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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------
                                   FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                              -------------------
                           RJR NABISCO HOLDINGS CORP.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                     <C>                  <C>
       DELAWARE               1-10215                13-3490602
   (State or other       (Commission file         (I.R.S. Employer
   jurisdiction of            number)           Identification No.)
   incorporation or
    organization)
</TABLE>
 
                               RJR NABISCO, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                     <C>                  <C>
       DELAWARE               1-6388                 56-0950247
   (State or other       (Commission file         (I.R.S. Employer
   jurisdiction of            number)           Identification No.)
   incorporation or
    organization)
</TABLE>
 
                          1301 AVENUE OF THE AMERICAS
                            NEW YORK, NEW YORK 10019
                                 (212) 258-5600
    (Address, including zip code, and telephone number, including area code,
    of the principal executive offices of RJR Nabisco Holdings Corp. and RJR
                                 Nabisco, Inc.)
                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
                                                         NAME OF EACH
                                                         EXCHANGE ON
                                                            WHICH
                  TITLE OF EACH CLASS                     REGISTERED
-------------------------------------------------------  ------------
<S>                                                      <C>
RJR NABISCO HOLDINGS CORP.
 Common Stock, par value $.01 per share                         New  York
 Series B Depositary Shares                                     New  York
RJR NABISCO, INC.
 8.30% Senior Notes due April 15, 1999                          New  York
 8% Notes due January 15, 2000                                  New  York
 8% Notes due 2001                                              New  York
 8 5/8% Notes due 2002                                          New  York
 7 5/8% Notes due September 15, 2003                            New  York
 8 1/4% Notes due 2004                                          New  York
 8.75% Senior Notes due April 15, 2004                          New  York
 8 3/4% Notes due 2005                                          New  York
 8 1/2% Notes due 2007                                          New  York
 8 3/4% Notes due 2007                                          New  York
 9 1/4% Debentures due 2013                                     New  York
 
<CAPTION>
 
                                                         NAME OF EACH
                                                         EXCHANGE ON
                                                            WHICH
                  TITLE OF EACH CLASS                     REGISTERED
-------------------------------------------------------  ------------
<S>                                                      <C>
SUBSIDIARIES OF THE REGISTRANTS
RJR NABISCO HOLDINGS CAPITAL TRUST I
  10% Trust Originated Preferred Securities                     New  York
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                                      None
 
    INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ___
 
    INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANTS' KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ X ]
 
    THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF RJR
NABISCO HOLDINGS CORP. ON FEBRUARY 28, 1998 WAS APPROXIMATELY $11.2 BILLION.
CERTAIN DIRECTORS OF RJR NABISCO HOLDINGS CORP. ARE CONSIDERED AFFILIATES FOR
PURPOSES OF THIS CALCULATION BUT SHOULD NOT NECESSARILY BE DEEMED AFFILIATES FOR
ANY OTHER PURPOSE. NONE OF THE VOTING STOCK OF RJR NABISCO, INC. IS HELD BY ANY
NON-AFFILIATE.
 
    INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS'
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: FEBRUARY 28, 1998:
 
RJR NABISCO HOLDINGS CORP.: 324,752,330 SHARES OF COMMON STOCK, PAR VALUE, $.01
                                   PER SHARE
  RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER
                                     SHARE
                              -------------------
 
RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
                              -------------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE DEFINITIVE PROXY STATEMENT OF RJR NABISCO HOLDINGS CORP. TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A OF
THE SECURITIES EXCHANGE ACT OF 1934 ON OR PRIOR TO MARCH 30, 1998 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
 
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<PAGE>
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                                                   PAGE
                                                                                                                   -----
<S>           <C>                                                                                               <C>
PART I
Item 1.       Business........................................................................................           1
                  (a) General Development of Business.........................................................           1
                  (b) Financial Information about Industry Segments...........................................           2
                  (c) Narrative Description of Business.......................................................           2
                        Tobacco...............................................................................           2
                        Food..................................................................................          13
                        Other Matters.........................................................................          17
                  (d) Financial Information about Foreign and Domestic Operations
                        and Export Sales......................................................................          17
Item 2.       Properties......................................................................................          17
Item 3.       Legal Proceedings...............................................................................          17
Item 4.       Submission of Matters to a Vote of Security Holders.............................................          18
              Executive Officers of the Registrants...........................................................          19
 
PART II
Item 5.       Market for Registrants' Common Equity and Related Stockholder Matters...........................          21
Item 6.       Selected Financial Data.........................................................................          22
Item 7.       Management's Discussion and Analysis of Financial Condition and
                Results of Operations.........................................................................          23
Item 7a.      Quantitative and Qualitative Disclosures about Market Risk......................................          36
Item 8.       Financial Statements and Supplementary Data.....................................................          36
Item 9.       Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure..........................................................................          36
 
PART III
Item 10.      Directors and Executive Officers of the Registrants.............................................          37
Item 11.      Executive Compensation..........................................................................          37
Item 12.      Security Ownership of Certain Beneficial Owners and Management..................................          37
Item 13.      Certain Relationships and Related Transactions..................................................          37
 
PART IV
Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................          38
</TABLE>
<PAGE>
                                     PART I
 
ITEM 1. BUSINESS
 
    (A) GENERAL DEVELOPMENT OF BUSINESS
 
    The operating subsidiaries of RJR Nabisco Holdings Corp. ("RJRN Holdings")
and its wholly-owned subsidiary, RJR Nabisco, Inc. ("RJRN") (collectively the
"Registrants"), comprise one of the largest tobacco and food companies in the
world. In the United States, the tobacco business is conducted by R.  J.
Reynolds Tobacco Company ("RJRT"), a wholly-owned subsidiary of RJRN and the
second largest manufacturer of cigarettes, and the packaged food business is
conducted under Nabisco Holdings Corp. ("Nabisco Holdings") by its wholly-owned
subsidiary, Nabisco, Inc. ("Nabisco"), the largest manufacturer and marketer of
cookies and crackers. RJRN owns 100% of the outstanding Class B Common Stock of
Nabisco Holdings, which represents approximately 80.7% of the economic interest
in Nabisco Holdings and approximately 97.7% of the total voting power of Nabisco
Holdings' outstanding common stock.
 
    Outside the United States, tobacco operations are conducted by R.J. Reynolds
International ("Reynolds International"), and food operations are conducted by
Nabisco International, Inc. ("Nabisco International") and Nabisco Ltd (formerly
Nabisco Brands Ltd). RJRT's and Reynolds International's tobacco products are
sold around the world under a variety of brand names. Nabisco's food products
are sold in the United States, Canada, Latin America, certain European countries
and certain other international markets. No customer of RJRN's subsidiaries in
the aggregate accounted for 10% or more of RJRN's consolidated 1997 revenues.
For financial information with respect to RJRN's industry segments, lines of
business and operations in various geographic locations, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and note 15 to the consolidated financial statements, and the
related notes thereto, of RJRN Holdings and RJRN as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31, 1997
(the "Consolidated Financial Statements").
 
    RJRN Holdings was organized as a Delaware corporation in 1988 at the
direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), a Delaware limited
partnership, to effect the acquisition of RJRN, which was completed on April 28,
1989. As a result of this acquisition, RJRN became an indirect, wholly-owned
subsidiary of RJRN Holdings. After a series of holding company mergers completed
on December 17, 1992, RJRN became a direct, wholly-owned subsidiary of RJRN
Holdings. The business of RJRN Holdings is conducted through RJRN. KKR no longer
holds an interest in RJRN Holdings.
 
    RJRN was incorporated as a holding company in 1970 holding the stock of RJRT
and other companies that have since been sold. It acquired Nabisco Holdings
Corp. (formerly Nabisco Brands, Inc.) in 1985.
 
    In recent years subsidiaries of RJRN Holdings and RJRN have completed a
number of acquisitions and have divested certain businesses. In 1997 these
acquisitions included the stock of Cornnuts, Inc., a manufacturer of crispy corn
kernel snacks.
 
    In 1996, these acquisitions included the Mayco and Capri biscuit businesses
and the Vizzolini pasta business in Argentina, the Pilar biscuit business in
Brazil and the Fontanda biscuit business in Spain as well as the biscuit,
confectionery and snack food assets of a Taiwan-based manufacturer and a 50%
interest plus management control of Azerbaijan Tobacco Company.
 
    RJRN will continue to assess its businesses to evaluate their consistency
with strategic objectives. Although RJRN may acquire and/or divest additional
businesses in the future, no other decisions have been made with respect to any
such acquisitions or divestitures. RJRN Holdings' and RJRN's credit agreements,
each dated as of April 28, 1995, as amended, prohibit the sale of all or any
substantial portion of certain assets of RJRN Holdings or its subsidiaries.
 
                                       1
<PAGE>
    (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
    During 1997, 1996 and 1995, RJRN's industry segments were tobacco and food.
 
    For information relating to industry segments for the years ended December
31, 1997, 1996 and 1995, see note 15 to the Consolidated Financial Statements.
 
    (C) NARRATIVE DESCRIPTION OF BUSINESS
 
                                    TOBACCO
 
    The tobacco line of business is conducted by RJRT and Reynolds
International, which manufacture, distribute and sell cigarettes. Cigarettes are
manufactured in the United States by RJRT and in over 40 foreign countries and
territories by Reynolds International and subsidiaries, joint ventures or
licensees of RJRT and are sold throughout the United States and in more than 170
markets around the world. In 1997, approximately 59% of total tobacco segment
net sales (after deducting excise taxes) and approximately 66% of total tobacco
segment operating income on a reported basis (before amortization of trademarks
and goodwill and restructuring expenses) were attributable to domestic tobacco
operations.
 
DOMESTIC TOBACCO OPERATIONS
 
    The domestic tobacco business is conducted by RJRT which is the second
largest cigarette manufacturer in the United States. RJRT's largest selling
cigarette brands in the United States include DORAL, WINSTON, CAMEL, SALEM, and
VANTAGE. RJRT's other cigarette brands, including MONARCH, MORE, NOW, CENTURY,
STERLING and MAGNA, are marketed to meet a variety of smoker preferences. All
RJRT brands are marketed in a variety of styles. Based on data collected for
RJRT by an independent market research firm, RJRT had an overall share of retail
consumer cigarette sales during 1997 of 25.4%, a decrease of approximately
one-half a share point from 1996. During 1997, RJRT and the largest domestic
cigarette manufacturer, Philip Morris Incorporated, together sold, on a shipment
basis, approximately 73% of all cigarettes sold in the United States.
 
    In May 1996, RJRT began test marketing in Chattanooga, Tennessee, ECLIPSE, a
cigarette that primarily heats rather than burns tobacco and thereby
substantially reduces second-hand smoke. Test markets were expanded in 1997 to
include Lincoln, Nebraska and Atlanta, Georgia. ECLIPSE is also available to
adult smokers by mail in 20 states. RJRT continues to assess the test results.
 
    A primary long-term objective of RJRT is to increase earnings and cash flow
through selective marketing investments in its key brands and continual
improvements in its cost structure and operating efficiency. Marketing programs
for full-price brands are designed to build brand awareness and add value to the
brands by building brand loyalty among current adult smokers and attracting
adult smokers of competing brands. In 1997, these efforts focused on
accelerating share of market gains of the CAMEL brand family and reestablishing
growth of the WINSTON brand through a complete marketplace repositioning
program. In the first half of the year, new CAMEL Menthol line extensions were
introduced nationally and distribution of the RED KAMEL styles was expanded to
pack-oriented retail outlets throughout the country. During the second half, the
company began the national introduction of WINSTON's new "No Bull" marketing
campaign which is designed to establish WINSTON as a brand with a "straight-up"
attitude leveraged by a unique product distinction: a 100-percent-tobacco blend
with no additives. RJRT believes it is essential to compete in all segments of
the cigarette market, and accordingly it offers a range of lower-priced brands
including DORAL, MONARCH and BEST VALUE, intended to appeal to more
cost-conscious adult smokers. For a discussion on competition in the tobacco
business, see "Business--Tobacco--Competition" in this Item 1.
 
    RJRT's domestic manufacturing facilities, consisting principally of
factories and leaf storage facilities, are located in or near Winston-Salem,
North Carolina and are owned by RJRT. Cigarette production is conducted at the
Tobaccoville cigarette manufacturing plant (approximately two million square
feet) and the Whitaker Park cigarette manufacturing complex (approximately one
and one-half million square feet).
 
                                       2
<PAGE>
RJRT believes that its cigarette manufacturing facilities are among the most
technologically advanced in the United States. RJRT also has significant
research and development facilities in Winston-Salem, North Carolina.
 
    RJRT's cigarettes are sold in the United States primarily to chain stores,
other large retail outlets and through distributors to other retail and
wholesale outlets. Except for McLane Company, Inc., which represented
approximately 17% of RJRT's sales, no RJRT customers accounted for more than 10%
of RJRT's sales for 1997. RJRT distributes its cigarettes primarily to public
warehouses located throughout the United States that serve as local distribution
centers for RJRT's customers.
 
    RJRT's products are sold to adult smokers primarily through retail outlets.
RJRT uses print media, billboards, point-of-sale displays and other methods of
advertising. Since 1971, television and radio advertising of cigarettes has been
prohibited in the United States.
 
INTERNATIONAL TOBACCO OPERATIONS
 
    Reynolds International operates in over 170 markets around the world.
Although overall foreign cigarette sales (excluding China, in which production
data indicates an approximate 2% per annum growth rate) have increased at a rate
of only 1% per annum in recent years, Reynolds International believes that the
American-blend segment, in which Reynolds International primarily competes, is
growing significantly faster. Although Reynolds International is the second
largest of two international cigarette producers that have significant positions
in the American-blend segment, its share of sales in this segment is
approximately one-fourth of the share of Philip Morris International Inc., the
largest American-blend producer.
 
    Reynolds International has strong brand presence in Western Europe and is
well established in its other key markets in the Middle East/Africa, Asia, the
CIS and Baltics region and Canada. Reynolds International is aggressively
pursuing development opportunities throughout the world.
 
    Reynolds International markets nearly 100 brands of which WINSTON, CAMEL and
SALEM, all American-blend cigarettes, are its international leaders. WINSTON,
Reynolds International's largest selling international brand, has a significant
presence in Puerto Rico and has particular strength in the Western Europe and
Middle East/Africa regions. CAMEL is sold in approximately 140 markets worldwide
and is Reynolds International's second largest selling international brand.
SALEM is the world's largest selling menthol cigarette and is particularly
strong in Far East markets. Reynolds International also markets a number of
local brands in various foreign markets. None of Reynolds International's
customers accounted for more than 10% of its sales in 1997.
 
    Approximately 18% of Reynolds International's 1997 volume was U.S.-made
product, with the remainder manufactured outside the U.S. Reynolds International
brands are manufactured in owned or joint-venture facilities in 22 locations
outside the United States, and through licensing agreements in about 20 other
countries. Reynolds International owned or joint-venture manufacturing locations
include Azerbaijan, Canada, the Canary Islands, China, the Czech Republic,
Finland, Germany, Hong Kong, Hungary, Indonesia, Kazakhstan, Malaysia, Poland,
Portugal, Romania, Russia, Switzerland, Tanzania, Turkey, Ukraine and Vietnam.
 
    Certain of Reynolds International's foreign operations are subject to local
regulations that set import quotas, restrict financing flexibility, affect
repatriation of earnings or assets and/or limit advertising. In recent years,
certain trade barriers for cigarettes, particularly in Asia and Eastern Europe,
have been liberalized. This may provide opportunities for all international
cigarette manufacturers, including Reynolds International, to expand operations
in such markets; however, there can be no assurance that the liberalizing trends
will be maintained or extended or that Reynolds International will be successful
in pursuing such opportunities.
 
RAW MATERIALS
 
    In its domestic production of cigarettes, RJRT primarily uses domestic
burley and flue cured leaf tobaccos purchased at domestic auction. RJRT also
purchases oriental tobaccos, grown primarily in Turkey
 
                                       3
<PAGE>
and Greece, and certain other non-domestic tobaccos. Reynolds International uses
a variety of tobacco leaf from both United States and international sources.
RJRT and Reynolds International believe there is a sufficient supply of tobacco
in the worldwide tobacco market to satisfy their current production
requirements. Reynolds International is actively involved in tobacco cultivation
activities with fully owned agronomy operations in Vietnam and Turkey and a
joint venture in China.
 
    Tobacco leaf is an agricultural commodity subject in the United States to
government production controls and price supports that can affect market prices
substantially. The tobacco leaf price support program is subject to
Congressional review and may be changed at any time. In December 1994, Congress
enacted the Uruguay Round Agreements Act to replace a domestic content
requirement with a tariff rate quota system that keys tariffs to import volumes.
The tariff rate quotas have been established by the United States with overseas
tobacco producers and became effective on September 13, 1995.
 
COMPETITION
 
    Generally, the markets in which RJRT and Reynolds International conduct
their businesses are highly competitive, with a number of large participants.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. For most of RJRT's and Reynolds International's brands,
substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new brand. Anti-smoking
groups have undertaken activities designed to inhibit cigarette sales, the form
and content of cigarette advertising and the testing and introduction of new
cigarette products.
 
    Because television and radio advertising for cigarettes is prohibited in the
United States and brand loyalty has tended to be higher in the cigarette
industry than in other consumer product industries, established cigarette brands
in the United States have a competitive advantage. RJRT has repositioned or
introduced brands designed to appeal to adult smokers of the largest selling
cigarette brand in the United States, but there can be no assurance that such
efforts will be successful.
 
    In addition, increased selling prices and taxes on cigarettes have resulted
in additional price sensitivity of cigarettes at the consumer level and in a
proliferation of discounted brands in the savings segment of the market.
Generally, sales of cigarettes in the savings segment are not as profitable as
those in other segments.
 
LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY
 
    The tobacco business is subject to a wide range of laws and regulations
regarding the advertising, sale, taxation and use of tobacco products imposed by
local, state, federal and foreign governments. In addition, at present, the U.S.
Congress is considering several bills that could change the regulatory framework
within which that business is conducted and make it significantly more
restrictive. Any such legislation is likely to also result in material new costs
and reduced sales for the cigarette industry but could also limit some of the
litigation risks to which it is now subject. For a discussion of the regulatory
and legislative environment applicable to the cigarette business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tobacco--Governmental Activity" and note 10 to the consolidated
financial statements.
 
LITIGATION AFFECTING THE CIGARETTE INDUSTRY
 
    OVERVIEW.  Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees,
including those claiming that lung cancer and other diseases as well as
addiction have resulted from the use of or exposure to RJRT's tobacco products.
During 1997, 492 new actions were served against RJRT and/or its affiliates or
indemnitees and 212 such actions were dismissed or otherwise resolved in favor
of RJRT and/or its affiliates or indemnitees without trial. There have been
noteworthy increases in the number of these cases pending. On December 31, 1997,
there were 516 active
 
                                       4
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cases pending, as compared with 234 on December 31, 1996, 132 on December 31,
1995 and 54 on December 31, 1994. As of March 3, 1998, 540 active cases were
pending against RJRT and/or its affiliates or indemnitees, 534 in the United
States, two in Puerto Rico, one in the Marshall Islands, two in Canada and one
in Nigeria.
 
    The United States cases are in 46 states and are distributed as follows: 198
in Florida, 101 in New York, 21 in Louisiana, 17 in each of Texas and
Pennsylvania, 14 in California, 12 in each of Alabama and Ohio, 11 in Tennessee,
nine in each of the District of Columbia, Illinois and Mississippi, seven in
each of Indiana, New Jersey and West Virginia, six in Georgia, five in each of
Maryland and Massachusetts, four in each of Kansas, Michigan, Minnesota and
South Dakota, three in each of Arizona, Arkansas, Colorado, Hawaii, Iowa,
Missouri, Nevada, Oklahoma and Rhode Island, two in each of Connecticut,
Montana, New Hampshire, New Mexico, Oregon, South Carolina, Utah, Washington and
Wisconsin, and one each in Alaska, Idaho, Kentucky, Maine, North Carolina and
Vermont. Of the 534 active cases in the United States, 426 are in state court
and 108 are in federal court. Most of these cases were brought by individual
plaintiffs, but an increasing number, discussed below, seek recovery on behalf
of states or large classes of claimants.
 
    THEORIES OF RECOVERY.  The plaintiffs in these actions seek recovery on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring
and common law public nuisance. Punitive damages, often in amounts ranging into
the hundreds of millions or even billions of dollars, are specifically pleaded
in a number of cases in addition to compensatory and other damages. Eight of the
534 active cases in the United States involve alleged non-smokers claiming
injuries purportedly resulting from exposure to environmental tobacco smoke.
Forty-seven cases purport to be class actions on behalf of thousands of
individuals. Purported classes include individuals claiming to be addicted to
cigarettes, individuals and their estates claiming illness and death from
cigarette smoking, and Blue Cross/Blue Shield subscribers seeking reimbursement
for premiums paid. One hundred two of the active cases seek, INTER ALIA,
recovery of the cost of Medicaid payments or other health-related costs paid for
treatment of individuals suffering from diseases or conditions allegedly related
to tobacco use. Four, brought by entities administering asbestos liability, seek
contribution for settlement costs.
 
    DEFENSES.  The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act of some or all such claims arising after 1969; the lack of any defect in the
product; assumption of the risk; contributory or comparative fault; lack of
proximate cause; and statutes of limitations or repose; and, in the attorney
general cases (discussed below), additional statutory, equitable, constitutional
and other defenses. RJRN and RJRN Holdings have asserted additional defenses,
including jurisdictional defenses, in many of these cases in which they are
named.
 
    Juries have found for plaintiffs in three smoking and health cases in which
RJRT was not a defendant, but in one such case, no damages were awarded and the
judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another
such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on
appeal and the case was subsequently dismissed. In the third such case, on
August 9, 1996, a Florida jury awarded damages of $750,000 to an individual
plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking
to reverse the judgment on appeal. On May 5, 1997, in an individual case filed
against RJRT, brought by the same attorney who represented plaintiffs in the
CARTER case, a Florida state court jury found no RJRT liability. On October 31,
1997, in still another case (KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY) brought
by the same attorney, another state court jury found no RJRT liability. On March
19, 1998, an Indiana state court found for RJRT, RJRN Holdings and other
defendants in an individual case, DUNN V. RJR NABISCO HOLDINGS CORP., in which
plaintiffs sought damages for the alleged harm caused to a non-smoker by
environmental tobacco smoke. In addition, during 1997 and early 1998, RJRT and
other tobacco industry defendants have settled five lawsuits. See "Interim
Agreements" below.
 
                                       5
<PAGE>
    CERTAIN CLASS ACTION SUITS.  In May 1996, in an early class action case,
CASTANO V. AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals
overturned the certification of a purported nationwide class of persons whose
claims related to alleged addiction to tobacco. The Court ordered the case
remanded to the district court for decertification of the class on the grounds
that a class consisting of all "addicted" smokers failed to meet the standards
and requirements of Federal Rule 23 governing class actions. The class has been
decertified and the parties have agreed to move for dismissal of the remaining
individual case with a right to replead after November 15, 1998. Since this
ruling by the Fifth Circuit, most purported class action suits have sought
certification of statewide rather than nationwide classes.
 
    Putative class action suits based on claims similar to those asserted in
CASTANO have been brought in state and, in a few instances, federal courts in
Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, South Dakota, Tennessee, Texas, Utah, West Virginia and Wisconsin.
A putative class action filed in Tennessee seeks reimbursement of Blue
Cross/Blue Shield premiums paid by subscribers throughout the United States.
Suits are also expected to be filed in additional jurisdictions and there are
also putative class action suits pending in Canada, Puerto Rico and Nigeria.
Each such suit asserts claims on behalf of residents of a particular
jurisdiction who claim to be addicted, injured, or at greater risk of injury by
the use of tobacco, or are the legal survivors of such persons.
 
    In the class action suit pending in Florida, ENGLE V. R.J. REYNOLDS TOBACCO
COMPANY, a class consisting of Florida residents or their survivors who claim to
have diseases or medical conditions caused by their "addiction" to cigarettes
has been certified. The case was scheduled for trial in February 1998 but was
removed from the court calendar and has not yet been rescheduled. A class was
certified in another purported class action suit pending in Louisiana state
court, SCOTT V. AMERICAN TOBACCO COMPANY, on April 11, 1997. Defendants are
seeking reconsideration of the certification. Class certification was granted in
two cases pending in New York state courts, HOSKINS V. R.J. REYNOLDS TOBACCO
COMPANY and GEIGER V. AMERICAN TOBACCO COMPANY (in which certification was
conditional). The parties have briefed and argued appeals brought by defendants
in both cases. On January 28, 1998, class certification was granted by a
Maryland state court in RICHARDSON V. PHILIP MORRIS. Class certification was
denied, however, on August 18, 1997, by a District of Columbia court in the case
of REED V. PHILIP MORRIS. In October 1997, class certification was also denied
in ARCH V. AMERICAN TOBACCO COMPANY (renamed BARNES V. AMERICAN TOBACCO
COMPANY), which was pending in the United States District Court for the Eastern
District of Pennsylvania. That court had initially certified a medical
monitoring class based on the plaintiffs' amended complaint (having refused to
certify a class based on the initial complaint), but on October 17, 1997, the
judge reversed the certification and also dismissed the claims of each of the
class representatives. Plaintiffs are appealing this ruling and briefing is
scheduled to continue through April 23, 1998. In addition, in another purported
class action brought in federal court in Puerto Rico, RUIZ V. AMERICAN TOBACCO
COMPANY, the court on March 17, 1998, denied plaintiffs motion for class
certification. Another class action suit, BROIN V. PHILIP MORRIS, was settled by
an agreement dated October 9, 1997 and approved by the Florida state court on
February 3, 1998. See "Interim Agreements" below.
 
    THE ATTORNEY GENERAL AND RELATED CASES.  In June 1994, the Mississippi
attorney general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, against
various industry members including RJRT. This case was brought on behalf of the
state to recover state funds paid for healthcare and medical and other
assistance to state citizens suffering from diseases and conditions allegedly
related to tobacco use. This suit, which was brought in Chancery (non-jury)
Court, Jackson County, Mississippi, also sought an injunction against
"promoting" or "aiding and abetting" the sale of cigarettes to minors. Both
actual and punitive damages were sought in unspecified amounts. The case was
scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at
an agreement in principle settling the claims relating to the subject matter of
the litigation. A comprehensive settlement agreement, based on the agreement in
principle, was signed on October 17, 1997. See "Interim Agreements" below.
 
    Following the filing of the MOORE case, other states, through their
attorneys general and/or other state agencies, sued RJRT and other U.S.
cigarette manufacturers as well as, in some instances, their parent
 
                                       6
<PAGE>
companies, in actions to recover the costs of medical expenses incurred by the
state or its agencies in the treatment of diseases allegedly caused by cigarette
smoking. Some of these cases also seek injunctive relief and treble damages for
state and/or federal antitrust law and RICO violations. Certain of the actions
also seek statutory penalties and other forms of relief under state consumer
protection and antitrust statutes. On March 3, 1998, there were 39 such cases
pending in the following states, commonwealths, or territories: Alaska, Arizona,
California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana,
Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New
Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode
Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia
and Wisconsin. In addition to the Mississippi case mentioned above, tobacco
company defendants have settled two additional attorney general cases; one in
the State of Florida (except for certain equitable claims) and another in the
State of Texas. See "Interim Agreements" below.
 
    One of the attorney general cases is currently on trial in Minnesota. The
trial, which began in January 1998, is expected to take approximately four
months. Plaintiffs in this case are seeking compensatory damages of $1.7 billion
and, in addition, seek disgorgement of profits, restitution, treble damages
under the State's antitrust statute, punitive damages, funding of smoking
cessation and public education programs, civil penalties of $25,000 for each
separate violation of various consumer protection statutes, civil penalties of
$50,000 for each separate violation of Minnesota's antitrust statute, attorneys'
fees and costs, various forms of non-monetary relief and such other relief as
the court deems just and equitable.
 
    During pre-trial discovery and in the course of trial to date, the court in
this case made a number of rulings adverse to the defendants. These rulings,
among other things, limit the defenses available to the defendants and require
production by the defendants of thousands of documents for which privilege had
been asserted. The tobacco companies are defending this case vigorously, but the
court's rulings could have an adverse effect on their ability to present their
defense effectively.
 
    In addition to the 39 pending actions brought by the various attorneys
general, 63 pending actions advancing similar theories have been brought by
private attorneys and/or local officials purportedly on behalf of the citizens
of certain states, counties and/or cities, union health and welfare funds, a
university and four native American tribes. One such union case, NORTHWEST
LABORERS V. PHILIP MORRIS, pending in the State of Washington, was certified as
a class action on December 24, 1997. A taxpayer case pending in Ohio was
dismissed for lack of standing on February 12, 1998 (COYNE V. AMERICAN TOBACCO).
 
    Although RJRT and most other cigarette manufacturers have agreed to the
Memorandum described below, the uncertainty of its enactment into law requires
that they continue to defend these attorney general and related cases vigorously
and, except as described below (see "Interim Agreements") they continue to do so
(as do RJRN and RJRN Holdings in the cases where they are named defendants). In
addition, the tobacco company defendants filed for declaratory judgment in
several of the states in which attorney general cases were threatened.
 
    PROPOSED RESOLUTION.  Following several months of negotiations with state
attorneys general, representatives of the public health community and
plaintiffs' lawyers, on June 20, 1997, a Memorandum of Understanding and
Resolution (the "Memorandum") that sets forth concepts for federal legislation
and a contractual protocol to resolve a variety of litigation and regulatory
issues concerning tobacco was entered into. The Memorandum requires the tobacco
companies to make an initial $10 billion payment and subsequent annual
multi-billion dollar payments expected to aggregate to approximately $368.5
billion over 25 years. Discussions with other manufacturers who were
participants in the negotiations which led to the Memorandum are still in
progress, but RJRT believes that its share of the initial payment will be in the
range of $600 to $700 million and that subsequent payments will be allocated
within the industry based on market share. The proposed legislation would also,
among other things, reduce retail access for tobacco products, eliminate
cigarette vending machines and tobacco product sampling, confer authority on the
FDA to regulate the manufacture of tobacco products (with express limitations on
authority relating to nicotine) and create publicly funded smoking cessation and
education programs. The proposed legislation would grant limited litigation
protection to the tobacco industry, including a bar on class action suits, suits
 
                                       7
<PAGE>
based on addiction and demands for punitive damages for past actions. It would
also cap industry payments in permitted individual lawsuits to an aggregate of
$5 billion per year. The proposal also provides a "look-back" provision which
would penalize manufacturers if youth smoking is not reduced by stated amounts
in certain years after enactment, culminating in a 60% reduction after 10 years.
 
    There can be no assurance that legislation required to implement the
Memorandum will be enacted or that it will be enacted without modification that
is materially adverse to the tobacco industry, particularly in light of the
complex legal and factual issues involved and the need to reconcile the views of
many competing interests. A number of bills have been introduced into Congress
incorporating terms that vary in significant ways from those agreed to in the
Memorandum. It is not certain that proposed legislation, if any, that emerges
from this process will be advantageous to RJRT. If enacted, the legislation
could face challenges on the grounds, among others, that the federal government
lacks the authority to regulate the tobacco industry or limit its liability in
the manner contemplated by the Memorandum. Regardless of the legislative
outcome, the negotiation and signing of the Memorandum could adversely affect
other federal, state and local regulation of the tobacco industry, alter the
climate for pending litigation against RJRN, RJRT and other tobacco industry
defendants and their corporate parents and affect the number of new smoking and
health claims filed against the industry.
 
    The financial effects of this legislation and the related contractual
protocol are difficult to predict. They depend, among other things, on (i) the
amount, timing and tax treatment of the payments actually required of RJRT by
the legislation; (ii) the means used to finance these payments; (iii) the impact
of increased cigarette prices and other aspects of the legislation and the
contractual protocol on domestic cigarette consumption; (iv) the effect of the
legislation and the contractual protocol on the consumption of tobacco products
and on the regulatory and litigation environment outside the United States; (v)
the effect, if any, on public attitudes toward smoking and the tobacco industry;
and (vi) the impact on RJRT's competitive position in the tobacco industry.
 
    Despite these uncertainties, RJRN believes that implementation of the
Memorandum would increase the costs and reduce the consumption of RJRT's tobacco
products in the United States. In particular, the substantial price increases
necessary to fund payments of the magnitude contemplated by the Memorandum could
reduce domestic industry cigarette volumes by up to 45% over 10 years depending
on the assumptions used, which assumptions, by their nature, are speculative.
Such volume reduction would likely have a significant negative effect on the
business of RJRT and the stated financial position of RJRN Holdings, RJRN and
RJRT. Any significant negative effect on the financial position of any of these
entities could ultimately impact the share repurchase and dividend policies of
RJRN Holdings. On the other hand, the proposals contemplated by the Memorandum
offer a measure of relief from certain litigation that could otherwise
materially affect the results of operations or cash flows of RJRN in particular
quarterly or annual periods or its financial condition. In evaluating any
proposed legislation to resolve tobacco issues, RJRN and RJRT will continue to
weigh carefully the potential benefits, principally greater regulatory and
litigation certainty and predictability in annual aggregate contingency risk,
against the resulting monetary, regulatory and other costs.
 
INTERIM AGREEMENTS
 
    Because the Memorandum, unless and until it is enacted into law, will not
resolve any pending litigation scheduled for trial in advance of such enactment,
the parties in each case must decide, on a case-by-case basis, whether to
proceed to trial or seek some other resolution. Thus far, five cases have been
settled, including three attorney general cases.
 
    THE ATTORNEY GENERAL AGREEMENTS.  In furtherance of the proposed resolution
under the Memorandum, tobacco companies have settled attorney general cases in
Mississippi, Florida and Texas as they came to trial. Each settling state has
agreed to a percentage share of the $10 billion initial and scheduled annual
payments agreed to in the Memorandum; 1.7% for Mississippi, 5.5% for Florida and
7.25% for Texas and will also be entitled to attorneys' costs as well as private
counsel fees as set by a panel of arbitrators subject to a $500 million
aggregate annual cap for payment of such fees for all settlements of similiar
litigation.
 
                                       8
<PAGE>
Each agreement also provides that if the U.S. Congress enacts federal
legislation in keeping with the Memorandum, the terms of that legislation would
generally supersede the terms of the state agreement. Defendants would receive
credit for their payments under the state agreements against the obligations
arising under the federal legislation. If, instead, the defendants enter into a
number of separate settlement agreements with other individual states, these
three settling states would be entitled to payment adjustments to assure at
least as favorable a settlement as any other separately settling state.
 
    The first attorney general case scheduled for trial after adoption of the
Memorandum was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was
agreed to on July 2, 1997, and a full settlement agreement was executed on
October 17, 1997. The agreement calls for the defendants to make an aggregate
up-front payment of $170 million to the State of Mississippi. It also provides
for continuing payments commencing December 31, 1998, and annually thereafter,
based, in 1998, on Mississippi's 1.7% share of $4 billion (the anticipated first
annual industry payment under the Memorandum) and escalating in several annual
steps to 1.7% of $8 billion in year eight and thereafter, adjusted upward by no
less than 3% per year and further adjusted upward or downward to reflect
increases or decreases in volume of domestic tobacco product sales. Mississippi
also became entitled to $61.8 million for an anti-smoking pilot program by
operation of the "most favored nation" provision of its agreement as a result of
Florida's subsequent settlement containing pilot program provisions.
 
    The second attorney general case to come to trial, STATE OF FLORIDA V.
AMERICAN TOBACCO COMPANY, was in the jury selection phase in Florida state court
when, on August 25, 1997, the parties announced that they had entered into a
settlement agreement. The agreement called for the tobacco company participants
to make an aggregate up-front payment of $550 million. It also provides for
annual payments beginning in September 1998 of 5.5% of $4 billion and increasing
in several annual steps to 5.5% of $8 billion by 2003 and thereafter (subject to
various adjustments) all consistent with the national annual payment schedule.
The tobacco companies also agreed to fund a $200 million pilot program to
discourage youth smoking. The agreement, like the other state settlements, also
requires the tobacco companies to discontinue all billboard advertisements as
well as all advertisements that appear on vehicles and in certain public areas,
within several months.
 
    Related to the Florida settlement, on November 18, 1997, a law firm that had
represented the State filed a suit against RJRT and others alleging tortious
interference with the plaintiff's contingency fee contract with the State as
well as conspiracy to induce the State to circumvent and negate plaintiff's
rights to recover under that contract. The case is now in discovery.
 
    Finally, the Texas case, STATE OF TEXAS V. AMERICAN TOBACCO COMPANY, was
settled by an agreement dated January 16, 1998 providing for a pilot program
payment of $264 million and an aggregate up-front payment of $725 million. Texas
will be entitled to a 1998 annual payment of $290 million (7.25% of $4 billion)
paid in two installments ($89 million on November 1, 1998 and $201 million on
December 31, 1998) and increasing in several annual steps to $580 million (7.25%
of $8 billion) by 2003 and thereafter (subject to adjustments). RJRT's shares of
the initial payment and pilot program will total approximately $114 million,
paid or to be paid over the course of 1998 in payments of approximately $32
million by February 1, 1998; $12 million by July 1, 1998; $23 million by October
1, 1998; and $47 million by November 1, 1998.
 
    The companies have also agreed to pay a $50 million advance on fees of the
State of Texas's private counsel prior to the arbitration decision awarding such
fees provided that the State of Texas makes an equivalent advance. RJRT's share
of the advance will be approximately $12 million. The payment of this amount,
originally scheduled for late February, has been suspended by stipulation of the
parties until March 24, 1998 as a result of a dispute raised by would-be
interveners about the scope of the settlement. Neither the Mississippi nor
Florida settlement agreement provides for payment of any advance on private
counsel fees. Therefore, under the most favored nation provisions of their
settlement agreements, provided that those states make equivalent advances, the
tobacco companies may be required to make advances to private counsel in those
states. Each tobacco company's share of advances of this type, for all settling
states, would be based on market share.
 
                                       9
<PAGE>
    If federal legislation in keeping with the Memorandum is enacted, the
parties expect that Mississippi, Florida and Texas, because of their
contribution to securing resolution of these matters, may apply to a panel of
arbitrators for additional compensation. The settling defendants have agreed not
to oppose applications of $75 million for Mississippi, $250 million for Florida
and $329.5 million for Texas (as well as, any increase over these amounts
necessary to offset the difference, if any, between the amounts to be paid to
these states during 1998 under the agreements and the amounts allocated to those
states for that period under the federal legislation). Payment of these amounts
would be made over a number of years and would be subject to an aggregate annual
cap of $100 million for all settling states.
 
    Each individual state agreement provides that the related settlement is not
an admission or concession or evidence of any liability or wrongdoing on the
part of any party and was entered into by the settling defendants solely to
avoid the further expense and uncertainty of litigation.
 
    RJRT has made certain payments under these attorney general agreements. Its
portion of the upfront payments, based on market capitalization, was $12.4
million for Mississippi and $37.4 million for Florida. Texas payments, both for
the initial amount and pilot program to discourage youth smoking are to be made
at several points in 1998 as described above. RJRT's portion of the pilot
program payments, based on market share, was $15.3 million for Mississippi and
$49 million for Florida. Additional payments, based on market share, were made
with respect to the costs and expenses of counsel in all three states which
totalled approximately $21 million.
 
    THE BROIN SETTLEMENT.  The plaintiffs' attorneys in a class action case,
BROIN V. PHILIP MORRIS, entered into a settlement agreement with participating
tobacco company defendants on October 9, 1997. This case had been brought in
Florida state court on behalf of all flight attendants of U.S. airlines alleged
to be suffering from diseases or ailments caused by second-hand smoke in
airplane cabins. This agreement requires the participating tobacco companies to
pay $300 million in three annual installments, allocated among the companies by
market share, to fund research on the early detection and cure of diseases
associated with tobacco smoke. It also calls for those companies to pay a total
of $49 million for plaintiffs' counsel's fees and expenses. The agreement bars
class members from bringing aggregate claims or obtaining punitive or exemplary
damages and also bars individual claims to the extent that they are based on
fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO,
suppression, concealment or any other alleged intentional or willful conduct.
The defendants agree that in any individual case brought by a class member, they
will bear the burden of proof regarding general causation that ordinarily would
be born by the plaintiffs. Trial court approval of the BROIN settlement was
granted on February 3, 1998, but this approval has been noticed for appeal. No
payments with respect to either the research fund or attorney's fees will be due
until final resolution of all appeals. RJRT's portion will be approximately $86
million. RJRT has already paid its market share of $3 million due to the BROIN
attorneys in respect of costs and expenses. This amount is subject to recovery
if the settlement is successfully challenged.
 
    THE MANGINI SETTLEMENT.  On September 5, 1997, a settlement agreement was
executed on behalf of the parties to MANGINI V. R.J. REYNOLDS TOBACCO COMPANY, a
case that had been scheduled for trial in San Francisco Superior Court for
December 1997. This case sought injunctive and other relief against RJRT and an
advertising agency with respect to the use of Joe Camel advertising as an unfair
business practice allegedly targeting minors. The agreement requires the
defendants to acknowledge that the lawsuit along with public controversy
surrounding Joe Camel, was a "substantial factor" in the phase-out of Joe Camel
advertising. It also requires prompt removal of Joe Camel billboards and
cessation of the use of Joe Camel in advertisements and promotional items in
California. The defendants agreed to authorize release to the public of
non-privileged and non-work product documents referring to persons under the age
of 18 and/or the Joe Camel advertising campaign that were produced during
discovery in the case. Pursuant to the agreement, RJRT has paid $10 million to
the City and County of San Francisco to cover attorneys' fees ($1 million) and
for distribution to the various state jurisdictions participating in the case
for anti-youth smoking advertisements ($9 million).
 
                                       10
<PAGE>
    The MANGINI settlement provides that plaintiffs' counsel will be paid in
accordance with the counsel fee arrangements ultimately arrived at for the
national legislative settlement. If there is no such arrangement, or the
arrangement does not allow plaintiffs' counsel to participate, fees will be
determined by an arbitration panel. Finally, the agreement preserves certain
claims brought by various California public entities, including claims that the
Joe Camel campaign violated certain sections of the California Business and
Professions Code.
 
    RJRT has participated and may continue to participate in discussions with
plaintiffs in certain healthcare cost-recovery and class actions scheduled to be
tried in the coming months in order to postpone or settle those actions in light
of the pending legislative initiative. There can be no assurance that any such
postponement or settlement can be achieved, or, if achieved, as to the terms
ultimately agreed to. In the absence of postponement or settlement, these
actions would be tried as scheduled and any final judgment reached prior to
enactment of the contemplated legislation might not be affected by the passage
of that legislation.
 
    RECENT AND SCHEDULED TRIALS.  As of March 3, 1998, there were 14 cases
scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco.
Two trials are currently in process, the attorney general case in Minnesota
discussed above and an individual environmental tobacco smoke case in Indiana
state court (DUNN V. RJR NABISCO HOLDINGS). The next attorney general case
scheduled for trial is Washington's which has been scheduled for September 1998.
The State of Florida's remaining equitable claims are also scheduled for trial
in September 1998. The State of Arizona's case is scheduled for October and that
of Oklahoma for November. Cases against other tobacco company defendants are
also scheduled for trial in 1998 and thereafter. Although trial schedules are
subject to change and many cases are dismissed before trial, it is likely that
there will be an increased number of tobacco cases, involving claims for
possibly billions of dollars, against RJRT and RJRN coming to trial over the
next year as compared to prior years when trials in these cases were infrequent.
 
    OTHER DEVELOPMENTS.  On May 28, 1997, a suit was filed against RJRT in the
U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR
V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal
Pay Act on behalf of female RJRT employees and applicants for employment in the
"southeast sales region," seeking equitable relief, back pay and lost benefits,
as well as punitive damages, based on allegations that plaintiffs had been
denied employment, desirable job assignments, training, promotion and equal pay.
No motion seeking class certification has yet been filed by plaintiffs. RJRT has
filed an answer in the case and intends to defend it vigorously.
 
    On September 15, 1997, a suit, RAYMARK INDUSTRIES V. BROWN & WILLIAMSON, was
filed against RJRT and RJRN and various other tobacco industry entities for
contribution/damages related to asbestos litigation. The suit was filed in the
United States District Court for the Northern District of Georgia. Raymark
alleged that it expended $400 million on the defense and payment of asbestos
personal injury claims in trial, verdict, appeal and settlement. Raymark alleged
that cigarette smoke inhaled by the asbestos claimants caused the cancers
complained of in the litigation in which it has been involved. Raymark seeks to
recover contribution and/or indemnity from the defendants for the share of
payments made by Raymark that were allegedly caused by tortious and otherwise
actionable conduct of defendants. Raymark's claims included counts for:
negligence, strict liability, fraud and misrepresentation, conspiracy and
damages. Three other cases making similar allegations were filed in December
1997, one in California and two in New York. RJRT and the other tobacco industry
defendants in this action dispute the claims advanced in these cases and intend
to defend all such actions vigorously.
 
    A purported class was granted conditional class certification in a case,
MOSELY V. PHILIP MORRIS COMPANIES, brought in Alabama state court against RJRT,
RJRN and others, alleging violations of Alabama antitrust law. The complaint in
this case alleges that cigarette companies and others have conspired to raise
prices. The class consists of all Alabama residents who purchased certain
defendants' cigarettes for smoking purposes since March 1997. The plaintiffs
seek statutory damages as well as actual damages of up to $500 per class member.
The defendants have removed the case to federal court. On
 
                                       11
<PAGE>
October 31, 1997, the federal court vacated the conditional class certification
pending a hearing on class certification in federal court and on February 6,
1998, the federal court denied plaintiff's motion to remand the case to state
court.
 
    RJRT understands that a grand jury investigation is being conducted in the
Eastern District of New York examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research -- USA,
Inc., of which RJRT is a sponsor. RJRT has responded, and will continue to
respond, to document subpoenas issued by this grand jury. In addition, subpoenas
dated May 24, 1996, November 8, 1996, December 5, 1996 and January 21, 1998 were
served on RJRT by a grand jury sitting in the District of Columbia. RJRT has
responded or is in the process of responding to those subpoenas. RJRN and RJRT
are unable to predict the outcome of these investigations.
 
    RJRT, R.J. Reynolds International ("Reynolds International") and Northern
Brands International, another subsidiary of RJRN, each received document
subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern
District of New York. RJRT understands that the grand jury is investigating
possible smuggling activities. RJRT, Reynolds International and Northern Brands
International are responding to these subpoenas but are unable to predict the
outcome of the grand jury's investigation.
 
    For a further discussion of litigation affecting the tobacco business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tobacco--Governmental Activity."
 
    Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, including the Memorandum referred to above.
These developments may negatively affect the outcomes of tobacco-related legal
actions and encourage the commencement of additional similar litigation.
 
    Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.
 
    RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
 
    For more detailed information about the class action and attorneys general
suits pending against RJRT and its affiliates and indemnitees, see exhibit 99 to
this Form 10-K, a copy of which will be provided free of charge to persons
requesting it in writing and addressed to Worldwide Communications, RJR
 
                                       12
<PAGE>
Nabisco Holdings Corp., 1301 Avenue of the Americas, New York, NY 10019 or by
phone to 800-RJR-NAB3.
 
                            ------------------------
 
                                      FOOD
 
    The food line of business is conducted by operating subsidiaries of Nabisco
Holdings. RJRN owns 100% of the outstanding Class B Common Stock of Nabisco
Holdings, which represents approximately 80.7% of the economic interest in
Nabisco Holdings and approximately 97.7% of the total voting power of Nabisco
Holdings' outstanding common stock. Nabisco's businesses in the United States
are comprised of Nabisco Biscuit and the U.S. Foods Group (collectively, the
"Domestic Food Group"). The U.S. Foods Group is comprised of the Sales &
Integrated Logistics Group and Specialty Products, LifeSavers, Planters,
Tablespreads and Food Service. Nabisco's businesses outside the United States
are conducted by Nabisco Ltd and Nabisco International, Inc. ("Nabisco
International" and together with Nabisco Ltd, the "International Food Group").
 
    Food products are sold under trademarks owned or licensed by Nabisco and
brand recognition is considered essential to their successful marketing. None of
Nabisco's customers accounted for more than 10% of sales for 1997.
 
DOMESTIC FOOD GROUP OPERATIONS
 
    NABISCO BISCUIT.  Nabisco Biscuit is the largest manufacturer and marketer
in the United States cookie and cracker industry with eight of the ten top
selling brands, each of which had annual net sales of over $150 million in 1997.
Overall, in 1997, Nabisco Biscuit had a 40% share of the domestic cookie
category and a 54% share of the domestic cracker category (in the aggregate more
than two times the share of its closest competitor) compared with 41% and 56%
respectively in 1996. Leading Nabisco Biscuit cookie brands include OREO, CHIPS
AHOY!, SNACKWELL's and NEWTONS. Leading Nabisco Biscuit cracker brands include
RITZ, PREMIUM, NABISCO HONEY MAID GRAHAMS, TRISCUIT, AIR CRISPS and WHEAT THINS.
 
    OREO and CHIPS AHOY! are the two largest selling cookies in the United
States. OREO, the leading sandwich cookie, is Nabisco Biscuit's largest selling
cookie brand. Line extensions such as OREO DOUBLE STUF, FUDGE COVERED OREO and
Reduced Fat OREO continue to increase the brand's appeal to targeted consumer
groups. CHIPS AHOY! is the leader in the chocolate chip cookie segment with line
extensions such as CHUNKY CHIPS AHOY! and CHEWY CHIPS AHOY! broadening its
appeal and adding incremental sales.
 
    NEWTONS, the oldest Nabisco Biscuit cookie brand, is the fourth leading
cookie brand in the United States. In recent years, fat free and reduced calorie
varieties of NEWTONS, as well as NEWTONS COBBLERS, have been introduced.
 
    Nabisco Biscuit's cracker business is led by RITZ, the largest selling
cracker in the United States, as well as RITZ BITS, RITZ BITS SANDWICHES, and
REDUCED FAT RITZ successful product line extensions which, together with RITZ,
accounted for 12.8% of cracker sales in the United States in 1997 compared with
13.9% in 1996. PREMIUM, the oldest Nabisco cracker brand and the leader in the
saltine cracker segment, is joined by NABISCO HONEY MAID GRAHAMS, TRISCUIT, AIR
CRISPS and WHEAT THINS to comprise, along with RITZ, six of the eight largest
selling cracker brands in the United States. AIR CRISPS, launched nationally in
1996, consists of a line of light, crispy baked snacks in Ritz, Cheese Nips,
Wheat Thins, Pretzel and Potato varieties and has achieved sales approaching
$150 million in 1997.
 
    Nabisco Biscuit's other cookie and cracker brands, which include NILLA,
NUTTER BUTTER, STELLA D'ORO, BETTER CHEDDARS, CHEESE NIPS and BARNUM'S ANIMAL
CRACKERS,
 
                                       13
<PAGE>
compete in consumer niche segments. Many are the first or second largest selling
brands in their respective segments.
 
    In 1994, Nabisco entered the breakfast snack aisle with the launch of
SNACKWELL'S cereal bars and granola bars and the repositioning of TOASTETTES
toaster pastries. The line was expanded in 1996 and 1997 with new cereal bar
varieties. Nabisco introduced SNACKWELL'S fat free toaster pastries in 1996.
 
    Nabisco Biscuit's products are manufactured in 14 Nabisco owned bakeries and
in 17 facilities with which Nabisco has production agreements. These facilities
are located throughout the United States. Nabisco Biscuit also operates a flour
mill in Toledo, Ohio which supplies over 85% of its flour needs.
 
    Nabisco Biscuit's products are sold to major grocery and other large retail
chains through Nabisco Biscuit's direct store delivery system. The system is
supported by a distribution network utilizing 11 major distribution warehouses
and 111 shipping branches where shipments are consolidated for delivery to
approximately 87,000 separate delivery points.
 
U.S. FOODS GROUP
 
    The U.S. Foods Group represents Nabisco's non-biscuit food operations in the
U.S. and is comprised of the following business units:
 
    SALES & INTEGRATED LOGISTICS GROUP.  The Sales & Integrated Logistics Group
handles sales and distribution for Specialty Products, LifeSavers, Planters, and
the Tablespreads companies and distribution for Food Service. It sells to retail
grocery chains and warehouse clubs through independent brokers and a direct
sales force, and to drug stores, mass merchandisers and other non-grocery retail
outlets through a direct sales force. The products are distributed from twenty
distribution centers located throughout the United States.
 
    SPECIALTY PRODUCTS.  Specialty Products manufactures and markets a broad
range of food products, with sauces and condiments, pet snacks, hot cereals,
healthy packaged egg products, dry mix desserts, and gelatins representing the
largest categories. Many of Specialty Products' products are first or second in
their product categories. Well-known brand names include A.1. steak sauces, GREY
POUPON mustards, MILK-BONE pet snacks, CREAM OF WHEAT hot cereals, EGGBEATERS
healthy packaged egg product, ROYAL desserts and KNOX gelatines.
 
    Specialty Products' primary entries in the steak sauce and mustard segments
are A.1. and A.1. SWEET & TANGY steak sauces, the leading line of steak sauces,
and GREY POUPON mustards, which include the leading Dijon mustard.
 
    Specialty Products is the second largest manufacturer of pet snacks in the
United States with MILK-BONE dog biscuits and dog snacks. MILK-BONE products
include MILK-BONE ORIGINAL BISCUITS, FLAVOR SNACKS, SUPER PREMIUM BISCUITS, DOG
TREATS and DOGGIE BAG TREATS.
 
    Specialty Products is a leading manufacturer of hot cereals and participates
in the cook-on-stove and mix-in-bowl segments of the category. CREAM OF WHEAT,
the leading wheat-based hot cereal, and CREAM OF RICE participate in the
cook-on-stove segment. INSTANT CREAM OF WHEAT participates in the mix-in-bowl
segment and includes new varieties such as BANANA NUT BREAD. Quaker Oats Company
is the most significant participant in the hot cereal category.
 
    Specialty Products manufactures products in five plants and sources products
from a number of contract manufacturers.
 
    LIFESAVERS.  LifeSavers manufactures and markets non-chocolate candy and gum
primarily for sale in the United States. LifeSavers' well-known brands include
LIFE SAVERS candy, BREATH SAVERS sugar free mints, CARE*FREE sugarless gum, ICE
BREAKERS gum, BUBBLE YUM bubble gum, GUMMI
 
                                       14
<PAGE>
SAVERS fruit chewy candy, NOW & LATER fruit chewy taffy and FRUIT STRIPE gum.
LIFE SAVERS is the largest selling non-chocolate candy brand in the United
States, with a 1997 share of 5.2%, compared to 5.4% in 1996, of the
non-chocolate candy category. BREATH SAVERS is the largest selling sugar free
breath mint in the United States and BUBBLE YUM is the largest selling bubble
gum in the United States.
 
    In 1997, LifeSavers introduced SNACKWELL'S chocolate candy, its first entry
into the sugared, reduced-fat chocolate candy segment.
 
    LifeSavers manufactures its products in four owned plants and utilizes two
primary contract manufacturers.
 
    PLANTERS.  Planters produces and markets nuts and salty snacks largely for
sale in the United States, primarily under the PLANTERS trademark. Planters, the
only nut brand sold nationally, is the clear leader in the packaged nut
category. Planters' products are seasonally strongest in the fourth quarter.
Planters manufactures its products in four plants. In December 1997, the
CORNNUTS line of crispy corn kernel snacks was acquired and added to Planters.
 
    FOOD SERVICE.  Food Service utilizes a direct national sales force to sell a
variety of specially packaged food products of the Domestic Food Group including
cookies, crackers, confections, hot cereals, sauces and condiments to the food
service and vending machine industry.
 
    TABLESPREADS.  Tablespreads manufactures and markets various margarines and
spreads, and is the second largest margarine producer in the United States,
participating in all segments of the margarine category, with the BLUE BONNET,
FLEISCHMANN'S and MOVE OVER BUTTER brands. Tablespreads strengthened its
position in the margarine category in 1995 with the October purchase of the
Kraft Foods, Inc. margarine business which includes the PARKAY, TOUCH OF BUTTER
and CHIFFON brands. Tablespreads currently manufactures in two facilities and
also sources products from two contract manufacturers.
 
INTERNATIONAL FOOD GROUP OPERATIONS
 
    NABISCO LTD.  Nabisco Ltd conducts Nabisco's Canadian operations through its
Biscuit Division, Grocery Division and Food Service Division. Excluding private
label brands, the Biscuit Division produced all of the top ten cookies and nine
of the top ten crackers in Canada in 1997. Nabisco Ltd's cookie and cracker
brands in Canada include OREO, CHIPS AHOY!, SNACKWELL'S, FUDGEE-O, PEEK FREANS,
DAD'S, DAVID, PREMIUM PLUS, RITZ, AIR CRISPS, TRISCUIT and STONED WHEAT THINS.
These products are manufactured in five bakeries in Canada and are sold through
a direct store delivery system, utilizing 10 sales offices and distribution
centers and a combination of company trucks and common carriers. Nabisco Ltd
also markets a variety of single-serve cookies, crackers and salty snacks under
such brand names as MINI OREO, RITZ BITS SANDWICHES and CRISPERS.
 
    Nabisco Ltd's Grocery Division produces and markets canned fruits and
vegetables, fruit juices and drinks, pet snacks, pasta and other Italian food
products. The Grocery Division is the leading canned fruit producer in Canada
and is the second largest canned vegetable producer in Canada. Canned fruits and
vegetables, fruit juices and drinks are marketed under the DEL MONTE trademark,
pursuant to a license from the Del Monte Corporation, and under the AYLMER
trademark. The Grocery Division also markets MILK-BONE pet snacks and MAGIC
baking powder, each a leading brand in Canada. Nabisco Ltd's Grocery Division
operated seven manufacturing facilities in 1997, five were devoted to canned
products, principally fruits and vegetables, one produced pet snacks and one
produced pasta. The Grocery Division's products are sold directly to retail
chains and are distributed through four regional warehouses. In 1995, Nabisco
Ltd acquired the PRIMO brand for dry pasta, canned tomatoes and other Italian
food products.
 
    Nabisco Ltd's Food Service Division sells a variety of specially packaged
food products including cookies, crackers, canned fruits, vegetables, pasta and
condiments to non-grocery outlets. The Food
 
                                       15
<PAGE>
Service Division has its own sales and marketing organization and sources
product from Nabisco Ltd's other divisions.
 
    NABISCO INTERNATIONAL.  Nabisco International is a leading producer of
biscuits, powdered dessert and drink mixes, baking powder, pasta, juices, milk
products and other grocery items, as well as industrial yeast and bakery
ingredients. Nabisco International also exports a variety of Domestic Food Group
products to markets in Europe, the Middle East, Latin America, Africa and Asia
from the United States. Nabisco International operates one of the largest
multinational packaged food businesses in Latin America, with operations in 17
countries.
 
    Nabisco International manufactures and markets biscuits and crackers under
the NABISCO, TERRABUSI, ARTIACH, MARBU and LUCKY brands, yeast and bakery
ingredients under the FLEISCHMANN'S brand, desserts, drink mixes and baking
powder under the ROYAL brand, processed milk products under the GLORIA brand,
juice under the MAGUARY brand, and canned fruits and vegetables under the DEL
MONTE brand pursuant to a license from the Del Monte Corporation.
 
    Nabisco International's largest market is Brazil, where it operates 21
facilities. In biscuits, Nabisco International is the market leader in Spain,
Argentina, Venezuela, Puerto Rico, Nicaragua, Uruguay and Taiwan, and it holds
strong number two positions in Peru, Ecuador, other Central American markets and
the three major markets in China. Nabisco International is the market leader in
powdered desserts in Spain and most of Latin America, in the yeast category in
Brazil and certain other Latin American countries, in baking powder throughout
South America, and in canned vegetables in Venezuela.
 
    In Asia, Nabisco International continues to expand its Chinese biscuit
business through joint ventures in Beijing and a wholly-owned subsidiary in
Suzhou. The Beijing bakery was trebled in size and a greenfield plant in Suzhou
started up in 1996. In Indonesia, a greenfield plant, 70% owned by Nabisco and
30% owned by its partner and distributor, started up in 1996. Biscuit leadership
in Taiwan was gained in 1996 through the acquisition of the assets of Lucky
Enterprises Corporation Limited, the leading biscuit company in Taiwan.
 
    Nabisco International's grocery products are sold to retail outlets through
its own local country sales forces and independent wholesalers and distributors.
Industrial yeast and bakery products are sold to the bakery trade through
Nabisco International's own local country sales forces and independent
distributors.
 
RAW MATERIALS
 
    Various agricultural commodities constitute the principal raw materials used
by Nabisco in its food businesses. These raw materials are normally purchased
through supplier contracts, while the commodities market is utilized to hedge
prices for a large portion of anticipated future requirements. Prices of
agricultural commodities tend to fluctuate due to various seasonal, climatic and
economic factors which generally also affect Nabisco's competitors. Management
believes that all of the raw materials for Nabisco products are in plentiful
supply and are readily available from a variety of independent suppliers.
 
COMPETITION
 
    Generally, the markets in which the Domestic Food Group and the
International Food Group conduct their business are highly competitive.
Competition consists of large domestic and international companies, local and
regional firms and generic and private label products of food retailers.
Competition is conducted on the basis of brand recognition, brand loyalty,
quality and price. Substantial advertising and promotional expenditures are
required to maintain or improve a brand's market position or to introduce a new
product.
 
    The trademarks under which the Domestic Food Group and the International
Food Group market their products are generally registered in the United States
and other countries in which such products are sold and are generally renewable
indefinitely. Nabisco and certain of its subsidiaries have from time to time
granted various parties exclusive licenses to use one or more of their
trademarks in particular
 
                                       16
<PAGE>
locations. Nabisco does not believe that such licensing arrangements have a
material effect on the conduct of its domestic or international business.
 
                                 OTHER MATTERS
 
ENVIRONMENTAL MATTERS
 
    The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the EPA and other governmental agencies under various
statutes have resulted in, and will likely continue to result in, substantial
expenditures for pollution control, waste treatment, plant modification and
similar activities.
 
    In April 1995, RJRN Holdings was named a potentially responsible party (a
"PRP") with certain third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to a superfund
site at which a former subsidiary of RJRN had operations. Certain subsidiaries
of the Registrants have also been named as PRPs with third parties or may have
indemnification obligations with respect to a number of additional sites.
Liability under CERCLA is joint and several.
 
    RJRN Holdings' subsidiaries have been engaged in a continuing program to
assure compliance with U.S., state and local laws and regulations. Although it
is difficult to identify precisely the portion of capital expenditures or other
costs attributable to compliance with environmental laws and to estimate the
cost of resolving these CERCLA matters, RJRN Holdings and RJRN do not expect
such expenditures or other costs to have a material adverse effect on the
business or financial condition of the Registrants and their subsidiaries taken
as a whole.
 
EMPLOYEES
 
    At December 31, 1997, RJRN Holdings together with its subsidiaries had
approximately 80,400 employees of which approximately 2,400 were part-time
employees. None of RJRT's operations is unionized. Most of the unionized workers
at Nabisco's operations are represented under a national contract with the
Bakery, Confectionery and Tobacco Workers International Union, which was
ratified in August 1996 and which will expire in August 2001. Other unions
represent the employees of a number of Nabisco's operations and several of
Reynolds International's operations are unionized. RJRN believes that its
subsidiaries' relations with these employees and with their unions are good.
 
    (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
     SALES
 
    For information about foreign and domestic operations and export sales for
the years 1995 through 1997, see "Geographic Data" in note 15 to the
Consolidated Financial Statements.
 
ITEM 2. PROPERTIES
 
    For information pertaining to the RJRN Holdings' and RJRN's assets by lines
of business and geographic areas as of December 31, 1997 and 1996, see note 15
to the Consolidated Financial Statements.
 
    For information on properties, see Item 1.
 
ITEM 3. LEGAL PROCEEDINGS
 
    In the fourth quarter of 1995, purported RJRN Holdings stockholders for
themselves and derivatively for RJRN Holdings and Nabisco Holdings filed three
putative class and derivative actions in the Court of Chancery of the State of
Delaware in and for New Castle County against members of RJRN Holdings Board of
Directors. The actions were consolidated in December 1995. The plaintiffs
allege, among other things, that the individual defendants breached their
fiduciary duty and wasted corporate assets by undertaking an exchange offer and
related consent solicitations completed by RJRN and Nabisco in
 
                                       17
<PAGE>
June 1995 and by amending, in August 1995, RJRN Holdings By-Law provisions
concerning the calling of shareholder meetings and procedures for shareholder
action by written consent. The plaintiffs allege that management took these and
other actions to wrongfully obstruct a spin-off of Nabisco Holdings, to enrich
the defendants at the expense of RJRN Holdings, its shareholders and Nabisco
Holdings and to entrench the defendants in the management and control of RJRN
Holdings. By agreement of the parties, the defendants' time to respond to the
complaint in these consolidated actions has been extended, most recently, to May
22, 1998. RJRN Holdings believes that these allegations are without merit and,
if necessary, will defend these actions vigorously.
 
    For information about other litigation and legal proceedings, see
"Business--Tobacco--Litigation Affecting the Cigarette Industry" and "Other
Matters--Environmental Matters" in Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Governmental
Activity" in Item 7.
 
                            ------------------------
 
    Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates or indemnitees. Determinations of liability or
adverse rulings against other cigarette manufacturers that are defendants in
similar actions, even if such rulings are not final, could adversely affect the
litigation against RJRT or its affiliates or indemnitees and increase the number
of such claims. Although it is impossible to predict the outcome of such events
or their effect on RJRT, a significant increase in litigation activities could
have an adverse effect on RJRT. RJRT believes that it has a number of valid
defenses to any such actions, including but not limited to those defenses based
on preemption under the CIPOLLONE decision, and RJRT intends to defend
vigorously all such actions.
 
    RJRN Holdings and RJRN believe that, not withstanding the quality of
defenses available to them and RJRT in litigation matters, it is possible that
the results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of litigation or to derive a meaningful estimate of the amount or
range of any possible loss in any particular quarterly or annual period or in
the aggregate.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None.
 
                                       18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANTS
EXECUTIVE OFFICERS OF RJRN HOLDINGS
 
    The executive officers of RJRN Holdings are Steven F. Goldstone (Chairman of
the Board, Chief Executive Officer and President), Gerald I. Angowitz (Senior
Vice President, Human Resources and Administration), John J. Delucca (Senior
Vice President and Treasurer), H. Colin McBride (Senior Vice President,
Associate General Counsel and Secretary), David B. Rickard (Senior Vice
President and Chief Financial Officer), William L. Rosoff (Senior Vice President
and General Counsel), and Richard G. Russell (Senior Vice President and
Controller). The following table sets forth certain information regarding such
officers.
 
<TABLE>
<CAPTION>
                                                            BUSINESS EXPERIENCE DURING THE PAST
           NAME                 AGE                           FIVE YEARS AND OTHER INFORMATION
---------------------------  ---------  ----------------------------------------------------------------------------
<S>                          <C>        <C>
Steven F. Goldstone                 52  Chairman since May 1996; Chief Executive Officer since December 1995;
                                          President since October 1995; prior thereto, General Counsel, March 1995
                                          to December 1995; previously Senior Partner with law firm of Davis, Polk &
                                          Wardwell until October 1995 and for more than five years prior thereto.
Gerald I. Angowitz                  48  Senior Vice President of Human Resources and Administration since March
                                          1995; prior thereto, Vice President of Human Resources, January 1994 to
                                          March 1995; Vice President of Employee Benefits, January 1992 to December
                                          1993.
John J. Delucca                     54  Senior Vice President and Treasurer since October 1993; Treasurer of Nabisco
                                          Holdings, October 1994 to February 1995; previously, Managing Director and
                                          Chief Financial Officer, Hascoe Associates, 1991 to 1993.
H. Colin McBride                    52  Senior Vice President, Associate General Counsel and Secretary since
                                          February 1998; prior thereto, Vice President, Assistant General Counsel
                                          and Secretary, December 1995 to February 1998; Vice President and
                                          Assistant General Counsel for more than five years prior thereto.
David B. Rickard                    51  Senior Vice President and Chief Financial Officer since March 1997;
                                          previously Executive Vice President, International Distillers and
                                          Vintners, 1996 to 1997; Finance Director, International Distillers and
                                          Vintners, 1995 to 1996; Group Controller, Grand Metropolitan PLC, 1994 to
                                          1995; Senior Vice President and Chief Financial Officer, The Pillsbury
                                          Company, 1991 to 1994.
William L. Rosoff                   51  Senior Vice President and General Counsel since January 1998; previously
                                          Partner with law firm of Davis Polk & Wardwell for more than five years
                                          prior thereto.
Richard G. Russell                  52  Senior Vice President and Controller since May 1995; previously Partner at
                                          the accounting firm of Deloitte & Touche LLP for more than five years
                                          prior thereto.
</TABLE>
 
                                       19
<PAGE>
EXECUTIVE OFFICERS OF RJRN HOLDINGS OR ITS SUBSIDIARIES NOT LISTED ABOVE
 
    Set forth below are the names, ages, positions and offices held and a brief
account of the business experience during the past five years of certain
executive officers of RJRN Holdings or its subsidiaries, other than those listed
above.
 
<TABLE>
<CAPTION>
                                                            BUSINESS EXPERIENCE DURING THE PAST
           NAME                 AGE                           FIVE YEARS AND OTHER INFORMATION
---------------------------  ---------  ----------------------------------------------------------------------------
<S>                          <C>        <C>
James M. Kilts                      50  President and Chief Executive Officer of Nabisco Holdings and of Nabisco
                                          since January 1998; previously Executive Vice President--Worldwide Food of
                                          Philip Morris Companies, 1994 to March 1997; President of Kraft USA, 1989
                                          to 1994.
Pierre de Labouchere                44  Chief Executive Officer and President of Reynolds International since
                                          December 1995; prior thereto, President of Eastern Europe, Middle East and
                                          Africa Region, Reynolds International, 1994 to December 1995; Regional
                                          Vice President--European and Special Markets, Reynolds International, 1991
                                          to 1994.
Andrew J. Schindler                 53  President and Chief Executive Officer of RJRT since July 1995; prior
                                          thereto, President and Chief Operating Officer--U.S.A., RJRT, May 1994 to
                                          June 1995; Executive Vice President-- Operations, RJRT, 1991 to 1994.
Jeffrey A. Kuchar                   43  Senior Vice President and General Auditor since January 1998; prior thereto,
                                          Vice President and General Auditor, 1993 to 1997; Director of Finance and
                                          Business Development, Specialty Products Company, Nabisco, 1993; Director
                                          of Financial Planning, Specialty Products Company, Nabisco, 1992 to 1993.
Lionel L. Nowell III                43  Senior Vice President of Strategy and Business Development since January
                                          1998; previously Vice President--Finance, Pillsbury North America,
                                          November 1996 to January 1998; Vice President-- Finance, Pillsbury
                                          Bakeries & Foodservice, February 1996 to November 1996; Vice President and
                                          Chief Financial Officer, Haagen-Dazs, November 1994 to February 1996; Vice
                                          President and Controller, The Pillsbury Company, May 1993 to November
                                          1994; Vice President--Food and International Retailing Audit of The
                                          Pillsbury Company, September 1992 to May 1993.
J. Thomas Pearson                   56  Senior Vice President, Taxation since 1988.
Huntley R. Whitacre                 55  Senior Vice President of Investor Relations since August 1995; prior
                                          thereto, Vice President of Investor Relations for more than five years.
Jason H. Wright                     37  Senior Vice President of Worldwide Communications since February 1994; prior
                                          thereto, Vice President of Worldwide Communications, 1993 to 1994; Vice
                                          President of Financial Communications, 1990 to 1993.
</TABLE>
 
                                       20
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
    The common stock of RJRN Holdings, par value $.01 per share (the "Common
Stock"), is listed and traded on the New York Stock Exchange (the "NYSE"). Since
completion of the acquisition there has been no public trading market for the
common stock of RJRN.
 
    As of February 28, 1998, there were approximately 55,000 record holders of
the Common Stock. All of the common stock of RJRN is owned by RJRN Holdings. The
Common Stock closing price on the NYSE for February 27, 1998 was $34 9/16.
 
    The following table sets forth, for the calendar periods indicated, the high
and low sales prices per share for the Common Stock on the NYSE Composite Tape,
as reported in the Wall Street Journal:
<TABLE>
<CAPTION>
                                                                       HIGH        LOW
                                                                     --------    --------
<S>                                                                  <C>         <C>
1997:
  First Quarter..................................................... $38 7/8     $30 5/8
  Second Quarter....................................................  36 1/2      27
  Third Quarter.....................................................  36 1/8      29 9/16
  Fourth Quarter....................................................  37 15/16    29 7/8
 
<CAPTION>
 
                                                                       HIGH        LOW
                                                                     --------    --------
<S>                                                                  <C>         <C>
1996:
  First Quarter..................................................... $35 1/4     $29
  Second Quarter....................................................  34 1/2      29
  Third Quarter.....................................................  32 3/8      25 1/8
  Fourth Quarter....................................................  34 5/8      25 3/4
</TABLE>
 
------------------------
 
    The Board of Directors of RJRN Holdings declared an initial quarterly cash
dividend of $.375 per share payable on April 1, 1995. During 1995, RJRN Holdings
continued to pay such a quarterly cash dividend on the Common Stock, adjusted to
take into account a one-for-five reverse split of the Common Stock. Cash
dividends paid by RJRN to RJRN Holdings are included in the Consolidated
Statements of Cash Flows in the Consolidated Financial Statements.
 
    On March 5, 1996, RJRN Holdings announced a 23% increase in its annual
common dividend rate from $1.50 to $1.85 per share of Common Stock and adopted
as an objective the repurchase of approximately 10 million shares of Common
Stock over the next several years based on the achievement of performance
targets. RJRN Holdings repurchased approximately $100 million of Common Stock in
1996. On February 28, 1997, the Board of Directors authorized an 11% increase in
the annual common dividend to $2.05 per share and authorized the repurchase of
up to $200 million of Common Stock in 1997. No such repurchases were made in
1997. Commencing with the July 1 payment, the quarterly dividend paid by Nabisco
was increased to $.175 per share or $.70 per share on an annual basis, from its
previous level of $.62 cents per share. As a result, the Nabisco Holdings
dividends payable to RJRN increased from approximately $132 million annually to
$141 million annually.
 
    The operations of RJRN Holdings and RJRN are conducted through RJRN's
subsidiaries and, therefore, RJRN Holdings and RJRN are dependent on the
earnings and cash flow of RJRN's subsidiaries to satisfy their respective
obligations and other cash needs. Certain Nabisco credit facilities limit the
amount of dividends, distributions and advances by Nabisco Holdings and its
subsidiaries to RJRN Holdings and its non-Nabisco subsidiaries. Moreover, RJRN's
credit agreements and certain policies adopted by the Board of Directors of RJRN
Holdings limit the payment by RJRN Holdings of dividends on the Common Stock in
excess of certain specific amounts. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Financial Condition" and notes 6 and 9 to the Consolidated Financial Statements.
RJRN Holdings does not believe that the provisions of its credit agreements or
its adopted policies concerning distributions to stockholders will limit its
ability to pay its anticipated quarterly dividends.
 
                                       21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)                                               1997       1996       1995       1994       1993
---------------------------------------------------------  ---------  ---------  ---------  ---------  ---------
<S>                                                        <C>        <C>        <C>        <C>        <C>
RESULTS OF OPERATIONS
  Net sales..............................................  $  17,057  $  17,063  $  16,008  $  15,366  $  15,104
  Income (loss) before extraordinary item................        402        611        627        764         (3)
PER SHARE DATA
  Basic income (loss) per share before extraordinary
    item.................................................  $    1.11  $    1.75  $    1.59  $    2.07  $   (0.26)
  Diluted income (loss) per share before extraordinary
    item.................................................  $    1.09  $    1.74  $    1.58  $    2.06  $   (0.26)
  Average number of common and common equivalent shares
    outstanding (in thousands):
    Basic................................................    323,787    324,917    325,476    305,142    269,839
    Diluted..............................................    325,318    325,947    326,235    306,756    269,839
  Dividends per share of common stock....................  $    2.05  $    1.85  $    1.50         --         --
  Dividends per share of Series A convertible preferred
    stock................................................         --         --         --  $    2.92  $    3.34
  Dividends per share of Series C convertible preferred
    stock................................................  $    2.25  $    6.01  $    6.01  $    3.94         --
CASH FLOW DATA
  Dividends paid on common and preferred stock...........  $     755  $     716  $     598  $     395  $     241
  Capital expenditures...................................        763        741        744        670        615
BALANCE SHEET DATA
  (AT END OF PERIODS)
  Total assets...........................................  $  30,678  $  31,289  $  31,518  $  31,408  $  31,295
  Long-term debt.........................................      9,456      9,256      9,429      8,883     12,005
  Mandatorily redeemable preferred securities............        953        954        954         --         --
  Stockholders' equity...................................      9,631     10,148     10,329     10,908      9,070
OTHER DATA
  Number of employees
    Tobacco..............................................     26,400     25,400     22,800     21,200     21,500
    Food.................................................     54,000     54,300     53,200     49,400     45,000
</TABLE>
 
------------------------
 
See the consolidated financial statements regarding (i) the restructuring of the
worldwide tobacco operations during 1997 and 1995; (ii) the tobacco settlement
agreements reached by RJRT with the Florida, Mississippi and Texas state
attorneys general and in certain class action cases during 1997; (iii) the
conversion during 1997 of Series C depositary shares issued during 1994; (iv)
the restructuring of the food operations during 1996 and (v) the exchange of
preferred securities by RJRN Holdings and a subsidiary and certain debt
exchanges between RJRN and Nabisco during 1995.
 
During 1994, the Series A depositary shares issued during 1991 converted into
42,000,000 shares of common stock and a pre-tax charge of $65 million was
recorded in connection with the realignment of corporate headquarters.
 
During 1993, a pre-tax restructuring charge of $730 million ($467 million
after-tax) was recorded in connection with a program to streamline both the
tobacco and food operations and to improve profitability.
 
Net sales and costs of products sold exclude excise taxes of $3.599 billion,
$3.852 billion, $3.832 billion, $3.578 billion and $3.757 billion for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
 
                See Notes to Consolidated Financial Statements.
 
                                       22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS
 
    The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJRN Holdings. The results of operations
discussion and analysis is broken into four sections. The first section includes
reported information for net sales, operating company contribution and
restructuring expenses as included in the historical consolidated financial
statements. The second section highlights items that management believes impact
the comparability of the historical financial information, including the
restructuring expenses in section one. The third section illustrates operating
company contribution on a basis consistent with how management manages the
ongoing businesses. It excludes one-time items that management believes affect
the comparability of the results of operations. This section should not be
viewed as a substitute for the historical results of operations but as a tool to
better understand underlying trends in the business. The last section includes
management's discussion and analysis of the ongoing results. The discussion and
analysis should be read in connection with the consolidated financial statements
and the related notes thereto of RJRN Holdings as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997.
 
                             RESULTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                                        % CHANGE FROM
                                                                                                          PRIOR YEAR
                                                                                                   ------------------------
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS)                       1997       1996       1995        1997         1996
----------------------------------------------------------------  ---------  ---------  ---------  -----------  -----------
<S>                                                               <C>        <C>        <C>        <C>          <C>
Net sales:
  R.J. Reynolds Tobacco.........................................  $   4,895  $   4,551  $   4,480           8%           2%
  Reynolds International........................................      3,428      3,623      3,234          (5)%         12%
                                                                  ---------  ---------  ---------
  Total Tobacco.................................................      8,323      8,174      7,714           2%           6%
                                                                  ---------  ---------  ---------
  Nabisco Biscuit...............................................      3,545      3,677      3,569          (4)%          3%
  U.S. Foods Group..............................................      2,604      2,638      2,451          (1)%          8%
                                                                  ---------  ---------  ---------
  Domestic Food Group...........................................      6,149      6,315      6,020          (3)%          5%
  International Food Group......................................      2,585      2,574      2,274          --%          13%
                                                                  ---------  ---------  ---------
  Total Nabisco.................................................      8,734      8,889      8,294          (2)%          7%
                                                                  ---------  ---------  ---------
                                                                  $  17,057  $  17,063  $  16,008          --%           7%
                                                                  ---------  ---------  ---------
                                                                  ---------  ---------  ---------
Operating company contribution (1)(2):
  R.J. Reynolds Tobacco.........................................  $   1,151  $   1,450  $   1,420         (21)%          2%
  Reynolds International........................................        581        803        643         (28)%         25%
                                                                  ---------  ---------  ---------
  Total Tobacco.................................................      1,732      2,253      2,063         (23)%          9%
                                                                  ---------  ---------  ---------
  Nabisco Biscuit...............................................        691        542        535          27%           1%
  U.S. Foods Group..............................................        386        346        355          12%          (3)%
                                                                  ---------  ---------  ---------
  Domestic Food Group...........................................      1,077        888        890          21%          --%
  International Food Group......................................        231        242        239          (5)%          1%
                                                                  ---------  ---------  ---------
  Total Nabisco.................................................      1,308      1,130      1,129          16%          --%
                                                                  ---------  ---------  ---------
  Headquarters..................................................        (70)       (67)       (64)         (4)%         (5)%
                                                                  ---------  ---------  ---------
                                                                  $   2,970  $   3,316  $   3,128         (10)%          6%
                                                                  ---------  ---------  ---------
                                                                  ---------  ---------  ---------
</TABLE>
 
    Restructuring expenses, which are not included in operating company
contribution, are allocated by business as follows:
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS)                                           1997       1996       1995
------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                   <C>        <C>        <C>
R.J. Reynolds Tobacco...............................................................  $      80  $      --  $     100
Reynolds International..............................................................        221         --         54
                                                                                      ---------  ---------  ---------
Total Tobacco.......................................................................        301         --        154
                                                                                      ---------  ---------  ---------
Nabisco Biscuit.....................................................................         --        238         --
U.S. Foods Group....................................................................         --        115         --
                                                                                      ---------  ---------  ---------
Domestic Food Group.................................................................         --        353         --
International Food Group............................................................         --         75         --
                                                                                      ---------  ---------  ---------
Total Nabisco.......................................................................         --        428         --
                                                                                      ---------  ---------  ---------
                                                                                      $     301  $     428  $     154
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>
 
------------------------------
(1) Includes restructuring-related and domestic tobacco settlement costs of $448
    million for 1997, restructuring-related costs of $97 million for 1996 and
    restructuring-related costs of $49 million for 1995. Restructuring-related
    costs are allocated to the business units as follows: Reynolds
    International--$89 million for the year ended December 31, 1997 and $49
    million for the year ended December 31, 1995; Nabisco Biscuit--$58 million,
    U.S. Foods Group--$33 million and the International Food Group--$6 million
    for the year ended December 31, 1996.
(2) Operating company contribution represents operating income before
    amortization of trademarks and goodwill and restructuring expenses.
 
                                       23
<PAGE>
    The following table summarizes items impacting comparability, which are
described in notes 2, 9 and 10 to the consolidated financial statements. We
believe these items are unusual and therefore are not included when evaluating
the ongoing performance of our businesses.
 
<TABLE>
<CAPTION>
                                                                                       1996                        1995
                                                           1997             --------------------------  --------------------------
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS,   --------------------------                PER DILUTED                 PER DILUTED
EXCEPT PER SHARE AMOUNTS)                         PRE-TAX                     PRE-TAX        SHARE        PRE-TAX        SHARE
----------------------------------------------  -----------                 -----------  -------------  -----------  -------------
                                                              PER DILUTED
                                                                 SHARE
                                                             -------------
<S>                                             <C>          <C>            <C>          <C>            <C>          <C>
Operating company contribution:
  Tobacco settlement expense at
    R.J. Reynolds Tobacco.....................   $     359     $     .67     $      --     $      --     $      --     $      --
  Restructuring-related costs.................          89           .24            97           .14            49           .10
                                                     -----         -----         -----         -----    -----------        -----
                                                       448           .91            97           .14            49           .10
                                                     -----         -----         -----         -----    -----------        -----
Restructuring expense.........................         301           .72           428           .74           154           .32
Other financial expense.......................          --            --            --            --           103           .21
Early extinguishment of debt, net tax.........          --           .06            --            --            --           .05
                                                     -----         -----         -----         -----    -----------        -----
 
  Total.......................................   $     749     $    1.69     $     525     $     .88     $     306     $     .68
                                                     -----         -----         -----         -----    -----------        -----
                                                     -----         -----         -----         -----    -----------        -----
</TABLE>
 
    The following table represents operating company contribution based upon
ongoing results.
 
<TABLE>
<CAPTION>
                                                                                                   % CHANGE FROM
                                                                                                     PRIOR YEAR
                                                                                              ------------------------
YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS)                  1997       1996       1995        1997         1996
-----------------------------------------------------------  ---------  ---------  ---------  -----------  -----------
<S>                                                          <C>        <C>        <C>        <C>          <C>
R.J. Reynolds Tobacco......................................  $   1,510  $   1,450  $   1,420           4%           2%
Reynolds International.....................................        670        803        692         (17)%         16%
                                                             ---------  ---------  ---------
Total Tobacco..............................................      2,180      2,253      2,112          (3)%          7%
                                                             ---------  ---------  ---------
Nabisco Biscuit............................................        691        600        535          15%          12%
U.S. Foods Group...........................................        386        379        355           2%           7%
                                                             ---------  ---------  ---------
Domestic Food Group........................................      1,077        979        890          10%          10%
International Food Group...................................        231        248        239          (7)%          4%
                                                             ---------  ---------  ---------
Total Nabisco..............................................      1,308      1,227      1,129           7%           9%
                                                             ---------  ---------  ---------
Headquarters...............................................        (70)       (67)       (64)         (4)%         (5)%
                                                             ---------  ---------  ---------
                                                             $   3,418  $   3,413  $   3,177          --%           7%
                                                             ---------  ---------  ---------
                                                             ---------  ---------  ---------
</TABLE>
 
    In addition to the above recorded items, another factor impacting
comparability was the decision by Reynolds International to reduce quarter-end
sales incentives in order to eliminate excess trade inventories that reduced
revenues and earnings. See the international tobacco and net income per share
discussion and analysis for the estimated impact.
 
                                       24
<PAGE>
    The percentage contributions of each industry segment to net sales and
operating company contribution during the last three years on an ongoing basis
were as follows:
 
<TABLE>
<CAPTION>
                                                                                  1997         1996         1995
                                                                                  -----        -----        -----
<S>                                                                            <C>          <C>          <C>
Net sales:
  Total Tobacco..............................................................          49%          48%          48%
  Total Food.................................................................          51           52           52
                                                                                      ---          ---          ---
                                                                                      100%         100%         100%
                                                                                      ---          ---          ---
                                                                                      ---          ---          ---
</TABLE>
 
<TABLE>
<S>                                                                    <C>          <C>          <C>
Operating company contribution(1):
  Total Tobacco......................................................          63%          65%          65%
  Total Food.........................................................          37           35           35
                                                                              ---          ---          ---
                                                                              100%         100%         100%
                                                                              ---          ---          ---
                                                                              ---          ---          ---
</TABLE>
 
--------------------------
 
(1) Contributions by industry segments were computed without effects of
    Headquarters' expenses.
 
    UNLESS OTHERWISE NOTED, OPERATING COMPANY CONTRIBUTION COMPARISONS WITHIN
THE FOLLOWING DISCUSSIONS ARE BASED ON ONGOING RESULTS.
 
TOBACCO
 
    The tobacco business is conducted by R.J. Reynolds Tobacco ("RJRT") and
Reynolds International.
 
    1997 VS. 1996.  RJRT's net sales increased 8% over 1996 to $4.9 billion. The
increase is primarily due to pricing of $409 million, partially offset by a 2%
volume decline of $81 million. The company believes that its shipments and those
of the entire domestic tobacco industry were influenced by wholesale trading
activity in anticipation of further price increases. The industry volume
declined 1% but it is estimated that volume would have declined by approximately
2%, excluding the impact of the additional buying activity.
 
    RJRT's retail share of market declined slightly to 25.41% from 25.90%.
RJRT's full-price share of market decreased slightly to 16.65% from 16.81%. The
company's savings share of market also decreased slightly to 8.76% from 9.09%.
Industrywide, the full-price category continues the upward momentum of recent
years growing to 73% of total shipments from 72% in 1996 and 70% in 1995. RJRT's
full-price shipments as a percentage of its total shipments has remained steady
at 63% for 1997, 1996 and 1995.
 
    The company has made progress on several initiatives designed to strengthen
its full-price business, as demonstrated by its stable full-price share of
market in the latter half of 1997. Camel shipments grew 5% as it continues to be
one of the fastest-growing full-price brands in the United States. During the
year, Camel successfully introduced a new advertising campaign "What You're
Looking For" to replace "Joe Camel." The newest additions to the Camel family,
Camel Menthol, Red Kamel and Kamel Menthe, continued to show positive results.
In addition, Winston, another of the company's flagship brands, grew 9% in
volume in the second half of 1997 compared to the same period of the prior year
and sustained share after the company introduced its national "No Bull"
marketing campaign. "No Bull" repositions the brand as a "straight-up" attitude
leveraging its image and unique product point-of-difference; a
100-percent-tobacco blend with no additives for true tobacco taste. In November,
the company began the test marketing of a new positioning strategy for the Salem
brand. It also continues to monitor and test Eclipse, a cigarette featuring
reduced smoke that leaves practically no ashes, stains or lingering odor.
 
    In the savings category, Doral, the industry's leading savings brand, grew
volume by 5% and its share of the savings segment was up 8%.
 
    Operating company contribution grew 4% over 1996 to $1.5 billion primarily
due to favorable pricing and mix, partially offset by higher marketing and
litigation expenses and the overall volume decline.
 
    On January 23, 1998, RJRT announced an average price increase of
approximately 2% across all its cigarette brands, which may have an impact on
future volume.
 
                                       25
<PAGE>
    Reynolds International's volume increased 1% over 1996 despite a decision to
reduce quarter-end sales incentives in order to eliminate excess trade
inventories. Excluding the estimated impact of eliminating excess trade
inventories, volume would have increased by approximately 4%. Unfavorable volume
mix (approximately $183 million) and currency translation (approximately $190
million) more than offset higher pricing (approximately $167 million), resulting
in a decrease in net sales of 5% to $3.4 billion. Excluding the estimated impact
of reducing excess trade inventories and the unfavorable currency translation,
net sales would have increased 4% to $3.8 billion.
 
    By region, volume declines in Western Europe of 15% and export shipments of
11% were more than offset by volume increases in the CIS and Baltics of 13% and
Central Europe of 43%. In Western Europe, short-term pricing pressures in France
and Spain, a general shift from the full-flavor segments throughout Western
Europe and the decision to reduce excess trade inventories caused the 15% volume
decline. Reynolds International's new lights entries (Camel Lights and Camel
Medium) are fueling growth in the low tar and nicotine category. Camel Lights
grew 5% in Western Europe while Camel Medium grew 17%. Difficult operating
conditions affected the volume performance in the European and Middle East
export markets. Regional heritage brands such as Peter I in Russia are fueling
the growth in the CIS and Baltics region. Peter I is the largest-selling filter
cigarette in Russia, where capacity is currently being expanded to meet the
growing demand. In addition, other heritage brands have been introduced
throughout the region and are also performing well. The volume increase in
Central Europe was driven by Winston and Monte Carlo. In Asia, volume declined
approximately 3% primarily driven by the trade inventory reduction. Salem
Pianissimo, a low smoke, low smell cigarette, continues to outperform
competition in Japan.
 
    Reynolds International's operating company contribution declined 17%,
primarily due to unfavorable volume mix, higher product costs and unfavorable
foreign currency translation, partly offset by higher pricing. Excluding the
estimated impact of the decision to reduce excess trade inventories and foreign
currency translation, Reynolds International's operating company contribution
would have increased by approximately 5%.
 
    1996 VS. 1995.  RJRT's net sales in 1996 increased 2% over 1995 to $4.6
billion primarily due to pricing ($164 million), partially offset by an overall
volume decline of 4% ($127 million). RJRT's full-price volume decreased 3% for
the full year. Given extra business days in 1996 versus 1995, total industry
shipments were up slightly versus 1995 while consumption was essentially flat.
The dynamics of the market continued to shift toward full-price brands in 1996
which comprised 72% of the total industry volume in 1996 versus 28% for savings
brands. This compares to a 70% to 30% split in 1995 and a 67% to 33% split in
1994. RJRT's full-price volume as a percentage of total volume was 63% in 1996
and 1995, and 60% in 1994.
 
    RJRT's full-price share of market decreased 0.4 share points to 16.81% with
1996 shipments of 75 billion units. Camel performed exceedingly well, generating
a 5% growth in shipments and a 0.3 share point gain for the full year versus
1995. However, Winston and Salem volume declined 8% and 3%, respectively. The
Winston brand family declined 8% primarily due to the decision to reduce support
of Winston Select.
 
    RJRT's savings brands shipments declined 4% to 44.1 billion units in 1996
due to planned sales reductions of lower priority brands. Offsetting the decline
on these brands was continued growth of the industry's largest savings brand,
Doral. Doral experienced a 4% volume increase over 1995, and a 2.2 share of
segment gain despite an industry savings category decline of two percentage
points from 30% to 28%. RJRT's overall volume performance reflects the decision
to focus on growth among its key full-price and savings brands.
 
    To stabilize full-price market share, RJRT tested several initiatives.
Building on the Camel momentum, RJRT introduced Camel Menthol during the third
quarter of 1996 and began a national launch in the first quarter of 1997. Red
Kamel and Kamel Menthe were also test marketed in several cities. RJRT conducted
a Florida test market of Winston that emphasized the "No Bull" positioning of
Winston and a no-additives blend. Eclipse, a cigarette featuring 80% reduced
second-hand smoke that leaves practically
 
                                       26
<PAGE>
no ashes, stain or lingering odor, was also tested in 1996. RJRT is also
continuing to test Moonlight Tobacco Company brands that feature innovative
packaging and product concepts. Test markets were New York City,
Seattle/Portland, Chicago, Cleveland, and North Carolina.
 
    RJRT's operating company contribution was $1.45 billion, $30 million higher
than 1995 primarily due to favorable pricing and lower manufacturing costs,
partially offset by lower volume and higher marketing and merchandising
spending.
 
    Reynolds International delivered 10% volume growth in 1996. The growth was
essentially across all regions and can be attributed to Reynolds International's
overall focus on the right brands in the right markets. Revenues increased 12%
over 1995 to $3.6 billion, primarily due to the 10% volume increase ($255
million), pricing ($200 million) and acquisitions ($58 million), partially
offset by the impact of unfavorable foreign currency translation ($150 million).
 
    The 10% volume gain was driven by Reynolds International's three flagship
brands: Camel, Winston and Salem. The three combined to account for 8% of the
10% increase. Individually, Camel, fueled by the introduction of new Camel
Lights, grew 2%. Winston, Reynolds International's largest brand, grew 12% and
Salem, aided by the introduction of Salem Pianissimo, grew 10%. Regionally, the
major contributions to volume growth were in the CIS and Baltics, Central
Europe, Africa, Japan, and to a lesser extent, Western Europe.
 
    In Western Europe, volume was up 2% over 1995 driven by the rollout of Camel
Lights, which helped abate the decline in the full-flavor segment. Camel Lights
became available throughout Western Europe. In the CIS and Baltics, core
brands--Camel, Winston, Salem, Magna, North Star and Peter I--grew volume by
more than 60%, with each brand recording double-digit volume growth. Total
market share grew two share points to almost 15%.
 
    In Central Europe, volume grew 55%, mainly in Turkey and Romania. Reynolds
International became the number one international cigarette company in Romania,
having almost doubled its market share to 15%. In Turkey, market share also
almost doubled. In Asia, fueled by the successful introduction of Salem
Pianissimo and Premier Pianissimo, Reynolds International became the
fastest-growing cigarette company in Japan. Salem Pianissimo is a menthol brand
featuring less smoke and less smell and Premier is the non-menthol version. In
Africa, volume almost doubled, driven by the successful integration of the
Tanzanian business acquired in 1995.
 
    Reynolds International's operating company contribution increased 16% or
$111 million to $803 million reflecting the volume growth and pricing, partially
offset by higher marketing spending, product costs and unfavorable foreign
currency translation.
 
GOVERNMENTAL ACTIVITY
 
    If the legislation contemplated by the Memorandum discussed in note 10 of
the consolidated financial statements ("Note 10") is enacted, RJRT and other
cigarette manufacturers would be subject to certain actions taken (or to be
taken) by certain governmental regulatory agencies that could be expected to
have an adverse effect on cigarette sales. As described in Note 10, RJRT would
be prepared to support the enactment of such legislation as part of a
comprehensive resolution of a variety of tobacco issues. Nonetheless, in the
absence of such legislation, regulatory conditions such as the following remain
of significant importance to RJRT.
 
    The advertising, sale and use of cigarettes have been under attack by
government and health officials in the United States and in other countries for
many years, principally due to health concerns about cigarette smoking and
environmental tobacco smoke. This attack has resulted in: a number of
substantial restrictions on the marketing, advertising and use of cigarettes;
diminishing social acceptability of smoking; and activities by anti-smoking
groups designed to inhibit cigarette sales, the form and content of cigarette
advertising and the testing and introduction of new cigarette products. Together
with manufacturers' price
 
                                       27
<PAGE>
increases in recent years and substantial increases in state and federal excise
taxes on cigarettes, these developments have had and will likely continue to
have an adverse effect on cigarette sales.
 
    Cigarettes are subject to substantial excise taxes in the United States and
to similar taxes in many foreign markets. The federal excise tax per pack of 20
cigarettes is currently 24 cents. On August 5, 1997, President Clinton signed
H.R. 2015 into law, which will increase the per pack federal cigarette excise
tax by 10 cents in fiscal year 2000, and an additional 5 cents in fiscal year
2002. In addition, all states and the District of Columbia impose excise taxes
at levels ranging from a low of 2.5 cents in Virginia to a high of $1.00 per
pack in Alaska. In 1997, the cigarette tax in ten states was increased by
amounts ranging from 2.5 cents to 71 cents per pack.
 
    In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted
jurisdiction over cigarettes and certain other tobacco products by declaring
such products to be medical devices and adopting regulations, first proposed in
1995, on the advertising, promotion and sale of cigarettes. The regulations
include a phased-in schedule of effectiveness over a two-year period. The first
phase began on February 28, 1997, when regulations establishing 18 as the
national minimum age for the sale of cigarettes and requiring age identification
from purchasers who appear to be under age 26 became effective. Among other
things, the remaining regulations would prohibit or impose stringent limits on a
broad range of sales and marketing practices, including bans on sampling,
sponsorship by brand name, and distribution of non-tobacco items carrying brand
names. The FDA's rules also limit advertising in print and on billboards to
black and white text and impose new labeling language.
 
    RJRT, together with the four other major domestic cigarette manufacturers
and an advertising agency, filed suit in the U.S. District Court for the Middle
District of North Carolina (COYNE BEAHM V. UNITED STATES FOOD & DRUG
ADMINISTRATION) challenging the regulations. Similar suits were filed in the
same court by manufacturers of smokeless tobacco products, by operators of
retail stores and by advertising interests. On April 26, 1997, the court ruled
on a motion for summary judgment, that based on the facts alleged by the FDA,
that agency was not barred from asserting jurisdiction over tobacco but lacked
authority to issue certain of the regulations bearing on marketing and
advertising. The court immediately certified its decision for appeal to the
Fourth Circuit Court of Appeals and stayed the effectiveness of that portion of
the regulations which had not yet been implemented pending appeal or further
court action. Oral argument on the appeal has been heard, but no decision has
been handed down to date. RJRT is unable to predict the ultimate outcome of this
litigation seeking to find the FDA's regulations to be unlawful. If the full
regulations do go into effect, they could be expected to have an adverse effect
on cigarette sales and RJRT.
 
    On May 28, 1997, the Federal Trade Commission (the "FTC") issued an
unfairness complaint against RJRT, seeking to stop the use of Joe Camel
advertising, to require RJRT to undertake certain public education activities
and to monitor sales and share of sales of each of RJRT's brands to smokers
under the age of 18. On June 17, 1997, RJRT filed suit against the FTC in the
Federal District Court for the Middle District of North Carolina, challenging
the FTC's action as procedurally improper. The FTC has moved to dismiss the
action.
 
    In March 1994, the U.S. Occupational Safety and Health Administration
("OSHA") announced proposed regulations that would restrict smoking in the
workplace to designated smoking rooms that are separately exhausted to the
outside. Although RJRT cannot predict the form or timing of any regulations that
may be finally adopted by OSHA, if the proposed regulations are adopted, RJRT
expects that many employers who have not already done so would prohibit smoking
in the workplace rather than make expenditures necessary to establish designated
smoking areas to accommodate smokers. RJRT submitted comments on the proposed
regulations during the comment period which closed in February 1996. Because
many employers currently do not permit smoking in the workplace, RJRT cannot
predict the effect of any regulations that may be adopted, but incremental
restrictions on smokers could have an adverse effect on cigarette sales and
RJRT.
 
                                       28
<PAGE>
    Legislation imposing various restrictions on public smoking has also been
enacted in 48 states and many local jurisdictions, and many employers have
initiated programs restricting or eliminating smoking in the workplace.
Seventeen states have enacted legislation designating a portion of increased
cigarette excise taxes to fund either anti-smoking programs, health care
programs or cancer research. Federal law prohibits smoking on all domestic
airline flights of six hours duration or less and the U.S. Interstate Commerce
Commission has banned smoking on buses transporting passengers inter-state.
Certain common carriers have imposed additional restrictions on passenger
smoking.
 
    In July 1996, Massachusetts enacted legislation requiring manufacturers of
tobacco products sold in Massachusetts to report yearly, beginning December 15,
1997, the ingredients of each brand sold. The statute also requires the
reporting of nicotine yield ratings in accordance with procedures established by
the State. The legislation contemplates public disclosure of all ingredients in
descending order, a trade-secret disclosure that RJRT believes could damage the
competitive position of its brands. RJRT, together with other cigarette
manufacturers, filed suit in the U.S. District Court for the District of
Massachusetts seeking to have the statute declared null and void and to restrain
Massachusetts officials from enforcing it. A similar suit was filed by
manufacturers of smokeless tobacco products. The court granted a preliminary
injunction that enjoined Massachusetts officials from enforcing the law relating
to ingredient reporting. Both the manufacturers and the State are now seeking
summary judgment from the district court. Oral argument is scheduled for April
1998.
 
    In 1997, Texas enacted legislation very similar to the Massachusetts law,
except that the Texas statute authorizes confidentiality of trade secrets and
its annual reporting requirements begin in 1998. RJRT believes that regulations
proposed by Texas, however, are inadequate to prevent inadvertent disclosure of
its trade secrets. Together with other cigarette manufacturers, RJRT has
provided comments on the regulations. Final regulations are expected from Texas
by mid-year. RJRT is unable to predict whether final regulations will provide
adequate security for its trade secrets.
 
    The California state legislature adopted two bills removing obstacles to
product liability actions against tobacco product manufacturers. One bill
removed barriers to public entities bringing such suits based on defectiveness
of the product, fraud or misconduct. The second removed tobacco products from
the list of inherently unsafe widely-used consumer products for which
manufacturers received immunity from product liability actions. These
legislative actions could result in an increase in the cases brought against
RJRT.
 
    In 1997, Minnesota enacted legislation that would require manufacturers of
tobacco products to report certain constituents of tobacco smoke for each brand
sold. Minnesota has not implemented the statute. RJRT is unable to predict
whether or when this statute will be enforced.
 
    A number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. In 1997, the Canadian Parliament
passed legislation permitting their Health Department to adopt new regulations
that may substantially limit cigarette advertising and sponsorships. The
regulations are expected to be promulgated by the end of 1998. Also in 1997, the
EU Council of Health Ministers approved a directive banning all tobacco
advertising (except at retail point-of-sale) and sponsorships. The EU Parliament
may approve the directive this year, and member countries will have three years
to enact conforming legislation.
 
                                       29
<PAGE>
    In 1990, RJRT and other U.S. cigarette manufacturers, through The Tobacco
Institute, announced a tobacco industry initiative to assist retailers in
enforcing minimum age laws on the sale of cigarettes, to support the enactment
of state laws requiring the adult supervision of cigarette vending machines in
places frequented by minors, to seek the uniform establishment of 18 as the
minimum age for the purchase of cigarettes in all states, to distribute
informational materials to assist parents in combatting peer pressure on their
children to smoke, and to limit voluntarily certain cigarette advertising and
promotional practices. In 1995, wholesalers, retailers and the tobacco industry
including RJRT formed the Coalition for Responsible Tobacco Retailing and
launched a new program ("We Card") focused on stopping underage access to
cigarettes. In 1992, the Alcohol, Drug Abuse and Mental Health Act was signed
into law. This act requires states to adopt a minimum age of 18 for purchases of
tobacco products and to establish a system to monitor, report and reduce the
illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January 1996,
regulations implementing this legislation were announced by the Department of
Health and Human Services.
 
    In 1964, the Report of the Advisory Committee to the Surgeon General of the
U.S. Public Health Service concluded that cigarette smoking was a health hazard
of sufficient importance to warrant appropriate remedial action. Since 1966,
federal law has required a warning statement on cigarette packaging. Since 1971,
television and radio advertising of cigarettes has been prohibited in the United
States. Cigarette advertising in other media in the United States is required to
include information with respect to the "tar" and nicotine yield content of
cigarettes, as well as a warning statement.
 
    During the past three decades, various laws affecting the cigarette industry
have been enacted. In 1984, Congress enacted the Comprehensive Smoking Education
Act (the "Smoking Education Act"). Among other things, the Smoking Education
Act: (i) establishes an interagency committee on smoking and health that is
charged with carrying out a program to inform the public of any dangers to human
health presented by cigarette smoking; (ii) requires a series of four health
warnings to be printed on cigarette packages and advertising on a rotating
basis; (iii) increases type size and area of the warning required in cigarette
advertisements; and (iv) requires that cigarette manufacturers provide annually,
on a confidential basis, a list of ingredients used in the manufacture of
cigarettes to the Secretary of Health and Human Services. The warnings currently
required on cigarette packages and advertisements (other than billboards) are as
follows: (i) "Surgeon General's Warning: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, And May Complicate Pregnancy"; (ii) "Surgeon General's
Warning: Quitting Smoking Now Greatly Reduces Serious Risks To Your Health";
(iii) "Surgeon General's Warning: Smoking By Pregnant Women May Result in Fetal
Injury, Premature Birth, and Low Birth Weight"; and (iv) "Surgeon General's
Warning: Cigarette Smoke Contains Carbon Monoxide." Similar warnings are
required on outdoor billboards.
 
    Since the initial report in 1964, the Secretary of Health, Education and
Welfare (now the Secretary of Health and Human Services) and the Surgeon General
have issued a number of other reports which purport to find the nicotine in
cigarettes addictive and to link cigarette smoking and exposure to cigarette
smoke with certain health hazards, including various types of cancer, coronary
heart disease and chronic obstructive lung disease. These reports have
recommended various governmental measures to reduce the incidence of smoking.
 
    It is not possible to determine what additional federal, state, local or
foreign legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT, Reynolds
International or the cigarette industry generally, but such legislation or
regulations could have an adverse effect on RJRT, Reynolds International or the
cigarette industry generally.
 
    For a description of certain litigation affecting RJRT and its affiliates
(including RJRN Holdings and RJRN) and indemnitees, see note 10 to the
consolidated financial statements.
 
FOOD
 
    The food business is conducted by Nabisco through its Domestic Food Group
and International Food Group. The Domestic Food Group is comprised of Nabisco
Biscuit and the U.S. Foods Group. The U.S.
 
                                       30
<PAGE>
Foods Group includes the Sales & Integrated Logistics Group, Specialty Products,
LifeSavers, Planters, Tablespreads and Food Service organizations. The
International Food Group is comprised of Nabisco Ltd and Nabisco International,
Inc.
 
    1997 VS. 1996.  The Domestic Food Group reported net sales of $6.1 billion,
a decrease of 3% from the 1996 level of $6.3 billion, with Nabisco Biscuit lower
by 4% and the U.S. Foods Group lower by 1% compared with last year. Nabisco
Biscuit's net sales decline was primarily due to volume declines in SnackWell's
and breakfast snacks, which more than offset volume increases in other core
cookie and cracker brands. The U.S. Foods Group's net sales decrease was
primarily due to lower sales volume for tablespreads, condiments and certain
other products and the impact from the sale of certain domestic regional brands
in the second quarter of 1997, partially offset by higher volume for nuts and
certain confectionery products. The International Food Group reported net sales
of $2.6 billion in 1997, slightly higher compared to 1996. The increase reflects
improved results in Asia and Mexico, partially offset by volume declines in
Brazil, resulting from aggressive competitive activity in the biscuit and milk
categories, and in Argentina, due to competitive pricing pressures.
 
    Nabisco's operating company contribution grew 7% to $1.3 billion in 1997.
Nabisco Biscuit, the largest division of Nabisco, grew operating company
contribution 15% to $691 million, primarily due to restructuring-driven margin
improvements and ongoing productivity initiatives. The U.S. Foods Group's
operating company contribution grew only 2% primarily due to reduced sales of
higher margin products which more than offset the benefits of restructuring
efficiencies. The International Food Group's operating company contribution
declined 7% for 1997 primarily as a result of lower volume in Brazil and lower
earnings in Argentina due to competitive pressures, partially offset by the
improved results in Mexico and Asia and productivity-driven earnings
improvements in Canada.
 
    Notwithstanding the improved earnings, Nabisco's results reflected a decline
in market share in a number of core brands, less market acceptance of certain
new products and in-store performance difficulties experienced in Nabisco
Biscuit's direct delivery system. Nabisco's results also reflected economic and
competitive problems in certain international markets and underperformance at
certain units. Nabisco Holdings is undertaking a number of initiatives designed
to improve performance, including improvements in marketing, changes in
training, compensation and recruiting of personnel at Nabisco Biscuit's delivery
system, continued emphasis on increased productivity, reevaluation of how new
products are identified and developed, accelerated international marketing of
core United States brands, and consideration of disposing of underperforming
units that do not fit into Nabisco Holdings' long-term plans. Implementation of
the changes will take time and Nabisco Holdings is unable to predict the effect
of the initiatives on performance in 1998.
 
    1996 VS. 1995.  Nabisco Holdings reported net sales of $8.9 billion in 1996,
an increase of 7% from the 1995 level of $8.3 billion, with the Domestic Food
Group up 5% and the International Food Group up 13%. Within the Domestic Food
Group, Nabisco Biscuit's net sales increased 3% versus the prior year, primarily
attributable to volume increases in the Oreo, Ritz, Air Crisps and Chips Ahoy!
brands, partially offset by lower volume for SnackWell's and Fig Newtons. The
U.S. Foods Group's net sales increased 8%, primarily due to higher volumes for
Planters nuts and the net impact of the October 1995 Parkay acquisition, offset
by the impact of the 1995 product line disposals. Planters nuts volume increase
resulted from gains in the warehouse club and mass merchandising channels and a
more stable competitive environment in the nut market. The International Food
Group's net sales increase for 1996 was primarily driven by 1995 business
acquisitions, principally Primo in Canada and Royal Beech-Nut in South Africa,
and 1996 business acquisitions in Latin America.
 
    Nabisco Holdings' operating company contribution of $1.2 billion in 1996 was
9% higher than last year's level, with the Domestic Food Group up 10% and the
International Food Group up 4%. The 1995 period includes a net gain of $11
million from the sale of the Ortega Mexican food ($18 million gain in the U.S.
Foods Group) and New York Style Bagel Chip ($7 million loss in the International
Food Group) businesses. The increase in operating company contribution for the
Domestic Food Group was primarily a result of the profit impact from higher net
sales and lower advertising expenses, partially offset by higher
 
                                       31
<PAGE>
trade promotion expenses and higher fixed manufacturing and distribution
expenses. The increase in the International Food Group's operating company
contribution was primarily due to the profit impact from business acquisitions.
 
RESTRUCTURING EXPENSE
 
    Restructuring charges of $301 million and $154 million were incurred during
1997 and 1995, respectively, to streamline operations and improve the
profitability of the tobacco operations. Restructuring charges of $428 million
were incurred in 1996 to streamline operations and improve the profitability of
the food operations. The programs included workforce reductions and product line
and facility rationalizations and are discussed further in note 2 to the
consolidated financial statements.
 
    Approximately $180 million of the 1997 restructuring charge, $240 million of
the 1996 restructuring charge and substantially all of the 1995 restructuring
charge is cash-related. The 1997 restructuring is expected to generate annual
savings of approximately $155 million in the year 2000 and thereafter. The 1996
restructuring is expected to generate approximately $175 million in annual
savings beginning in 1998.
 
OTHER INCOME (EXPENSE), NET
 
    Consolidated other income (expense), net for 1995 includes a pre-tax charge
of approximately $103 million ($67 million after-tax) for fees and expenses
incurred in connection with an exchange of debt between RJRN and Nabisco.
 
INCOME TAXES
 
    The effective income tax rate on an ongoing basis for 1997, 1996 and 1995
was 42.4%, 43.7% and 43.4%, respectively. The lower effective income tax rate
for 1997 primarily reflects lower taxes on foreign earnings.
 
NET INCOME PER SHARE (DILUTED)
 
<TABLE>
<CAPTION>
                                                      1997       1996       1995
                                                    ---------  ---------  ---------
<S>                                                 <C>        <C>        <C>
Reported..........................................  $    1.03  $    1.74  $    1.53
 
Ongoing...........................................  $    2.72  $    2.62  $    2.21
</TABLE>
 
    Net income per share was calculated pursuant to the provisions of Statement
of Financial Accounting Standards No. 128, Earnings per Share, which was adopted
in the fourth quarter of 1997. All prior year amounts have been restated. The
diluted net income per share amounts are essentially the same as the fully
diluted net income per share amounts as computed under Accounting Principles
Board Opinion No. 15, Earnings per Share. Excluding the estimated impact of
reducing excess trade inventories, ongoing diluted net income per share would
have been approximately $2.95, a 13% increase over 1996.
 
                                       32
<PAGE>
                       LIQUIDITY AND FINANCIAL CONDITION
 
DECEMBER 31, 1997
 
    Net cash flows from operating activities for 1997 increased by $74 million
to $1.57 billion. The increase in net cash flows from operating activities
primarily reflects reduced working capital requirements resulting from the
decision to reduce excess trade inventories in 1997 and special leaf inventory
programs in 1996, partially offset by tobacco litigation settlement payments and
higher restructuring and related payments in 1997.
 
    Net cash flows used in investing activities for 1997 were $686 million, a
decrease of $91 million from the 1996 level of $777 million. The decrease
reflects a reduction in acquisitions of businesses from the prior year,
partially offset by an increase in capital expenditures and a repurchase of
Nabisco Holdings' Class A common stock during 1997.
 
    Net cash flows used in financing activities increased to $751 million in
1997 from $689 million in 1996. The increase was primarily due to an increase in
dividends paid and higher debt repayments during 1997, partially offset by the
repurchase of RJRN Holdings' common stock in 1996.
 
    Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
certain other corporate purposes such as common stock dividends, stock
repurchases and acquisitions. It is essentially net cash flow from operating
activities and investing activities per the Consolidated Statements of Cash
Flows, adjusted for acquisitions and divestitures of businesses, less preferred
stock dividends. Free cash flow resulted in inflows of $869 million and $748
million for 1997 and 1996, respectively. The increase in free cash flow from
1996 to 1997 primarily reflects the increase in net cash flows from operating
activities and lower preferred stock dividend payments as a result of the Series
C preferred stock conversion, partially offset by a lower level of proceeds from
the disposition of certain assets compared to the prior year.
 
    In May 1997, 26,675,000 shares of Series C preferred stock mandatorily
converted into 53,350,000 shares of common stock.
 
    In July 1997, RJRN repaid commercial paper borrowings with proceeds from the
issuance of $150 million 8 1/4% notes due 2004 and $200 million 8 1/2% notes due
2007. In August 1997, Nabisco issued $200 million of notes due 2009. In December
1997, Nabisco refinanced $432 million of 8.3% notes due 1999 and $541 million of
8% notes due 2000 with short-term borrowings. These short-term borrowings were
refinanced in January 1998 with 6.0%-6 3/8% long-term notes due 2011-2035. Fixed
rate debt comprised approximately 77% of total consolidated debt at December 31,
1997.
 
    For a discussion of the potential impact on the financial condition of RJRN
Holdings and RJRN of the proposed resolution of national regulatory and
litigation issues and various litigation settlements, see note 10 to the
consolidated financial statements.
 
    RJRN maintains a three-year $2.75 billion revolving credit facility, of
which no borrowings were outstanding at December 31, 1997, and a 364-day $568
million credit facility primarily to support commercial paper issuances, of
which the entire facility was available at December 31, 1997. In June 1997, the
maturity of the revolving credit facility was extended to June 2000 and the
364-day credit facility was renewed to June 1998. The commitments under the
revolving credit facility decline to approximately $2.2 billion in the final
year. The revolving credit facility also provides for the issuance of up to $800
million of letters of credit, of which $362 million was issued at December 31,
1997. Availability under the revolving credit facility is reduced by the amount
of any borrowings outstanding and letters of credit issued under the facility
and by the amount of outstanding commercial paper in excess of $568 million.
During 1997, RJRN Holdings and RJRN also amended certain terms of these credit
agreements to accommodate the adoption of a policy of increased cash returns to
shareholders, a restructuring charge and related adjustments to streamline the
operations of the domestic and international tobacco businesses, and the
settlement of certain litigation.
 
                                       33
<PAGE>
    Nabisco maintains a five-year $1.5 billion revolving credit facility, of
which no borrowings were outstanding at December 31, 1997, and a 364-day $1.381
billion credit facility primarily to support commercial paper issuances, all of
which was completely utilized at December 31, 1997. At the end of the 364-day
period, any borrowings outstanding under the 364-day credit facility are
convertible into a three-year term loan at Nabisco's option. In October 1997,
the maturity under the revolving credit facility was extended to October 2002
and the 364-day credit facility was renewed to October 1998. The commitments
under the revolving credit facility decline to approximately $1.46 billion in
the final year. The revolving credit facility also provides for the issuance of
up to $300 million of letters of credit, of which none was issued at December
31, 1997. Availability under the revolving credit facility is reduced by the
amount of any borrowings outstanding and letters of credit issued under the
facility and by the amount of outstanding commercial paper in excess of $1.381
billion. At December 31, 1997, $890 million was available under the revolving
credit facility.
 
    Distributions and the payment of dividends by RJRN Holdings are subject to
certain restrictions under certain financing agreements and debt instruments of
RJRN Holdings and RJRN and their subsidiaries. The financing agreements
generally restrict cumulative common and preferred dividends and distributions,
limit the ability to incur indebtedness, engage in transactions with
stockholders and affiliates, create liens, sell or dispose of certain assets and
certain subsidiaries' stock, issue certain equity securities and engage in
certain mergers or consolidations. RJRN Holdings and RJRN believe that they are
currently in compliance with all covenants and restrictions imposed by the terms
of their indebtedness.
 
    Nabisco's credit agreements, among other things, generally restrict common
and preferred dividends and distributions, limit loans and advances by Nabisco
Holdings and its subsidiaries to RJRN, limit the ability to incur indebtedness,
engage in transactions with stockholders and affiliates, create liens, acquire,
sell or dispose of certain assets and securities and engage in certain mergers
or consolidations. Nabisco Holdings and Nabisco believe that they are currently
in compliance with all covenants and restrictions imposed by the terms of their
indebtedness.
 
    Management of RJRN Holdings and its subsidiaries is continuing to review
various strategic transactions, including but not limited to, acquisitions,
divestitures, mergers and joint ventures. Management is also exploring ways to
increase efficiency and productivity, and to reduce the cost structures of its
respective businesses. No assurance may be given that any such transactions will
be announced or completed. See note 9 to the consolidated financial statements
for management's policy regarding distributions of capital stock of its
subsidiaries.
 
    Capital expenditures were $763 million, $741 million and $744 million for
1997, 1996 and 1995, respectively. The increased level of capital expenditures
in 1997 was primarily due to increased capital investments for Reynolds
International (notably in Russia). The current level of expenditures planned for
1998 is expected to be in the range of approximately $650 million to $700
million (approximately 52% Food and 48% Tobacco), which will be funded primarily
by cash flows from operating activities. Management expects that its capital
expenditure program will continue at a level sufficient to support the strategic
and operating needs of RJRN Holdings' operating subsidiaries.
 
    RJRN Holdings' subsidiaries have operations in many countries which utilize
many different functional currencies. Significant foreign currency net
investments are located in Canada, Spain, Argentina, Puerto Rico, Germany,
Brazil, Mexico, Malaysia, Venezuela and Hong Kong. RJRN Holdings' subsidiaries
also have significant exposure to foreign exchange transactions in currencies
other than their functional currencies. Exposures primarily include the U.S.
dollar, German mark, French franc, British pound, Italian lira, Japanese yen,
Swiss franc, Hong Kong dollar, Singapore dollar, Finnish markka, Canadian
dollar, Spanish peseta, Dutch guilder, Brazilian real, Malaysian ringgitt,
Indonesian rupiah, Russian rouble, Romanian leu, and Turkish lira. Whenever
possible, RJRN Holdings' policy is to net exposures and utilize natural offsets
to minimize the effects of foreign currency transactions on cash flows;
otherwise, consideration is given to foreign currency arrangements to protect
RJRN Holdings and its subsidiaries from risk that the eventual dollar cash flows
resulting from transactions with international parties will be adversely
 
                                       34
<PAGE>
affected by changes in exchange rates. In addition, consideration is given to
foreign currency arrangements to hedge foreign currency exposures on existing
assets and liabilities, including certain international debt.
 
    At December 31, 1997, there was $1.982 billion of accumulated and
undistributed income of foreign subsidiaries. No applicable U.S. federal
deferred income taxes have been provided because management intends to reinvest
these earnings abroad indefinitely to fund international acquisitions, new
products and other opportunities in foreign markets.
 
YEAR 2000
 
    The year 2000 issue stems from computer applications that were written using
two digits rather than four digits to define the applicable year. The issue is
whether computer systems will properly interpret date-sensitive information when
the year changes to 2000. RJRN Holdings recognizes the issues associated with
the year 2000 problem and the need to ensure that its operations will not be
adversely impacted by year 2000 software failures. Comprehensive reviews of all
systems and applications, including key suppliers and vendors, are being
conducted, implementation plans to resolve any issues are being formulated and
certain corrective actions have commenced.
 
    RJRN Holdings expects its year 2000 compliance programs, which began in
1996, to be completed in all material respects by the end of 1999. The total
cost of achieving year 2000 compliance is estimated to be approximately $90
million. All modification costs are expensed as incurred. Through December 31,
1997, approximately $19 million had been expensed. The remainder will be
incurred in 1998 and 1999.
 
LITIGATION
 
    For a description of certain litigation affecting RJRT and its affiliates
(including RJRN Holdings and RJRN) and indemnitees, see note 10 to the
consolidated financial statements.
 
ENVIRONMENTAL MATTERS
 
    The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the Environmental Protection Agency and other
governmental agencies under various statutes have resulted in, and will likely
continue to result in, substantial expenditures for pollution control, waste
treatment, plant modification and similar activities.
 
    In April 1995, RJRN Holdings was named a potentially responsible party (a
"PRP") with certain third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to a superfund
site at which a former subsidiary of RJRN had operations. RJRN has also been
named in an insurance coverage suit brought by another company named as a PRP at
this site. In this lawsuit, DEL MONTE FRESH PRODUCE V. FIREMEN'S FUND INSURANCE,
filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the
plaintiff seeks declaratory judgment that it is entitled to insurance coverage
for the site or, in the alternative, that RJRN is obligated to indemnify Del
Monte under the terms of the agreement by which RJRN sold that company in 1989.
 
    Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs
with third parties or may have indemnification obligations with respect to a
number of additional sites. Liability under CERCLA is joint and several.
 
    RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing
program to assure compliance with U.S., state and local laws and regulations.
Although it is difficult to identify precisely the portion of capital
expenditures or other costs attributable to compliance with environmental laws
and to estimate the cost of resolving these CERCLA matters, RJRN Holdings and
RJRN do not expect such expenditures or other costs to have a material adverse
effect on the business or financial condition of RJRN Holdings and RJRN and
their subsidiaries taken as a whole.
 
                                       35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of RJRN Holdings due to
adverse changes in financial and commodity market prices and rates. RJRN
Holdings is exposed to market risk in the areas of foreign currency exchange
rates, interest rates and commodity prices. These exposures are directly related
to its international operations, its use of agricultural commodities in its food
operations and its normal investing and funding activities. RJRN Holdings has
established various policies and procedures to manage its exposure to market
risks, including the use of financial and commodity derivatives, which are
highly correlated to underlying exposures. See note 11 to the consolidated
financial statements for further information regarding the use of financial
derivatives. RJRN Holdings estimates its market risk due to changes in foreign
currency rates, interest rates and commodity prices utilizing a financial model
called Value at Risk ("VaR"). VaR is a statistical measure of the potential loss
in terms of fair value, cash flows or earnings of market-risk sensitive
instruments over a one-year horizon using a 95% confidence interval for changes
in market rates and prices.
 
FOREIGN EXCHANGE AND INTEREST RATE EXPOSURES
 
    Upon reviewing its derivatives and other foreign currency and interest rate
instruments, based on historical foreign currency rate movements and the fair
value of market-rate sensitive instruments at year-end, RJRN Holdings does not
believe that near term changes in foreign currency or interest rates will have a
material impact on its future earnings, fair values or cash flows.
 
COMMODITY PRICE EXPOSURE
 
    Based on either Nabisco Holdings' derivative commodity instruments or its
net commodity exposure (derivatives plus physical contracts less anticipated
future consumption), a near-term change in commodity prices, based on historical
commodity price movements, would not have a material impact on future earnings,
fair values or cash flows of RJRN Holdings.
 
                            ------------------------
 
    The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, particularly with respect to capital expenditures, the year 2000
problem, market risk in the areas of foreign currency exchange rates, interest
rates and commodity prices, restructuring savings and the impact of proposed
national legislation and various litigation settlements, which reflect
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effect on financial
performance and future events of competitive pricing for products, success of
new product innovations and acquisitions, local economic conditions and the
effects of currency fluctuations in countries in which RJRN Holdings and its
subsidiaries do business, the effects of domestic and foreign government
regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in
the case of the tobacco business, litigation and related legislative and
regulatory developments. For additional information concerning factors affecting
future events and policies and RJRN Holdings' performance, see Part I, Items 1
through 3 and Part II, Item 5 of this report. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    Refer to the Index to Financial Statements and Financial Statement Schedules
on page 41 for the required information.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE
 
    None.
 
                                       36
<PAGE>
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
 
    Item 10 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998. Reference is also made regarding the executive officers
of the Registrants to "Executive Officers of the Registrants" following Item 4
of Part I of this Report.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    Item 11 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    Item 12 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Item 13 is hereby incorporated by reference to RJRN Holdings' Definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
prior to March 30, 1998.
 
                                       37
<PAGE>
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
<TABLE>
<S>        <C>        <C>
(A)               1.  The financial statements listed in the accompanying Index to Financial
                      Statements and Financial Statement Schedules are filed as part of this report.
                  2.  The financial statement schedules listed in the accompanying Index to Financial
                      Statements and Financial Statement Schedules are filed as part of this report.
                  3.  The exhibits listed in the accompanying Index to Exhibits are filed as part of
                      this report.
(B)                   REPORTS ON FORM 8-K FILED SINCE THE THIRD QUARTER 1997
                      Form 8-K dated January 16, 1998, reporting on the settlement of a healthcare
                      cost recovery suit in the State of Texas and filing as exhibits the related
                      settlement agreement and press release.
(C)                   EXHIBITS
                      See Exhibit Index.
(D)                   FINANCIAL STATEMENT SCHEDULES.
                      See Index to Financial Statements and Financial Statement Schedules.
</TABLE>
 
                                       38
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 27, 1998.
 
<TABLE>
<C>                                               <S>        <C>
                                                  RJR NABISCO HOLDINGS CORP.
 
                                                  BY:                    /S/ STEVEN F. GOLDSTONE
                                                             -----------------------------------------------
                                                                          (Steven F. Goldstone)
                                                                               Chairman and
                                                                         Chief Executive Officer
</TABLE>
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1998.
 
<TABLE>
<CAPTION>
                    SIGNATURE                                             TITLE
--------------------------------------------------  --------------------------------------------------
 
<C>                                                 <S>                                                 <C>
                /s/ STEVEN F. GOLDSTONE             Chairman and Chief Executive Officer (principal
     ---------------------------------------          executive officer)
              (Steven F. Goldstone)
 
               /s/ DAVID B. RICKARD                 Senior Vice President and Chief Financial Officer
     ---------------------------------------          (principal financial officer)
                (David B. Rickard)
 
              /s/ RICHARD G. RUSSELL                Senior Vice President and Controller (principal
     ---------------------------------------          accounting officer)
               (Richard G. Russell)
 
                        *                           Director
     ---------------------------------------
               (John T. Chain, Jr.)
 
                        *                           Director
     ---------------------------------------
               (Julius L. Chambers)
 
                        *                           Director
     ---------------------------------------
               (John L. Clendenin)
 
                        *                           Director
     ---------------------------------------
              (L. Dennis Kozlowski)
 
                        *                           Director
     ---------------------------------------
                 (Ray J. Groves)
 
                        *                           Director
     ---------------------------------------
               (H. Eugene Lockhart)
 
                        *                           Director
     ---------------------------------------
               (Theodore E. Martin)
 
                        *                           Director
     ---------------------------------------
              (John G. Medlin, Jr.)
 
                        *                           Director
     ---------------------------------------
               (Rozanne L. Ridgway)
</TABLE>
 
<TABLE>
<C>                                              <S>        <C>
                                                 *By:                    /s/ WILLIAM L. ROSOFF
                                                            ----------------------------------------------
                                                                           William L. Rosoff
                                                                           Attorney-in-Fact
</TABLE>
 
                                       39
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on March 27, 1998.
 
<TABLE>
<C>                                               <S>        <C>
                                                  RJR NABISCO, INC.
 
                                                  BY:                    /S/ STEVEN F. GOLDSTONE
                                                             -----------------------------------------------
                                                                          (Steven F. Goldstone)
                                                                            Chairman and Chief
                                                                            Executive Officer
</TABLE>
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 1998.
 
<TABLE>
<CAPTION>
                    SIGNATURE                                             TITLE
--------------------------------------------------  --------------------------------------------------
 
<C>                                                 <S>                                                 <C>
                /s/ STEVEN F. GOLDSTONE             Chairman and Chief Executive Officer (principal
     ---------------------------------------          executive officer)
              (Steven F. Goldstone)
 
               /s/ DAVID B. RICKARD                 Senior Vice President and Chief Financial Officer
     ---------------------------------------          (principal financial officer)
                (David B. Rickard)
 
              /s/ RICHARD G. RUSSELL                Senior Vice President and Controller (principal
     ---------------------------------------          accounting officer)
               (Richard G. Russell)
 
                        *                           Director
     ---------------------------------------
               (John T. Chain, Jr.)
 
                        *                           Director
     ---------------------------------------
               (Julius L. Chambers)
 
                        *                           Director
     ---------------------------------------
               (John L. Clendenin)
 
                        *                           Director
     ---------------------------------------
                 (Ray J. Groves)
 
                        *                           Director
     ---------------------------------------
              (L. Dennis Kozlowski)
 
                        *                           Director
     ---------------------------------------
               (H. Eugene Lockhart)
 
                        *                           Director
     ---------------------------------------
               (Theodore E. Martin)
 
                        *                           Director
     ---------------------------------------
              (John G. Medlin, Jr.)
 
                        *                           Director
     ---------------------------------------
               (Rozanne L. Ridgway)
</TABLE>
 
<TABLE>
<C>                                              <S>        <C>
                                                 *By:                    /s/ WILLIAM L. ROSOFF
                                                            ----------------------------------------------
                                                                           William L. Rosoff
                                                                           Attorney-in-Fact
</TABLE>
 
                                       40
<PAGE>
        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                            ---------
<S>                                                                                                         <C>
FINANCIAL STATEMENTS
  Report of Deloitte & Touche LLP, Independent Auditors...................................................        F-1
  Report of Management's Responsibility for Financial Statements..........................................        F-1
  Consolidated Statements of Income--Years Ended December 31, 1997, 1996 and 1995.........................        F-2
  Consolidated Statements of Cash Flows--Years Ended December 31, 1997,
    1996 and 1995.........................................................................................        F-3
  Consolidated Balance Sheets--December 31, 1997 and 1996.................................................        F-4
  Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1997, 1996 and 1995...........        F-6
  Notes to Consolidated Financial Statements..............................................................        F-7
</TABLE>
 
FINANCIAL STATEMENT SCHEDULES
 
    For the years ended December 31, 1997, 1996 and 1995:
 
<TABLE>
<S>            <C>                                                                  <C>
  Schedule I   --Condensed Financial Information of Registrants...................          S-1
</TABLE>
 
                                       41
<PAGE>
             REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
 
RJR Nabisco Holdings Corp.
RJR Nabisco, Inc.:
 
    We have audited the accompanying consolidated balance sheets of RJR Nabisco
Holdings Corp. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN") as of December
31, 1997 and 1996, and the related consolidated statements of income, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1997. Our audits also included the financial statement schedules of
RJRN Holdings and RJRN as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997 as listed in the accompanying
index to the financial statements. These financial statements and financial
statement schedules are the responsibility of the Companies management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of RJRN Holdings and
RJRN at December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
 
/S/ DELOITTE & TOUCHE LLP
New York, New York
January 26, 1998,
(March 3, 1998 as to note 10)
 
         REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
 
    The financial statements presented in this report have been prepared by
management 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 the
Company'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 is comprised solely of outside directors. It meets
periodically with management, the internal auditors, and the independent
auditors, Deloitte & Touche LLP, 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/ STEVEN F. GOLDSTONE
----------------------------
 
Chairman and
Chief Executive Officer
 
/S/ DAVID B. RICKARD
----------------------------
 
Senior Vice President
and Chief Financial Officer
 
                                      F-1
<PAGE>
                       CONSOLIDATED STATEMENTS OF INCOME
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                     1997                        1996                        1995
-----------------------------------------------  --------------------------  --------------------------  --------------------------
<S>                                              <C>           <C>           <C>           <C>           <C>           <C>
                                                     RJRN                        RJRN                        RJRN
                                                   HOLDINGS        RJRN        HOLDINGS        RJRN        HOLDINGS        RJRN
                                                 ------------  ------------  ------------  ------------  ------------  ------------
NET SALES*.....................................   $   17,057    $   17,057    $   17,063    $   17,063    $   16,008    $   16,008
                                                 ------------  ------------  ------------  ------------  ------------  ------------
Costs and expenses:
  Cost of products sold*.......................        7,847         7,847         7,973         7,973         7,468         7,468
  Selling, advertising, administrative and
    general expenses...........................        5,881         5,888         5,774         5,779         5,412         5,412
  Tobacco settlement expense (note 10).........          359           359            --            --            --            --
  Amortization of trademarks and goodwill......          634           634           636           636           636           636
  Restructuring expense........................          301           301           428           428           154           154
                                                 ------------  ------------  ------------  ------------  ------------  ------------
      OPERATING INCOME.........................        2,035         2,028         2,252         2,247         2,338         2,338
Interest and debt expense......................         (912)         (817)         (927)         (832)         (899)         (872)
Other income (expense), net....................         (107)         (107)         (126)         (127)         (173)         (175)
                                                 ------------  ------------  ------------  ------------  ------------  ------------
      INCOME BEFORE INCOME TAXES...............        1,016         1,104         1,199         1,288         1,266         1,291
Provision for income taxes.....................          530           566           585           619           580           594
                                                 ------------  ------------  ------------  ------------  ------------  ------------
      INCOME BEFORE MINORITY INTEREST IN INCOME
        OF NABISCO HOLDINGS....................          486           538           614           669           686           697
Less minority interest in income of Nabisco
  Holdings.....................................           84            84             3             3            59            59
                                                 ------------  ------------  ------------  ------------  ------------  ------------
      INCOME BEFORE EXTRAORDINARY
        ITEM...................................          402           454           611           666           627           638
Extraordinary item--loss on early extin-
  guishments of debt, net of income taxes and
  minority interest............................          (21)          (21)           --            --           (16)          (16)
                                                 ------------  ------------  ------------  ------------  ------------  ------------
      NET INCOME...............................   $      381    $      433    $      611    $      666    $      611    $      622
                                                 ------------  ------------  ------------  ------------  ------------  ------------
                                                 ------------  ------------  ------------  ------------  ------------  ------------
BASIC NET INCOME PER SHARE:
  Income before extraordinary item.............   $     1.11                  $     1.75                  $     1.59
  Net income...................................   $     1.05                  $     1.75                  $     1.54
DILUTED NET INCOME PER SHARE:
  Income before extraordinary item.............   $     1.09                  $     1.74                  $     1.58
  Net income...................................   $     1.03                  $     1.74                  $     1.53
DIVIDENDS PER SHARE:
  Common stock.................................   $     2.05                  $     1.85                  $     1.50
  Series C preferred stock.....................   $     2.25                  $     6.01                  $     6.01
</TABLE>
 
------------------------
 
* Excludes excise taxes as follows: 1997--$3.599 billion, 1996--$3.852 billion
and 1995--$3.832 billion.
 
                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
                                      F-2
<PAGE>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                  1997                    1996              1995
--------------------------------------------------------------  ----------------------  ----------------------  -----------
<S>                                                             <C>          <C>        <C>          <C>        <C>
                                                                   RJRN                    RJRN                    RJRN
                                                                 HOLDINGS      RJRN      HOLDINGS      RJRN      HOLDINGS
                                                                -----------  ---------  -----------  ---------  -----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
  Net income..................................................   $     381   $     433   $     611   $     666   $     611
                                                                -----------  ---------  -----------  ---------  -----------
  Adjustments to reconcile net income to net cash flows from
    operating activities:
    Depreciation and amortization.............................       1,138       1,138       1,174       1,174       1,171
    Deferred income tax benefit...............................        (183)       (184)       (120)       (114)       (172)
    Extraordinary item........................................          43          43          --          --          29
    Tobacco settlement expense, net of cash payments..........         226         226          --          --          --
    Restructuring and restructuring-related expenses, net of
      cash payments...........................................         168         168         257         257         (53)
    Other changes that provided (used) cash:
        Accounts and notes receivable.........................         208         216         (77)        (66)       (351)
        Inventories...........................................         (40)        (40)       (135)       (135)        159
        Accounts payable and accrued liabilities, including
          income taxes........................................        (270)       (278)       (310)       (283)        145
        Other, net............................................        (102)       (100)         95          87         126
                                                                -----------  ---------  -----------  ---------  -----------
        Total adjustments.....................................       1,188       1,189         884         920       1,054
                                                                -----------  ---------  -----------  ---------  -----------
    Net cash flows from operating activities..................       1,569       1,622       1,495       1,586       1,665
                                                                -----------  ---------  -----------  ---------  -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
  Capital expenditures........................................        (763)       (763)       (741)       (741)       (744)
  Acquisitions of businesses..................................         (46)        (46)       (189)       (189)       (429)
  Divestitures of businesses and certain assets...............         145         145         153         153         237
  Net proceeds from issuance (repurchases) of Nabisco Hold-
    ings' common stock........................................         (22)        (22)         --          --       1,201
                                                                -----------  ---------  -----------  ---------  -----------
    Net cash flows from (used in) investing activities........        (686)       (686)       (777)       (777)        265
                                                                -----------  ---------  -----------  ---------  -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt....................         787         787          34          34       2,324
  Repayments of long-term debt................................      (1,181)     (1,181)       (216)       (216)     (1,285)
  Increase (decrease) in short-term borrowings................         358         358         249         249      (2,500)
  Repurchase of common stock..................................          --          --        (100)         --          --
  Dividends paid on common and preferred stock................        (755)        (34)       (716)        (30)       (598)
  Financing and advisory fees paid............................          --          --          --          --        (114)
  Other, net, including intercompany transfers and payments...          40        (733)         60        (816)         50
                                                                -----------  ---------  -----------  ---------  -----------
    Net cash flows used in financing activities...............        (751)       (803)       (689)       (779)     (2,123)
                                                                -----------  ---------  -----------  ---------  -----------
 
Effect of exchange rate changes on cash and cash equivalents..         (36)        (36)        (11)        (11)          4
                                                                -----------  ---------  -----------  ---------  -----------
    Net change in cash and cash equivalents...................          96          97          18          19        (189)
Cash and cash equivalents at beginning of period..............         252         251         234         232         423
                                                                -----------  ---------  -----------  ---------  -----------
Cash and cash equivalents at end of period....................   $     348   $     348   $     252   $     251   $     234
                                                                -----------  ---------  -----------  ---------  -----------
                                                                -----------  ---------  -----------  ---------  -----------
 
Income taxes paid, net of refunds.............................   $     652   $     690   $     693   $     727   $     583
Interest paid.................................................   $     895   $     800   $     913   $     794   $     788
 
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
<S>                                                             <C>
 
                                                                  RJRN
                                                                ---------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
  Net income..................................................  $     622
                                                                ---------
  Adjustments to reconcile net income to net cash flows from
    operating activities:
    Depreciation and amortization.............................      1,171
    Deferred income tax benefit...............................       (173)
    Extraordinary item........................................         29
    Tobacco settlement expense, net of cash payments..........         --
    Restructuring and restructuring-related expenses, net of
      cash payments...........................................        (53)
    Other changes that provided (used) cash:
        Accounts and notes receivable.........................       (344)
        Inventories...........................................        159
        Accounts payable and accrued liabilities, including
          income taxes........................................        125
        Other, net............................................        163
                                                                ---------
        Total adjustments.....................................      1,077
                                                                ---------
    Net cash flows from operating activities..................      1,699
                                                                ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
  Capital expenditures........................................       (744)
  Acquisitions of businesses..................................       (429)
  Divestitures of businesses and certain assets...............        237
  Net proceeds from issuance (repurchases) of Nabisco Hold-
    ings' common stock........................................      1,201
                                                                ---------
    Net cash flows from (used in) investing activities........        265
                                                                ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt....................      2,324
  Repayments of long-term debt................................     (1,285)
  Increase (decrease) in short-term borrowings................     (2,500)
  Repurchase of common stock..................................         --
  Dividends paid on common and preferred stock................        (15)
  Financing and advisory fees paid............................       (114)
  Other, net, including intercompany transfers and payments...       (555)
                                                                ---------
    Net cash flows used in financing activities...............     (2,145)
                                                                ---------
Effect of exchange rate changes on cash and cash equivalents..          4
                                                                ---------
    Net change in cash and cash equivalents...................       (177)
Cash and cash equivalents at beginning of period..............        409
                                                                ---------
Cash and cash equivalents at end of period....................  $     232
                                                                ---------
                                                                ---------
Income taxes paid, net of refunds.............................  $     583
Interest paid.................................................  $     784
</TABLE>
 
                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
                                      F-3
<PAGE>
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
DECEMBER 31                                                                      1997                    1996
----------------------------------------------------------------------  ----------------------  ----------------------
<S>                                                                     <C>          <C>        <C>          <C>
                                                                           RJRN                    RJRN
                                                                         HOLDINGS      RJRN      HOLDINGS      RJRN
                                                                        -----------  ---------  -----------  ---------
ASSETS
Current assets:
  Cash and cash equivalents...........................................   $     348   $     348   $     252   $     251
  Accounts and notes receivable, net..................................       1,122       1,118       1,418       1,413
  Inventories:
    Finished products.................................................         816         816         830         830
    Leaf tobacco......................................................       1,184       1,184       1,161       1,161
    Raw materials.....................................................         226         226         234         234
    Other.............................................................         391         391         411         411
                                                                        -----------  ---------  -----------  ---------
    Total inventories.................................................       2,617       2,617       2,636       2,636
                                                                        -----------  ---------  -----------  ---------
  Prepaid expenses and excise taxes...................................         538         538         445         445
                                                                        -----------  ---------  -----------  ---------
      TOTAL CURRENT ASSETS............................................       4,625       4,621       4,751       4,745
                                                                        -----------  ---------  -----------  ---------
Property, plant and equipment--at cost:
    Land and land improvements........................................         324         324         323         323
    Buildings and leasehold improvements..............................       2,002       2,002       1,974       1,974
    Machinery and equipment...........................................       6,299       6,299       5,936       5,936
    Construction-in-process...........................................         554         554         604         604
                                                                        -----------  ---------  -----------  ---------
    Total property, plant and equipment...............................       9,179       9,179       8,837       8,837
Less accumulated depreciation.........................................       3,240       3,240       3,002       3,002
                                                                        -----------  ---------  -----------  ---------
    Property, plant and equipment, net................................       5,939       5,939       5,835       5,835
                                                                        -----------  ---------  -----------  ---------
Trademarks, net of accumulated amortization (1997-$2,226,
  1996--$1,996).......................................................       7,759       7,759       8,030       8,030
Goodwill, net of accumulated amortization (1997-$3,277,
  1996--$2,901).......................................................      11,885      11,885      12,268      12,268
Other assets and deferred charges.....................................         470         453         405         382
                                                                        -----------  ---------  -----------  ---------
                                                                         $  30,678   $  30,657   $  31,289   $  31,260
                                                                        -----------  ---------  -----------  ---------
                                                                        -----------  ---------  -----------  ---------
</TABLE>
 
                                      F-4
<PAGE>
                    CONSOLIDATED BALANCE SHEETS (CONTINUED)
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
DECEMBER 31                                                                      1997                    1996
----------------------------------------------------------------------  ----------------------  ----------------------
<S>                                                                     <C>          <C>        <C>          <C>
                                                                           RJRN                    RJRN
                                                                         HOLDINGS      RJRN      HOLDINGS      RJRN
                                                                        -----------  ---------  -----------  ---------
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings...............................................   $     361   $     361   $     609   $     609
  Accounts payable....................................................         733         733         691         690
  Accrued liabilities.................................................       2,750       2,572       2,684       2,527
  Current maturities of long-term debt................................          33          33          63          63
  Income taxes accrued................................................         268         243         259         235
                                                                        -----------  ---------  -----------  ---------
      TOTAL CURRENT LIABILITIES.......................................       4,145       3,942       4,306       4,124
                                                                        -----------  ---------  -----------  ---------
 
Long-term debt (less current maturities)..............................       9,456       9,456       9,256       9,256
Other noncurrent liabilities..........................................       2,969       2,720       3,020       2,669
Deferred income taxes.................................................       3,524       3,460       3,605       3,542
Commitments and contingencies (note 10)
RJRN Holdings' obligated mandatorily redeemable preferred securities
  of subsidiary trust holding solely junior subordinated
  debentures*.........................................................         953          --         954          --
 
Stockholders' equity:
  Series C convertible preferred stock (26,675,000 shares issued and
    outstanding in 1996)..............................................          --          --           3          --
  Other preferred stock...............................................         520          --         534          --
  Common stock (1997-327,158,090 shares issued, 1996-- 273,574,308
    shares issued)....................................................           3          --           3          --
  Paid-in capital.....................................................       9,668      11,470      10,038      11,890
  Retained earnings...................................................          --          --          --          --
  Cumulative translation adjustments..................................        (391)       (391)       (221)       (221)
  Treasury stock, at cost.............................................        (100)         --        (100)         --
  Other stockholders' equity..........................................         (69)         --        (109)         --
                                                                        -----------  ---------  -----------  ---------
      TOTAL STOCKHOLDERS' EQUITY......................................       9,631      11,079      10,148      11,669
                                                                        -----------  ---------  -----------  ---------
                                                                         $  30,678   $  30,657   $  31,289   $  31,260
                                                                        -----------  ---------  -----------  ---------
                                                                        -----------  ---------  -----------  ---------
</TABLE>
 
------------------------------
 
* The sole asset of the subsidiary trust is the junior subordinated debentures
of RJRN Holdings. Upon redemption of the junior subordinated debentures, which
have a final maturity of December 31, 2044, the preferred securities will be
mandatorily redeemed. The outstanding junior subordinated debentures have an
aggregate principal amount of approximately $978 million and an annual interest
rate of 10%.
 
                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
                                      F-5
<PAGE>
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
                                                                                             CUMULATIVE
                                                       CAPITAL     PAID-IN    RETAINED       TRANSLATION      TREASURY
                                                       STOCK*      CAPITAL    EARNINGS       ADJUSTMENTS        STOCK
                                                     -----------  ---------  -----------  -----------------  -----------
<S>                                                  <C>          <C>        <C>          <C>                <C>
Balance at January 1, 1995.........................   $   1,501   $  10,157   $    (364)      $    (164)      $      --
  Net income.......................................                                 611
  Foreign currency translation, net of tax.........                                                 (12)
  Retirement of 324,453 shares of ESOP preferred
    stock..........................................          (5)
  Exchange of preferred securities of a subsidiary
    for 37,956 shares of Series B preferred
    stock..........................................        (949)         (5)
  Issuance of 543,787 shares of common stock.......                      13
  Repurchase and cancellation of 67,222 shares of
    common stock...................................                      (2)
  Gain on sale of Nabisco Holdings' common stock...                     401
  Dividends........................................                    (432)       (247)
  ESOP note payments received......................
  Other............................................                     (22)
                                                     -----------  ---------       -----           -----           -----
Balance at December 31, 1995.......................         547      10,110      --                (176)             --
  Net income.......................................                                 611
  Foreign currency translation, net of tax.........                                                 (45)
  Retirement of 431,757 shares of ESOP preferred
    stock..........................................          (7)
  Issuance of 775,366 shares of common stock.......                      18
  Repurchase of 3,377,300 shares of common stock...                                                                (100)
  Cancellation of 9,000 shares of common stock.....
  Dividends........................................                     (97)       (611)
  ESOP note payments received......................
  Other............................................                       7
                                                     -----------  ---------       -----           -----           -----
Balance at December 31, 1996.......................         540      10,038      --                (221)           (100)
  Net income.......................................                                 381
  Foreign currency translation, net of tax.........                                                (170)
  Retirement of 843,970 shares of ESOP preferred
    stock..........................................         (14)
  Conversion of 26,675,000 shares
    of Series C preferred stock
    into 53,350,000 shares
    of common stock................................          (3)          3
  Issuance of 405,532 shares of common stock.......                      10
  Cancellation of 171,750 shares of common stock...                      (5)
  Dividends........................................                    (361)       (381)
  ESOP note payments received......................
  Other............................................                     (17)
                                                     -----------  ---------       -----           -----           -----
Balance at December 31, 1997.......................   $     523   $   9,668   $  --           $    (391)      $    (100)
                                                     -----------  ---------       -----           -----           -----
                                                     -----------  ---------       -----           -----           -----
 
<CAPTION>
 
                                                        OTHER       TOTAL
                                                     -----------  ---------
<S>                                                  <C>          <C>
Balance at January 1, 1995.........................   $    (222)  $  10,908
  Net income.......................................                     611
  Foreign currency translation, net of tax.........                     (12)
  Retirement of 324,453 shares of ESOP preferred
    stock..........................................                      (5)
  Exchange of preferred securities of a subsidiary
    for 37,956 shares of Series B preferred
    stock..........................................                    (954)
  Issuance of 543,787 shares of common stock.......                      13
  Repurchase and cancellation of 67,222 shares of
    common stock...................................                      (2)
  Gain on sale of Nabisco Holdings' common stock...                     401
  Dividends........................................                    (679)
  ESOP note payments received......................          27          27
  Other............................................          43          21
                                                          -----   ---------
Balance at December 31, 1995.......................        (152)     10,329
  Net income.......................................                     611
  Foreign currency translation, net of tax.........                     (45)
  Retirement of 431,757 shares of ESOP preferred
    stock..........................................                      (7)
  Issuance of 775,366 shares of common stock.......                      18
  Repurchase of 3,377,300 shares of common stock...                    (100)
  Cancellation of 9,000 shares of common stock.....                      --
  Dividends........................................                    (708)
  ESOP note payments received......................          34          34
  Other............................................           9          16
                                                          -----   ---------
Balance at December 31, 1996.......................        (109)     10,148
  Net income.......................................                     381
  Foreign currency translation, net of tax.........                    (170)
  Retirement of 843,970 shares of ESOP preferred
    stock..........................................                     (14)
  Conversion of 26,675,000 shares
    of Series C preferred stock
    into 53,350,000 shares
    of common stock................................                      --
  Issuance of 405,532 shares of common stock.......                      10
  Cancellation of 171,750 shares of common stock...                      (5)
  Dividends........................................                    (742)
  ESOP note payments received......................          36          36
  Other............................................           4         (13)
                                                          -----   ---------
Balance at December 31, 1997.......................   $     (69)  $   9,631
                                                          -----   ---------
                                                          -----   ---------
</TABLE>
 
------------------------
 
* Includes $3 million of common stock for each reporting period presented. The
  number of shares of common stock, par value $.01, authorized at December 31,
  1997 was 440,000,000. Common shares outstanding: 1997-323,780,790 and 1996 -
  270,197,008.
 
                SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
                                      F-6
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    BASIS OF PRESENTATION
 
    The consolidated financial statements include the accounts of RJR Nabisco
Holdings Corp. ("RJRN Holdings"), its wholly-owned subsidiary RJR Nabisco, Inc.
("RJRN") and their majority-owned subsidiaries, including 80.7% of Nabisco
Holdings Corp. ("Nabisco Holdings") and its wholly-owned subsidiary, Nabisco,
Inc. ("Nabisco").
 
    The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
    Certain prior years' amounts have been reclassified to conform to the 1997
presentation.
 
    Unless otherwise noted, all dollar amounts presented are in millions except
per share amounts.
 
    CASH EQUIVALENTS
 
    Cash equivalents include all short-term, highly liquid investments that are
readily convertible to known amounts of cash and that have original maturities
of three months or less.
 
    INVENTORIES
 
    Inventories are stated at the lower of cost or market. The cost of U.S.
tobacco inventories is determined principally under the LIFO method. The cost of
remaining inventories is determined principally under the FIFO, specific lot and
weighted average methods. In accordance with recognized industry practice,
stocks of tobacco, which must be cured for more than one year, are classified as
current assets.
 
    DEPRECIATION AND AMORTIZATION AND VALUATION OF INTANGIBLES
 
    Property, plant and equipment are depreciated by the straight-line method
over the estimated useful lives of the assets.
 
    Goodwill and trademarks are amortized using the straight-line method,
principally over 40 years. Management periodically evaluates the recoverability
of goodwill and trademarks. The carrying value of goodwill and trademarks would
be reduced if it is probable that management's best estimate of future operating
income before amortization of goodwill and trademarks from related operations,
on an undiscounted basis, will be less than the carrying value over the
remaining amortization period.
 
    OTHER INCOME (EXPENSE), NET
 
    Interest income, certain gains and losses on foreign currency transactions,
financing-related fees and other items of a financial nature are included in
"Other income (expense), net".
 
    INCOME TAXES
 
    Income taxes are calculated for RJRN on a separate return basis.
 
    ADVERTISING AND RESEARCH AND DEVELOPMENT
 
    Advertising and research and development costs are expensed as incurred.
 
                                      F-7
<PAGE>
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    INTEREST RATE ARRANGEMENTS
 
    For interest rate swaps, the differential to be paid or received is accrued
and recognized in interest expense and may change as market interest rates
change. For purchased interest rate caps, the premium paid is amortized to
interest expense over the term of the cap and any amounts receivable are accrued
as a reduction of interest expense. If an arrangement is terminated prior to
maturity, the gain or loss is recognized over the remaining original life of the
arrangement if the item hedged remains outstanding, or immediately, if the item
hedged does not remain outstanding. If the arrangement is not terminated prior
to maturity, but the underlying hedged item is no longer outstanding, the
interest rate arrangement is marked to market and any unrealized gain or loss is
recognized immediately.
 
    FOREIGN CURRENCY ARRANGEMENTS
 
    Forward foreign exchange contracts are carried at fair value on the
consolidated balance sheets. The corresponding gains or losses on those
contracts entered into to hedge firm commitments are deferred on the
consolidated balance sheets as well and included in the basis of the underlying
hedged transaction when settled. To the extent that the underlying hedged
foreign currency transaction does not occur, the gains and losses deferred would
be recognized in earnings immediately. Gains or losses on those contracts
entered into to hedge foreign currency exposure of existing assets and
liabilities are generally recognized in income currently, along with the related
translation gains or losses recognized from the remeasurement of the assets or
liabilities hedged.
 
    Translation gains or losses resulting from foreign-denominated borrowings
that are accounted for as hedges of certain foreign currency net investments
result in charges or credits to the cumulative translation adjustments account
in stockholders' equity.
 
    COMMODITY CONTRACTS
 
    Changes in the market value of commodity contracts are recorded as an
addition to, or reduction from, the raw material inventory cost. Market value
changes are recorded in cost of products sold when the related finished products
are sold. Due to wide fluctuations in the market prices for various agricultural
commodities, futures contracts are frequently entered into to hedge the price
risk associated with anticipated purchases.
 
    NEW ACCOUNTING PRONOUNCEMENTS
 
    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"), which establishes standards
for the way that public business enterprises report information about operating
segments. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. RJRN Holdings is currently reviewing its
operating segment disclosures and will adopt SFAS No. 131 in the fourth quarter
of 1998.
 
NOTE 2--RESTRUCTURING
 
    RJRN Holdings recorded a pre-tax restructuring expense of $301 million ($235
million after-tax) in the fourth quarter of 1997 to reorganize its worldwide
tobacco operations. The 1997 restructuring program was undertaken to enhance its
competitive position and improve its long-term earnings growth prospects.
 
                                      F-8
<PAGE>
NOTE 2--RESTRUCTURING (CONTINUED)
    The components of the $301 million charge are as follows:
 
<TABLE>
<CAPTION>
                                                                                    INTERNATIONAL     DOMESTIC       TOTAL
                                                                                   ---------------  -------------  ---------
 
<S>                                                                                <C>              <C>            <C>
Employee severance and related benefits..........................................     $     142       $      30    $     172
Rationalization of manufacturing operations......................................            42              30           72
Disposal of non-strategic investments............................................            33          --               33
Contract termination and other costs.............................................             4              20           24
                                                                                          -----             ---    ---------
                                                                                      $     221       $      80    $     301
                                                                                          -----             ---    ---------
                                                                                          -----             ---    ---------
</TABLE>
 
    For international tobacco, the employee severance and related benefits
pertains to workforce reductions of 2,600 employees at various manufacturing
facilities, headquarters and regional support centers; the rationalization of
manufacturing operations is primarily in Germany, Switzerland, Finland and Asia;
and the disposal of non-strategic investments is primarily in Central Europe and
Russia.
 
    For domestic tobacco, the employee severance and related benefits pertains
to workforce reductions of 192 full-time positions and 217 seasonal positions at
a manufacturing facility and staff related areas; the rationalization of
manufacturing operations relates to the closing of a leaf processing facility;
and the contract termination relates to a supply agreement.
 
    Of the $301 million charge, cash outlays will aggregate approximately $180
million. The program is expected to be completed in late 1999 and yield
approximately $155 million in annual savings beginning in the year 2000.
 
    In addition to the above restructuring charge, approximately $89 million was
recognized in operating expenses for international tobacco for implementation
and integration expenses, principally training and relocation of employees and
equipment.
 
    Nabisco Holdings recorded a pre-tax restructuring expense of $428 million
($241 million after-tax, net of minority interest) in the second quarter of
1996, $240 million of which was a cash expense. The 1996 restructuring program,
which was undertaken to streamline operations and improve profitability, was
substantially completed during 1997. In addition to the restructuring expense,
approximately $97 million was recognized during 1996 for implementation and
integration expenses, principally for training and relocation of employees and
equipment. The major components of the $428 million restructuring expense were
domestic sales force reorganizations and other domestic and international
workforce reductions totaling 6,000 employees, product line rationalizations,
non-strategic product line writedowns, contract terminations, plant closures and
facility reorganizations. The restructuring expense consisted of approximately
$353 million for the domestic food business and approximately $75 million for
the international food business, primarily for Brazil, Canada and Iberia.
 
    RJRN Holdings recorded a pre-tax restructuring expense of $154 million ($104
million after-tax) in the fourth quarter of 1995 to reorganize its worldwide
tobacco operations. The 1995 restructuring program, which was primarily
undertaken in order to streamline operations and improve profitability, was
substantially completed during 1996. A significant portion of the 1995
restructuring program was a cash expense. In addition to the $154 million
restructuring expense, approximately $49 million was recorded in the fourth
quarter of 1995 for the consolidation and relocation of the international
tobacco operations' headquarters facilities and certain of its sales offices.
The major components of the $154 million restructuring expense were workforce
reductions totaling 1,260 employees, the rationalization and closing of
facilities relating to the international tobacco operations and equipment and
lease abandonments at the domestic tobacco operations.
 
                                      F-9
<PAGE>
NOTE 3--EARNINGS PER SHARE
 
    Earnings per share has been computed and presented pursuant to the
provisions of Statement of Financial Accounting Standards No. 128, Earnings per
Share, which was adopted in the fourth quarter of 1997. The components of the
calculation for income before extraordinary items are as follows:
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                          ----------------------------------------------------------------------
                                                   1997                    1996                    1995
                                          ----------------------  ----------------------  ----------------------
<S>                                       <C>         <C>         <C>         <C>         <C>         <C>
                                            BASIC      DILUTED      BASIC      DILUTED      BASIC      DILUTED
                                          ----------  ----------  ----------  ----------  ----------  ----------
Income applicable to common stock before
 extraordinary item:
  Income before extraordinary item......  $      402  $      402  $      611  $      611  $      627  $      627
  Preferred stock dividends.............         (44)        (44)        (43)        (43)       (110)       (110)
  Adjustment for the dilutive effect of
    Nabisco Holdings' stock options.....          --          (3)         --          --          --          --
                                          ----------  ----------  ----------  ----------  ----------  ----------
                                          $      358  $      355  $      568  $      568  $      517  $      517
                                          ----------  ----------  ----------  ----------  ----------  ----------
                                          ----------  ----------  ----------  ----------  ----------  ----------
Weighted average number of common and
  common equivalent shares outstanding
  (in thousands):
  Common shares outstanding.............     323,787     323,787     324,917     324,917     325,476     325,476
  Assumed exercise of RJRN Holdings'
    stock options.......................      --           1,531      --           1,030      --             759
                                          ----------  ----------  ----------  ----------  ----------  ----------
                                             323,787     325,318     324,917     325,947     325,476     326,235
                                          ----------  ----------  ----------  ----------  ----------  ----------
                                          ----------  ----------  ----------  ----------  ----------  ----------
</TABLE>
 
Shares of ESOP convertible preferred stock of 13,714,950, 14,558,920 and
14,990,677 were not included in computing diluted earnings per share for 1997,
1996 and 1995, respectively, because the effect would have been antidilutive.
 
NOTE 4--ACCOUNTS RECEIVABLE
 
    Nabisco maintains an arrangement to sell for cash substantially all of its
domestic trade accounts receivable to a financial institution. In addition,
similar arrangements have been established for the sale of trade accounts
receivable by certain foreign tobacco and food subsidiaries.
 
NOTE 5--INVENTORIES
 
    At December 31, 1997 and 1996, approximately $592 million and $694 million,
respectively, of domestic tobacco inventories was valued under the LIFO method.
The current cost of LIFO inventories at December 31, 1997 and 1996 was greater
than the amount at which these inventories were carried on the consolidated
balance sheets by $151 million and $166 million, respectively.
 
    For the years ended December 31, 1997, 1996 and 1995, net income was
increased by approximately $14 million, $35 million and $29 million,
respectively, as a result of LIFO inventory liquidations. The LIFO liquidations
resulted from programs to reduce domestic leaf durations consistent with
forecasts of future operating requirements.
 
                                      F-10
<PAGE>
NOTE 6--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS
 
<TABLE>
<CAPTION>
                                                                 1997                        1996
                                                      --------------------------  --------------------------
<S>                                                   <C>          <C>            <C>          <C>
                                                                      AVERAGE                     AVERAGE
                                                        AMOUNT       YEAR-END       AMOUNT       YEAR-END
                                                      OUTSTANDING  INTEREST RATE  OUTSTANDING  INTEREST RATE
                                                      -----------  -------------  -----------  -------------
Nabisco Holdings:
  Domestic commercial paper (see note 9)............   $   1,991           6.2%    $   1,175           5.8%
  International commercial paper....................          26           4.1%           45           3.2%
  Notes payable to banks............................         154           8.2%          206          14.8%
  Other (see note 9)................................          50           5.8%           --            --
                                                      -----------                 -----------
                                                           2,221                       1,426
  Amount reclassified as long-term debt (see note
    9)..............................................      (2,041)                     (1,175)
                                                      -----------                 -----------
    Total Nabisco Holdings..........................         180                         251
                                                      -----------                 -----------
 
RJRN:
  Domestic commercial paper (see note 9)............          --            --           297           6.2%
  Notes payable to banks............................         181           6.4%          358           6.4%
                                                      -----------                 -----------
                                                             181                         655
  Amount reclassified as long-term debt (see note
    9)..............................................          --                        (297)
                                                      -----------                 -----------
    Total RJRN......................................         181                         358
                                                      -----------                 -----------
    Total short-term
      borrowings....................................   $     361                   $     609
                                                      -----------                 -----------
                                                      -----------                 -----------
</TABLE>
 
    RJRN maintains a three-year $2.75 billion revolving credit facility and a
364-day $568 million credit facility primarily to support commercial paper
issuances. The commitments under the revolving credit facility decline to
approximately $2.2 billion in the final year. Borrowings under the revolving
credit facility bear interest at rates which vary with the prime rate or LIBOR.
Borrowings under the 364-day credit facility bear interest at rates which vary
with LIBOR.
 
    Nabisco maintains a five-year $1.5 billion revolving credit facility and a
364-day $1.381 billion credit facility primarily to support commercial paper
issuances. At the end of the 364-day period, any borrowings outstanding under
the 364-day credit facility are convertible into a three-year term loan at
Nabisco's option. The commitments under the revolving credit facility decline to
approximately $1.46 billion in the final year. Borrowings under the revolving
credit facility bear interest at rates which vary with the prime rate or LIBOR.
Borrowings outstanding under the 364-day credit facility bear interest at rates
which vary with LIBOR.
 
    Based on RJRN's and Nabisco's intention and ability to continue to refinance
for more than one year the amount of their respective domestic commercial paper
and revolving credit agreement borrowings and certain other borrowings through
their separate long-term revolving credit facilities, such borrowings were
reclassified as long-term debt.
 
    Distributions and the payment of dividends by RJRN Holdings are subject to
certain restrictions under certain financing agreements and debt instruments of
RJRN Holdings and RJRN and their subsidiaries. The financing agreements
generally restrict cumulative common and preferred dividends and distributions,
limit the ability to incur indebtedness, engage in transactions with
stockholders and affiliates, create liens, sell or dispose of certain assets and
certain subsidiaries' stock, issue certain equity securities and engage in
certain mergers or consolidations.
 
                                      F-11
<PAGE>
NOTE 6--SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS (CONTINUED)
    Nabisco's credit agreements, among other things, generally restrict common
and preferred dividends and distributions, limit loans and advances by Nabisco
Holdings and its subsidiaries to RJRN, limit the ability to incur indebtedness,
engage in transactions with stockholders and affiliates, create liens, acquire,
sell or dispose of certain assets and securities and engage in certain mergers
or consolidations.
 
NOTE 7--ACCRUED LIABILITIES
 
<TABLE>
<CAPTION>
                                                                       1997           1996
                                                                   -------------  -------------
<S>                                                                <C>            <C>
    Payroll and employee benefits................................    $     595      $     552
    Marketing and advertising....................................          424            461
    Excise taxes.................................................          205            255
    Restructuring................................................          368            210
    Dividends....................................................          186            164
    Tobacco settlement...........................................          177             --
    Accrued interest.............................................          163            202
    Other........................................................          632            840
                                                                        ------         ------
                                                                     $   2,750      $   2,684
                                                                        ------         ------
                                                                        ------         ------
</TABLE>
 
NOTE 8--INCOME TAXES
 
    The provision for income taxes consisted of the following:
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                      1997             1996             1995
----------------------------------------------------------------------  ---------------  ---------------  ---------------
<S>                                                                     <C>              <C>              <C>
Current:
  Federal.............................................................     $     482        $     471        $     525
  Foreign and other...................................................           231              234              227
                                                                               -----            -----            -----
                                                                                 713              705              752
                                                                               -----            -----            -----
Deferred:
  Federal.............................................................          (139)            (147)            (190)
  Foreign and other...................................................           (44)              27               18
                                                                               -----            -----            -----
                                                                                (183)            (120)            (172)
                                                                               -----            -----            -----
Provision for income taxes............................................     $     530        $     585        $     580
                                                                               -----            -----            -----
                                                                               -----            -----            -----
</TABLE>
 
                                      F-12
<PAGE>
NOTE 8--INCOME TAXES (CONTINUED)
    The components of the deferred income tax liability disclosed on the
consolidated balance sheets included the following:
 
<TABLE>
<CAPTION>
                                                                                         1997       1996
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Deferred tax assets:
  Pension and other postretirement liabilities.......................................  $    (418) $    (403)
  Restructuring and other accrued liabilities........................................       (247)      (242)
                                                                                       ---------  ---------
        Total deferred tax assets before valuation allowance.........................       (665)      (645)
  Valuation allowance................................................................         79         86
                                                                                       ---------  ---------
        Net deferred tax assets......................................................       (586)      (559)
                                                                                       ---------  ---------
 
Deferred tax liabilities:
  Property and equipment.............................................................        921        963
  Trademarks.........................................................................      2,624      2,755
  Other..............................................................................        565        446
                                                                                       ---------  ---------
        Total deferred tax liabilities...............................................      4,110      4,164
                                                                                       ---------  ---------
        Net deferred income taxes....................................................  $   3,524  $   3,605
                                                                                       ---------  ---------
                                                                                       ---------  ---------
</TABLE>
 
    Pre-tax income for domestic and foreign operations consisted of the
following:
 
<TABLE>
<CAPTION>
                                                                            1997           1996           1995
                                                                        -------------  -------------  -------------
<S>                                                                     <C>            <C>            <C>
Domestic (includes U.S. exports)......................................    $     651      $     554      $     782
Foreign...............................................................          365            645            484
                                                                             ------         ------         ------
Pre-tax income........................................................    $   1,016      $   1,199      $   1,266
                                                                             ------         ------         ------
                                                                             ------         ------         ------
</TABLE>
 
    The differences between the provision for income taxes and income taxes
computed at statutory U.S. federal income tax rates are explained as follows:
 
<TABLE>
<CAPTION>
                                                                     1997             1996             1995
                                                                ---------------  ---------------  ---------------
<S>                                                             <C>              <C>              <C>
Income taxes computed at statutory U.S. federal income tax
  rates.......................................................     $     356        $     420        $     443
State and local income taxes, net of federal tax benefits.....            44               55               52
Goodwill amortization.........................................           126              132              125
Taxes on foreign operations at rates different than statutory
  U.S. federal rate...........................................            14               (9)              (4)
Exempt foreign sales corporation earnings.....................            (5)              (7)             (15)
Other items, net..............................................            (5)              (6)             (21)
                                                                       -----            -----            -----
Provision for income taxes....................................     $     530        $     585        $     580
                                                                       -----            -----            -----
                                                                       -----            -----            -----
Effective tax rate............................................          52.2%            48.8%            45.8%
                                                                       -----            -----            -----
                                                                       -----            -----            -----
</TABLE>
 
    At December 31, 1997, there was $1.982 billion of accumulated and
undistributed income of foreign subsidiaries. These earnings are intended by
management to be reinvested abroad indefinitely. Accordingly, no applicable U.S.
federal deferred income taxes have been provided nor is a determination of the
amount of unrecognized U.S. federal deferred income taxes practicable.
 
                                      F-13
<PAGE>
NOTE 9--LONG-TERM DEBT
 
<TABLE>
<CAPTION>
                                                                                                   1997       1996
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Nabisco Holdings:
  Short-term borrowings, reclassified..........................................................  $   2,041  $   1,175
  6.7-8.3% notes, due 1998 through 2015........................................................      1,946      2,938
  Other indebtedness...........................................................................        368        124
  Current maturities of long-term debt.........................................................        (21)       (24)
                                                                                                 ---------  ---------
      Total Nabisco Holdings long-term debt....................................................      4,334      4,213
                                                                                                 ---------  ---------
RJRN:
  Short-term borrowings, reclassified..........................................................         --        297
  6.80-9.25% notes, due 1999 through 2013......................................................      4,443      4,122
  5.375-10% foreign currency debt, due 2000 to 2001............................................        469        501
  Other indebtedness...........................................................................        222        162
  Current maturities of long-term debt.........................................................        (12)       (39)
                                                                                                 ---------  ---------
      Total RJRN long-term debt................................................................      5,122      5,043
                                                                                                 ---------  ---------
      Total long-term debt.....................................................................  $   9,456  $   9,256
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
------------------------
 
The payment of long-term debt through December 31, 2002 is as follows:
    1999--$237; 2000--$765; 2001-- $2,024 and 2002--$1,972.
 
    In July 1997, RJRN issued $150 million 8 1/4% notes due 2004 and $200
million 8 1/2% notes due 2007. Interest on the notes is payable semi-annually on
January 1 and July 1 of each year, beginning January 1, 1998. The net proceeds
from the issuance of the notes were used to repay commercial paper borrowings.
 
    In August 1997, Nabisco issued $200 million notes due 2009. These notes
contain both a put and a call option exercisable at the end of two years. The
interest rate for the first two years varies with LIBOR (5.85% at December 31,
1997). Thereafter, the notes, if extended, will bear interest at 6.2% plus
Nabisco's future credit spread on ten-year treasury notes.
 
    In December 1997, Nabisco redeemed $432 million of its $538 million
outstanding 8.3% notes due 1999 and $541 million of its $688 million outstanding
8% notes due 2000. An extraordinary loss of approximately $43 million ($21
million after-tax, net of minority interest, or $.06 per basic and diluted
common share of RJRN Holdings) was recorded related to this transaction. The
redemption of these notes was financed with short-term borrowings, which in turn
were refinanced in January 1998 with long-term notes as follows: $400 million
6.0% notes due 2011, puttable/callable in 2001; $300 million 6 1/8% notes due
2033, puttable/callable in 2003; and $300 million 6 3/8% notes due 2035,
puttable/callable in 2005. The interest rates on the 6.0%, 6 1/8% and 6 3/8%
notes, if not put or called, will be reset at 5.75%, 6.07% and 6.07%,
respectively, plus, in each case, Nabisco's future credit spread on treasury
notes of comparable maturities.
 
    During 1995, RJRN and Nabisco completed a debt exchange which resulted in a
pre-tax charge of approximately $103 million for fees and expenses incurred.
 
    An extraordinary loss of approximately $29 million ($16 million after-tax,
net of minority interest or $.05 per basic and diluted common share of RJRN
Holdings) was recorded in 1995 in connection with the refinancing of certain
long-term debt.
 
    The junior subordinated debentures issued by the subsidiary trust of RJRN
Holdings may be redeemed at RJRN Holdings' election at $25 per debenture on or
after August 19, 1998 and are due in December 2044. Cash distributions on the
preferred securities, which were issued by the subsidiary in
 
                                      F-14
<PAGE>
NOTE 9--LONG-TERM DEBT (CONTINUED)
exchange for an equal amount of RJRN Holdings Series B preferred stock, are
cumulative at an annual rate of 10% of the liquidation amount of $25 per
security and are payable quarterly in arrears.
 
    At December 31, 1997, approximately $5.0 billion of total debt (notes
payable and long-term debt, including current maturities) was owed by RJRN and
approximately $4.9 billion was owed by its subsidiaries.
 
    The estimated fair value of RJRN Holdings' consolidated long-term debt as of
December 31, 1997 and 1996 was approximately $9.8 billion and $9.4 billion,
respectively, based on available market quotes, discounted cash flows and book
values, as appropriate.
 
    RJRN Holdings manages overall interest rate exposure by adjusting the mix of
floating rate debt and fixed rate debt for both RJRN and Nabisco. As part of
managing such interest rate exposures, RJRN and Nabisco may enter into various
interest rate arrangements from time to time. See note 11 to the consolidated
financial statements for further information regarding interest rate
arrangements.
 
    RJRN Holdings adopted a policy setting forth its intention not to make a
distribution to shareholders prior to December 31, 1998 of shares of capital
stock of a subsidiary if that distribution would cause the ratings of the senior
indebtedness of RJRN to be reduced from investment grade to non-investment grade
or if, after giving effect to such distribution, any publicly held senior
indebtedness of the distributed company would not be rated investment grade. The
board of directors of RJRN Holdings is committed to effecting a spin-off of
Nabisco Holdings at the appropriate time. There is no assurance that any such
distribution will take place. Additional policies provide that an amount equal
to the net cash proceeds from any issuance and sale of equity by RJRN Holdings
or from any sale outside the ordinary course of business of material assets
owned or used by subsidiaries in the tobacco business, in each case before
December 31, 1998, will be used either to repay, purchase or redeem consolidated
indebtedness or to acquire properties, assets or businesses to be used in
existing or new lines of business and that an amount equal to the net cash
proceeds of any secondary sale of shares of Nabisco Holdings before December 31,
1998 will be used to repay, purchase or redeem consolidated debt. No assurance
can be given that RJRN Holdings will issue or sell any equity or sell any
material assets outside the ordinary course of business.
 
NOTE 10--COMMITMENTS AND CONTINGENCIES
 
    TOBACCO LITIGATION
 
    OVERVIEW.  Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including, with increasing frequency, RJRN and RJRN Holdings) or indemnitees,
including those claiming that lung cancer and other diseases as well as
addiction have resulted from the use of or exposure to RJRT's tobacco products.
During 1997, 492 new actions were served against RJRT and/or its affiliates or
indemnitees and 212 such actions were dismissed or otherwise resolved in favor
of RJRT and/or its affiliates or indemnitees without trial. There have been
noteworthy increases in the number of these cases pending. On December 31, 1997,
there were 516 active cases pending, as compared with 234 on December 31, 1996,
132 on December 31, 1995 and only 54 on December 31, 1994. As of March 3, 1998,
540 active cases were pending against RJRT and/or its affiliates or indemnitees,
534 in the United States, two in Puerto Rico, one in the Marshall Islands, two
in Canada and one in Nigeria.
 
    The United States cases are in 46 states and are distributed as follows: 198
in Florida, 101 in New York, 21 in Louisiana, 17 in each of Texas and
Pennsylvania, 14 in California, 12 in each of Alabama and Ohio, 11 in Tennessee,
nine in each of the District of Columbia, Illinois and Mississippi, seven in
each of Indiana, New Jersey and West Virginia, six in Georgia, five in each of
Maryland and Massachusetts, four in each of Kansas, Michigan, Minnesota and
South Dakota, three in each of Arizona, Arkansas, Colorado, Hawaii, Iowa,
Missouri, Nevada, Oklahoma and Rhode Island, two in each of Connecticut,
Montana, New Hampshire, New Mexico, Oregon, South Carolina, Utah, Washington and
Wisconsin, and one each in
 
                                      F-15
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Alaska, Idaho, Kentucky, Maine, North Carolina and Vermont. Of the 534 active
cases in the United States, 426 are in state court and 108 are in federal court.
Most of these cases were brought by individual plaintiffs, but an increasing
number, discussed below, seek recovery on behalf of states or large classes of
claimants.
 
    THEORIES OF RECOVERY.  The plaintiffs in these actions seek recovery on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring
and common law public nuisance. Punitive damages, often in amounts ranging into
the hundreds of millions or even billions of dollars, are specifically pleaded
in a number of cases in addition to compensatory and other damages. Eight of the
534 active cases in the United States involve alleged non-smokers claiming
injuries purportedly resulting from exposure to environmental tobacco smoke.
Forty-seven cases purport to be class actions on behalf of thousands of
individuals. Purported classes include individuals claiming to be addicted to
cigarettes, individuals and their estates claiming illness and death from
cigarette smoking, and Blue Cross/Blue Shield subscribers seeking reimbursement
for premiums paid. One hundred two of the active cases seek, INTER ALIA,
recovery of the cost of Medicaid payments or other health-related costs paid for
treatment of individuals suffering from diseases or conditions allegedly related
to tobacco use. Four, brought by entities administering asbestos liability, seek
contribution for settlement costs.
 
    DEFENSES.  The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act of some or all such claims arising after 1969; the lack of any defect in the
product; assumption of the risk; contributory or comparative fault; lack of
proximate cause; and statutes of limitations or repose; and, in the attorney
general cases (discussed below), additional statutory, equitable, constitutional
and other defenses. RJRN and RJRN Holdings have asserted additional defenses,
including jurisdictional defenses, in many of these cases in which they are
named.
 
    Juries have found for plaintiffs in three smoking and health cases in which
RJRT was not a defendant, but in one such case, no damages were awarded and the
judgment was affirmed on appeal. The jury awarded plaintiffs $400,000 in another
such case, CIPOLLONE V. LIGGETT GROUP, INC., but the award was overturned on
appeal and the case was subsequently dismissed. In the third such case, on
August 9, 1996, a Florida jury awarded damages of $750,000 to an individual
plaintiff. The defendant in that case, CARTER V. BROWN & WILLIAMSON, is seeking
to reverse the judgment on appeal. On May 5, 1997, in an individual case filed
against RJRT, brought by the same attorney who represented plaintiffs in the
CARTER case, a Florida state court jury found no RJRT liability. On October 31,
1997, in still another case (KARBIWNYK V. R.J. REYNOLDS TOBACCO COMPANY) brought
by the same attorney, another state court jury found no RJRT liability. In
addition, during 1997 and early 1998, RJRT and other tobacco industry defendants
have settled five lawsuits. See "Interim Agreements" below.
 
    CERTAIN CLASS ACTION SUITS.  In May 1996, there was an important ruling in
one of the purported class action cases, CASTANO V. THE AMERICAN TOBACCO
COMPANY, originally filed in March 1994 in the United States District Court for
the Eastern District of Louisiana against tobacco industry defendants, including
RJRT and RJRN. Plaintiffs sought to obtain certification of a class action on
behalf of all United States residents who allegedly are or claim to be addicted,
or are the legal survivors of persons who allegedly were addicted, to tobacco
products manufactured by defendants. The complaint alleged that cigarette
manufacturers manipulated the levels of nicotine in their tobacco products to
induce addiction in smokers. Plaintiffs' motion for certification of the class
was granted in part on February 17, 1995 but, on May 23, 1996, the Fifth Circuit
Court of Appeals overturned the certification and ordered the case remanded to
the district court for decertification of the class on the grounds that a class
consisting of all "addicted" smokers failed to meet the standards and
requirements of Federal Rule 23 governing class actions. The class has been
decertified and the parties have agreed to move for dismissal of the remaining
individual case with a
 
                                      F-16
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
right to replead after November 15, 1998. Another purported class action, filed
shortly after CASTANO, remains stayed in federal district court in Louisiana.
 
    Putative class action suits based on similar claims have been brought in
state and, in a few instances, federal courts in Alabama, Arkansas, California,
the District of Columbia (D.C. court), Florida, Georgia, Hawaii, Illinois,
Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, New Mexico,
Nevada, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, South Dakota,
Tennessee, Texas, Utah, West Virginia and Wisconsin. A putative class action
filed in Tennessee seeks reimbursement of Blue Cross/Blue Shield premiums paid
by subscribers throughout the United States. Suits are also expected to be filed
in additional jurisdictions and there are also putative class action suits
pending in Canada, Puerto Rico and Nigeria. Each such suit asserts claims on
behalf of residents of a particular jurisdiction who claim to be addicted,
injured, or at greater risk of injury by the use of tobacco, or are the legal
survivors of such persons.
 
    In the class action suit pending in Florida, ENGLE V. R.J. REYNOLDS TOBACCO
COMPANY, a class consisting of Florida residents or their survivors who claim to
have diseases or medical conditions caused by their "addiction" to cigarettes
has been certified. The case was scheduled for trial in February 1998 but was
removed from the court calendar and has not yet been rescheduled. A class was
certified in another purported class action suit, SCOTT V. AMERICAN TOBACCO
COMPANY, on April 11, 1997. Defendants are seeking reconsideration of the
certification. Class certification was granted in two cases pending in New York,
HOSKINS V. R.J. REYNOLDS TOBACCO COMPANY and GEIGER V. AMERICAN TOBACCO COMPANY
(in which certification was conditional). The parties have briefed and argued
appeals brought by defendants in both cases. On January 28, 1998, class
certification was granted by a Maryland state court in RICHARDSON V. PHILIP
MORRIS. Class certification was denied, however, on August 18, 1997, by a
District of Columbia court in the case of REED V. PHILIP MORRIS. In October
1997, class certification was also denied in ARCH V. AMERICAN TOBACCO COMPANY
(renamed BARNES V. AMERICAN TOBACCO COMPANY), which was pending in the United
States District Court for the Eastern District of Pennsylvania. That court had
initially certified a medical monitoring class based on the plaintiffs' amended
complaint (having refused to certify a class based on the initial complaint),
but on October 17, 1997, the judge reversed the certification and also dismissed
the claims of each of the class representatives. Plaintiffs are appealing this
ruling and briefing is scheduled to continue through April 23, 1998. Another
class action suit, BROIN V. PHILIP MORRIS, was settled by an agreement dated
October 9, 1997 and approved by the Florida state court on February 3, 1998. See
"Interim Agreements" below.
 
    THE ATTORNEYS GENERAL AND RELATED CASES.  In June 1994, the Mississippi
attorney general brought an action, MOORE V. AMERICAN TOBACCO COMPANY, against
various industry members including RJRT. This case was brought on behalf of the
state to recover state funds paid for healthcare and medical and other
assistance to state citizens suffering from diseases and conditions allegedly
related to tobacco use. This suit, which was brought in Chancery (non-jury)
Court, Jackson County, Mississippi, also sought an injunction against
"promoting" or "aiding and abetting" the sale of cigarettes to minors. Both
actual and punitive damages were sought in unspecified amounts. The case was
scheduled for trial on July 7, 1997, but on July 2, 1997, the parties arrived at
an agreement in principle settling the claims relating to the subject matter of
the litigation. A comprehensive settlement agreement, based on the agreement in
principle, was signed on October 17, 1997. See "Interim Agreements" below.
 
    Following the filing of the MOORE case, other states, through their
attorneys general and/or other state agencies, sued RJRT and other U.S.
cigarette manufacturers as well as, in some instances, their parent companies,
in actions to recover the costs of medical expenses incurred by the state or its
agencies in the treatment of diseases allegedly caused by cigarette smoking.
Some of these cases also seek injunctive relief and treble damages for state
and/or federal antitrust law and RICO violations. Certain of the actions also
seek statutory penalties and other forms of relief under state consumer
protection and antitrust statutes. On March 3, 1998, there were 39 such cases
pending in the following states, commonwealths, or territories:
 
                                      F-17
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Alaska, Arizona, California, Colorado, Connecticut, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire,
New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto
Rico, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington,
West Virginia and Wisconsin. In addition to the Mississippi case mentioned
above, tobacco company defendants have settled two additional attorney general
cases; one in the State of Florida (except for certain equitable claims) and
another in the State of Texas. See "Interim Agreements" below.
 
    One of the attorney general cases is currently on trial in Minnesota. The
trial, which began in January 1998, is expected to take approximately four
months. Plaintiffs in this case are seeking compensatory damages of $1.7 billion
and, in addition, seek disgorgement of profits, restitution, treble damages
under the State's antitrust statute, punitive damages, funding of smoking
cessation and public education programs, civil penalties of $25,000 for each
separate violation of various consumer protection statutes, civil penalties of
$50,000 for each separate violation of Minnesota's antitrust statute, attorneys'
fees and costs, various forms of non-monetary relief and such other relief as
the court deems just and equitable.
 
    During pre-trial discovery and in the course of trial to date, the court in
this case made a number of rulings adverse to the defendants. These rulings,
among other things, limit the defenses available to the defendants and require
production by the defendants of thousands of documents for which privilege had
been asserted. The tobacco companies are defending this case vigorously, but the
court's rulings could have an adverse effect on their ability to present their
defense effectively.
 
    In addition to the 39 pending actions brought by the various attorneys
general, 63 pending actions advancing similar theories have been brought by
private attorneys and/or local officials purportedly on behalf of the citizens
of certain states, counties and/or cities, union health and welfare funds, a
university and four native American tribes. One such union case, NORTHWEST
LABORERS V. PHILIP MORRIS, pending in the State of Washington, was certified as
a class action on December 24, 1997. A taxpayer case pending in Ohio was
dismissed for lack of standing on February 12, 1998 (COYNE V. AMERICAN TOBACCO).
 
    Although RJRT and most other cigarette manufacturers have agreed to the
Memorandum described below, the uncertainty of its enactment into law requires
that they continue to defend these attorney general and related cases vigorously
as they come to trial and, except as described below (see "Interim Agreements")
they continue to do so (as do RJRN and RJRN Holdings in the cases where they are
named defendants). In addition, the tobacco company defendants filed for
declaratory judgment in several of the states in which attorney general cases
were threatened.
 
    PROPOSED RESOLUTION.  Following several months of negotiations with state
attorneys general, representatives of the public health community and
plaintiffs' lawyers, on June 20, 1997, a Memorandum of Understanding and
Resolution (the "Memorandum") that sets forth concepts for federal legislation
and a contractual protocol to resolve a variety of litigation and regulatory
issues concerning tobacco was entered into. The Memorandum requires the tobacco
companies to make an initial $10 billion payment and subsequent annual
multi-billion dollar payments expected to aggregate to approximately $368.5
billion over 25 years. Discussions with other manufacturers who were
participants in the negotiations which led to the Memorandum are still in
progress, but RJRT believes that its share of the initial payment will be in the
range of $600 to $700 million and that subsequent payments will be allocated
within the industry based on market share. The proposed legislation would also,
among other things, reduce retail access for tobacco products, eliminate
cigarette vending machines and tobacco product sampling, confer authority on the
FDA to regulate the manufacture of tobacco products (with express limitations on
authority relating to nicotine) and create publicly funded smoking cessation and
education programs. The proposed legislation would grant limited litigation
protection to the tobacco industry, including a bar on class action suits, suits
based on addiction and demands for punitive damages for past actions. It would
also cap industry payments in permitted individual lawsuits to an aggregate of
$5 billion per year. The proposal also provides
 
                                      F-18
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
a "look-back" provision which would penalize manufacturers if youth smoking is
not reduced by stated amounts in certain years after enactment, culminating in a
60% reduction after 10 years.
 
    There can be no assurance that legislation required to implement the
Memorandum will be enacted or that it will be enacted without modification that
is materially adverse to the tobacco industry, particularly in light of the
complex legal and factual issues involved and the need to reconcile the views of
many competing interests. A number of bills have been introduced into Congress
incorporating terms that vary in significant ways from those agreed to in the
Memorandum. It is not certain that proposed legislation, if any, that emerges
from this process will be advantageous to RJRT. If enacted, the legislation
could face challenges on the grounds, among others, that the federal government
lacks the authority to regulate the tobacco industry or limit its liability in
the manner contemplated by the Memorandum. Regardless of the legislative
outcome, the negotiation and signing of the Memorandum could adversely affect
other federal, state and local regulation of the tobacco industry, alter the
climate for pending litigation against RJRN, RJRT and other tobacco industry
defendants and their corporate parents and affect the number of new smoking and
health claims filed against the industry.
 
    The financial effects of this legislation and the related contractual
protocol are difficult to predict. They depend, among other things, on (i) the
amount, timing and tax treatment of the payments actually required of RJRT by
the legislation; (ii) the means used to finance these payments; (iii) the impact
of increased cigarette prices and other aspects of the legislation and the
contractual protocol on domestic cigarette consumption; (iv) the effect of the
legislation and the contractual protocol on the consumption of tobacco products
and on the regulatory and litigation environment outside the United States; (v)
the effect, if any, on public attitudes toward smoking and the tobacco industry;
and (vi) the impact on RJRT's competitive position in the tobacco industry.
 
    Despite these uncertainties, RJRN believes that implementation of the
Memorandum would increase the costs and reduce the consumption of RJRT's tobacco
products in the United States. In particular, the substantial price increases
necessary to fund payments of the magnitude contemplated by the Memorandum could
reduce domestic industry cigarette volumes by up to 45% over 10 years depending
on the assumptions used, which assumptions, by their nature, are speculative.
Such volume reduction would likely have a significant negative effect on the
business of RJRT and the stated financial position of RJRN Holdings, RJRN and
RJRT. Any significant negative effect on the financial position of any of these
entities could ultimately impact the share repurchase and dividend policies of
RJRN Holdings. On the other hand, the proposals contemplated by the Memorandum
offer a measure of relief from certain litigation that could otherwise
materially affect the results of operations or cash flows of RJRN in particular
quarterly or annual periods or its financial condition. In evaluating any
proposed legislation to resolve tobacco issues, RJRN and RJRT will continue to
weigh carefully the potential benefits, principally greater regulatory and
litigation certainty and predictability in annual aggregate contingency risk,
against the resulting monetary, regulatory and other costs.
 
INTERIM AGREEMENTS
 
    Because the Memorandum, unless and until it is enacted into law, will not
resolve any pending litigation scheduled for trial in advance of such enactment,
the parties in each case must decide, on a case-by-case basis, whether to
proceed to trial or seek some other resolution. Thus far, five cases have been
settled, including three attorney general cases.
 
    THE ATTORNEY GENERAL AGREEMENTS.  In furtherance of the proposed resolution
under the Memorandum, tobacco companies have settled attorney general cases in
Mississippi, Florida and Texas as they came to trial. Each settling state has
agreed to a percentage share of the $10 billion initial and scheduled annual
payments agreed to in the Memorandum; 1.7% for Mississippi, 5.5% for Florida and
7.25% for Texas and will also be entitled to attorneys' costs as well as private
counsel fees as set by a panel of arbitrators subject to a $500 million
aggregate annual cap for payment of such fees for all settlements of similiar
litigation.
 
                                      F-19
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Each agreement also provides that if the U.S. Congress enacts federal
legislation in keeping with the Memorandum, the terms of that legislation would
generally supersede the terms of the state agreement. Defendants would receive
credit for their payments under the state agreements against the obligations
arising under the federal legislation. If, instead, the defendants enter into a
number of separate settlement agreements with other individual states, these
three settling states would be entitled to payment adjustments to assure at
least as favorable a settlement as any other separately settling state.
 
    The first attorney general case scheduled for trial after adoption of the
Memorandum was MOORE V. AMERICAN TOBACCO COMPANY. In that case, a settlement was
agreed to on July 2, 1997, and a full settlement agreement was executed on
October 17, 1997. The agreement calls for the defendants to make an aggregate
up-front payment of $170 million to the State of Mississippi. It also provides
for continuing payments commencing December 31, 1998, and annually thereafter,
based, in 1998, on Mississippi's 1.7% share of $4 billion (the anticipated first
annual industry payment under the Memorandum) and escalating in several annual
steps to 1.7% of $8 billion in year eight and thereafter, adjusted upward by no
less than 3% per year and further adjusted upward or downward to reflect
increases or decreases in volume of domestic tobacco product sales. Mississippi
also became entitled to $61.8 million for an anti-smoking pilot program by
operation of the "most favored nation" provision of its agreement as a result of
Florida's subsequent settlement containing pilot program provisions.
 
    The second attorney general case to come to trial, STATE OF FLORIDA V.
AMERICAN TOBACCO COMPANY, was in the jury selection phase in Florida state court
when, on August 25, 1997, the parties announced that they had entered into a
settlement agreement. The agreement called for the tobacco company participants
to make an aggregate up-front payment of $550 million. It also provides for
annual payments beginning in September 1998 of 5.5% of $4 billion and increasing
in several annual steps to 5.5% of $8 billion by 2003 and thereafter (subject to
various adjustments) all consistent with the national annual payment schedule.
The tobacco companies also agreed to fund a $200 million pilot program to
discourage youth smoking. The agreement, like the other state settlements, also
requires the tobacco companies to discontinue all billboard advertisements as
well as all advertisements that appear on vehicles and in certain public areas,
within several months.
 
    Related to the Florida settlement, on November 18, 1997, a law firm that had
represented the State filed a suit against RJRT and others alleging tortious
interference with the plaintiff's contingency fee contract with the State as
well as conspiracy to induce the State to circumvent and negate plaintiff's
rights to recover under that contract. The case is now in discovery.
 
    Finally, the Texas case, STATE OF TEXAS V. AMERICAN TOBACCO COMPANY, was
settled by an agreement dated January 16, 1998 providing for a pilot program
payment of $264 million and an aggregate up-front payment of $725 million. Texas
will be entitled to a 1998 annual payment of $290 million (7.25% of $4 billion)
paid in two installments ($89 million on November 1, 1998 and $201 million on
December 31, 1998) and increasing in several annual steps to $580 million (7.25%
of $8 billion) by 2003 and thereafter (subject to adjustments). RJRT's shares of
the initial payment and pilot program will total approximately $114 million,
paid or to be paid over the course of 1998 in payments of approximately $32
million by February 1, 1998; $12 million by July 1, 1998; $23 million by October
1, 1998; and $47 million by November 1, 1998.
 
    The companies have also agreed to pay a $50 million advance on fees of the
State of Texas's private counsel prior to the arbitration decision awarding such
fees provided that the State of Texas makes an equivalent advance. RJRT's share
of the advance will be approximately $12 million. The payment of this amount,
originally scheduled for late February, has been suspended by stipulation of the
parties until March 24, 1998 as a result of a dispute raised by would-be
interveners about the scope of the settlement. Neither the Mississippi nor
Florida settlement agreement provides for payment of any advance on private
counsel fees. Therefore, under the most favored nation provisions of their
settlement agreements, provided that those states make equivalent advances, the
tobacco companies may be required to make
 
                                      F-20
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
advances to private counsel in those states. Each tobacco company's share of
advances of this type, for all settling states, would be based on market share.
 
    If federal legislation in keeping with the Memorandum is enacted, the
parties expect that Mississippi, Florida and Texas, because of their
contribution to securing resolution of these matters, may apply to a panel of
arbitrators for additional compensation. The settling defendants have agreed not
to oppose applications of $75 million for Mississippi, $250 million for Florida
and $329.5 million for Texas (as well as, any increase over these amounts
necessary to offset the difference, if any, between the amounts to be paid to
these states during 1998 under the agreements and the amounts allocated to those
states for that period under the federal legislation). Payment of these amounts
would be made over a number of years and would be subject to an aggregate annual
cap of $100 million for all settling states.
 
    Each individual state agreement provides that the related settlement is not
an admission or concession or evidence of any liability or wrongdoing on the
part of any party and was entered into by the settling defendants solely to
avoid the further expense and uncertainty of litigation.
 
    RJRT has made certain payments under these attorney general agreements. Its
portion of the upfront payments, based on market capitalization, was $12.4
million for Mississippi and $37.4 million for Florida. Texas payments, both for
the initial amount and pilot program to discourage youth smoking are to be made
at several points in 1998 as described above. RJRT's portion of the pilot
program payments, based on market share, was $15.3 million for Mississippi and
$49 million for Florida. Additional payments, based on market share, were made
with respect to the costs and expenses of counsel in all three states which
totalled approximately $21 million.
 
    THE BROIN SETTLEMENT.  The plaintiffs' attorneys in a class action case,
BROIN V. PHILIP MORRIS, entered into a settlement agreement with participating
tobacco company defendants on October 9, 1997. This case had been brought in
Florida state court on behalf of all flight attendants of U.S. airlines alleged
to be suffering from diseases or ailments caused by second-hand smoke in
airplane cabins. This agreement requires the participating tobacco companies to
pay $300 million in three annual installments, allocated among the companies by
market share, to fund research on the early detection and cure of diseases
associated with tobacco smoke. It also calls for those companies to pay a total
of $49 million for plaintiffs' counsel's fees and expenses. The agreement bars
class members from bringing aggregate claims or obtaining punitive or exemplary
damages and also bars individual claims to the extent that they are based on
fraud, misrepresentation, conspiracy to commit fraud or misrepresentation, RICO,
suppression, concealment or any other alleged intentional or willful conduct.
The defendants agree that in any individual case brought by a class member, they
will bear the burden of proof regarding general causation that ordinarily would
be born by the plaintiffs. Trial court approval of the BROIN settlement was
granted on February 3, 1998, but this approval has been noticed for appeal. No
payments with respect to either the research fund or attorney's fees will be due
until final resolution of all appeals. RJRT's portion will be approximately $86
million. RJRT has already paid its market share of $3 million due to the BROIN
attorneys in respect of costs and expenses. This amount is subject to recovery
if the settlement is successfully challenged.
 
    THE MANGINI SETTLEMENT.  On September 5, 1997, a settlement agreement was
executed on behalf of the parties to MANGINI V. R.J. REYNOLDS TOBACCO COMPANY, a
case that had been scheduled for trial in San Francisco Superior Court for
December 1997. This case sought injunctive and other relief against RJRT and an
advertising agency with respect to the use of Joe Camel advertising as an unfair
business practice allegedly targeting minors. The agreement requires the
defendants to acknowledge that the lawsuit along with public controversy
surrounding Joe Camel, was a "substantial factor" in the phase-out of Joe Camel
advertising. It also requires prompt removal of Joe Camel billboards and
cessation of the use of Joe Camel in advertisements and promotional items in
California. The defendants agreed to authorize release to the public of
non-privileged and non-work product documents referring to persons under the age
of 18 and/or the Joe Camel advertising campaign that were produced during
discovery in the case. Pursuant to the
 
                                      F-21
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreement, RJRT has paid $10 million to the City and County of San Francisco to
cover attorneys' fees ($1 million) and for distribution to the various state
jurisdictions participating in the case for anti-youth smoking advertisements
($9 million).
 
    The MANGINI settlement provides that plaintiffs' counsel will be paid in
accordance with the counsel fee arrangements ultimately arrived at for the
national legislative settlement. If there is no such arrangement, or the
arrangement does not allow plaintiffs' counsel to participate, fees will be
determined by an arbitration panel. Finally, the agreement preserves certain
claims brought by various California public entities, including claims that the
Joe Camel campaign violated certain sections of the California Business and
Professions Code.
 
    RJRT has participated and may continue to participate in discussions with
plaintiffs in certain healthcare cost-recovery and class actions scheduled to be
tried in the coming months in order to postpone or settle those actions in light
of the pending legislative initiative. There can be no assurance that any such
postponement or settlement can be achieved, or, if achieved, as to the terms
ultimately agreed to. In the absence of postponement or settlement, these
actions would be tried as scheduled and any final judgment reached prior to
enactment of the contemplated legislation might not be affected by the passage
of that legislation.
 
    RECENT AND SCHEDULED TRIALS.  As of March 3, 1998, there were 14 cases
scheduled for trial in 1998 against RJRT alleging injuries relating to tobacco.
Two trials are currently in process, the attorney general case in Minnesota
discussed above and an individual environmental tobacco smoke case in Indiana
state court (DUNN V. RJR NABISCO HOLDINGS). The next attorney general case
scheduled for trial is Washington's which has been scheduled for September 1998.
The State of Florida's remaining equitable claims are also scheduled for trial
in September 1998. The State of Arizona's case is scheduled for October and that
of Oklahoma for November. Cases against other tobacco company defendants are
also scheduled for trial in 1998 and thereafter. Although trial schedules are
subject to change and many cases are dismissed before trial, it is likely that
there will be an increased number of tobacco cases, involving claims for
possibly billions of dollars, against RJRT and RJRN coming to trial over the
next year as compared to prior years when trials in these cases were infrequent.
 
    OTHER DEVELOPMENTS.  On May 28, 1997, a suit was filed against RJRT in the
U.S. District Court for the Northern District of Georgia, Atlanta Division, FARR
V. R.J. REYNOLDS TOBACCO COMPANY, alleging claims under Title VII and the Equal
Pay Act on behalf of female RJRT employees and applicants for employment in the
"southeast sales region," seeking equitable relief, back pay and lost benefits,
as well as punitive damages, based on allegations that plaintiffs had been
denied employment, desirable job assignments, training, promotion and equal pay.
No motion seeking class certification has yet been filed by plaintiffs. RJRT has
filed an answer in the case and intends to defend it vigorously.
 
    On September 15, 1997, a suit, RAYMARK INDUSTRIES V. BROWN & WILLIAMSON, was
filed against RJRT and RJRN and various other tobacco industry entities for
contribution/damages related to asbestos litigation. The suit was filed in the
United States District Court for the Northern District of Georgia. Raymark
alleged that it expended $400 million on the defense and payment of asbestos
personal injury claims in trial, verdict, appeal and settlement. Raymark alleged
that cigarette smoke inhaled by the asbestos claimants caused the cancers
complained of in the litigation in which it has been involved. Raymark seeks to
recover contribution and/or indemnity from the defendants for the share of
payments made by Raymark that were allegedly caused by tortious and otherwise
actionable conduct of defendants. Raymark's claims included counts for:
negligence, strict liability, fraud and misrepresentation, conspiracy and
damages. Three other cases making similar allegations were filed in December
1997, one in California and two in New York. RJRT and the other tobacco industry
defendants in this action dispute the claims advanced in these cases and intend
to defend all such actions vigorously.
 
    A purported class was granted conditional class certification in a case,
MOSELY V. PHILIP MORRIS COMPANIES, brought in Alabama state court against RJRT,
RJRN and others, alleging violations of
 
                                      F-22
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Alabama antitrust law. The complaint in this case alleges that cigarette
companies and others have conspired to raise prices. The class consists of all
Alabama residents who purchased certain defendants' cigarettes for smoking
purposes since March 1997. The plaintiffs seek statutory damages as well as
actual damages of up to $500 per class member. The defendants have removed the
case to federal court. On October 31, 1997, the federal court vacated the
conditional class certification pending a hearing on class certification in
federal court and on February 6, 1998, the federal court denied plaintiff's
motion to remand the case to state court.
 
    RJRT understands that a grand jury investigation is being conducted in the
Eastern District of New York examining possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research -- USA,
Inc., of which RJRT is a sponsor. RJRT has responded, and will continue to
respond, to document subpoenas issued by this grand jury. In addition, subpoenas
dated May 24, 1996, November 8, 1996, December 5, 1996 and January 21, 1998 were
served on RJRT by a grand jury sitting in the District of Columbia. RJRT has
responded or is in the process of responding to those subpoenas. RJRN and RJRT
are unable to predict the outcome of these investigations.
 
    RJRT, R.J. Reynolds International ("Reynolds International") and Northern
Brands International, another subsidiary of RJRN, each received document
subpoenas dated July 24, 1997, from a federal grand jury sitting in the Northern
District of New York. RJRT understands that the grand jury is investigating
possible smuggling activities. RJRT, Reynolds International and Northern Brands
International are responding to these subpoenas but are unable to predict the
outcome of the grand jury's investigation.
 
    For a further discussion of litigation affecting the tobacco business see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tobacco--Governmental Activity."
 
    Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, including the Memorandum referred to above.
These developments may negatively affect the outcomes of tobacco-related legal
actions and encourage the commencement of additional similar litigation.
 
    Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.
 
    RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
 
ENVIRONMENTAL MATTERS
 
    The U.S. Government and various state and local governments have enacted or
adopted laws and regulations concerning protection of the environment. The
regulations promulgated by the Environmental Protection Agency and other
governmental agencies under various statutes have resulted in, and will likely
continue to result in, substantial expenditures for pollution control, waste
treatment, plant modification and similar activities.
 
                                      F-23
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
    In April 1995, RJRN Holdings was named a potentially responsible party (a
"PRP") with certain third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") with respect to a superfund
site at which a former subsidiary of RJRN had operations. RJRN has also been
named in an insurance coverage suit brought by another company named as a PRP at
this site. In this lawsuit, DEL MONTE FRESH PRODUCE V. FIREMEN'S FUND INSURANCE,
filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the
plaintiff seeks declaratory judgment that it is entitled to insurance coverage
for the site or, in the alternative, that RJRN is obligated to indemnify Del
Monte under the terms of the agreement by which RJRN sold that company in 1989.
 
    Certain subsidiaries of RJRN Holdings and RJRN have also been named as PRPs
with third parties or may have indemnification obligations with respect to a
number of additional sites. Liability under CERCLA is joint and several.
 
    RJRN Holdings' and RJRN's subsidiaries have been engaged in a continuing
program to assure compliance with U.S., state and local laws and regulations.
Although it is difficult to identify precisely the portion of capital
expenditures or other costs attributable to compliance with environmental laws
and to estimate the cost of resolving these CERCLA matters, RJRN Holdings and
RJRN do not expect such expenditures or other costs to have a material adverse
effect on the business or financial condition of RJRN Holdings and RJRN and
their subsidiaries taken as a whole.
 
COMMITMENTS
 
    At December 31, 1997, commitments totalled approximately $900 million,
principally for minimum operating leases, the purchase of leaf tobacco
inventories and other contractual arrangements.
 
NOTE 11--FINANCIAL INSTRUMENTS
 
INTEREST RATE ARRANGEMENTS
 
    At December 31, 1997, Nabisco had: (i) $1.074 billion of interest rate caps
with expiration dates within six months, (ii) $500 million of forward starting
interest rate caps commencing within six months and with expiration dates six
months thereafter, and (iii) $300 million of fixed to floating interest rate
swaps expiring the beginning of 1999. These financial interest rate arrangements
were entered into to reduce the potential impact of increases in interest rates
on floating rate debt and swap a portion of its fixed rate debt to floating rate
debt. In addition, in connection with certain puttable/callable fixed rate debt
issued by Nabisco during January 1998, $600 million of U.S. Treasury locks
expiring February 1998 and $900 million of written call options were entered
into during 1997. The written call options were subsequently settled upon the
issuance of the puttable/callable fixed rate debt. The U.S. Treasury locks and
written call options were entered into to lock into the call premium and initial
interest rates prior to issuance of such debt.
 
    The carrying amounts and estimated fair values of interest rate arrangements
entered into as of December 31, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                                          1997                              1996
                                                            --------------------------------  --------------------------------
                                                                  ASSETS/(LIABILITIES)              ASSETS/(LIABILITIES)
                                                            --------------------------------  --------------------------------
                                                             CARRYING VALUE     FAIR VALUE     CARRYING VALUE     FAIR VALUE
                                                            -----------------  -------------  -----------------  -------------
<S>                                                         <C>                <C>            <C>                <C>
Interest rate swaps:
  Variable rate pay swaps.................................      $      --        $      (1)       $      (1)       $      (2)
  Fixed rate pay swaps....................................      $      --        $      --        $      (6)       $     (10)
Interest rate caps........................................      $       1        $      --        $       2        $       1
U.S. Treasury locks.......................................      $      --        $      (3)       $      --        $      --
Written call options......................................      $      --        $     (13)       $      --        $      --
</TABLE>
 
                                      F-24
<PAGE>
FOREIGN CURRENCY ARRANGEMENTS
 
    RJRN Holdings' subsidiaries have significant exposure to foreign exchange
transactions in currencies other than their functional currencies. Exposures
primarily include the U.S. dollar, German mark, French franc, British pound,
Italian lira, Japanese yen, Swiss franc, Hong Kong dollar, Singapore dollar,
Finnish markka, Canadian dollar, Spanish peseta, Dutch guilder, Brazilian real,
Malaysian ringgit, Indonesian rupiah, Russian rouble, Romanian leu, and Turkish
lira. Whenever possible, RJRN Holdings' policy is to net exposures and utilize
natural offsets to minimize the effects of foreign currency transactions on cash
flows; otherwise, consideration is given to foreign currency arrangements to
protect RJRN Holdings and its subsidiaries from risk that the eventual dollar
cash flows resulting from transactions with international parties will be
adversely affected by changes in exchange rates. In addition, consideration is
given to foreign currency arrangements to hedge foreign currency exposures on
existing assets and liabilities, including certain international debt.
 
    At December 31, 1997 and 1996, RJRN Holdings and its subsidiaries had
approximately $472 million and $608 million, respectively, of outstanding
foreign exchange contracts with banks in which foreign currencies (primarily the
Swiss franc, Spanish peseta, British pound, Canadian dollar and the German mark)
were purchased, and approximately $267 million and $245 million, respectively,
of outstanding foreign exchange contracts in which foreign currencies (primarily
the Japanese yen, Spanish peseta, Brazilian real and Indonesian rupiah) were
sold. The weighted average maturity of the arrangements outstanding at December
31, 1997 approximated two months.
 
    At December 31, 1997 and 1996, the carrying values and estimated fair values
of foreign currency arrangements entered into were as follows:
 
<TABLE>
<CAPTION>
                                                                      1997
                                                            -------------------------                1996
                                                                                       --------------------------------
                                                              ASSETS/(LIABILITIES)
                                                            -------------------------        ASSETS/(LIABILITIES)
                                                                              FAIR     --------------------------------
                                                            CARRYING VALUE    VALUE     CARRYING VALUE     FAIR VALUE
                                                            --------------  ---------  -----------------  -------------
<S>                                                         <C>             <C>        <C>                <C>
Forward foreign exchange contracts to purchase foreign
 currencies...............................................        $3           $1          $      (7)       $      (7)
Forward foreign exchange contracts to sell foreign
 currencies...............................................       $14           $15         $      12        $      13
</TABLE>
 
MARKET AND CREDIT RISK
 
    The above interest rate and foreign currency arrangements entered into
involve, to varying degrees, elements of market risk as a result of potential
changes in future interest and foreign currency exchange rates. To the extent
that the financial instruments entered into remain outstanding as effective
hedges of existing interest rate and foreign currency exposure, the impact of
such potential changes in future interest and foreign currency exchange rates on
the financial instruments entered into would offset the related impact on the
items being hedged. Also, RJRN Holdings and its subsidiaries may be exposed to
credit losses in the event of non-performance by the counterparties to these
financial instruments. However, RJRN Holdings and its subsidiaries continually
monitor their positions and the credit ratings of their counterparties and
therefore, do not anticipate any non-performance.
 
    There are no significant concentrations of credit risk with any individual
counterparties or groups of counterparties as a result of any financial
instruments entered into including those financial instruments discussed above.
 
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL
 
    The outstanding capital stock of RJRN Holdings at December 31, 1997
consisted of common stock, Series B preferred stock (stated value of $25,000 per
share) and ESOP convertible preferred stock (stated value of $16 per share). All
classes of preferred stock of RJRN Holdings (150,000,000 shares authorized at
December 31, 1997) rank senior to common stock as to dividends and liquidation
preferences. In addition, Series B depositary shares were issued in connection
with the issuance of the Series B preferred stock.
 
                                      F-25
<PAGE>
NOTE 12--CAPITAL STOCK AND PAID-IN CAPITAL (CONTINUED)
Each Series B depositary share (12,043,940 outstanding at December 31, 1997 and
1996) represents a .001 ownership interest in a share of Series B preferred
stock.
 
    Each share of Series B preferred stock (12,044 shares issued and outstanding
at December 31, 1997 and 1996) bears cumulative cash dividends of $2,312.50 or
$2.3125 per Series B depositary share per annum, payable quarterly in arrears.
RJRN Holdings may redeem Series B preferred stock on or after August 19, 1998,
resulting in the redemption of the Series B depositary shares at $25 per Series
B depositary share plus accrued and unpaid dividends.
 
    In May 1997, 26,675,000 shares of Series C preferred stock mandatorily
converted into 53,350,000 shares of common stock.
 
    RJRN Holdings and its subsidiaries sponsor a defined contribution plan in
which matching contributions to eligible employees are made in the form of ESOP
preferred stock. Every five shares of ESOP preferred stock (13,714,950 and
14,558,920 shares issued and outstanding at December 31, 1997 and 1996,
respectively) is generally convertible into one share of common stock of RJRN
Holdings, and bears cumulative dividends at 7.8125% of stated value per annum at
least until April 10, 1999, payable semi-annually in arrears. The ESOP preferred
stock is redeemable at the option of RJRN Holdings on or after April 10, 1999 at
an initial redemption price of $16.25 per share. The redemption price declines
thereafter to $16 per share on April 10, 2001, plus accrued and unpaid
dividends. RJRN Holdings matches $.50 for every pre-tax dollar contributed by
each eligible employee, up to a maximum of 6% of the employee's pay. The shares
of ESOP preferred stock are allocated to employees at either a floor value of
$16 per share or the fair market value of one-fifth of a share of common stock,
whichever is higher. Unallocated shares totalled 4,182,985 and 6,423,948 at
December 31, 1997 and 1996, respectively. During 1997, 1996 and 1995,
approximately $32 million, $28 million and $23 million, respectively, was
contributed to the ESOP by RJRN Holdings and approximately $18 million, $18
million and $19 million, respectively, of ESOP dividends were used to service
the ESOP's debt to RJRN Holdings that was incurred in connection with the
initial formation of the ESOP.
 
NOTE 13--STOCK PLANS
 
    RJRN Holdings' 1989 stock plan provides for grants of options to purchase
common stock of RJRN Holdings to non-employee directors, directors and key
employees. A maximum of 6,000,000 shares may be issued under this plan. The
options granted under the plan generally vest over three years, are separately
exercisable for primarily ten years from the date of grant and are exercisable
at a price that is generally the fair market value of the stock at the grant
date.
 
    RJRN Holdings' 1990 long-term incentive plan ("LTIP") provides for grants of
incentive stock options, other stock options, stock appreciation rights,
restricted stock, purchase stock, dividend equivalent rights, performance units,
performance shares and other stock-based grants to key employees. A maximum of
33,000,000 shares of common stock of RJRN Holdings may be issued under the LTIP.
The options granted under the plan generally vest over three years, are
exercisable for 10-15 years from date of grant, and are exercisable at a price
that is generally the fair market value of the stock at the grant date. As of
December 31, 1997, purchase stock, stock options other than incentive stock
options, restricted stock and other stock-based grants have been granted under
the LTIP.
 
    In 1995, employees of RJRN Holdings and its non-Nabisco subsidiaries
surrendered 8,378,449 options in exchange for a new grant of options under the
LTIP. These options are fully vested but are not exercisable for three years
thereafter.
 
    Nabisco Holdings' 1994 long-term incentive plan is similar to the LTIP
except that stock-based awards are denominated in shares of Class A common stock
of Nabisco Holdings. In 1995, employees of Nabisco Holdings with outstanding
stock options granted under RJRN Holdings' stock plans exchanged 4,968,214 of
these options for options in the Nabisco Holdings' stock plan. Also in 1995,
employees of RJRN
 
                                      F-26
<PAGE>
NOTE 13--STOCK PLANS (CONTINUED)
Holdings with outstanding stock options under RJRN Holdings' stock plans
exchanged 264,989 of these options for options under the Nabisco Holdings' stock
plan. The Nabisco Holdings' stock options granted (5,971,858) in exchange for
the cancellation of RJRN Holdings' stock options are fully vested; however, such
Nabisco Holdings' stock options may not be exercised for three years thereafter.
 
    The changes in stock options under RJRN Holdings' stock plans are as
follows:
 
<TABLE>
<CAPTION>
                                           1997                        1996                          1995
                                --------------------------  ---------------------------  -----------------------------
                                                WEIGHTED-                    WEIGHTED-
                                                 AVERAGE                      AVERAGE
                                                EXERCISE                     EXERCISE                      EXERCISE
                                   OPTIONS        PRICE        OPTIONS         PRICE        OPTIONS         PRICE
                                -------------  -----------  --------------  -----------  -------------  --------------
Balance at beginning of
 year.........................     17,783,323   $   29.54       14,855,935   $   28.40      16,166,323  $  22.60-57.80
<S>                             <C>            <C>          <C>             <C>          <C>            <C>
Options granted...............        589,600       32.37        3,792,447       34.57      12,837,460     26.88-32.25
Options exercised.............       (396,363)      25.81         (595,112)      25.68        (168,097)    22.82-29.69
Options cancelled.............       (598,519)      34.68         (269,947)      31.41     (13,979,751)    22.82-54.69
                                -------------               --------------               -------------
Balance at end of year........     17,378,041       29.54       17,783,323       29.54      14,855,935     22.60-57.80
                                -------------               --------------               -------------
                                -------------               --------------               -------------
Exercisable at end of year....      5,683,937       31.09        4,618,935       30.46       3,437,549
                                -------------               --------------               -------------
                                -------------               --------------               -------------
</TABLE>
 
    The changes in stock options under Nabisco Holdings' stock plan are as
follows:
 
<TABLE>
<CAPTION>
                                          1997                       1996
                                -------------------------  -------------------------
                                               WEIGHTED-                  WEIGHTED-                1995
                                                AVERAGE                    AVERAGE    ------------------------------
                                               EXERCISE                   EXERCISE                      EXERCISE
                                  OPTIONS        PRICE       OPTIONS        PRICE       OPTIONS          PRICE
                                ------------  -----------  ------------  -----------  ------------  ----------------
<S>                             <C>           <C>          <C>           <C>          <C>           <C>
Balance at beginning
  of year.....................    11,727,881   $   28.57      8,909,663   $   26.77        --              --
Options granted...............     2,758,500       37.22      3,114,200       33.83      9,043,263  $  24.50 - 29.38
Options cancelled.............      (326,854)      33.13       (295,982)      29.73       (133,600)    27.38 - 29.00
                                ------------               ------------               ------------
Balance at end of year........    14,159,527       30.15     11,727,881       28.57      8,909,663     24.50 - 29.38
                                ------------               ------------               ------------
                                ------------               ------------               ------------
</TABLE>
 
    Additional information at December 31, 1997 with respect to options under
RJRN Holdings' and Nabisco Holdings' stock plans are as follows:
 
<TABLE>
<CAPTION>
                                                                                     RJRN            NABISCO
                                                                                   HOLDINGS          HOLDINGS
                                                                                ---------------  ----------------
<S>                                                                             <C>              <C>
 Option price range at end of year............................................     $22.82-52.50      $24.50-46.31
  Shares of common stock available for future grant...........................       15,851,816        14,370,820
  Weighted average remaining contractual life of outstanding options at end of
    year......................................................................       10.7 years        10.8 years
</TABLE>
 
    RJRN Holdings and its subsidiaries recognize and measure compensation costs
related to employee stock plans utilizing the intrinsic value based method. Had
compensation expense been determined based
 
                                      F-27
<PAGE>
NOTE 13--STOCK PLANS (CONTINUED)
upon the fair value of awards granted during 1997, 1996 and 1995, RJRN Holdings'
net income and earnings per share would have been as follows:
 
<TABLE>
<CAPTION>
                                                   1997                        1996                        1995
                                         -------------------------  --------------------------  --------------------------
<S>                                      <C>            <C>         <C>            <C>          <C>            <C>
                                          AS REPORTED   PRO FORMA    AS REPORTED    PRO FORMA    AS REPORTED    PRO FORMA
                                         -------------  ----------  -------------  -----------  -------------  -----------
Net income.............................         $ 381       $ 354          $ 611        $ 591          $ 611        $ 542
Basic earnings per share...............         $1.05       $0.96          $1.75        $1.69          $1.54        $1.33
Diluted earnings per share.............         $1.03       $0.94          $1.74        $1.68          $1.53        $1.32
Weighted average grant date fair value
 of RJRN Holdings' options granted
 during the year.......................       --            $6.79        --             $7.06        --             $5.11
Weighted average grant date fair value
 of Nabisco Holdings' options granted
 during the year.......................       --           $12.55        --        $    11.00        --        $    11.41
</TABLE>
 
    For options granted, fair value was determined using the Black-Scholes
option pricing model with the following weighted-average assumptions:
 
<TABLE>
<CAPTION>
                                                              1997                      1996                      1995
                                                    ------------------------  ------------------------  ------------------------
                                                       RJRN        NABISCO       RJRN        NABISCO       RJRN        NABISCO
                                                     HOLDINGS     HOLDINGS     HOLDINGS     HOLDINGS     HOLDINGS     HOLDINGS
                                                    -----------  -----------  -----------  -----------  -----------  -----------
<S>                                                 <C>          <C>          <C>          <C>          <C>          <C>
Dividend yield....................................         5.8%         1.7%         5.3%         1.9%         5.5%         1.9%
Expected volatility...............................          31%          23%          29%          24%          29%          27%
Risk-free interest rate...........................         6.4%         6.6%         6.2%         6.4%         5.3%         6.8%
Expected option lives (years).....................           5            7            5            7            5           11
</TABLE>
 
NOTE 14--RETIREMENT BENEFITS
 
    RJRN and its subsidiaries sponsor a number of non-contributory defined
benefit pension plans covering most U.S. and certain foreign employees. Plans
covering regular full-time employees in the tobacco operations as well as the
majority of salaried employees in the corporate groups and food operations
provide pension benefits that are based on credits, determined by age, earned
throughout an employee's service and final average compensation before
retirement. Plan benefits are offered as lump sum or annuity options. Plans
covering hourly as well as certain salaried employees in the corporate groups
and food operations provide pension benefits that are based on the employee's
length of service and final average compensation before retirement. RJRN's
policy is to fund the cost of current service benefits and past service cost
over periods not exceeding 30 years to the extent that such costs are currently
tax deductible. Additionally, RJRN and its subsidiaries participate in several
(i) multi-employer plans, which provide benefits to certain union employees, and
(ii) defined contribution plans, which provide benefits to certain employees in
foreign countries. Employees in foreign countries who are not U.S. citizens are
covered by various post-employment benefit arrangements, some of which are
considered to be defined benefit plans for accounting purposes.
 
                                      F-28
<PAGE>
NOTE 14--RETIREMENT BENEFITS (CONTINUED)
    A summary of the components of pension expense is as follows:
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                          1997           1996           1995
---------------------------------------------------------------------------  -------------  -------------  -------------
<S>                                                                          <C>            <C>            <C>
Defined benefit pension plans:
  Service cost--benefits earned during the period..........................    $      86      $      96      $      69
  Interest cost on projected benefit obligation............................          291            281            265
  Less actual return on plan assets........................................         (493)          (445)          (555)
  Net amortization and deferral............................................          186            159            308
                                                                                   -----          -----          -----
      Total................................................................           70             91             87
Multi-employer and other defined contribution plans........................           39             42             39
                                                                                   -----          -----          -----
      Total pension expense................................................    $     109      $     133      $     126
                                                                                   -----          -----          -----
                                                                                   -----          -----          -----
</TABLE>
 
    The principal plans used the following actuarial assumptions for accounting
purposes:
 
<TABLE>
<CAPTION>
                                                                   U.S. PLANS                FOREIGN PLANS
                                                              --------------------  --------------------------------
DECEMBER 31                                                     1997       1996          1997             1996
------------------------------------------------------------  ---------  ---------  ---------------  ---------------
<S>                                                           <C>        <C>        <C>              <C>
Weighted average discount rate..............................         7%       7.5%      3.5%-8%           4%-9%
Rate of increase in compensation levels.....................         5%         5%       3%-5%            3%-5%
Expected long-term rate of return on assets.................       9.5%       9.5%    4.5%-8.25%       4.75%-8.5%
</TABLE>
 
    The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at December 31, 1997 and 1996 for U.S. defined
benefit pension plans:
<TABLE>
<CAPTION>
                                                                                  U.S. PLANS
                                                    ----------------------------------------------------------------------
<S>                                                 <C>              <C>                <C>              <C>
                                                                   1997                                1996
                                                    ----------------------------------  ----------------------------------
 
<CAPTION>
                                                      PLANS WHOSE       PLANS WHOSE       PLANS WHOSE       PLANS WHOSE
                                                    ASSETS EXCEEDED     ACCUMULATED     ASSETS EXCEEDED     ACCUMULATED
                                                      ACCUMULATED    BENEFITS EXCEEDED    ACCUMULATED    BENEFITS EXCEEDED
                                                       BENEFITS           ASSETS           BENEFITS           ASSETS
                                                    ---------------  -----------------  ---------------  -----------------
<S>                                                 <C>              <C>                <C>              <C>
Actuarial present value of:
  Vested benefits.................................     $     300         $   3,107         $   3,032         $     120
  Non-vested benefits.............................            25               119                32                 3
                                                          ------            ------            ------            ------
  Accumulated benefit obligation..................           325             3,226             3,064               123
  Effect of future salary increases...............            34               322               301                14
                                                          ------            ------            ------            ------
  Projected benefit obligation....................           359             3,548             3,365               137
Plan assets at fair market value..................           368             3,066             3,172                17
                                                          ------            ------            ------            ------
Plan assets in excess of (less than) projected
  benefit obligation..............................             9              (482)             (193)             (120)
Unrecognized net (gain) loss......................           (13)              177               (65)               41
Unrecognized prior service cost...................             4                (8)               (5)               (6)
Adjustment required to recognize minimum pension
  liability.......................................            --               (40)               --               (21)
                                                          ------            ------            ------            ------
Net pension assets (liabilities) recognized in the
  consolidated balance sheets.....................     $      --         $    (353)        $    (263)        $    (106)
                                                          ------            ------            ------            ------
                                                          ------            ------            ------            ------
</TABLE>
 
                                      F-29
<PAGE>
NOTE 14--RETIREMENT BENEFITS (CONTINUED)
 
    The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at December 31, 1997 and 1996 for foreign
defined benefit pension plans:
<TABLE>
<CAPTION>
                                                                                 FOREIGN PLANS
                                                    ------------------------------------------------------------------------
<S>                                                 <C>              <C>                <C>                <C>
                                                                   1997                                 1996
                                                    ----------------------------------  ------------------------------------
 
<CAPTION>
                                                      PLANS WHOSE       PLANS WHOSE        PLANS WHOSE        PLANS WHOSE
                                                    ASSETS EXCEEDED     ACCUMULATED      ASSETS EXCEEDED      ACCUMULATED
                                                      ACCUMULATED    BENEFITS EXCEEDED     ACCUMULATED     BENEFITS EXCEEDED
                                                       BENEFITS           ASSETS            BENEFITS            ASSETS
                                                    ---------------  -----------------  -----------------  -----------------
<S>                                                 <C>              <C>                <C>                <C>
Actuarial present value of:
  Vested benefits.................................     $     242         $     175          $     283          $     105
  Non-vested benefits.............................             3                28                  2                 29
                                                          ------            ------              -----             ------
  Accumulated benefit obligation..................           245               203                285                134
  Effect of future salary increases...............            24                27                 27                 38
                                                          ------            ------              -----             ------
  Projected benefit obligation....................           269               230                312                172
Plan assets at fair market value..................           293                60                331                  3
                                                          ------            ------              -----             ------
Plan assets in excess of (less than) projected
  benefit obligation..............................            24              (170)                19               (169)
Unrecognized net (gain) loss......................            (8)               12                (21)                11
Unrecognized prior service cost...................            12                --                 10                 --
Transition amount.................................            (5)                9                 (6)                11
Adjustment required to recognize minimum pension
  liability.......................................            --                (6)                --                 (2)
                                                          ------            ------              -----             ------
Net pension assets (liabilities) recognized in the
  consolidated balance sheets.....................     $      23         $    (155)         $       2          $    (149)
                                                          ------            ------              -----             ------
                                                          ------            ------              -----             ------
</TABLE>
 
    At December 31, 1997, approximately 92% of the plans' assets were invested
in listed stocks and bonds and other highly liquid investments. The balance
consisted of various income-producing investments.
 
    In addition to providing pension benefits, RJRN provides certain healthcare
and life insurance benefits for retired employees and their dependents.
Substantially all of its regular full-time employees, including certain
employees in foreign countries, may become eligible for those benefits if they
reach retirement age while working for RJRN and its subsidiaries.
 
    Net postretirement health and life insurance benefit costs consisted of the
following:
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                       1997               1996               1995
----------------------------------------------------------------------  -----------------  -----------------  -----------------
<S>                                                                     <C>                <C>                <C>
Service cost--benefits earned during the period.......................      $      14          $      16          $      18
Interest cost on accumulated postretirement benefit obligation........             68                 64                 62
                                                                                  ---                ---                ---
  Net postretirement healthcare and life insurance costs..............      $      82          $      80          $      80
                                                                                  ---                ---                ---
                                                                                  ---                ---                ---
</TABLE>
 
                                      F-30
<PAGE>
NOTE 14--RETIREMENT BENEFITS (CONTINUED)
    Postretirement health and life insurance benefit plans currently are not
funded. The status of the plans at December 31, 1997 and 1996 was as follows:
 
<TABLE>
<CAPTION>
                                                                                                   1997       1996
                                                                                                 ---------  ---------
<S>                                                                                              <C>        <C>
Actuarial present value of accumulated postretirement benefit obligation:
  Retirees.....................................................................................  $     768  $     697
  Fully eligible active plan participants......................................................        130        131
  Other active plan participants...............................................................        289        265
 
Unrecognized actuarial amounts.................................................................       (174)       (95)
                                                                                                 ---------  ---------
Accrued postretirement healthcare and life insurance costs.....................................  $   1,013  $     998
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
    The assumed healthcare cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.5% in 1997 and 6.0% in 1998 gradually
declining to 5% by the year 2000 and remaining at that level thereafter. A one
percentage point increase in the assumed healthcare cost trend rate for each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 and the aggregate of the service and interest cost components
of the net postretirement benefit cost for the year then ended by approximately
$82 million and $6 million, respectively.
 
    The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 7.0% and 7.5% as of December 31, 1997 and 1996,
respectively.
 
NOTE 15--SEGMENT INFORMATION
 
    INDUSTRY SEGMENT DATA
 
    RJRN Holdings is a holding company whose subsidiaries are engaged
principally in the manufacture, distribution and sale of tobacco products,
cookies, crackers, and other food products. Cigarettes are manufactured in the
United States by RJRT and in approximately 40 foreign countries and territories
by Reynolds International and subsidiaries or licensees of RJRT and are sold
throughout the United States and in approximately 170 markets around the world
including Europe, the Middle East, Africa, Asia, the CIS and Baltics, and
Canada. RJRN's 80.7%-owned subsidiary, Nabisco Holdings, manufactures and
markets cookies, crackers, non-chocolate candy and gum products, nuts and
snacks, various margarines and spreads, and other specialty products under
several brand names in the United States, Canada, Europe, Asia, and Latin
America.
 
                                      F-31
<PAGE>
NOTE 15--SEGMENT INFORMATION (CONTINUED)
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                              1997       1996       1995
---------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Net sales:
  Tobacco........................................................................  $   8,323  $   8,174  $   7,714
  Food...........................................................................      8,734      8,889      8,294
                                                                                   ---------  ---------  ---------
    Consolidated net sales.......................................................  $  17,057  $  17,063  $  16,008
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Operating income:
  Tobacco........................................................................  $   1,023  $   1,845  $   1,500
  Food...........................................................................      1,082        474        902
  Headquarters...................................................................        (70)       (67)       (64)
                                                                                   ---------  ---------  ---------
    Consolidated operating income................................................  $   2,035  $   2,252  $   2,338
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Capital expenditures:
  Tobacco........................................................................  $     371  $     304  $     231
  Food...........................................................................        392        437        513
                                                                                   ---------  ---------  ---------
    Consolidated capital expenditures............................................  $     763  $     741  $     744
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Depreciation expense:
  Tobacco........................................................................  $     184  $     217  $     236
  Food...........................................................................        277        270        244
  Headquarters...................................................................          2          2          2
                                                                                   ---------  ---------  ---------
    Consolidated depreciation expense............................................  $     463  $     489  $     482
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
DECEMBER 31                                                                               1997       1996
--------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                     <C>        <C>
Assets:
  Tobacco.............................................................................  $  18,297  $  18,952
  Food................................................................................     12,100     12,235
  Headquarters(1).....................................................................        281        102
                                                                                        ---------  ---------
    Consolidated assets...............................................................  $  30,678  $  31,289
                                                                                        ---------  ---------
                                                                                        ---------  ---------
</TABLE>
 
------------------------
 
(1) Cash and cash equivalents for the domestic tobacco operations are included
    in Headquarters' assets.
 
                                      F-32
<PAGE>
NOTE 15--SEGMENT INFORMATION (CONTINUED)
    GEOGRAPHIC DATA
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                              1997       1996       1995
---------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
Net sales:
  United States (including U.S. export sales)....................................  $  11,492  $  11,513  $  11,295
  Europe.........................................................................      3,022      2,897      2,184
  Other geographic areas.........................................................      3,675      3,631      3,261
  Less transfers between geographic areas(1).....................................     (1,132)      (978)      (732)
                                                                                   ---------  ---------  ---------
    Consolidated net sales.......................................................  $  17,057  $  17,063  $  16,008
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
Operating income:
  United States..................................................................  $   1,696  $   1,606  $   1,749
  Europe.........................................................................         76        300        299
  Other geographic areas.........................................................        333        413        354
  Headquarters...................................................................        (70)       (67)       (64)
                                                                                   ---------  ---------  ---------
    Consolidated operating income................................................  $   2,035  $   2,252  $   2,338
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
DECEMBER 31                                                                                  1997       1996
-----------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                        <C>        <C>
Assets:
  United States..........................................................................  $  24,399  $  24,860
  Europe.................................................................................      2,416      2,843
  Other geographic areas.................................................................      3,582      3,484
  Headquarters(2)........................................................................        281        102
                                                                                           ---------  ---------
    Consolidated assets..................................................................  $  30,678  $  31,289
                                                                                           ---------  ---------
                                                                                           ---------  ---------
</TABLE>
 
------------------------
 
(1) Transfers between geographic areas are generally made at fair market value.
 
(2) Cash and cash equivalents for the domestic tobacco operations are included
    in Headquarters' assets.
 
NOTE 16--ADDITIONAL INFORMATION
 
<TABLE>
<CAPTION>
  YEARS ENDED DECEMBER 31                                                                     1997       1996       1995
------------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
  Advertising expense.....................................................................  $     603  $     544  $     496
  Research and development expense........................................................        178        191        229
  Rent expense............................................................................        182        167        163
</TABLE>
 
                                      F-33
<PAGE>
NOTE 17--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                               FIRST     SECOND      THIRD     FOURTH
                                                                             ---------  ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>        <C>
1997(1)(2)
  Net sales................................................................  $   3,779  $   4,286  $   4,409  $   4,583
  Operating income.........................................................        653        716        484        182
  Income (loss) before extraordinary item..................................        213        243        122       (176)
  Net income (loss)........................................................        213        243        122       (197)
  Per share data:(3)
    Basic income (loss) per share before extraordinary item................  $     .62  $     .72  $     .34  $    (.58)
    Diluted income (loss) per share before extraordinary item..............        .62        .71        .34       (.58)
    Common stock dividends declared........................................      .5125      .5125      .5125      .5125
    Market price of common stock
      --high...............................................................  $  38 7/8  $  36 1/2  $  36 1/8  $37 15/16
      --low................................................................     30 5/8         27    29 9/16   29 14/16
      --close..............................................................     32 1/4         33     34 3/8     37 1/2
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                FIRST     SECOND      THIRD     FOURTH
                                                                              ---------  ---------  ---------  ---------
<S>                                                                           <C>        <C>        <C>        <C>
1996(4)
  Net sales.................................................................  $   3,886  $   4,203  $   4,349  $   4,625
  Operating income..........................................................        640        237        683        692
  Income (loss) before extraordinary item...................................        198        (27)       225        215
  Net income (loss).........................................................        198        (27)       225        215
  Per share data:(3)
    Basic income (loss) per share before extraordinary item.................  $     .58  $    (.11) $     .66  $     .63
    Diluted income (loss) per share before extraordinary item...............        .57       (.11)       .66        .63
    Common stock dividends declared.........................................      .4625      .4625      .4625      .4625
    Market price of common stock
      --high................................................................  $  35 1/4  $  34 1/2  $  32 3/8  $  34 5/8
      --low.................................................................         29         29     25 1/8     25 3/4
      --close...............................................................     30 1/4     31 3/4     26 1/8         34
</TABLE>
 
------------------------
 
(1) The third quarter of 1997 includes $219 million ($133 million after-tax)
    related to the settlement agreements reached by RJRT with the Florida and
    Mississippi state attorneys general and in certain class action cases.
 
(2) The fourth quarter of 1997 includes $301 million ($235 million after-tax) of
    restructuring expense and approximately $89 million ($78 million after-tax)
    of restructuring-related expenses at the tobacco operations and $140 million
    ($85 million after-tax) related to the settlement agreement reached by RJRT
    with the Texas state attorney general.
 
(3) Earnings per share is computed independently for each of the periods
    presented; therefore, the sum of the earnings per share amounts for the
    quarters may not equal the total for the year.
 
(4) The second quarter of 1996 includes $428 million ($241 million after-tax,
    net of minority interest) of restructuring expense at the food operations.
    The second, third and fourth quarters of 1996 include $10 million, $17
    million and $70 million, respectively, of restructuring-related expenses at
    the food operations.
 
                          ----------------------------
 
                                      F-34
<PAGE>
                                                                      SCHEDULE I
 
                           RJR NABISCO HOLDINGS CORP.
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                         CONDENSED STATEMENTS OF INCOME
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                   1997           1996           1995
--------------------------------------------------------------------  -------------  -------------  -------------
<S>                                                                   <C>            <C>            <C>
Interest and debt expense...........................................    $     (98)     $     (98)     $     (29)
Other income (expense), net.........................................            7              6              2
                                                                      -------------  -------------  -------------
      Loss before income taxes......................................          (91)           (92)           (27)
Benefit for income taxes............................................          (36)           (34)           (15)
                                                                      -------------  -------------  -------------
      Loss before equity in income from subsidiaries................          (55)           (58)           (12)
Equity in income from subsidiaries, net of income taxes.............          457            669            639
                                                                      -------------  -------------  -------------
      Income before extraordinary item..............................          402            611            627
Extraordinary item--loss on early extinguishments of debt of
  subsidiary, net of income taxes...................................          (21)            --            (16)
                                                                      -------------  -------------  -------------
      Net income....................................................    $     381      $     611      $     611
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
</TABLE>
 
                 SEE NOTES TO CONDENSED FINANCIAL INFORMATION.
 
                                      S-1
<PAGE>
                                                                      SCHEDULE I
 
                           RJR NABISCO HOLDINGS CORP.
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                       CONDENSED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31                                                   1997           1996           1995
--------------------------------------------------------------------  -------------  -------------  -------------
<S>                                                                   <C>            <C>            <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
  Net income........................................................    $     381      $     611      $     611
                                                                      -------------  -------------  -------------
  Adjustments to reconcile net income to net cash flows from
    operating activities:
    Deferred income tax provision (benefit).........................            1             (6)             1
    Extraordinary item..............................................           43             --             29
    Equity in income from subsidiaries,
      net of income taxes...........................................         (457)          (669)          (639)
    Dividends received from subsidiary..............................          834          1,108            267
    Other, net......................................................           16             (2)           (36)
                                                                      -------------  -------------  -------------
        Total adjustments...........................................          437            431           (378)
                                                                      -------------  -------------  -------------
    Net cash flows from operating activities........................          818          1,042            233
                                                                      -------------  -------------  -------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
  Repurchase of common stock........................................           --           (100)            --
  Dividends paid on common and preferred stock......................         (721)          (686)          (583)
  Other, net--including intercompany transfers and payments.........          (98)          (257)           338
                                                                      -------------  -------------  -------------
    Net cash flows used in financing activities.....................         (819)        (1,043)          (245)
                                                                      -------------  -------------  -------------
    Net change in cash and cash equivalents.........................           (1)            (1)           (12)
Cash and cash equivalents at beginning of period....................            1              2             14
                                                                      -------------  -------------  -------------
Cash and cash equivalents at end of period..........................    $      --      $       1      $       2
                                                                      -------------  -------------  -------------
                                                                      -------------  -------------  -------------
</TABLE>
 
                 SEE NOTES TO CONDENSED FINANCIAL INFORMATION.
 
                                      S-2
<PAGE>
                                                                      SCHEDULE I
 
                           RJR NABISCO HOLDINGS CORP.
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEETS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
DECEMBER 31                                                                              1997           1996
-----------------------------------------------------------------------------------  -------------  -------------
<S>                                                                                  <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents........................................................    $      --      $       1
  Accounts and notes receivable, net...............................................            4              5
                                                                                     -------------  -------------
        TOTAL CURRENT ASSETS.......................................................            4              6
                                                                                     -------------  -------------
Investment in subsidiaries.........................................................       11,115         11,702
Other assets.......................................................................           17             23
                                                                                     -------------  -------------
                                                                                       $  11,136      $  11,731
                                                                                     -------------  -------------
                                                                                     -------------  -------------
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities.........................................    $     178      $     158
  Income taxes accrued.............................................................           33             24
                                                                                     -------------  -------------
        TOTAL CURRENT LIABILITIES..................................................          211            182
                                                                                     -------------  -------------
Intercompany payable, net..........................................................          229            355
Other noncurrent liabilities.......................................................           18             --
Deferred income taxes..............................................................           64             63
Junior subordinated debentures.....................................................          983            983
Commitments and contingencies (note D)
 
Stockholders' equity:
  Series C convertible preferred stock.............................................           --              3
  Other preferred stock............................................................          520            534
  Common stock--(1997--327,158,090 shares issued, 1996--273,574,308 shares
    issued)........................................................................            3              3
  Paid-in capital..................................................................        9,668         10,038
  Retained earnings................................................................           --             --
  Cumulative translation adjustments...............................................         (391)          (221)
  Treasury stock, at cost..........................................................         (100)          (100)
  Other stockholders' equity.......................................................          (69)          (109)
                                                                                     -------------  -------------
        TOTAL STOCKHOLDERS' EQUITY.................................................        9,631         10,148
                                                                                     -------------  -------------
                                                                                       $  11,136      $  11,731
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>
 
                 SEE NOTES TO CONDENSED FINANCIAL INFORMATION.
 
                                      S-3
<PAGE>
                                                                      SCHEDULE I
 
                           RJR NABISCO HOLDINGS CORP.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                    NOTES TO CONDENSED FINANCIAL INFORMATION
 
NOTE A--BASIS OF PRESENTATION
 
    Certain prior years' amounts have been reclassified to conform to the 1997
presentation.
 
NOTE B--SUPPLEMENTAL CASH FLOWS INFORMATION
 
    For information regarding certain non-cash financing activities, see note 9
to the consolidated financial statements.
 
NOTE C--JUNIOR SUBORDINATED DEBENTURES
 
    See note 9 to the consolidated financial statements for information
regarding the issuance of the junior subordinated debentures.
 
    RJRN Holdings' obligations under the junior subordinated debentures are
unsecured and subordinate to all senior indebtedness of RJRN Holdings, but
junior to all future stock issuances and stock guarantees. As of December 31,
1997, RJRN Holdings had no senior indebtedness other than its guarantee of
RJRN's obligations under RJRN's credit agreements. RJRN Holdings guarantees all
distributions made by its subsidiary trust, subordinate to any distributions to
any senior debenture holders and junior subordinated debenture holders.
 
    Interest on the junior subordinated debentures is payable quarterly in
arrears. The junior subordinated debentures may be redeemed by RJRN Holdings on
or after August 19, 1998 and mature in December, 2044. Covenants applicable to
the junior subordinated debentures limit RJRN Holdings' ability to enter into
certain capital stock transactions, among other things, if RJRN Holdings is in
default of any payments or guarantees with respect to the junior subordinated
debentures.
 
NOTE D--COMMITMENTS AND CONTINGENCIES
 
    RJRN Holdings has guaranteed the indebtedness of RJRN under RJRN's credit
facilities.
 
    For disclosure of additional contingent liabilities, see note 10 to the
consolidated financial statements.
 
                                      S-4
<PAGE>
                                                                      SCHEDULE I
 
                               RJR NABISCO, INC.
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                         CONDENSED STATEMENTS OF INCOME
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                                1997       1996       1995
----------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                 <C>        <C>        <C>
Administrative expenses...........................................................  $      (5) $      (5) $      --
Interest and debt expense.........................................................       (433)      (454)      (614)
Other income (expense), net.......................................................        942        956        923
                                                                                    ---------  ---------  ---------
      Income before income taxes..................................................        504        497        309
Provision for income taxes........................................................        173        169         80
                                                                                    ---------  ---------  ---------
Income before equity in income from subsidiaries..................................        331        328        229
Equity in income from subsidiaries, net of income taxes...........................        123        338        409
                                                                                    ---------  ---------  ---------
      Income before extraordinary item............................................        454        666        638
Extraordinary item-loss on early extinguishments of debt of a subsidiary, net of
  income taxes and minority interest..............................................        (21)        --        (16)
                                                                                    ---------  ---------  ---------
Net income........................................................................  $     433  $     666  $     622
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
                 SEE NOTES TO CONDENSED FINANCIAL INFORMATION.
 
                                      S-5
<PAGE>
                                                                      SCHEDULE I
 
                               RJR NABISCO, INC.
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                       CONDENSED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                                  1997       1996       1995
------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                   <C>        <C>        <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
  Net income........................................................................  $     433  $     666  $     622
                                                                                      ---------  ---------  ---------
  Adjustments to reconcile net income to net cash flows from (used in) operating
    activities:
    Deferred income tax provision (benefit).........................................          7         (8)      (146)
    Extraordinary item..............................................................         43         --         29
    Equity in income from subsidiaries,
      net of income taxes...........................................................       (123)      (338)      (409)
    Dividends received from subsidiary..............................................        141        125         58
    Other, net......................................................................          1         20       (288)
                                                                                      ---------  ---------  ---------
        Total adjustments...........................................................         69       (201)      (756)
                                                                                      ---------  ---------  ---------
    Net cash flows from (used in) operating activities..............................        502        465       (134)
                                                                                      ---------  ---------  ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
  Capital expenditures..............................................................         --         (1)        --
                                                                                      ---------  ---------  ---------
    Net cash flows from (used in) investing activities..............................         --         (1)        --
                                                                                      ---------  ---------  ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt..........................................        345         --        666
  Repayments of long-term debt......................................................        (28)      (118)      (800)
  Increase (decrease) in short-term borrowings......................................       (295)        53     (2,390)
  Financing and advisory fees paid..................................................         --         --        (29)
  Dividends paid to parent..........................................................       (834)    (1,108)      (267)
  Other, net--including intercompany transfers and payments.........................        437        717      2,919
                                                                                      ---------  ---------  ---------
    Net cash flows from (used in) financing activities..............................       (375)      (456)        99
                                                                                      ---------  ---------  ---------
    Net change in cash and cash equivalents.........................................        127          8        (35)
Cash and cash equivalents at beginning of period....................................         13          5         40
                                                                                      ---------  ---------  ---------
Cash and cash equivalents at end of period..........................................  $     140  $      13  $       5
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
</TABLE>
 
                 SEE NOTES TO CONDENSED FINANCIAL INFORMATION.
 
                                      S-6
<PAGE>
                                                                      SCHEDULE I
 
                               RJR NABISCO, INC.
           SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEETS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
DECEMBER 31                                                                                     1997       1996
--------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................................................  $     140  $      13
  Accounts and notes receivable.............................................................         40         63
  Prepaid expenses..........................................................................          6          1
                                                                                              ---------  ---------
        TOTAL CURRENT ASSETS................................................................        186         77
                                                                                              ---------  ---------
Intercompany receivable, net................................................................     10,802     11,248
Investment in subsidiaries..................................................................      5,815      6,067
Property, plant and equipment, net..........................................................          5          6
Other assets................................................................................         56         72
                                                                                              ---------  ---------
                                                                                              $  16,864  $  17,470
                                                                                              ---------  ---------
                                                                                              ---------  ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................................................  $     171  $     184
  Current maturities of long-term debt......................................................         --         24
  Income taxes accrued......................................................................         42         43
                                                                                              ---------  ---------
        TOTAL CURRENT LIABILITIES...........................................................        213        251
                                                                                              ---------  ---------
Long-term debt (less current maturities)....................................................      4,944      4,928
Other noncurrent liabilities................................................................         54         71
Deferred income taxes.......................................................................        574        551
Commitments and contingencies (note C)
Stockholder's equity:
  Paid-in capital...........................................................................     11,470     11,890
  Retained earnings.........................................................................         --         --
  Cumulative translation adjustments........................................................       (391)      (221)
                                                                                              ---------  ---------
        TOTAL STOCKHOLDER'S EQUITY..........................................................     11,079     11,669
                                                                                              ---------  ---------
                                                                                              $  16,864  $  17,470
                                                                                              ---------  ---------
                                                                                              ---------  ---------
</TABLE>
 
                 SEE NOTES TO CONDENSED FINANCIAL INFORMATION.
 
                                      S-7
<PAGE>
                                                                      SCHEDULE I
 
                               RJR NABISCO, INC.
          SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                    NOTES TO CONDENSED FINANCIAL INFORMATION
 
NOTE A--BASIS OF PRESENTATION
 
    Certain prior years' amounts have been reclassified to conform to the 1997
presentation.
 
NOTE B--SUPPLEMENTAL CASH FLOWS INFORMATION
 
    For information regarding certain non-cash financing activities, see note 9
to the consolidated financial statements.
 
NOTE C--COMMITMENTS AND CONTINGENCIES
 
    RJR Nabisco, Inc. has guaranteed most of the indebtedness of its
international tobacco subsidiary. For disclosure of contingent liabilities, see
note 10 to the consolidated financial statements.
 
                            ------------------------
 
                                      S-8
<PAGE>
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>          <S>
 
      3.1 (a) Composite of the Amended and Restated Certificate of Incorporation of RJR Nabisco Holdings Corp. as
             amended to and including April 12, 1995 (incorporated by reference to Exhibit 3.1(a) of the Quarterly
             Report on Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended
             March 31, 1995, filed May 19, 1995 (the "First Quarter 1995 Form 10-Q")).
 
      3.1 (b) Certificate of Retirement of certain shares of Series B Cumulative Preferred Stock, filed October 11,
             1995 (incorporated by reference to Exhibit 3.1(m) of the Registrants' Annual Report on Form 10-K for
             the fiscal year ended December 31, 1995, File No.'s I-10215 and I-6388, filed on February 22, 1996
             (the "1995 Form 10-K")).
 
     *3.2    By-Laws of RJR Nabisco Holdings Corp. as Amended Effective December 15, 1997.
 
      3.3    A composite of the Certificate of Incorporation of RJR Nabisco, Inc., as amended to May 13, 1994
             (incorporated by reference to Exhibit 3.3(d) of the Registrants' Annual Report on Form 10-K for the
             fiscal year ended December 31, 1994, File No.'s I- 10215 and I-6388 filed on February 23, 1995 (the
             "1994 Form 10-K")).
 
     *3.4    By-Laws of RJR Nabisco, Inc. as Amended Effective December 15, 1997.
 
      4.1    Amended and Restated Indenture, dated as of July 24, 1995, between RJR Nabisco, Inc. and Citibank,
             N.A., dated as of July 24, 1995 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on
             Form 10-Q of RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. for the fiscal quarter ended June 30,
             1995 (the "Second Quarter 1995 10-Q")).
 
      4.2    Indenture (the "TOPrS Indenture"), dated as of September 21, 1995, between RJR Nabisco Holdings Corp.
             and the Bank of New York (incorporated by reference to Exhibit 4.1 to the Registration Statement on
             Form S-4 of RJR Nabisco Holdings Corp. and RJR Nabisco Holdings Capital Trust I, Registration Nos.
             33-60415 and 33-60415-01, filed June 20, 1995 (the "TOPrS Registration Statement")).
 
      4.3    Form of First Supplemental Indenture to the TOPrS Indenture (incorporated by reference to Exhibit 4.2
             to the TOPrS Registration Statement).
 
      4.4    Form of Amended and Restated Declaration of Trust of RJR Nabisco Holdings Capital Trust I
             (incorporated by reference to Exhibit 4.5 to the TOPrS Registration Statement).
 
      4.5    Form of Preferred Security of RJR Nabisco Holdings Capital Trust I (included in Exhibit 4.4 above).
 
      4.6    Form of Junior Subordinated Debenture (included in Exhibit 4.2 above).
 
      4.7    Form of Guarantee Agreement with respect to Preferred Securities between RJR Nabisco Holdings Corp.
             and the Bank of New York as the Guarantee Trustee (incorporated by reference to Exhibit 4.8 to the
             TOPrS Registration Statement).
 
      4.8    Indenture, dated as of June 5, 1995, between Nabisco, Inc. and Citibank, N.A., (incorporated by
             reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of Nabisco,
             Inc., Registration No. 33-90224, filed March 29, 1995).
 
      4.9    The Registrants agree to furnish copies of any instrument defining the rights of holders of long-term
             debt of the Registrants and their consolidated subsidiaries that does not exceed 10 percent of the
             total assets of the Registrants and their consolidated subsidiaries to the Commission upon request.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>          <S>
     10.1    Credit Agreement (the "Three Year Credit Agreement"), dated as of April 28, 1995, among RJR Nabisco,
             Inc., as Borrower, RJR Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase
             Manhattan Bank, N.A., Chemical Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing
             Agents, and various lending institutions (incorporated by reference to Exhibit 10.1 to the Second
             Quarter 1995 Form 10-Q).
 
     10.2    Credit Agreement (the "364 Day Credit Agreement"), dated as of April 28, 1995, among RJR Nabisco,
             Inc., as Borrower, RJR Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase
             Manhattan Bank, N.A., Chemical Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing
             Agents, and various lending institutions (incorporated by reference to Exhibit 10.2 to the Second
             Quarter 1995 Form 10-Q).
 
     10.3    Agreement and Waiver to the Three Year Credit Agreement and the 364 Day Credit Agreement
             (collectively, the "RJRN Credit Agreements"), dated as of July 27, 1995 (incorporated by reference to
             Exhibit 10.5 to the Second Quarter 1995 Form 10-Q).
 
     10.4    First Amendment, dated as of September 12, 1995, to the RJRN Credit Agreements (incorporated by
             reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter
             ended September 30, 1995 filed October 31, 1995 (the "Third Quarter 1995 Form 10-Q")).
 
     10.5    Second Amendment, dated as of June 3, 1996, to the 364 Day Credit Agreement (incorporated by
             reference to Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter
             ended June 30, 1996 filed July 31, 1996 (the "Second Quarter 1996 Form 10-Q")).
 
     10.6    Second Amendment to the Three Year Credit Agreement and Third Amendment to the 364 Day Credit
             Agreement, dated as of January 31, 1997 (incorporated by reference to Exhibit 10.6 to the
             Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed March 14,
             1997 (the "1996 Form 10-K")).
 
     10.7    Fourth Amendment to the 364 Day Credit Agreement, dated as of April 4, 1997 (incorporated by
             reference to Exhibit 10.6 to the Registrants' Quarterly Report on Form 10-Q for the fiscal quarter
             ended June 30, 1997, filed August 8, 1997 (the "Second Quarter 1997 Form 10-Q")).
 
     10.8    Third Amendment to the Three Year Credit Agreement and Fifth Amendment to the 364 Day Credit
             Agreement, dated as of September 29, 1997 (incorporated by reference to Exhibit 10.1 to the
             Registrants' Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, filed
             November 5, 1997 (the "Third Quarter 1997 Form 10-Q")).
 
    *10.9    Fourth Amendment to the Three Year Credit Agreement and Sixth Amendment to the 364 Day Credit
             Agreement, dated as of December 5, 1997.
 
    *10.10   Fifth Amendment to the Three Year Credit Agreement and Seventh Amendment to the 364 Day Credit
             Agreement, dated as of February 13, 1998.
 
     10.11   Credit Agreement (the "Five Year Nabisco Credit Agreement"), dated as of October 31, 1996, among
             Nabisco, Inc., as Borrower, Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase
             Manhattan Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents, and various
             lending institutions (incorporated by reference to Exhibit 10.7 to the 1996 Form 10-K).
 
     10.12   Credit Agreement (the "364 Day Nabisco Credit Agreement"), dated as of October 31, 1996, among
             Nabisco, Inc., as Borrower, Nabisco Holdings Corp., as Guarantor, Bankers Trust Company, The Chase
             Manhattan Bank, Citibank, N.A. and The Fuji Bank, Limited, as Senior Managing Agents, and various
             lending institutions (incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K).
 
    *10.13   First Amendment to the 364 Day Nabisco Credit Agreement, dated as of September 18, 1997.
 
     10.14   RJR Nabisco, Inc. Annual Incentive Award Plan, as amended and restated effective January 1, 1997
             (incorporated by reference to Exhibit 10.2 of the Third Quarter 1997 Form 10-Q).
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     10.15   RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan as amended and restated effective April 16,
             1997 (incorporated by reference to Exhibit 10.1 of the Second Quarter 1997 Form 10-Q).
 
     10.16   Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the Director named
             therein dated as of April 16, 1997 (incorporated by reference to Exhibit 10.2 of the Second Quarter
             1997 Form 10-Q).
 
     10.17   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the Director
             named therein dated as of April 16, 1997 (incorporated by reference to Exhibit 10.3 of the Second
             Quarter 1997 Form 10-Q).
 
     10.18   Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein
             (1997 grant -- 1 year period) dated as of February 28, 1997 (incorporated by reference to Exhibit
             10.4 of the Second Quarter 1997 Form 10-Q).
 
     10.19   Form of Restricted Stock Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named
             therein dated as of June 16, 1997 (incorporated by reference to Exhibit 10.5 of the Second Quarter
             1997 Form 10-Q).
 
     10.20   Non-Qualified Stock Option Agreement dated January 10, 1997 between RJR Nabisco Holdings Corp. and
             Steven F. Goldstone (incorporated by reference to Exhibit 10.1 of the Registrants' Quarterly Report
             on Form 10-Q for the fiscal quarter ended March 31, 1997, filed May 13, 1997 (the "First Quarter 1997
             Form 10-Q"))
 
     10.21   Form of Performance Appreciation Right Agreement between RJR Nabisco Holdings Corp. and the grantee
             named therein (incorporated by reference to Exhibit 10.2 of the First Quarter 1997 Form 10-Q).
 
     10.22   Restricted Stock Unit Agreement dated March 24, 1997 between RJR Nabisco Holdings Corp. and David B.
             Rickard (incorporated by reference to Exhibit 10.3 of the First Quarter 1997 Form 10-Q).
 
     10.23   Form of Performance Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named therein
             (1996; three-year period) (incorporated by reference to Exhibit 10.2 of the Registrants' Quarterly
             Report on Form 10-Q for the fiscal quarter ended March 31, 1996, filed on May 1, 1996 (the "First
             Quarter 1996 Form 10-Q")).
 
     10.24   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named
             therein (1996 grant-regular) incorporated by reference to Exhibit 10.3 of the First Quarter 1996 Form
             10-Q.
 
     10.25   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named
             therein(1996 grant-insider) (incorporated by reference to Exhibit 10.4 of the First Quarter 1996 Form
             10-Q).
 
     10.26   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named
             therein (1996 grant-executive)(incorporated by reference to Exhibit 10.5 of the First Quarter 1996
             Form 10-Q).
 
     10.27   Amendment to Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the
             grantee named therein (1996 grant-insider) (incorporated by reference to Exhibit 10.5 to the Second
             Quarter 1996 Form 10-Q).
 
     10.28   Retirement Trust Agreement, made as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank
             and Trust Company, N.A.(incorporated by reference to Exhibit 10.6 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 (the "Form S-4, Registration No. 33-27894")).
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     10.29   Trust Agreement between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A., Trustee, dated
             January 27, 1989 (incorporated by reference to Exhibit 10(d)(iv) to the Registrants' Annual Report on
             Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989 (the "1988 Form 10-K")).
 
     10.30   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 Form S-4,
             Registration No. 33-27894).
 
     10.31(a) Amendment No. 1 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to
             Exhibit 10(g)(ii) to the 1988 Form 10-K).
 
     10.31(b) Amendment No. 2 to Master Trust Agreement, dated January 27,1989 (incorporated by reference to
             Exhibit 10(g)(iii) to the 1988 Form 10-K).
 
     10.32   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 the Form S-4, Registration No. 33-27894).
 
     10.33   Amendment No. 1 to Excess Benefit Master Trust Agreement, dated January 27, 1989 (incorporated by
             reference to Exhibit 10(h)(ii) to the 1988 Form 10- K).
 
     10.34   RJR Nabisco, Inc. Supplemental Executive Retirement Plan, as amended on July 21, 1988 (incorporated
             by reference to Exhibit 10.32 to the Form S-4, Registration No. 33-27894).
 
     10.35(a) Amendment to Supplemental Executive Retirement Plan, dated November 23, 1988 (incorporated by
             reference to Exhibit 10(m)(ii) to the 1988 Form 10-K).
 
     10.35(b) Amendment No. 2 to Supplemental Executive Retirement Plan, dated January 27, 1989 (incorporated by
             reference to Exhibit 10(m)(iii) to the 1988 Form 10-K).
 
     10.35(c) Amendment to Supplemental Executive Retirement Plan, dated April 10, 1993 (incorporated by reference
             to the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1993, File
             No.'s I- 10215 and I-6388 filed on February 24, 1994 (the "1993 Form 10-K")).
 
     10.36   Amended and Restated Employment Agreement (dated June 1, 1996) by and between R.J. Reynolds
             International B.V. and Pierre deLabouchere (incorporated by reference to Exhibit 10.1 to the
             Registrants' Quarterly Report on Form 10-Q for the Third Quarter ended September 30, 1996, filed
             November 1, 1996 (the "Third Quarter 1996 Form 10-Q")).
 
     10.37   Engagement Agreement (dated March 3, 1995) between RJR Nabisco Holdings Corp. and Steven F. Goldstone
             (incorporated by reference to Exhibit 10.38 of the 1995 Form 10-K).
 
     10.38   Amended and Restated Employment Agreement (dated December 5,1995) by and among RJR Nabisco Holdings
             Corp., and RJR Nabisco, Inc. and Steven F. Goldstone (incorporated by reference to Exhibit 10.40 of
             the 1995 Form 10-K).
 
     10.39   Contingent Performance Share Agreement (dated December 5, 1995) between RJR Nabisco Holdings Corp.
             and Steven F. Goldstone (incorporated by reference to Exhibit 10.42 of the 1995 Form 10-K).
 
     10.40   Secured Promissory Note (dated December 5, 1995) of Steven F. Goldstone in favor of RJR Nabisco
             Holdings Corp. (incorporated by reference to Exhibit 10.43 of the 1995 Form 10-K).
 
     10.41   Secured Promissory Note (dated May 15, 1996) of Steven F. Goldstone in favor of Nabisco Holdings
             Corp. (incorporated by reference to Exhibit 10.6 to the Third Quarter 1996 Form 10-Q).
 
     10.42   Amendment dated December 5, 1995 to Employment Agreement between RJR Nabisco Holdings Corp. and
             Andrew J. Schindler (incorporated by reference to Exhibit 10.44 of the Registrants' 1995 Form 10-K).
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     10.43   Participation Agreement RJR Nabisco, Inc. Supplemental Executive Retirement Plan for Andrew J.
             Schindler dated December 28, 1995 (incorporated by reference to Exhibit 10.45 of the Registrants'
             1995 Form 10-K).
 
     10.44   Amended and Restated Deferred Compensation Plan for RJR Directors (dated as of September 1, 1996)
             (incorporated by reference to Exhibit 10.2 of the Third Quarter 1996 Form 10-Q).
 
     10.45   Amended and Restated Equity Incentive Award Plan for Directors and Key Employees of RJR Nabisco
             Holdings Corp. and Subsidiaries (dated as of September 1, 1996) (incorporated by reference to Exhibit
             10.3 to the Third Quarter 1996 Form 10-Q).
 
     10.46   Performance Unit Program under RJR Nabisco Holdings Corp. 1990 Long Term Incentive Plan (incorporated
             by reference to Exhibit 10.3 to the First Quarter 1994 Form 10-Q).
 
     10.47   Amendment to Non-Qualified Stock Option Agreements dated prior to October 11, 1995 (incorporated by
             reference to Exhibit 10.75 of the 1995 Form 10-K).
 
     10.48   Form of Non-Qualified Stock Option Agreement dated April 27, 1995 between RJR Nabisco Holdings Corp.
             and the grantee named therein (Reissued options) (incorporated by reference to Exhibit 10.77 of the
             1995 Form 10-K).
 
     10.49   Form of Non-Qualified Stock Option Agreement dated April 27, 1995 between RJR Nabisco Holdings Corp.
             and the grantee named therein (Premium options) (incorporated by reference to Exhibit 10.78 of the
             1995 Form 10-K).
 
     10.50   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp. and the grantee named
             therein (incorporated by reference to Exhibit 10.79 of the 1995 Form 10-K).
 
     10.51   Form of Deferred Stock Unit Agreement between RJR Nabisco Holdings Corp. and the grantee named
             therein dated as of May 31, 1996 (incorporated by reference to Exhibit 10.5 to the Third Quarter 1996
             Form 10-Q).
 
     10.52   Amendment dated July 10, 1995 to Executive Equity Program Agreement under the 1990 Long Term
             Incentive Plan between RJR Nabisco Holdings Corp. and the grantee named therein (incorporated by
             reference to Exhibit 10.82 of the 1995 Form 10-K).
 
     10.53   Form of Employment Agreement dated October 11, 1995 (incorporated by reference to Exhibit 10.83 of
             the 1995 Form 10-K).
 
     10.54   Form of Employment Agreement dated November 1, 1995 (incorporated by reference to Exhibit 10.84 of
             the 1995 Form 10-K).
 
     10.55   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp., and Director named
             therein (Election version) (incorporated by reference to Exhibit 10.86 of the 1995 Form 10-K).
 
     10.56   Form of Non-Qualified Stock Option Agreement between RJR Nabisco Holdings Corp., and Director named
             therein (Annual version) (incorporated by reference to Exhibit 10.87 of the 1995 Form 10-K).
 
     10.57   Settlement Agreement dated August 25, 1997, between the State of Florida and settling defendants in
             THE STATE OF FLORIDA V. AMERICAN TOBACCO COMPANY (incorporated by reference to Exhibit 2 to the
             Registrants' Current Report on Form 8-K dated August 25, 1997).
 
     10.58   Settlement Agreement dated January 16, 1998, between the State of Texas and settling defendants in
             THE STATE OF TEXAS V. AMERICAN TOBACCO COMPANY (incorporated by reference to Exhibit 2 to the
             Registrants' Current Report on Form 8-K dated January 16, 1998).
 
    *12.1    RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for each of the periods within
             the five year period ended December 31, 1997.
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    *21.     Subsidiaries of the Registrants.
 
    *23.     Consent of Independent Auditors.
 
    *24.     Powers of Attorney.
 
    *27.1    Financial Data Schedule of RJR Nabisco Holdings Corp.
 
    *27.2    Financial Data Schedule of RJR Nabisco, Inc.
 
    *99.     Expanded Litigation Disclosure.
</TABLE>
 
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*   Filed herewith.