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                                                                   Exhibit 10.38












                      R.J. REYNOLDS TOBACCO HOLDINGS, INC.

                           ANNUAL INCENTIVE AWARD PLAN

                            Effective January 1, 1987
                 Amended and Restated Effective January 1, 2002




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                      R.J. REYNOLDS TOBACCO HOLDINGS, INC.

                           ANNUAL INCENTIVE AWARD PLAN

                            Effective January 1, 1987
                 Amended and Restated Effective January 1, 2002

                                      INDEX
                                      -----


       Section                                                             Page

1.     Purpose................................................................3
2.     Definitions............................................................3
3.     Eligibility............................................................3
4.     Performance Objectives.................................................3
5.     Determination of Target Awards.........................................4
6.     Determination of Cash Awards...........................................4
7.     Deferral...............................................................6
8.     Tax Withholding........................................................9
9.     Adjustments, Amendment or Termination..................................9
10.    Miscellaneous..........................................................9
11.    Effective Date........................................................11
Exhibit A:  Definitions....................... ..............................12


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                      R.J. REYNOLDS TOBACCO HOLDINGS, INC.

                           ANNUAL INCENTIVE AWARD PLAN

                            Effective January 1, 1987
                 Amended and Restated Effective January 1, 2002

1.       Purpose

         The R.J. Reynolds Tobacco Holdings, Inc. Annual Incentive Award Plan is
         established to link corporate and business priorities with individual
         and group performance objectives for the management employees of R.J.
         Reynolds Tobacco Holdings, Inc. and its affiliated companies.

2.       Definitions

         Capitalized terms have the meanings set forth in Exhibit A.

3.       Eligibility

         To be eligible to participate in the Plan and receive an award, an
         employee must:

         (a)      except as otherwise provided in Section 6, be employed by a
                  Company or one of its subsidiaries for at least three months
                  during the year at a salary grade approved for participation
                  in the Plan by the Chief Executive Officer;

         (b)      not be a participant in a sales incentive plan or any other
                  bonus plan designated by the Committee; and

         (c)      except as otherwise provided herein, be actively employed by a
                  Company or one of its subsidiaries on the last day of the
                  year.

4.       Performance Objectives

         (a)      Subject to the approval of the Committee, the Chief Executive
                  Officer of each Company will establish specific objectives
                  (the "Performance Objectives") for each Company for each year.
                  Subject to the approval of the Chief Executive Officer of
                  RJRTH, the Chief Executive Officers of the Operating Companies
                  also may establish Performance Objectives for some or all of
                  their respective subsidiaries. Performance Objectives may be
                  based on any financial, operational or other criteria, such as
                  market share.

         (b)      Each participant and the manager to whom the Participant
                  reports (the "Reviewing Manager") may have specific individual
                  performance objectives (the "Personal Program Objectives") for
                  each year in which


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                  Personal Program Objectives determine, in whole or in part,
                  the Participant's Cash Award. The next higher level of
                  management will review the Personal Program Objectives to
                  ensure that they contribute to the Performance Objectives
                  established by the Chief Executive Officer. In addition,
                  subject to the approval of the Chief Executive Officer of
                  RJRTH, the Chief Executive Officers of the Operating Companies
                  may establish specific Company focus areas (the "Company Focus
                  Areas") for some or all of their respective subsidiaries in
                  place of Personal Program Objectives for each year in which
                  Company Focus Areas determine, in whole or in part, the
                  Participant's Cash Award.

         (c)      Each of the Performance Objectives and Personal Program
                  Objectives/Company Focus Areas will be weighted for the
                  purpose of determining awards under the Plan. Different
                  weights may be assigned to the objectives for different
                  Participants and Companies. However, the aggregate weights for
                  the Performance Objectives and Personal Program
                  Objectives/Company Focus Areas will each range from 1-100% and
                  together total 100%.

         (d)      Performance Objectives and Personal Program Objectives/Company
                  Focus Areas may be reviewed and revised during the year
                  pursuant to the procedures used for their adoption. The Chief
                  Human Resources Officer may change the weighting of any
                  objective for any Participant.

5.       Determination of Target Awards

         Each Participant's target award for each year equals the product of (a)
         the Participant's highest annual rate of base salary in effect for
         three months or more during the year, multiplied by (b) the
         Participant's highest target award level for which he was eligible for
         three months or more during the year. Each Participant's target award
         level is expressed as a percentage of base pay and falls within a range
         of target award levels set for the Participant's salary grade. The
         Committee will periodically review and may modify the range of target
         award levels for each salary grade. Subject to the approval of the
         Chief Human Resources Officer, Reviewing Managers will periodically
         review and may modify specific target award levels for individual
         Participants.

6.       Determination of Cash Awards

         (a)      Promptly after the end of each year, the Chief Executive
                  Officer of RJRTH will review the performance of each Company
                  with the Committee. Subject to the approval of the Committee,
                  the Chief Executive Officers of the Operating Companies may
                  give a rating to each Performance Objective for the year (a "
                  Performance Rating") ranging from 1-150% for each Performance
                  Objective.


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         (b)      The Reviewing Manager will review the performance of each
                  Participant promptly after the end of each year in which
                  Personal Program Objectives determine, in whole or in part,
                  the Participant's Cash Award. The Reviewing Manager will give
                  the Participant a rating (a "Personal Program Rating") for
                  each of his or her Personal Program Objectives for the year,
                  which may range from 1-150%. The Chief Executive Officers of
                  the Operating Companies will review the Company performance
                  for specific Company Focus Areas promptly after the end of
                  each year in which Company Focus Areas determine, in whole or
                  in part, each Participant's Cash Award. Subject to the
                  approval of the Committee, the Chief Executive Officers of the
                  Operating Companies may give a rating to each Company Focus
                  Area (a "Company Focus Area Rating") ranging from 1-150%.

         (c)      The amount of each Cash Award is determined by multiplying the
                  Participant's Performance Ratings and Personal Program
                  Ratings/Company Focus Area Ratings by the respective weights
                  assigned to the corresponding Performance Objectives and
                  Personal Program Objectives/Company Focus Areas pursuant to
                  Section 4(c). The sum of the resulting percentages is then
                  multiplied by the target award for the Participant established
                  pursuant to Section 5. If a Participant is transferred during
                  the year to a position with different Performance Objectives,
                  the Performance Ratings applicable to the Participant will be
                  determined by applying the applicable Performance Ratings on a
                  pro-rata basis, based on the months of employment during the
                  year in each position.

         (d)      When a Participant becomes eligible to participate in the Plan
                  after the start of the year, the Participant's Cash Award will
                  be prorated for the number of months of eligibility during the
                  year. In the event a Participant is on a leave of absence
                  during the year, the Participant's Cash Award may be prorated,
                  based on the number of full or partial months of active
                  employment at the discretion of the Chief Human Resources
                  Officer.

         (e)      If a Participant's employment is interrupted by the
                  Participant's death, Disability or Retirement at any time
                  during the year, the Participant will receive a Cash Award
                  equal to his or her target award, prorated for the number of
                  full or partial months of employment during the year, as soon
                  as practicable after such death, Disability or Retirement. The
                  prorating will give the Participant a full month's credit for
                  any partial month of work or short-term disability.

         (f)      If a Participant's employment terminates pursuant to an SBC
                  Program at any time during the year, the Participant will
                  receive a Cash Award for the year of termination of active
                  employment equal to the lesser of his or her target award or
                  the actual award determined in accordance with Section 6(c),
                  prorated for the number of full or partial months as an active


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                  employee. In addition, the SBC Program may provide the
                  Participant with credit for some or all of the period of
                  salary continuation and, if so, will establish criteria to
                  determine the Performance Ratings for the Participant during
                  this period. Payment of the resulting Cash Awards, if any,
                  will be governed by the terms of the SBC Program.

         (g)      After obtaining approval from the Committee and satisfying its
                  requirements, the Companies will pay the Cash Award as soon as
                  practicable after the end of the year (or at such other time
                  as determined by the Committee), except as provided in the
                  event of death, Disability or Retirement pursuant to Section
                  6(e).

7.       Deferral

         (a)      As of the last day of each year, each Participant who is on a
                  United States payroll may elect to defer payment of the Cash
                  Award for that year. An election to defer will be pursuant to
                  procedures established by the Committee and will be in
                  writing, signed by the Participant and delivered to the
                  Company by December 15 of the year preceding payment. The
                  election will be irrevocable and will specify the percentage
                  of the Cash Awards (from 5% to 100%) which will be paid (i) as
                  soon as practicable after the year in which the Participant's
                  Retirement, Disability or other termination of employment
                  occurs or, if earlier, (ii) in January of any designated
                  future year. If the Participant's employment with the
                  Companies and their subsidiaries terminates before the
                  designated year, the award will be paid in January of the year
                  following termination. If a Participant is eligible for CIP
                  and elects to defer the proceeds of Cash Awards, the Company
                  will contribute an additional 3% to the amount deferred on
                  account of the 3% Company match that the Participant would
                  have received under CIP if the Participant had not deferred
                  the Cash Award.

         (b)      Each Participant will specify, on the notice electing deferred
                  payment pursuant to Section 7(a), whether the Cash Award will
                  be deferred by cash credit, Common Stock credit, or a
                  combination of the two. If a Participant elects to defer
                  payment pursuant to Section 7(a) and fails to choose a mode of
                  deferral, the Participant's deferral will be by means of a
                  cash credit. Cash credits and stock credits will be recorded
                  in accounts established in each Participant's name on the
                  books of the Participant's Company. At the direction of RJRTH,
                  any Participant's accounts may be consolidated on the books of
                  RJRTH or any of its subsidiaries.

                  (i)      If the deferral is wholly or partly a cash credit,
                           the Participant's cash credit account will be
                           credited, as of the date(s) that payment of the Cash
                           Awards would otherwise have been made, with the
                           dollar amount of the portion of the Cash Awards
                           deferred by means of a


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                           cash credit. In addition, the Participant's cash
                           credit account will be credited as of the last day of
                           each calendar quarter with an interest equivalent in
                           an amount determined by applying to the current
                           balance in the account an interest rate equal to the
                           average prime rate of Morgan Guaranty Trust Company
                           of New York or its successor during the preceding
                           quarter. Interest will be credited for the actual
                           number of days in the quarter using a 365-day year.

                  (ii)     If the deferral is wholly or partly a Common Stock
                           credit, the Participant's Common Stock credit account
                           will be credited, as of the date(s) that payment of
                           the Cash Awards would otherwise have been made, with
                           the Common Stock equivalent of the number of shares
                           of Common Stock (including fractions of a share) that
                           could have been purchased with the portion of the
                           Cash Awards deferred by means of a Common Stock
                           credit at the Closing Price on the date that payment
                           of the Cash Awards would otherwise have been made. As
                           of the date any dividend is paid to shareholders of
                           Common Stock, the Participant's Common Stock credit
                           account will also be credited with an additional
                           Common Stock equivalent equal to the number of shares
                           of Common Stock (including fractions of a share) that
                           could have been purchased at the Closing Price on
                           such date with the dividend paid on the number of
                           shares of Common Stock to which the Participant's
                           Common Stock credit account is then equivalent. If
                           dividends are paid in property, the dividend will be
                           deemed to be the fair market value of the property at
                           the time of distribution of the dividend, as
                           determined by the Committee.

         (c)      Payment of deferred Cash Awards will be made in a single cash
                  payment as soon as practicable in January of the appropriate
                  year. If and to the extent that the deferral is by means of
                  the Common Stock credit account the value of the payment will
                  be based on the Closing Price of Common Stock on the last
                  trading day of the year prior to payment. Notwithstanding the
                  foregoing, if a Participant elects in writing before December
                  15 of the year his employment terminates due to Retirement or
                  Disability, payment will be made in substantially equal annual
                  installments (not to exceed ten) commencing in January
                  following the Retirement or Disability. Notwithstanding any
                  election under Section 7(a) to defer Cash Awards by means of a
                  Common Stock credit, the Common Stock credit account of a
                  Participant who elects to receive installment payments will be
                  converted into a cash credit account as of January 1 of the
                  year in which such installment payments commence. Any election
                  by a Participant under this Section 7(c) will be irrevocable
                  after December 15 of the year prior to commencement of
                  payment.

         (d)      At the one-time election of a Participant made in writing to
                  the Committee, all or any designated portion of the Common
                  Stock credit


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                  account may be converted to, and such Participant will be
                  credited with, a cash credit account as of the first business
                  day of the calendar quarter following the quarter in which the
                  election is made. The amount credited to the cash credit
                  account will be determined by multiplying the number of shares
                  of Common Stock to which the Participant's Common Stock credit
                  account is then equivalent and as to which such election has
                  been made by the Closing Price on the last business day of the
                  calendar quarter in which the election is made. Any Common
                  Stock credits attributable to dividends paid on Common Stock
                  during the calendar quarter in which the election is made will
                  be credited before making the conversion. Such election may be
                  made by a Participant at any time prior to the end of the
                  calendar year in which termination of employment occurs. An
                  election by a Participant under this Section 7(d) will be
                  irrevocable.

         (e)      If the number of outstanding shares of Common Stock is
                  increased as the result of any stock dividend, subdivision or
                  reclassification of shares, the number of shares of Common
                  Stock to which each Participant's Common Stock credit account
                  is equivalent will be increased in proportion to the increase
                  in the number of outstanding shares of Common Stock. If the
                  number of outstanding shares of Common Stock is decreased as
                  the result of any combination or reclassification of shares,
                  the number of shares of Common Stock to which each
                  Participant's Common Stock credit account is equivalent will
                  be decreased in proportion to the decrease in the number of
                  outstanding shares of Common Stock. In the event the Company
                  is consolidated with or merged into any other corporation and
                  holders of the Company's Common Stock receive common shares of
                  the resulting or surviving corporation, each Participant's
                  Common Stock credit account, in place of the shares then
                  credited thereto, will be credited with a stock equivalent
                  determined by multiplying the number of common shares of stock
                  given in exchange for a share of Common Stock upon such
                  consolidation or merger, by the number of shares of Common
                  Stock to which the Participant's account is then equivalent.
                  If in such a consolidation or merger, holders of the Company's
                  Common Stock receive any consideration other than common
                  shares of the resulting or surviving corporation, the
                  Committee will determine the appropriate change in
                  Participants' accounts. In the event of an extraordinary
                  dividend, including any spin-off, the Committee will make
                  appropriate adjustments to each Participant's Common Stock
                  credit account.

         (e)      If a Participant dies, whether before or after termination of
                  employment, any cash credit account and Common Stock credit
                  account to which he or she is entitled, including any award
                  approved after the Participant's death as to which an election
                  to defer was made and any remaining installment payments, will
                  be distributed in cash, as soon as practicable (unless the
                  Committee otherwise provides) to the Participant's
                  beneficiaries pursuant to Section 10(j).


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8.       Tax Withholding

         Each Participant's employer will deduct any taxes required to be
         withheld by federal, state, local or foreign governments from payments
         and distributions under the Plan.

9.       Adjustments, Amendments or Termination

         (a)      The Committee may make appropriate and equitable adjustments
                  in the Performance Ratings, Personal Program Ratings/Company
                  Focus Areas Ratings and the number, terms and conditions of
                  any Cash Awards if it determines that conditions warrant such
                  adjustment. Such conditions may include, without limitation,
                  changes in the economy, laws, regulations and generally
                  accepted accounting principles, as well as corporate events
                  such as a merger, consolidation, recapitalization,
                  reclassification, stock split, stock dividend, spin-off,
                  change of control or other event. Any adjustment made by the
                  Committee shall be final and binding upon the Companies and
                  the Participants.

         (b)      The Committee may amend, suspend or terminate the Plan at will
                  and at any time, but it will not take any action that would
                  materially adversely affect the rights of Participants with
                  respect to deferral accounts.

10.      Miscellaneous

         (a)      Except as determined by the Committee, no person will have any
                  right to receive an award.

         (b)      The Committee has the power to interpret the Plan and,
                  together with the officers of the Companies, has complete
                  discretion in making determinations and taking action pursuant
                  to the Plan. All interpretations, determinations and actions
                  by the Committee will be final, conclusive and binding on all
                  parties. Subject to the preceding sentence, the Chief
                  Executive Officer of RJRTH will administer the Plan and will
                  resolve all administrative questions and interpretations. The
                  Committee and the Chief Executive Officer of RJRTH may
                  delegate their authority to anyone. In such event, references
                  in the Plan to the Committee or to the Chief Executive Officer
                  of RJRTH will refer to their delegates when appropriate.

         (c)      The Companies, their Boards of Directors, the Committee, the
                  officers and the other employees of RJRTH and its subsidiaries
                  will not be liable for any action taken in good faith in
                  interpreting and administering the Plan.


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         (d)      For purposes of the Plan, a Participant on leave of absence
                  approved by a Company or a subsidiary of a Company will be
                  considered an employee. Except as otherwise provided herein, a
                  Participant on salary continuation under an SBC Program or
                  agreement of severance will not be considered an employee but
                  will be deemed to be terminated on his or her last day of
                  active employment. A Participant absent due to short-term
                  disability on the last day of a year is deemed to be actively
                  employed if such Participant was actively employed at any time
                  during the year.

         (e)      The Cash Awards and the interest, dividends and other expenses
                  on deferred Cash Awards will be charged to the Participant's
                  Company. If the Participant is employed by more than one
                  Company during the year, the Participant's Plan expenses may
                  be allocated between the Companies in a manner prescribed by
                  the Committee.

         (f)      The Plan does not create or confer on any Participant any
                  right to employment, and the employment of any Participant may
                  be terminated by the Participant or the Participant's employer
                  without regard to the effect that termination might have on
                  the Participant with respect to the Plan.

         (g)      Participants may not transfer, pledge or encumber any benefit
                  under the Plan prior to its receipt in cash. Except as
                  required by law, creditors may not attach or seize any such
                  benefit.

         (h)      The obligations of the Companies under the Plan are unsecured
                  liabilities. No assets of the Companies are allocable to the
                  satisfaction of Plan obligations.

         (i)      The Plan will be governed by and subject to the laws of the
                  State of Delaware.

         (j)      In the event of the death of a Participant, any distribution
                  to which such Participant is entitled under the Plan shall be
                  made to the beneficiary designated by the Participant to
                  receive the proceeds of any noncontributory group life
                  insurance coverage provided for the Participant by the
                  Participant's Company ("Group Life Insurance Coverage"). If
                  the Participant has not designated such beneficiary, or
                  desires to designate a different beneficiary, the Participant
                  may file with the Chief Human Resources Officer a written
                  designation of a beneficiary under the Plan, which designation
                  may be changed or revoked only by the Participant, in writing.
                  If no designation of beneficiary has been made by a
                  Participant under the Group Life Insurance Coverage or filed
                  with the Chief Human Resources Officer under the Plan,
                  distribution upon such Participant's death shall be made in
                  accordance with the provisions of the Group Life Insurance
                  Coverage. If a Participant is no longer an employee of a
                  Company or one of its subsidiaries at the time of death, no
                  longer has any

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                  Group Life Insurance Coverage and has not filed a designation
                  of beneficiary with the Chief Human Resources Officer under
                  the Plan, distribution upon such Participant's death shall be
                  made to the Participant's estate.

         (k)      A Company may supersede some or all of the terms of the Plan
                  with respect to individual Participants pursuant to an
                  employment, termination or similar agreement. In case of
                  conflict, the agreement will control.

11.      Effective Date

         The Plan is effective as of January 1, 1987 and has been amended and
         restated as of January 1, 2002.


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                                    EXHIBIT A

                                   Definitions


(a)      Board of Directors. The Board of Directors of RJRTH.

(b)      Cash Award. Annual cash payments made to Participants pursuant to the
         Plan.

(c)      Chief Executive Officer. For employees of RJRTH and the chief executive
         officers of the Operating Companies, the chief executive officer of
         RJRTH. For the other employees of each Operating Company and its
         subsidiaries, the chief executive officer of the Operating Company
         primarily responsible for their performance.

(d)      Chief Human Resources Officer. For employees of RJRTH and the executive
         officers of the Operating Companies, the chief human resources officer
         of RJRTH. For the other employees of each Operating Company and its
         subsidiaries, the chief personnel officer of the Operating Company
         primarily responsible for their performance.

(e)      CIP. The R. J. Reynolds Capital Investment Plan, or comparable
         Company-sponsored 401(k) plan in which employees participate, or any
         successor thereof.

(f)      Closing Price. The closing sale price of the Common Stock as shown on
         the New York Stock Exchange consolidated tape and reported in the Wall
         Street Journal.

(g)      Committee. The Compensation Committee of the Board of Directors.

(h)      Common Stock. The Common Stock of RJRTH.

(i)      Companies. RJRTH and the Operating Companies.

(j)      Company Focus Areas. As defined in Section 4(b) of the Plan.

(k)      Company Focus Areas Rating. As defined in Section 6(b) of the Plan.

(l)      Disability. Being totally and permanently disabled as defined in the
         Long-Term Disability Plan of the Operating Company employing the
         participant.

(m)      Group Life Insurance Coverage. As defined in Section 10(j) of the Plan.

(n)      Operating Companies. R. J. Reynolds Tobacco Company and, effective upon
         its acquisition by RJRTH, Santa Fe Natural Tobacco Company, Inc.

(o)      Participant. For any year, an employee who is eligible for or who has
         deferred receipt of an award under the Plan. An eligible employee is a
         Participant only with respect to the Company for which he works most
         directly. (p) Performance Objectives. As defined in Section 4(a) of the
         Plan.

(q)      Performance Rating. As defined in Section 6(a) of the Plan.

(r)      Personal Program Objectives. As defined in Section 4(b) of the Plan.

(s)      Personal Program Rating. As defined in Section 6(b) of the Plan.


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(t)      Plan. R.J. Reynolds Tobacco Holdings, Inc. Annual Incentive Award Plan.

(u)      Retirement. Retirement with eligibility for retiree medical benefits.

(v)      Reviewing Manager. As defined in Section 4(b) of the Plan.

(w)      RJRTH. R.J. Reynolds Tobacco Holdings, Inc.

(x)      SBC Program. A salary and benefits continuation or other program
         maintained by a Company for the purpose of providing severance-type
         benefits to employees whose employment is involuntarily terminated.




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