting provision or exercise period. The allocation of RJR
options was transferred into the 1999 LTIP.

76



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Also, in connection with the spin-off, holders of restricted
stock under the NGH LTIP received one RJR restricted share for
every three NGH restricted shares. The resulting 316,700
restricted shares were transferred into the 1999 LTIP. The
five-year vesting provisions of the restricted shares remain
unchanged for those held by continuing employees of RJR and its
subsidiaries and lapsed on those held by employees of the sold
international tobacco business and NGH. Compensation expense
related to the shares held by continuing employees of RJR and
its subsidiaries was insignificant in each of 2001, 2000 and
1999. At December 31, 2001, 43,333 shares remained
restricted. Unless forfeited, restrictions on all of these
shares will lapse in 2003. The unamortized portion remaining in
stockholders equity at December 31, 2001 was
insignificant.

In 1999, RJR granted 777,000 shares of restricted stock in
tandem with 3,108,000 options, included in the following option
table, to eligible employees under the 1999 LTIP. On each
vesting date, each eligible employee will receive the portion of
the tandem award with the highest value, the vesting shares of
RJR common stock or tandem stock options, unless he or she has
previously made an affirmative election otherwise. Generally,
these shares may not be disposed of, or transferred while
restricted during the three- to five-year vesting period. Of
these restrictions, 334,500 will lapse in 2002 and 167,250 will
lapse in each of 2003 and 2004, unless the related shares are
forfeited. Since the date of grant, 108,000 shares have been
forfeited. The market price of the stock on the grant date was
charged to stockholders equity as unearned compensation
and was amortized on a straight-line basis over the vesting
periods through September 2000. Since the fourth quarter of
2000, it has been more probable that holders will forfeit the
restricted stock grant at vesting and elect to exercise the
related tandem options. Accordingly, amortization of the
unamortized equity to compensation expense was suspended. During
2001, a reversal of previous compensation expense of $1 million
resulted from the forfeiture of unvested restricted shares.
Compensation expense of $4 million and $3 million was recorded
in 2000 and 1999, respectively. The unamortized portion
remaining in stockholders equity at December 31, 2001
was $13 million.

In 2000, RJR granted 673,898 shares of restricted stock at
$17.03 to eligible employees under the 1999 LTIP. Generally,
these shares may not be disposed of or transferred during the
three-year vesting period. These restrictions will lapse in
2003, unless the related shares are forfeited. Since the date of
grant, 25,374 shares have been forfeited and restrictions on
9,782 shares have lapsed. Because the actual number of shares
granted may increase or decrease based on certain performance
factors, this grant is accounted for as a variable grant and,
accordingly, the fair value is being charged to
stockholders equity as unearned compensation and is being
amortized over the three-year vesting period. During 2001 and
2000, including amortization of expected performance shares and
dividends on forfeited shares, compensation expense was $17
million and $11 million, respectively, and the unamortized
portion remaining in stockholders equity at
December 31, 2001 was $15 million.

During 2001, RJR granted 304,590 shares of restricted stock at
$52.96 to eligible employees under the 1999 LTIP. Generally,
these shares may not be disposed of or transferred during the
three-year vesting period. These restrictions will lapse in
2004, unless the related shares are forfeited. Because the
actual number of shares granted may increase or decrease based
on certain performance factors, this grant is accounted for as a
variable grant and, accordingly, the fair value is being charged
to stockholders equity as unearned compensation and is
being amortized over the three-year vesting period. During 2001,
1,764 restricted shares were forfeited and restrictions on 190
shares lapsed. During 2001, including amortization of expected
performance shares and dividends on forfeited shares,
compensation expense was $6 million and the unamortized portion
remaining in stockholders equity at December 31, 2001
was $12 million.

77



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


In the EIAP and the 1999 LTIP, at December 31, 2001, there
were 4,344,054 options outstanding, of which 1,664,144 were
exercisable, with an exercise price range of $23.32 to $33.71,
and a weighted average remaining contractual life of
7.4 years. Additionally, there were 49,722 options
outstanding and exercisable, with an exercise price range of
$36.24 to $48.33, and a weighted average remaining contractual
life of 4.6 years. The changes in RJRs stock options
during 2001, 2000 and 1999 were:

|                             |  |         |            |          |  |         |       |          |  |         |            |          |  |   |       |  |  |  |           |   |  |   |       | 
|---------------------------- |  | ------- | ---------- | -------- |  | ------- | ----- | -------- |  | ------- | ---------- | -------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                             |  |         |            |          |  |        
|                             |  | 2001    |            | 2000     |  | 1999   
|                             |  |         |            |          |  |        
|                             |  |         |            | Weighted |  |         |       | Weighted |  |         |            | Weighted
|                             |  |         |            | Average  |  |         |       | Average  |  |         |            | Average 
|                             |  |         |            | Exercise |  |         |       | Exercise |  |         |            | Exercise
|                             |  | Options |            | Price    |  | Options |       | Price    |  | Options |            | Price   
|                             |  |         |            |          |  |         |       |          |  |         |            |         
|Balance at beginning of year |  |         | 6,096,570  |          |  | $       | 28.76 |          |  |         | 8,492,564  |          |  | $ | 28.43 |  |  |  |          |   |  | $ |      | 
|                            
|                            
|                            
|                            
|Options transferred in       |  |         |           |          |  |         |      |          |  |         |           |          |  |   |      |  |  |  | 5,456,114 |   |  |   | 28.02 | 
|                            
|                            
|                            
|                            
|Options granted              |  |         |           |          |  |         |      |          |  |         |           |          |  |   |      |  |  |  | 3,199,500 |   |  |   | 29.01 | 
|                            
|                            
|                            
|                            
|Options cancelled            |  |         | (220,000   | )        |  |         | 27.50 |          |  |         | (138,371   | )        |  |   | 27.52 |  |  |  |          |   |  |   |      | 
|                            
|                            
|                            
|                            
|Options exercised            |  |         | (1,482,794 | )        |  |         | 28.23 |          |  |         | (2,257,623 | )        |  |   | 27.58 |  |  |  | (163,050  | ) |  |   | 26.13 | 
|                             |  |         |            |          |  |         |       |          |  |         |            |          |  |   |       |  |  |  |           |   |  |   |       | 
|Balance at end of year       |  |         | 4,393,776  |          |  |         | 29.01 |          |  |         | 6,096,570  |          |  |   | 28.76 |  |  |  | 8,492,564 |   |  |   | 28.43 | 
|                             |  |         |            |          |  |         |       |          |  |         |            |          |  |   |       |  |  |  |           |   |  |   |       | 
|Exercisable at end of year   |  |         | 1,713,866  |          |  |         | 28.76 |          |  |         | 3,108,731  |          |  |   | 28.55 |  |  |  | 5,325,068 |   |  |   | 28.09 | 
|                             |  |         |            |          |  |         |       |          |  |         |            |          |  |   |       |  |  |  |           |   |  |   |       | 

Compensation costs related to employee stock plans are measured
and expensed utilizing the intrinsic value based method. During
1999, the amortization of tandem restricted stock held was
recorded as compensation expense and, as a result, approximated
compensation expense had it been based on fair value.
Furthermore, related pro forma results would have approximated
those reported. During 2000, had compensation expense been based
on the fair value, net income would have been reduced by $3
million or $.03 per basic share and per diluted share. During
2001, had compensation expense been based on the fair value, net
income would have been reduced by $5 million or $.05 per basic
share and per diluted share. The impact of pro forma
compensation cost was based on fair value at grant date, using a
Black-Scholes methodology assuming a 5.96% risk-free interest
rate, a weighted average expected life of 4.2 years,
expected volatility of 33.0% and no dividend yield.

78



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 18  Retirement Benefits

RJR and its subsidiaries sponsor a number of non-contributory
defined benefit pension plans covering most employees, and also
provide certain health and life insurance benefits for retired
employees and their dependents. The changes in benefit
obligations and plan assets, as well as the funded status of the
pension plans at December 31 were:

|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |      |  
|------------------------------------------------------------------ | -------------------------------------- | ---------------- | ----- | -------------- | - | ---- | ----- | ---- | - | - | ---- | ---- | - | - | ---- | ---- | -
|                                                                   |                                        |                  |       |                |   |     
|                                                                   |                                        |                  |       | Postretirement
|                                                                   |                                        | Pension Benefits |       | Benefits      
|                                                                   |                                        |                  |       |               
|                                                                   |                                        | 2001             |       | 2000           |   | 2001 |       | 2000
|                                                                   |                                        |                  |       |                |   |      |       |     
|Change in benefit obligation:                                      |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Obligation at beginning of year                                    |                                        | $                | 2,462 |                |   | $    | 2,270 |      |   | $ | 675  |      |   | $ | 589  |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Service cost                                                       |                                        |                  | 35    |                |   |      | 31    |      |   |   | 6    |      |   |   | 6    |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest cost                                                      |                                        |                  | 179   |                |   |      | 176   |      |   |   | 54   |      |   |   | 49   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Actuarial loss                                                     |                                        |                  | 48    |                |   |      | 148   |      |   |   | 69   |      |   |   | 75   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Plan amendments                                                    |                                        |                  | 6     |                |   |      | 5     |      |   |   |     |      |   |   |     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Benefits paid                                                      |                                        |                  | (188  | )              |   |      | (190  | )    |   |   | (64  | )    |   |   | (50  | )   
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Settlements                                                        |                                        |                  | (13   | )              |   |      | (11   | )    |   |   |     |      |   |   |     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Acquisition of NGH                                                 |                                        |                  |      |                |   |      | 33    |      |   |   |     |      |   |   | 6    |     
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Obligation at end of year                                          |                                        | $                | 2,529 |                |   | $    | 2,462 |      |   | $ | 740  |      |   | $ | 675  |     
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Change in plan assets:                                             |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Fair value of plan assets at beginning of year                     |                                        | $                | 2,260 |                |   | $    | 2,499 |      |   | $ |     |      |   | $ |     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Actual return on plan assets                                       |                                        |                  | 1     |                |   |      | (156  | )    |   |   |     |      |   |   |     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Employer contributions                                             |                                        |                  | 100   |                |   |      | 98    |      |   |   | 64   |      |   |   | 50   |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Benefits paid                                                      |                                        |                  | (188  | )              |   |      | (190  | )    |   |   | (64  | )    |   |   | (50  | )   
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Settlements                                                        |                                        |                  | (13   | )              |   |      | (11   | )    |   |   |     |      |   |   |     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Acquisition of NGH                                                 |                                        |                  |      |                |   |      | 20    |      |   |   |     |      |   |   |     |     
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Fair value of plan assets at end of year                           |                                        | $                | 2,160 |                |   | $    | 2,260 |      |   | $ |     |      |   | $ |     |     
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Funded status:                                                     |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Funded status                                                      |                                        | $                | (369  | )              |   | $    | (202  | )    |   | $ | (740 | )    |   | $ | (675 | )   
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Unrecognized transition asset                                      |                                        |                  |      |                |   |      |      |      |   |   | (15  | )    |   |   | (21  | )   
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Unrecognized prior service cost                                    |                                        |                  | 9     |                |   |      |      |      |   |   |     |      |   |   |     |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Unrecognized net actuarial loss                                    |                                        |                  | 379   |                |   |      | 117   |      |   |   | 169  |      |   |   | 109  |     
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Net amount recognized                                              |                                        | $                | 19    |                |   | $    | (85   | )    |   | $ | (586 | )    |   | $ | (587 | )   
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Amounts recognized in the consolidated balance
	sheets consist of: |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accrued benefit liability              |                  | $     | (181           | ) |      | $     | (104 | ) |   | $    | (586 | ) |   | $    | (587 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Intangible asset                       |                  |       | 13             |   |      |       | 7    |   |   |      |     |   |   |      |     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated other comprehensive income |                  |       | 187            |   |      |       | 12   |   |   |      |     |   |   |      |     |  
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     
|Net amount recognized                                              |                                        | $                | 19    |                |   | $    | (85   | )    |   | $ | (586 | )    |   | $ | (587 | )   
|                                                                   |                                        |                  |       |                |   |      |       |      |   |   |      |      |   |   |      |     

79



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


As of December 31, 2001, all of the pension plans
experienced accumulated benefit obligations in excess of plan
assets, for which the projected benefit obligation, accumulated
benefit obligation and fair value of plan assets were $2,529
million, $2,340 million and $2,160 million, respectively. As of
December 31, 2000, for the plans with accumulated benefit
obligations in excess of plan assets, the projected benefit
obligation, accumulated benefit obligation and fair value of
plan assets were $89 million, $76 million and $15 million,
respectively.

|                                           |                             |                  |      |                |   |      |      |      |   |      |      |      |  |   |    |    |  |   |    |    |  |   |    |    | 
|------------------------------------------ | --------------------------- | ---------------- | ---- | -------------- | - | ---- | ---- | ---- | - | ---- | ---- | ---- |  | - | -- | -- |  | - | -- | -- |  | - | -- | -- | 
|                                           |                             |                  |      |                |   |      |      |     
|                                           |                             |                  |      | Postretirement
|                                           |                             | Pension Benefits |      | Benefits      
|                                           |                             |                  |      |               
|                                           |                             | 2001             |      | 2000           |   | 1999 |      | 2001 |   | 2000 |      | 1999
|                                           |                             |                  |      |                |   |      |      |      |   |      |      |     
|Components of total benefit cost (income): |                             |                  |      |                |   |      |      |      |   |      |      |      |  |   |    |    |  |   |    |    |  |   |    |   
|                                          
|                                          
|                                          
|                                          
|Service cost                               |                             | $                | 35   |                |   | $    | 31   |      |   | $    | 39   |      |  | $ | 6  |    |  | $ | 6  |    |  | $ | 6  |   
|                                          
|                                          
|                                          
|                                          
|Interest cost                              |                             |                  | 179  |                |   |      | 176  |      |   |      | 169  |      |  |   | 54 |    |  |   | 49 |    |  |   | 44 |   
|                                          
|                                          
|                                          
|                                          
|Expected return on plan assets             |                             |                  | (220 | )              |   |      | (229 | )    |   |      | (195 | )    |  |   |   |    |  |   |   |    |  |   |   |   
|                                          
|                                          
|                                          
|                                          
|Amortization of transition asset           |                             |                  |     |                |   |      |     |      |   |      |     |      |  |   | (6 | )  |  |   | (6 | )  |  |   | (6 | ) 
|                                          
|                                          
|                                          
|                                          
|Amortization of prior service cost         |                             |                  | (3   | )              |   |      | (3   | )    |   |      | (3   | )    |  |   |   |    |  |   |   |    |  |   |   |   
|                                          
|                                          
|                                          
|                                          
|Amortization of net loss (gain)            |                             |                  | 2    |                |   |      | (7   | )    |   |      | 2    |      |  |   | 9  |    |  |   | 1  |    |  |   | 6  |   
|                                           |                             |                  |      |                |   |      |      |      |   |      |      |      |  |   |    |    |  |   |    |    |  |   |    |   
|Net periodic benefit cost (income)         |                             |                  | (7   | )              |   |      | (32  | )    |   |      | 12   |      |  |   | 63 |    |  |   | 50 |    |  |   | 50 |   
|                                          
|                                          
|                                          
|                                          
|Curtailment/special benefits               |                             |                  |     |                |   |      |     |      |   |      | 14   |      |  |   |   |    |  |   |   |    |  |   | 1  |   
|                                          
|                                          
|                                          
|                                          
|Settlements                                |                             |                  | 4    |                |   |      | 2    |      |   |      |     |      |  |   |   |    |  |   |   |    |  |   |   |   
|                                           |                             |                  |      |                |   |      |      |      |   |      |      |      |  |   |    |    |  |   |    |    |  |   |    |   
|                                           | Total benefit cost (income) |                  | $    | (3             | ) |      | $    | (30  | ) |      | $    | 26   |  |   | $  | 63 |  |   | $  | 50 |  |   | $  | 51 | 
|                                           |                             |                  |      |                |   |      |      |      |   |      |      |      |  |   |    |    |  |   |    |    |  |   |    |   

The weighted average actuarial assumptions used for the pension
and postretirement benefit plans as of December 31 were:

|                                       |  |      |       |      |  |  |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|                                       |  | 2001 |       | 2000
|                                       |  |      |       |     
|Discount rate                          |  |      | 7.40% |      |  |  | 7.50% | 
|                                      
|                                      
|                                      
|                                      
|Expected return on pension plan assets |  |      | 9.50% |      |  |  | 9.50% | 
|                                      
|                                      
|                                      
|                                      
|Rate of compensation increase          |  |      | 5.00% |      |  |  | 5.00% | 

For measurement purposes, a 13% annual rate of increase in the
pre-65 per capita cost of covered health care was assumed for
the HMO plan for 2001. The rate was assumed to decrease to 9%
for 2002 and then decrease by 1% per year to an ultimate rate of
5%. The annual rate of increase for post-65 per capita cost of
covered care for the HMO plan was assumed to be 13% for 2001,
10% for 2002, decreasing 1% per year to an ultimate rate of 5%.
Additionally, for the indemnity plan, a 10% annual rate of
increase in the pre-65 per capita cost of covered health care
was assumed for 2001. The rate was assumed to decrease to 9% for
2002, 8% for 2003, then decrease by .5% per year to an ultimate
rate of 5%. The annual rate of increase for post-65 per capita
cost of covered care for the indemnity plan was assumed to be
12% for 2001, decreasing by 1% to an ultimate rate of 5%.
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for the healthcare plans. A
one-percentage-point change in assumed healthcare cost trend
rates would effect:

|                                              |  |              |    |              |  |   |     |  
|--------------------------------------------- |  | ------------ | -- | ------------ |  | - | --- | -
|                                              |  | 1-Percentage |    | 1-Percentage
|                                              |  | Point        |    | Point       
|                                              |  | Increase     |    | Decrease    
|                                              |  |              |    |             
|Total of service and interest cost components |  | $            | 2  |              |  | $ | (2  | )
|                                             
|                                             
|                                             
|                                             
|Postretirement benefit obligation             |  |              | 36 |              |  |   | (31 | )

In connection with the NGH acquisition in 2000, plan assets and
benefit obligations attributable to certain former NGH employees
were transferred to RJR, which resulted in an increase in
pension plan assets of $20 million and an increase in pension
plan benefit obligations of $33 million. Postretirement benefit
obligations of $6 million were also acquired by RJR.

In connection with the reorganization in 1999, the assets and
liabilities of the Retirement Plan for Employees of RJR Nabisco,
Inc., referred to as the old plan, were split into two new
plans, one for employees

80



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


and former employees of RJR and its subsidiaries and the other
for employees and former employees of Nabisco and NGH. The split
of the assets and liabilities of the old plan was in accordance
to an agreement with the Pension Benefit Guaranty Corporation.
The PBGC agreement required contributions of $58 million in each
of the five years beginning in 1999, as well as contribution of
the RJR plans normal cost beginning in 2000 through the
end of the agreement. The agreement is expected to continue for
five years; however, there are certain circumstances under which
it could be extended.

In connection with the close-down of the New York headquarters,
special termination benefits were provided to employees
resulting in a 1999 one-time charge of $14 million for pension
benefits and $1 million for postretirement benefits.

RJR and its subsidiaries sponsor a qualified defined
contribution plan, and following a participants
contribution, match 50% based on a maximum of 6% of a
participants compensation. The expense related to this
plan was $12 million in each of 2001, 2000 and 1999.

Note 19  Segment Information

RJR has one reportable operating segment, RJR Tobacco, which
comprised more than 90% of RJRs total consolidated assets
at December 31, 2001 and substantially all of RJRs
consolidated income from continuing operations during 2001, 2000
and 1999. At December 31, 2001, the consolidated total
assets also included the remaining proceeds from the NGH
acquisition. The consolidated income from continuing operations
included corporate costs and interest income on the NGH proceeds.

RJR Tobacco manufactures and markets cigarettes in the United
States. During 2001, 2000 and 1999, sales made by RJR Tobacco to
McLane Company, Inc. and its affiliate, Wal-Mart Stores, Inc.,
comprised 20%, 19% and 17%, respectively, of RJRs
consolidated revenue. No other customer accounted for 10% or
more of RJRs consolidated revenue during those years.

81



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Note 20  Quarterly Results of Operations
(Unaudited)

|                                             |                                              |       |       |        |  |       |       |        |  |   |       |      |   |   |       |     | 
|-------------------------------------------- | -------------------------------------------- | ----- | ----- | ------ |  | ----- | ----- | ------ |  | - | ----- | ---- | - | - | ----- | --- | 
|2001                                         |                                              | First |       | Second |  | Third |       | Fourth
|                                             |                                              |       |       |        |  |       |       |       
|Net sales (1)                                |                                              | $     | 1,950 |        |  | $     | 2,269 |        |  | $ | 2,273 |      |   | $ | 2,093 |    
|                                            
|                                            
|                                            
|                                            
|Gross profit                                 |                                              |       | 1,113 |        |  |       | 1,293 |        |  |   | 1,357 |      |   |   | 1,262 |    
|                                            
|                                            
|                                            
|                                            
|Income from continuing operations            |                                              |       | 100   |        |  |       | 127   |        |  |   | 128   |      |   |   | 89    |    
|                                            
|                                            
|                                            
|                                            
|Discontinued operations, net of income taxes |                                              |       |      |        |  |       |      |        |  |   | (9    | )    |   |   |      |    
|                                            
|                                            
|                                            
|                                            
|Net income                                   |                                              |       | 100   |        |  |       | 127   |        |  |   | 119   |      |   |   | 89    |    
|                                            
|                                            
|                                            
|                                            
|Per share data (2):                          |                                              |       |       |        |  |       |       |        |  |   |       |      |   |   |       |    
|                                            
|                                            
|                                            
|                                            
|Basic:                                       |                                              |       |       |        |  |       |       |        |  |   |       |      |   |   |       |    
|                                            
|                                            
|                                            
|                                            
|                                             | Income from continuing operations            |       |       | 1.00   |  |       |       | 1.29   |  |   |       | 1.34 |   |   |       | .95 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Discontinued operations, net of income taxes |       |       |       |  |       |       |       |  |   |       | (.10 | ) |   |       |    | 
|                                            
|                                            
|                                            
|                                            
|                                             | Net income                                   |       |       | 1.00   |  |       |       | 1.29   |  |   |       | 1.24 |   |   |       | .95 | 
|                                            
|                                            
|                                            
|                                            
|Diluted:                                     |                                              |       |       |        |  |       |       |        |  |   |       |      |   |   |       |    
|                                            
|                                            
|                                            
|                                            
|                                             | Income from continuing operations            |       |       | .98    |  |       |       | 1.26   |  |   |       | 1.31 |   |   |       | .93 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Discontinued operations, net of income taxes |       |       |       |  |       |       |       |  |   |       | (.09 | ) |   |       |    | 
|                                            
|                                            
|                                            
|                                            
|                                             | Net income                                   |       |       | .98    |  |       |       | 1.26   |  |   |       | 1.22 |   |   |       | .93 | 

|                                        |                                         |  |       |     |  |  |       |      |  |  |       |      |  |  |       |       | 
|--------------------------------------- | --------------------------------------- |  | ----- | --- |  |  | ----- | ---- |  |  | ----- | ---- |  |  | ----- | ----- | 
|2000                                    |                                         |  |       |     |  |  |       |     
|                                        |                                         |  |       |     |  |  |       |     
|Net sales (1)                           |                                         |  | 1,904 |     |  |  | 2,053 |      |  |  | 2,089 |      |  |  | 2,012 |      
|                                       
|                                       
|                                       
|                                       
|Gross profit                            |                                         |  | 1,078 |     |  |  | 1,168 |      |  |  | 1,207 |      |  |  | 1,169 |      
|                                       
|                                       
|                                       
|                                       
|Income from continuing operations       |                                         |  | 80    |     |  |  | 109   |      |  |  | 117   |      |  |  | 46    |      
|                                       
|                                       
|                                       
|                                       
|Extraordinary item, net of income taxes |                                         |  |      |     |  |  |      |      |  |  |      |      |  |  | 1,475 |      
|                                       
|                                       
|                                       
|                                       
|Net income                              |                                         |  | 80    |     |  |  | 109   |      |  |  | 117   |      |  |  | 1,521 |      
|                                       
|                                       
|                                       
|                                       
|Per share data (2):                     |                                         |  |       |     |  |  |       |      |  |  |       |      |  |  |       |      
|                                       
|                                       
|                                       
|                                       
|Basic:                                  |                                         |  |       |     |  |  |       |      |  |  |       |      |  |  |       |      
|                                       
|                                       
|                                       
|                                       
|                                        | Income from continuing operations       |  |       | .77 |  |  |       | 1.08 |  |  |       | 1.17 |  |  |       | .46   | 
|                                       
|                                       
|                                       
|                                       
|                                        | Extraordinary item, net of income taxes |  |       |    |  |  |       |     |  |  |       |     |  |  |       | 14.76 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Net income                              |  |       | .77 |  |  |       | 1.08 |  |  |       | 1.17 |  |  |       | 15.22 | 
|                                       
|                                       
|                                       
|                                       
|Diluted:                                |                                         |  |       |     |  |  |       |      |  |  |       |      |  |  |       |      
|                                       
|                                       
|                                       
|                                       
|                                        | Income from continuing operations       |  |       | .77 |  |  |       | 1.07 |  |  |       | 1.16 |  |  |       | .45   | 
|                                       
|                                       
|                                       
|                                       
|                                        | Extraordinary item, net of income taxes |  |       |    |  |  |       |     |  |  |       |     |  |  |       | 14.58 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Net income                              |  |       | .77 |  |  |       | 1.07 |  |  |       | 1.16 |  |  |       | 15.03 | 






|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Adoption of EITF No. 00-14 required the classification of
	certain sales incentive costs as reductions of net sales, and
	also resulted in shifting a portion of those costs to other
	interim periods within the annual period.
|(2) | Income per share is computed independently for each of the
	periods presented. The sum of the income per share amounts for
	the quarters may not equal the total for the year.                                                  

Note 21  Condensed Consolidating Financial
Statements

Separate financial statements and other disclosures have not
been presented concerning RJR Tobacco and RJR Acquisition Corp.
because such information is not believed to be material to
holders of the exchange notes. RJR Tobacco and RJR Acquisition
Corp. are wholly owned subsidiaries of RJR, and have fully and
unconditionally guaranteed the exchange notes. Because the
guarantees are full and unconditional and joint and several, the
following condensed consolidating financial statements include:
the accounts and activities of RJR, the issuer of the debt
securities; RJR Tobacco and RJR Acquisition Corp., the
guarantors; other subsidiaries of RJR and RJR Tobacco that are
not guarantors; and elimination adjustments.

82



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Statements of Income

(Dollars in Millions) (Unaudited)


|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |       |       | 
|---------------------------------------------------------------------- | ------------------------------------------------------ | ---------- | ------ | ---------- | ----- | -------------- | ----- | ------------ | ----- | ------------ | ----- | ----- | ----- | - | ------ | ------ | ------ | - | ----- | ----- | ----- | 
|                                                                       |                                                        | Issuer     |        | Guarantors |       | Non-Guarantors |       | Eliminations |       | Consolidated
|                                                                       |                                                        |            |        |            |       |                |       |              |       |             
|For the Year Ended December 31,
	2001                                  |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net sales                                                              |                                                        | $          |       |            |       | $              | 8,585 |              |       | $            | 50    |       |       | $ | (50    | )      |        | $ | 8,585 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cost of products sold                                                  |                                                        |            |       |            |       |                | 3,607 |              |       |              | 3     |       |       |   | (50    | )      |        |   | 3,560 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Selling, general and administrative expenses                           |                                                        |            | 32     |            |       |                | 4,065 |              |       |              | (352  | )     |       |   |       |        |        |   | 3,745 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Amortization of trademarks and goodwill                                |                                                        |            |       |            |       |                | 260   |              |       |              | 102   |       |       |   |       |        |        |   | 362   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Interest and debt expense                                              |                                                        |            | 138    |            |       |                | 12    |              |       |              |      |       |       |   |       |        |        |   | 150   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Interest income                                                        |                                                        |            | (4     | )          |       |                | (129  | )            |       |              | (4    | )     |       |   |       |        |        |   | (137  | )    
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intercompany interest (income) expense                                 |                                                        |            | (10    | )          |       |                | 274   |              |       |              | (264  | )     |       |   |       |        |        |   |      |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intercompany dividend                                                  |                                                        |            | (1,632 | )          |       |                | (698  | )            |       |              |      |       |       |   | 2,330  |        |        |   |      |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other expense (income), net                                            |                                                        |            | (3     | )          |       |                | 16    |              |       |              |      |       |       |   |       |        |        |   | 13    |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income from continuing operations before
	income taxes |            |        | 1,479      |       |                |       | 1,178        |       |              |       | 565   |       |   |        | (2,330 | )      |   |       | 892   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Provision for (benefit from) income taxes                              |                                                        |            | (51    | )          |       |                | 300   |              |       |              | 199   |       |       |   |       |        |        |   | 448   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Equity income from subsidiaries                                        |                                                        |            | 1,235  |            |       |                | 357   |              |       |              |      |       |       |   | (1,592 | )      |        |   |      |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income from continuing operations                      |            |        | 2,765      |       |                |       | 1,235        |       |              |       | 366   |       |   |        | (3,922 | )      |   |       | 444   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Loss on sale of discontinued businesses, net of
	income taxes          |                                                        |            |       |            |       |                |      |              |       |              | (9    | )     |       |   |       |        |        |   | (9    | )    
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       |                                                        | Net income |        | $          | 2,765 |                |       | $            | 1,235 |              |       | $     | 357   |   |        | $      | (3,922 | ) |       | $     | 435   | 
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|For the Year Ended December 31,
	2000                                  |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net sales                                                              |                                                        | $          |       |            |       | $              | 8,060 |              |       | $            | 48    |       |       | $ | (50    | )      |        | $ | 8,058 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cost of products sold                                                  |                                                        |            |       |            |       |                | 3,483 |              |       |              | 3     |       |       |   | (50    | )      |        |   | 3,436 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Selling, general and administrative expenses                           |                                                        |            | 42     |            |       |                | 3,615 |              |       |              | (315  | )     |       |   |       |        |        |   | 3,342 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Amortization of trademarks and goodwill                                |                                                        |            |       |            |       |                | 260   |              |       |              | 106   |       |       |   |       |        |        |   | 366   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Impairment charge                                                      |                                                        |            |       |            |       |                |      |              |       |              | 89    |       |       |   |       |        |        |   | 89    |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other operating expense                                                |                                                        |            |       |            |       |                | (3    | )            |       |              |      |       |       |   |       |        |        |   | (3    | )    
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Interest and debt expense                                              |                                                        |            | 164    |            |       |                | 4     |              |       |              |      |       |       |   |       |        |        |   | 168   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Interest income                                                        |                                                        |            | (1     | )          |       |                | (111  | )            |       |              | (7    | )     |       |   |       |        |        |   | (119  | )    
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intercompany interest (income) expense                                 |                                                        |            | (11    | )          |       |                | 394   |              |       |              | (383  | )     |       |   |       |        |        |   |      |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intercompany dividend                                                  |                                                        |            | (238   | )          |       |                | (861  | )            |       |              |      |       |       |   | 1,099  |        |        |   |      |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other expense (income), net                                            |                                                        |            | 6      |            |       |                | 26    |              |       |              | (1    | )     |       |   |       |        |        |   | 31    |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income before income taxes                             |            |        | 38         |       |                |       | 1,253        |       |              |       | 556   |       |   |        | (1,099 | )      |   |       | 748   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Provision for (benefit from) income taxes                              |                                                        |            | (64    | )          |       |                | 264   |              |       |              | 196   |       |       |   |       |        |        |   | 396   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Equity income from subsidiaries                                        |                                                        |            | 2,825  |            |       |                | 360   |              |       |              |      |       |       |   | (3,185 | )      |        |   |      |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income before extraordinary item                       |            |        | 2,927      |       |                |       | 1,349        |       |              |       | 360   |       |   |        | (4,284 | )      |   |       | 352   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Extraordinary itemgain (loss) on
	acquisition, net of taxes           |                                                        |            | (1     | )          |       |                | 1,476 |              |       |              |      |       |       |   |       |        |        |   | 1,475 |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       |                                                        | Net income |        | $          | 2,926 |                |       | $            | 2,825 |              |       | $     | 360   |   |        | $      | (4,284 | ) |       | $     | 1,827 | 
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|For the Year Ended December 31,
	1999                                  |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Net sales                                                              |                                                        | $          |       |            |       | $              | 7,412 |              |       | $            | 56    |       |       | $ |       |        |        | $ | 7,468 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Cost of products sold                                                  |                                                        |            |       |            |       |                | 3,283 |              |       |              | 9     |       |       |   |       |        |        |   | 3,292 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Selling, general and administrative expenses                           |                                                        |            | 43     |            |       |                | 3,184 |              |       |              | (303  | )     |       |   |       |        |        |   | 2,924 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Amortization of trademarks and goodwill                                |                                                        |            |       |            |       |                | 260   |              |       |              | 106   |       |       |   |       |        |        |   | 366   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Headquarters close-down and related charges                            |                                                        |            | 143    |            |       |                |      |              |       |              |      |       |       |   |       |        |        |   | 143   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other operating expense                                                |                                                        |            |       |            |       |                | 21    |              |       |              |      |       |       |   |       |        |        |   | 21    |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Interest and debt expense                                              |                                                        |            | 267    |            |       |                | 1     |              |       |              |      |       |       |   |       |        |        |   | 268   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Interest income                                                        |                                                        |            | (4     | )          |       |                | (85   | )            |       |              | (25   | )     |       |   |       |        |        |   | (114  | )    
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Intercompany interest (income) expense                                 |                                                        |            | (393   | )          |       |                | 620   |              |       |              | (227  | )     |       |   |       |        |        |   |      |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Other expense (income), net                                            |                                                        |            | (67    | )          |       |                | 7     |              |       |              | 118   |       |       |   |       |        |        |   | 58    |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income from continuing operations before
	income taxes |            |        | 11         |       |                |       | 121          |       |              |       | 378   |       |   |        |       |        |   |       | 510   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Provision for (benefit from) income taxes                              |                                                        |            | (16    | )          |       |                | 163   |              |       |              | 168   |       |       |   |       |        |        |   | 315   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Equity income from subsidiaries from continuing
	operations            |                                                        |            | 168    |            |       |                | 209   |              |       |              |      |       |       |   | (377   | )      |        |   |      |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income from continuing operations                      |            |        | 195        |       |                |       | 167          |       |              |       | 210   |       |   |        | (377   | )      |   |       | 195   |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Income (loss) from discontinued operations                             |                                                        |            | (611   | )          |       |                | 1,162 |              |       |              | 1,847 |       |       |   |       |        |        |   | 2,398 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Equity income from subsidiaries from discontinued
	operations          |                                                        |            | 3,009  |            |       |                | 1,848 |              |       |              |      |       |       |   | (4,857 | )      |        |   |      |      
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       | Income before extraordinary item                       |            |        | 2,593      |       |                |       | 3,177        |       |              |       | 2,057 |       |   |        | (5,234 | )      |   |       | 2,593 |      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Extraordinary itemloss on early
	extinguishment of debt, net of taxes |                                                        |            | (250   | )          |       |                |      |              |       |              |      |       |       |   |       |        |        |   | (250  | )    
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      
|                                                                       |                                                        | Net income |        | $          | 2,343 |                |       | $            | 3,177 |              |       | $     | 2,057 |   |        | $      | (5,234 | ) |       | $     | 2,343 | 
|                                                                       |                                                        |            |        |            |       |                |       |              |       |              |       |       |       |   |        |        |        |   |       |      

83



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Statements of Cash Flows

(Dollars in Millions) (Unaudited)


|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |        |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------- | ----- | ---------- | ---- | -------------- | ----- | ------------ | ------ | ------------ | ---- | ------ | ------ | - | ------ | ----- | ----- | - | ------ | ------ | ------ | -
|                                                                                                                                        |                                                                   | Issuer                                             |       | Guarantors |      | Non-Guarantors |       | Eliminations |        | Consolidated
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |             
|For the Year Ended December 31,
	2001                                                                                                   |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Cash flows from operating activities                                                                                                    |                                                                   | $                                                  | 1,003 |            |      | $              | 895   |              |        | $            | 420  |        |        | $ | (1,692 | )     |       | $ | 626    |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows from (used in) investing activities:                                                                                         |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Short-term investments                                            |                                                    |       |           |      |                |       | (207         | )      |              |      |       |        |   |        |      |       |   |        | (207   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Intercompany notes receivable                                     |                                                    |       | (5         | )    |                |       | (9           | )      |              |      | 281    |        |   |        | (267  | )     |   |        |       |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other, net                                                        |                                                    |       |           |      |                |       | (85          | )      |              |      | (15    | )      |   |        |      |       |   |        | (100   | )     
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows from (used in) investing activities |       |            | (5   | )              |       |              | (301   | )            |      |        | 266    |   |        |       | (267  | ) |        |        | (307   | )
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows from (used in) financing activities:                                                                                         |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Repurchase of common stock                                        |                                                    |       | (494       | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (494   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Dividends paid on common stock                                    |                                                    |       | (320       | )    |                |       | (994         | )      |              |      | (698   | )      |   |        | 1,692 |       |   |        | (320   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Repayments of long-term debt                                      |                                                    |       | (73        | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (73    | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Proceeds from exercise of stock options                           |                                                    |       | 45         |      |                |       |             |        |              |      |       |        |   |        |      |       |   |        | 45     |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Intercompany notes payable                                        |                                                    |       | 15         |      |                |       | (290         | )      |              |      | 8      |        |   |        | 267   |       |   |        |       |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows used in financing activities        |       |            | (827 | )              |       |              | (1,284 | )            |      |        | (690   | ) |        |       | 1,959 |   |        |        | (842   | )
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Net change in cash and cash equivalents                                                                                                 |                                                                   |                                                    | 171   |            |      |                | (690  | )            |        |              | (4   | )      |        |   |       |       |       |   | (523   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Cash and cash equivalents at beginning of year                                                                                          |                                                                   |                                                    | 14    |            |      |                | 2,424 |              |        |              | 105  |        |        |   |       |       |       |   | 2,543  |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash and cash equivalents at end of year                                                                                                |                                                                   | $                                                  | 185   |            |      | $              | 1,734 |              |        | $            | 101  |        |        | $ |       |       |       | $ | 2,020  |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|For the Year Ended December 31,
	2000                                                                                                   |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Cash flows from operating activities                                                                                                    |                                                                   | $                                                  | 615   |            |      | $              | 641   |              |        | $            | 432  |        |        | $ | (1,098 | )     |       | $ | 590    |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows from (used in) investing activities:                                                                                         |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Short-term investments                                            |                                                    |       |           |      |                |       | 109          |        |              |      | 1      |        |   |        |      |       |   |        | 110    |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Intercompany notes receivable                                     |                                                    |       | 2          |      |                |       | 34           |        |              |      | 811    |        |   |        | (847  | )     |   |        |       |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Net proceeds from acquisition                                     |                                                    |       |           |      |                |       | 1,519        |        |              |      |       |        |   |        |      |       |   |        | 1,519  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other, net                                                        |                                                    |       | (5         | )    |                |       | (50          | )      |              |      | (1     | )      |   |        |      |       |   |        | (56    | )     
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows from (used in) investing activities |       |            | (3   | )              |       |              | 1,612  |              |      |        | 811    |   |        |       | (847  | ) |        |        | 1,573  |  
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows from (used in) financing activities:                                                                                         |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Repurchase of common stock                                        |                                                    |       | (231       | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (231   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Dividends paid on common stock                                    |                                                    |       | (322       | )    |                |       | (238         | )      |              |      | (860   | )      |   |        | 1,098 |       |   |        | (322   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Repayments of long-term debt                                      |                                                    |       | (387       | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (387   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Intercompany notes payable                                        |                                                    |       | 1          |      |                |       | (470         | )      |              |      | (377   | )      |   |        | 846   |       |   |        |       |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other, net                                                        |                                                    |       | 238        |      |                |       | (164         | )      |              |      | (16    | )      |   |        | 1     |       |   |        | 59     |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows used in financing activities        |       |            | (701 | )              |       |              | (872   | )            |      |        | (1,253 | ) |        |       | 1,945 |   |        |        | (881   | )
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows related to discontinued operations  |       |            | 103  |                |       |              | (19    | )            |      |        |       |   |        |       |      |   |        |        | 84     |  
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Net change in cash and cash equivalents                                                                                                 |                                                                   |                                                    | 14    |            |      |                | 1,362 |              |        |              | (10  | )      |        |   |       |       |       |   | 1,366  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Cash and cash equivalents at beginning of year                                                                                          |                                                                   |                                                    |      |            |      |                | 1,062 |              |        |              | 115  |        |        |   |       |       |       |   | 1,177  |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash and cash equivalents at end of year                                                                                                |                                                                   | $                                                  | 14    |            |      | $              | 2,424 |              |        | $            | 105  |        |        | $ |       |       |       | $ | 2,543  |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|For the Year Ended December 31,
	1999                                                                                                   |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Cash flows from operating activities                                                                                                    |                                                                   | $                                                  | 138   |            |      | $              | 518   |              |        | $            | 273  |        |        | $ |       |       |       | $ | 929    |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows from (used in) investing activities:                                                                                         |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Net proceeds from the sale of the international
	tobacco business |                                                    |       | (35        | )    |                |       | 2,611        |        |              |      | 5,184  |        |   |        |      |       |   |        | 7,760  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Short-term investments                                            |                                                    |       |           |      |                |       | (109         | )      |              |      | (1     | )      |   |        |      |       |   |        | (110   | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other, net                                                        |                                                    |       |           |      |                |       | (55          | )      |              |      | (19    | )      |   |        |      |       |   |        | (74    | )     
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows from (used in) investing activities |       |            | (35  | )              |       |              | 2,447  |              |      |        | 5,164  |   |        |       |      |   |        |        | 7,576  |  
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows from (used in) financing activities:                                                                                         |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Repayments of long-term debt                                      |                                                    |       | (4,450     | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (4,450 | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Intercompany transfer                                             |                                                    |       | 5,216      |      |                |       | (881         | )      |              |      | (4,335 | )      |   |        |      |       |   |        |       |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Proceeds from issuance of long-term debt                          |                                                    |       | 1,244      |      |                |       |             |        |              |      |       |        |   |        |      |       |   |        | 1,244  |       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Transfers and payments to former parent                           |                                                    |       | (1,968     | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (1,968 | )     
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                        | Other, net                                                        |                                                    |       | (185       | )    |                |       |             |        |              |      |       |        |   |        |      |       |   |        | (185   | )     
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net cash flows used in financing activities        |       |            | (143 | )              |       |              | (881   | )            |      |        | (4,335 | ) |        |       |      |   |        |        | (5,359 | )
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash flows related to discontinued operations
	(including income taxes paid on the gain on sale of the
	international tobacco business) |                                                                   |                                                    |      |            |      |                | (982  | )            |        |              | (987 | )      |        |   |       |       |       |   | (1,969 | )     
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|                                                                                                                                        |                                                                   | Net change in cash and cash equivalents            |       |            | (40  | )              |       |              | 1,102  |              |      |        | 115    |   |        |       |      |   |        |        | 1,177  |  
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Cash and cash equivalents at beginning of year                                                                                          |                                                                   |                                                    | 40    |            |      |                | (40   | )            |        |              |     |        |        |   |       |       |       |   |       |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       
|Cash and cash equivalents at end of year                                                                                                |                                                                   | $                                                  |      |            |      | $              | 1,062 |              |        | $            | 115  |        |        | $ |       |       |       | $ | 1,177  |       
|                                                                                                                                        |                                                                   |                                                    |       |            |      |                |       |              |        |              |      |        |        |   |        |       |       |   |        |       

84



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Balance Sheets

(Dollars in Millions)


(Unaudited)


|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |        | 
|---------------------------------------- | ------------------------------------------ | ------ | ------ | ---------- |  | -------------- | ------ | ------------ |  | ------------ | ----- | ----- |  | - | ------- | ------- | - | - | ----- | ------ | 
|                                         |                                            | Issuer |        | Guarantors |  | Non-Guarantors |        | Eliminations |  | Consolidated
|                                         |                                            |        |        |            |  |                |        |              |  |             
|December 31, 2001                        |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                        
|                                        
|                                        
|                                        
|Assets                                   |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                        
|                                        
|                                        
|                                        
|Cash and cash equivalents                |                                            | $      | 185    |            |  | $              | 1,734  |              |  | $            | 101   |       |  | $ |        |         |   | $ | 2,020 |       
|                                        
|                                        
|                                        
|                                        
|Short-term investments                   |                                            |        |       |            |  |                | 207    |              |  |              |      |       |  |   |        |         |   |   | 207   |       
|                                        
|                                        
|                                        
|                                        
|Other current assets                     |                                            |        | 95     |            |  |                | 1,983  |              |  |              | 37    |       |  |   | (486    | )       |   |   | 1,629 |       
|                                        
|                                        
|                                        
|                                        
|Trademarks, net                          |                                            |        |       |            |  |                |       |              |  |              | 2,773 |       |  |   |        |         |   |   | 2,773 |       
|                                        
|                                        
|                                        
|                                        
|Goodwill, net                            |                                            |        |       |            |  |                | 6,875  |              |  |              |      |       |  |   |        |         |   |   | 6,875 |       
|                                        
|                                        
|                                        
|                                        
|Intercompany notes receivable            |                                            |        | 146    |            |  |                | 14     |              |  |              | 3,822 |       |  |   | (3,982  | )       |   |   |      |       
|                                        
|                                        
|                                        
|                                        
|Investment in subsidiaries               |                                            |        | 10,585 |            |  |                | 5,772  |              |  |              |      |       |  |   | (16,357 | )       |   |   |      |       
|                                        
|                                        
|                                        
|                                        
|Other noncurrent assets                  |                                            |        | 65     |            |  |                | 1,497  |              |  |              | 16    |       |  |   | (32     | )       |   |   | 1,546 |       
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                         | Total assets                               |        | $      | 11,076     |  |                | $      | 18,082       |  |              | $     | 6,749 |  |   | $       | (20,857 | ) |   | $     | 15,050 | 
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|Liabilities and stockholders
	equity    |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                        
|                                        
|                                        
|                                        
|Tobacco settlement and related accruals  |                                            | $      |       |            |  | $              | 1,520  |              |  | $            |      |       |  | $ |        |         |   | $ | 1,520 |       
|                                        
|                                        
|                                        
|                                        
|Other current liabilities                |                                            |        | 664    |            |  |                | 1,080  |              |  |              | 14    |       |  |   | (486    | )       |   |   | 1,272 |       
|                                        
|                                        
|                                        
|                                        
|Intercompany notes payable               |                                            |        | 69     |            |  |                | 3,905  |              |  |              | 8     |       |  |   | (3,982  | )       |   |   |      |       
|                                        
|                                        
|                                        
|                                        
|Long-term debt (less current maturities) |                                            |        | 1,534  |            |  |                | 97     |              |  |              |      |       |  |   |        |         |   |   | 1,631 |       
|                                        
|                                        
|                                        
|                                        
|Other noncurrent liabilities             |                                            |        | 783    |            |  |                | 876    |              |  |              | 974   |       |  |   | (32     | )       |   |   | 2,601 |       
|                                        
|                                        
|                                        
|                                        
|Stockholders equity                     |                                            |        | 8,026  |            |  |                | 10,604 |              |  |              | 5,753 |       |  |   | (16,357 | )       |   |   | 8,026 |       
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                         | Total liabilities and stockholders equity |        | $      | 11,076     |  |                | $      | 18,082       |  |              | $     | 6,749 |  |   | $       | (20,857 | ) |   | $     | 15,050 | 
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|December 31, 2000                        |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                        
|                                        
|                                        
|                                        
|Assets                                   |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                        
|                                        
|                                        
|                                        
|Cash and cash equivalents                |                                            | $      | 14     |            |  | $              | 2,424  |              |  | $            | 105   |       |  | $ |        |         |   | $ | 2,543 |       
|                                        
|                                        
|                                        
|                                        
|Other current assets                     |                                            |        | 7      |            |  |                | 2,221  |              |  |              | 54    |       |  |   | (954    | )       |   |   | 1,328 |       
|                                        
|                                        
|                                        
|                                        
|Trademarks, net                          |                                            |        |       |            |  |                |       |              |  |              | 2,875 |       |  |   |        |         |   |   | 2,875 |       
|                                        
|                                        
|                                        
|                                        
|Goodwill, net                            |                                            |        |       |            |  |                | 7,303  |              |  |              |      |       |  |   |        |         |   |   | 7,303 |       
|                                        
|                                        
|                                        
|                                        
|Intercompany notes receivable            |                                            |        | 141    |            |  |                | 5      |              |  |              | 4,103 |       |  |   | (4,249  | )       |   |   |      |       
|                                        
|                                        
|                                        
|                                        
|Investment in subsidiaries               |                                            |        | 11,957 |            |  |                | 6,117  |              |  |              |      |       |  |   | (18,074 | )       |   |   |      |       
|                                        
|                                        
|                                        
|                                        
|Other noncurrent assets                  |                                            |        | 69     |            |  |                | 1,429  |              |  |              | 6     |       |  |   | 1       |         |   |   | 1,505 |       
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                         | Total assets                               |        | $      | 12,188     |  |                | $      | 19,499       |  |              | $     | 7,143 |  |   | $       | (23,276 | ) |   | $     | 15,554 | 
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|Liabilities and stockholders
	equity    |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                        
|                                        
|                                        
|                                        
|Tobacco settlement and related accruals  |                                            | $      |       |            |  | $              | 1,394  |              |  | $            |      |       |  | $ |        |         |   | $ | 1,394 |       
|                                        
|                                        
|                                        
|                                        
|Other current liabilities                |                                            |        | 1,307  |            |  |                | 993    |              |  |              | 36    |       |  |   | (954    | )       |   |   | 1,382 |       
|                                        
|                                        
|                                        
|                                        
|Intercompany notes payable               |                                            |        | 54     |            |  |                | 4,195  |              |  |              |      |       |  |   | (4,249  | )       |   |   |      |       
|                                        
|                                        
|                                        
|                                        
|Long-term debt (less current maturities) |                                            |        | 1,576  |            |  |                | 98     |              |  |              |      |       |  |   |        |         |   |   | 1,674 |       
|                                        
|                                        
|                                        
|                                        
|Other noncurrent liabilities             |                                            |        | 815    |            |  |                | 843    |              |  |              | 1,009 |       |  |   | 1       |         |   |   | 2,668 |       
|                                        
|                                        
|                                        
|                                        
|Stockholders equity                     |                                            |        | 8,436  |            |  |                | 11,976 |              |  |              | 6,098 |       |  |   | (18,074 | )       |   |   | 8,436 |       
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       
|                                         | Total liabilities and stockholders equity |        | $      | 12,188     |  |                | $      | 19,499       |  |              | $     | 7,143 |  |   | $       | (23,276 | ) |   | $     | 15,554 | 
|                                         |                                            |        |        |            |  |                |        |              |  |              |       |       |  |   |         |         |   |   |       |       

Note 22  Subsequent Events

On January 7, 2002, in connection with its agreement with
the PBGC as of May 20, 1999, RJR accelerated its expected
required contributions to the pension plan for 2002 and 2003. As
a result, the PBGC cancelled its $116 million letter of credit
required of RJR.

On January 16, 2002, RJR completed its acquisition of Santa
Fe Natural Tobacco Company, Inc. by acquiring 100% of Santa
Fes privately held voting stock for $340 million in cash,
subject to post-closing adjustments. Santa Fe is a wholly owned
operating subsidiary of RJR, and results of its operations
subsequent to the acquisition will be included in RJRs
consolidated financial statements.

On February 6, 2002, RJRs board of directors
authorized the repurchase of up to $1 billion of RJRs
common stock over time in the open market, to enhance
stockholder value. This program will be funded by dividends from
RJR Acquisition Corp. utilizing the cash proceeds of the NGH
acquisition and from cash provided by operating activities. The
timing of repurchases and the number of shares purchased under
this authorization will depend upon market conditions.

85



---



##### 





|        |                                                                                             
|------- | --------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure

None.

PART III



|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Item 10 is incorporated by reference to Item 1:
Election of Class III Directors and Stock
Ownership-Section 16(a) beneficial ownership of reporting
compliance of RJRs Definitive Proxy Statement to be
filed with the SEC on or before March 15, 2002. For
information regarding the executive officers, see
Executive Officers and Certain Significant Employees of
the Registrant in Item 4 of Part I of this report.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Item 11 is incorporated by reference to Executive
Compensation and Transactions with Management of
RJRs Definitive Proxy Statement to be filed with the SEC
on or before March 15, 2002.



|         |                                                                       
|-------- | ----------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
        Management

Item 12 is incorporated by reference to Stock
Ownership of RJRs Definitive Proxy Statement to be
filed with the SEC on or before March 15, 2002.



|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

None.

PART IV



|         |                                                                         
|-------- | ------------------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules, and Reports on
        Form 8-K



|    |                                                            
|--- | -----------------------------------------------------------
|(a) | The following documents are filed as a part of this report:



| |     |                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------
| | (1) | Consolidated Statements of Income for the years ended
        December 31, 2001, 2000 and 1999.                               
| |     | Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.                                   
| |     | Consolidated Balance Sheets as of December 31, 2001 and
2000.                                                                 
| |     | Consolidated Statements of Stockholders Equity and
Comprehensive Income for the years ended December 31, 2001,
2000 and 1999.



| |     |                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Financial Statement Schedules have been omitted because the
        information required has been separately disclosed in the
        consolidated financial statements or notes.
|
| | (3) | See (c) below.                                                                                                                                                                   



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(b) | No reports on Form 8-K were filed during the year ended
        December 31, 2001.

86



---



##### 





|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | The following exhibits are filed as part of this report, Exhibit
	Numbers 10.20 through 10.59 are management contracts,
	compensatory plans or arrangements:

|        |     |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     | 
|Number  |     | 
|        |     | 
|        | 2.1 |  |  | Distribution Agreement dated as of May 12,
	1999, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and R.
	J. Reynolds Tobacco Company (incorporated by reference to
	Exhibit 2.1 to Registrants Form 8-A filed
	May 19, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 2.2 |  |  | Amendment No. 1, dated as of June 28,
	2001, to the Distribution Agreement, dated as of May 12,
	1999, among RJR Nabisco Holdings Corp. (now known as RJR
	Acquisition Corp.), RJR Nabisco, Inc. (now known as R.J.
	Reynolds Tobacco Holdings, Inc.) and R. J. Reynolds Tobacco
	Company (incorporated by reference to Exhibit 2.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 2001, filed August 1, 2001)                                                                                                                                                                                                                                                                                                     
|        | 2.3 |  |  | Certificate of Merger and Agreement and Plan of
	Merger among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and
	R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference
	to Exhibit 2.2 to Registrants Form 8-K filed
	May 28, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 2.4 |  |  | Agreement and Plan of Merger dated as of
	June 25, 2000, among Nabisco Group Holdings Corp., R.J.
	Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp.
	(incorporated by reference to Exhibit 2.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 2000, filed August 7, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 2.5 |  |  | Amendment No. 1, dated September 20,
	2000, to the Agreement and Plan of Merger dated as of
	June 25, 2000, among Nabisco Group Holdings Corp., R.J.
	Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp.
	(incorporated by reference to Exhibit 2.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 2000, filed November 3,
	2000)                                                                                                                                                                                                                                                                                                                                                                      
|        | 2.6 |  |  | Letter dated October 19, 2000, from R.J.
	Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp.,
	electing that Nabisco Group Holdings Corp. be merged with and
	into RJR Acquisition Corp. under the Agreement and Plan of
	Merger dated as of June 25, 2000, as amended, among Nabisco
	Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and
	RJR Acquisition Corp. (incorporated by reference to
	Exhibit 2.2 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 2000, filed
	November 3, 2000)                                                                                                                                                                                             
|        | 2.7 |  |  | Letter dated November 20, 2000, from R.J.
	Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp.,
	withdrawing its previous election made on October 19, 2000,
	and electing that RJR Acquisition Corp. be merged with and into
	Nabisco Group Holdings Corp. under the Agreement and Plan of
	Merger dated as of June 25, 2000, as amended, among Nabisco
	Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and
	RJR Acquisition Corp. (incorporated by reference to
	Exhibit 2.4 to Registrants Form 8-K dated
	December 11, 2000)                                                                                                                                                                                          
|        | 2.8 |  |  | Letter dated October 27, 2000, from R.J.
	Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp.,
	agreeing that it will pay or cause to be paid to stockholders of
	Nabisco Group Holdings Corp., in circumstances described in
	Section 2.02(b) of the Agreement and Plan of Merger dated
	as of June 25, 2000, as amended, among Nabisco Group
	Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR
	Acquisition Corp., an amount equal to 100% of the difference
	between the Net Proceeds (as defined in the Agreement and Plan
	of Merger) and $11.729 billion (incorporated by reference to
	Exhibit 2.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 2000,
	filed November 3, 2000)
|        | 3.1 |  |  | Restated Certificate of Incorporation of R.J.
	Reynolds Tobacco Holdings, Inc. (incorporated by reference to
	Exhibit 3.1 to Registrants Form 8-K dated
	June 14, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 3.2 |  |  | Bylaws of R.J. Reynolds Tobacco Holdings, Inc.,
	as amended and restated effective April 25, 2001
	(incorporated by reference to Exhibit 4.2 to
	Registrants Registration Statement on Form S-8 filed
	April 27, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

87



---



##### 



|        |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 4.1  |  |  | Rights Agreement dated as of May 18, 1999,
	between R.J. Reynolds Tobacco Holdings, Inc. and its rights
	agent (incorporated by reference to Exhibit 4.1 to
	Registrants Form 8-K dated June 14, 1999)                                                                                                                                                                                                                                                                                                                                                        
|        | 4.2  |  |  | Amended and Restated Indenture dated as of
	July 24, 1995, between RJR Nabisco, Inc. and The Bank of
	New York (incorporated by reference to Exhibit 4.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1995, filed August 8, 1995)                                                                                                                                                                                                                                                                                            
|        | 4.3  |  |  | First Supplemental Indenture and Waiver dated as
	of April 27, 1999, between RJR Nabisco, Inc. and The Bank
	of New York, to the Amended and Restated Indenture dated as of
	July 24, 1995, between RJR Nabisco, Inc. and The Bank of
	New York, as successor trustee (incorporated by reference to
	Exhibit 10.3 to Registrants Form 8-A filed
	May 19, 1999)                                                                                                                                                                                                
|        | 4.4  |  |  | Second Supplemental Indenture and Waiver dated as
	of April 27, 1999, between RJR Nabisco, Inc. and The Bank
	of New York, to the Amended and Restated Indenture dated as of
	May 18, 1992 between RJR Nabisco, Inc. and The Bank of New
	York, as successor trustee, as amended by the Form of First
	Supplemental Indenture and Waiver thereto dated as of
	June 2, 1995 (incorporated by reference to
	Exhibit 10.4 to Registrants Form 8-A filed
	May 19, 1999)                                                                                           
|        | 4.5  |  |  | Indenture dated as of May 15, 1999, among
	RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank
	of New York, as trustee (incorporated by reference to
	Exhibit 10.2 to Registrants Form 8-A filed
	May 19, 1999)                                                                                                                                                                                                                                                                                                                                   
|        | 4.6  |  |  | First Supplemental Indenture dated as of
	December 12, 2000, among RJR Acquisition Corp., R.J.
	Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company
	and The Bank of New York, as Trustee, to the Indenture dated as
	of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds
	Tobacco Company and The Bank of New York, as Trustee
	(incorporated by reference to Exhibit 4.6 to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 2000, filed March 1, 2001)                                                            
|        | 10.1 |  |  | Amended and Restated Credit Agreement dated as of
	November 17, 2000, among R.J. Reynolds Tobacco Holdings,
	Inc. and the lending institutions listed and to be listed from
	time to time on Annex I (incorporated by reference to
	Exhibit 10.1 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 2000, filed
	March 1, 2001)                                                                                                                                                                                                       
|        | 10.2 |  |  | First Amendment to the Credit Agreement dated as
	of November 19, 2001, among R.J. Reynolds Tobacco Holdings,
	Inc. and lending institutions party to the Credit Agreement                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.3 |  |  | Form of Amended and Restated Subsidiary Guaranty
	by R. J. Reynolds Tobacco Company and RJR Acquisition Corp. to
	the creditors defined therein, issued in connection with the
	Credit Agreement dated as of May 18, 1999 and Amended and
	Restated as of November 17, 2000, among R.J. Reynolds
	Tobacco Holdings, Inc. and the lending institutions listed and
	to be listed from time to time on Annex I (incorporated by
	reference to Exhibit 10.2 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	2000, filed March 1, 2001)
|        | 10.4 |  |  | Guarantee dated as of May 18, 1999, by R. J.
	Reynolds Tobacco Company to the holders and to The Bank of New
	York, as trustee, issued in connection with the Indenture dated
	as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds
	Tobacco Company and The Bank of New York, as trustee
	(incorporated by reference to Exhibit 10.6 to
	Registrants Form 8-A filed May 19, 1999)                                                                                                                                                                     
|        | 10.5 |  |  | Tax Sharing Agreement dated as of June 14,
	1999, among RJR Nabisco Holdings Corp., R.J. Reynolds Tobacco
	Holdings, Inc., R. J. Reynolds Tobacco Company and Nabisco
	Holdings Corp. (incorporated by reference to Exhibit 10.1
	to Registrants Form 8-K dated June 14, 1999)                                                                                                                                                                                                                                                                                
|        | 10.6 |  |  | Amendment to Tax Sharing Agreement dated
	June 25, 2000, among Nabisco Group Holdings Corp., R.J.
	Reynolds Tobacco Holdings, Inc., Nabisco Holdings Corp. and R.
	J. Reynolds Tobacco Company (incorporated by reference to
	Exhibit 10.2 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 2000, filed
	August 7, 2000)                                                                                                                                                                                                          

88



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.7  |  |  | Agreement dated as of May 20, 1999, among
	Pension Benefit Guaranty Corporation, RJR Nabisco Holdings Corp.
	and R. J. Reynolds Tobacco Company (incorporated by reference to
	Exhibit 10.16 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1999, filed
	August 16, 1999)                                                                                                                                         
|        | 10.8  |  |  | Amendment effective as of June 14, 1999, to
	the Agreement effective as of May 20, 1999, by and among
	the Pension Benefit Guaranty Corporation, R.J. Reynolds Tobacco
	Holdings, Inc. and R. J. Reynolds Tobacco Company (incorporated
	by reference to Exhibit 10.3 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended June 30,
	2000, filed August 7, 2000)                                                                 
|        | 10.9  |  |  | Second Amendment effective as of January 7,
	2002, to the Agreement effective as of May 20, 1999, by and
	among the Pension Benefit Guaranty Corporation, R.J. Reynolds
	Tobacco Holdings, Inc. and R. J. Reynolds Tobacco Company                                                                                                                                                                                                               
|        | 10.10 |  |  | Purchase Agreement dated as of March 9,
	1999, as amended and restated as of May 11, 1999, among R.
	J. Reynolds Tobacco Company, RJR Nabisco, Inc. and Japan Tobacco
	Inc. (incorporated by reference to Exhibit 2.1 to
	Registrants Form 8-K dated May 12, 1999)                                                                                                                                                                              
|        | 10.11 |  |  | Settlement Agreement dated August 25, 1997,
	between the State of Florida and settling defendants in The
	State of Florida v. American Tobacco Co.(incorporated by
	reference to Exhibit 2 to Registrants Form 8-K
	dated August 25, 1997)                                                                                                                                                                                                      
|        | 10.12 |  |  | Comprehensive Settlement Agreement and Release
	dated January 16, 1998, between the State of Texas and
	settling defendants in The State of Texas v. American Tobacco
	Co.(incorporated by reference to Exhibit 2 to
	Registrants Form 8-K dated January 16, 1998)                                                                                                                                                                              
|        | 10.13 |  |  | Settlement Agreement and Release in re: The
	State of Minnesota v. Philip Morris, Inc., by and among the
	State of Minnesota, Blue Cross and Blue Shield of Minnesota and
	the various tobacco company defendants named therein, dated as
	of May 8, 1998 (incorporated by reference to Exhibit 99.1
	to Registrants Quarterly Report on Form 10-Q for the
	quarter ended March 30, 1998, filed May 15, 1998)                                   
|        | 10.14 |  |  | Settlement Agreement and Stipulation for Entry of
	Consent Judgment in re: The State of Minnesota v. Philip
	Morris, Inc., by and among the State of Minnesota, Blue
	Cross and Blue Shield of Minnesota and the various tobacco
	company defendants named therein, dated as of May 8, 1998
	(incorporated by reference to Exhibit 99.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended March 30, 1998, filed May 15, 1998)
|        | 10.15 |  |  | Form of Consent Judgment by Judge Kenneth J.
	Fitzpatrick, Judge of District Court in re: The State of
	Minnesota v. Philip Morris, Inc.(incorporated by reference
	to Exhibit 99.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 30, 1998, filed
	May 15, 1998)                                                                                                                                                    
|        | 10.16 |  |  | Stipulation of Amendment to Settlement Agreement
	and for Entry of Agreed Order dated July 2, 1998, by and
	among the Mississippi Defendants, Mississippi and the
	Mississippi Counsel in connection with the Mississippi Action
	(incorporated by reference to Exhibit 99.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1998, filed August 14, 1998)                                                         
|        | 10.17 |  |  | Stipulation of Amendment to Settlement Agreement
	and for Entry of Consent Decree dated July 24, 1998, by and
	among the Texas Defendants, Texas and the Texas Counsel in
	connection with the Texas Action (incorporated by reference to
	Exhibit 99.4 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1998, filed
	August 14, 1998)                                                                              
|        | 10.18 |  |  | Stipulation of Amendment to Settlement Agreement
	and for Entry of Consent Decree dated September 11, 1998,
	by and among the State of Florida and the tobacco companies
	named therein (incorporated by reference to Exhibit 99.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 1998, filed November 12,
	1998)                                                                                           

89



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                             
|------- | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.19 |  |  | Master Settlement Agreement (the MSA)
	dated November 23, 1998, between the Settling States named
	in the MSA and the Participating Manufacturers also named
	therein (incorporated by reference to Exhibit 4 to
	Registrants Form 8-K dated November 23, 1998)                                                                                                          
|        | 10.20 |  |  | Amended and Restated Equity Incentive Award Plan
	for Directors of R.J. Reynolds Tobacco Holdings, Inc. and
	Subsidiaries (the EIAP) (incorporated by reference
	to Exhibit 10.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 31, 2000, filed
	May 9, 2000)                                                                                 
|        | 10.21 |  |  | Form of Deferred Stock Unit Agreement between
	R.J. Reynolds Tobacco Holdings, Inc. and the Director named
	therein, pursuant to the EIAP (incorporated by reference to
	Exhibit 10.9 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1999, filed
	August 16, 1999)                                                                           
|        | 10.22 |  |  | Form of Stock Option Agreement (Initial) between
	R.J. Reynolds Tobacco Holdings, Inc. and the Director named
	therein, pursuant to the EIAP (incorporated by reference to
	Exhibit 10.10 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1999, filed
	August 16, 1999)                                                                       
|        | 10.23 |  |  | Form of Stock Option Agreement (Annual) between
	R.J. Reynolds Tobacco Holdings, Inc. and the Director named
	therein, pursuant to the EIAP, dated as of June 15, 1999
	(incorporated by reference to Exhibit 10.11 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1999, filed August 16, 1999)                                             
|        | 10.24 |  |  | Deferred Compensation Plan for Directors between
	R.J. Reynolds Tobacco Holdings, Inc. (Effective June 14,
	1999) (incorporated by reference to Exhibit 10.12 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1999, filed August 16, 1999)                                                                                                   
|        | 10.25 |  |  | R.J. Reynolds Tobacco Holdings, Inc. 1999 Long
	Term Incentive Plan (incorporated by reference to
	Exhibit 10.2 to Registrants Form 8-K dated
	June 15, 1999)                                                                                                                                                                                                              
|        | 10.26 |  |  | Amendments to the R.J. Reynolds Tobacco Holdings,
	Inc. 1999 Long Term Incentive Plan dated December 5, 2001.                                                                                                                                                                                                                                                               
|        | 10.27 |  |  | Form of 1999 Performance Appreciation Rights
	Agreement under R.J. Reynolds Tobacco Holdings, Inc. 1999 Long
	Term Incentive Plan between R.J. Reynolds Tobacco Holdings, Inc.
	and the grantee named therein (incorporated by reference to
	Exhibit 10.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)
|        | 10.28 |  |  | Form of Tandem Restricted Stock/Stock Option
	Agreement dated June 15, 1999, between R.J. Reynolds
	Tobacco Holdings, Inc. and the grantee named therein
	(incorporated by reference to Exhibit 10.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 1999, filed November 12,
	1999)                                                    
|        | 10.29 |  |  | Form of Tandem Restricted Stock/Stock Option
	Agreement dated June 15, 1999, between R.J. Reynolds
	Tobacco Holdings, Inc. and Andrew J. Schindler (incorporated by
	reference to Exhibit 10.3 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended
	September 30, 1999, filed November 12, 1999)                                                           
|        | 10.30 |  |  | Amendment No. 1 to Tandem Restricted
	Stock/Stock Option Agreement Dated June 15, 1999, dated
	December 5, 2001.                                                                                                                                                                                                                                                            
|        | 10.31 |  |  | Form of Tandem Restricted Stock/Stock Option
	Agreement dated July 28, 1999, between R.J. Reynolds
	Tobacco Holdings, Inc. and the grantee named therein
	(incorporated by reference to Exhibit 10.4 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 1999, filed November 12,
	1999)                                                    
|        | 10.32 |  |  | Amendment No. 1 to Tandem Restricted
	Stock/Stock Option Agreement Dated July 28, 1999, dated
	December 5, 2001.                                                                                                                                                                                                                                                            

90



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|------- | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.33 |  |  | Form of Restricted Stock Agreement dated
	February 2, 2000, between R.J. Reynolds Tobacco Holdings,
	Inc. and the grantee named therein (incorporated by reference to
	Exhibit 10.35 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1999, filed
	March 8, 2000)                                                                                   
|        | 10.34 |  |  | Form of Performance Unit Agreement (three-year
	vesting) dated February 2, 2000, between R.J. Reynolds Tobacco
	Holdings, Inc. and the grantee named therein (incorporated by
	reference to Exhibit 10.36 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1999, filed March 8, 2000)                                                              
|        | 10.35 |  |  | Form of Restricted Stock Agreement dated
	January 31, 2001, between R.J. Reynolds Tobacco Holdings,
	Inc. and the grantee named therein (incorporated by reference to
	Exhibit 10.36 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 2000, filed
	March 1, 2001)                                                                                   
|        | 10.36 |  |  | Form of Performance Unit Agreement (three-year
	vesting) dated January 31, 2001, between R.J. Reynolds Tobacco
	Holdings, Inc. and the grantee named therein (incorporated by
	reference to Exhibit 10.38 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	2000, filed March 1, 2001)                                                              
|        | 10.37 |  |  | Amendment No. 1 to Performance Unit
	Agreements dated December 5, 2001, between R.J. Reynolds
	Tobacco Holdings, Inc. and the grantee named therein                                                                                                                                                                                                                            
|        | 10.38 |  |  | R.J. Reynolds Tobacco Holdings, Inc. Annual
	Incentive Award Plan, Effective January 1, 1987 Amended and
	Restated Effective January 1, 2002.                                                                                                                                                                                                                                  
|        | 10.39 |  |  | Master Trust Agreement, as amended and restated
	as of October 12, 1988, between RJR Nabisco, Inc. and
	Wachovia Bank and Trust Company, N.A. (incorporated by reference
	to Exhibit 10.18 to the Registration Statement on
	Form S-4 of RJR Holdings Corp. and RJR Holdings Group,
	Inc., Registration No. 33-27894, filed April 5, 1989,
	as amended)                        
|        | 10.40 |  |  | Amendment No. 1 to Master Trust Agreement,
	dated January 27, 1989 (incorporated by reference to
	Exhibit 10(g)(ii) to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1988,
	filed March 9, 1989)                                                                                                                                             
|        | 10.41 |  |  | Amendment No. 2 to Master Trust Agreement,
	dated January 27, 1989 (incorporated by reference to
	Exhibit 10(g)(iii) to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1988,
	filed March 9, 1989)                                                                                                                                            
|        | 10.42 |  |  | Excess Benefit Master Trust Agreement, as amended
	and restated as of October 12, 1988, between RJR Nabisco,
	Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by
	reference to Exhibit 10.21 to Registrants
	Registration Statement on Form S-4 of RJR Holdings Corp.
	and RJR Holdings Group, Inc., Registration No. 33-27894,
	filed April 5, 1989, as amended)
|        | 10.43 |  |  | Amendment No. 1 to Excess Benefit Master
	Trust Agreement, dated January 27, 1989 (incorporated by
	reference to Exhibit 10(h)(ii) to Registrants Annual
	Report on Form 10-K for the fiscal year ended
	December 31, 1988, filed March 9, 1989)                                                                                                                              
|        | 10.44 |  |  | RJR Nabisco, Inc. Supplemental Executive
	Retirement Plan, as amended on July 21, 1988 (incorporated
	by reference to Exhibit 10.32 to the Registration Statement
	on Form S-4 of RJR Holdings Corp. and RJR Holdings Group,
	Inc., Registration No. 33-27894, filed April 5, 1989,
	as amended)                                                                               
|        | 10.45 |  |  | Amendment to Supplemental Executive Retirement
	Plan, dated November 23, 1988 (incorporated by reference to
	Exhibit 10(m)(ii) to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1998,
	filed March 9, 1989)                                                                                                                                  

91



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##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.46 |  |  | Amendment No. 2 to Supplemental Executive
	Retirement Plan, dated January 27, 1989 (incorporated by
	reference to Exhibit 10(m)(iii) to Registrants Annual
	Report on Form 10-K for the fiscal year ended
	December 31, 1988, filed March 9, 1989)                                                                                                        
|        | 10.47 |  |  | Amendment to Supplemental Executive Retirement
	Plan, dated April 10, 1993 (incorporated by reference to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1993, filed February 24, 1994)                                                                                                                                          
|        | 10.48 |  |  | Retention Trust Agreement dated May 13,
	1998, by and between RJR Nabisco, Inc. and Wachovia Bank, N.A.
	(incorporated by reference to Registrants Quarterly Report
	on Form 10-Q for the quarter ended June 30, 1998,
	filed August 14, 1998)                                                                                                            
|        | 10.49 |  |  | Form of Employment Agreement dated as of
	October 31, 1988, by and between RJR Nabisco, Inc. and
	Andrew J. Schindler (incorporated by reference to
	Exhibit 10 to Registrants Schedule 14D-9 filed
	on November 8, 1988)                                                                                                                                 
|        | 10.50 |  |  | Form of Special Addendum dated December 20,
	1988, to the Employment Agreement dated as of October 31,
	1988, between RJR Nabisco, Inc. and Andrew J. Schindler
	(incorporated by reference to Exhibit 10(d)(i) to
	Registrants Annual Report on Form 10-K for the fiscal
	year ended December 31, 1988, filed March 8, 1989)                             
|        | 10.51 |  |  | Amendment dated June 7, 1999, to the
	Employment Agreement dated as of October 31, 1988, and
	previously amended as of December 20, 1988, between RJR
	Nabisco, Inc. and Andrew J. Schindler (incorporated by reference
	to Exhibit 10.8 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)
|        | 10.52 |  |  | Amendment dated January 4, 2002, to the
	Employment Agreement dated as of October 31, 1988, and
	previously amended as of December 20, 1988 and June 7,
	1999, between R.J. Reynolds Tobacco Holdings, Inc. (formerly
	known as RJR Nabisco, Inc.) and Andrew J. Schindler                                                                                 
|        | 10.53 |  |  | Change of Control Letter Agreement dated
	October 25, 1999, by and among R.J. Reynolds Tobacco
	Holdings, Inc. and Andrew J. Schindler                                                                                                                                                                                                                     
|        | 10.54 |  |  | Participation Agreement, RJR Nabisco, Inc.
	Supplemental Executive Retirement Plan, for Andrew J. Schindler
	dated December 28, 1995 (incorporated by reference to
	Exhibit 10.45 to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1995,
	filed February 22, 1996)                                                       
|        | 10.55 |  |  | Amendment dated October 25, 1999, to the
	Participation Agreement  R.J. Reynolds Supplemental
	Executive Retirement Plan dated as of December 28, 1995,
	between R.J. Reynolds Tobacco Holdings, Inc. and Andrew J.
	Schindler                                                                                                                            
|        | 10.56 |  |  | Cash Retention Grant Letter Agreement dated
	August 17, 1999, between R.J. Reynolds Tobacco Holdings,
	Inc. and Andrew J. Schindler (incorporated by reference to
	Exhibit 10.9 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)                                                         
|        | 10.57 |  |  | Form of Change of Control Letter Agreement
	between R.J. Reynolds Tobacco Holdings, Inc. and the executive
	officer named therein (incorporated by reference to
	Exhibit 10.5 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)                                                           
|        | 10.58 |  |  | Form of Special Severance Benefits Letter
	Agreement between R. J. Reynolds Tobacco Company and the
	executive officer named therein (incorporated by reference to
	Exhibit 10.6 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)                                                        

92



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                 
|------- | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.59 |  |  | Form of Amendment to Special Severance Benefits
	Letter Agreement between R. J. Reynolds Tobacco Company and the
	executive officer named therein (incorporated by reference to
	Exhibit 10.7 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)
|        | 12.1  |  |  | Computation of Ratio of Earnings to Combined
	Fixed Charges and Preferred Stock Dividends/Deficiency in the
	Coverage of Combined Fixed Charges and Preferred Stock Dividends
	by Earnings Before Fixed Charges for each of the five years
	within the period ended December 31, 2001.                          
|        | 21.1  |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                  
|        | 23.1  |  |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                 
|        | 23.2  |  |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                 
|        | 99.1  |  |  | Expanded Litigation Disclosure                                                                                                                                                                                                                                                                                  

93



---



##### 



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.



| |                                     
| | ------------------------------------
| | R.J. REYNOLDS TOBACCO HOLDINGS, INC.

Dated: February 28, 2002

| |     |                        
| | --- | -----------------------
| | By: | /s/ Andrew J. Schindler

| |                                     
| | ------------------------------------
| |                                     
| | Andrew J. Schindler                 
| | Chairman of the Board, President,   
| | Chief Executive Officer and Director

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 and on the
date indicated.

|                                           |  |                                                                                                        |  |                  
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------ |  | -----------------
|Signature                                  |  | Title                                                                                                  |  | Date             
|                                           |  |                                                                                                        |  |                  
|/s/ Andrew J. SchindlerAndrew J. Schindler |  | Chairman of the Board, President,
	Chief Executive Officer and Director
	(principal executive officer) |  | February 28, 2002
|/s/ Kenneth J. LapiejkoKenneth J. Lapiejko |  | Executive Vice President and
	Chief Financial Officer
	(principal financial officer)                   |  | February 28, 2002
|/s/ Thomas R. AdamsThomas R. Adams         |  | Senior Vice President and Controller
	(principal accounting officer)                                   |  | February 28, 2002
|/s/ Mary K. BushMary K. Bush               |  | Director                                                                                               |  | February 28, 2002
|/s/ John T. Chain, Jr.John T. Chain, Jr.   |  | Director                                                                                               |  | February 28, 2002
|/s/ A.D. Frazier, Jr.A.D. Frazier, Jr.     |  | Director                                                                                               |  | February 28, 2002
|/s/ Denise IlitchDenise Ilitch             |  | Director                                                                                               |  | February 28, 2002
|/s/ John G. Medlin, Jr.John G. Medlin, Jr. |  | Director                                                                                               |  | February 28, 2002
|/s/ Nana MensahNana Mensah                 |  | Director                                                                                               |  | February 28, 2002
|/s/ Joseph P. VivianoJoseph P. Viviano     |  | Director                                                                                               |  | February 28, 2002
|/s/ Thomas C. WajnertThomas C. Wajnert     |  | Director                                                                                               |  | February 28, 2002

94



---



##### 



INDEX TO EXHIBITS

|        |     |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | --- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     | 
|Number  |     | 
|        |     | 
|        | 2.1 |  |  | Distribution Agreement dated as of May 12,
	1999, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and R.
	J. Reynolds Tobacco Company (incorporated by reference to
	Exhibit 2.1 to Registrants Form 8-A filed
	May 19, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 2.2 |  |  | Amendment No. 1, dated as of June 28,
	2001, to the Distribution Agreement, dated as of May 12,
	1999, among RJR Nabisco Holdings Corp. (now known as RJR
	Acquisition Corp.), RJR Nabisco, Inc. (now known as R.J.
	Reynolds Tobacco Holdings, Inc.) and R. J. Reynolds Tobacco
	Company (incorporated by reference to Exhibit 2.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 2001, filed August 1, 2001)                                                                                                                                                                                                                                                                                                     
|        | 2.3 |  |  | Certificate of Merger and Agreement and Plan of
	Merger among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and
	R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference
	to Exhibit 2.2 to Registrants Form 8-K filed
	May 28, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 2.4 |  |  | Agreement and Plan of Merger dated as of
	June 25, 2000, among Nabisco Group Holdings Corp., R.J.
	Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp.
	(incorporated by reference to Exhibit 2.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 2000, filed August 7, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 2.5 |  |  | Amendment No. 1, dated September 20,
	2000, to the Agreement and Plan of Merger dated as of
	June 25, 2000, among Nabisco Group Holdings Corp., R.J.
	Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp.
	(incorporated by reference to Exhibit 2.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 2000, filed November 3,
	2000)                                                                                                                                                                                                                                                                                                                                                                      
|        | 2.6 |  |  | Letter dated October 19, 2000, from R.J.
	Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp.,
	electing that Nabisco Group Holdings Corp. be merged with and
	into RJR Acquisition Corp. under the Agreement and Plan of
	Merger dated as of June 25, 2000, as amended, among Nabisco
	Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and
	RJR Acquisition Corp. (incorporated by reference to
	Exhibit 2.2 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 2000, filed
	November 3, 2000)                                                                                                                                                                                             
|        | 2.7 |  |  | Letter dated November 20, 2000, from R.J.
	Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp.,
	withdrawing its previous election made on October 19, 2000,
	and electing that RJR Acquisition Corp. be merged with and into
	Nabisco Group Holdings Corp. under the Agreement and Plan of
	Merger dated as of June 25, 2000, as amended, among Nabisco
	Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and
	RJR Acquisition Corp. (incorporated by reference to
	Exhibit 2.4 to Registrants Form 8-K dated
	December 11, 2000)                                                                                                                                                                                          
|        | 2.8 |  |  | Letter dated October 27, 2000, from R.J.
	Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp.,
	agreeing that it will pay or cause to be paid to stockholders of
	Nabisco Group Holdings Corp., in circumstances described in
	Section 2.02(b) of the Agreement and Plan of Merger dated
	as of June 25, 2000, as amended, among Nabisco Group
	Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR
	Acquisition Corp., an amount equal to 100% of the difference
	between the Net Proceeds (as defined in the Agreement and Plan
	of Merger) and $11.729 billion (incorporated by reference to
	Exhibit 2.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 2000,
	filed November 3, 2000)
|        | 3.1 |  |  | Restated Certificate of Incorporation of R.J.
	Reynolds Tobacco Holdings, Inc. (incorporated by reference to
	Exhibit 3.1 to Registrants Form 8-K dated
	June 14, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 3.2 |  |  | Bylaws of R.J. Reynolds Tobacco Holdings, Inc.,
	as amended and restated effective April 25, 2001
	(incorporated by reference to Exhibit 4.2 to
	Registrants Registration Statement on Form S-8 filed
	April 27, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 4.1 |  |  | Rights Agreement dated as of May 18, 1999,
	between R.J. Reynolds Tobacco Holdings, Inc. and its rights
	agent (incorporated by reference to Exhibit 4.1 to
	Registrants Form 8-K dated June 14, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



---



##### 



|        |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 4.2  |  |  | Amended and Restated Indenture dated as of
	July 24, 1995, between RJR Nabisco, Inc. and The Bank of
	New York (incorporated by reference to Exhibit 4.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1995, filed August 8, 1995)                                                                                                                                                                                                                                                                                            
|        | 4.3  |  |  | First Supplemental Indenture and Waiver dated as
	of April 27, 1999, between RJR Nabisco, Inc. and The Bank
	of New York, to the Amended and Restated Indenture dated as of
	July 24, 1995, between RJR Nabisco, Inc. and The Bank of
	New York, as successor trustee (incorporated by reference to
	Exhibit 10.3 to Registrants Form 8-A filed
	May 19, 1999)                                                                                                                                                                                                
|        | 4.4  |  |  | Second Supplemental Indenture and Waiver dated as
	of April 27, 1999, between RJR Nabisco, Inc. and The Bank
	of New York, to the Amended and Restated Indenture dated as of
	May 18, 1992 between RJR Nabisco, Inc. and The Bank of New
	York, as successor trustee, as amended by the Form of First
	Supplemental Indenture and Waiver thereto dated as of
	June 2, 1995 (incorporated by reference to
	Exhibit 10.4 to Registrants Form 8-A filed
	May 19, 1999)                                                                                           
|        | 4.5  |  |  | Indenture dated as of May 15, 1999, among
	RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank
	of New York, as trustee (incorporated by reference to
	Exhibit 10.2 to Registrants Form 8-A filed
	May 19, 1999)                                                                                                                                                                                                                                                                                                                                   
|        | 4.6  |  |  | First Supplemental Indenture dated as of
	December 12, 2000, among RJR Acquisition Corp., R.J.
	Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company
	and The Bank of New York, as Trustee, to the Indenture dated as
	of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds
	Tobacco Company and The Bank of New York, as Trustee
	(incorporated by reference to Exhibit 4.6 to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 2000, filed March 1, 2001)                                                            
|        | 10.1 |  |  | Amended and Restated Credit Agreement dated as of
	November 17, 2000, among R.J. Reynolds Tobacco Holdings,
	Inc. and the lending institutions listed and to be listed from
	time to time on Annex I (incorporated by reference to
	Exhibit 10.1 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 2000, filed
	March 1, 2001)                                                                                                                                                                                                       
|        | 10.2 |  |  | First Amendment to the Credit Agreement dated as
	of November 19, 2001, among R.J. Reynolds Tobacco Holdings,
	Inc. and lending institutions party to the Credit Agreement                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.3 |  |  | Form of Amended and Restated Subsidiary Guaranty
	by R. J. Reynolds Tobacco Company and RJR Acquisition Corp. to
	the creditors defined therein, issued in connection with the
	Credit Agreement dated as of May 18, 1999 and Amended and
	Restated as of November 17, 2000, among R.J. Reynolds
	Tobacco Holdings, Inc. and the lending institutions listed and
	to be listed from time to time on Annex I (incorporated by
	reference to Exhibit 10.2 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	2000, filed March 1, 2001)
|        | 10.4 |  |  | Guarantee dated as of May 18, 1999, by R. J.
	Reynolds Tobacco Company to the holders and to The Bank of New
	York, as trustee, issued in connection with the Indenture dated
	as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds
	Tobacco Company and The Bank of New York, as trustee
	(incorporated by reference to Exhibit 10.6 to
	Registrants Form 8-A filed May 19, 1999)                                                                                                                                                                     
|        | 10.5 |  |  | Tax Sharing Agreement dated as of June 14,
	1999, among RJR Nabisco Holdings Corp., R.J. Reynolds Tobacco
	Holdings, Inc., R. J. Reynolds Tobacco Company and Nabisco
	Holdings Corp. (incorporated by reference to Exhibit 10.1
	to Registrants Form 8-K dated June 14, 1999)                                                                                                                                                                                                                                                                                
|        | 10.6 |  |  | Amendment to Tax Sharing Agreement dated
	June 25, 2000, among Nabisco Group Holdings Corp., R.J.
	Reynolds Tobacco Holdings, Inc., Nabisco Holdings Corp. and R.
	J. Reynolds Tobacco Company (incorporated by reference to
	Exhibit 10.2 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 2000, filed
	August 7, 2000)                                                                                                                                                                                                          



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.7  |  |  | Agreement dated as of May 20, 1999, among
	Pension Benefit Guaranty Corporation, RJR Nabisco Holdings Corp.
	and R. J. Reynolds Tobacco Company (incorporated by reference to
	Exhibit 10.16 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1999, filed
	August 16, 1999)                                                                                                                                         
|        | 10.8  |  |  | Amendment effective as of June 14, 1999, to
	the Agreement effective as of May 20, 1999, by and among
	the Pension Benefit Guaranty Corporation, R.J. Reynolds Tobacco
	Holdings, Inc. and R. J. Reynolds Tobacco Company (incorporated
	by reference to Exhibit 10.3 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended June 30,
	2000, filed August 7, 2000)                                                                 
|        | 10.9  |  |  | Second Amendment effective as of January 7,
	2002, to the Agreement effective as of May 20, 1999, by and
	among the Pension Benefit Guaranty Corporation, R.J. Reynolds
	Tobacco Holdings, Inc. and R. J. Reynolds Tobacco Company                                                                                                                                                                                                               
|        | 10.10 |  |  | Purchase Agreement dated as of March 9,
	1999, as amended and restated as of May 11, 1999, among R.
	J. Reynolds Tobacco Company, RJR Nabisco, Inc. and Japan Tobacco
	Inc. (incorporated by reference to Exhibit 2.1 to
	Registrants Form 8-K dated May 12, 1999)                                                                                                                                                                              
|        | 10.11 |  |  | Settlement Agreement dated August 25, 1997,
	between the State of Florida and settling defendants in The
	State of Florida v. American Tobacco Co.(incorporated by
	reference to Exhibit 2 to Registrants Form 8-K
	dated August 25, 1997)                                                                                                                                                                                                      
|        | 10.12 |  |  | Comprehensive Settlement Agreement and Release
	dated January 16, 1998, between the State of Texas and
	settling defendants in The State of Texas v. American Tobacco
	Co.(incorporated by reference to Exhibit 2 to
	Registrants Form 8-K dated January 16, 1998)                                                                                                                                                                              
|        | 10.13 |  |  | Settlement Agreement and Release in re: The
	State of Minnesota v. Philip Morris, Inc., by and among the
	State of Minnesota, Blue Cross and Blue Shield of Minnesota and
	the various tobacco company defendants named therein, dated as
	of May 8, 1998 (incorporated by reference to Exhibit 99.1
	to Registrants Quarterly Report on Form 10-Q for the
	quarter ended March 30, 1998, filed May 15, 1998)                                   
|        | 10.14 |  |  | Settlement Agreement and Stipulation for Entry of
	Consent Judgment in re: The State of Minnesota v. Philip
	Morris, Inc., by and among the State of Minnesota, Blue
	Cross and Blue Shield of Minnesota and the various tobacco
	company defendants named therein, dated as of May 8, 1998
	(incorporated by reference to Exhibit 99.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended March 30, 1998, filed May 15, 1998)
|        | 10.15 |  |  | Form of Consent Judgment by Judge Kenneth J.
	Fitzpatrick, Judge of District Court in re: The State of
	Minnesota v. Philip Morris, Inc.(incorporated by reference
	to Exhibit 99.3 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 30, 1998, filed
	May 15, 1998)                                                                                                                                                    
|        | 10.16 |  |  | Stipulation of Amendment to Settlement Agreement
	and for Entry of Agreed Order dated July 2, 1998, by and
	among the Mississippi Defendants, Mississippi and the
	Mississippi Counsel in connection with the Mississippi Action
	(incorporated by reference to Exhibit 99.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1998, filed August 14, 1998)                                                         
|        | 10.17 |  |  | Stipulation of Amendment to Settlement Agreement
	and for Entry of Consent Decree dated July 24, 1998, by and
	among the Texas Defendants, Texas and the Texas Counsel in
	connection with the Texas Action (incorporated by reference to
	Exhibit 99.4 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1998, filed
	August 14, 1998)                                                                              
|        | 10.18 |  |  | Stipulation of Amendment to Settlement Agreement
	and for Entry of Consent Decree dated September 11, 1998,
	by and among the State of Florida and the tobacco companies
	named therein (incorporated by reference to Exhibit 99.1 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 1998, filed November 12,
	1998)                                                                                           



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                             
|------- | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.19 |  |  | Master Settlement Agreement (the MSA)
	dated November 23, 1998, between the Settling States named
	in the MSA and the Participating Manufacturers also named
	therein (incorporated by reference to Exhibit 4 to
	Registrants Form 8-K dated November 23, 1998)                                                                                                          
|        | 10.20 |  |  | Amended and Restated Equity Incentive Award Plan
	for Directors of R.J. Reynolds Tobacco Holdings, Inc. and
	Subsidiaries (the EIAP) (incorporated by reference
	to Exhibit 10.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended March 31, 2000, filed
	May 9, 2000)                                                                                 
|        | 10.21 |  |  | Form of Deferred Stock Unit Agreement between
	R.J. Reynolds Tobacco Holdings, Inc. and the Director named
	therein, pursuant to the EIAP (incorporated by reference to
	Exhibit 10.9 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1999, filed
	August 16, 1999)                                                                           
|        | 10.22 |  |  | Form of Stock Option Agreement (Initial) between
	R.J. Reynolds Tobacco Holdings, Inc. and the Director named
	therein, pursuant to the EIAP (incorporated by reference to
	Exhibit 10.10 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended June 30, 1999, filed
	August 16, 1999)                                                                       
|        | 10.23 |  |  | Form of Stock Option Agreement (Annual) between
	R.J. Reynolds Tobacco Holdings, Inc. and the Director named
	therein, pursuant to the EIAP, dated as of June 15, 1999
	(incorporated by reference to Exhibit 10.11 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1999, filed August 16, 1999)                                             
|        | 10.24 |  |  | Deferred Compensation Plan for Directors between
	R.J. Reynolds Tobacco Holdings, Inc. (Effective June 14,
	1999) (incorporated by reference to Exhibit 10.12 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1999, filed August 16, 1999)                                                                                                   
|        | 10.25 |  |  | R.J. Reynolds Tobacco Holdings, Inc. 1999 Long
	Term Incentive Plan (incorporated by reference to
	Exhibit 10.2 to Registrants Form 8-K dated
	June 15, 1999)                                                                                                                                                                                                              
|        | 10.26 |  |  | Amendments to the R.J. Reynolds Tobacco Holdings,
	Inc. 1999 Long Term Incentive Plan dated December 5, 2001.                                                                                                                                                                                                                                                               
|        | 10.27 |  |  | Form of 1999 Performance Appreciation Rights
	Agreement under R.J. Reynolds Tobacco Holdings, Inc. 1999 Long
	Term Incentive Plan between R.J. Reynolds Tobacco Holdings, Inc.
	and the grantee named therein (incorporated by reference to
	Exhibit 10.1 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)
|        | 10.28 |  |  | Form of Tandem Restricted Stock/Stock Option
	Agreement dated June 15, 1999, between R.J. Reynolds
	Tobacco Holdings, Inc. and the grantee named therein
	(incorporated by reference to Exhibit 10.2 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 1999, filed November 12,
	1999)                                                    
|        | 10.29 |  |  | Form of Tandem Restricted Stock/Stock Option
	Agreement dated June 15, 1999, between R.J. Reynolds
	Tobacco Holdings, Inc. and Andrew J. Schindler (incorporated by
	reference to Exhibit 10.3 to Registrants Quarterly
	Report on Form 10-Q for the quarter ended
	September 30, 1999, filed November 12, 1999)                                                           
|        | 10.30 |  |  | Amendment No. 1 to Tandem Restricted
	Stock/Stock Option Agreement Dated June 15, 1999, dated
	December 5, 2001.                                                                                                                                                                                                                                                            
|        | 10.31 |  |  | Form of Tandem Restricted Stock/Stock Option
	Agreement dated July 28, 1999, between R.J. Reynolds
	Tobacco Holdings, Inc. and the grantee named therein
	(incorporated by reference to Exhibit 10.4 to
	Registrants Quarterly Report on Form 10-Q for the
	quarter ended September 30, 1999, filed November 12,
	1999)                                                    
|        | 10.32 |  |  | Amendment No. 1 to Tandem Restricted
	Stock/Stock Option Agreement Dated July 28, 1999, dated
	December 5, 2001.                                                                                                                                                                                                                                                            



---



##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                
|------- | ----- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.33 |  |  | Form of Restricted Stock Agreement dated
	February 2, 2000, between R.J. Reynolds Tobacco Holdings,
	Inc. and the grantee named therein (incorporated by reference to
	Exhibit 10.35 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 1999, filed
	March 8, 2000)                                                                                   
|        | 10.34 |  |  | Form of Performance Unit Agreement (three-year
	vesting) dated February 2, 2000, between R.J. Reynolds Tobacco
	Holdings, Inc. and the grantee named therein (incorporated by
	reference to Exhibit 10.36 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	1999, filed March 8, 2000)                                                              
|        | 10.35 |  |  | Form of Restricted Stock Agreement dated
	January 31, 2001, between R.J. Reynolds Tobacco Holdings,
	Inc. and the grantee named therein (incorporated by reference to
	Exhibit 10.36 to Registrants Annual Report on
	Form 10-K for the year ended December 31, 2000, filed
	March 1, 2001)                                                                                   
|        | 10.36 |  |  | Form of Performance Unit Agreement (three-year
	vesting) dated January 31, 2001, between R.J. Reynolds Tobacco
	Holdings, Inc. and the grantee named therein (incorporated by
	reference to Exhibit 10.38 to Registrants Annual
	Report on Form 10-K for the year ended December 31,
	2000, filed March 1, 2001)                                                              
|        | 10.37 |  |  | Amendment No. 1 to Performance Unit
	Agreements dated December 5, 2001, between R.J. Reynolds
	Tobacco Holdings, Inc. and the grantee named therein                                                                                                                                                                                                                            
|        | 10.38 |  |  | R.J. Reynolds Tobacco Holdings, Inc. Annual
	Incentive Award Plan, Effective January 1, 1987 Amended and
	Restated Effective January 1, 2002.                                                                                                                                                                                                                                  
|        | 10.39 |  |  | Master Trust Agreement, as amended and restated
	as of October 12, 1988, between RJR Nabisco, Inc. and
	Wachovia Bank and Trust Company, N.A. (incorporated by reference
	to Exhibit 10.18 to the Registration Statement on
	Form S-4 of RJR Holdings Corp. and RJR Holdings Group,
	Inc., Registration No. 33-27894, filed April 5, 1989,
	as amended)                        
|        | 10.40 |  |  | Amendment No. 1 to Master Trust Agreement,
	dated January 27, 1989 (incorporated by reference to
	Exhibit 10(g)(ii) to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1988,
	filed March 9, 1989)                                                                                                                                             
|        | 10.41 |  |  | Amendment No. 2 to Master Trust Agreement,
	dated January 27, 1989 (incorporated by reference to
	Exhibit 10(g)(iii) to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1988,
	filed March 9, 1989)                                                                                                                                            
|        | 10.42 |  |  | Excess Benefit Master Trust Agreement, as amended
	and restated as of October 12, 1988, between RJR Nabisco,
	Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by
	reference to Exhibit 10.21 to Registrants
	Registration Statement on Form S-4 of RJR Holdings Corp.
	and RJR Holdings Group, Inc., Registration No. 33-27894,
	filed April 5, 1989, as amended)
|        | 10.43 |  |  | Amendment No. 1 to Excess Benefit Master
	Trust Agreement, dated January 27, 1989 (incorporated by
	reference to Exhibit 10(h)(ii) to Registrants Annual
	Report on Form 10-K for the fiscal year ended
	December 31, 1988, filed March 9, 1989)                                                                                                                              
|        | 10.44 |  |  | RJR Nabisco, Inc. Supplemental Executive
	Retirement Plan, as amended on July 21, 1988 (incorporated
	by reference to Exhibit 10.32 to the Registration Statement
	on Form S-4 of RJR Holdings Corp. and RJR Holdings Group,
	Inc., Registration No. 33-27894, filed April 5, 1989,
	as amended)                                                                               
|        | 10.45 |  |  | Amendment to Supplemental Executive Retirement
	Plan, dated November 23, 1988 (incorporated by reference to
	Exhibit 10(m)(ii) to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1998,
	filed March 9, 1989)                                                                                                                                  



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##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                                            
|------- | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.46 |  |  | Amendment No. 2 to Supplemental Executive
	Retirement Plan, dated January 27, 1989 (incorporated by
	reference to Exhibit 10(m)(iii) to Registrants Annual
	Report on Form 10-K for the fiscal year ended
	December 31, 1988, filed March 9, 1989)                                                                                                        
|        | 10.47 |  |  | Amendment to Supplemental Executive Retirement
	Plan, dated April 10, 1993 (incorporated by reference to
	Registrants Annual Report on Form 10-K for the year
	ended December 31, 1993, filed February 24, 1994)                                                                                                                                          
|        | 10.48 |  |  | Retention Trust Agreement dated May 13,
	1998, by and between RJR Nabisco, Inc. and Wachovia Bank, N.A.
	(incorporated by reference to Registrants Quarterly Report
	on Form 10-Q for the quarter ended June 30, 1998,
	filed August 14, 1998)                                                                                                            
|        | 10.49 |  |  | Form of Employment Agreement dated as of
	October 31, 1988, by and between RJR Nabisco, Inc. and
	Andrew J. Schindler (incorporated by reference to
	Exhibit 10 to Registrants Schedule 14D-9 filed
	on November 8, 1988)                                                                                                                                 
|        | 10.50 |  |  | Form of Special Addendum dated December 20,
	1988, to the Employment Agreement dated as of October 31,
	1988, between RJR Nabisco, Inc. and Andrew J. Schindler
	(incorporated by reference to Exhibit 10(d)(i) to
	Registrants Annual Report on Form 10-K for the fiscal
	year ended December 31, 1988, filed March 8, 1989)                             
|        | 10.51 |  |  | Amendment dated June 7, 1999, to the
	Employment Agreement dated as of October 31, 1988, and
	previously amended as of December 20, 1988, between RJR
	Nabisco, Inc. and Andrew J. Schindler (incorporated by reference
	to Exhibit 10.8 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)
|        | 10.52 |  |  | Amendment dated January 4, 2002, to the
	Employment Agreement dated as of October 31, 1988, and
	previously amended as of December 20, 1988 and June 7,
	1999, between R.J. Reynolds Tobacco Holdings, Inc. (formerly
	known as RJR Nabisco, Inc.) and Andrew J. Schindler                                                                                 
|        | 10.53 |  |  | Change of Control Letter Agreement dated
	October 25, 1999, by and among R.J. Reynolds Tobacco
	Holdings, Inc. and Andrew J. Schindler                                                                                                                                                                                                                     
|        | 10.54 |  |  | Participation Agreement, RJR Nabisco, Inc.
	Supplemental Executive Retirement Plan, for Andrew J. Schindler
	dated December 28, 1995 (incorporated by reference to
	Exhibit 10.45 to Registrants Annual Report on
	Form 10-K for the fiscal year ended December 31, 1995,
	filed February 22, 1996)                                                       
|        | 10.55 |  |  | Amendment dated October 25, 1999, to the
	Participation Agreement  R.J. Reynolds Supplemental
	Executive Retirement Plan dated as of December 28, 1995,
	between R.J. Reynolds Tobacco Holdings, Inc. and Andrew J.
	Schindler                                                                                                                            
|        | 10.56 |  |  | Cash Retention Grant Letter Agreement dated
	August 17, 1999, between R.J. Reynolds Tobacco Holdings,
	Inc. and Andrew J. Schindler (incorporated by reference to
	Exhibit 10.9 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)                                                         
|        | 10.57 |  |  | Form of Change of Control Letter Agreement
	between R.J. Reynolds Tobacco Holdings, Inc. and the executive
	officer named therein (incorporated by reference to
	Exhibit 10.5 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)                                                           
|        | 10.58 |  |  | Form of Special Severance Benefits Letter
	Agreement between R. J. Reynolds Tobacco Company and the
	executive officer named therein (incorporated by reference to
	Exhibit 10.6 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)                                                        



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##### 



|        |       |  |  |                                                                                                                                                                                                                                                                                                                 
|------- | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Number  |       | 
|        |       | 
|        | 10.59 |  |  | Form of Amendment to Special Severance Benefits
	Letter Agreement between R. J. Reynolds Tobacco Company and the
	executive officer named therein (incorporated by reference to
	Exhibit 10.7 to Registrants Quarterly Report on
	Form 10-Q for the quarter ended September 30, 1999,
	filed November 12, 1999)
|        | 12.1  |  |  | Computation of Ratio of Earnings to Combined
	Fixed Charges and Preferred Stock Dividends/Deficiency in the
	Coverage of Combined Fixed Charges and Preferred Stock Dividends
	by Earnings Before Fixed Charges for each of the five years
	within the period ended December 31, 2001.                          
|        | 21.1  |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                  
|        | 23.1  |  |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                 
|        | 23.2  |  |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                 
|        | 99.1  |  |  | Expanded Litigation Disclosure