EXHIBIT 99.1

Kraft Foods Inc.
Final Prospectus Pursuant to Rule 424(b)(1)

FILED PURSUANT TO RULE NO. 424(b)(1)
REGISTRATION NO. 333-57162

280,000,000 Shares

[KRAFT LOGO]

Kraft Foods Inc.

Class A Common Stock

-----------

This is our initial public offering and no public market currently exists
for our shares.

We are currently a wholly-owned subsidiary of Philip Morris Companies Inc.
Upon completion of this offering, Philip Morris will own 49.5% of our Class A
common stock and 100% of our Class B common stock. Each share of Class A
common stock has one vote and each share of Class B common stock has ten
votes. Accordingly, following this offering, Philip Morris will own common
stock representing 97.7% of the combined voting power of our common stock.

Our shares have been authorized for listing on the New York Stock Exchange
under the symbol "KFT."

We have granted the underwriters an option to purchase up to an additional
28,000,000 shares of our Class A common stock to cover over-allotments.

Investing in our Class A common stock involves risks. See "Risk Factors"
beginning on page 7.

Per Share Total
--------- -----

Initial public offering price............ $31.0000 $8,680,000,000
Underwriting discount.................... $ 0.8471 $ 237,181,000
Proceeds, before expenses, to Kraft...... $30.1529 $8,442,819,000

The underwriters expect to deliver the shares of Class A common stock on or
about June 18, 2001.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.

-----------

Credit Suisse First Boston Salomon Smith Barney

-----------

Deutsche Banc Alex. Brown
JPMorgan
Morgan Stanley Dean Witter
UBS Warburg

-----------

BNP PARIBAS HSBC Lehman Brothers

-----------

Blaylock & Partners, L.P.
Dresdner Kleinwort Wasserstein
Prudential Securities
Ramirez & Co., Inc.
Sanford C. Bernstein & Co., LLC
Utendahl Capital Partners, L.P.

Prospectus dated June 12, 2001

[Inside Front Cover Artwork and Graphics:

Approximately 1 1/2 inches down from the top of the page is written the
following text centered on the page: "Our superior brand portfolio has seven
brands with over $1 billion in sales . . .". Below the text appear the logos of
our seven billion dollar brands: Philadelphia, Nabisco, Oscar Mayer, Kraft,
Maxwell House, Jacobs and Post.]

[Front Gatefold Artwork and Graphics:

Across the top of the gatefold is written the following text: "........ and a
total of sixty-one brands with over $100 million in sales, sold in over 140
countries." Below the text appear pictures of our products which represent our
sixty-one brands with over $100 million in sales: A.1. steak sauce, Freia
confectionery, Post cereal, Tang drink mix, Tombstone pizza, Cote d'Or candy,
Knudsen sour cream, DiGiorno pizza, Sathers confectionery, Polly-O cheese,
Newtons cookies, Cool Whip whipped toppings, Royal desserts, Kraft Minute Brand
rice, Kraft Macaroni & Cheese Dinners, Oscar Mayer hot dogs, Nabisco Grahams
crackers, Wheat Thins crackers, Original Milk-Bone Brand dog biscuits, Gevalia
coffee, Kool-Aid drink mix, Jacobs coffee, Triscuit crackers, Jack's Pizza,
Premium crackers, Oscar Mayer Lunchables Lunch Combinations, Breyer's All
Natural Yogurt, Capri Sun All Natural juice drinks, Jacques Vabre coffee,
Suchard confectionery, Miracle Whip dressing, Cracker Barrel cheese, Jell-O
desserts, Ritz crackers, Oreo cookies, Milka confectionery, Louis Rich bacon,
Planters nuts, Lacta confectionery, Stove Top Oven Classic stuffing mix, Kenco
coffee, Handi-Snacks snack combinations, Maxwell House coffee, Claussen Cold
Crisp Delicious pickles, Marabou confectionery, SnackWell's cookies, Chips
Ahoy! cookies, Kaffee HAG coffee, Country Time drink mix, Crystal Light drink
mix, Carte Noire coffee, Kraft Velveeta prepared cheese product, Philadelphia
cream cheese, Altoids candy, General Foods International Coffees flavored
coffees, Terry's chocolate, All Natural Breakstone's cottage cheese, Cheez Whiz
process cheese sauce, Toblerone chocolate, Life Savers candy and Balance energy
bars.]

TABLE OF CONTENTS

Page Page
---- ----

Prospectus Summary................ 1 Regulation....................... 73
Risk Factors...................... 7 Legal Proceedings................ 73
Cautionary Statement Regarding Management......................... 75
Forward-Looking Statements....... 11 Directors and Executive
About this Prospectus............. 11 Officers........................ 75
Use of Proceeds................... 12 Composition of Board of
Dividend Policy................... 12 Directors....................... 76
Capitalization.................... 13 Committees of Board of
Dilution.......................... 14 Directors....................... 77
Pro Forma Condensed Combined Compensation of Directors........ 77
Financial Information............ 15 Compensation Committee Interlocks
Selected Historical Combined and Insider Participation....... 78
Financial and Other Data......... 19 Stock Ownership of Directors and
Management's Discussion and Executive Officers.............. 78
Analysis of Financial Condition Executive Compensation........... 79
and Results of Operations........ 21 Grants of Stock Options.......... 80
Overview of Our Business........ 21 Exercises of Stock Options....... 81
Combined Operating Results by Pension Plan Tables.............. 81
Segment........................ 24 Employment Contracts, Termination
Operating Results by Business of Employment and Change of
Segment........................ 28 Control Arrangements............ 83
Financial Condition and Kraft Performance Incentive
Liquidity...................... 40 Plan............................ 83
Market Risk..................... 42 Kraft Director Plan.............. 87
New Accounting Standards........ 44 Sole Shareholder................... 88
Business.......................... 45 Relationship with Philip Morris.... 88
Overview........................ 45 Description of Capital Stock....... 92
Our History..................... 48 Option Grants and Sales to
Our Competitive Strengths....... 49 Employees......................... 96
Strategies...................... 56 Shares Eligible for Future Sale.... 97
Markets and Products............ 59 Material United States Federal Tax
Sales, Retailer Relations and Consequences for Non-United States
Food Service................... 66 Shareholders...................... 98
Consumer Marketing and Underwriting....................... 101
Advertising.................... 68 Notice to Canadian Residents....... 106
Manufacturing and Processing Validity of Class A Common Stock... 107
Facilities..................... 69 Experts............................ 107
Distribution.................... 70 Where You Can Find More
Competition..................... 70 Information....................... 107
Raw Materials................... 71 Index to Financial Statements...... F-1
Employees....................... 71 Appendix: "Meet the Management of
Research and Development........ 72 Kraft" Presentation for Kraft
Intellectual Property........... 72 Foods Inc......................... A-1

------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different.
This prospectus may only be used where it is legal to sell these securities.
The information in this prospectus may only be accurate on the date of this
document.
------------
Dealer Prospectus Delivery Requirement

Through and including July 7, 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to unsold allotments or
subscriptions.

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding us and our Class A common stock being sold in this
offering and our historical and pro forma combined financial statements
included elsewhere in this prospectus.

KRAFT

We are the largest branded food and beverage company headquartered in the
United States and the second largest in the world based on 2000 revenue on a
pro forma basis for our acquisition of Nabisco. We have a superior brand
portfolio created and supported through dynamic product innovation, worldclass
marketing, experienced management, global scale and strategic acquisitions. Our
brands are sold in more than 140 countries and, according to A.C. Nielsen, are
enjoyed in 99.6% of the households in the United States. Consumers of all ages
around the world enjoy our brands, whether at home or away from home, across
the entire spectrum of food and beverage occasions: breakfast, lunch, dinner
and snacks. We employ approximately 117,000 persons, including more than 20,000
salespersons deployed in 60 countries, and we have 228 manufacturing facilities
around the world.

In December 2000, to expand our global presence and to strengthen our
position in the fast growing snacks consumer sector, we acquired Nabisco
Holdings Corp., the largest manufacturer and marketer of cookies and crackers
in the world based on retail sales. Together with Nabisco, we would have
reported 2000 pro forma revenue of $34.7 billion and 2000 pro forma earnings
before interest, income taxes, depreciation and amortization of $6.3 billion.

We hold the #1 global share position in eleven product categories. In the
United States, based on dollar shares, we hold the #1 share position in 23 of
our 25 most profitable categories or, based on volume or equivalent unit
shares, in 21 of these 25 categories. In addition, based on volume or
equivalent unit shares, we hold the #1 share position in 21 of our 25 most
profitable international country categories. Our portfolio includes 61 brands
with 2000 revenue over $100 million, accounting for 75% of our 2000 pro forma
revenue. Seven of our brands, listed below, had 2000 revenue over $1 billion,
accounting for 40% of our 2000 pro forma revenue:

. Kraft--the #1 cheese brand in the world, as well as our best known brand
for salad and spoonable dressings, packaged dinners, barbecue sauce and
other products;

. Nabisco--the umbrella brand for the #1 cookie and cracker business in
the world, including nine of our $100 million brands;

. Oscar Mayer--the #1 processed meats brand in the United States;

. Post--the #3 brand of ready-to-eat cereals in the United States;

. Maxwell House--one of the leading coffee brands in the world;

. Philadelphia--the #1 cream cheese brand in the world; and

. Jacobs--the #1 roast and ground coffee brand in Western Europe.

Kraft Foods North America accounted for $25.3 billion, or 73%, of our 2000
pro forma revenue. Kraft Foods International, which operates in 63 countries
and sells its products in more than 140 countries, accounted for $9.4 billion,
or 27%, of our 2000 pro forma revenue.

OUR GOALS, STRENGTHS AND STRATEGIES

Our Goals

Our long-term mission is to be recognized as the undisputed leader of the
global food and beverage industry. To that end, we strive to be:

. the first choice of our consumers;

. an indispensable partner to our retailers and other customers;

. the most desired partner for strategic alliances;

. the employer of choice in our industry;

. a responsible citizen in our communities; and

. a consistent producer of industry-leading financial performance and
returns for our investors.

Since 1998, our volume grew at a compound annual rate of 1.7%, our net
earnings grew at a compound annual rate of 10.7% and our net earnings,
excluding amortization of goodwill, grew at a compound annual rate of 8.0%. Our
financial targets, which include the impact of the Nabisco acquisition, are to
achieve the following growth rates versus 2000 pro forma as adjusted results
over the next three years:

. compound annual volume growth between 3% and 4%;

. compound annual net earnings growth between 18% and 22%; and

. compound annual net earnings growth, excluding amortization of goodwill,
between 14% and 16%.

Net earnings amounts reflect the application of the net proceeds from this
offering of approximately $8.4 billion to retire a portion of our $11.0 billion
long-term note payable to Philip Morris.

Our Strengths

Our strengths are:

. our superior brand portfolio--our brands enjoy consumer loyalty, trust
and satisfaction, and offer our retail customers a strong combination of
growth and profitability;

. our innovative products supported by worldclass marketing--we nurture
the growth of our brands by developing new and innovative products and
line and geographic extensions and supporting them with effective
advertising and promotions;

. our successful portfolio management--a key contributor to our growth and
financial returns has been our proven ability to strengthen our
portfolio through acquisitions and divestitures;

. our global scale--our size and scope enable us to be more efficient and
effective in serving our customers worldwide and to expand our brands
geographically while reducing costs and improving productivity and
margins; and

. our management's proven ability to execute--we have an experienced
management team committed to achieving superior performance.

Our Strategies

We intend to create superior value for our investors by continuing to
execute our proven growth and operating strategies. We achieve significant
benefits from our scale by applying the following strategies across our entire
global organization:

. accelerate growth of core brands--grow our brands by:

-- focusing on consumer sectors with attractive growth characteristics;

-- addressing consumer needs, including convenience and health and
wellness;

-- expanding our presence in faster growing distribution channels; and

-- targeting attractive demographic and economic segments in each
market;

. drive global category leadership--attain and expand the leading position
in our core categories across our key markets in order to capture a
higher share of each category's growth and profit;

. optimize our portfolio--actively manage our business and brand portfolio
through acquisitions, divestitures and licensing arrangements to improve
the growth profile and profitability of our business;

. maximize operating efficiency--drive excess costs and unproductive
assets out of our system and realize synergies from our acquisition of
Nabisco, while emphasizing product quality and customer service; and

. build employee and organizational excellence--invest significant
resources in training, development and career management and utilize
employee measurement and compensation systems, all designed to achieve
our success in the marketplace.

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

Our principal executive offices are located at Three Lakes Drive,
Northfield, Illinois 60093 and our telephone number is (847) 646-2000.

THE OFFERING

Class A common stock
offered................ 280,000,000 shares

Common stock to be
outstanding immediately
after this offering
Class A................ 555,000,000 shares
Class B................ 1,180,000,000 shares

Common stock to be held
by Philip Morris
immediately after
this offering
Class A................ 275,000,000 shares (49.5% of outstanding)
Class B................ 1,180,000,000 shares (100% of outstanding)

Common stock voting
rights
Class A................ One vote per share
Class B................ Ten votes per share

Use of proceeds......... We intend to use the net proceeds of the offering to
retire a portion of our long-term notes payable to Philip
Morris.

Dividend policy......... We intend to pay regular quarterly dividends on our Class
A and Class B common stock at the initial annual rate of
$0.52 per share, depending on our financial results and
action by our board of directors.

New York Stock Exchange
symbol................. KFT

Risk factors............ See "Risk Factors" and the other information included in
this prospectus for a discussion of factors you should
carefully consider before deciding to invest in shares of
our Class A common stock.

The number of shares of Class A common stock to be outstanding after this
offering excludes:

. 28,000,000 shares issuable upon exercise of the underwriters' over-
allotment option;

. 21,322,596 shares issuable upon exercise of employee stock options to be
granted by us concurrently with this offering at an option price equal
to the initial public offering price on the cover page of this
prospectus; and

. 54,612,904 additional shares available for future issuance under our
stock option and incentive plans.

OUR RELATIONSHIP WITH PHILIP MORRIS

We are currently a wholly-owned subsidiary of Philip Morris Companies Inc.
Upon completion of this offering, Philip Morris will own 49.5% of our
outstanding Class A common stock, or 47.2% if the underwriters exercise their
over-allotment option in full, and 100% of our outstanding Class B common
stock, giving it 97.7% of the combined voting power of our outstanding common
stock, or 97.5% if the underwriters exercise their over-allotment option in
full. Philip Morris will have the ability to direct the election of members of
our board of directors and to determine the outcome of other matters submitted
to the vote of our shareholders.

Philip Morris has advised us that its current intent is to continue to hold
all of our common stock owned by it following this offering, other than shares
of our Class A common stock subject to stock options granted by Philip Morris
to its employees. However, Philip Morris is not subject to any contractual
obligation to maintain its share ownership, except that Philip Morris has
agreed not to sell or otherwise dispose of any shares of our common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of the underwriters.

SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND
OTHER DATA

The following table presents our summary historical and pro forma combined
financial and other data and should be read along with "Pro Forma Condensed
Combined Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Kraft combined financial
statements, the Nabisco consolidated financial statements, and the accompanying
notes to those statements included in this prospectus.

On December 11, 2000, we acquired all of the outstanding shares of Nabisco
for $55 per share in cash. We have accounted for the acquisition as a purchase.
Nabisco's balance sheet has been consolidated with our balance sheet as of
December 31, 2000; however, Nabisco's earnings from December 11, 2000 through
December 31, 2000, have not been included in our combined operating results
because the amounts were insignificant. Our interest cost of $65 million
associated with acquiring Nabisco has been included in interest and other debt
expense, net, in our combined statement of earnings for the year ended December
31, 2000. Nabisco's earnings have been included in our combined operating
results for the first quarter of 2001.

Our pro forma results of operations data present:

. our pro forma results of operations for the year ended December 31,
2000, as if the acquisition of Nabisco had occurred on January 1, 2000;
and

. our pro forma as adjusted results of operations for the year ended
December 31, 2000, as if this offering had been completed on January 1,
2000, at the initial public offering price of $31.00 per share and
assuming the underwriters do not exercise their over-allotment option,
with the net proceeds being used to retire a portion of our $11.0
billion long-term note payable to Philip Morris.

Our as adjusted balance sheet and statement of earnings data as of March 31,
2001 and for the quarter ended March 31, 2001, present, using the same
assumptions and application of the net proceeds described above:

. our as adjusted financial position as of March 31, 2001, as if this
offering had been completed on March 31, 2001; and

. our as adjusted results of operations for the quarter ended March 31,
2001, as if this offering had been completed on January 1, 2001.

Our pro forma and as adjusted results are not necessarily indicative of what
actually would have occurred if the acquisition had been consummated, and this
offering had been completed, on the dates indicated, nor are they necessarily
indicative of our future operating results.

We define EBITDA as earnings before interest and other debt expense, net;
provision for income taxes; depreciation; and amortization. We believe that
EBITDA is a measure commonly used by analysts and investors. Accordingly, we
have disclosed this information to permit a more complete analysis of our
operating performance. EBITDA should not be considered in isolation or as a
substitute for net earnings or other results of operations data or cash flow
data prepared in accordance with accounting principles generally accepted in
the United States as a measure of our profitability or liquidity. EBITDA, as we
calculate it, may not be comparable to similarly titled measures reported by
other companies.

We define operating companies income as operating income before amortization
of goodwill and corporate expenses. We use this measure to report our segment
profitability under accounting principles generally accepted in the United
States.

We also evaluate our operating results and the performance of our businesses
by reviewing underlying results, including underlying operating revenue,
underlying operating companies income and underlying operating companies income
margin. Underlying results reflect the results of our business operations,
excluding significant one-time items for employee separation programs, write-
downs of property, plant and equipment, estimated sales made in advance of the
century date change and gains (losses) on sales of businesses. Underlying
results also exclude the operating results of businesses that have been sold.
Accordingly, we have disclosed underlying results to permit a more complete
analysis of our operating performance. Underlying operating companies income
should not be considered in isolation or as a substitute for net earnings or
other results of operations data prepared in accordance with accounting
principles generally accepted in the United States.

We calculate operating companies income margin by dividing operating
companies income by operating revenue. We calculate underlying operating
companies income margin by dividing underlying operating companies income by
underlying operating revenue.

First Quarter Ended
Year Ended December 31, March 31,
------------------------------------------------ -----------------------------
Pro Pro Forma
Forma as Adjusted as Adjusted
1998 1999 2000 2000 2000 2000 2001 2001
------- ------- -------- ------- ----------- ------- ------- -----------
(in millions, except per share data)

Statement of Earnings
Data:
Operating revenue...... $27,311 $26,797 $ 26,532 $34,679 $34,679 $ 6,460 $ 8,367 $ 8,367
Cost of sales.......... 15,544 14,573 13,917 18,266 18,266 3,381 4,267 4,267
------- ------- -------- ------- ------- ------- ------- -------
Gross profit......... 11,767 12,224 12,615 16,413 16,413 3,079 4,100 4,100
Marketing,
administration and
research costs........ 7,688 8,106 8,068 10,890 10,890 2,017 2,768 2,768
Amortization of
goodwill.............. 544 539 535 961 961 133 240 240
------- ------- -------- ------- ------- ------- ------- -------
Operating income..... 3,535 3,579 4,012 4,562 4,562 929 1,092 1,092
Interest and other
debt expense, net..... 536 539 597 2,002 1,348 127 482 318
------- ------- -------- ------- ------- ------- ------- -------
Earnings before
income taxes........ 2,999 3,040 3,415 2,560 3,214 802 610 774
Provision for income
taxes................. 1,367 1,287 1,414 1,156 1,427 332 284 360
------- ------- -------- ------- ------- ------- ------- -------
Net earnings......... $ 1,632 $ 1,753 $ 2,001 $ 1,404 $ 1,787 $ 470 $ 326 $ 414
======= ======= ======== ======= ======= ======= ======= =======
Basic and diluted
earnings per share.... $ 1.12 $ 1.20 $ 1.38 $ 0.96 $ 1.03 $ 0.32 $ 0.22 $ 0.24
======= ======= ======== ======= ======= ======= ======= =======
Weighted average
number of shares...... 1,455 1,455 1,455 1,455 1,735 1,455 1,455 1,735
Balance Sheet Data:
Goodwill, net of
accumulated
amortization.......... $16,408 $15,296 $ 31,584 $15,337 $31,423 $31,423
Total assets........... 31,391 30,336 52,071 30,456 52,053 52,053
Short-term borrowings,
including current
maturities............ 109 105 859 121 493 493
Long-term notes
payable to Philip
Morris................ 6,234 6,602 21,407 6,488 21,390 12,956
Other long-term debt... 483 433 2,695 425 2,721 2,721
Shareholders' equity... 15,134 13,461 14,048 13,847 14,321 22,755
Cash Flow Data:
Cash provided by (used
in):
Operating
activities.......... $ 2,324 $ 2,693 $ 3,254 $ 548 $ 2
Investing
activities.......... (763) (669) (16,138) (440) (194)
Financing
activities.......... (1,565) (2,031) 12,982 (72) 164
Depreciation and
amortization.......... 1,038 1,030 1,034 $ 1,722 $ 1,722 260 425 $ 425
Capital expenditures... (841) (860) (906) (1,151) (1,151) (120) (174) (174)
Other Data:
Volume (in pounds)..... 12,694 12,817 13,130 17,613 17,613 3,113 4,280 4,280
EBITDA................. $ 4,573 $ 4,609 $ 5,046 $ 6,284 $ 6,284 $ 1,189 $ 1,517 $ 1,517
Corporate expenses..... 103 135 208 208 208 51 50 50
Operating companies
income:
Reported............. 4,182 4,253 4,755 5,731 5,731 1,113 1,382 1,382
Underlying........... 4,108 4,308 4,620 5,620 5,620 1,142 1,411 1,411
Operating companies
income margin:
Reported............. 15.3% 15.9% 17.9% 16.5% 16.5% 17.2% 16.5% 16.5%
Underlying........... 15.3 16.4 17.4 16.3 16.3 17.6 16.9 16.9

RISK FACTORS

You should carefully consider the risks described below and the other
information in this prospectus before deciding to invest in shares of our
Class A common stock. If any of the following risks actually occurs, our
business, financial condition and results of operations could suffer, in which
case the trading price of our Class A common stock could decline.

Risks Related to Our Business and Industry

We may be unable to maintain our profit margin in the face of a
consolidating retail environment.

Our 15 largest customers together accounted for approximately 40% of our
2000 pro forma revenue. As the retail grocery trade continues to consolidate
and our retail customers grow larger and become more sophisticated, our retail
customers demand lower pricing and increased promotional programs. Further,
these customers are reducing their inventories and increasing their emphasis
on private label products. If we fail to use our scale, marketing expertise,
unique products and category leadership positions to respond to these trends,
our volume growth could slow or we may need to lower our prices or increase
promotional support of our products, any of which would adversely affect our
profitability.

We may be unable to offset the reduction in volume and revenue resulting
from our participation in categories experiencing declining consumption rates.

The coffee, dry packaged desserts, powdered soft drinks, ready-to-eat
cereals and stuffing categories in the United States, which together accounted
for approximately 10% of our 2000 pro forma revenue, have experienced
declining consumption rates since 1997, averaging 1.8% per year. This decline
is due in part to consumer trends toward more convenient foods. Many of our
products require some preparation before they are consumed. Our success
depends in part on our ability to execute our strategy of continuously
improving our portfolio of brands and satisfying consumer preferences for
convenience. If we do not succeed, our volume, revenue and operating companies
income will not increase sufficiently to enable us to achieve our financial
targets.

If we are not an efficient producer, our profitability will suffer as a
result of the highly competitive environment in which we operate.

Our success depends in part on our ability to be an efficient producer in a
highly competitive industry. Our ability to reduce costs further is limited to
the extent efficiencies have already been achieved. Our failure to reduce
costs through productivity gains or by eliminating redundant costs resulting
from acquisitions would weaken our competitive position.

We may be unable to anticipate changes in consumer preferences, which may
result in decreased demand for our products.

Our success depends in part on our ability to anticipate the tastes and
dietary habits of consumers and to offer products that appeal to their
preferences. Consumer preferences change and our failure to anticipate,
identify or react to these changes could result in reduced demand for our
products, which would in turn cause our volume, revenue and operating
companies income to suffer.

We may be unable to add products that are in faster growing and more
profitable categories.

The food industry's growth potential is constrained by population growth,
which has been limited to an annual average increase of 1.1% in North America
and 1.3% globally since 1996. Our success depends in part on our ability to
grow our business faster than populations are growing in the markets that we
serve. One way to achieve that growth is to enhance our portfolio by adding
products that are in faster growing and more profitable categories. If we do
not succeed in making these enhancements, our volume growth may slow, which
would adversely affect our profitability.

We have only recently acquired Nabisco and may not be able to successfully
integrate its operations and achieve our anticipated cost synergies and new
product opportunities.

Although Kraft and Nabisco have each operated separately for many years,
Kraft only recently began to operate the businesses as a combined entity. There
can be no assurance that we will be able to successfully integrate our business
with Nabisco in order to achieve anticipated cost synergies. Our failure to
successfully integrate could have a material adverse effect on our operating
companies income.

A strengthening United States dollar reduces our reported results of
operations from our international business.

In 2000, we derived approximately 32% of our pro forma revenue from sales in
foreign currencies. In our combined financial statements, we translate local
currency financial results into United States dollars based on average exchange
rates prevailing during a reporting period. During times of a strengthening
United States dollar, our reported international revenue and earnings will be
reduced because the local currency will translate into fewer United States
dollars.

We are major purchasers of many commodities that we use for raw materials
and packaging, and price changes for the commodities we depend on may adversely
affect our profitability.

The raw materials used in our business are largely commodities that
experience price volatility caused by external conditions, commodity market
fluctuations, currency fluctuations and changes in governmental agricultural
programs. Commodity price changes may result in unexpected increases in raw
material and packaging costs, and we may be unable to increase our prices to
offset these increased costs without suffering reduced volume, revenue and
operating companies income. We do not fully hedge against changes in commodity
prices and our hedging procedures may not work as planned.

We may be unable to pass on increased costs we incur due to changes in laws
and regulations without incurring volume loss as a result of our higher prices.

Various governments throughout the world are considering regulatory
proposals relating to genetically modified organisms or ingredients, food
safety and market and environmental regulation which, if adopted, would
increase our costs. If any of these or other proposals are enacted, we may
experience a disruption in supply and we may be unable to pass on the cost
increases to our customers without incurring volume loss as a result of our
higher prices.

Economic downturns could cause consumers to shift their food purchases from
our higher priced premium products to lower priced items.

The willingness of consumers to purchase premium branded food and beverage
products depends in part on local economic conditions. In periods of economic
uncertainty, consumers tend to purchase more private label or other economy
brands and our volume could suffer accordingly.

Concerns with the safety and quality of food products could cause consumers
to avoid our products.

We could be adversely affected if consumers in our principal markets lose
confidence in the safety and quality of certain food products. Adverse
publicity about these types of concerns, like the recent publicity about
genetically modified organisms and "mad cow disease" in Europe, whether or not
valid, may discourage consumers from buying our products or cause production
and delivery disruptions.

If our food products become adulterated or misbranded, we would need to
recall those items and may experience product liability claims if consumers are
injured as a result.

We may need to recall some of our products if they become adulterated or
misbranded. We may also be liable if the consumption of any of our products
causes injury. A widespread product recall or a significant product liability
judgment against us could cause products to be unavailable for a period of time
and a loss of consumer confidence in our food products and could have a
material adverse effect on our business.

We could be liable for income taxes owed by the consolidated group of
Nabisco's former parent.

Before we acquired Nabisco, it was a member of the consolidated group of
Nabisco Group Holdings Corp. Each member of that consolidated group is jointly
and severally liable for the federal income tax liability of each other member
of the group. Consequently, Nabisco could be liable in the event any such
liability is incurred, and not discharged, by any other member of the Nabisco
Group Holdings Corp. consolidated group. Disputes or assessments could arise
during future audits by the Internal Revenue Service in amounts that we cannot
quantify.

Risks Related to Our Relationship with Philip Morris

Because Philip Morris controls substantially all the voting power of our
common stock, investors will not be able to affect the outcome of any
shareholder vote.

Following this offering, Philip Morris will own 49.5% of our outstanding
Class A common stock, or 47.2% if the underwriters exercise their over-
allotment option in full, and 100% of our outstanding Class B common stock. Our
Class A common stock has one vote per share while our Class B common stock has
ten votes per share. As a result, Philip Morris after this offering will
control 97.7% of the combined voting power of all of our outstanding common
stock, or 97.5% if the underwriters exercise their over-allotment option in
full. For as long as Philip Morris continues to own shares of common stock
representing more than 50% of the combined voting power of our common stock, it
will be able to direct the election of all of the members of our board of
directors and determine the outcome of all matters submitted to a vote of our
shareholders, including matters involving mergers or other business
combinations, the acquisition or disposition of assets, the incurrence of
indebtedness, the issuance of any additional shares of common stock or other
equity securities and the payment of dividends on common stock. Philip Morris
will also have the power to prevent or cause a change in control, and could
take other actions that might be favorable to Philip Morris but not to Kraft.

Because Philip Morris will control us, conflicts of interest between Philip
Morris and us could be resolved in a manner unfavorable to us.

Various conflicts of interest between Kraft and Philip Morris could arise
including, but not limited to, the following areas:

Cross Directorships and Stock Ownership. Ownership interests of directors or
officers of Kraft in the common stock of Philip Morris or service as a director
or officer of both Kraft and Philip Morris could create or appear to create
potential conflicts of interest when directors and officers are faced with
decisions that could have different implications for the two companies. For
example, these decisions could relate to:

. the nature, quality and cost of services rendered to us by Philip
Morris;

. disagreement over the desirability of a potential acquisition
opportunity;

. employee retention or recruiting;

. the timing of repayments of our indebtedness to Philip Morris; or

. our dividend policy.

Control of Tax Decisions. Under our tax-sharing agreement with Philip
Morris, Philip Morris has sole authority to respond to and conduct all income
tax proceedings, including tax audits, relating to Kraft, to file all income
tax returns on behalf of Kraft, and to determine the amount of Kraft's
liability to, or entitlement to payment from, Philip Morris under the tax-
sharing agreement. This arrangement may result in conflicts of interest between
Kraft and Philip Morris. For example, under the tax-sharing agreement, Philip
Morris may choose to contest, compromise or settle any adjustment or deficiency
proposed by the relevant taxing authority in a manner that may be beneficial to
Philip Morris and detrimental to Kraft.

We could be liable for income taxes owed by Philip Morris.

Each member of the Philip Morris consolidated group, which includes Philip
Morris, our company, and Philip Morris' other subsidiaries, is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Consequently, we could be liable in the event any such
liability is incurred, and not discharged, by any other member of the Philip
Morris consolidated group. Disputes or assessments could arise during future
audits by the Internal Revenue Service in amounts that we cannot quantify.

Future sales or distributions of our shares by Philip Morris could depress
the market price for shares of our Class A common stock.

After completion of this offering, Philip Morris may sell all or part of the
shares of our common stock that it owns or distribute those shares to its
shareholders. Sales or distributions by Philip Morris of substantial amounts of
our common stock in the public market or to its shareholders could adversely
affect prevailing market prices for our Class A common stock. Philip Morris has
advised us that it intends to continue to hold all of our common stock that it
owns following this offering, other than shares of our Class A common stock
subject to stock options granted by Philip Morris to its employees. However,
Philip Morris is not subject to any contractual obligation to maintain its
ownership position in our shares, except that it has agreed not to sell or
otherwise dispose of any of our shares of common stock for a period of 180 days
after the date of this prospectus without the prior written consent of the
underwriters. Consequently, we cannot assure you that Philip Morris will
maintain its ownership of our common stock after the 180 day period following
this offering.

Investor perception that Philip Morris may be required to sell shares of our
common stock owned by it to satisfy liabilities related to tobacco litigation
may depress the price of our shares.

Our shares could be discounted in the marketplace because of investor
concern that our principal shareholder, Philip Morris, may face significant
liabilities relating to tobacco litigation. See "Relationship with Philip
Morris--Litigation Against Philip Morris" on page 91.

Stock Market Risk

The market price of our Class A common stock may be volatile, which could
cause the value of your investment to decline.

Securities markets worldwide experience significant price and volume
fluctuations. This market volatility, as well as general economic, market or
political conditions, could reduce the market price of our Class A common stock
in spite of our operating performance. In addition, our operating results could
be below the expectations of public market analysts and investors, and in
response, the market price of our Class A common stock could decrease
significantly. You may be unable to resell your shares of our Class A common
stock at or above the initial public offering price.

Some shares in this offering may have been offered in violation of the
Securities Act of 1933, which could give certain purchasers of these shares the
right to seek refunds or damages.

Prior to the effectiveness of the registration statement covering the shares
of our Class A common stock being sold in this offering, some of the
underwriters of this offering provided written copies of a "pre-marketing
feedback" form to certain potential purchasers of our Class A common stock. The
feedback form was for internal use only and was designed to elicit orally
certain information from designated accounts as part of designing strategy in
connection with this offering. This form may constitute a prospectus that does
not meet the requirements of the Securities Act of 1933. We urge all persons to
read and base their investment decision only on the preliminary prospectus,
dated May 21, 2001, and the final prospectus dated the date hereof.

If the distribution of this form by the underwriters did constitute a
violation of the Securities Act of 1933, persons who received this form,
directly or indirectly, and who purchased our Class A common stock in this
offering may have the right, for a period of one year from the date of the
violation, to obtain recovery of the consideration paid in connection with
their purchase of our Class A common stock or, if they had already sold the
stock, attempt to recover losses resulting from their purchase of our Class A
common stock. We do not believe that any attempts to rescind these purchases or
to recover these losses will have a material adverse effect on our financial
position.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Pro Forma Condensed Combined Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus include forward-looking statements.
You can identify these forward-looking statements by the use of words like
"strategy," "expects," "plans," "believes," "will," "estimates," "intends,"
"projects," "goals," "targets" and other words of similar meaning. You can also
identify them by the fact that they do not relate strictly to historical or
current facts. We are identifying below important factors that could cause
actual results and outcomes to differ materially from those contained in any
forward-looking statement. Any such statement is qualified by reference to the
following cautionary statement.

Demand for our products is subject to intense competition, changes in
consumer preferences and local economic conditions. In order to compete
effectively against lower priced products in a consolidating environment at the
retail and manufacturer levels, our results are dependent upon our continued
ability to:

. promote our brands successfully;

. anticipate and respond to new consumer trends;

. develop new products and markets;

. broaden our brand portfolio;

. improve productivity; and

. respond to changing prices for our raw materials.

Our results are also dependent upon our ability to successfully integrate
and derive cost savings from the integration of Nabisco's operations with ours.
In addition, we are subject to the effects of foreign economies and currency
movements. Developments in any of these areas could cause our results to differ
materially from results that have been or may be projected.

We caution you that the above list of important factors is not exclusive,
and other factors are discussed in more detail under "Risk Factors" in this
prospectus. These forward-looking statements are made as of the date of this
prospectus.

ABOUT THIS PROSPECTUS

Trademarks and servicemarks in this prospectus appear in bold italic type
and are the property of or licensed by our subsidiaries.

In this prospectus, we rely on and refer to statistics regarding the food
industry. Where specified, these statistics reflect our own internal estimates.
Otherwise, we obtained these statistics from various third party sources that
we believe are reliable, but we have not independently verified the statistics.
Unless otherwise specified, information concerning category shares of our
brands and category and market size has been obtained from A.C. Nielsen for
Kraft brands, other than Nabisco brands, sold in the United States and from
Information Resources Inc. for Nabisco brands sold in the United States. Unless
otherwise specified, information concerning category shares of our brands
outside of the United States and global data have been obtained from
A.C. Nielsen or Euromonitor International. Information concerning international
category and market size has been obtained from A.C. Nielsen or Euromonitor
International. Unless otherwise specified, all share information is based on
dollar shares, pounds or equivalent units as indicated and is for the year 2000
or for the year 1999 if 2000 data are unavailable.

Kraft Foods Inc. is a holding company incorporated in Virginia on December
7, 2000. Its two principal subsidiaries are Kraft Foods North America, Inc.,
which conducts our food business in the United States, Canada and Mexico, and
Kraft Foods International, Inc., which conducts our food business in the rest
of the world. In this prospectus, we use the terms "Kraft," "we," "our" and
"us" when we do not need to distinguish among these entities or when any
distinction is clear from the context. Otherwise, we use the terms "Kraft Foods
Inc.," "Kraft Foods North America" and "Kraft Foods International." The term
"Philip Morris" refers to our parent, Philip Morris Companies Inc. The term
"Nabisco" refers to Nabisco Holdings Corp. and its subsidiaries, which we
acquired in December 2000.

USE OF PROCEEDS

Our net proceeds from this offering will be approximately $8.4 billion,
based on the initial public offering price of $31.00 per share and after
deducting the underwriting discount and estimated offering expenses payable by
us. If the underwriters' over-allotment option is exercised in full, our net
proceeds will be approximately $9.3 billion.

We will use the net proceeds from this offering to retire a portion of an
$11.0 billion 7.75% note payable to Philip Morris, due in December 2002,
incurred in connection with the Nabisco acquisition.

DIVIDEND POLICY

Our board of directors currently intends to pay regular quarterly dividends
on our Class A common stock and Class B common stock at an initial annual rate
of $0.52 per share. The first dividend is expected to be declared during the
third quarter of 2001 and to be payable in October 2001. The declaration of
dividends is subject to the discretion of our board of directors and will
depend upon various factors, including our net earnings, financial condition,
cash requirements, future prospects and other factors deemed relevant by our
board of directors.

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2001. We
have presented our capitalization:

. on an actual basis; and

. on an as adjusted basis to reflect our receipt and use of the net
proceeds from the sale of 280,000,000 shares of Class A common stock in
this offering at the initial public offering price of $31.00 per share
and the use of the net proceeds to retire a portion of our $11.0 billion
long-term note payable to Philip Morris.

You should read the information set forth below together with "Prospectus
Summary--Summary Historical and Pro Forma Combined Financial and Other Data,"
"Pro Forma Condensed Combined Financial Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Kraft
combined financial statements, the Nabisco consolidated financial statements,
and the accompanying introductions and notes to those statements included
elsewhere in this prospectus.

As of March 31,
2001
-----------------
As
Actual Adjusted
------- --------
(in millions)

Short-term borrowings, including current maturities.......... $ 493 $ 493
Short-term obligation payable to Philip Morris............... 1,616 1,616
Long-term notes payable to Philip Morris..................... 21,390 12,956
Other long-term debt......................................... 2,721 2,721
------- -------
Total debt................................................. 26,220 17,786
------- -------
Shareholders' equity:
Preferred stock, no par value, 500,000,000 shares
authorized; none issued and outstanding...................
Class A common stock, no par value, 3,000,000,000 shares
authorized; 275,000,000 shares issued and outstanding,
actual; and 555,000,000 shares issued and outstanding, as
adjusted..................................................
Class B common stock, no par value, 2,000,000,000 shares
authorized; 1,180,000,000 shares issued and outstanding,
actual and as adjusted....................................
Additional paid-in capital................................. 15,230 23,664
Earnings reinvested in the business........................ 1,318 1,318
Accumulated other comprehensive losses (primarily currency
translation adjustments).................................. (2,227) (2,227)
------- -------
Total shareholders' equity................................. 14,321 22,755
------- -------
Total capitalization......................................... $40,541 $40,541
======= =======

The number of shares of our Class A common stock to be outstanding after
this offering excludes:

. 28,000,000 shares issuable upon exercise of the underwriters' over-
allotment option;

. 54,612,904 additional shares available for future issuance under our
stock option and incentive plans.

See "Option Grants and Sales to Employees."

DILUTION

Our total liabilities exceeded our total tangible assets at March 31, 2001,
by approximately $17.1 billion, or $11.75 per share of common stock. Our net
tangible book value per share represents:

. our total assets less intangible assets;

. reduced by our total liabilities; and

. divided by the number of shares of our common stock outstanding.

Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of our Class A common stock in this
offering and the net tangible book value per share of our common stock
immediately following this offering.

After giving effect to:

. the sale by us of 280,000,000 shares of our Class A common stock in this
offering at the initial public offering price of $31.00 per share; and

. the receipt and application of the proceeds after deducting the
underwriting discount and estimated offering expenses;

our adjusted net tangible book value as of March 31, 2001, would have been
approximately ($8.7) billion, or ($5.00) per share. This represents an
immediate increase in net tangible book value of $6.75 per share to Philip
Morris, our sole shareholder. This also represents an immediate dilution of
$36.00 per share to new investors purchasing shares of our Class A common stock
in this offering. The following table illustrates this per share dilution:

Initial public offering price per Class A share................ $31.00
Net tangible book value per share before this offering....... ($11.75)
Increase per share attributable to investors in this
offering.................................................... 6.75
-------
Adjusted net tangible book value per share after this
offering...................................................... (5.00)
------
Dilution per share to new investors............................ $36.00
======

These calculations do not give effect to 28,000,000 shares of Class A common
stock that we will issue if the underwriters exercise their over-allotment
option in full.

Assuming this offering had occurred on March 31, 2001, the following table
summarizes the differences between the total consideration paid, or to be paid,
and the average price per share paid, or to be paid, by our current shareholder
and the investors in this offering with respect to the number of shares of
Class A common stock purchased from us:

Shares
Purchased Total Consideration
-------------- -----------------------------
(in millions, except per share amounts)
Average Price
Number Percent Amount Percent Per Share
------ ------- ------- ------- -------------

Current shareholder............... 1,455 83.9% $14,321 62.3% $ 9.84
Investors in this offering........ 280 16.1 8,680 37.7 31.00
----- ----- ------- -----
Total........................... 1,735 100.0% $23,001 100.0%
===== ===== ======= =====

The table above takes into account our outstanding Class B common stock and
does not take into account any shares underlying stock options granted to
officers or employees.

PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Introduction

On December 11, 2000, we acquired all of the outstanding shares of Nabisco
for $55 per share in cash. The purchase of the outstanding shares, retirement
of employee stock options and other payments totaled approximately $15.2
billion. In addition, the acquisition included the assumption of approximately
$4.0 billion of existing Nabisco debt. We financed the acquisition by issuing
two long-term notes payable to Philip Morris totaling $15.0 billion and by
using short-term intercompany borrowings of $255 million.

We have accounted for the Nabisco acquisition as a purchase. Nabisco's
balance sheet has been consolidated with our balance sheet as of December 31,
2000; however, Nabisco's earnings from December 11, 2000 through December 31,
2000, have not been included in our combined operating results because the
amounts were insignificant. Our interest cost of $65 million associated with
acquiring Nabisco has been included in interest and other debt expense, net, in
our combined statement of earnings for the year ended December 31, 2000.

We have based the allocation of excess purchase price on preliminary
estimates and assumptions. This allocation is subject to revision when
appraisals and integration plans have been finalized. Accordingly, revisions to
the allocation, which may be significant, will be reported in a future period
as increases or decreases to amounts reported as goodwill, other intangible
assets, amortization of goodwill and income taxes.

We are also evaluating plans to close or sell a number of Nabisco
facilities, pending the completion of logistical studies. We estimate that
these actions could result in additional severance and other exit liabilities
(and a corresponding increase to excess purchase price) of $500 million to $600
million. These amounts will be recorded on Kraft's combined balance sheet as
adjustments to excess purchase price when plans have been finalized and
announced to employees. The increase to excess purchase price would increase
our annual amortization of goodwill by $12 million to $15 million, which has
not been reflected in our pro forma condensed combined statement of earnings.

Our pro forma condensed combined statement of earnings presents:

. our pro forma results of operations for the year ended December 31,
2000, as if the Nabisco acquisition had occurred on January 1, 2000; and

The integration of Nabisco into our operations may result in the sale or
closure of a number of our existing facilities. We estimate that these actions
could result in charges of $200 million to $300 million, which will be recorded
as expense in our combined statement of earnings in the period during which our
plans are finalized and announced. Our pro forma condensed combined statement
of earnings does not give effect to any synergies expected to result from the
merger of Nabisco's operations with ours.

Our pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been consummated, and this offering had
been completed, on January 1, 2000, nor are they necessarily indicative of our
future operating results.

Our pro forma condensed combined statement of earnings should be read in
conjunction with the Kraft combined financial statements and the Nabisco
consolidated financial statements and their accompanying notes included
elsewhere in this prospectus.

PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

For the Year Ended December 31, 2000

(Unaudited)

Historical Adjustments Pro Forma
------------------ Sales of Acquisition For This As
Kraft Nabisco(a) Businesses(b) Adjustments Pro Forma Offering Adjusted
------- ---------- ------------- ----------- --------- ----------- ---------
(in millions of dollars, except per share data)

Operating revenue....... $26,532 $8,888 $ (741) $ $34,679 $ $34,679
Cost of sales........... 13,917 4,764 (439) 24 (c) 18,266 18,266
------- ------ ------- ------- ------- ------- -------
Gross profit.......... 12,615 4,124 (302) (24) 16,413 16,413
Marketing,
administration and
research costs......... 8,068 3,229 (157) (250)(d) 10,890 10,890
Amortization of
goodwill............... 535 244 (5) 187 (e) 961 961
------- ------ ------- ------- ------- ------- -------
Operating income...... 4,012 651 (140) 39 4,562 4,562
Interest and other debt
expense, net........... 597 304 (1) 1,102 (f) 2,002 (654)(h) 1,348
------- ------ ------- ------- ------- ------- -------
Earnings before income
taxes................ 3,415 347 (139) (1,063) 2,560 654 3,214
Provision for income
taxes.................. 1,414 192 (49) (401)(g) 1,156 271 (i) 1,427
------- ------ ------- ------- ------- ------- -------
Net earnings.......... $ 2,001 $ 155 $ (90) $ (662) $ 1,404 $ 383 $ 1,787
======= ====== ======= ======= ======= ======= =======
Per share data:
Basic earnings per
share................ $ 1.38 $ 0.96 $ 1.03
======= ======= =======
Diluted earnings per
share................ $ 1.38 $ 0.96 $ 1.03
======= ======= =======
Basic weighted average
number of shares
(millions)........... 1,455 1,455 280 (h) 1,735
======= ======= ======= =======
Diluted weighted
average number of
shares (millions).... 1,455 1,455 280 (h) 1,735
======= ======= ======= =======

See introduction and accompanying notes.

NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

(Unaudited)

(a) The historical Nabisco column represents:

. the unaudited results of Nabisco on an historical basis for the
period from January 1, 2000 through December 11, 2000; and

. Nabisco's results, including the amortization of goodwill and other
adjustments resulting from the Nabisco acquisition on December 11,
2000, for the period from December 12, 2000 through December 31,
2000.

The following is a summary of the estimated pro forma adjustments, based
upon available information and upon certain assumptions that management
believes are reasonable, that are reflected in our pro forma condensed combined
statement of earnings:

(b) In order to address concerns raised by United States trade regulation
authorities, Nabisco sold its domestic dry packaged desserts and baking powder
businesses, as well as its intense mints and gum businesses in December 2000.
The businesses sold by Nabisco are not included in our historical combined
balance sheet as of December 31, 2000. In addition, we have announced plans to
sell Nabisco's Canadian grocery business as well as a number of additional
Nabisco businesses that do not fit strategically with our businesses. The
businesses that we plan to sell are included in our historical combined balance
sheet at December 31, 2000 within the caption "Assets held for sale." Our 2000
pro forma condensed combined statement of earnings has been adjusted to
eliminate the operating results of the businesses sold by Nabisco and to be
sold by us, as follows:

(in millions)
-------------

Net earnings of businesses sold by Nabisco................... $61
Net earnings of businesses to be sold by us.................. 29
---
Total...................................................... $90
===

(in millions)
-------------

Charge to reflect the cost of conforming Nabisco's
employee benefit plans................................... $ 8
Adjustment to record Nabisco's inventory on a last-in,
first-out basis.......................................... 16
---
Total................................................... $24
===

(d) Represents the following adjustments:

(in millions)
-------------

Reversal of Nabisco's non-recurring charge for expenses
associated with the acquisition of Nabisco (financial,
legal and advisor fees and payments to retire employee
stock options) included in earnings for the year ended
December 31, 2000.......................................... $(127)
Elimination of Nabisco's loss on businesses sold in order to
address concerns raised by United States trade regulation
authorities in connection with the Nabisco acquisition..... (139)
Charge to reflect the cost of conforming Nabisco's employee
benefit plans.............................................. 16
-----
Total..................................................... $(250)
=====

(e) Represents amortization of acquisition goodwill over 40 years by the
straight-line method, net of the reversal of Nabisco's amortization of pre-
acquisition goodwill. The allocation of excess purchase price is based upon
preliminary estimates and assumptions and is subject to revision when
appraisals and integration plans have been finalized. Accordingly, revisions to
the allocation, which may be significant, will be reported in a future period
as increases or decreases to amounts reported as goodwill, other intangible
assets, amortization of goodwill and income taxes.

We are also evaluating plans to close or sell a number of Nabisco
facilities, pending the completion of logistical studies. We estimate that
these actions could result in additional severance and other exit liabilities
(and a corresponding increase to excess purchase price) of $500 million to $600
million. These amounts will be recorded on our combined balance sheet as
adjustments to excess purchase price when plans have been finalized and
announced to employees. The increase to excess purchase price would increase
our annual amortization of goodwill by $12 million to $15 million which has not
been reflected in our pro forma condensed combined statement of earnings.

(f) Represents interest expense to finance the Nabisco acquisition. Interest
expense has been computed as follows:

(in millions)
-------------

Fixed rate note payable to Philip Morris--$11.0 billion at
7.75%, due December 2002................................... $ 853
Fixed rate note payable to Philip Morris--$4.0 billion at
7.40%, due December 2002................................... 296
Short-term intercompany borrowings from Philip Morris--$255
million at 7.14%........................................... 18
Adjustment for interest expense relating to debt incurred to
finance the acquisition recorded in our combined statement
of earnings for the year ended December 31, 2000........... (65)
------
Total..................................................... $1,102
======

(g) Recognition of income tax effects at a rate of 41.4%, excluding the
impact of the amortization of goodwill, which is not deductible for income tax
purposes, net of income taxes of approximately $75 million previously recorded
by Nabisco on the non-recurring adjustments included in item (d) above.

(h) Adjustments to give effect to:

. the receipt as of January 1, 2000, of the net proceeds of this
offering of approximately $8.4 billion, after deduction of the
underwriting discount and estimated offering expenses aggregating to
$246 million; and

. the reduction of interest expense for the year ended December 31,
2000, to reflect the retirement of a portion of our $11.0 billion
long-term note payable to Philip Morris with the net proceeds of
this offering.

The adjustments assume the underwriters do not exercise their over-allotment
option. See "Use of Proceeds" and "Capitalization."

(i) Recognition of income tax effects at a rate of 41.4%.

SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA

Introduction

The following table presents our selected historical combined financial and
other data and should be read along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the Kraft combined financial
statements, and the accompanying notes to those statements included in this
prospectus. The financial information as of December 31, 1999 and 2000, and for
each of the three years in the period ended December 31, 2000, has been derived
from the audited Kraft combined financial statements included in this
prospectus. The financial information as of December 31, 1996, 1997 and 1998,
and for each of the two years in the period ended December 31, 1997, has been
derived from Kraft's unaudited financial information. The financial information
as of and for the quarters ended March 31, 2000 and 2001, has been derived from
the unaudited Kraft condensed combined financial statements. The unaudited
financial information includes all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of our results of
operations for these periods.

We are currently a wholly-owned subsidiary of Philip Morris. In
contemplation of this offering, Philip Morris transferred its indirectly owned
Latin American food subsidiaries to us. The combined financial data in this
prospectus give retroactive effect to the contribution of these Latin American
businesses as if the transfer had occurred on January 1, 1996.

On December 11, 2000, we acquired Nabisco. We have accounted for the Nabisco
acquisition as a purchase. Nabisco's balance sheet has been consolidated with
our balance sheet as of December 31, 2000; however, Nabisco's earnings from
December 11, 2000, through December 31, 2000, have not been included in our
combined operating results because the amounts were insignificant. Our interest
cost of $65 million associated with acquiring Nabisco has been included in
interest and other debt expense, net, in our combined statement of earnings for
the year ended December 31, 2000. Nabisco's earnings have been included in our
combined operating results for the first quarter of 2001.

SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA

First Quarter Ended
Year Ended December 31, March 31,
-------------------------------------------- --------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- -------- --------- ---------
(in millions, except per share data)

Statement of Earnings
Data:
Operating revenue...... $27,950 $27,690 $27,311 $26,797 $ 26,532 $ 6,460 $ 8,367
Cost of sales.......... 16,387 15,978 15,544 14,573 13,917 3,381 4,267
------- ------- ------- ------- -------- --------- ---------
Gross profit......... 11,563 11,712 11,767 12,224 12,615 3,079 4,100
Marketing,
administration and
research costs........ 7,729 7,601 7,688 8,106 8,068 2,017 2,768
Amortization of
goodwill.............. 569 552 544 539 535 133 240
------- ------- ------- ------- -------- --------- ---------
Operating income..... 3,265 3,559 3,535 3,579 4,012 929 1,092
Interest and other
debt expense, net..... 509 476 536 539 597 127 482
------- ------- ------- ------- -------- --------- ---------
Earnings before
income taxes........ 2,756 3,083 2,999 3,040 3,415 802 610
Provision for income
taxes................. 1,289 1,291 1,367 1,287 1,414 332 284
------- ------- ------- ------- -------- --------- ---------
Net earnings......... $ 1,467 $ 1,792 $ 1,632 $ 1,753 $ 2,001 $ 470 $ 326
======= ======= ======= ======= ======== ========= =========
Basic and diluted
earnings per share..... $ 1.01 $ 1.23 $ 1.12 $ 1.20 $ 1.38 $ 0.32 $ 0.22
======= ======= ======= ======= ======== ========= =========
Weighted average number
of shares.............. 1,455 1,455 1,455 1,455 1,455 1,455 1,455

Balance Sheet Data:
Goodwill, net of
accumulated
amortization.......... $18,114 $16,843 $16,408 $15,296 $ 31,584 $ 15,337 $ 31,423
Total assets........... 33,366 31,257 31,391 30,336 52,071 30,456 52,053
Short-term borrowings,
including current
maturities............ 152 168 109 105 859 121 493
Long-term notes
payable to Philip
Morris................ 5,000 5,000 6,234 6,602 21,407 6,488 21,390
Other long-term debt... 634 531 483 433 2,695 425 2,721
Shareholders' equity... 17,530 15,761 15,134 13,461 14,048 13,847 14,321

Cash Flow Data:
Cash provided by (used
in):
Operating
activities.......... $ 2,341 $ 1,940 $ 2,324 $ 2,693 $ 3,254 $ 548 $ 2
Investing
activities.......... (485) 781 (763) (669) (16,138) (440) (194)
Financing
activities.......... (1,924) (2,699) (1,565) (2,031) 12,982 (72) 164
Depreciation and
amortization.......... 1,115 1,064 1,038 1,030 1,034 260 425
Capital expenditures... (812) (737) (841) (860) (906) (120) (174)

Other Data:
Volume (in pounds)..... 12,913 12,767 12,694 12,817 13,130 3,113 4,280
EBITDA................. $ 4,380 $ 4,623 $ 4,573 $ 4,609 $ 5,046 $ 1,189 $ 1,517
Corporate expenses..... 97 88 103 135 208 51 50
Operating companies
income:
Reported............. 3,931 4,199 4,182 4,253 4,755 1,113 1,382
Underlying........... 3,596 3,911 4,108 4,308 4,620 1,142 1,411
Operating companies
income margin:
Reported............. 14.1% 15.2% 15.3% 15.9% 17.9% 17.2% 16.5%
Underlying........... 13.8 14.7 15.3 16.4 17.4 17.6 16.9

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the "Pro Forma
Condensed Combined Financial Information" and the accompanying introduction and
notes, as well as the Kraft combined financial statements, the Nabisco
consolidated financial statements and their accompanying notes, included
elsewhere in this prospectus.

Overview of Our Business

General

We conduct our global business through two units: Kraft Foods North America
and Kraft Foods International. Kraft Foods North America manages its operations
by product category, while Kraft Foods International manages its operations by
geographic region. Kraft Foods North America's segments are Cheese, Meals and
Enhancers; Biscuits, Snacks and Confectionery; Beverages, Desserts and Cereals;
and Oscar Mayer and Pizza. Kraft Foods North America's food service business
within the United States and its businesses in Canada and Mexico are managed
under the Cheese, Meals and Enhancers segment. Kraft Foods International's
segments are Europe, Middle East and Africa; and Latin America and Asia
Pacific.

We manufacture and distribute a diverse and extensive range of products
globally. Our products are sold in over 140 countries. Within many of our
product lines, we hold the number one category share in a substantial number of
our markets. As of March 15, 2001, we had 228 plants, of which 106 were located
in North America.

Our operating revenue and operating companies income are affected by various
factors including volume, price, currency, acquisitions, divestitures and
product mix. Product mix refers to the change in relative percentage of our
volume comprising products with higher margins per pound versus lower margins
per pound. Favorable product mix occurs when our volume includes more products
that generate higher margins and unfavorable product mix occurs when our volume
includes more products that generate lower margins. Our cost of sales consists
of commodity and other materials costs, labor costs and manufacturing costs. We
use a number of commodities in producing our products, principally coffee and
cocoa beans and dairy products. We also use paper and other materials to
package our products. Fluctuation in commodity costs can cause retail price
volatility, intensify price competition and influence consumer and trade buying
patterns.

Our marketing, administration and research costs include the costs of
marketing our products, other general costs not directly related to
manufacturing our products and costs incurred to develop new and innovative
products. The most significant component of our marketing, administration and
research costs is marketing expense, which relates to the advertising and
promotion of our products.

Our businesses are subject to competitive challenges in various product
categories and markets, including trends toward increasing consolidation in the
retail trade and changing consumer preferences. To confront these challenges,
we continue to take steps to build the value of our brands with new products
and marketing initiatives, to enhance our portfolio of food and beverage
businesses and to reduce costs.

Factors Affecting Comparability

Acquisitions, Divestitures and License Agreements. On December 11, 2000, we
acquired all of the outstanding shares of Nabisco for an aggregate cost of
approximately $19.2 billion, including the assumption of approximately $4.0
billion of Nabisco's existing debt. In connection with the acquisition, we
issued long-term notes payable to Philip Morris in an aggregate principal
amount of $15.0 billion and financed the balance of the acquisition through
short-term intercompany borrowings of $255 million. We will use the net
proceeds from this offering to retire a portion of our $11.0 billion long-term
note payable to Philip Morris. We plan to repay the remainder of these notes
from the proceeds of future issuances of debt and internally generated cash
flow.

We accounted for the Nabisco acquisition as a purchase in our combined
financial statements as of December 31, 2000. Nabisco's balance sheet has been
consolidated with our balance sheet as of December 31, 2000. However, Nabisco's
earnings from December 11, 2000 through December 31, 2000, have not been
included in our combined operating results because the amounts were
insignificant. Our interest cost of $65

million associated with acquiring Nabisco has been included in interest and
other debt expense, net, in our combined statement of earnings for the year
ended December 31, 2000. Nabisco's earnings have been included in our combined
operating results for the first quarter of 2001.

Had the Nabisco acquisition occurred at the beginning of 2000, our 2000 pro
forma combined operating revenue would have been $34.7 billion and our 2000 pro
forma combined operating companies income would have been $5.7 billion. Our pro
forma amounts are not necessarily indicative of what actually would have
occurred if the acquisition had been consummated at the beginning of 2000, nor
are they necessarily indicative of our future operating results.

During 2001, we will finalize the Nabisco acquisition balance sheet,
including the completion of fair value appraisals of Nabisco's assets. During
this process, we will also finalize our plans to integrate the operations of
Nabisco. We anticipate closing or selling a number of Nabisco facilities. We
estimate that costs for these actions will range from $500 million to $600
million. These costs will increase goodwill on our combined balance sheet and
will be recorded as our plans to close facilities are finalized and announced.

The integration of Nabisco's operations may also result in closing or
selling a number of Kraft facilities. We estimate that these actions could
result in charges, which will be reflected in our combined statement of
earnings, in the range of $200 million to $300 million. These charges will be
recorded during the period in which the integration plans have been finalized
and announced. During the first quarter of 2001, we sold a Kraft facility in
North America and recorded a pre-tax loss of $29 million.

We have also purchased and sold smaller businesses and entered into
licensing agreements, including the following:

. During the first quarter of 2001, we purchased coffee businesses in
Romania and Morocco. The aggregate purchase price of these businesses
was $33 million. We also announced the purchase of a coffee company in
Bulgaria, pending government approval, for a price of approximately $45
million.

. During 2000, we purchased Balance Bar Co., a maker of energy and
nutrition snack products, as well as Boca Burger, Inc., a manufacturer
and marketer of soy-based meat alternatives. The aggregate purchase
price of these businesses was $358 million.

. During 2000, we sold a French confectionery business for $251 million,
resulting in a pre-tax gain of $139 million.

. In 1998, we entered into a licensing agreement to market, sell and
distribute Starbucks bagged coffee to grocery customers across the
United States.

While these actions are important to the success of our business strategy, the
operating results of these and other smaller acquisitions, licensing agreements
and divestitures have not had a material impact on our combined results of
operations.

Benefit Plans. Our domestic pension plans are currently overfunded, which
means that pension funds exceed our plans' liabilities to their participants.
To the extent that pension fund investments earn more than the cost of
providing benefits to our employees each year, we record income in our combined
statements of earnings in accordance with accounting principles generally
accepted in the United States. However, our health care plans, postemployment
plans and some of our international pension plans are either unfunded or
underfunded and, therefore, generate benefit plan expense in our combined
statements of earnings. The net amount of our benefit plan income and expense
resulted in pre-tax expense of $52 million in 1998 and pre-tax income of $27
million in 1999 and $103 million in 2000. The increases in the net benefit
income in 1999 and 2000 are primarily attributable to our pension fund's
investment performance. However, given recent performance of these investments
and additional benefit expense for Nabisco, we expect the level of net benefit
income to decrease in 2001 by an amount which is not currently determinable.

Foreign Currency. During the first quarter of 2001, changes in currency
exchange rates decreased our operating revenue by $173 million and operating
companies income by $20 million. Changes in currency exchange rates decreased
our operating revenue by $857 million and operating companies income by $91

million during 2000. During 1999, changes in currency exchange rates decreased
our operating revenue by $335 million and our operating companies income by $36
million. In the first quarter of 2001 and for the full-year 2000, these
decreases were primarily due to the strength of the United States dollar
against Western European currencies, primarily the Euro. In 1999, these
decreases were due to the strength of the United States dollar against Western
European and Latin American currencies. Although we cannot predict future
changes in currency exchange rates, the continued strength of the United States
dollar against Western European currencies, particularly the Euro, if sustained
during the remainder of 2001, would continue to have an adverse effect on our
operating revenue and operating companies income.

Most Western European countries use the Euro as their single currency, while
still continuing to use their own notes and coins for cash transactions.
Beginning in January 2002, new Euro-denominated notes and coins will be issued
and local currencies will be withdrawn from circulation. The Euro conversion
has not had, and we currently anticipate that it will not have, a material
adverse effect on our combined financial condition, operating companies income
or cash flows.

Century Date Change. Our year-end 1999 inventories and trade receivables
increased due to preemptive contingency plans in the event of a century date
change disruption. These increases resulted in a shift of cash outflows to the
fourth quarter of 1999 from the first quarter of 2000, in an amount we have
estimated to be approximately $155 million. In addition, some of our customers
purchased additional products in 1999 in anticipation of potential disruptions
related to the century date change. We estimate that the increased shipments in
the fourth quarter of 1999 resulted in incremental operating revenue of
approximately $97 million and operating companies income of approximately $40
million, and corresponding decreases in operating revenue and operating
companies income in the first quarter of 2000.

53rd Week. Our subsidiaries end their fiscal years on the Saturday closest
to December 31. Accordingly, most years contain 52 weeks of operating results
while every sixth year includes 53 weeks. In 2000, our results include a 53rd
week, which resulted in incremental operating companies income of approximately
$96 million and increased operating cash flows by approximately $80 million.

Trade Inventory Reductions. During 2000, our United States customers reduced
their inventories of our products, primarily powdered soft drinks, cheese,
coffee, cereals and dry packaged desserts. We estimate that these actions
decreased our operating companies income by approximately $117 million in 2000.

Separation Programs. During 1999, we offered voluntary retirement incentive
or separation programs to certain eligible hourly and salaried employees in the
United States. Employees electing to terminate employment under the terms of
these programs were entitled to enhanced retirement or severance benefits.
Approximately 1,100 hourly and salaried employees accepted the benefits offered
by these programs, and as a result we recorded a pre-tax charge of $157 million
during 1999. This charge was included in marketing, administration and research
costs in our combined statement of earnings for 1999. Payments of pension and
postretirement benefits were made in accordance with the terms of the
applicable benefit plans. Severance benefits, which are paid over a period of
time, commenced upon dates of termination, which ranged from April 1999 to
March 2000. The program and related payments were completed during 2000. Salary
and related benefit costs of employees prior to their retirement or termination
date were expensed as incurred.

Energy Costs. During the latter part of 2000 and the first quarter of 2001,
our energy costs increased as a result of higher prices charged for oil and
natural gas. However, this increase in energy costs did not have a material
adverse effect on our operating companies income.

Environmental Matters. We are subject to laws and regulations relating to
the protection of the environment. On an annual basis, our recurring costs of
ensuring that we comply with environmental laws and regulations for ongoing
operations have not been material to our combined results of operations or cash
flows, and we do not currently expect any material change in the level of our
expenditures during 2001. We are party to a number of proceedings relating to
various environmental matters. We are not currently subject to any mandate or
order, the resolution of which, either individually or in the aggregate, is
reasonably likely to have a material effect on our combined financial position,
results of operations or cash flows.

Combined Operating Results by Segment

First Quarter
Ended
Year Ended December 31, March 31,
------------------------------------ --------------
Pro Forma
1998 1999 2000 2000 2000 2001
------- ------- ------- --------- ------ ------
(dollars and pounds in millions)

Volume (in pounds):
Kraft Foods North America
Cheese, Meals and
Enhancers.............. 4,913 4,874 4,820 5,365 1,158 1,308
Biscuits, Snacks and
Confectionery.......... 43 47 54 2,549 12 609
Beverages, Desserts and
Cereals................ 2,705 2,883 3,117 3,197 765 861
Oscar Mayer and Pizza... 1,388 1,433 1,507 1,507 367 383
------- ------- ------- ------- ------ ------
Total Kraft Foods North
America................ 9,049 9,237 9,498 12,618 2,302 3,161
------- ------- ------- ------- ------ ------
Kraft Foods International
Europe, Middle East and
Africa................. 2,887 2,816 2,829 3,012 634 640
Latin America and Asia
Pacific................ 758 764 803 1,983 177 479
------- ------- ------- ------- ------ ------
Total Kraft Foods
International.......... 3,645 3,580 3,632 4,995 811 1,119
------- ------- ------- ------- ------ ------
Total volume.......... 12,694 12,817 13,130 17,613 3,113 4,280
======= ======= ======= ======= ====== ======
Operating revenue:
Kraft Foods North America
Cheese, Meals and
Enhancers.............. $ 9,322 $ 9,360 $ 9,405 $10,328 $2,234 $2,494
Biscuits, Snacks and
Confectionery.......... 220 265 329 6,037 74 1,440
Beverages, Desserts and
Cereals................ 5,039 5,074 5,266 5,459 1,395 1,464
Oscar Mayer and Pizza... 3,059 3,198 3,461 3,461 831 884
------- ------- ------- ------- ------ ------
Total Kraft Foods North
America................ 17,640 17,897 18,461 25,285 4,534 6,282
------- ------- ------- ------- ------ ------
Kraft Foods International
Europe, Middle East and
Africa................. 8,307 7,676 6,824 6,995 1,639 1,503
Latin America and Asia
Pacific................ 1,364 1,224 1,247 2,399 287 582
------- ------- ------- ------- ------ ------
Total Kraft Foods
International.......... 9,671 8,900 8,071 9,394 1,926 2,085
------- ------- ------- ------- ------ ------
Total operating
revenue............... $27,311 $26,797 $26,532 $34,679 $6,460 $8,367
======= ======= ======= ======= ====== ======
Operating companies
income:
Kraft Foods North America
Cheese, Meals and
Enhancers.............. $ 1,599 $ 1,658 $ 1,845 $ 2,052 $ 449 $ 491
Biscuits, Snacks and
Confectionery.......... 54 73 100 802 21 165
Beverages, Desserts and
Cereals................ 1,005 1,009 1,090 1,112 311 339
Oscar Mayer and Pizza... 470 450 512 512 132 148
------- ------- ------- ------- ------ ------
Total Kraft Foods North
America................ 3,128 3,190 3,547 4,478 913 1,143
------- ------- ------- ------- ------ ------
Kraft Foods International
Europe, Middle East and
Africa................. 884 895 1,019 985 170 172
Latin America and Asia
Pacific................ 170 168 189 268 30 67
------- ------- ------- ------- ------ ------
Total Kraft Foods
International.......... 1,054 1,063 1,208 1,253 200 239
------- ------- ------- ------- ------ ------
Total operating
companies income...... $ 4,182 $ 4,253 $ 4,755 $ 5,731 $1,113 $1,382
======= ======= ======= ======= ====== ======
Operating companies
income margin:
Kraft Foods North America
Cheese, Meals and
Enhancers.............. 17.2% 17.7% 19.6% 19.9% 20.1% 19.7%
Biscuits, Snacks and
Confectionery.......... 24.5 27.5 30.4 13.3 28.4 11.5
Beverages, Desserts and
Cereals................ 19.9 19.9 20.7 20.4 22.3 23.2
Oscar Mayer and Pizza... 15.4 14.1 14.8 14.8 15.9 16.7
Total Kraft Foods North
America................ 17.7 17.8 19.2 17.7 20.1 18.2

Kraft Foods International
Europe, Middle East and
Africa................. 10.6 11.7 14.9 14.1 10.4 11.4
Latin America and Asia
Pacific................ 12.5 13.7 15.2 11.2 10.5 11.5
Total Kraft Foods
International.......... 10.9 11.9 15.0 13.3 10.4 11.5

Total operating
companies income
margin................ 15.3% 15.9% 17.9% 16.5% 17.2% 16.5%

We define operating companies income as operating income before amortization
of goodwill and corporate expenses. We use this measure to review and report
our segment profitability, as presented in the preceding table. We also review,
among other measures, underlying operating results to evaluate the performance
of our business on a comparable basis. Underlying operating results reflect the
results of our business operations, excluding significant one-time items for
employee separation programs, estimated sales made in advance of the century
date change and gains (losses) on sales of businesses. Underlying operating
results also exclude the operating results of businesses that have been sold.
Accordingly, we have disclosed underlying results to permit a more complete
analysis of our operating performance. The following is a reconciliation of
reported operating results to underlying operating results for each of the
three years in the period ended December 31, 2000, and for the first quarter of
2000 and 2001:

First Quarter
Ended March
Year Ended December 31, 31,
------------------------- --------------
1998 1999 2000 2000 2001
------- ------- ------- ------ ------
(dollars and pounds in millions)

Reported volume (in pounds).......... 12,694 12,817 13,130 3,113 4,280
Volume of businesses sold.......... (215) (137) (43) (17)
Estimated impact of century date
change............................ (55) 55 55
------- ------- ------- ------ ------
Underlying volume (in pounds)........ 12,479 12,625 13,142 3,151 4,280
======= ======= ======= ====== ======
Reported operating revenue........... $27,311 $26,797 $26,532 $6,460 $8,367
Operating revenue of businesses
sold.............................. (547) (352) (141) (53)
Estimated impact of century date
change............................ (97) 97 97
------- ------- ------- ------ ------
Underlying operating revenue......... $26,764 $26,348 $26,488 $6,504 $8,367
======= ======= ======= ====== ======
Reported operating companies income.. $ 4,182 $ 4,253 $ 4,755 $1,113 $1,382
Gain on sale of a French
confectionery business............ (139)
Loss on sale of a food factory..... 29
Operating companies income of
businesses sold................... (74) (62) (36) (11)
Estimated impact of century date
change............................ (40) 40 40
Separation programs................ 157
------- ------- ------- ------ ------
Underlying operating companies
income.............................. $ 4,108 $ 4,308 $ 4,620 $1,142 $1,411
======= ======= ======= ====== ======

First Quarter 2001 Compared with First Quarter 2000

Our volume for the first quarter of 2001 increased by 1,167 million pounds,
or 37.5%, over the first quarter of 2000. Excluding the impact of divested
businesses and the estimated shift in volume due to the century date change,
our underlying volume grew 35.8%. The majority of this increase related to the
Nabisco acquisition. If we had owned Nabisco during the first quarter of 2000,
our underlying volume would have increased by 3.3% with increases in all
segments.

Our operating revenue for the first quarter of 2001 increased $1.9 billion,
or 29.5%, from the first quarter of 2000. This increase was due primarily to
the acquisition of Nabisco and the impact of higher volume of $162 million.
This increase was partially offset by unfavorable currency exchange rates of
$173 million. Excluding the effects of divested businesses and the estimated
shift in revenue due to the century date change, our underlying operating
revenue for the first quarter of 2001 increased $1.9 billion, or 28.6%, from
the first quarter of 2000. If we had owned Nabisco during the first quarter of
2000, our underlying operating revenue would have increased 0.4%.

Our operating companies income increased $269 million, or 24.2%, from the
first quarter of 2000. This increase was due primarily to a $229 million
increase attributable to the Nabisco acquisition, a $98 million impact of
volume increases and higher margins of $54 million. This increase was partially
offset by higher

marketing, administration and research costs of $63 million, unfavorable
product mix of $24 million and unfavorable currency exchange rates of $20
million. Higher margins on our products were primarily the result of lower
commodity-related costs and lower manufacturing costs. Excluding the loss on
the sale of a North American food factory in 2001, the earnings of divested
businesses and the estimated shift in income due to the century date change,
our underlying operating companies income increased $269 million, or 23.6%. If
we had owned Nabisco during the first quarter of 2000, our underlying operating
companies income would have increased 6.9%.

Interest and other debt expense, net, increased $355 million in the first
quarter of 2001 from $127 million in the first quarter of 2000. Amortization of
goodwill increased $107 million in the first quarter of 2001 from $133 million
in the first quarter of 2000. These increases were due to our acquisition of
Nabisco.

Our first quarter 2001 net earnings decreased $144 million and our first
quarter 2001 basic and diluted earnings per share each decreased by 31.3%.
These decreases were due primarily to higher levels of goodwill amortization
and interest expense in connection with our acquisition of Nabisco. Excluding
the loss on the sale of a North American food factory in 2001 and the impact of
the estimated shift in income due to the century date change, our first quarter
2001 underlying net earnings of $344 million decreased 30.4% from $494 million
in the first quarter of 2000, and our underlying basic and diluted earnings per
share each decreased 29.4% from $0.34 in the first quarter of 2000 to $0.24 in
the first quarter of 2001. If we had owned Nabisco during the first quarter of
2000, our net earnings would have increased 12.4% and our basic and diluted
earnings per share would have increased 14.3%.

2000 Compared with 1999

Our volume increased by 313 million pounds, or 2.4%, during 2000. Of this
increase, 1.6 percentage points related to the inclusion of 53 weeks in 2000
operating results, partially offset by a 0.9 percentage point decrease related
to trade inventory reductions in the United States. Volume grew in every
segment but Cheese, Meals and Enhancers, in which a decrease in lower-margin
food service products more than offset volume increases in higher margin
products. Excluding the impact of divested businesses and the estimated shift
in volume due to the century date change, our underlying volume grew 4.1%, of
which 1.6 percentage points related to the inclusion of 53 weeks in 2000
operating results, partially offset by a 0.9 percentage point decrease related
to trade inventory reductions in the United States.

Our operating revenue for 2000 decreased $265 million, or 1.0%, from 1999.
This decrease was due primarily to unfavorable currency exchange rates of $857
million, the estimated shift in revenue attributable to the century date change
of $194 million and the impact of divested businesses of $211 million. These
decreases were partially offset by an increase of $774 million attributable to
higher volume, the impact of acquisitions of $148 million and price increases
of $49 million. Excluding the effects of divested businesses and the estimated
shift in revenue due to the century date change, our underlying operating
revenue for 2000 increased $140 million, or 0.5%, from 1999.

Our operating companies income increased $502 million, or 11.8%, from 1999.
This increase was due primarily to a $430 million impact of volume increases,
higher margins of $402 million, the absence of 1999 separation charges of $157
million and the $139 million gain on the sale of the French confectionery
business in 2000. These increases were partially offset by higher marketing
expenses of $366 million, unfavorable currency exchange rates of $91 million,
the shift in income due to the century date change estimated to be $80 million,
unfavorable product mix of $43 million and the impact of divested businesses.
Higher margins on our products were primarily the result of price increases,
coupled with lower cost of sales due to lower commodity-related costs and lower
manufacturing costs. Marketing expense increased in every segment, with the
largest increase in Cheese, Meals and Enhancers. We increased price promotions
on cheese products in 2000 in the United States during a period of intense
competition that resulted from declining cheese commodity costs. Excluding the
gain on sale of the French confectionery business in 2000, the impact of the
1999 separation charges, the estimated shift in income due to the century date
change and the earnings of divested businesses, our underlying operating
companies income increased 7.2% over 1999.

Interest and other debt expense, net, increased $58 million, or 10.8%, due
primarily to notes issued to Philip Morris in connection with our purchase of
Nabisco.

Our provision for income taxes for the years ended December 31, 1999 and
2000, reflected effective income tax rates of 42.3% and 41.4%, respectively.
The lower 2000 effective rate resulted primarily from a reduction in state and
local income taxes due to the mix of pre-tax earnings in various states.

Our 2000 net earnings increased by $248 million and our 2000 basic and
diluted earnings per share each increased by 15.0%. Excluding the impact of the
gain on sale of the French confectionery business, separation charges in 1999
and the impact of the estimated shift in income due to the century date change,
our 2000 underlying net earnings of $1.9 billion grew 6.6% over $1.8 billion in
1999, and our underlying basic and diluted earnings per share each grew 7.2%
from $1.25 in 1999 to $1.34 in 2000.

1999 Compared with 1998

Our volume increased 123 million pounds, or 1.0%, over 1998. Increases in
most segments were partially offset by lower shipments in the Cheese, Meals and
Enhancers segment and lower volume in Europe. Excluding divested businesses and
the estimated shift in shipments due to the century date change, our underlying
volume increased 1.2% over 1998.

Our operating revenue for 1999 decreased $514 million, or 1.9%, from 1998.
This decrease was due primarily to unfavorable currency exchange rates of $335
million and lower pricing of $301 million resulting from lower commodity costs.
Partially offsetting these decreases was an estimated shift in revenue of $97
million attributable to the century date change. Excluding the impact of
divested businesses and the estimated shift in revenue due to the century date
change, our underlying operating revenue for 1999 decreased $416 million, or
1.6%, from 1998.

Our operating companies income increased $71 million, or 1.7%, over 1998.
This increase was due primarily to higher margins of $507 million, the impact
of higher volume of $70 million and the estimated shift in income due to the
century date change of $40 million. These increases were partially offset by
$157 million of separation charges in 1999, higher marketing, administration
and research costs of $294 million, unfavorable currency exchange rates of $36
million, unfavorable product mix of $20 million and the impact of divested
businesses of $12 million. Higher margins on our products were the result of
lower cost of sales due to lower commodity-related costs and lower
manufacturing costs, partially offset by lower pricing. Marketing expense
increased in every segment except Latin America and Asia Pacific. Excluding the
impact of the 1999 separation charges, the estimated shift in income due to the
century date change and the earnings of divested businesses, our underlying
operating companies income increased 4.9% over 1998.

Our provision for income taxes for the years ended December 31, 1998 and
1999, reflected effective income tax rates of 45.6% and 42.3%, respectively.
The lower effective rate for 1999 resulted primarily from a reduction in
foreign income taxes.

Our 1999 net earnings increased by $121 million and our 1999 basic and
diluted earnings per share each increased 7.1%, due primarily to higher
operating companies income. Excluding the impact of the 1999 separation charges
and the estimated shift in income due to the century date change, our 1999
underlying net earnings of $1.8 billion grew 11.7% over $1.6 billion in 1998,
and our underlying basic and diluted earnings per share each increased 11.6%
from $1.12 in 1998 to $1.25 in 1999.

Operating Results by Business Segment

Kraft Foods North America

The following table is a reconciliation of Kraft Foods North America's
reported operating results to underlying operating results for each of the
three years in the period ended December 31, 2000, and for the first quarter of
2000 and 2001:

First Quarter Ended
Year Ended December 31, March 31,
------------------------- --------------------
1998 1999 2000 2000 2001
------- ------- ------- --------- ---------
(dollars and pounds in millions)

Reported volume (in pounds).... 9,049 9,237 9,498 2,302 3,161
Volume of businesses sold:
Cheese, Meals and
Enhancers................. (14) (13) (5) (4)
Estimated impact of century
date change:
Cheese, Meals and
Enhancers................. (16) 16 16
Biscuits, Snacks and
Confectionery............. (1) 1 1
Beverages, Desserts and
Cereals................... (19) 19 19
Oscar Mayer and Pizza...... (5) 5 5
------- ------- ------- --------- ---------
Underlying volume (in pounds).. 9,035 9,183 9,534 2,339 3,161
======= ======= ======= ========= =========
Reported operating revenue..... $17,640 $17,897 $18,461 $ 4,534 $ 6,282
Operating revenue of
businesses sold:
Cheese, Meals and
Enhancers................. (29) (25) (10) (7)
Estimated impact of century
date change:
Cheese, Meals and
Enhancers................. (34) 34 34
Biscuits, Snacks and
Confectionery............. (3) 3 3
Beverages, Desserts and
Cereals................... (22) 22 22
Oscar Mayer and Pizza...... (12) 12 12
------- ------- ------- --------- ---------
Underlying operating revenue... $17,611 $17,801 $18,522 $ 4,598 $ 6,282
======= ======= ======= ========= =========
Reported operating companies
income........................ $ 3,128 $ 3,190 $ 3,547 $ 913 $ 1,143
Operating companies income of
businesses sold:
Cheese, Meals and
Enhancers................. (7) (8) (4) (3)
Estimated impact of century
date change:
Cheese, Meals and
Enhancers................. (15) 15 15
Biscuits, Snacks and
Confectionery............. (1) 1 1
Beverages, Desserts and
Cereals................... (7) 7 7
Oscar Mayer and Pizza...... (4) 4 4
Loss on sale of a food
factory:
Cheese, Meals and
Enhancers................. 29
Separation programs:
Cheese, Meals and
Enhancers................. 71
Biscuits, Snacks and
Confectionery............. 2
Beverages, Desserts and
Cereals................... 46
Oscar Mayer and Pizza...... 38
------- ------- ------- --------- ---------
Underlying operating companies
income........................ $ 3,121 $ 3,312 $ 3,570 $ 937 $ 1,172
======= ======= ======= ========= =========

First Quarter 2001 Compared with First Quarter 2000

Kraft Foods North America's volume for the first quarter of 2001 increased
37.3% over the first quarter of 2000. Excluding the impact of divested
businesses and the estimated shift in volume attributable to the century date
change, our underlying volume increased 35.1%, due primarily to the acquisition
of Nabisco. If we had owned Nabisco during the first quarter of 2000, our
underlying volume would have increased 3.3%.

Operating revenue increased $1.7 billion, or 38.6%, over the first quarter
of 2000, due primarily to a $1.6 billion increase attributable to the Nabisco
acquisition, the impact of higher volume of $131 million and the estimated
shift in revenue attributable to the century date change of $71 million.
Partially offsetting this increase were unfavorable product mix of $68 million
and unfavorable currency exchange rates of $16 million. Excluding the
estimated shift in revenue attributable to the century date change and the
revenue of divested businesses, our underlying operating revenue increased
36.6%. If we had owned Nabisco during the first quarter of 2000, our
underlying operating revenue would have increased 2.1%.

Operating companies income increased $230 million, or 25.2%, due primarily
to a $211 million increase attributable to the Nabisco acquisition, the impact
of higher volume of $76 million, higher margins of $58 million and the
estimated shift in income attributable to the century date change of $27
million. This increase was partially offset by higher marketing,
administration and research costs of $78 million, the majority of which
related to higher marketing expenses, the loss on the sale of a North American
food factory of $29 million and unfavorable product mix of $24 million. Higher
margins were the result of lower commodity-related and manufacturing costs.
Excluding the estimated shift in income attributable to the century date
change, the loss on the sale of a North American food factory and the income
of divested businesses, our underlying operating companies income increased
25.1% over the first quarter of 2000. If we had owned Nabisco during the first
quarter of 2000, our underlying operating companies income would have
increased 6.5%.

The following discusses operating results within each of Kraft Foods North
America's business segments.

Cheese, Meals and Enhancers. Total Cheese, Meals and Enhancers volume
increased 13.0% over the first quarter of 2000. Excluding the volume of
divested businesses and the estimated shift in volume attributable to the
century date change, our underlying volume increased 11.8%, due primarily to
the acquisition of Nabisco. If we had owned Nabisco during the first quarter
of 2000, our volume would have increased 1.0%, as higher volume in meals and
enhancers was partially offset by lower cheese and food service volume. In
cheese, volume declined due to lower process cheese shipments and the
discontinuance of some of our lower-margin, non-branded products, partially
offset by higher volume in natural cheese, cream cheese, cottage cheese and
sour cream. Meals volume increased, reflecting higher shipments of dinners and
rice. Enhancers volume increased due to gains in spoonable and pourable salad
dressings and steak sauce.

Operating revenue increased $260 million, or 11.6%, over the first quarter
of 2000. This increase was due primarily to a $221 million increase
attributable to the Nabisco acquisition, the impact of higher volume of $24
million and the estimated shift in revenue attributable to the century date
change of $34 million. This increase was partially offset by unfavorable
currency exchange rates of $16 million. Excluding the estimated shift in
revenue attributable to the century date change and revenue of divested
businesses, our underlying first quarter 2001 operating revenue increased
10.3%. If we had owned Nabisco during the first quarter of 2000, our
underlying operating revenue would have increased 0.8%.

Operating companies income increased $42 million, or 9.4%, over the first
quarter of 2000. This increase was due primarily to a $51 million increase
attributable to the Nabisco acquisition, higher margins of $29 million,
favorable product mix of $20 million, the estimated shift in income
attributable to the century date change of $15 million and the impact of
higher volume. Partially offsetting this increase were higher marketing,
administration and research costs of $49 million and the loss on the sale of a
food factory of $29 million. Higher margins were due to lower commodity-
related and manufacturing costs. Favorable product mix was the result of lower
volume in low-margin food service products and the discontinuance of some of
our lower margin, non-branded cheese products. Excluding the estimated shift
in income attributable to the century date change, the loss on the sale of a
food factory and the income of divested businesses, our underlying first
quarter 2001 operating companies income of $520 million increased 12.8% over
$461 million in the first quarter of 2000. If we had owned Nabisco during the
first quarter of 2000, our underlying operating companies income would have
increased 3.5%.

Biscuits, Snacks and Confectionery. Reported and underlying volume of
Biscuits, Snacks and Confectionery both grew more than 100% over the first
quarter of 2000, due primarily to the acquisition of Nabisco. If we had owned
Nabisco during the first quarter of 2000, our underlying volume would have
increased 3.3%, due primarily to new product introductions in biscuits and
confectionery. In salty snacks, volume declined due primarily to lower
shipments of nuts to non-grocery channels.

Reported and underlying operating revenue both increased $1.4 billion, or
more than 100%, over the first quarter of 2000, due primarily to the
acquisition of Nabisco. If we had owned Nabisco during the first quarter of
2000, our underlying operating revenue would have increased 5.3%, due primarily
to new biscuit and confectionery products.

Operating companies income increased $144 million, and underlying operating
companies income increased $143 million, both more than 100%, over the first
quarter of 2000, due primarily to a $155 million increase attributable to the
Nabisco acquisition. Partially offsetting this increase were higher marketing,
administration and research costs of $11 million, the majority of which related
to higher marketing expenses. If we had owned Nabisco during the first quarter
of 2000, our underlying operating companies income would have increased 21.0%,
due primarily to higher volume from new biscuit and confectionery products and
favorable margins.

Beverages, Desserts and Cereals. Total Beverages, Desserts and Cereals
volume increased 12.5% over the first quarter of 2000. Excluding the estimated
shift in volume attributable to the century date change, our underlying volume
increased 9.8%. If we had owned Nabisco during the first quarter of 2000, our
underlying volume would have increased 7.1% due primarily to volume gains in
beverages and coffee. In beverages, volume increased due primarily to higher
shipments of aseptic juice drinks. Volume in coffee increased due primarily to
increases in Starbucks coffee sold through grocery stores and an increase in
overall coffee consumption. In our desserts business, volume was slightly below
the prior year, as increases in frozen whipped toppings and nutrition and
energy snack bars were more than offset by lower shipments of dry packaged and
refrigerated ready-to-eat desserts. Cereal volume declined, due primarily to
increased competition in the ready-to-eat cereal category.

Operating revenue increased $69 million, or 4.9%, over the first quarter of
2000. This increase was due primarily to the impact of higher volume of $92
million, $41 million attributable to the Nabisco acquisition and $19 million
attributable to the acquisition of Balance Bar Co., as well as the estimated
shift in revenue attributable to the century date change of $22 million.
Partially offsetting this increase were unfavorable product mix of $80 million
and lower pricing of $29 million. Lower pricing was due to coffee price
reductions as the cost for green coffee beans declined. Excluding the estimated
shift in revenue attributable to the century date change, our underlying
operating revenue increased 3.3%. If we had owned Nabisco during the first
quarter of 2000, our underlying operating revenue would have decreased 0.2%.

Operating companies income increased $28 million, or 9.0%, over the first
quarter of 2000. This increase was due primarily to the impact of higher volume
of $60 million, higher margins of $14 million, the effect of the Nabisco
acquisition of $5 million and the estimated shift in income attributable to the
century date change of $7 million. Partially offsetting this increase was
unfavorable product mix of $56 million. The unfavorable product mix was due
primarily to the volume increase in aseptic juice drinks, which generate lower
margins per pound than the aggregate margins per pound of our other beverages,
desserts and cereals products. Excluding the estimated shift in income
attributable to the century date change, our underlying operating companies
income of $339 million for the first quarter of 2001 increased 6.6% over $318
million in the first quarter of 2000. If we had owned Nabisco during the first
quarter of 2000, our underlying operating companies income would have increased
4.3%.

Oscar Mayer and Pizza. Total Oscar Mayer and Pizza volume grew 4.4% from the
first quarter of 2000. Excluding the estimated shift in volume attributable to
the century date change, our underlying volume increased 3.0%, due to volume
gains in both processed meats and pizza. Volume increased in our processed

meats business due to hot dogs, bacon, luncheon meats, and soy-based meat
alternatives. Lunch combinations volume was down due to the timing of
shipments. Volume in our pizza business increased, driven by new products.

Operating revenue increased $53 million, or 6.4%, over the first quarter of
2000. This increase was due primarily to the impact of higher volume of $17
million, favorable product mix of $13 million, the estimated shift in revenue
attributable to the century date change of $12 million and $7 million from the
acquisition of Boca Burger. Excluding the estimated shift in revenue
attributable to the century date change, our underlying operating revenue
increased 4.9%.

Operating companies income increased $16 million, or 12.1%, from the first
quarter of 2000. This increase was due primarily to higher margins of $15
million, the impact of higher volume of $8 million, favorable product mix of
$11 million and the estimated shift in income attributable to the century date
change of $4 million. Partially offsetting this increase were higher
marketing, administration and research costs of $21 million, the majority of
which related to higher marketing expenses. Higher margins were due primarily
to lower manufacturing costs. Favorable product mix was due primarily to
volume increases in higher margin pizza and processed meat products. Excluding
the estimated shift in income attributable to the century date change, our
underlying operating companies income of $148 million for the first quarter of
2001 increased 8.8% over $136 million in the first quarter of 2000.

2000 Compared with 1999

Kraft Foods North America's volume for 2000 increased 2.8% over 1999.
Excluding the impact of divested businesses and the estimated shift in volume
attributable to the century date change, volume increased 3.8%, of which 1.6
percentage points related to the impact of the 53rd week of shipments,
partially offset by a 1.3 percentage point decrease related to trade inventory
reductions in 2000.

Operating revenue increased $564 million, or 3.2%, over 1999, due primarily
to the $483 million impact of higher volume, the impact of acquisitions of
$148 million and higher pricing of $79 million. Partially offsetting these
increases was the estimated shift in revenue attributable to the century date
change of $142 million.

Operating companies income grew by $357 million, or 11.2%, to $3.5 billion,
due primarily to higher margins of $318 million, driven by higher pricing
coupled with lower commodity-related costs. Also contributing to this increase
was the absence of the 1999 pre-tax charge for separation programs of $157
million and the impact of higher volume of $283 million. Partially offsetting
these increases were higher marketing, administration and research costs of
$310 million, the majority of which related to higher marketing expenses;
unfavorable product mix of $43 million; and the estimated shift in income
attributable to the century date change of $54 million. Our underlying 2000
operating companies income increased 7.8% from 1999.

The following discusses operating results within each of Kraft Foods North
America's business segments.

Cheese, Meals and Enhancers. Total Cheese, Meals and Enhancers volume
decreased 1.1% from 1999 driven by a 7.1% decline in our United States food
service business, which more than offset an increase in our retail businesses.
We recently reached the contractual termination of an exclusivity agreement
with a single food service distributor and are moving to open distribution of
our Kraft branded food service products. This transition resulted in lower
food service volume in 2000. Also contributing to the decrease in food service
volume was the loss of a contract to supply cold cuts and the pruning of low
margin products. Cheese volume increased over 1999 with gains in process,
natural and cream cheese products. Meals volume was lower in 2000, reflecting
lower shipments of Mexican dinners and rice. Enhancers volume decreased
slightly. Volume in Canada grew due to new product introductions. Excluding
the impact of divested businesses and the estimated shift in volume
attributable to the century date change, our underlying 2000 volume decreased
0.3%.

Operating revenue increased $45 million, or 0.5%, over 1999, due primarily
to favorable product mix of $128 million and favorable currency exchange rates
of $30 million. Partially offsetting these increases were the impact of lower
volume of $29 million, the estimated shift in revenue attributable to the
century date change of $68 million and the impact of divestitures of $15
million.

Operating companies income increased $187 million, or 11.3%, over 1999 due
to higher margins of $254 million, driven by lower commodity-related and
manufacturing costs. Also contributing to this increase was favorable product
mix of $81 million and the absence of the 1999 separation charge of $71
million. Partially offsetting these increases were higher marketing,
administration and research costs of $171 million, primarily from marketing;
the estimated shift in income attributable to the century date change of $30
million; and the impact of lower volume of $14 million. Our marketing expense
increased as we increased price promotions on cheese products during 2000 in
the United States during a period of intense competition that resulted from low
cheese commodity costs. Favorable product mix was the result of lower volume in
low-margin food service products. Excluding the impact of the 1999 separation
charges, the income of divested businesses and the estimated shift in income
attributable to the century date change, our underlying 2000 operating
companies income of $1.9 billion increased 8.8% from $1.7 billion in 1999.

Biscuits, Snacks and Confectionery. Total Biscuits, Snacks and Confectionery
volume grew 14.9% over 1999, reflecting the continued success of two-
compartment snacks and the introduction of new intense mint and chocolate
products.

Operating revenue increased $64 million, or 24.2%, over 1999, due primarily
to the impact of higher volume. Operating companies income increased $27
million, or 37.0%, due primarily to the impact of higher volume of $45 million
and the absence of the 1999 separation charge of $2 million. Partially
offsetting these increases were higher marketing, administration and research
costs of $24 million. Excluding the 1999 separation charges and the estimated
shift in revenue attributable to the century date change, our underlying 2000
operating companies income of $101 million increased 36.5% from $74 million in
1999.

Beverages, Desserts and Cereals. Total Beverages, Desserts and Cereals
volume grew 8.1% from 1999. Beverages volume grew on the strength of aseptic
juice drinks, reflecting new product introductions, and higher coffee shipments
due to growth in Starbucks bagged coffees. Volume also grew in frozen whipped
toppings, due in part to the introduction of new products. Partially offsetting
these increases were declines in ready-to-eat cereals, due to an intensely
competitive environment, and in dry packaged desserts, reflecting lower
promotions. Excluding the estimated shift in volume attributable to the century
date change, our underlying 2000 volume grew 9.5%, of which approximately 0.6
percentage points related to the acquisition of Balance Bar.

Operating revenue increased $192 million, or 3.8%, over 1999, due primarily
to the impact of higher volume of $250 million and $113 million from the
acquisition of Balance Bar. Partially offsetting these increases were
unfavorable product mix of $124 million and the estimated shift in revenue
attributable to the century date change of $44 million.

Operating companies income increased $81 million, or 8.0%, over 1999. This
increase was due primarily to the impact of higher volume of $154 million; the
absence of the 1999 separation charges of $46 million; higher margins of $20
million, due primarily to lower commodity costs; and the acquisition of Balance
Bar. Partially offsetting these increases were unfavorable product mix of $104
million; higher marketing, administration and research costs of $29 million,
primarily from marketing; and the estimated shift in income attributable to the
century date change of $14 million. Our unfavorable product mix was due
primarily to the volume increase in aseptic juice drinks, which generate lower
margins per pound than the aggregate margins per pound of our other beverages,
desserts and cereals products. The increase in marketing expense reflected
introductions of new aseptic juice drink products, partially offset by lower
marketing attributable to powdered soft drinks, dry packaged desserts and
ready-to-eat cereals. Excluding the impact of the 1999 separation charges and
the estimated shift in income attributable to the century date change, our
underlying 2000 operating companies income of $1.1 billion increased 4.7% from
$1.0 billion in 1999.

Oscar Mayer and Pizza. Total Oscar Mayer and Pizza volume grew 5.2% from
1999. Volume grew in pizza, reflecting the continued success of our rising
crust pizza and new product introductions. Volume growth also reflected the
introduction of Mega Pack Lunchables lunch combinations, the acquisition of
Boca Burger and gains in hot dogs and cold cuts. Excluding the estimated shift
in volume attributable to the century date change, our underlying 2000 volume
increased 5.9%, of which approximately 0.8 percentage points related to the
acquisition of Boca Burger.

Operating revenue increased $263 million, or 8.2%, over 1999, due primarily
to the impact of higher volume of $190 million, higher pricing of $82 million
and $35 million from the acquisition of Boca Burger. This increase in
operating revenue was partially offset by the estimated shift in revenue
attributable to the century date change of $24 million and unfavorable product
mix of $22 million.

Operating companies income increased $62 million, or 13.8%, over 1999. This
increase was due primarily to the impact of higher volume of $98 million,
higher margins of $43 million and the absence of the 1999 separation charge of
$38 million. Partially offsetting these increases were higher marketing,
administration and research costs of $86 million, primarily from marketing;
unfavorable product mix of $20 million; and the estimated shift in income
attributable to the century date change of $8 million. Higher marketing
expense and unfavorable product mix both reflected the effects of new product
introductions during 2000. Excluding the impact of the 1999 separation charges
and the estimated shift in income attributable to the century date change, our
underlying 2000 operating companies income of $516 million increased 6.6% from
$484 million in 1999.

1999 Compared with 1998

Kraft Foods North America's volume increased 2.1% during 1999, of which
approximately 0.5 percentage points related to the estimated shift in volume
attributable to the century date change.

Operating revenue increased $257 million, or 1.5%, over 1998, due primarily
to the impact of higher volume of $93 million, the estimated shift in revenue
attributable to the century date change of $71 million and favorable pricing
of $65 million.

Operating companies income grew $62 million, or 2.0%, over 1998. This
increase was due primarily to higher margins of $428 million, driven by lower
commodity and manufacturing costs; the impact of higher volume of $58 million;
and the estimated shift in income attributable to the century date change of
$27 million. Partially offsetting these increases were higher marketing,
administration and research costs of $247 million, the majority of which
related to higher marketing expenses; separation charges of $157 million; and
unfavorable product mix of $20 million. Marketing expense increased across all
segments, with the largest increase in Cheese, Meals and Enhancers, as we
increased price promotions on cheese products. Excluding the impact of
divested businesses, the 1999 separation charges and the estimated shift in
income attributable to the century date change, our underlying 1999 operating
companies income increased 6.1% over 1998.

The following discusses operating results within each of Kraft Foods North
America's business segments.

Cheese, Meals and Enhancers. Total Cheese, Meals and Enhancers volume
decreased 0.8% from 1998, due primarily to lower food service shipments and
the exit of lower-margin product lines in Canada. Enhancers also contributed
to the volume decline as lower shipments of spoonable dressings more than
offset increases in barbecue sauce. Partially offsetting the overall volume
decline was cheese volume, which increased over 1998 with gains in several
product lines. Meals volume also increased due primarily to the introduction
of new products. Excluding the impact of divested businesses and the estimated
shift in volume attributable to the century date change, underlying 1999
volume decreased 1.1% from 1998.

During 1999, operating revenue increased $38 million, or 0.4%, over 1998,
due primarily to higher pricing of $140 million and the estimated shift in
revenue attributable to the century date change of $34 million. These
increases were partially offset by the impact of lower volume of $131 million.

Operating companies income increased $59 million, or 3.7%, over 1998. This
increase was due primarily to higher margins of $340 million, driven by higher
pricing coupled with lower commodity and manufacturing costs; the estimated
shift in income attributable to the century date change of $15 million; and
favorable product mix of $38 million. Partially offsetting these increases were
higher marketing, administration and research costs of $179 million, primarily
from marketing; the impact of lower volume of $73 million; and 1999 separation
charges of $71 million. Marketing expense increased due to price promotions on
cheese products and the introduction of new products. Favorable product mix was
the result of lower volume in lower-margin food service products and the
discontinuance of lower-margin product lines in Canada. Excluding the impact of
the 1999 separation charges, the income of divested businesses and the
estimated shift in income attributable to the century date change, underlying
1999 operating companies income of $1.7 billion increased 7.2% over 1998.

Biscuits, Snacks and Confectionery. Total volume grew 9.3% over 1998 on the
continued success of intense mints and two-compartment snacks. Excluding the
estimated shift in volume attributable to the century date change, underlying
1999 volume increased 7.0% over 1998.

During 1999, operating revenue increased $45 million, or 20.5%, over 1998,
due primarily to favorable product mix of $23 million and the impact of higher
volume of $18 million.

Operating companies income increased $19 million, or 35.2%, over 1998, due
primarily to favorable product mix of $19 million and higher volume of $11
million. These increases were partially offset by higher marketing,
administration and research costs. Higher marketing expense and favorable
product mix both reflected growth in our intense mints business. Excluding the
1999 separation charges and the estimated shift in income attributable to the
century date change, underlying 1999 operating companies income of $74 million
increased 37.0% from $54 million in 1998.

Beverages, Desserts and Cereals. Total Beverages, Desserts and Cereals
volume grew 6.6% over 1998. Volume grew in aseptic juice drinks, as well as in
powdered soft drinks, both fueled by new product introductions. Coffee volume
grew on the successful rollout of Starbucks bagged coffee to grocery customers
throughout 1999. Volume also grew in ready-to-eat refrigerated desserts and in
frozen whipped toppings. Partially offsetting these increases were declines in
dry packaged desserts and ready-to-eat cereals, due to intense competition.
Excluding the estimated shift in volume attributable to the century date
change, underlying 1999 volume increased 5.9% over 1998.

During 1999, operating revenue increased $35 million, or 0.7%, due primarily
to the impact of higher volume of $117 million, acquisitions of $91 million and
the estimated shift in revenue attributable to the century date change of $22
million. Partially offsetting these increases were unfavorable mix of $113
million and lower pricing of $81 million.

Operating companies income increased $4 million, or 0.4%, over 1998, due
primarily to the impact of higher volume of $74 million, higher margins of $69
million and the estimated shift in income attributable to the century date
change. Partially offsetting these increases were unfavorable product mix of
$71 million, the 1999 separation charges of $46 million and higher marketing,
administration and research costs. The unfavorable product mix was due
primarily to the volume increase in aseptic juice drinks. Excluding the 1999
separation charges and the estimated shift in income attributable to the
century date change, underlying 1999 operating companies income of $1.0 billion
increased 4.3% from 1998.

Oscar Mayer and Pizza. Total Oscar Mayer and Pizza volume grew 3.2% over
1998. Volume grew in pizza, reflecting the continued success of our rising
crust pizza and new product introductions. Volume also grew in lunch
combinations, bacon and hot dogs. Partially offsetting these increases was a
decline in cold cuts. Excluding the estimated shift in volume attributable to
the century date change, underlying 1999 volume increased 2.9% over 1998.

During 1999, operating revenue increased $139 million, or 4.5%, over 1998,
due primarily to the impact of higher volume of $89 million, the estimated
shift in revenue attributable to the century date change of $12 million and
favorable product mix of $33 million.

Operating companies income decreased $20 million, or 4.3%, from 1998. This
decrease was due primarily to the 1999 separation charge of $38 million, the
impact of higher marketing, administration and research costs of $30 million,
primarily from marketing, and increased expense related to food safety. These
decreases were partially offset by the impact of higher volume of $46 million
and the estimated shift in income attributable to the century date change of $4
million. The increase in marketing expense was due primarily to the
introduction of new pizza products. Excluding the 1999 separation charges and
the estimated shift in income attributable to the century date change,
underlying 1999 operating companies income of $484 million increased 3.0% over
$470 million in 1998.

Kraft Foods International

The following table is a reconciliation of Kraft Foods International's
reported operating results to underlying operating results for each of the
three years in the period ended December 31, 2000, and for the first quarter of
2000 and 2001:

Reported volume (in pounds).... 3,645 3,580 3,632 811 1,119
Volume of businesses sold:
Europe, Middle East and
Africa.................... (161) (91) (38) (13)
Latin America and Asia
Pacific................... (40) (33)
Estimated impact of century
date change:
Europe, Middle East and
Africa.................... (7) 7 7
Latin America and Asia
Pacific................... (7) 7 7
------- ------- ------- --------- ---------
Underlying volume (in pounds).. 3,444 3,442 3,608 812 1,119
======= ======= ======= ========= =========
Reported operating revenue..... $ 9,671 $ 8,900 $ 8,071 $ 1,926 $ 2,085
Operating revenue of
businesses sold:
Europe, Middle East and
Africa.................... (461) (294) (131) (46)
Latin America and Asia
Pacific................... (57) (33)
Estimated impact of century
date change:
Europe, Middle East and
Africa.................... (14) 14 14
Latin America and Asia
Pacific................... (12) 12 12
------- ------- ------- --------- ---------
Underlying operating revenue... $ 9,153 $ 8,547 $ 7,966 $ 1,906 $ 2,085
======= ======= ======= ========= =========
Reported operating companies
income........................ $ 1,054 $ 1,063 $ 1,208 $ 200 $ 239
Gain on sale of a French
confectionery business:
Europe, Middle East and
Africa.................... (139)
Operating companies income of
businesses sold:
Europe, Middle East and
Africa.................... (66) (52) (32) (8)
Latin America and Asia
Pacific................... (1) (2)
Estimated impact of century
date change:
Europe, Middle East and
Africa.................... (8) 8 8
Latin America and Asia
Pacific................... (5) 5 5
------- ------- ------- --------- ---------
Underlying operating companies
income........................ $ 987 $ 996 $ 1,050 $ 205 $ 239
======= ======= ======= ========= =========

First Quarter 2001 Compared with First Quarter 2000

Kraft Foods International's volume for the first quarter of 2001 increased
38.0% over the first quarter of 2000. Excluding the impact of divested
businesses and the estimated shift in volume attributable to the century date
change, our underlying volume increased 37.8%, due primarily to the
acquisition of Nabisco. If we had owned Nabisco during the first quarter of
2000, our underlying volume would have increased 3.3%.

Operating revenue increased $159 million, or 8.3%, over the first quarter
of 2000. Excluding the estimated shift in revenue attributable to the century
date change and the revenue of divested businesses, our underlying operating
revenue increased $179 million, or 9.4%, due primarily to a $287 million
increase attributable to the Nabisco acquisition and higher volume of $31
million. This increase was partially offset by unfavorable currency exchange
rates of $157 million. If we had owned Nabisco during the first quarter of
2000, operating revenue would have decreased 4.4% from the comparable 2000
period, due primarily to unfavorable currency exchange rates.

Operating companies income increased $39 million, or 19.5%, from the first
quarter of 2000. Excluding the estimated shift in income related to the
century date change and the income of divested businesses, our underlying
operating companies income increased $34 million, or 16.6%. This increase was
due primarily to an $18 million increase attributable to the Nabisco
acquisition, higher volume of $22 million and lower marketing, administration
and research costs of $15 million. This increase was partially offset by
unfavorable currency exchange rates of $18 million. If we had owned Nabisco
during the first quarter of 2000, our underlying operating companies income
would have increased 8.6%.

The following discusses operating results within each of Kraft Foods
International's business segments.

Europe, Middle East and Africa. Volume in Europe, Middle East and Africa
grew 0.9% from the first quarter of 2000. Excluding the volume of divested
businesses and the estimated shift in volume attributable to the century date
change, our underlying volume increased 1.9%, due primarily to the acquisition
of Nabisco. If we had owned Nabisco during the first quarter of 2000,
underlying volume would have increased 0.4%, as gains in the developing
markets of Central and Eastern Europe and growth in many Western European
markets were mostly offset by lower volume in Germany and lower canned meats
volume in Italy. In beverages, coffee volume was lower in Germany due to
reduced trade purchases in anticipation of lower coffee prices. Snacks volume
increased, driven by confectionery and salty snacks. Cheese volume grew,
driven primarily by cream cheese in Italy, Belgium and Spain and process
cheese in the United Kingdom and Spain. In grocery, lower ketchup volume in
Germany was partially offset by higher spoonable dressing shipments in Spain
and Greece.

Operating revenue decreased $136 million, or 8.3%, from the first quarter
of 2000. Excluding the estimated shift in revenue attributable to the century
date change and the revenue of divested businesses, our underlying operating
revenue decreased $104 million, or 6.5%. This decrease was due primarily to
unfavorable currency exchange rates of $118 million. Partially offsetting this
decrease was $12 million attributable to the Nabisco acquisition. If we had
owned Nabisco during the first quarter of 2000, underlying operating revenue
would have decreased 7.1%, due primarily to unfavorable currency exchange
rates.

Operating companies income increased $2 million, or 1.2%, over the first
quarter of 2000. Excluding the estimated shift in income attributable to the
century date change and the income of divested businesses, our underlying
operating companies income also increased $2 million, or 1.2%, over the first
quarter of 2000. This increase was due primarily to the impact of higher
volume of $14 million, partially offset by unfavorable currency exchange rates
of $12 million. If we had owned Nabisco during the first quarter of 2000, our
underlying operating companies income would have increased 1.8%.

Latin America and Asia Pacific. Latin America and Asia Pacific volume grew
more than 100% from the first quarter of 2000, due primarily to the
acquisition of Nabisco. If we had owned Nabisco during the first quarter of
2000, underlying volume would have increased 7.5% due to gains across most
categories. Beverages volume increased, due primarily to refreshment beverages
volume growth, including powdered soft drinks in

Brazil, China, the Philippines and Argentina and juice concentrate in Brazil.
Snacks volume increased, driven primarily by higher biscuit volume in Brazil
and China. In confectionery, volume grew in Asia Pacific due to chewy candy in
China and Southeast Asia. Cheese volume increased, due primarily to cream
cheese in Australia, Japan and the Caribbean, and process cheese in Australia
and the Philippines. Grocery volume was higher, due primarily to higher
shipments of spoonable dressings in the Philippines.

Operating revenue increased $295 million, more than 100% over the first
quarter of 2000. Excluding the estimated shift in revenue attributable to the
century date change and the revenue of divested businesses, our underlying
operating revenue increased $283 million, or 94.6%. This increase was due
primarily to a $275 million increase attributable to the Nabisco acquisition,
the impact of higher volume of $12 million and higher pricing of $6 million.
This increase was partially offset by unfavorable currency exchange rates. If
we had owned Nabisco during the first quarter of 2000, underlying operating
revenue would have increased 3.2%.

Operating companies income increased $37 million, more than 100% from the
first quarter of 2000. Excluding the estimated shift in income attributable to
the century date change and the income of divested businesses, our underlying
operating companies income increased $32 million, or 91.4%. This increase was
due primarily to an $18 million increase attributable to the Nabisco
acquisition, lower marketing, administration and research costs of $12 million
and higher volume of $8 million. This increase was partially offset by
unfavorable currency exchange rates. If we had owned Nabisco during the first
quarter of 2000, underlying operating companies income would have increased
31.4%.

2000 Compared with 1999

Kraft Foods International's volume increased 1.5% during 2000. Excluding
the impact of divested businesses and the estimated shift in volume
attributable to the century date change, volume increased 4.8%, of which 1.6
percentage points related to the impact of the 53rd week of shipments in 2000.

Operating revenue decreased $829 million, or 9.3%, from 1999. This decrease
was due primarily to unfavorable currency exchange rates of $887 million, the
impact of divestitures of $196 million, the estimated shift in revenue
attributable to the century date change of $52 million and lower pricing of
$30 million, due primarily to lower coffee prices. Partially offsetting these
decreases was the impact of higher volume of $291 million.

Operating companies income grew by $145 million, or 13.6%, to $1.2 billion,
due primarily to the impact of higher volume of $147 million, the gain on sale
of the French confectionery business of $139 million and higher margins of $84
million, primarily relating to lower commodity costs. Partially offsetting
these increases were unfavorable currency exchange rates of $96 million,
higher marketing, administration and research costs of $78 million, the
estimated shift in income attributable to the century date change of $26
million and the impact of divested businesses of $22 million. Excluding the
gain on sale of the French confectionery business, the income of divested
businesses and the estimated shift in income attributable to the century date
change, our underlying 2000 operating companies income of $1,050 million
increased 5.4% from $996 million in 1999.

The following discusses operating results within each of Kraft Foods
International's business segments.

Europe, Middle East and Africa. Total volume in Europe, Middle East and
Africa increased 0.5% over 1999. Adjusting for the estimated shift in volume
attributable to the century date change and excluding the volume from divested
businesses, volume grew 2.9% over 1999, with growth in all product categories.
In beverages, coffee volume benefited from strong growth in the developing
markets of Central and Eastern Europe and in the established markets of
Sweden, Austria, Italy and the United Kingdom. Volume in refreshment beverages
grew in Central and Eastern Europe, driven by the expansion of powdered soft
drinks. Volume growth in snacks reflected double-digit gains in salty snacks
on expansion into Central and Eastern Europe, as well as successful new
confectionery product launches and line extensions. Cheese volume grew on the
strength of Philadelphia cream cheese, reflecting successful marketing
programs across Europe and a re-

launch in the Middle East. Volume also grew for process cheese in Italy and
Spain. In convenient meals, volume grew on the successful launch of new
Lunchables varieties in the United Kingdom and line extensions of packaged
dinners in Germany and Belgium. Volume grew in grocery, reflecting gains in
spoonable dressings, benefiting from effective marketing programs in Italy and
new product launches in Spain.

Operating revenue decreased $852 million, or 11.1%, from 1999. This decrease
was due primarily to unfavorable currency exchange rates of $830 million, the
impact of divestitures of $163 million, lower pricing of $60 million, due to
the effect of lower coffee commodity costs, and the estimated shift in revenue
attributable to the century date change of $28 million. These decreases were
partially offset by the favorable impact of higher volume of $186 million.

Operating companies income increased $124 million, or 13.9%, over 1999. This
increase was due primarily to the $139 million gain on the sale of the French
confectionery business, the impact of higher volume of $104 million and higher
margins of $70 million, primarily due to favorable coffee commodity costs.
Partially offsetting these increases were unfavorable currency exchange rates
of $97 million, higher marketing, administration and research costs of $58
million, the impact of divestitures of $20 million and the estimated shift in
income attributable to the century date change of $16 million. The increase in
marketing expense reflected new product introductions. Excluding the gain on
sale of the French confectionery business, the impact of divested businesses
and the estimated shift in income attributable to the century date change, our
underlying 2000 operating companies income of $856 million grew 2.5% from $835
million in 1999.

Latin America and Asia Pacific. Latin America and Asia Pacific volume grew
5.1% over 1999. Adjusting for the estimated shift in volume attributable to the
century date change and excluding the volume from divested businesses, volume
grew 11.9% over 1999, led by strong growth in Brazil, Australia, China, the
Philippines, Indonesia, Japan and Korea and higher exports to the Caribbean.
Beverages volume grew due to increased coffee volume in the Caribbean and
China. Refreshment beverages volume grew strongly, benefiting from new flavors
in Brazil, successful marketing programs in China and the Philippines, and
expansion into Thailand. Snacks volume gains were driven by double-digit
confectionery volume growth in Asia Pacific, reflecting new product launches in
Indonesia, China and the Philippines. In Latin America, volume benefited from
the launch of new chocolate products in Brazil. Cheese volume grew, driven by
successful marketing and promotion of Philadelphia cream cheese in Australia
and Japan, as well as gains in process cheese in the Philippines and Indonesia.
Convenient meals volume grew, led by exports of macaroni & cheese dinners to
Asian markets. Grocery volume grew on higher shipments of yeast spread in
Australia and increased shipments of gelatins and cereals to Asia.

Operating revenue increased $23 million, or 1.9%, over 1999, due primarily
to the impact of higher volume of $105 million and increased pricing of $30
million. Partially offsetting these increases were unfavorable currency
exchange rates of $57 million, the impact of divestitures of $33 million and
the estimated shift in revenue attributable to the century date change of $24
million.

Operating companies income grew $21 million, or 12.5%, over 1999, due
primarily to higher volume of $43 million and pricing of $14 million. Partially
offsetting these increases were higher marketing, administration and research
costs of $20 million and the estimated shift in income attributable to the
century date change of $10 million. Excluding the estimated shift in income
attributable to the century date change and the impact of divested businesses,
our underlying 2000 operating companies income of $194 million grew 20.5% from
$161 million in 1999.

1999 Compared with 1998

Kraft Foods International's volume decreased 1.8% during 1999. Excluding
divested businesses and the estimated shift in volume attributable to the
century date change, underlying volume decreased 0.1%.

Operating revenue decreased $771 million, or 8.0%, from 1998. This decrease
was due primarily to lower pricing of $366 million, resulting from lower coffee
commodity costs, unfavorable currency exchange rates of $303 million and the
impact of divestitures.

Operating companies income grew 0.9% over 1998. This increase was due
primarily to higher margins of $79 million, resulting from lower commodity
costs, and the estimated shift in income attributable to the century date
change of $13 million. Partially offsetting this growth were higher marketing,
administration and research costs of $47 million and unfavorable currency
exchange rates.

The following discusses operating results within each of Kraft Foods
International's business segments.

Europe, Middle East and Africa. Volume in Europe, Middle East and Africa
decreased 2.5% from 1998. Excluding the impact of divested businesses and the
estimated shift in volume attributable to the century date change, our
underlying volume decreased 0.3%, as lower snacks volume was partially offset
by volume gains in beverages, convenient meals and grocery. In beverages,
coffee volume grew in France, Spain, Denmark, Switzerland, Hungary and the
Slovak Republic. In refreshment beverages, volume benefited from the expansion
of powdered soft drinks in Central and Eastern Europe. In convenient meals,
volume growth was driven by the launch of lunch combinations in Germany and
their success in the United Kingdom. In snacks, confectionery volume was lower
due to economic weakness in Russia and other parts of Eastern Europe, as well
as unusually hot summer weather across Europe.

During 1999, operating revenue decreased $631 million, or 7.6%, from 1998.
This decrease was due primarily to lower pricing of $378 million, resulting
from lower coffee commodity costs, the impact of divestitures of $167 million
and unfavorable currency exchange rates. These decreases were partially offset
by the estimated shift in revenue attributable to the century date change of
$14 million.

Operating companies income increased $11 million, or 1.2%, over 1998. This
increase was due primarily to higher margins of $63 million, driven by
favorable coffee and cocoa commodity costs; favorable product mix of $24
million; and the estimated shift in income attributable to the century date
change of $8 million. Partially offsetting these increases were higher
marketing, administration and research costs of $49 million, the impact of
divestitures of $14 million and unfavorable currency exchange rates of $21
million. Favorable product mix resulted from lower volume in lower-margin
products in Russia and Eastern Europe. Higher marketing expense reflected
product launches in Western Europe. Excluding divested businesses and the
estimated shift in income attributable to the century date change, our
underlying 1999 operating companies income of $835 million grew 2.1% from $818
million in 1998.

Latin America and Asia Pacific. Latin America and Asia Pacific volume
increased 0.8% over 1998. Excluding the impact of divestitures and the
estimated shift in volume attributable to the century date change, our
underlying volume increased 0.8%, driven by growth in Asia Pacific, reflecting
gains in cheese, convenient meals and grocery volumes. In cheese, higher
volume was reported in Australia, Japan, the Philippines and Indonesia. In
grocery, volume benefited from growth in Australia, reflecting gains in
spoonable and pourable salad dressings and peanut butter. This increase was
partially offset by lower volume in Latin America, due primarily to lower
confectionery volume in Brazil and lower powdered soft drinks volume in
Argentina. Lower powdered soft drinks volume in Argentina reflected sales lost
to cola products as cola producers continued to reduce prices.

During 1999, operating revenue decreased $140 million, or 10.3%, from 1998,
due primarily to unfavorable currency exchange rates of $156 million and the
impact of divestitures of $24 million. These decreases were partially offset
by the estimated shift in revenue attributable to the century date change of
$12 million, higher pricing of $12 million and the impact of higher volume of
$10 million.

Operating companies income decreased by $2 million, or 1.2%, from 1998, due
primarily to unfavorable currency exchange rates of $15 million and
unfavorable product mix of $12 million. These decreases were partially offset
by higher pricing of $16 million, the estimated shift in income attributable
to the century date change of $5 million and lower marketing, administration
and research costs. The unfavorable product mix reflected lower powdered soft
drinks volume in Argentina and lower confectionery volume in Brazil. Excluding
the estimated shift in income attributable to the century date change and the
impact of divested businesses, underlying 1999 operating companies income of
$161 million decreased 4.7% from $169 million in 1998.

Financial Condition and Liquidity

Net Cash Provided by Operating Activities. During the first quarter of 2001,
our net cash provided by operating activities was $2 million compared with $548
million in the first quarter of 2000. The decrease in net cash provided by
operating activities reflects unusual timing of payments and receipts as
follows:

. The estimated $155 million shift in cash outflows from the first quarter
of 2000 to the fourth quarter of 1999 attributable to the century date
change.

. The 53rd week in the fourth quarter of 2000 resulted in the collection of
$80 million of accounts receivable from holiday sales. We would normally
have collected these receivables in the first quarter of 2001.

. We paid taxes of $76 million in the first quarter of 2001 related to the
gain on the sale of our French confectionery business in 2000.

. Our cash spending on other working capital items increased $248 million
as compared with the first quarter of 2000, due primarily to the timing
of marketing spending and the payment of accrued salaries and benefits,
as well as severance and change in control costs due to the acquisition
of Nabisco.

While our operating cash flow was unusually low in the first quarter of 2001,
we estimate that net cash provided by operating activities will be
approximately $3.0 billion for the year 2001.

During 2000, our net cash provided by operating activities was $3.3 billion,
compared with $2.7 billion in 1999 and $2.3 billion in 1998. The increase in
2000 operating cash flow over 1999 primarily reflected increased net earnings
of $248 million and reduced levels of receivables and inventories of $318
million, which included the estimated shift in working capital attributable to
the century date change. The increase in 1999 operating cash flows over 1998
primarily reflected higher net earnings of $121 million and a reduced level of
receivables of $476 million, offset in part by a $179 million increase in
inventories. The change in 1999 inventories reflected the estimated shift in
working capital attributable to the century date change. Nabisco's operating
cash flows are not included in our operating cash flows for any of the years
presented because its results of operations were not included with ours.

Net Cash Used in Investing Activities. During the first quarter of 2001, our
net cash used in investing activities was $194 million, down from $440 million
in 2000. This decrease primarily reflects the decline in cash used for
acquisitions. During the first quarter of 2000, we purchased Boca Burger and
Balance Bar for an aggregate cost of $358 million. During the first quarter of
2001, we purchased coffee businesses in Romania and Morocco for an aggregate
purchase price of $33 million.

During 2000, net cash used in investing activities was $16.1 billion, up
from $669 million in 1999 and $763 million in 1998. The increase in 2000
primarily reflected the purchase of Nabisco in December 2000.

Our capital expenditures increased to $906 million in 2000 from $860 million
in 1999 and $841 million in 1998. These expenditures were made primarily to
modernize our manufacturing facilities, lower our cost of production and expand
our production capacity for our growing product lines. We expect capital
expenditures to be approximately $1.3 billion in 2001 and to be funded from
operations. The expected increase in 2001 spending reflects the inclusion of
Nabisco's operations and expenditures related to the integration of the Nabisco
business. The majority of integration expenditures in 2001 represents
information systems costs to bring Nabisco's headquarters, sales offices and
plants in line with Kraft's systems, and increased spending on machinery and
equipment as we consolidate Nabisco and Kraft production worldwide.

Net Cash Provided by Financing Activities. During the first quarter of 2001,
our financing activities provided net cash of $164 million, compared with $72
million used in financing activities during 2000. This difference was due
primarily to net proceeds from the increase in the amounts due to Philip Morris
in the first quarter of 2001, compared with net debt repayments during the
first quarter of 2000.

During 2000, financing activities provided net cash of $13.0 billion, as we
issued $15.0 billion of long-term notes payable to Philip Morris in connection
with the Nabisco acquisition, paid dividends of $1.0 billion and repaid debt.
During 1999 and 1998, we used net cash in financing activities primarily to pay
dividends of $3.0 billion in 1999 and $2.2 billion in 1998.

Working Capital, Debt and Liquidity. In managing our business, we attempt to
reduce working capital to minimum levels. Our working capital deficit at March
31, 2001, was $1 million, as compared to a deficit of $438 million at December
31, 2000. This change was due primarily both to a decrease in accounts payable,
reflecting the timing of payments, and to higher raw material purchases,
primarily cheese, in advance of rising commodity costs.

Our working capital at December 31, 1999 was $517 million, as compared to a
working capital deficit of $438 million at December 31, 2000. Contributing to
the 2000 decrease were reductions in accounts receivable and inventories of
$379 million, due primarily to our continued management of these assets and a
reduction of approximately $150 million of inventories that were maintained at
the end of 1999 in advance of the century date change. Also contributing to
this decrease was our acquisition of Nabisco, which further reduced working
capital at December 31, 2000 by $497 million.

Our total debt, including intercompany accounts payable to Philip Morris,
was $26.2 billion at March 31, 2001, and $25.8 billion at December 31, 2000.
Our debt-to-equity ratio was 1.8 at March 31, 2001, and at December 31, 2000.
Our total debt, including intercompany accounts payable to Philip Morris, was
$7.8 billion at December 31, 1999. Our debt-to-equity ratio was 0.6 at December
31, 1999. The increases in our debt and debt-to-equity ratio in 2000 were the
result of our borrowings to fund the acquisition of Nabisco.

In connection with the acquisition of Nabisco, Philip Morris entered into a
$9.0 billion, 364-day revolving credit agreement, expiring in October 2001. We
anticipate that Philip Morris will transfer the credit facility to us following
this offering or, alternatively, we may enter into a new facility. The
principal conditions to the assignment of the existing facility are the
completion of this offering, the completion of satisfactory documentation and
covenants, and our maintaining our existing credit ratings described below.
There are no borrowings currently outstanding under this credit facility and we
do not expect that there will be any outstanding borrowings if and when it is
transferred to us. We intend to use either the $9.0 billion facility or a new
facility to support commercial paper borrowings, the proceeds of which will be
used to retire a portion of our long-term notes payable to Philip Morris. In
addition, we maintain committed and uncommitted credit facilities with a number
of lending institutions amounting to approximately $430 million, of which
approximately $284 million were unused at December 31, 2000. We maintain these
facilities primarily to meet short-term working capital needs of our
international businesses.

We issued $15.0 billion of notes payable to Philip Morris due in 2002 in
connection with the acquisition of Nabisco. $11.0 billion of these notes
payable bear interest at 7.75% and the balance of the notes bear interest at
7.40%. Previously, we had issued a note payable to Philip Morris in the
principal amount of $5.0 billion bearing interest at 7.00% due in 2009 and two
Swiss franc notes payable to Philip Morris, the first in the principal amount
of $692 million bearing interest at 3.58% and due in 2006, and the second in
the principal amount of $715 million bearing interest at 4.58% and due in 2008.
Subsequent to March 31, 2001, we refinanced the two long-term Swiss franc notes
payable to Philip Morris with short-term Swiss franc borrowings from Philip
Morris at variable interest rates based on six-month LIBOR plus twenty-five
basis points. The United States dollar denominated notes must be prepaid from
the proceeds of this offering and future external financings, other than
proceeds from future external financings intended to refinance maturing
indebtedness. All notes payable to Philip Morris must be prepaid in their
entirety on the date on which Philip Morris ceases to control at least 50% of
the voting power of our capital stock. Our cash from operations will not be
sufficient to repay the indebtedness to Philip Morris due in 2002. Accordingly,
we will seek to refinance this indebtedness. The nature and amount of our long-
term and short-term debt and the proportionate amount of

each can be expected to vary significantly as we repay Philip Morris with
proceeds from commercial paper borrowings. We intend to refinance the
commercial paper with the issuance of long-term debt as market conditions
permit.

Following the repayment of debt to Philip Morris with the net proceeds from
this offering, we will have long-term notes payable to Philip Morris of
approximately $13.0 billion and we anticipate that our total debt will be
approximately $17.8 billion and will result in annual interest expense of
approximately $1.3 billion. In addition, we anticipate that the integration of
Nabisco will result in additional costs of $500 million to $600 million, the
majority of which will require cash payments for severance obligations. The
integration of Nabisco may further result in charges related to existing Kraft
facilities of $200 million to $300 million, less than 10% of which will require
cash payments.

Philip Morris and certain of its affiliates provide us with various
services, including planning, legal, treasury, accounting, auditing, insurance,
human resources, office of the secretary, corporate affairs, information
technology and tax services. In 2001, we will enter into a formal agreement
with Philip Morris providing for a continuation of these services, the cost of
which is expected to be approximately $300 million in 2001.

We believe that our cash from operations and existing credit facilities will
be sufficient to meet our working capital needs and planned capital
expenditures in 2001. However, we will not be able to meet the 2002 maturities
of our notes payable to Philip Morris without external borrowings. Philip
Morris has informed us that in the event we are unable to obtain such external
borrowings due to capital market conditions, it would extend the maturities of
our notes payable to Philip Morris until we are able to do so.

Our credit rating by Moody's is "P-1" in the commercial paper market and
"A2" for long-term debt obligations. Our credit rating by Standards & Poor's is
"A1" in the commercial paper market and "A" for long-term debt obligations.
There is no assurance that we can maintain these ratings, and a ratings
reduction could result in higher interest costs.

Market Risk

We are exposed to market risk, primarily related to foreign exchange rates,
commodity prices and interest rates. We actively monitor these exposures. To
manage these exposures, we enter into a variety of derivative financial
instruments to reduce our exposure to market risk by creating offsetting
exposures. Our objective is to reduce, where it is deemed appropriate to do so,
fluctuations in earnings and cash flows associated with changes in foreign
currency exchange rates, commodity prices and interest rates. It is our policy
and practice to use derivative financial instruments only to the extent
necessary to manage our exposures. Since we use currency rate-sensitive and
commodity price-sensitive instruments to hedge a certain portion of our
existing and anticipated transactions, we expect that any loss in value for
those instruments generally would be offset by increases in the value of those
hedged transactions. We do not use derivative financial instruments for
speculative purposes.

Foreign Exchange Rates. We are exposed to foreign currency exchange
movements, primarily in European, Canadian, Australian, Asian and Latin
American currencies. Consequently, we enter into various contracts, which
change in value as foreign currency exchange rates change, to preserve the
value of commitments and anticipated transactions. We use foreign currency
option and forward contracts to hedge certain transaction exposures and
anticipated foreign currency cash flows. We also enter into short-term currency
swap contracts, primarily to hedge intercompany financing transactions
denominated in foreign currencies. At March 31, 2001, we had option and forward
foreign exchange contracts, principally for the Canadian dollar, the Japanese
yen and the British pound. The aggregate notional amounts of these contracts
were $315 million for both the purchase and sale of foreign currencies. At
December 31, 2000 and 1999, we had option and forward foreign currency exchange
contracts, principally for the Japanese yen, the Australian dollar and the
Euro. The aggregate notional amounts of these contracts were $237 million and
$231 million, respectively, for both the purchase and sale of foreign
currencies.

Commodity Prices. We are exposed to price risk related to anticipated
purchases of certain commodities used as raw materials by our businesses.
Accordingly, we enter into commodity future, forward and option contracts to
manage the fluctuations in prices of anticipated purchases. These contracts are
primarily for cheese, coffee, cocoa, milk, sugar, wheat, corn and, beginning in
2000, energy. At March 31, 2001, we had net long commodity positions of $601
million. At December 31, 2000 and 1999, we had net long commodity positions of
$617 million and $163 million, respectively. Unrealized gains or losses on net
commodity positions were insignificant at March 31, 2001, and December 31, 2000
and 1999.

Interest Rates. We intend to manage our exposure to interest rate risk
through the proportion of fixed rate debt and variable rate debt in our total
debt portfolio. At December 31, 2000, nearly all of our debt was long-term at
fixed rates, with the majority of it being indebtedness to Philip Morris.
Subsequent to March 31, 2001, we refinanced the two long-term Swiss franc notes
payable to Philip Morris with short-term Swiss franc borrowings from Philip
Morris at variable interest rates based on six-month LIBOR plus twenty-five
basis points. We intend to repay a portion of our fixed-rate debt with proceeds
from this offering. Following this offering, provided various conditions are
met, Philip Morris may assign to us a $9.0 billion, 364-day revolving credit
agreement maturing in October 2001 that will enable us to borrow on a short-
term basis at variable rates. Alternatively, we may enter into a new revolving
credit agreement. Our intent is to use the revolving credit agreement as
support for commercial paper borrowings, rather than borrowing against it.

Value at Risk. We use a value at risk computation to estimate the potential
one-day loss in the fair value of our interest rate-sensitive financial
instruments and to estimate the potential one-day loss in pre-tax earnings of
our foreign currency and commodity price-sensitive derivative financial
instruments. The computation estimate includes our:

. debt;

. short-term investments;

. foreign currency forwards, swaps and options; and

. commodity futures, forwards and options.

Anticipated transactions, foreign currency trade payables and receivables
and net investments in foreign subsidiaries, which the foregoing instruments
are intended to hedge, are excluded from the computation.

The computation estimates are made assuming normal market conditions, using
a 95% confidence interval. We used a "variance/co-variance" model to determine
the observed interrelationships between movements in interest rates and various
currencies. These interrelationships were determined by observing interest rate
and forward currency rate movements over the preceding quarter for the
calculation of value at risk amounts at December 31, 1999 and 2000. The
interest rate and forward currency rate movements were also monitored over each
of the four preceding quarters for the calculation of average value at risk
amounts during each year. The values of foreign currency and commodity options
do not change on a one-to-one basis with the underlying currency or commodity,
and are valued accordingly in the value at risk computation.

The estimated potential one-day loss in fair value of our interest rate-
sensitive instruments, primarily debt, under normal market conditions and the
estimated potential one-day loss in pre-tax earnings from foreign currency
exchange rates and commodity instruments under normal market conditions, as
calculated in the value at risk model, follow (in millions):

Pre-tax Earnings Impact Fair Value Impact
------------------------- -------------------------
At At
12/31/99 Average High Low 12/31/99 Average High Low
-------- ------- ---- --- -------- ------- ---- ---

Instruments sensitive to:
Interest rates............ $52 $71 $87 $52
Foreign currency rates.... $15 $15 $19 $12
Commodity prices.......... 13 9 13 5

Pre-tax Earnings Impact Fair Value Impact
------------------------- -------------------------
At At
12/31/00 Average High Low 12/31/00 Average High Low
-------- ------- ---- --- -------- ------- ---- ---

Instruments sensitive to:
Interest rates............ $166 $83 $166 $39
Foreign currency rates.... $20 $20 $24 $15
Commodity prices.......... 9 8 9 7

This value at risk computation is a risk analysis tool designed to
statistically estimate the maximum probable daily loss from adverse movements
in interest rates, foreign currency rates and commodity prices under normal
market conditions. The computation does not purport to represent actual losses
in fair value or earnings to be incurred by us, nor does it consider the effect
of favorable changes in market rates. We cannot predict actual future movements
in market rates and do not present these results to be indicative of future
movements in such market rates or to be representative of any actual impact
that future changes in market rates may have on our future results or financial
position.

New Accounting Standards

The Financial Accounting Standards Board has issued standards that mandate
the accounting for derivative financial instruments. Effective January 1, 2001,
we adopted these standards. These standards require that all of our derivative
financial instruments be recorded on our combined balance sheets at their fair
value as either assets or liabilities. Changes in the fair value of derivatives
are recorded each period in earnings or accumulated other comprehensive losses.
How the derivative is recorded depends upon whether it is designated and
effective as part of a hedge transaction and, if it is, the type of hedge
transaction. Gains and losses on derivative instruments reported in accumulated
other comprehensive losses are reclassified as earnings in the periods during
which earnings are affected by the hedged item. The adoption of these new
standards did not have a material effect on net earnings (less than $1 million)
or accumulated other comprehensive losses (less than $1 million). During the
quarter ended March 31, 2001, accumulated other comprehensive losses increased
by $5 million due to hedging transactions, offset by $5 million reclassified
from accumulated other comprehensive losses to the combined statement of
earnings.

The Emerging Issues Task Force has issued pronouncements addressing the
recognition, measurement and statement of earnings classification for certain
sales incentives. These pronouncements will be effective in the first quarter
of 2002. As a result, certain items previously included in marketing,
administration and research costs on our combined statements of earnings will
be recorded as reductions of operating revenue. Upon adoption, we will
reclassify prior period amounts to conform to the new requirements. Due to
anticipated additional consideration of this pronouncement by the EITF, we are
currently unable to quantify the impact of adoption. We presently expect that
adoption and subsequent application of this pronouncement will not have a
material effect on our financial position or results of operations. The EITF
also issued a pronouncement addressing the statement of earnings classification
of shipping and handling costs billed to vendors. This pronouncement was
effective for the fourth quarter of 2000, but did not have an impact on our
combined financial statements.

In the first quarter of 2001, the Financial Accounting Standards Board
issued an Exposure Draft related to business combinations. If the final rules
are adopted as proposed, as of January 1, 2002, we will no longer be required
to amortize our goodwill as a charge to earnings. In addition, we will be
required to periodically review our goodwill for potential impairment. If an
impairment is found to exist, a charge will be taken against earnings in our
combined statement of earnings. We cannot currently determine the amount of an
impairment charge, if any, that would be recorded upon adoption.

BUSINESS

Overview

We are the largest branded food and beverage company headquartered in the
United States and the second largest in the world based on 2000 pro forma
revenue. We generated 2000 pro forma revenue of $34.7 billion and 2000 pro
forma earnings before interest, income taxes, depreciation and amortization of
$6.3 billion. Our brands are sold in more than 140 countries and, according to
A.C. Nielsen, are enjoyed in 99.6% of the households in the United States.
Consumers of all ages around the world enjoy our brands, whether at home or
away from home, across the entire spectrum of food and beverage occasions:
breakfast, lunch, dinner and snacks.

We have a superior brand portfolio created and supported through dynamic
product innovation, worldclass marketing, experienced management, global scale
and strategic acquisitions. Our portfolio includes 61 brands with 2000 revenue
over $100 million, accounting for 75% of our 2000 pro forma revenue. Seven of
our brands, shown below, had 2000 revenue over $1 billion, accounting for 40%
of our 2000 pro forma revenue.

2000
Pro Forma
Revenue
(in millions)
-------------

[LOGO OF KRAFT] . The #1 cheese brand in the world, as $4,302
well as our best known brand for salad
and spoonable dressings, packaged
dinners, barbecue sauce and other
products

[LOGO OF NABISCO]
. The umbrella brand for the #1 cookie and 3,547
cracker business in the world, including
nine of our $100 million brands

[LOGO OF OSCAR MAYER]
. The #1 processed meats brand in the 1,366
United States

[LOGO OF POST]
. The #3 brand of ready-to-eat cereals in 1,352
the United States

[LOGO OF MAXWELL HOUSE]
. One of the leading coffee brands in the 1,111
world

[LOGO OF PHILADELPHIA]
. The #1 cream cheese brand in the world 1,068

[LOGO OF JACOBS]
. The #1 roast and ground coffee brand in 1,043
Western Europe

Our other brands with 2000 revenue exceeding $100 million include many
additional household favorites, such as:

. Carte Noire--the #1 coffee brand in France;

. Gevalia--the #1 coffee brand in Scandinavia;

. Jell-O--the #1 dry packaged and refrigerated ready-to-eat gelatins
and puddings brand in the United States;

. Lacta--the #1 chocolate confectionery brand in Brazil;

. Lunchables--the #1 lunch combinations brand in the United States
and Europe;

. Planters--the #1 brand in snack nuts worldwide; and

. Tang--the #1 brand in powdered soft drinks worldwide.

We hold the #1 global share position in eleven product categories. In the
United States, based on dollar shares, we hold the #1 share position in 23 of
our 25 most profitable categories or, based on volume or equivalent unit
shares, in 21 of these 25 categories. In addition, based on volume or
equivalent unit shares, we hold the #1 share position in 21 of our 25 most
profitable international country categories. We strive to be the category
leader in all of our principal markets. Category leaders often achieve higher
margins than other category participants, due to the benefits of scale,
consumer loyalty and retail customer emphasis that are frequently associated
with category leadership.

We concentrate our product innovation, marketing, management and investment
efforts on our $100 million brands and selected other brands that enjoy strong
regional recognition. We support these core brands with a disciplined program
of investment in new product development and worldclass marketing to generate
increased revenue growth and profitability. We combine this brand support with
our global infrastructure and our knowledge of local consumer tastes and
preferences to maintain or achieve leading category positions in the regions in
which we operate.

We believe our ability to execute brand-building and growth-oriented
marketing and sales strategies is among the best in the global food and
beverage industry. We are one of the largest food and beverage advertisers in
the world, with 2000 pro forma advertising expenditures exceeding $1.4 billion.
Our advertising has won numerous awards around the world for its originality
and effectiveness. Our execution with the retail trade is also extremely
strong. In the 2000 Cannondale Associates PoweRanking(TM) survey of United
States retailers, we ranked #1 among all consumer packaged goods companies as
offering the "Best combination of growth and profitability" to retailers. We
also ranked #1 among all food and beverage companies in the "Best of the Best"
composite ranking and in every surveyed category, including "Consumer brands
most important to retailers"; "Best sales force/customer teams"; and "Most
innovative marketing programs."

We conduct our global food business through two units. Kraft Foods North
America operates in the United States, Canada and Mexico and accounted for
$25.3 billion, or 73%, of our 2000 pro forma revenue. Kraft Foods International
has operations in 63 countries and accounted for $9.4 billion, or 27%, of our
2000 pro forma revenue. Kraft Foods International had 2000 pro forma revenue of
nearly $2 billion in Germany and significant scale in 11 other countries with
2000 pro forma revenue exceeding $200 million in each country. These two units
participate in five core consumer sectors: snacks, beverages, cheese, grocery
and convenient meals. We coordinate our global activities and share best
practices through worldwide councils. We also participate in three
international ventures that are strong players in their local markets: United
Biscuits for biscuits in Europe; Ajinomoto General Foods for coffee in Japan;
and Dong Suh Foods for coffee and cereal in Korea.

Underlying Combined Results

The following table sets forth underlying combined results of operations
for Kraft. Underlying results exclude the results of divested businesses,
gains (losses) on sales of businesses, the estimated shift of sales
attributable to the century date change and the effects of asset writedowns
and employee separation programs associated with the integration of our
businesses:

Year Ended December 31, Compound
------------------------------------------------- Annual Growth
Pro Forma Rate
1996 1997 1998 1999 2000 2000(1) 1996-2000(2)
------- ------- ------- ------- ------- --------- -------------
(dollars and pounds in millions)

Volume (in pounds)...... 11,816 12,258 12,479 12,625 13,142 17,465 2.7%
Operating revenue....... $26,145 $26,640 $26,764 $26,348 $26,488 $34,493 0.3
Operating companies
income................. 3,596 3,911 4,108 4,308 4,620 5,620 6.5
Operating companies
income margin.......... 13.8% 14.7% 15.3% 16.4% 17.4% 16.3% +3.6pp

- --------------------
(1) Includes Nabisco as if we had acquired it on January 1, 2000.
(2) Represents compound annual growth rate from 1996 to 2000, excluding pro
forma data, except for operating companies income margin, which represents
absolute change in percentage points over the 1996-2000 period, excluding
pro forma data.

Kraft Foods North America Underlying Combined Results

The following table sets forth underlying combined results of operations
for Kraft Foods North America.

Year Ended December 31, Compound
------------------------------------------------- Annual
Pro Forma Growth Rate
1996 1997 1998 1999 2000 2000(1) 1996-2000(2)
------- ------- ------- ------- ------- --------- ------------
(dollars and pounds in millions)

Volume (in pounds)...... 8,400 8,740 9,035 9,183 9,534 12,653 3.2%
Operating revenue....... $16,237 $17,038 $17,611 $17,801 $18,522 $25,331 3.3
Operating companies
income................. 2,592 2,905 3,121 3,312 3,570 4,478 8.3
Operating companies
income margin.......... 16.0% 17.1% 17.7% 18.6% 19.3% 17.7% +3.3pp

Since 1996, Kraft Foods North America's underlying volume increased at a
compound annual growth rate of 3.2%, which is nearly three times the compound
annual growth rate of North America's population during the same period.

The addition of Nabisco would have increased Kraft Foods North America's
2000 underlying volume by 32.7% and underlying operating companies income by
25.4%. Pro forma results are not necessarily indicative of what would have
actually occurred if the acquisition had been consummated at the beginning of
2000, nor are they necessarily indicative of our future operating results.

Kraft Foods International Underlying Combined Results

The following table sets forth underlying combined results of operations for
Kraft Foods International.

Year Ended December 31, Compound
-------------------------------------------- Annual
Pro Forma Growth Rate
1996 1997 1998 1999 2000 2000(1) 1996-2000(2)
------ ------ ------ ------ ------ --------- ------------
(dollars and pounds in millions)

Volume (in pounds)...... 3,416 3,518 3,444 3,442 3,608 4,812 1.4%
Operating revenue....... $9,908 $9,602 $9,153 $8,547 $7,966 $9,162 (5.3)
Operating companies
income................. 1,004 1,006 987 996 1,050 1,142 1.1
Operating companies
income margin.......... 10.1% 10.5% 10.8% 11.7% 13.2% 12.5% +3.1pp

- ---------------------
(1) Includes Nabisco as if we had acquired it on January 1, 2000.
(2) Represents compound annual growth rate from 1996 to 2000, excluding pro
forma data, except for operating companies income margin, which represents
absolute change in percentage points over the 1996-2000 period, excluding
pro forma data.

Kraft Foods International's 5.3% compound annual decrease in underlying
operating revenue from 1996 to 2000 was due primarily to the impact of
unfavorable currency exchange rates of $2.6 billion. From 1996 to 2000, we took
steps to reduce costs and streamline our portfolio. These steps contributed to
strong performance in 2000 with underlying volume up 4.8% and underlying
operating companies income up 5.4% from 1999, and underlying operating
companies income margin up 3.1 percentage points since 1996.

The addition of Nabisco would have increased Kraft Foods International's
2000 underlying volume by 33.4% and underlying operating companies income by
8.8%. Pro forma results are not necessarily indicative of what would have
actually occurred if the acquisition had been consummated at the beginning of
2000, nor are they necessarily indicative of our future operating results.

Our History

Our company was created through a series of acquisitions beginning with
Philip Morris' acquisitions of General Foods Corporation for $5.6 billion in
1985 and Kraft, Inc. for $12.9 billion in 1988. In 1989, Philip Morris merged
General Foods and Kraft to form our company. We acquired Jacobs Suchard, a
leading European coffee and confectionery company, for $4.2 billion in 1990,
and Freia Marabou, the leading confectionery company in Scandinavia, for $1.3
billion in 1993.

In December 2000, to expand our global presence and to strengthen our
position in the growing snacks consumer sector, we acquired Nabisco Holdings
Corp. at an aggregate cost of approximately $19.2 billion, which includes the
assumption of approximately $4.0 billion of existing Nabisco debt.

Since 1990, we have also acquired more than 50 other domestic and
international food businesses, including the United States operations of Capri
Sun, the rapidly growing leader in the United States aseptic juice drinks
category; Terry's Group, a leader in the chocolate gifting category in the
United Kingdom; Nabob, a leading premium coffee producer in Canada; Lacta, the
#1 chocolate confectionery business in Brazil; Balance Bar, our entry into the
expanding energy and nutrition bar category in the United States; and Boca
Burger, our entry into the emerging soy-based meat alternatives category in the
United States. We were among the first to invest in the newly opened markets in
Central and Eastern Europe, making ten acquisitions between 1992 and 1995.

Our Competitive Strengths

Our Superior Brand Portfolio

Our collection of brands represents one of the strongest portfolios in the
food and beverage industry. Our brands enjoy consumer loyalty and trust and
offer our retail customers a strong combination of growth and profitability.
Because consumers desire our brands, we are well positioned to profitably
maintain and increase our global category leadership positions. Our established
brands also provide a powerful platform for growth driven by new products,
product line extensions and geographic expansion.

Our portfolio is led by two standout brands, Kraft and Nabisco. For millions
of consumers, the name Kraft is synonymous with quality. This association began
with J. L. Kraft's invention of process cheese during World War I. Since that
time, we have carefully nurtured the Kraft brand, extending it to new products,
categories and geographies, strongly supported by worldclass advertising and
promotion.

Our recent acquisition of Nabisco supplemented our strong brand portfolio
with 15 brands having 2000 revenue exceeding $100 million each, nine of which
fall under the Nabisco umbrella brand. Nabisco, with roots to 1898, has evolved
into a global brand representing a collection of biscuit brands ranking #1 in
the world. This collection encompasses eight of the top twelve selling cookie
and cracker brands in the United States, including Oreo, Chips Ahoy!, Newtons,
Ritz and Triscuit. Nabisco's leading non-biscuit brands include Planters nuts,
Life Savers candies, A.1. steak sauce and Grey Poupon mustard.

Many of our other core brands have also been built through years, and in
many cases decades, of significant investment in advertising and promotion. The
resulting brand equity of our portfolio has been critical to our continued
growth in the face of a consolidating retail environment and the expansion of
private label products. Since 1996, in grocery stores and supercenters in the
United States, we have gained an average of 0.9 share points, based on dollar
shares, in our 20 most profitable United States categories, excluding five of
our recently acquired Nabisco categories. During this period, in these same
categories, private label products gained an average of 0.9 share points and
branded competitors lost an average of 1.8 share points.

In the United States, based on dollar shares, we hold the #1 share position
in 23 of our 25 most profitable categories or, based on volume or equivalent
unit shares, in 21 of these 25 categories. Products within these top 25
categories, shown below, generated more than 70% of Kraft Foods North America's
2000 pro forma revenue.

Kraft Foods North America
Top 25 U.S. Categories for 2000

Dollar/ Size of Our U.S. Our U.S.
Volume U.S. Category Category Category
Share (Dollars in Dollar Share Volume Share
Consumer Sector/Category Rank Major Brands Millions) (%) (%)
- ------------------------ ------- ------------ ------------- ------------ ------------

Snacks
Cookies #1 Oreo, Chips Ahoy! $4,114 40.9% 35.9%
Crackers #1 Ritz, Premium 3,210 50.7 45.4
Ready-to-Eat Refrigerated
Desserts #1 Jell-O 542 60.9 57.6
Snack Nuts #1 Planters 1,193 46.8 45.5
Sugar Confectionery #1/#2 Life Savers, Altoids 2,356 19.2 16.7

Beverages
Aseptic Juice Drinks #1 Capri Sun, Tang 1,071 41.5 46.0
Coffee #1/#2 Maxwell House 3,517 34.3 31.9
Powdered Soft Drinks #1 Kool-Aid,
Crystal Light 756 84.7 81.0

Cheese
Cream Cheese #1 Philadelphia 822 67.6 61.9
Grated Cheese #1 Kraft 392 55.4 49.8
Natural Cheese #1 Kraft 4,169 28.2 24.5
Process Cheese Loaves #1 Velveeta 391 87.7 84.5
Process Cheese Slices #1 Kraft 1,938 55.2 46.8

Grocery
Dry Packaged Desserts #1 Jell-O 507 82.8 79.7
Frozen Whipped Toppings #1 Cool Whip 368 72.7 67.8
Ready-to-Eat Cereals #3 Post 7,515 16.5 16.8
Salad Dressings #1 Kraft 1,788 31.9 32.9
Spoonable Dressings #1 Kraft, Miracle Whip 1,155 46.4 44.8
Steak Sauces #1 A.1. 219 63.9 56.3

Convenient Meals
Bacon #1 Oscar Mayer, Louis Rich 1,977 19.6 14.3
Cold Cuts #1 Oscar Mayer, Louis Rich 3,241 31.7 30.8
Frozen Pizza #1 DiGiorno, Tombstone 2,597 37.5 37.5
Hot Dogs #2 Oscar Mayer, Louis Rich 1,726 21.3 17.2
Lunch Combinations #1 Lunchables 778 83.6 85.3
Macaroni & Cheese Dinners #1 Kraft 766 82.6 71.4

- ---------------------
Note: U.S. category and share data are supplied by A.C. Nielsen and Information
Resources Inc., and reflect grocery stores, supercenters and mass
merchandisers; share data do not include all retail outlets.

We hold the #1 share position, based on volume or equivalent unit shares, in
21 of our 25 most profitable international country categories. Products within
these categories, shown below, generated 46% of Kraft Foods International's
2000 pro forma revenue.

Kraft Foods International
Top 25 Country Categories for 2000

Size of
Category Our Category
Consumer Share (U.S. Dollars Volume Share
Sector/Category Country Rank Major Brands in Millions) (%)
- --------------- ------- ----- ------------ ------------- ------------

Snacks
Biscuits Argentina #1 Terrabusi $ 905 30.2%
Biscuits Venezuela #1 Club Social 298 45.9
Chocolate Austria #1 Milka 452 47.7
Chocolate Belgium #1 Cote d'Or 860 31.0
Chocolate France #2 Milka, Cote d'Or 2,080 19.1
Chocolate Germany #3 Milka 4,955 11.3
Chocolate Norway #1 Freia 431 53.6
Chocolate Sweden #1 Marabou 589 51.0
Salty Snacks Scandinavia/Finland #1 Estrella 893 36.5

Beverages
Coffee France #1 Carte Noire 1,696 42.3
Coffee Germany #1 Jacobs 3,416 24.8
Coffee Poland #2 Jacobs 656 17.0
Coffee Sweden #1 Gevalia 526 42.1
Coffee United Kingdom #2 Kenco, Maxwell House 1,217 21.7
Powdered Soft Drinks Argentina #1 Tang, Clight 207 75.1
Powdered Soft Drinks Brazil #1 Tang, Clight 574 50.4

Cheese
Cream Cheese Germany #1 Philadelphia 477 23.0
Cream Cheese Italy #1 Philadelphia 221 62.5
Cream Cheese United Kingdom #1 Philadelphia 110 60.2
Process Cheese Australia #1 Kraft Singles 137 48.5
Process Cheese Italy #1 Kraft Sottilette 374 55.5
Process Cheese United Kingdom #1 Kraft Dairylea 308 43.8

Grocery
Spoonable Dressings Germany #1 Miracel Whip 145 33.8
Yeast Spreads Australia #1 Vegemite 48 88.0

Convenient Meals
Canned Beef Italy #1 Simmenthal 163 60.6

- ---------------------
Note: International category data are supplied by Euromonitor International,
where available, and A.C. Nielsen or Information Resources Inc.;
international share data are supplied by A.C. Nielsen, except for canned
beef, which are supplied by Information Resources Inc., and German and
Swedish coffee, which are supplied by GfK; share data do not include all
retail outlets.

Innovative Products Supported by Worldclass Marketing

We maintain strong and vibrant brands and nurture their growth by developing
new and innovative products and line extensions that appeal to consumer
preferences. We also introduce into new geographic markets products that have
been successful in other markets. We support all of these efforts with
worldclass marketing. As a result, new products introduced by Kraft and Nabisco
from 1996 to 2000 contributed over $4 billion to 2000 pro forma revenue, and
new products introduced from 1998 to 2000 contributed nearly $3 billion to 2000
pro forma revenue.

Innovative Products with Consumer Appeal. Our ability to anticipate the
changing tastes, eating patterns and dietary habits of consumers and to create
new products that appeal to their preferences is a key factor to our success
and growth. In 2000, on a pro forma basis, we spent $364 million on research
and development. Since 1981, we have received more food-related United States
patents than any other food and beverage company. We focus our innovation
efforts on product attributes that are most valued by our consumers, including
taste, convenience and nutrition. This has led to numerous brand extensions,
both within a category by adding variety in flavors, sizes and forms, and
across categories by extending our brands into new product categories. Examples
of our successful innovations include:

Product Innovation Results
------- ---------- -------

. Oscar Mayer Lunchables . created new category of . increased revenue from
ready-to-eat lunch conveniently packaged approximately $60 million
combinations meals, snacks, beverages in the U.S. in 1989 to
and desserts over $600 million
worldwide in 2000, a
. extended to more than 50 compound annual growth
varieties, including rate of nearly 25%
Pizza, All Star Burgers
and Hot Dogs
and Mega Pack Lunchables . we hold an 83.6% dollar
share of the U.S.
category
. recently extended from
the United States to
Europe

. DiGiorno Rising Crust . modified atmosphere . 2000 North America
frozen pizza packaging and self-rising revenue, including
crust formula permitting Delissio, exceeded $400
frozen pizza for the million, with a compound
first time to rival the annual growth rate since
quality of take-out or 1996 of over 30%
delivery pizza

. line extensions into a . solidified our position
variety of sizes and as the leading frozen
toppings including half- pizza producer in the
and-half combinations U.S. with a 37.5% dollar
category share
. fast adapted for the
Canadian market . Delissio became the top
selling frozen pizza in
Canada in 2000 within six
months of its
introduction

. Kenco instant coffee, the . extended premium line . Kenco Rappor rose to a
#2 instant coffee in the marketed to upscale 4.9% volume category
United Kingdom, the consumers in the United share within its first 18
nation with the second Kingdom by introducing months without adversely
largest consumption of Kenco Rappor instant affecting the existing
instant coffee in the coffee to mainstream line
world consumers
. increased Kenco line's
total volume category
share to 12.2% in 2000
from 7.6% in 1998

Worldclass Marketing. We use worldclass marketing and advertising to
communicate the benefits of our products to consumers and to build brand
equity, thus driving increased demand for our products. Our 2000 pro forma
advertising expenditures exceeded $1.4 billion. We invest more in advertising
in the United States than any other food and beverage company, and we are one
of the largest food and beverage advertisers in the world. During the past five
years, the New York American Marketing Association has presented us with 21
Effie awards, which recognize advertising that is effective in growing brands.

We support certain brands through globally integrated marketing activities.
Philadelphia cream cheese, for example, achieved worldwide revenue over $1.0
billion in 2000, including more than $350 million from sales outside North
America. Volume for Philadelphia outside North America has grown at a 5.4%
compound annual rate since 1996. We are supporting Philadelphia with a global
advertising campaign adapted to local cultures in each market. We have also
harmonized the product's packaging worldwide and have introduced several new
products aligned with consumer trends, including Philadelphia snack bars for
snacking, Philadelphia Portions for single serve convenience and Philadelphia
Creamo, a gourmet cream cheese.

As another example, we support our Milka chocolates with a globally
integrated marketing program that links images of snow capped Alpine peaks and
cows bearing the Milka lilac color. We created an integrated pan-European
promotional, public relations and point of sale campaign revolving around our
sponsorship of World Cup skiing. We use banners, air balloons, inflatable cows
and giveaway skis, all bearing the Milka logo and colors. We coordinated these
marketing efforts with our product innovation efforts to extend the Milka line
into several variations, including seasonal gift products such as Milka
chocolate Easter eggs and Santa Clauses. From its key German market, we have
expanded Milka into more than 20 countries across Europe and Latin America.
Through these efforts, we increased volume for Milka outside Germany at a
compound annual growth rate of 5.2% since 1996. Worldwide revenue for Milka in
2000 was more than $850 million.

Our Successful Portfolio Management

We have demonstrated our ability to strengthen our portfolio through
acquisitions, brand licensing arrangements and divestitures. This aggressive
program has been a key contributor to our growth, higher profitability and
enhanced financial returns. For the period from 1990 to 2000, we purchased 58
businesses, excluding Nabisco, for $8.6 billion and divested 55 businesses for
proceeds of $5.8 billion. As a result of successfully managing our portfolio as
well as our ongoing productivity programs and our product innovations, our
reported operating companies income margin grew from 10.2% in 1990 to 17.9% in
2000.

We take a disciplined approach to acquisitions, evaluating candidates based
on four key criteria:

. the candidate should place us in new or existing growth categories;

. the acquisition should add valuable trademarks that we can develop
further;

. the business should improve our scale and market position; and

. the acquisition should generate attractive financial returns and be
quickly accretive to cash earnings.

We have successfully integrated both our large and small acquisitions,
achieving strategic objectives and generating significant financial and
operational benefits. For example, in our integration of General Foods and
Kraft during the 1990s, we streamlined and unified our sales forces and
administration personnel, consolidated our manufacturing and distribution
infrastructures and leveraged our increased scale to produce significant
productivity savings and increased margins. As a result of these and other
actions, Kraft Foods North America's revenue per employee increased
approximately 75% between 1991 and 2000. In addition, Kraft Foods International
combined and streamlined multiple sales forces, resulting in one retail sales
force per nation for most of Europe. We are applying the skills derived from
these experiences to the ongoing integration of Nabisco.

In addition to acquiring brands, we have further strengthened our portfolio
by obtaining the right to use selected brands through licenses from companies
in restaurant or food related businesses that view us as the

partner of choice. In 1998, we acquired the rights to sell, market and
distribute Starbucks bagged coffee to United States grocery stores. Our 2000
revenue from this business helped us achieve the #1 position in the United
States coffee category based on dollar share.

We have aggressively managed our portfolio by divesting underperforming
businesses to concentrate on our core brands. We evaluate divestiture
candidates based on three key criteria:

. underperformance relative to the rest of our portfolio in terms of
growth or profitability;

. diminished prospects for growth or profitability; and

. the potential to obtain an attractive sale price.

Since 1990, we divested businesses that had an aggregate of $9.0 billion of
revenue, but only $0.5 billion of operating companies income, in the year
before sale. These divestitures included our food service distribution
business, Entenmann's baked goods, Log Cabin syrups, the Breyers, Sealtest and
Kibon ice cream businesses, Lender's bagels and Birds Eye frozen vegetables.

Our Global Scale Drives Customer Service, Productivity and Geographic
Expansion

Our global scale enables us to be more efficient and effective in serving
our customers, while reducing costs, improving productivity and sustaining our
high margins. We can better serve our customers through our large and effective
direct-selling sales forces and strengthen customer loyalty with our diverse
and popular brand portfolio, customized programs and supply chain solutions.
Our scale also enables us to manufacture and distribute our products more
efficiently and to expand the geographic reach of our brands.

Customer Service. Globally, we employ more than 20,000 salespersons across
60 countries. We use our global scale to strengthen our relationships with our
retail customers, which is essential in the face of ongoing global retailer
consolidation. As a leading global manufacturer, we help to improve retailers'
profitability by providing them with many leading brands, efficiently
delivering products to their warehouses and stores, including through direct-
store-delivery systems, and helping them manage their inventory. In addition,
our significant trade spending helps generate strong retailer support of our
brands, including retailer participation in promotions, advertising and in-
store displays.

Productivity. Our scale contributes to improved productivity, an area that
has been a key contributor to our financial performance. We define productivity
as a measure of the actions we have taken to reduce costs in purchasing,
conversion, distribution and transportation. Our target is to realize
productivity savings of 3.5% of cost of sales each year, adjusted for the
exclusion of excise taxes on coffee. Excluding Nabisco, we averaged more than
$450 million per year in productivity savings over the last five years and
realized savings of 3.4% of cost of sales in each of the last two years. We are
among the world's largest buyers of food-related raw and packaging materials,
spending approximately $11.6 billion in 2000 on a pro forma basis. Our
purchasing scale and our experienced purchasing staff enable us to negotiate
attractive prices and terms for necessary goods and services.

Geographic Expansion. We use our global scale and infrastructure and our
worldwide councils and local consumer insights to quickly adapt products
popular in one market for introduction into other markets. For example, we
successfully adapted the United States versions of Lunchables lunch
combinations and Handi-Snacks two-compartment snacks for introduction in Europe
under the Dairylea Lunchables, Kraft Lunchables, Kraft Suzanna Snacks and
Dairylea Dunkers trademarks. These new lines of lunch combinations and
wholesome snacks generated approximately $95 million in revenue in 2000.

We have achieved strong growth in developing markets, including Central and
Eastern Europe, Africa, the Middle East, Latin America and Asia Pacific, where
underlying volume was up 11.9% from 1999 to 2000. This growth was fueled by the
introduction of a number of our Western European brands, including
confectionery, salty snacks and coffee products in Central and Eastern Europe
and the Middle East. We also registered strong growth in Latin America, with
underlying 2000 volume up 10.6%, and in Asia Pacific, with underlying 2000
volume up 12.7%, in each case from 1999.

Our expansion of Tang powdered soft drinks from its base in the United
States to numerous developing markets demonstrates our ability to expand the
geographic reach of our brands. Between 1996 and 2000, volume for Tang outside
North America grew at a compound annual rate of 8.9%. Revenue for Tang outside
North America was nearly $300 million in 2000.

We have also found opportunities to introduce selected international brands
in North America. In 1995, we launched Altoids mints in the United States where
it achieved 2000 revenue exceeding $150 million, due in part to the successful
Altoids Wintergreen and Cinnamon line extensions. Altoids Cinnamon sales
exceeded the sales of all other competitors in the United States intense mints
category in 2000.

Our Management's Proven Ability to Execute

We have an experienced management team committed to achieving our goals.
This team emphasizes excellence in execution in every facet of our business.
This emphasis, particularly in the areas of customer relations, productivity
and employee excellence, has helped to drive our superior performance.

Our top 25 executives have an average of 20 years of industry experience.
More than one-half have worked outside their home country to gain global
experience. Our worldwide councils, together with our emphasis on moving
employees among our various operating entities, provide opportunities for our
executives to learn best practices generated across all of our geographic
regions.

Kraft is renowned not only for the quality of its senior management team but
also for its promotion of excellence at all levels of the organization. We make
significant investments in employee development through extensive training.
According to The Wall Street Journal: "In the food world, Kraft is considered
the Harvard of career management." Our leadership pipeline is built by
identifying talented individuals early and accelerating their advancement
through challenging and broadening assignments. Employee excellence is
recognized through a compensation system that rewards performance and
leadership potential throughout all managerial levels.

Our strong collaborative relationships with our retail customers demonstrate
our strength and execution capabilities. Our retail customers have recognized
our strengths and abilities in the 2000 annual PoweRanking(TM) survey of
retailers conducted by Cannondale Associates, a sales and marketing consulting
firm that surveys the United States' leading retailers to produce a benchmark
rating of the performance of food, beverage, household and personal care
products manufacturers. Among all consumer packaged goods companies, we were
ranked #1 in the category of "Best combination of growth and profitability" to
retailers, and tied for #1 in the "Best sales force/customer teams" category.
We also ranked #1 among all food and beverage companies in the "Best of the
Best" composite ranking and in every surveyed category, as follows:

Strategic Rankings: Business Fundamental Rankings:

. offers retailers the best . best sales force/customer teams;
combination of growth and
profitability; . most innovative marketing
programs;
. clearest company strategy; and
. most helpful consumer
. consumer brands most important to information;
retailers.
. best supply chain management; and

. best category management.

A similar 1999 survey of retailers in Germany, our most significant overseas
market, also ranked our sales force as the best in the food and beverage
industry.

Strategies

We intend to continue executing our proven growth and operating strategies
to fulfill our mission to be the undisputed leader of the global food and
beverage industry and to achieve our financial targets. These strategies build
on our core strengths of brands, innovation, marketing, portfolio management
and execution. We achieve significant benefits of scale by applying our
strategies across our entire global organization.

Accelerate Growth of Core Brands

We have powerful brands in a wide range of attractive categories and
geographies in which we invest most of our marketing, innovation, sales and
distribution resources. We strive to grow these brands by:

. focusing on the growing consumer sectors of snacks, beverages and
convenient meals;

. addressing consumer health and wellness needs;

. expanding our presence in faster growing distribution channels; and

. targeting attractive demographic and economic segments in each market.

In each of these areas, we use our extensive knowledge of consumer tastes and
preferences to address changing consumer needs through new products, line
extensions and selective acquisitions. We support these actions with superior
marketing, sales and distribution execution.

Focus on Growing Consumer Sectors. Although we target growth opportunities
across each of our five core consumer sectors, we have identified in particular
the snacks, beverages and convenient meals consumer sectors as having
significant global growth potential. Within these three growing consumer
sectors, we concentrate on and have strengths in the following ten categories:

. Snacks--cookies, crackers, confectionery and salty snacks;

. Beverages--coffee, powdered soft drinks and aseptic juice drinks; and

. Convenient Meals--lunch combinations, frozen pizza and packaged dinners.

Approximately 65% of our 2000 pro forma revenue was attributable to products in
these three growing consumer sectors.

Our strong execution of this strategy has produced many successes,
including:

. Snacks--1996-2000 United States revenue from Planters snack nuts grew
over 10% annually from approximately $500 million to approximately $750
million;

. Beverages--1996-2000 North America revenue for Capri Sun aseptic juice
drinks grew nearly 20% annually from approximately $240 million to
nearly $500 million; and

. Convenient Meals--1996-2000 North America revenue for DiGiorno and
Delissio Rising Crust pizza grew over 30% annually from approximately
$125 million to over $400 million.

In addition, we plan to maintain the vibrancy of our mature brands by
extending them into higher growth categories, as we have done with the
evolution of the Jell-O brand from a basic powdered product requiring
preparation to a premium line of refrigerated ready-to-eat gelatins, puddings
and other desserts. In 2000, approximately 40% of Jell-O revenue was from these
ready-to-eat products. In 1999, we updated our traditional powdered soft drink,
Tang, with a ready-to-drink foil pouch, which achieved over $80 million in
United States revenue in 2000. Also, we successfully extended our leading
Philadelphia brand to create an entirely new category, cheesecake snack bars,
by introducing Philadelphia snack bars.

Address Health and Wellness Needs. Consumers in both developed and
developing markets are increasingly looking for foods with positive health,
energy or nutritional attributes. Health and wellness foods include those that
are fat free or sugar free, reduced in fat, calorie or sugar content, or
nutritionally fortified versions of existing products. We have aggressively
introduced or acquired a broad portfolio of products with

these attributes. Examples include calcium fortified Kraft 2% Milk Cheese
Singles, vitamin enriched Tang aseptic juice drinks and powdered soft drinks,
Boca Burger soy-based meat alternatives, reduced fat Philadelphia cream cheese
and the Balance Bar line of energy bars. Our products with health and wellness
attributes generated more than $2 billion in 2000 revenue. Our research and
development efforts continue to explore opportunities in calcium and vitamin
enrichment, soy, low-calorie sweeteners and other health and wellness areas.

Expand Representation in Faster Growing Distribution Channels. We have
recently invested significant sales, distribution and innovation resources in
improving our penetration of alternate distribution channels, including
supercenters, convenience stores, mass merchandisers, drug stores and club
stores. In the United States, our sales volume through these distribution
channels has increased at a compound annual rate of 24% since 1996. We view
this as a significant opportunity to grow our core brands in these channels
because our share of total food and beverage sales in these channels is lower
than in the grocery channel. In North America, we have created a National
Channels team to target the needs of alternate formats. This team is developing
product and packaging innovations, including jumbo sizes for club stores and
single serve sizes for convenience stores, and pricing and promotion strategies
that appeal to each channel. Our acquisition of Nabisco, which has a direct-
store-delivery system for cookies and crackers and a sales organization for
confectionery products targeted to small independent outlets, increases our
ability to promote and ship directly to customers within these alternate
channels. Nabisco's existing relationships with customers in these alternate
channels provide us an opportunity to broaden the distribution of Kraft
confectionery products. Nabisco's experience will help shape future product
development tailored for customers in alternate distribution channels.

In Europe, we have created an Away-from-Home team focused on our core coffee
category to target the vending, office and other food service channels that
account for almost one-quarter of European coffee sales. As a result, our Kenco
brand appears on nearly 37,000 office vending machines throughout the United
Kingdom; our Jacobs brand appears on nearly 3,000 single cup machines for small
offices and cafeterias throughout Germany; our Gevalia brand appears in
numerous coffee shops and cafes throughout Scandinavia; and our Carte Noire
brand appears on cups, menus and point-of-sale material in McDonald's
restaurants in France.

Target Attractive Demographic and Economic Segments. We develop or
geographically expand products to capitalize on changing demographic and
economic trends. In the United States, we intend to increase our sales to
African-American and Hispanic consumers, two population groups that, in the
aggregate, are growing almost five times faster than the rest of the United
States population. Our strategies here include improving sales force coverage
of distribution channels that serve these consumers, increasing marketing
spending directed toward these consumers and developing new products appealing
to these consumers. In developing markets, we introduce premium products that
fill consumer needs as purchasing power increases. For example, we have
expanded the Milka chocolate brand to Central and Eastern Europe and Latin
America as a premium price confectionery product that complements our current
portfolio of local mainstream brands.

Drive Global Category Leadership

Our strategy is to attain and expand the leading position in our core
categories across our key markets and to expand in developing markets. As a
category leader with the benefits of scale, consumer loyalty and retail
customer emphasis, we are positioned to capture a significant share of a
category's growth and profit, generating additional resources to reinvest in
marketing and innovation, and enabling us to sustain ongoing leadership and
profitability.

We presently hold the #1 share position in eleven product categories
globally.

Global #1 Position
--------------------------------------------------------------------------------

. Coffee . Dessert mixes . Process cheese
. Cookies . Dry packaged dinners . Salad dressings
. Crackers . Lunch combinations . Snack nuts
. Cream cheese . Powdered soft drinks

Approximately 55% of our 2000 pro forma revenue was derived from our global
#1 categories. We focus our global resources on sustaining and improving our
leadership in these categories. We have worldwide councils covering the
principal categories in which we compete in many geographies. These councils
cover our biscuits, cheese, coffee, confectionery and refreshment beverages
categories. These councils are led by senior managers from around the world in
the respective categories, and their task is to transfer best practices,
facilitate the fast adapting of products from one region to another, and
optimize our worldwide productivity and sourcing efforts. We also have
worldwide functional linkages in technology, operations, sales and human
resources to ensure that we maximize efficiency and effectiveness in these key
areas.

A key element of our strategy is to expand our sales in developing markets
in Central and Eastern Europe, Africa, the Middle East, Latin America and Asia
Pacific. These developing markets are home to 86% of the world's population.
Consumers in these markets account for 18% of the world's disposable income,
based on data from Euromonitor International, but only 9% of our 2000
underlying revenue, presenting a significant growth opportunity. We have begun
to implement this strategy, and our underlying volume in developing markets
grew 11.9% from 1999 to 2000. This growth strategy has four key components.
First, we expand geographically by introducing additional snacks, beverages and
cheese categories within developing countries where we have an existing
presence. Second, we leverage our portfolio by introducing additional brands
across the key price segments within categories in markets where we have an
existing presence. Third, we enter developing countries in which we have
previously not had operations. Finally, we pursue tactical fill-in
acquisitions, especially in snacks and beverages, to build upon our existing
portfolio in developing markets.

Optimize our Portfolio

We actively manage our business and brand portfolio through acquisitions,
licensing arrangements and divestitures to improve the mix of growing,
profitable and high-return businesses. Our acquisition and licensing strategies
add businesses that are in fast-growing categories, have valuable brands or
provide improved scale and market position.

The Nabisco acquisition is the largest and most recent example of our
acquisition strategy. Nabisco improved our product mix and will accelerate our
growth by increasing our share of the growing global snacks consumer sector.
The combination of Nabisco and Kraft offers numerous opportunities for new
products, larger scale promotions and expanded distribution. Thus far, we have
identified opportunities that we estimate will generate incremental operating
companies income from revenue synergies of approximately $50 million by 2003.

We have announced plans to sell Nabisco's Canadian grocery business. We
currently plan to sell a number of other Nabisco businesses that do not align
strategically with our food and beverage operations.

Maximize Operating Efficiency

We continue to drive excess costs and unproductive assets out of our system,
thus reducing our cost of sales and overhead expenditures, while enhancing our
earnings and cash flow. At the same time we continue to emphasize product
quality and customer service. Our ongoing plan for continuing to achieve our
productivity targets includes a number of operational improvements throughout
the organization as follows:

. consolidate manufacturing plants; . adopt advanced manufacturing
processes;
. consolidate purchasing;
. streamline customer
. consolidate sales forces within communications; and
each country;
. expand Internet-based
. streamline distribution purchasing.
processes;

For example, we continue to consolidate and centralize our purchasing
function by expanding its scope beyond traditional raw and packaging materials
to encompass indirect products and services used by all our plants, offices and
divisions. We will support this expansion by implementing Internet-based
purchasing systems to reduce our transaction costs while centralizing
purchasing responsibility.

We also plan to reduce costs by migrating technical operations advances
across borders, optimizing our capacity utilization and consolidating
operations on a regional and global basis. We will continue to take advantage
of lower cost raw material and production sources within regions covered by
free trade agreements. For example, the Association of Southeast Asian Nations
pact permitted us to replace our plant in the Philippines with a new plant in
Thailand, from which we source Tang powdered soft drinks throughout Southeast
Asia. This cost effective measure permitted us to situate our plant near the
source of the lowest cost sugar available in the region. To take advantage of
the Central Europe Free Trade Agreement, we now source some key confectionery
products throughout Central Europe from the Slovak Republic.

We have a proven history of generating cost savings by combining acquired
operations with our own, and the acquisition of Nabisco provides significant
cost synergy opportunities that we intend to capture. By combining Nabisco's
operations with ours, we currently expect to generate annual cost synergies in
excess of $400 million in 2002, growing to more than $550 million in 2003. Our
statement of earnings charges to obtain these synergies will consist
principally of systems integration, employee training and benefit costs, and
will aggregate approximately $300 million from 2001 to 2003. Consequently, we
expect to achieve net cost synergies of approximately $100 million in 2001,
$300 million in 2002 and $475 million in 2003. We estimate that these savings
will be derived from:

. more efficient operations and research and development--37% to 40%;

. lower administration costs--37% to 40%;

. more efficient selling organizations and programs--16% to 18%; and

. more efficient marketing--5% to 7%.

Our current estimates are subject to revision as we finalize and implement our
integration plans.

Build Employee and Organizational Excellence

The effective execution of our growth strategies relies on experienced and
well-trained management and employees at all levels and in all geographies. We
will continue to build employee excellence and instill in our personnel the
values we believe in: focus, innovation, passion, speed, trust and teamwork. We
will also continue to invest in training, development and career management to
continuously improve the quality of our management team. Finally, we will
continue to align our measurement and reward systems with actions that drive
our success in the marketplace and create superior value for our investors. As
a result of this offering, we will have an important new management incentive
tool, our common stock, that we can use to motivate and reward excellent
performance by our key employees and more closely align their interests with
those of our shareholders.

Markets and Products

We conduct our business through two units: Kraft Foods North America and
Kraft Foods International. Kraft Foods North America manages its operations in
the following business segments: Cheese, Meals and Enhancers; Biscuits, Snacks
and Confectionery; Beverages, Desserts and Cereals; and Oscar Mayer and Pizza.
Kraft Foods International manages its operations by geographic region in two
business segments: Europe, Middle East and Africa; and Latin America and Asia
Pacific.

Our superior brand portfolio spans five core consumer sectors:

. Snacks--primarily cookies, crackers, salty snacks and confectionery;

. Beverages--primarily coffee, aseptic juice drinks and powdered soft
drinks;

. Cheese--primarily natural, process and cream cheeses;

. Grocery--primarily ready-to-eat cereals, enhancers and desserts; and

. Convenient Meals--primarily frozen pizza, packaged dinners, lunch
combinations and processed meats.

The following table shows our business segments' participation in these five
core consumer sectors.

2000 Pro Forma Revenue by Consumer Sector
-------------------------------------------------
Convenient
Segment(1) Snacks Beverages Cheese Grocery Meals Total
---------- ------ --------- ------ ------- ---------- -----
(in billions)

Kraft Foods North America
Cheese, Meals and
Enhancers(2)............ $ 0.5 $0.6 $5.0 $2.6 $1.6 $10.3
Biscuits, Snacks and
Confectionery........... 5.9 0.1 6.0
Beverages, Desserts and
Cereals................. 0.6 2.8 2.1 5.5
Oscar Mayer and Pizza.... 3.5 3.5
----- ---- ---- ---- ---- -----
Total Kraft Foods North
America................ 7.0 3.4 5.0 4.8 5.1 25.3
----- ---- ---- ---- ---- -----
Kraft Foods International
Europe, Middle East and
Africa.................. 2.5 2.8 1.0 0.4 0.3 7.0
Latin America and Asia
Pacific................. 1.1 0.4 0.3 0.5 0.1 2.4
----- ---- ---- ---- ---- -----
Total Kraft Foods
International.......... 3.6 3.2 1.3 0.9 0.4 9.4
----- ---- ---- ---- ---- -----
Total 2000 pro forma
revenue.............. $10.6 $6.6 $6.3 $5.7 $5.5 $34.7
===== ==== ==== ==== ==== =====
Percentage of total 2000
pro forma revenue(3)...... 30.6% 19.0% 18.0% 16.6% 15.8% 100.0%
===== ==== ==== ==== ==== =====

- ---------------------
(1) The amounts of operating revenue and long-lived assets attributable to each
of our geographic regions and the amounts of our operating revenue and
operating companies income of each of our segments for each of the last
three fiscal years are set forth in Note 11 to our combined financial
statements.
(2) Our Cheese, Meals and Enhancers segment includes our United States food
service business and our Canada and Mexico businesses, which sell products
across all consumer sectors.
(3) Percentages are calculated based upon dollars rounded to millions.

Snacks Consumer Sector

Globally, snacks accounted for $10.6 billion, or 30.6%, of our 2000 pro
forma revenue.

North America

Snacks accounted for 28% of Kraft Foods North America's 2000 pro forma
revenue. We participate in this consumer sector through our Biscuits, Snacks
and Confectionery segment; our Beverages, Desserts and Cereals segment; and our
Cheese, Meals and Enhancers segment via our Canada and Mexico businesses and
our United States food service business. Our products within this consumer
sector are primarily cookies, crackers, snack nuts, ready-to-eat snacks and
sugar confectionery, as follows:

Biscuits . 8 of the top 12 cookie and cracker brands in the
United States

. #1 with a 40.9% dollar share of the $4.1 billion U.S.
cookies category

--cookie brands include Oreo, Chips Ahoy!, Newtons,
Nilla, Nutter Butter, Stella D'Oro and SnackWell's

. #1 with a 50.7% dollar share of the $3.2 billion U.S.
crackers category

--cracker brands include Ritz, Premium, Triscuit,
Wheat Thins, Cheese Nips, Better Cheddars, Nabisco
Honey Maid Grahams and Teddy Grahams

Snacks . #1 with a 46.8% dollar share of the $1.2 billion U.S.
snack nuts category, a share position that is more
than ten times greater than the nearest branded
competitor, through our Planters brand

. #1 with a 60.9% dollar share of the $0.5 billion U.S.
ready-to-eat refrigerated desserts category through
our Jell-O brand

. another snack brand is Handi-Snacks two-compartment
snacks

Confectionery . #1 with a 19.2% dollar share of the $2.4 billion U.S.
sugar confectionery category

. Life Savers and Creme Savers are the #1 and #2 hard
candy brands in the U.S.

. other brands include Terry's and Toblerone chocolate
confectionery products and Altoids and Gummi Savers
sugar confectionery products

International

Snacks accounted for 38% of Kraft Foods International's 2000 pro forma
revenue.

Europe, Middle East and Africa. Snacks accounted for 36% of our 2000 pro
forma revenue in the Europe, Middle East and Africa segment. We participate in
this consumer sector primarily in chocolate confectionery and salty snacks, as
follows:

Confectionery . #3 with an 11.1% volume share of the $22.6 billion
chocolate confectionery category in Western Europe

. #1 with a 23.4% volume share of the $3.1 billion
chocolate confectionery category in Central and
Eastern Europe, excluding Russia

. brands include Milka, Suchard, Cote d'Or, Marabou,
Toblerone, Freia, Terry's, Daim, Figaro, Korona,
Poiana, Prince Polo and Siesta

Snacks . #1 with a 36.5% volume share of the $0.9 billion
salty snacks category in Scandinavia and Finland

. brands are Estrella, Maarud and Lyux

We also have a 26.5% interest in the United Biscuits venture, a leader in
the biscuits and snacks categories in Europe. Based on volume, United Biscuits
holds the #1 position in biscuits in the United Kingdom, Spain and the
Netherlands, and the #2 position in France and Belgium. Its leading brands
include McVities, Verkade, Carr's, BN, Go Ahead!, Jaffa and Digestive.

Latin America and Asia Pacific. The geographic regions served by our Latin
America and Asia Pacific segment are home to more than one-half of the world's
population. These regions present a significant growth opportunity because
their populations are growing and increasing their purchasing power and, in
Asia Pacific, trade barriers are being eliminated. Through our Nabisco
acquisition we significantly increased our 2000 revenue in snacks in Latin
America from $274 million to $863 million on a pro forma basis. We also
increased our snacks 2000 revenue in Asia Pacific from $56 million to $244
million on a pro forma basis. Snacks accounted for 46% of our 2000 pro forma
revenue in the Latin America and Asia Pacific segment. We participate in this
consumer sector primarily in cookies, crackers and chocolate confectionery, as
follows:

Biscuits . #2 with a 14.9% volume share of the $5.9 billion
biscuit category in Latin America

. biscuit brands include Oreo, Chips Ahoy!, Ritz,
Terrabusi, Canale, Club Social,
Cerealitas, Trakinas and Lucky

Confectionery . #2 with a 22.2% volume share of the $3.0 billion
chocolate confectionery category in Latin America

. brands include Milka, Lacta and Gallito

. growing sugar confectionery business in Asia Pacific
with Sugus and Artic brands

Beverages Consumer Sector

Globally, beverages accounted for $6.6 billion, or 19.0%, of our 2000 pro
forma revenue.

North America

Beverages accounted for 13% of Kraft Foods North America's 2000 pro forma
revenue. We participate in this consumer sector through our Beverages, Desserts
and Cereals segment; and our Cheese, Meals and Enhancers segment via our Canada
and Mexico businesses and our United States food service business. Our products
within this consumer sector are primarily coffee, aseptic juice drinks and
powdered soft drinks, as follows:

Coffee . #1 with a 34.3% dollar share of the $3.5 billion U.S.
coffee category

. brands include

-- Maxwell House, our largest brand

-- General Foods International Coffees, our entry
into flavored coffees

-- Starbucks super premium bagged coffees, sold
through grocery stores

-- Yuban, our premium western U.S. brand

-- Gevalia super premium coffees, sold through our
direct mail coffee business

Aseptic Juice . #1 with a 41.5% dollar share of the $1.1 billion U.S.
Drinks aseptic juice drinks category

. Capri Sun revenue in the U.S. increased from less
than $100 million in 1992, our first full year of
operating the business, to nearly $500 million in
2000, a compound annual growth rate exceeding 20%

. other brands include Tang and Crystal Light

Powdered Soft . #1 with an 84.7% dollar share of the $0.8 billion
Drinks U.S. powdered soft drinks category

. brands include Kool-Aid, Tang, Crystal Light and
Country Time

International

Beverages accounted for 35% of Kraft Foods International's 2000 pro forma
revenue.

Europe, Middle East and Africa. Beverages accounted for 40% of our 2000 pro
forma revenue in the Europe, Middle East and Africa segment. We participate in
this consumer sector primarily in coffee, powdered soft drinks and chocolate
drinks, as follows:

Coffee . #1 with a 21.6% equivalent unit share of the $12.0
billion coffee category in Western Europe

. #1 with a 42.3% equivalent unit share of the $1.7
billion coffee category in France

. #1 with a 24.8% equivalent unit share of the $3.4
billion coffee category in Germany

. #2 with a 21.7% equivalent unit share of the $1.2
billion coffee category in the United Kingdom

. #1 with a 16.9% equivalent unit share of the $4.2
billion coffee category in Central and Eastern Europe

. brands include Jacobs, Gevalia, Carte Noire, Jacques
Vabre, Kaffee HAG, Grand' Mere, Kenco, Saimaza,
Maxwell House and Dadak

Powdered Soft Drinks . growing in Central and Eastern Europe through the
Tang brand

Chocolate Drinks . brands include Suchard Express, O'Boy, Milka and Kaba

Latin America and Asia Pacific. Beverages accounted for 18% of our 2000 pro
forma revenue in the Latin America and Asia Pacific segment. We participate in
this consumer sector primarily in powdered soft drinks, as follows:

Powdered Soft Drinks . #1 with a 48.9% volume share of the $1.3 billion
powdered soft drinks category in Latin America

. brands include Tang, Clight, Kool-Aid, Royal, Verao,
Fresh, Frisco, Q-Refres-Ko and Ki-Suco

We own a 50.0% interest in Ajinomoto General Foods, which holds the #2 share
position in the Japanese coffee category. Its leading brands include Maxim and
Blendy. We also own a 49.0% interest in Dong Suh Foods, which holds the #1
share position in coffee in Korea. Its leading brands include Maxim and Maxwell
House.

Cheese Consumer Sector

Globally, cheese products accounted for $6.3 billion, or 18.0%, of our 2000
pro forma revenue.

North America

We participate in this consumer sector entirely through our Cheese, Meals
and Enhancers segment. Cheese products accounted for 20% of Kraft Foods North
America's 2000 pro forma revenue. We are the industry leader with more than a
43% dollar share of the United States cheese consumer sector:

. #1 with a 28.2% dollar share of the $4.2 billion U.S.
natural cheese category, primarily through the Kraft
and Cracker Barrel brands

. #1 with a 67.6% dollar share of the $0.8 billion U.S.
cream cheese category through the Philadelphia brand

. #1 with a 55.2% dollar share of the $1.9 billion U.S.
process cheese slices category, primarily through the
Kraft brand

. #1 with an 87.7% dollar share of the $0.4 billion
U.S. process cheese loaves category through the
Velveeta brand

. #1 with a 55.4% dollar share of the $0.4 billion U.S.
grated cheese category, primarily through the Kraft
brand

. #1 U.S. dollar share positions in the process cheese
sauces, aerosol cheese spreads, cottage cheese and
sour cream categories; brands include:

-- Cheez Whiz process cheese sauce

-- Easy Cheese aerosol cheese spread

-- Breakstone's and Knudsen cottage cheese and sour
cream

International

Cheese products accounted for 13% of Kraft Foods International's 2000 pro
forma revenue.

Europe, Middle East and Africa. Cheese products accounted for 14% of our
2000 pro forma revenue in the Europe, Middle East and Africa segment. We
participate in this consumer sector as follows:

. Philadelphia is the #1 cream cheese brand in

-- Germany, with a 23.0% volume share of the $0.5
billion category

-- Italy, with a 62.5% volume share of the $0.2
billion category

-- the United Kingdom, with a 60.2% share of the
$0.1 billion category

. #1 with a 55.5% volume share of the $0.4 billion
process cheese category in Italy, primarily through
the Kraft Sottilette brand

. #1 with a 43.8% volume share of the $0.3 billion
process cheese category in the United Kingdom through
the Kraft Dairylea brand

. other brands include:

-- El Caserio and Invernizzi cheese

-- Kraft process cheese

Latin America and Asia Pacific. Cheese products accounted for 12% of our
2000 pro forma revenue in the Latin America and Asia Pacific segment. We
participate in this consumer sector as follows:

. #1 with a 48.5% volume share of the $0.1 billion
process cheese category in Australia, primarily
through the Kraft Singles brand

. Kraft and Eden process cheeses

. Philadelphia cream cheese

. Kraft grated cheese

. Cheese Whiz process cheese sauce

Grocery Consumer Sector

Globally, grocery accounted for $5.7 billion, or 16.6%, of our 2000 pro
forma revenue.

North America

Grocery products accounted for 19% of Kraft Foods North America's 2000 pro
forma revenue. We participate in this consumer sector primarily through our
Cheese, Meals and Enhancers segment, which includes our Canada and Mexico
businesses and our United States food service business; and our Beverages,
Desserts and Cereals segment. We participate in this consumer sector in
desserts, cereals and enhancers as follows:

Desserts . #1 with an 82.8% dollar share of the $0.5 billion
U.S. dry packaged desserts category through the
Jell-O brand

. #1 with a 72.7% dollar share of the $0.4 billion U.S.
frozen whipped toppings category through the Cool
Whip brand

Cereals . #3 with a 16.5% dollar share of the $7.5 billion U.S.
ready-to-eat cereals category through the Post brand

. Post brands include: Alpha-Bits, Banana Nut Crunch,
Blueberry Morning, Cranberry Almond Crunch, Fruit &
Fibre, Golden Crisp, Grape-Nuts, Great Grains, Honey
Bunches of Oats, Honeycomb, Oreo O's, Pebbles, Raisin
Bran, Shredded Wheat, Toasties and Waffle Crisp

. other brands are Cream of Wheat and Cream of Rice hot
cereals

Enhancers . #1 with a 31.9% dollar share of the $1.8 billion U.S.
salad dressings category primarily through the Kraft
brand

. #1 with a 46.4% dollar share of the $1.2 billion U.S.
spoonable dressings category through the Kraft and
Miracle Whip brands

. #1 with a 63.9% dollar share of the $0.2 billion U.S.
steak sauces category through the A.1. brand

. other brands include:

-- Kraft and Bull's-Eye barbecue sauces

-- Grey Poupon premium mustards

-- Shake 'N Bake coatings

International

Grocery accounted for 10% of Kraft Foods International's 2000 pro forma
revenue.

Europe, Middle East and Africa. Grocery items accounted for 6% of our 2000
pro forma revenue in the Europe, Middle East and Africa segment. We participate
in this consumer sector principally through our Kraft pourable and spoonable
salad dressings and Miracel Whip spoonable dressing.

Latin America and Asia Pacific. Grocery items accounted for 21% of our 2000
pro forma revenue in the Latin America and Asia Pacific segment. We participate
in this consumer sector, as follows:

. Royal dry packaged desserts and baking powder

. Kraft spoonable and salad dressings

. Kraft and ETA peanut butter

. Vegemite yeast spread

Convenient Meals Consumer Sector

Globally, convenient meals accounted for $5.5 billion, or 15.8%, of our 2000
pro forma revenue.

North America

Convenient meals accounted for 20% of Kraft Foods North America's 2000 pro
forma revenue. We participate in this consumer sector through our Oscar Mayer
and Pizza segment; and our Cheese, Meals and Enhancers segment via our Canada
and Mexico businesses and our United States food service business. Our products
within this consumer sector are primarily frozen pizza, packaged dinners, lunch
combinations and processed meats, as follows:

. #1 with a 37.5% dollar share of the $2.6 billion U.S. frozen pizza
category through the DiGiorno, Tombstone, Jack's and California
Pizza Kitchen brands

. #1 with a 34.8% dollar share of the growing Canadian frozen pizza
category through the Delissio brand

. #1 with an 82.6% dollar share of the $0.8 billion U.S. macaroni &
cheese dinners category through the Kraft brand

. other packaged dinners brands include:

-- Taco Bell Mexican-style food products

-- Stove Top Oven Classics meal kits

. #1 with an 83.6% dollar share of the $0.8 billion U.S. lunch
combinations category, which we created, through the Lunchables
brand

. #1 with a 31.7% dollar share of the $3.2 billion U.S. cold cuts
category through the Oscar Mayer and Louis Rich brands

. #2 with a 21.3% dollar share of the $1.7 billion U.S. hot dogs
category through the Oscar Mayer and Louis Rich brands

. #1 with a 19.6% dollar share of the $2.0 billion U.S. bacon category
through the Oscar Mayer and Louis Rich brands

. other brands include:

-- Boca Burger soy-based meat alternative products

-- Stove Top stuffing

-- Minute rice

International

Convenient meals accounted for 4% of Kraft Foods International's 2000 pro
forma revenue.

Europe, Middle East and Africa. Convenient meals accounted for 4% of our
2000 pro forma revenue in the Europe, Middle East and Africa segment. We
participate in this consumer sector as follows:

. Lunchables lunch combinations

. Kraft and Miracoli pasta dinners and sauces

. Simmenthal meats in Italy

Latin America and Asia Pacific. Convenient meals accounted for 3% of our pro
forma revenue in the Latin America and Asia Pacific segment, principally
through Kraft macaroni & cheese dinners in Australia and Latin America.

Additional Product Disclosure

Products or similar products contributing 10% or more of our combined
revenue for each of the three years in the period ended December 31, 2000 were
as follows:

1998 1999 2000
---- ---- ----

Cheese........................................................ 22% 23% 23%
Coffee........................................................ 20 18 17
Confectionery................................................. 11 11 10

Sales, Retailer Relations and Food Service

Sales

We have more than 20,000 salespersons operating from sales offices in 60
countries and calling on approximately 120,000 retail stores. The structure of
our sales forces is tailored to local markets.

In the United States, we have a direct sales force that calls on retail
outlets and retailer headquarters. It includes 150 customer business managers
responsible for over 300 customer teams, servicing approximately 26,000 retail
outlets. Each team has category captains charged with working with the customer
to manage individual categories more effectively, creating a stronger customer
relationship. For example, our Kraft Plus Three-Step Category Builder program
enables retailers to improve sales within targeted product categories. This
program provides retailers with consumer category data and analysis, identifies
promotional, assortment, pricing and space management opportunities, and
enables retailers to develop and implement plans to generate higher category
growth and profits.

In the United States, we also operate two strong direct-store-delivery
systems: a dry products system for snacks obtained in our Nabisco acquisition
and our frozen pizza system. Through these systems, we deliver selected snack
products, primarily cookies and crackers, and frozen pizza directly to our
customers' stores in our own trucks. These systems employ more than 6,000
representatives calling on more than 65,000 retail outlets. The frequent
presence of our employees in supermarkets helps to ensure that our products are
available and displayed in the best position for retail sale. Retailers benefit
from direct-store-delivery systems because they save warehousing and shelf
stocking costs and because products delivered through these systems generate a
high level of retail sales and profits.

In developed international markets we take an approach similar to the one we
use in the United States, using direct sales forces consolidated on a country-
by-country basis. We have also created specialty teams to focus on smaller
retail outlets and to focus on the away-from-home channel. Because most
developing markets are characterized by a large number of small retail outlets,
we generally use established local distributors and wholesalers to obtain
widespread penetration in these countries.

Retailer Relations

We sell our products in North America generally to supermarket chains,
wholesalers, supercenters, club stores, mass merchandisers, convenience stores,
gasoline stations and other retail food outlets. Internationally, we sell our
products generally to retailers, supermarkets, wholesalers, distributors and
gasoline stations.

Our five largest customers accounted for approximately 23% of our 2000 pro
forma revenue, while our 15 largest customers accounted for approximately 40%
of our 2000 pro forma revenue. None of our customers accounted for 10% or more
of our 2000 pro forma revenue. The table below lists our 15 largest customers
based on 2000 pro forma revenue.

15 Largest Customers
----------------------------------------------------------------------------------

. Ahold . Kroger . SuperValu
. Albertson's . Metro . Tenglemann
. Carrefour . Publix . Wal-Mart
. Delhaize le Lion . Rewe . Weston/Loblaws
. Fleming . Safeway (USA) . Winn-Dixie

Many of these customers have grown rapidly and have expanded across borders.
In response, we have developed global strategies aimed at achieving our
objective of being an indispensable partner to our customers. For our largest
global customers, we have assembled global customer sales teams drawn from the
countries in which the customers operate to assure coordinated sales and
services and to execute global promotions.

A recent survey by McKinsey & Company identified the needs of global
retailers as including:

. strong global brands;

. category management skills;

. managers who are highly qualified to deal with both local and
multinational issues;

. significant supplier presence in the customers' key countries; and

. customized solutions.

We are well positioned to satisfy each of these needs. Our direct sales
force and our direct-store-delivery personnel provide the primary interface
with our customers. We plan to further improve service to our customers by
expanding our vendor managed inventory programs that allow our customers to
manage their inventory levels more efficiently. In 2001, we plan to roll out in
the United States our Kraft Plus ez-Serv website, which facilitates
communications and information flow to our customers, and we will continue to
implement our category management programs that help customers determine the
optimal product and brand mix within a category. We will drive these service
priorities through our national, regional and global dedicated customer teams.

Food Service

In the United States, according to Technomic, Inc., the food service channel
totals approximately $129 billion in manufacturers' sales and has grown at a
compound annual rate of approximately 5.3% from 1996 to 2000. We sell a wide
range of our brands in this channel, covering all meal and beverage occasions.
Approximately 50% of our pro forma food service sales are composed of products
where consumers know they are consuming our brands, compared to an industry
average estimated by Technomic, Inc. to be 15% to 20%.

Kraft's United States food service business had $1.4 billion of pro forma
revenue in 2000, primarily from sales in five channels:

. national quick service restaurant chains such as McDonald's and Burger
King, and full service chains such as Applebee's and Outback;

. "down-the-street" outlets, including independent restaurants, small
chains and hotels;

. contract management firms, such as Sodexho Marriott, Aramark and
Compass, that manage dining operations for offices, schools, healthcare
and recreation;

. vending operations managed by operators such as Aramark and Canteen; and

. convenience stores, such as 7-Eleven, that offer prepared food for
takeout.

We are repositioning our food service business to participate in this
growing channel. Our pre-Nabisco United States food service revenue declined
2.3% on a compound annual basis over the past four years as a result of two
factors. First, we have been pruning our low margin businesses from our
portfolio, reducing revenue, but growing operating companies income at 2.7% per
year over the period. Second, our agreement granting the buyer of our former
food service distribution business the exclusive right to distribute our Kraft
branded products in the food service channel expired in 2000, and the buyer
began to substitute private label products for some of our products. At the
same time, other distributors were reluctant to authorize Kraft branded
products, given our continued relationship with our former food service
subsidiary.

As a result of the Nabisco acquisition, we have expanded our strategic
direction to balance our overall penetration of the food service business. In
addition to continuing to focus on key retail outlets, we have enhanced our
selling focus to more effectively reach food service distributors. Most
notably, we have targeted incremental opportunities with the top three
distributors, Sysco, U.S. Foodservice and Alliant, as well as with key
independent distributor organizations. As a result of these factors, together
with the opportunities provided by integrating Nabisco's food service business,
we believe we are now well positioned to succeed in this growing channel.

Outside North America, we have a food service business which had 2000 pro
forma revenue of $0.6 billion, focused primarily on European coffee, as well as
cheese and grocery products. We have a leading position in the European coffee
away-from-home channel where we benefit from our new coffee machine technology,
our strong retail brands and our integrated pan-European food service
organization.

Consumer Marketing and Advertising

We support our brands with worldclass advertising that has earned numerous
awards. During the past five years, the New York American Marketing Association
has presented us with 21 Effie awards, which recognize advertising that is
effective in growing brands. We received more Effie awards during this period
than any other company, including top-level Gold awards for our Altoids,
Balance Bar, Gevalia Kaffe, Maxwell House, Miracle Whip and Wheat Thins
campaigns. We also won the 1997 Kelly Award for General Excellence in
advertising for Altoids, and the 1999 London International Advertising Award
for best TV/cinema spot in the foods category for Kraft dinners.

We also invest heavily in consumer promotions to stimulate demand for our
products. For example, the Oreo "Cookie Stacking" and Kraft macaroni & cheese
"I Want the Blues" contests increase consumer interest in our products, and the
Oscar Mayer Wienermobile and Planters Mr. Peanut continue to travel the
country,

entertaining consumers and generating goodwill. We have garnered numerous
awards for our consumer promotions, including five Reggie awards during the
past five years from the Promotion Marketing Association. In 2000, we won the
top-level Gold Reggie for our Oscar Mayer "Share the Smiles" consumer
promotion.

Our large marketing budget and brand portfolio also enable us to
differentiate ourselves from competitors that share advertising space in
newspaper promotional inserts sponsored by grocery chains. In the United
States, we publish Kraft Food and Family, a standalone magazine inserted into
newspapers, which advertises a multitude of our brands and combines meal
solution ideas and coupons for our products.

We have designed an Internet presence that enhances our position in the
marketplace and enables us to develop a more direct, personal and interactive
relationship with consumers. In the United States, we had four of the top ten
consumer packaged goods websites--www.nabiscoworld.com, www.candystand.com,
www.nabisco.com and www.kraftfoods.com. This last site, which hosts our award-
winning Kraft Interactive Kitchen, achieves approximately one million visits
per month and is one of the most popular food manufacturer websites of its
type. The site gives consumers timely, practical meal solutions with services
such as tips on making a meal with ingredients on hand, a dedicated health and
wellness section, a personal recipe box and customized grocery lists by aisle.
Nabiscoworld.com and Candystand.com are entertainment sites that appeal
primarily to children. Our other websites for brands such as Gevalia and
Altoids in the United States and Milka and Estrella in Europe in the aggregate
averaged over one million visits per month in 2000.

Manufacturing and Processing Facilities

As of March 15, 2001, we had 228 manufacturing and processing facilities
worldwide. In North America, we have 106 facilities, and outside of North
America we have 122 facilities located in 44 countries. These manufacturing and
processing facilities are located throughout the following territories:

Number of
Territory Facilities
--------- ----------

United States................................................... 81
Canada.......................................................... 21
Mexico.......................................................... 4
Western Europe.................................................. 39
Central and Eastern Europe, Middle East and Africa.............. 14
Latin America................................................... 51
Asia Pacific.................................................... 18
---
Total......................................................... 228
===

We own 213 and lease 15 of these manufacturing and processing facilities.
All of our plants and properties are maintained in good condition, and we
believe they are suitable and adequate for our present needs.

As we further integrate Nabisco's operations into ours, we anticipate
closing or selling a number of Nabisco's facilities that do not align
strategically with ours. In addition, the further integration of Nabisco's
operations could result in the closure or sale of a number of Kraft's
facilities.

We manage our global network of production facilities and distribution
centers by eliminating excess capacity through consolidation, taking advantage
of best practices, harmonizing production practices and safety procedures and
aggressively pursuing productivity opportunities that cut across multiple
divisions, product lines and geographies. As a result of these actions, many of
our production facilities and distribution centers accommodate multiple product
lines. We have created worldwide operations and technology councils to
facilitate the application of new technologies for manufacturing our products
and new information systems for managing our facilities. This approach reduces
costs, fixed assets and inventories while delivering better service to our
retail customers and higher quality products to our consumers.

We believe we have highly effective manufacturing quality systems to ensure
that the products we make are safe and wholesome. Over the past two years, we
have invested over $100 million in our manufacturing processes designed to meet
or exceed all applicable state and federal regulations and to produce food and
beverages that meet our high standards. We continue to develop and
commercialize new technologies and to work with government and industry
associations to strengthen consumer confidence in the safety of our food
supply.

We also have arrangements with more than 300 contract manufacturers
worldwide, in addition to our owned and operated manufacturing facilities.
These contract manufacturers produce various components and finished products
for us when we determine it is advantageous to outsource the production.

Distribution

Our distribution network is an important part of our sales and customer
service performance. Our objective is to meet the needs of our customers by
providing them with desired stock levels and delivery times. We have developed
a network of owned, leased and contracted distribution centers, depots and
warehouses located throughout the world to meet the demands of our customers
and our own objectives. We use a combination of owned, public and contract
carriers to deliver our products from our distribution points to our customers.
Our distribution system moves dry, refrigerated and frozen products.

As of March 15, 2001, our distribution facilities consisted of 550
distribution centers and depots worldwide. In North America, we had 420
distribution centers and depots, more than 75% of which support our direct-
store-delivery systems. Outside North America, we had 130 distribution centers
and depots in 40 countries. We own 112 of these distribution centers and two of
these depots and lease 224 of these distribution centers and 212 of these
depots. We believe that all of these facilities are in good condition and that
we have sufficient capacity to meet our distribution needs for the foreseeable
future.

We distribute food and beverage products in North America through
distribution centers, satellite warehouses, company-operated and public cold-
storage facilities, depots and other facilities. Most of our distribution in
North America is to our customers' warehouses. We have similar warehouse
delivery systems in Western Europe.

We also distribute snacks and frozen pizza through two direct-store-delivery
systems in North America. Our direct-store-delivery systems for snacks and
frozen pizza consist of over 6,000 salespersons delivering products from plant-
based and remote warehouse operations. These systems provide in-store presence
of our salespersons to ensure quality, service, prompt new product
introductions, promotion and merchandising.

We have also implemented vendor managed inventory systems to meet the needs
of our customers. These systems employ an electronic data interface with some
of our retail customers to track their sales of our products and, consequently,
their inventory requirements. We then ship the customer's requirements directly
to the appropriate warehouse as needed, thereby reducing the retailer's
potential for excess inventory or out-of-stock products. These vendor managed
inventory systems enable our customers to improve their profitability and help
us foster stronger relationships with our customers.

Competition

We are subject to highly competitive conditions in all aspects of our
business. Competitors include large national and international companies and
numerous local and regional public and private companies. Some competitors have
different profit objectives and some international competitors are less
susceptible to changes in currency exchange rates. Some international
competitors also benefit from government subsidies. Our products also compete
with generic products and private-label products of food retailers, wholesalers
and cooperatives. We compete primarily on the basis of product quality, brand
recognition, brand loyalty, service, marketing, advertising and price.
Substantial advertising and promotional expenditures are required to maintain
or improve a brand's market position or to introduce a new product.

Raw Materials

We are major purchasers of milk, cheese, nuts, green coffee beans, cocoa,
corn products, wheat, rice, poultry, beef, vegetable oil, and sugar and other
sweeteners. We also use significant quantities of glass, plastic and cardboard
for our packaging requirements. We continuously monitor worldwide supply and
cost trends of these commodities to enable us to take appropriate action to
obtain ingredients and packaging needed for production. We purchase a
substantial portion of our milk requirements from independent agricultural
cooperatives and individual producers, and a substantial portion of our cheese
requirements from independent sources. The prices for milk and other dairy
product purchases are substantially influenced by government programs, as well
as market supply and demand. The most significant cost item in coffee products
is green coffee beans, which are purchased on world markets. Green coffee bean
prices are affected by the quality and availability of supply, trade agreements
among producing and consuming nations, the unilateral policies of the producing
nations, changes in the value of the United States dollar in relation to
certain other currencies and consumer demand for coffee products. Another
significant cost item is the cocoa used in our chocolate confectionery
products, which is purchased on world markets, the price of which is affected
by the quality and availability of supply relative to demand, and changes in
the value of the British pound sterling and the United States dollar relative
to certain other currencies.

The prices paid for raw materials and agricultural materials used in food
products generally reflect external factors such as weather conditions,
commodity market fluctuations, currency fluctuations and the effects of
governmental agricultural programs. Although the prices of the principal raw
materials can be expected to fluctuate as a result of these factors, we believe
these raw materials to be in adequate supply and generally available from
numerous sources. However, we use hedging techniques to minimize the impact of
price fluctuations in our principal raw materials. We do not fully hedge
against changes in commodity prices and these strategies may not protect us
from sharp increases in specific raw material costs, which we have experienced
in the past.

We have created worldwide purchasing councils with representatives from our
major geographic regions to coordinate our global sourcing requirements. The
goal of these councils is to obtain the lowest available cost for our raw
materials and other requirements. We are centralizing our formerly local
requisitioning departments in North America and Europe, and many of our local
operations will be able to order supplies through electronic catalogues on
terms we plan to have centrally negotiated.

We also use and plan to expand Internet-based procurement initiatives to
source our supply of various raw materials. For example, we are currently
testing electronic reverse auctions and similar models for the purchase of
direct and indirect materials at substantial savings. We have taken a
leadership role in the development of several Internet markets. These include
TRANSORA, a joint effort of major consumer products manufacturers to automate
procurement and logistics processes, and Dairy.com, a joint initiative to
facilitate transactions between dairy suppliers and buyers.

Employees

As of December 31, 2000, we employed approximately 117,000 people worldwide.
About one-half of our 31,000 hourly employees in the United States are
represented by labor unions. Most of the unionized workers at our domestic
locations are represented under contracts with the Bakery, Confectionery,
Tobacco Workers and Grain Millers International Union; the United Food and
Commercial Workers International Union; and the International Brotherhood of
Teamsters. These contracts expire at various times throughout the next several
years. Other unions represent employees at a number of our United States
locations. Outside the United States, approximately 70% of our 40,000 hourly
employees are represented by labor unions or workers councils. Our business
units are subject to a number of laws and regulations relating to our
relationship with our employees that are specific to the location of each
enterprise. In addition, in accordance with European Union requirements, we
have established a European Works Council composed of management and elected
members of our workforce. We believe that our relations with our employees and
their representative organizations are good.

Research and Development

We pursue four objectives in research and development:

. uncompromising product safety and quality;

. growth through new products;

. superior consumer satisfaction; and

. reduced costs.

Our research and development resources include more than 2,000 food
scientists, chemists and engineers, deployed primarily in five key technology
centers: East Hanover, New Jersey; Glenview, Illinois; Tarrytown, New York;
Banbury, United Kingdom and Munich, Germany. These technology centers are
equipped with pilot plants and state-of-the-art instruments. Our research and
development expense was $247 million in 1998, $262 million in 1999 and $270
million in 2000. Our 2000 pro forma research and development expense was $364
million.

We regularly test our products with consumers to ensure that we are
providing satisfying, high quality products. We also use our technology
resources to improve consumer satisfaction, as we did recently by introducing
Jacobs Kronung coffee with a proprietary process that retains the aroma of
freshly ground coffee, and by introducing easier to open versions of our
popular Capri Sun aseptic juice drinks and our Milka chocolate bars.

We maintain excellent food safety standards and we are developing new
technologies that reduce or eliminate food safety risks across our portfolio,
and we work with government and industry associations across the globe. We
recently shared a proprietary food safety approach for processed meats with the
United States Department of Agriculture that we will share with other food
companies.

Finally, we apply technology innovations to our formulations and
manufacturing processes to create high quality products at lower cost. This
approach allows us to generate higher profit margins while investing more
resources in new product development and marketing to drive top line growth.

Intellectual Property

Our trademark portfolio is of material importance to our business. We
protect these rights by registration or otherwise in the United States and
other markets where the related products are sold. We have from time to time
granted various parties exclusive or non-exclusive licenses to use one or more
of our trademarks in particular locations. We do not believe that these
licensing arrangements have had a material effect on the conduct of our
business or operating results.

Some of our products are sold under brands that we have licensed from others
on terms that are generally renewable at our discretion. These licensed brands
include the following:

. Starbucks bagged coffee for sale in United States grocery stores;

. Capri Sun aseptic juice drinks for sale in North America;

. Taco Bell Mexican-style food products for sale in United States grocery
stores;

. Pebbles ready-to-eat cereals; and

. Breyers yogurt products.

Similarly, we own thousands of patents worldwide, and the patent portfolio
as a whole is material to our business; however, no one patent or group of
related patents is material to us. We also have proprietary trade secrets,
technology, know-how, processes and other intellectual property rights that are
not registered.

Regulation

All of our United States food products and packaging materials are subject
to regulations administered by the Food and Drug Administration or, with
respect to products containing meat and poultry, the United States Department
of Agriculture. Among other things, these agencies enforce statutory
prohibitions against misbranded and adulterated foods, establish safety
standards for food processing, establish ingredients and manufacturing
procedures for certain foods, establish standards of identity for certain
foods, determine the safety of food additives and establish labeling standards
and nutrition labeling requirements for food products. In addition, various
states regulate the business of our United States operating units by licensing
dairy plants, enforcing federal and state standards of identity for selected
food products, grading food products, inspecting plants, regulating certain
trade practices in connection with the sale of dairy products and in a few
instances imposing their own labeling requirements on food products. Many of
the food commodities on which our United States businesses rely are subject to
governmental agricultural programs. These programs have substantial effects on
prices and supplies and are subject to Congressional and administrative review.
Almost all of the activities of our food operations outside of the United
States are subject to local and national regulations similar to those
applicable to our United States businesses and, in some cases, international
regulatory provisions, such as those of the European Union, relating to
labeling, packaging, food content, pricing, marketing and advertising, and
related areas.

The European Union and certain individual countries require that food
products containing genetically modified organisms or ingredients derived from
them be labeled accordingly. Other countries may adopt similar regulations. The
FDA has concluded that there is no basis for similar mandatory labeling under
current United States law.

We are subject to various federal, state, local and foreign laws and
regulations concerning the discharge of materials into the environment, or
otherwise related to environmental protection, including the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act and the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
also known as Superfund. Superfund imposes joint and several liability on
parties that arranged for the disposal of hazardous substances, and on current
and previous owners and operators of a facility for the clean-up of hazardous
substances released from the facility into the environment. At the end of 2000,
our subsidiaries were involved in approximately 90 Superfund and other clean-up
actions in the United States relating to our current operations and certain
former or divested operations for which we retain environmental liability.

Outside the United States, we are subject to applicable multi-national,
national and local environmental laws and regulations in the host countries in
which we do business. We have specific programs across our international
business units designed to meet compliance requirements in the environmental
area.

Although it is not possible to predict precisely the estimated costs for
such environmental-related expenditures, compliance with environmental laws and
regulations, including the payment of any clean-up costs, has not had, and is
not expected to have, a material adverse effect on our capital expenditures,
results of operations or our competitive or financial position.

Legal Proceedings

Our subsidiaries are parties to a variety of legal proceedings arising out
of the normal course of business, including the matters discussed below. We
believe that we have valid defenses, and we are vigorously defending all of the
litigation pending against us. While the results of litigation cannot be
predicted with certainty, management believes that the final outcome of these
proceedings will not have a material adverse effect on our results of
operations or financial position.

National Cheese Exchange Cases. Since 1996, seven putative class actions
have been filed by various dairy farmers alleging that we and others engaged in
a conspiracy to fix and depress the prices of bulk cheese and milk through our
trading activity on the National Cheese Exchange. Plaintiffs seek injunctive
and equitable

relief and unspecified treble damages. Two of the actions were voluntarily
dismissed by plaintiffs after class certification was denied. Three cases were
consolidated in state court in the Circuit Court of Wisconsin, Dane County, and
in November 1999, the court granted our motion for summary judgment. The
plaintiffs' appeal is now pending before the Wisconsin Court of Appeals, Fourth
Circuit. Our motions to dismiss were granted in cases pending in the Circuit
Court of Cook County, Illinois and in the U.S. District Court for the Central
District of California. Appellate courts have reversed and remanded both cases
for further proceedings. No classes have been certified in any of the cases.

Environmental Matters. On May 3, 2001, the Attorney General for the State of
Ohio notified us that we may be subject to an enforcement action for alleged
violations of the state's water pollution control law at our cottage cheese and
sour cream production facility in Farmdale, Trumbull County, Ohio. The Ohio
Attorney General has alleged that this facility has exceeded its water permit
effluent limits and violated its reporting requirements. The Attorney General
has offered to attempt to negotiate a settlement of this matter, and we have
accepted the offer to do so. We have received no indication from the state what
relief it is seeking in this matter. We recently installed additional waste
water treatment equipment at the facility, and the facility currently is
operating in compliance with its waste water discharge permit.

On March 20, 2000, the state of Missouri filed a civil action in the Circuit
Court of Boone County, Missouri against us alleging that our practice from 1995
through 1999 of sending spent wiener casings to a farm site near Columbia,
Missouri, for recycling violated the Missouri solid waste and clean water laws.
The state is seeking civil penalties and injunctive relief, including the
removal of the spent casings from the farm site and disposal in a permitted
solid waste facility.

We are potentially liable for certain environmental matters arising from the
operations of Nabisco's former wholly-owned subsidiary, Rowe Industries. Rowe
operated a small engine manufacturing facility in Sag Harbor, New York in the
1950s, 1960s and early 1970s that used various solvents. About 20 homes
downgradient from the site were connected to public drinking water in the mid-
1980s after solvents were detected in their individual wells. Since 1996, three
toxic tort cases have been brought against Nabisco in New York state court,
collectively by or on behalf of approximately 80 individuals, including 17
minors. The first case, filed on March 6, 1996 in Supreme Court of the State of
New York, was dismissed as barred by the statute of limitations. The other two
cases, which were both filed on January 3, 2000, in Supreme Court of the State
of New York, are at an early stage in the trial court. Each complaint states
that the relief sought by the plaintiffs is $10 million in compensatory and
$100 million in punitive damages. The primary claims are based on alleged
personal injury, diminution of property value and fear or risk of cancer.

We are also potentially liable for certain environmental matters arising
from Nabisco's or a former affiliate's connection with Del Monte Corporation in
the 1970s and 1980s. Del Monte Corporation operated a plantation on Oahu,
Hawaii, which used various pesticides for crop application over an extended
time period. A pesticide spill at the site led to the closure of nearby
drinking water wells and an investigation, under the oversight of the United
States Environmental Protection Agency, of soil and groundwater contamination
associated with the site. Upon completion of this investigation, the EPA will
be selecting a plan to remedy the contamination.

In addition, two lawsuits were filed in 1999 against Del Monte Corporation
and approximately six other Oahu growers and pesticide manufacturers seeking
unspecified compensatory and punitive damages for alleged pesticide
contamination of drinking water supplies. The Board of Water Supply of the City
and County of Honolulu filed the first lawsuit on September 27, 1999 in the
Circuit Court of the First Circuit of the State of Hawaii. The second lawsuit,
which was filed on October 7, 1999 in the Circuit Court of the First Circuit of
the State of Hawaii, was brought by numerous area residents alleging bodily
injury, emotional distress and wrongful death. Both cases are in the early
stages of discovery and, to our knowledge, Del Monte Corporation has not
received a settlement demand in either case.

We believe a third party has indemnification obligations for these potential
Del Monte Corporation environmental liabilities, and we are vigorously seeking
enforcement of these indemnification rights.

MANAGEMENT

Directors and Executive Officers

We have provided below information about our directors and executive
officers and their ages as of May 1, 2001.

Name Age Title
---- --- -----------------------------------------------------

Geoffrey C. Bible... 63 Director and Chairman

Louis C. Camilleri.. 46 Director

William H. Webb..... 61 Director

Roger K. Deromedi... 47 Director and Co-Chief Executive Officer; and
President and Chief Executive Officer, Kraft Foods
International

Betsy D. Holden..... 45 Director and Co-Chief Executive Officer; and
President and Chief Executive Officer, Kraft Foods
North America

Ronald J.S. Bell.... 51 Group Vice President, Kraft Foods International and
President European Union Region

Calvin J. Collier... 59 Senior Vice President, General Counsel and Corporate
Secretary; and Senior Vice President, General Counsel
and Corporate Affairs, Kraft Foods North America

Irene B. Rosenfeld.. 48 Group Vice President, Kraft Foods North America, and
President, Operations, Technology and Kraft Foods
Canada, Mexico and Puerto Rico

James P. Dollive.... 49 Senior Vice President and Chief Financial Officer

All directors and officers of Kraft Foods Inc., a newly-formed holding
company, have held their positions with Kraft Foods Inc. since March 2001.

Geoffrey C. Bible; Director and Chairman. Mr. Bible is Chairman and Chief
Executive Officer of Philip Morris Companies Inc., a position he has held since
February 1995. Mr. Bible has been employed continuously by Philip Morris and
its subsidiaries in various capacities since 1976. He is a director of The News
Corporation Limited and the Lincoln Center for the Performing Arts, Inc.

Louis C. Camilleri; Director. Mr. Camilleri is Senior Vice President and
Chief Financial Officer of Philip Morris Companies Inc., a position he has held
since November 1996. Mr. Camilleri has been employed continuously by Philip
Morris and its subsidiaries in various capacities since 1978. Before assuming
his current position, Mr. Camilleri was President and Chief Executive Officer,
Kraft Foods International from December 1995 until October 1996.

William H. Webb; Director. Mr. Webb is Chief Operating Officer of Philip
Morris Companies Inc., a position he has held since March 1997. Mr. Webb has
been employed continuously by Philip Morris and its subsidiaries in various
capacities since 1966. Before assuming his current position, Mr. Webb was
President and Chief Executive Officer, Philip Morris International Inc. from
1993 until 1997. Mr. Webb is a director of the International Tennis Hall of
Fame and the Alvin Ailey American Dance Theater.

Roger K. Deromedi; Director and Co-Chief Executive Officer, Kraft Foods
Inc.; and President and Chief Executive Officer, Kraft Foods International, a
position he has held since April 1999. Mr. Deromedi has been employed
continuously by Kraft and its subsidiaries and predecessor, General Foods
Corporation, in various capacities since 1977. Before assuming his current
position, Mr. Deromedi served as Group Vice President, Kraft Foods
International and President Asia Pacific from 1998 until 1999; President
Western Europe, Kraft Foods International from December 1995 until 1998; and
Executive Vice President, Kraft Foods North America, and General Manager of the
Kraft Cheese Division from 1993 until 1995.

Betsy D. Holden; Director and Co-Chief Executive Officer, Kraft Foods Inc.;
and President and Chief Executive Officer, Kraft Foods North America, a
position she has held since May 2000. Ms. Holden has been employed continuously
by Kraft and its subsidiaries and predecessor, General Foods Corporation, in
various capacities since 1982. Before assuming her current position, Ms. Holden
served as Executive Vice President, Kraft Foods North America from 1998 until
May 2000; Executive Vice President, Kraft Foods North America, and President of
the Kraft Cheese Division from 1997 until 1998; and Executive Vice President,
Kraft Foods North America, and General Manager of the Kraft Cheese Division
from 1995 until 1997. Ms. Holden is a director of Tupperware Corporation, the
Grocery Manufacturers Association, Evanston Northwestern Hospital and the
Ravinia Music Festival. She also serves on the Advisory Board of the J.L.
Kellogg Graduate School of Management at Northwestern University and is
President of the Board of the Off the Street Club.

Ronald J.S. Bell; Group Vice President, Kraft Foods International and
President European Union Region, a position he has held since 1998. Mr. Bell
has been employed continuously by Kraft and its subsidiaries and predecessor,
General Foods Corporation, in various capacities since 1974. Before assuming
his current position, Mr. Bell was Executive Vice President and Area Director,
Northern Europe, Kraft Foods International from 1995 until 1998. Mr. Bell is a
director of United Biscuits Group (Investments) Limited.

Calvin J. Collier; Senior Vice President, General Counsel and Corporate
Secretary, Kraft Foods Inc.; and Senior Vice President, General Counsel and
Corporate Affairs, Kraft Foods North America, a position he has held since
1988. Before that he was a partner at the law firm of Hughes Hubbard & Reed.
Mr. Collier is a member of the Board of Directors of eCPG.net, Inc. (d/b/a
TRANSORA), an emeritus member of the Board of Visitors of Duke University and a
member of the boards of the Council of Better Business Bureaus, Inc., the
Private Adjudication Center of Duke University, and the National Advertising
Review Council.

Irene B. Rosenfeld; Group Vice President, Kraft Foods North America, and
President, Operations, Technology and Kraft Foods Canada, Mexico and Puerto
Rico, a position she has held since February 2001. Ms. Rosenfeld has been
employed continuously by Kraft and its subsidiaries and predecessor, General
Foods Corporation, in various capacities since 1981. Before assuming her
current position, she served as Group Vice President, Kraft Foods North
America, and President, Kraft Foods Canada and Operations Technology from May
2000 until February 2001, President, Kraft Foods Canada from 1996 until May
2000; and Executive Vice President and General Manager of the Desserts and
Snacks Division, Kraft Foods North America from 1994 until 1996. Ms. Rosenfeld
is a director of AutoNation Inc., and on the Board of Trustees of Cornell
University and is the former Chair of the Board of the Food and Consumer
Products Manufacturers of Canada.

James P. Dollive; Senior Vice President and Chief Financial Officer, Kraft
Foods Inc. From July 1998 until April 2001, Mr. Dollive was Senior Vice
President, Finance and Information Systems, Kraft Foods North America. Mr.
Dollive has been employed continuously by Kraft and its subsidiaries and
predecessor, General Foods Corporation, in various capacities since 1978.
Before assuming his current position, Mr. Dollive served as Vice President,
Finance and Strategy, Kraft Foods International from 1997 until July 1998; and
Senior Vice President, Strategy, Kraft Foods North America from 1996 until
1997.

Composition of Board of Directors

When we complete this offering, our board of directors will consist of five
persons. We intend for our board ultimately to consist of nine persons. Under
the corporate agreement that we intend to enter into with Philip Morris, so
long as Philip Morris holds more than 50% of our then outstanding common stock,
our board will have three members designated by Philip Morris and four members
unaffiliated with Kraft or Philip Morris. Our board will use its best efforts
to elect its four unaffiliated members within 90 days following the completion
of this offering. In the event the number of our directors changes, we will
amend the corporate agreement to maintain these proportions. Under the
corporate agreement, Philip Morris will also have the right to designate the
chairman of the board. All board members will serve one-year terms.

Committees of Board of Directors

Our board will establish various committees to assist it with its
responsibilities. Those committees are described below.

Audit Committee

The Audit Committee, which will have no directors who are employees of Kraft
or Philip Morris, will meet with management, our independent accountants and
our internal auditors to consider the adequacy of our internal controls and
other financial reporting matters. The Audit Committee will:

. approve an audit committee charter and recommend it to our board for
adoption;

. recommend to our board the engagement of independent accountants;

. discuss with the independent accountants their audit procedures,
including the proposed scope of the audit, the audit results and the
related management letters; and

. review the services performed by the independent accountants in
connection with determining their independence.

Under the corporate agreement we will enter into with Philip Morris, the
committee will approve all material transactions with Philip Morris. The
initial members of the committee will be three or more "independent" (as
defined under the rules of the New York Stock Exchange) members of our board
when they are elected.

Compensation and Governance Committee

The Compensation and Governance Committee will:

. administer our compensation programs and remuneration arrangements for
our executive officers;

. review the succession plans for our chief executive officers and other
senior executives; and

. make recommendations to our board on board practices, the functions and
duties of committees of the board and nominees to the board, and advise
the board generally on corporate governance matters, including our
relations with the holders of our Class A common stock.

The members of the committee will be: Mr. Bible (chair) and three or more
independent members of our board when they are elected.

Executive Committee

The Executive Committee will have authority to act for our board on most
matters during intervals between board meetings. The members of the committee
have not yet been appointed.

Compensation of Directors

Directors who are full-time employees of Kraft or Philip Morris will receive
no additional compensation for services as a director. For our non-employee
directors, we intend to provide competitive compensation and benefits that will
attract and retain high quality directors, target director compensation at a
level that is consistent with our compensation objectives and encourage
ownership of our stock to further align their interests with those of our
shareholders.

Initially, we intend to pay non-employee directors an annual retainer of
$35,000 and fees of $1,000 for each board meeting attended and $1,000 for each
committee meeting attended. We intend to pay the chair of each committee an
annual retainer of $5,000 for additional services rendered in connection with
committee chair responsibilities.

We also intend to pay non-employee directors stock-based compensation. On
the date of each annual meeting of our shareholders, each non-employee director
will receive shares of Class A common stock having an aggregate fair market
value on that date of $30,000, and nonqualified stock options to purchase the
number of shares of Class A common stock calculated by dividing $30,000 by the
Black-Scholes value of a Kraft stock option. See pages 87 to 88 for a further
description of the 2001 Kraft Director Plan under which we intend to grant
these awards.

A non-employee director may elect to defer meeting fees and all or part of
the annual retainer. Deferred amounts are "credited" to an unfunded account and
may be "invested" in eight "investment choices." These "investment choices"
parallel the investment alternatives offered to employees under the Kraft Foods
Thrift Plan and determine the "earnings" that are credited for bookkeeping
purposes to a director's account. Subject to certain restrictions, a director
is permitted to take cash distributions, in whole or in part, from his or her
account before or after termination of service.

Compensation Committee Interlocks and Insider Participation

With the exception of Mr. Bible, there are no "interlocks," as defined by
the Securities and Exchange Commission, with respect to any member of the
Compensation and Governance Committee. Mr. Bible is the Chairman and Chief
Executive Officer of Philip Morris. Kraft was indebted to Philip Morris as of
December 31, 2000, in the aggregate amount of $22.3 billion, which amount is in
excess of 5% of our total consolidated assets as of that date.

Stock Ownership of Directors and Executive Officers

All of our common stock is currently owned by Philip Morris, and, thus, none
of our directors or executive officers own any of our common stock.

The following table shows the number of shares of Philip Morris common stock
beneficially owned as of February 28, 2001, by each director and executive
officer named in the Summary Compensation Table in the "--Executive
Compensation" section below, and by all of our directors and executive officers
as a group. Unless otherwise noted, each of the named individuals had sole
voting and investment power with respect to the shares shown. The beneficial
ownership of each director and executive officer and of the group is less than
one percent of the outstanding shares of Philip Morris. The total number of
shares of Philip Morris common stock outstanding as of February 28, 2001, was
2,206,007,834.

Amount and Nature of
Beneficial Ownership of
Name Philip Morris Common Stock(1)(2)
---- --------------------------------

Geoffrey C. Bible............................ 6,651,162
Louis C. Camilleri........................... 1,471,462
William H. Webb.............................. 1,828,858
Roger K. Deromedi............................ 657,787
Betsy D. Holden.............................. 223,936
Ronald J.S. Bell............................. 419,429
Calvin J. Collier............................ 426,997
Irene B. Rosenfeld........................... 218,101
James P. Dollive............................. 239,760
Directors and executive officers as a group
(9)......................................... 12,137,492

- ---------------------
(1) Includes number of shares subject to purchase before April 28, 2001, upon
the exercise of stock options, as follows: Mr. Bible, 5,710,839 shares; Mr.
Camilleri, 1,310,190 shares; Mr. Webb, 1,586,207 shares; Mr. Deromedi,
618,280 shares; Ms. Holden, 204,020 shares; Mr. Bell, 389,290 shares; Mr.
Collier, 338,846 shares; Ms. Rosenfeld, 203,350 shares; Mr. Dollive,
182,890 shares; and the directors and executive officers as a group,
10,543,912 shares.
(2) Includes 21,146 shares as to which voting and/or investment power is shared
with or controlled by another person and as to which beneficial ownership
is not disclaimed, as follows: Mr. Bible, 20,000 (shares held by spouse);
Mr. Camilleri, 225 (shares held by spouse); and Ms. Rosenfeld, 921 (shares
held in joint tenancy).

Executive Compensation

The following table shows the compensation for the fiscal year ended
December 31, 2000, received by or paid to our chief executive officers and each
of our three most highly compensated executives other than our chief executive
officers, based on salary and bonus compensation from Philip Morris and its
subsidiaries. The option grants shown in this table represent options to
acquire shares of Philip Morris common stock. This offering will not result in
accelerated vesting of the remaining unvested portion of these option grants
nor the conversion of these options. These options will continue to vest and be
exercisable according to their terms.

Summary Compensation Table

Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
---------------------------------- --------------------- ---------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Value(1) Options LTIP(2) Compensation(3)
------------------ ---- ------- ------- ------------ ---------- ---------- --------- ---------------
($) ($) ($) ($) (Shs.) ($) ($)

Roger K. Deromedi...... 2000 634,231(4) 725,000 10,316(5) 0 257,700(4) 2,086,100 43,352
President and Chief
Executive Officer,
Kraft Foods
International

Betsy D. Holden........ 2000 555,769(4) 700,000 4,205(6) 0 70,280(4) 1,438,500 30,088
President and Chief
Executive Officer,
Kraft Foods North
America

Ronald J.S. Bell....... 2000 431,163(7) 358,372(7) 317,942(7)(8) 0 98,390 1,234,433(7) 46,867(7)
Group VP, Kraft Foods
International and
President European
Union Region

Calvin J. Collier...... 2000 421,250 275,000 0 0 63,260 949,000 23,739
Senior VP, General
Counsel and Corporate
Affairs, Kraft Foods
North America

Irene B. Rosenfeld..... 2000 444,192 360,000 0 0 70,280 946,200 24,631
Group VP, Kraft Foods
North America, and
President, Operations,
Technology and Kraft
Foods Canada, Mexico
and Puerto Rico

- ---------------------
(1) On December 29, 2000, the final day of trading in 2000, each of the named
executive officers held restricted shares of Philip Morris common stock,
with a value at such date as follows: Mr. Deromedi, 24,040 shares,
$1,057,760; Ms. Holden, 11,810 shares, $519,640; Mr. Bell, 14,940 shares,
$657,360; Mr. Collier, 7,030 shares, $309,320; and Ms. Rosenfeld, 6,750
shares, $297,000. During 2000, dividends were paid on the restricted stock
in cash at the same rates and dates as all other shares of Philip Morris
common stock.
(2) In 2000, a limited number of senior executives earned long-term performance
awards for performance covering a three-year cycle commencing January 1,
1998, and ending December 31, 2000. The awards to the executive officers
named in this table were based upon the achievement of financial and
strategic goals over the three-year period.
(3) The amounts in this column consist of matching contributions to defined
contribution plans. Kraft has made available funding payments to certain
executives with vested accrued benefits under non-qualified retirement
plans. During 2000, the following amounts, less applicable tax withholding,
were made

available to the named executive officers to provide funding for matching
contributions to the Kraft Foods supplemental defined contribution plan
through November 30, 1999, and for earnings through May 1, 2000 on such
matching contributions, unless otherwise noted: Mr. Collier, $515,949;
Mr. Deromedi, $80,011 (matching contributions and earnings through May 31,
2000); Ms. Holden, $159,289; and Ms. Rosenfeld, $149,275. The funding of
these amounts is not intended to increase total promised benefits.
(4) Mr. Deromedi and Ms. Holden each has a current annual base salary of
$740,000. In January 2001, Mr. Deromedi and Ms. Holden received equivalent
grants of stock options to acquire 146,480 shares of Philip Morris common
stock.
(5) Includes reimbursement for taxes on a portion of the earnings on assets
held in trust for Mr. Deromedi. These trust assets offset amounts,
otherwise payable by Kraft, for vested benefits under supplemental
retirement plans and are not intended to increase total promised benefits.
(6) Includes reimbursement for taxes on a portion of the earnings on assets
held in trust for Ms. Holden. These trust assets offset amounts, otherwise
payable by Kraft, for vested benefits under supplemental retirement plans
and are not intended to increase total promised benefits.
(7) These amounts have been converted from British pounds to U.S. dollars based
on a currency translation rate of .6697 as of December 29, 2000.
(8) In connection with the relocation of the Kraft Foods International European
Union headquarters, Mr. Bell received a temporary housing allowance of
$317,942 for 2000 and $304,429 for 2001 under an arrangement that is
expiring.

Grants of Stock Options

The following table shows all grants of options to acquire shares of Philip
Morris common stock to our executive officers named in the Summary Compensation
Table in the fiscal year ended December 31, 2000:

2000 Option Grants

Number of % of Total Options Exercise
Securities Granted to Philip or Base Grant Date Value at
Underlying Options Morris Employees Price Expiration Present Value December 31,
Name Granted (#)(1) in Fiscal Year ($/Sh) Date ($)(2) 2000 ($)(3)
---- ------------------ ------------------ -------- ------------ ------------- ------------

January 26,
Roger K. Deromedi....... 257,700(4) 0.63% 21.3438 2010 823,094 5,838,502
January 26,
Betsy D. Holden......... 70,280(4) 0.17% 21.3438 2010 224,474 1,592,278
January 26,
Ronald J.S. Bell........ 98,390 0.24% 21.3438 2010 314,258 2,229,144
January 26,
Calvin J. Collier....... 63,260 0.15% 21.3438 2010 202,052 1,433,231
January 26,
Irene B. Rosenfeld...... 70,280 0.17% 21.3438 2010 224,474 1,592,278

- ---------------------
(1) Options are not exercisable until one year after the date of the grant.
(2) In accordance with Securities and Exchange Commission rules, grant date
present value is determined using the Black-Scholes Model. The Black-
Scholes Model is a complicated mathematical formula widely used to value
exchange-traded options. However, stock options granted by Philip Morris
are long-term, non-transferable and subject to vesting restrictions, while
exchange-traded options are short-term and can be exercised or sold
immediately in a liquid market. The Black-Scholes Model relies on several
key assumptions to estimate the present value of options, including the
volatility of, and dividend yield on, the security underlying the option,
the risk-free rate of return on the date of grant and the estimated time
period until exercise of the option. In calculating the grant date present
values shown in the table, the volatility was based on the monthly closing
stock prices and dividends for the time period (as shown in the table below
and rounded to the nearest whole year) preceding the grant dates, the
dividend yield was based on an annual dividend rate of $1.92 per share (the
dividend rate in effect at the time the options were granted), the risk-
free rate of return was fixed at the rate for a five-year U.S. Treasury
Note for the month of grant as reported in the Federal Reserve Statistic
Release H.15(159), and an estimated time period equal to the lesser of the
option term or five years was used. The following assumptions were used in
the table:

Black-Scholes Model Assumptions

Stock Option Risk-Free
Grant Expiration Date Volatility Dividend Yield Rate of Return Time Period
------------ ----------------- ---------- -------------- -------------- -----------

January 26, 2000 January 26, 2010 31.7% 9% 6.58% 5 years

The use of different assumptions can produce significantly different
estimates of the present value of options. Consequently, the grant date
present values shown in the table are only theoretical values and may not
accurately represent present value. The actual value, if any, an optionee
will realize will depend on the excess of market value of the Philip Morris
common stock over the exercise price on the date the option is exercised.
(3) Based on the closing price of Philip Morris common stock of $44.00 on
December 29, 2000, the final day of trading in 2000.
(4) In January 2001, Mr. Deromedi and Ms. Holden received equivalent grants of
stock options to acquire 146,480 shares of Philip Morris common stock.

Exercises of Stock Options

The following table shows total exercises of options to purchase Philip
Morris common stock in the fiscal year ended December 31, 2000, by our
executive officers named in the Summary Compensation Table:

2000 Option Exercises and Year-End Values

Total Shares of
Philip Morris Common Value of Unexercised
Stock Underlying in-the-Money Options Held
Philip Morris Unexercised Options at at December 31, 2000
Common Stock December 31, 2000 ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------- ------------ ----------- ------------- ----------- -------------

Roger K. Deromedi....... 0 0 351,460 309,950 3,319,907 6,047,516
Betsy D. Holden......... 0 0 133,740 76,530 1,131,293 1,617,281
Ronald J.S. Bell........ 0 0 275,900 122,390 2,733,639 2,325,148
Calvin J. Collier....... 29,400 331,056 275,586 69,510 2,057,952 1,458,234
Irene B. Rosenfeld...... 46,320 852,170 133,070 76,530 970,147 1,617,281

- ---------------------
(1) Based on the closing price of Philip Morris common stock of $44.00 on
December 29, 2000, the final day of trading in 2000.

Pension Plan Tables

Kraft Foods Retirement Plan

Five-Year Years of Service(1)
Average ------------------------------------------------------------------------
Compensation 10 15 20 25 30 35 40
- ------------ -------- -------- ---------- ---------- ---------- ---------- ----------

$ 500,000 $ 82,355 $123,532 $ 164,709 $ 205,886 $ 247,064 $ 259,564 $ 272,064
750,000 124,230 186,344 248,459 310,574 372,689 391,439 410,189
1,000,000 166,105 249,157 332,209 415,261 498,314 523,314 548,314
1,250,000 207,980 311,969 415,959 519,949 623,939 655,189 686,439
1,500,000 249,855 374,782 499,709 624,636 749,564 787,064 824,564
1,750,000 291,730 437,594 583,459 729,324 875,189 918,939 962,689
2,000,000 333,605 500,407 667,209 834,011 1,000,814 1,050,814 1,100,814
2,250,000 375,480 563,219 750,959 938,699 1,126,439 1,182,689 1,238,939
2,500,000 417,355 626,032 834,709 1,043,386 1,252,064 1,314,564 1,377,064
2,750,000 459,230 688,844 918,459 1,148,074 1,377,689 1,446,439 1,515,189
3,000,000 501,105 751,657 1,002,209 1,252,761 1,503,314 1,578,314 1,653,314

- ---------------------
(1) At February 1, 2001, Mr. Deromedi had accredited service of 13 years; Ms.
Holden had accredited service of 17 years; Mr. Collier had accredited
service of 12 years; and Ms. Rosenfeld had accredited service of 20 years.

Mr. Deromedi, Ms. Holden, Mr. Collier and Ms. Rosenfeld participate in the
tax-qualified Kraft Foods Retirement Plan and a supplemental non-qualified
pension plan. These plans provide for fixed retirement benefits in relation to
the participant's years of accredited service, five-year average annual
compensation (the highest average annual compensation during any period of five
full consecutive years out of the 10 years preceding retirement) and applicable
Social Security-covered compensation amount. The fixed retirement benefit is
also dependent upon the periods of service before January 1, 1989 (for former
Kraft participants), or January 1, 1991 (for former General Foods
participants), in which the participant elected to make contributions.
Allowances are payable upon retirement at the normal retirement age of 65 and
upon attainment of certain conditions at earlier ages. Annual compensation
includes the amount shown as annual salary and bonus in the Summary
Compensation Table. At December 31, 2000, five-year average annual compensation
was $803,373 for Mr. Deromedi; $535,073 for Ms. Holden; $626,579 for Mr.
Collier; and $527,572 for Ms. Rosenfeld.

The above table gives examples of annual pension benefits payable under
these plans. The examples, which assume retirement at the normal retirement age
of 65, are based on the Social Security covered compensation amount in effect
for an employee attaining age 65 in calendar year 2001. Since participant
contributions could be substantial in individual cases, the benefit amounts
shown in the table may be attributed in certain instances to participant
contributions to a significant degree, depending upon retirement date and years
of service. Kraft provides funding for individual trusts for covered officers
and certain other employees with vested accrued benefits under non-qualified
supplemental retirement plans. During 2000, the following amounts, less
applicable tax withholding, were made available to the following executive
officers named in the Summary Compensation Table to provide funding for pension
benefits earned under the Kraft Foods supplemental defined benefit plan as of
December 31, 1999, and valued at May 1, 2000, unless otherwise noted: Mr.
Deromedi, $94,363 (projected benefit to be earned through July 1, 2001 and
valued at July 1, 2000), Ms. Holden, $96,617; Mr. Collier, $734,049; and Ms.
Rosenfeld, $132,834. These amounts offset benefits previously accrued and do
not increase total promised benefits.

Kraft Foods Retirement Benefits Plan in the UK

Three-Year Years of Service(1)
Average Covered ---------------------------------------------------------------
Compensation(2) 10 15 20 25 30 35 40
- --------------- -------- -------- -------- -------- -------- -------- ---------

$ 500,000 $ 66,500 $ 99,750 $133,000 $166,250 $199,500 $232,750 $ 266,000
750,000 99,750 149,625 199,500 249,375 299,250 349,125 399,000
1,000,000 133,000 199,500 266,000 332,500 399,000 465,500 532,000
1,250,000 166,250 249,375 332,500 415,625 498,750 581,875 665,000
1,500,000 199,500 299,250 399,000 498,750 598,500 698,250 798,000
1,750,000 232,750 349,125 465,500 581,875 698,250 814,625 931,000
2,000,000 266,000 399,000 532,000 665,000 798,000 931,000 1,064,000

- ---------------------
(1) At January 31, 2001, Mr. Bell had accredited service of 26 years.
(2) The amounts in this table have been converted from British pounds to U.S.
dollars based on a currency translation rate of .6697 as of December 29,
2000.

Mr. Bell participates in the Kraft Foods Retirement Benefits Plan in the UK.
The Kraft Foods Retirement Benefits Plan in the UK is a non-contributory plan
providing benefits related to the participant's years of accredited service and
three-year average covered compensation as illustrated by the above table.
Benefits are payable upon retirement at the normal retirement age of 62 and at
earlier ages, in the form of a 50% joint and survivor annuity. Covered
compensation is determined at April 6 as the rate of salary and a three-year
average of bonus shown in the Summary Compensation Table less an offset for the
UK State Basic Pension. At December 31, 2000, three-year average covered
compensation for Mr. Bell was $644,381 ((Pounds)431,542), based on a currency
translation rate of .6697 as of December 29, 2000.

Employment Contracts, Termination of Employment and Change of Control
Arrangements

Philip Morris has entered into change of control employment agreements with
Mr. Deromedi, Ms. Holden and Mr. Collier. The agreements provide that, if the
executive is terminated other than for cause within three years after a change
of control of Philip Morris or if the executive terminates his or her
employment for good reason within this three-year period or voluntarily during
the 30-day period following the first anniversary of the change of control, the
executive is entitled to receive a lump-sum severance payment equal to two and
one-half times the sum of base salary and highest annual bonus, times a
fraction, the numerator of which is the number of months remaining until the
expiration of the three-year period, and the denominator of which is 30,
together with certain other payments and benefits, including continuation of
employee welfare benefits. An additional payment is required to compensate the
executive for excise taxes imposed upon payments under the agreements.

Kraft Performance Incentive Plan

Our board of directors has adopted the 2001 Kraft Performance Incentive Plan
and our sole shareholder has approved the Kraft Performance Incentive Plan,
which will be established concurrently with this offering.

The Kraft Performance Incentive Plan will permit us to grant to our salaried
employees stock options, stock appreciation rights, restricted stock and other
awards based on our Class A common stock, as well as performance-based annual
and long-term incentive awards. The Kraft Performance Incentive Plan will
support our ongoing efforts to develop and retain worldclass leaders and will
give us the ability to provide our employees with incentives that are directly
linked to the profitability of our businesses and increases in shareholder
value.

Eligibility and Limits on Awards

Our salaried employees and those of our subsidiaries and affiliates who are
responsible for or contribute to our combined management, growth and
profitability will be eligible to receive awards under the Kraft Performance
Incentive Plan, except that employees of Philip Morris and its subsidiaries
other than Kraft will not be eligible to receive awards. The Kraft Performance
Incentive Plan places limits on the maximum amount of awards that we may grant
to any employee in any plan year.

Under the Kraft Performance Incentive Plan, no employee may receive stock
options or stock appreciation rights that total more than 7,500,000 shares in
any plan year. The value of an employee's annual incentive award may not exceed
$7,500,000; and individual long-term incentive awards are limited to 150,000
shares times the number of years in the applicable performance cycle and, in
the case of awards expressed in currency, $4,500,000 times the number of years
in the applicable performance cycle.

Administration

Our Compensation and Governance Committee will administer the Kraft
Performance Incentive Plan. Our Compensation and Governance Committee will
select the eligible employees to receive awards and will set the terms of the
awards, including any performance goals applicable to annual and long-term
incentive awards. Our Compensation and Governance Committee may delegate its
authority under the Kraft Performance Incentive Plan to our officers, subject
to guidelines, for employees who are not our "executive officers."

Shares Reserved for Awards

The total number of shares of Class A common stock available under the Kraft
Performance Incentive Plan will be 75,000,000. If any award under the Kraft
Performance Incentive Plan is exercised, cashed out, terminated, expired or
forfeited without payment being made in the form of our Class A common stock,
the shares subject to the award will again be available for distribution under
the Kraft Performance Incentive Plan, as will shares that are used by an
employee to pay withholding taxes or as payment for the exercise price of an

award. We may not award more than 25% of the shares issuable under the Kraft
Performance Incentive Plan as restricted stock or under incentive awards or
"other stock-based awards." Stock options may be exercised by tendering Class A
common stock to us in full or partial payment of the exercise price.

In the event of any transaction or event that affects our Class A common
stock, including but not limited to a merger, share exchange, reorganization,
recapitalization, reclassification, distribution, stock dividend, stock split,
reverse stock split, split-up, spin-off or issuance of rights or warrants, then
our board is authorized, to the extent it deems appropriate, to make
substitutions or adjustments in the number and kind of shares reserved for
issuance under the Kraft Performance Incentive Plan, in the number, kind and
price of shares subject to outstanding awards under the Kraft Performance
Incentive Plan and in the limits on individual awards described above.

Annual and Long-Term Incentive Awards

We may grant annual and long-term incentive awards under the Kraft
Performance Incentive Plan. The awards will be earned only if corporate,
business unit or individual performance objectives over performance cycles
established by or under the direction of our Compensation and Governance
Committee are met. The performance objectives may vary from employee to
employee, group to group and period to period. The performance objectives for
awards that are intended to constitute "qualified performance-based
compensation" will be based upon one or more of the following:

. earnings per share;

. total shareholder return;

. operating companies income;

. net income;

. cash flow;

. return on equity;

. return on capital; or

. economic value added, which we calculate as net after-tax operating
profit less the cost of capital.

Awards may be paid in the form of cash, shares of Class A common stock or in
any combination, as determined by our Compensation and Governance Committee.

Stock Options

The Kraft Performance Incentive Plan will permit us to grant to our eligible
employees incentive stock options, which qualify for special tax treatment, and
nonqualified stock options. The option grants may include executive ownership
stock options to an eligible employee who tenders mature shares of Class A
common stock already owned by the employee for at least six months to pay all
or a portion of the exercise price of a stock option and/or to cover minimum-
required withholding tax liabilities, including Social Security and Medicare,
resulting from the exercise of the stock option. An executive ownership stock
option will entitle the employee to acquire shares of Class A common stock
equal to the number of mature shares tendered to pay the exercise price and/or
withholding tax liabilities. The exercise price for any stock option will not
be less than the fair market value of Class A common stock on the date of
grant.

Stock Appreciation Rights

We may also grant stock appreciation rights either singly or in combination
with underlying stock options. Stock appreciation rights entitle the holder
upon exercise to receive an amount in any combination of cash or

shares of Class A common stock (as determined by our Compensation and
Governance Committee) equal in value to the excess of the fair market value of
the shares covered by the right over the grant price. The grant price for any
stock appreciation right will not be less than the fair market value of the
Class A common stock on the date of grant.

Restricted Stock

We may also award shares of restricted Class A common stock. The restricted
stock will vest and become transferable upon the satisfaction of conditions
described in the restricted stock award agreement. If, for example, a
recipient's employment terminates before the award vests, he or she will
forfeit his or her restricted stock awards. Except as specified in the
restricted stock award agreement, the holder of a restricted stock award will
have all the rights of a holder of Class A common stock on his or her
restricted shares.

Other Stock-Based Awards

The Kraft Performance Incentive Plan also provides for awards that are
denominated in, valued by reference to, or otherwise based on or related to,
Class A common stock. These awards may include performance shares and
restricted stock units that entitle the recipient to receive, upon satisfaction
of performance goals or other conditions, a specified number of shares of Class
A common stock or the cash equivalent of those shares. Where the value of the
stock-based award is based on the difference between the fair market value of
the shares covered by the award and the exercise price, the grant price for the
award will not be less than the fair market value of our Class A common stock
on the date of grant.

Change-in-Control Provisions

In the event of a change in control of Kraft, such as a merger with or into
another corporation in which our shareholders before the transaction do not
continue to hold at least 50% of the successor or resulting entity; the sale by
Philip Morris of the Kraft common stock it holds with the result that Philip
Morris holds less than 50% of the aggregate voting power of Kraft; the sale of
substantially all of our assets; and other transactions described in the Kraft
Performance Incentive Plan, the following events will occur:

. all stock options and stock appreciation rights will become fully vested
and immediately exercisable;

. the restrictions applicable to outstanding restricted stock and other
stock-based awards will lapse;

. unless otherwise determined by our Compensation and Governance
Committee, the value of outstanding stock options, stock appreciation
rights, restricted stock and other stock-based awards will be cashed out
on the basis of the highest price per share paid in any transaction
reported on the New York Stock Exchange-Composite Transactions or paid
or offered in any bona fide transaction related to a potential or actual
change in control of Kraft during the preceding 60-day period; and

. outstanding incentive awards will be vested and paid out on a prorated
basis, based on the maximum award opportunity of the awards and the
number of months elapsed compared with the total number of months in the
performance cycle.

Amendment

Our board may amend the Kraft Performance Incentive Plan at any time,
provided that no amendment will be made without shareholder approval if
shareholder approval is required under applicable law, or if the amendment
would:

. decrease the grant or exercise price of any stock option, stock
appreciation right or other stock-based award to less than fair market
value of our Class A common stock on the date of grant; or

. increase the number of shares that may be distributed under the Kraft
Performance Incentive Plan.

Transferability and Other Terms

The Kraft Performance Incentive Plan provides that an award may not be
transferred except in the event of the employee's death or unless otherwise
required by law. The award agreements, which will include other terms and
conditions of each award, can be amended by our Compensation and Governance
Committee. Awards under the Kraft Performance Incentive Plan may earn dividends
or dividend equivalents, as determined by the Compensation and Governance
Committee.

Founders Grant Program

Our board of directors has approved two grants of options to purchase shares
of our Class A common stock, as of the closing date of this offering, to the
following individuals and groups of executive officers and employees of Kraft
and its subsidiaries, with the fair market values specified below. The shares
of Class A common stock underlying options granted in the founders grant
program are included in the 75,000,000 shares available under the Kraft
Performance Incentive Plan.

The first grant of options in the founders grant program is intended to
align the interests of a broad group of our middle and senior level management
with the interests of our shareholders. The exercise price for each of these
options is equal to the initial public offering price per share. The options
will become exercisable on January 31, 2003, and will expire 10 years from the
date of the grant.

Number of Shares
Underlying Fair Market
Option Recipient Options Value ($)
---------------- ---------------- ------------

Roger K. Deromedi............................ 209,677 $ 6,500,000
Betsy D. Holden.............................. 209,677 6,500,000
Ronald J.S. Bell............................. 77,419 2,400,000
Calvin J. Collier............................ 45,161 1,400,000
Irene B. Rosenfeld........................... 64,516 2,000,000
James P. Dollive............................. 48,387 1,500,000
Executive officers of Kraft and its
subsidiaries as a group (6)................. 654,837 20,300,000
All eligible employees of Kraft and its
subsidiaries as a group (2,560)............. 18,725,806 $580,500,000

The second grant of options in the founders grant program is intended to
provide our senior executives who are most critical to the success of our
business with additional performance incentives tied closely to the value of
our Class A common stock. The exercise price for each of these options is equal
to the initial public offering price per share. The options will become
exercisable on a schedule based on total shareholder return for our Class A
common stock during the three years following the date of grant. Any options
that are not exercisable after these three years will become exercisable five
years from the date of the grant. These options will expire 10 years from the
date of the grant.

Number of Shares
Underlying Fair Market
Option Recipient Options Value ($)
---------------- ---------------- -----------

Roger K. Deromedi............................. 209,677 $ 6,500,000
Betsy D. Holden............................... 209,677 6,500,000
Ronald J.S. Bell.............................. 64,516 2,000,000
Calvin J. Collier............................. 48,387 1,500,000
Irene B. Rosenfeld............................ 64,516 2,000,000
James P. Dollive.............................. 48,387 1,500,000
Executive officers of Kraft and its
subsidiaries as a group (6).................. 645,160 20,000,000
All eligible employees of Kraft and its
subsidiaries as a group (66)................. 2,161,290 $67,000,000

See "Option Grants and Sales to Employees" on page 96 for additional
information regarding shares of our Class A common stock made available to our
employees and to employees of Philip Morris and its subsidiaries.

Kraft Director Plan

Our board of directors has adopted the 2001 Kraft Director Plan and our sole
shareholder has approved the Kraft Director Plan.

The Kraft Director Plan will provide for the annual grant to non-employee
directors of awards of stock and stock options. The Kraft Director Plan will
promote greater alignment of the interests of our non-employee directors, our
shareholders and us and will assist us in attracting and retaining highly
qualified non-employee directors by affording them an opportunity to share in
our future success.

Eligibility

We will only grant awards under the Kraft Director Plan to members of our
board who are not full-time employees of Kraft or Philip Morris or their
subsidiaries. The four non-employee directors to be elected after the
completion of this offering will be granted awards under the Kraft Director
Plan.

Administration

Our board will designate our Compensation and Governance Committee or a
subcommittee of the Compensation and Governance Committee to administer the
Kraft Director Plan.

Shares Reserved for Awards

500,000 shares of Class A common stock will be reserved and available for
awards under the Kraft Director Plan. If any stock option under the Kraft
Director Plan is forfeited or expires without the delivery of Class A common
stock, the shares subject to the stock option will again be available for
distribution under the Kraft Director Plan, as will shares that are used by a
non-employee director as payment for the exercise price of a stock option.
Stock options may be exercised by tendering mature Class A common stock to
Kraft in full or partial payment of the exercise price.

In the event of any transaction or event that affects our Class A common
stock, including but not limited to a merger, share exchange, reorganization,
recapitalization, reclassification, distribution, stock dividend, stock split,
reverse stock split, split-up, spin-off or issuance of rights or warrants, then
our board is authorized, to the extent it deems appropriate, to make
substitutions or adjustments in the number and kind of shares reserved for
issuance under the Kraft Director Plan, in the number, kind and price of shares
subject to outstanding awards under the Kraft Director Plan and in the amounts
of annual awards under the Kraft Director Plan or to make provision for cash
payments to holders.

Annual Awards

Upon his or her initial election or appointment as a non-employee director
and on the date of each annual meeting of our shareholders, each non-employee
director will receive shares of Class A common stock having an aggregate fair
market value on that date of $30,000, and nonqualified stock options to
purchase the number of shares of Class A common stock calculated by dividing
$30,000 by the Black-Scholes value of each option. In each case, fractional
shares will be rounded up to the next whole share. Non-employee directors may
elect to defer the receipt of the shares of Class A common stock awarded by
timely filing an election to establish a notional deferred stock account, which
will be credited with earnings or dividend equivalents. The term of each stock
option will be 10 years and the exercise price of each option will be the fair
market value of a share of our Class A common stock on the date of grant.

Amendment

Our board of directors may amend the Kraft Director Plan at any time,
provided that no amendment will be made without shareholder approval if
shareholder approval is required under applicable law, or if the amendment
would:

. decrease the grant or exercise price for stock options to less than fair
market value of our Class A common stock on the date of grant; or

. increase the number of shares that may be distributed under the Kraft
Director Plan.

Transferability and Other Terms

The Kraft Director Plan provides that an award may not be transferred except
in the event of a non-employee director's death or unless otherwise required by
law. Other terms and conditions of each award will be included in award
agreements, which can be amended.

SOLE SHAREHOLDER

Before this offering, all of the outstanding shares of our common stock will
be owned by Philip Morris. After the completion of this offering, Philip Morris
will own approximately 49.5% of our Class A common stock, or 47.2% if the
underwriters exercise their over-allotment option in full, and 100% of our
Class B common stock. Philip Morris has advised us that its current intent is
to continue to hold all of our common stock beneficially owned by it following
the completion of this offering, other than shares of our Class A common stock
subject to stock options granted by Philip Morris to its employees. However,
Philip Morris is not subject to any contractual obligation to retain its
controlling interest, except that Philip Morris has agreed, subject to
exceptions described under "Underwriting," not to sell or otherwise dispose of
any shares of our common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Credit Suisse First Boston
Corporation and Salomon Smith Barney Inc. on behalf of the underwriters.

RELATIONSHIP WITH PHILIP MORRIS

Included below are descriptions of certain agreements, relationships and
transactions we have with Philip Morris.

Corporate Agreement

We intend to enter into a corporate agreement with Philip Morris under which
we will grant to Philip Morris a continuing option to purchase additional
shares of our Class A common stock. Philip Morris may exercise the option
simultaneously with the issuance of any equity security of Kraft, only to the
extent necessary to permit Philip Morris to maintain its then-existing
percentage ownership of our common stock. This option is not exercisable in
connection with this offering, upon the exercise of the underwriters' over-
allotment option or upon the issuance of stock in connection with employee
compensation. The purchase price of the shares of our Class A common stock
purchased upon any exercise of this option will be equal to the price paid for
the Class A common stock in the related issuance if we issue Class A common
stock for cash, or the then current market price of Class A common stock if we
issue a different equity security or Class A common stock for other than cash.

The corporate agreement will provide that, upon the request of Philip
Morris, we will use our best efforts to register under the applicable federal
and state securities laws any of the shares of our Class A common stock
beneficially owned by Philip Morris, including shares underlying stock options
or other incentive awards made by Philip Morris to its employees or the
employees of its subsidiaries. Philip Morris will also have the right to
include the shares of our Class A common stock it beneficially owns in certain
other registrations of our common equity securities initiated by us on our own
behalf or on behalf of our other shareholders. Philip Morris will agree to pay
our out-of-pocket costs and expenses in connection with each registration that
Philip Morris requests or in which Philip Morris participates.

The corporate agreement will contain indemnification and contribution
provisions by Philip Morris for the benefit of Kraft and related persons and by
Kraft for the benefit of Philip Morris and related persons. The corporate
agreement will also provide that neither Kraft nor Philip Morris will take any
action or enter into any commitment or agreement that may reasonably be
anticipated to result in a violation by the other party of:

. any provision of applicable law or regulation;

. any provision of the other party's articles of incorporation or bylaws;

. any existing credit agreement or other material instrument binding upon
the other party; or

. any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the other party or any of its respective
assets.

The corporate agreement will provide that all material intercompany
transactions, including any material amendments to the corporate agreement, the
services agreement, the tax sharing agreement or any other agreement between
Kraft and Philip Morris, will be subject to the approval of the Audit Committee
of our board of directors.

We have agreed with Philip Morris that both Kraft and Philip Morris have the
right to:

. engage in the same or similar business activities as the other party;

. do business with any customer or client of the other party; and

. employ or engage any officer or employee of the other party.

Neither Philip Morris nor Kraft, nor their respective related persons, will be
liable to the other as a result of engaging in any of these activities.

Under the corporate agreement, if one of our officers or directors who also
serves as an officer or director of Philip Morris becomes aware of a potential
transaction related primarily to the food and beverage industry, other than
beer, that may represent a corporate opportunity for both Kraft and Philip
Morris, the officer or director has no duty to present that opportunity to
Philip Morris; and we will have the sole right to pursue the transaction if our
board so determines. If one of our officers or directors who also serves as an
officer or director of Philip Morris becomes aware of any other potential
transaction that may represent a corporate opportunity for both Kraft and
Philip Morris, the officer or director will have a duty to present that
opportunity to Philip Morris; and Philip Morris will have the sole right to
pursue the transaction if Philip Morris' board so determines. If one of our
officers or directors who does not serve as an officer or director of Philip
Morris becomes aware of a potential transaction that may represent a corporate
opportunity for both Kraft and Philip Morris, neither Kraft nor the officer or
director has a duty to present that opportunity to Philip Morris; and we may
pursue the transaction if our board so determines.

Under the corporate agreement, we must obtain Philip Morris' written consent
before taking any of the following actions:

. entering into any agreement or arrangement that binds or purports to
bind Philip Morris or any of its affiliates, or contains provisions that
trigger a default or require a material payment when Philip Morris
exercises its rights to convert the Class B common stock;

. declaring extraordinary dividends or making other extraordinary
distributions to the holders of our capital stock; and

. issuing any equity securities or securities convertible into or
exercisable for equity securities except for Class A common stock equity
securities issued or granted to our employees.

Philip Morris may assign these consent rights to a third party who may
exercise them so long as the third party directly or indirectly owns or has the
right to acquire more than 50% of our then outstanding common stock.

The corporate agreement will terminate when Philip Morris owns less than 50%
of our then outstanding common stock, except that the indemnification
provisions will survive the termination.

Services Agreement

Philip Morris Management Corp., a wholly-owned subsidiary of Philip Morris,
has provided, and we expect that it will continue to provide, certain services
to us for fees based on costs incurred by Philip Morris and its subsidiaries in
providing the services and a management fee. In 2000, we paid $248 million for
these services and we expect to make comparable payments to Philip Morris
Management Corp. for similar levels of services in 2001. In 2001, Philip Morris
Management Corp. will also provide additional information technology and
financial services for approximately $50 million. We expect these additional
payments to be approximately equivalent to the costs we will eliminate from
previously providing these services internally. We believe the terms of these
services in the aggregate are at least as favorable to us as those we could
have obtained from unrelated third parties through arm's-length negotiations.
These services, which are the subject of a services agreement, include:

. government and corporate affairs services;

. human resources services;

. treasury services, including insurance services;

. financial, reporting, research and ledger services;

. internal auditing services;

. information technology services;

. legal and corporate secretary services;

. aviation, building and conference services;

. tax services;

. corporate planning and analysis services;

. corporate business development services; and

. financial communications and investor relations services.

Philip Morris Management Corp. and we may each terminate any or all of the
services under the services agreement by giving the other party written notice
at least 12 months in advance of termination. Philip Morris Management Corp.
has agreed to provide us with reasonable assistance to make an orderly
transition to other service providers upon the termination of the services
agreement.

Tax-Sharing Agreement

We are, and after the completion of this offering will continue to be,
included in Philip Morris' federal consolidated income tax group, and our
federal income tax liability will be included in the consolidated federal
income tax liability of Philip Morris and its subsidiaries. In certain
circumstances, certain of our subsidiaries will also be included with certain
Philip Morris subsidiaries in combined, consolidated or unitary income tax
groups for state and local income tax purposes. We intend to enter into a tax-
sharing agreement with Philip Morris. Under the tax-sharing agreement, we will
make payments to Philip Morris, with respect to any period, for the amount of
taxes to be paid by us, and these taxes will be determined as though we were to
file separate federal, state and local income tax returns as the common parent
of an affiliated group of corporations filing combined, consolidated or
unitary, as applicable, federal, state and local income tax returns. Our
payments to Philip Morris will also include amounts determined by a tax
authority or estimated by Philip Morris to be due as a result of a
redetermination of the tax liability of Philip Morris arising from an audit or
otherwise. We will be reimbursed, however, for tax items such as foreign tax
credits, net operating losses and alternative minimum tax credits, based on the
usage of the tax items by the consolidated group.

In determining the amount of tax-sharing payments under the tax-sharing
agreement, Philip Morris will prepare pro forma returns with respect to federal
and applicable state and local income taxes that reflect the

same positions and elections used by Philip Morris in preparing the returns for
Philip Morris' consolidated group and other applicable groups. The tax-sharing
agreement provides that Philip Morris:

. will continue to have all the rights of a parent of a consolidated
group, and similar rights provided for by applicable state and local law
with respect to a parent of a combined, consolidated or unitary group;

. will be the sole and exclusive agent for Kraft in any and all matters
relating to the income, franchise and similar liabilities of Kraft, to
the extent included in the consolidated federal and combined,
consolidated or unitary state and local income tax returns;

. will have sole and exclusive responsibility for the preparation and
filing of consolidated federal and combined, consolidated or unitary
state and local income tax returns, or amended returns; and

. will have the power, in its sole discretion, with respect to any
consolidated federal and combined, consolidated or unitary state and
local income tax returns, to contest or compromise any asserted tax
adjustment or deficiency and to file, litigate or compromise any claim
for refund on our behalf.

In addition, Philip Morris will undertake to provide the services mentioned
above with respect to our separate state and local returns and our foreign
returns.

In general, we will be included in Philip Morris' consolidated group for
federal income tax purposes for so long as Philip Morris beneficially owns at
least 80% of the total voting power and value of our outstanding common stock.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the tax-sharing agreement allocates tax liabilities
between Kraft and Philip Morris, during the period in which we are included in
Philip Morris' consolidated group, we could be liable in the event that any
federal tax liability is incurred, but not discharged, by any other member of
Philip Morris' consolidated group. See "Risk Factors--Risks Related to Our
Relationship with Philip Morris." However, Philip Morris and we will agree to
indemnify each other for the respective obligations under the tax-sharing
agreement, which includes any liability of Nabisco for the payment of federal
tax liability as a result of an express or implied obligation to indemnify any
other person.

Litigation Against Philip Morris

Various legal actions, proceedings and claims relating to tobacco products
are pending or may be instituted against operating subsidiaries of Philip
Morris that are engaged in the manufacture and sale of cigarettes and also
against Philip Morris. If plaintiffs were successful in holding Philip Morris
responsible, shares of our Class A or Class B common stock that are owned by
Philip Morris would be among the assets of Philip Morris available to satisfy
these liabilities. Because Kraft Foods Inc. and its subsidiaries are separate
corporations that have not engaged in the business of manufacturing and selling
cigarettes, we believe that the risk that our assets could be attached to
satisfy these liabilities is remote.

Borrowings from Philip Morris

During 2000, we issued long-term notes payable to Philip Morris in the
aggregate principal amount of $15.0 billion. See Note 3 to our combined
financial statements for a description of the terms of these notes and other
short-term borrowings from Philip Morris and its affiliates.

DESCRIPTION OF CAPITAL STOCK

General

The authorized capital stock of Kraft consists of:

. 3,000,000,000 shares of Class A common stock, without par value;

. 2,000,000,000 shares of Class B common stock, without par value; and

. 500,000,000 shares of preferred stock, without par value.

Before this offering, there were 275,000,000 shares of Class A common stock
and 1,180,000,000 shares of Class B common stock outstanding, all of which were
held by Philip Morris. After this offering there will be 555,000,000 shares of
Class A common stock outstanding, not including shares subject to the
underwriters' over-allotment option, and 1,180,000,000 shares of Class B common
stock outstanding. At the closing of this offering, no shares of preferred
stock will be outstanding.

The following description of our capital stock is subject to our articles of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and the provisions of
applicable Virginia law.

Common Stock

Voting Rights

The holders of Class A common stock and Class B common stock generally have
identical rights, except that holders of Class A common stock are entitled to
one vote per share while holders of Class B common stock are entitled to 10
votes per share on all matters to be voted on by shareholders. Directors are
elected by a plurality of the votes cast by shares entitled to vote. With
certain exceptions, other matters to be voted on by shareholders must be
approved by a majority of the votes cast on the matter by the holders of Class
A common stock and Class B common stock present in person or represented by
proxy, voting together as a single voting group at a meeting at which a quorum
is present, subject to any voting rights granted to holders of any outstanding
shares of preferred stock. Approval of an amendment of our articles of
incorporation, a merger, a share exchange, a sale of all our property or a
dissolution must be approved by a majority of all votes entitled to be cast by
the holders of Class A common stock and Class B common stock, voting together
as a single group.

Dividends

Holders of Class A common stock and Class B common stock will share equally
on a per share basis in any dividend declared by our board of directors,
subject to any preferential rights of holders of any outstanding shares of
preferred stock. Dividends payable in shares of common stock may be paid only
as follows: shares of Class A common stock may be paid only to holders of Class
A common stock, and shares of Class B common stock may be paid only to holders
of Class B common stock; and the number of shares so paid will be payable at
the same rate per share so as to retain the relative proportion of outstanding
shares of Class A common stock and Class B common stock.

Conversion

Each share of Class B common stock is convertible while held by Philip
Morris or any of its subsidiaries, excluding Kraft, at the option of the holder
into one share of Class A common stock. Following any distribution of Class B
common stock to shareholders of Philip Morris in a transaction, including any
distribution in exchange for Philip Morris shares or securities, intended to
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code, or any corresponding provision of any successor statute (a "Tax-Free
Spin-Off"), shares of Class B common stock will no longer be convertible into
shares of Class A

common stock. Shares of Class B common stock transferred to shareholders of
Philip Morris in a Tax-Free Spin-Off will not be converted into shares of Class
A common stock and, following a Tax-Free Spin-Off, shares of Class B common
stock will be transferable as Class B common stock, subject to applicable laws.

Before a Tax-Free Spin-Off, any shares of Class B common stock transferred
to a person other than Philip Morris or any of its subsidiaries, excluding
Kraft, will automatically be converted into shares of Class A common stock.

Other Rights

In the event of any reorganization of Kraft with one or more corporations or
a merger or share exchange of Kraft with another corporation in which shares of
our common stock are converted into or exchangeable for shares of stock, other
securities or property, including cash, all holders of our common stock,
regardless of class, will be entitled to receive with respect to each share
held the same kind and amount of shares of stock and other securities and
property, including cash.

On liquidation, dissolution or winding up of Kraft, after payment in full of
the amounts required to be paid to holders of any outstanding shares of
preferred stock, if any, all holders of common stock, regardless of class, are
entitled to receive the same amount per share with respect to any distribution
of assets to holders of shares of common stock.

No shares of either class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of common stock or other
securities of Kraft.

Upon closing of this offering, all the outstanding shares of Class A common
stock and Class B common stock will be validly issued, fully paid and
nonassessable.

Preferred Stock

Our board of directors has the authority, without action by the
shareholders, to designate and issue preferred stock in one or more series or
classes and to designate the rights, preferences and privileges of each series
or class, which may be greater than the rights of our common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of our common stock until our board of
directors determines the specific rights of the holders of the preferred stock.
However, the effects might include, among other things:

. restricting dividends on our common stock;

. diluting the voting power of our common stock;

. impairing the liquidation rights of our common stock; or

. delaying or preventing a change in control of us without further action
by the shareholders.

We have no present plans to issue any shares of preferred stock.

Certain Provisions of Virginia Law, our Articles of Incorporation and our
Bylaws

Board of Directors; Removal; Vacancies

Virginia law provides that the board of directors of a Virginia corporation
shall consist of a number of individuals specified in or fixed in accordance
with the bylaws of the corporation or, if not specified in or fixed in
accordance with the bylaws, then a number specified in or fixed in accordance
with the articles of incorporation of the corporation.

Our bylaws will provide that the number of members of our board of
directors shall be nine. Under Virginia law, our board of directors may amend
the bylaws from time to time to increase or decrease the number of directors
by up to 30% of the number of directors last elected by our shareholders;
provided, that any decrease in the number of directors may not shorten an
incumbent director's term or reduce any quorum or voting requirements until
the person ceases to be a director.

Under Virginia law, a member of our board of directors may be removed with
or without cause by a majority of the votes entitled to be cast at a meeting
of shareholders called expressly for that purpose at which a quorum is
present. If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove the
director.

Our bylaws provide that any vacancy occurring on our board of directors may
be filled by the affirmative vote of the majority of the remaining directors,
though less than a quorum.

Shareholder Meetings

Under our bylaws, only our board of directors, the chairman of our board of
directors and, until Philip Morris owns less than 50% of our common stock,
Philip Morris, may call special meetings of shareholders.

No Cumulative Voting

Our articles of incorporation and bylaws do not provide for cumulative
voting in the election of directors.

Shareholder Nominations and Proposals

Our bylaws provide that, subject to the rights of holders of any
outstanding shares of preferred stock, a shareholder may nominate one or more
persons for election as directors at a meeting only if written notice of the
shareholder's nomination has been given, either by personal delivery or
certified mail, to the corporate secretary of Kraft not less than 120 nor more
than 150 days before the first anniversary of the date of our proxy statement
in connection with the last annual meeting of shareholders. Each notice must
contain:

. the name, age, business address and, if known, residential address of
each nominee;

. the principal occupation or employment of each nominee;

. the number and class of capital shares of Kraft beneficially owned by
each nominee;

. any other information relating to each nominee required by the
Securities and Exchange Commission's proxy rules; and

. the written consent of each nominee to be named in our proxy statement
and to serve as director if elected.

The corporate secretary of Kraft will deliver all notices to the Compensation
and Governance Committee of our board of directors for review. After review,
the Compensation and Governance Committee will make its recommendation
regarding nominees to our board of directors. Defective nominations will be
disregarded. Until Philip Morris owns less than 50% of our outstanding voting
shares on an as-converted basis, notice by Philip Morris shall be timely and
complete if delivered orally at any time prior to or during the annual
meeting.

For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice of the proposed
business in writing to the corporate secretary of Kraft. To be timely, a
shareholder's notice must be given, either by personal delivery or by
certified mail, to the Secretary not less than 120 days nor more than 150 days
before the first anniversary of the date of our proxy statement in connection
with the last annual meeting. The notice must contain:

. a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting the business at the annual
meeting;

. the name and address of the shareholder proposing the business as they
appear on the stock transfer books of Kraft;

. a representation that the shareholder is a shareholder of record and
intends to appear in person or by proxy at the annual meeting to bring
the business proposed in the notice before the meeting;

. the class, series and number of our shares beneficially owned by the
shareholder; and

. any material interest of the shareholder in the business.

Business brought before an annual meeting without complying with these
provisions will not be transacted. Until Philip Morris owns less than 50% of
our outstanding voting shares on an as-converted basis, notice by Philip Morris
shall be timely and complete if delivered orally at any time prior to or during
the meeting.

Liability of Officers and Directors

Our articles of incorporation provide that no director or officer shall be
liable to Kraft or its shareholders for monetary damages except for liability
resulting from willful misconduct or a knowing violation of the criminal law or
of any federal or state securities laws.

Our articles of incorporation require us to indemnify any director, officer
or employee who was or is a party to any proceeding due to his or her status as
a director, officer or employee of Kraft, and any director, officer or employee
serving at the request of Kraft as a director, trustee, partner, officer or
employee of another entity, unless he or she engaged in willful misconduct or a
knowing violation of the criminal law. We have been informed that in the
opinion of the Securities and Exchange Commission indemnification for
liabilities under the Securities Act of 1933 is against public policy and is
unenforceable.

Anti-Takeover Statutes

We have opted out of the Virginia anti-takeover law regulating "control
share acquisitions." Under Virginia law, shares acquired in a control share
acquisition have no voting rights unless granted by a majority vote of all
outstanding shares other than those held by the acquiring person or any officer
or employee director of the corporation, or the articles of incorporation or
bylaws of the corporation provide that this regulation does not apply to
acquisitions of its shares. An acquiring person that owns five percent or more
of the corporation's voting stock may require that a special meeting of the
shareholders be held, within 50 days of the acquiring person's request, to
consider the grant of voting rights to the shares acquired in the control share
acquisition. If voting rights are not granted and the corporation's articles of
incorporation or bylaws permit, the acquiring person's shares may be
repurchased by the corporation, at its option, at a price per share equal to
the acquiring person's cost. Virginia law grants dissenters' rights to any
shareholder who objects to a control share acquisition that is approved by a
vote of disinterested shareholders and that gives the acquiring person control
of a majority of the corporation's voting shares. This regulation was designed
to deter certain takeovers of Virginia public corporations.

Virginia law also regulates "affiliated transactions." Material acquisition
transactions between a Virginia corporation and any holder of more than 10% of
any class of its outstanding voting shares are required to be approved by the
holders of at least two-thirds of the remaining voting shares. Affiliated
transactions subject to this approval requirement include mergers, share
exchanges, material dispositions of corporate assets not in the ordinary course
of business, any dissolution of the corporation proposed by or on behalf of a
10% holder or any reclassification, including reverse stock splits,
recapitalization or merger of the corporation with its subsidiaries, that
increases the percentage of voting shares owned beneficially by a 10% holder by
more than five percent. Because Philip Morris currently owns 100% of our stock,
the Virginia law regulating affiliated transactions will not apply to Philip
Morris.

Transfer Agent and Registrar

The transfer agent and registrar for our Class A common stock is EquiServe
Trust Company, N.A.

OPTION GRANTS AND SALES TO EMPLOYEES

We intend to grant options to purchase shares of our Class A common stock to
approximately 2,600 employees in a founders grant program pursuant to the Kraft
Performance Incentive Plan. See "Management--Kraft Performance Incentive Plan"
on page 83. Philip Morris intends to grant options to purchase shares of our
Class A common stock that Philip Morris owns to approximately 1,600 employees
of its subsidiaries. Each option will have an exercise price equal to the
initial public offering price shown on the cover page of this prospectus. Each
option will become exercisable on January 31, 2003, and will expire 10 years
from the date of grant. We currently expect to file registration statements
under the Securities Act of 1933 to register these shares.

At our request, the underwriters have reserved for sale to U.S.-based
employees of Kraft and Philip Morris and their respective subsidiaries in a
directed share purchase plan up to 8,400,000 of the shares of our Class A
common stock offered by this prospectus at the initial public offering price
shown on the cover page of this prospectus. See "Underwriting" on page 101.

Finally, we intend to grant to approximately 4,355 of our employees resident
in countries other than the United States an option to purchase 100 shares of
our Class A common stock at the initial public offering price shown on the
cover page of this prospectus. Philip Morris intends to grant to each of
approximately 3,000 employees of its subsidiaries resident in countries other
than the United States an option to purchase 100 shares of our Class A common
stock that Philip Morris owns at the initial public offering price shown on the
cover page of this prospectus.

SHARES ELIGIBLE FOR FUTURE SALE

All of the shares of our Class A common stock sold in this offering will be
freely tradable without restriction under the Securities Act of 1933, except
for any shares that may be acquired by an affiliate of Kraft, as that term is
defined in Rule 144 under the Securities Act. Persons who may be deemed to be
affiliates generally include individuals or entities that control, are
controlled by, or are under common control with, Kraft and may include
directors and officers of Kraft as well as significant shareholders of Kraft.

The shares of our Class A and Class B common stock held by Philip Morris are
"restricted securities" as defined in Rule 144, and may not be sold other than
through registration under the Securities Act or under an exemption from
registration, such as the one provided by Rule 144.

Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions, within any three-month period, a number of
shares that does not exceed the greater of:

. 1% of the then outstanding shares of common stock; and

. the average weekly trading volume of the common stock on the open market
during the four calendar weeks preceding such sale.

Sales under Rule 144 are also subject to post-sale notice requirements and
the availability of current public information about the issuer.

In the event that any person other than Philip Morris who is deemed to be
our affiliate purchases shares of our common stock in this offering or acquires
shares of our common stock pursuant to one of our employee benefit plans, the
shares held by that person are required under Rule 144 to be sold in brokers'
transactions, subject to the volume limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradable without restriction.

Philip Morris and we have agreed not to offer or sell any shares of our
Class A or Class B common stock, subject to the exceptions listed on page 103,
for a period of 180 days after the date of this prospectus, without the prior
written consent of Credit Suisse First Boston Corporation and Salomon Smith
Barney Inc. as representatives of the underwriters.

Our senior officers and the senior officers of Philip Morris and its
subsidiaries who are purchasing our Class A common stock in this offering have
signed lock-up agreements with the underwriters under which they have agreed
not to transfer or dispose of, directly or indirectly, any shares of our Class
A common stock acquired by them from among the shares reserved for sales to
employees for a period of 180 days after the date of this prospectus without
the prior written consent of Credit Suisse First Boston Corporation and Salomon
Smith Barney Inc. as representatives of the underwriters.

Kraft has been advised by the representatives that they may at their
discretion waive the lock-up agreements; however, they have no current
intention of releasing any shares subject to a lock-up agreement. The release
of any lock-up would be considered on a case-by-case basis. In considering any
request to release shares covered by a lock-up agreement, the representatives
would consider, among other factors, the particular circumstances surrounding
the request, including but not limited to the number of shares requested to be
released, market conditions, the possible impact on the market for our Class A
common stock, the trading price of our Class A common stock, historical trading
volumes of our Class A common stock, the reasons for the request and whether
the person seeking the release is one of Kraft's or Philip Morris' officers or
directors, or is Kraft or Philip Morris. No agreement has been made between the
representatives and Kraft or any shareholder pursuant to which the
representatives will waive the lock-up restrictions.

Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock.

All shares issued in this offering or to employees as described in the
previous section, other than shares issued to affiliates, generally will be
freely tradable.

MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES SHAREHOLDERS

This is a general summary of material United States federal income and
estate tax considerations with respect to your acquisition, ownership and
disposition of Class A common stock if you are a beneficial owner of shares
other than:

. a citizen or resident of the United States;

. a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision of the
United States;

. an estate, the income of which is subject to United States federal
income taxation regardless of its source;

. a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions
of the trust; or

. a trust that existed on August 20, 1996, was treated as a United States
person on August 19, 1996, and elected to be treated as a United States
person.

This summary does not address all of the United States federal income and
estate tax considerations that may be relevant to you in light of your
particular circumstances or if you are a beneficial owner subject to special
treatment under United States income tax laws (such as a "controlled foreign
corporation," "passive foreign investment company," "foreign personal holding
company," company that accumulates earnings to avoid United States federal
income tax, foreign tax-exempt organization, financial institution, broker or
dealer in securities or former United States citizen or resident). This summary
does not discuss any aspect of state, local or non-United States taxation. This
summary is based on current provisions of the Internal Revenue Code ("Code"),
Treasury regulations, judicial opinions, published positions of the United
States Internal Revenue Service ("IRS") and all other applicable authorities,
all of which are subject to change, possibly with retroactive effect. This
summary is not intended as tax advice.

We urge prospective non-United States shareholders to consult their tax
advisors regarding the United States federal, state, local and non-United
States income and other tax considerations of acquiring, holding and disposing
of shares of Class A common stock.

Dividends

In general, any distributions we make to you with respect to your shares of
Class A common stock that constitute dividends for United States federal income
tax purposes will be subject to United States withholding tax at a rate of 30%
of the gross amount, unless you are eligible for a reduced rate of withholding
tax under an applicable income tax treaty and you provide proper certification
of your eligibility for such reduced rate (usually on an IRS Form W-8BEN). A
distribution will constitute a dividend for United States federal income tax
purposes to the extent of our current or accumulated earnings and profits as
determined under the Code. Any distribution not constituting a dividend will be
treated first as reducing your basis in your shares of Class A common stock
and, to the extent it exceeds your basis, as gain from the disposition of your
shares of Class A common stock.

Dividends we pay to you that are effectively connected with your conduct of
a trade or business within the United States (and, if certain income tax
treaties apply, are attributable to a United States permanent establishment
maintained by you) generally will not be subject to United States withholding
tax if you comply with applicable certification and disclosure requirements.
Instead, such dividends generally will be subject to United States federal
income tax, net of certain deductions, at the same graduated individual or
corporate rates applicable to United States persons. If you are a corporation,
effectively connected income may also be subject

to a "branch profits tax" at a rate of 30% (or such lower rate as may be
specified by an applicable income tax treaty). Dividends that are effectively
connected with your conduct of a trade or business but that under an applicable
income tax treaty are not attributable to a United States permanent
establishment maintained by you may be eligible for a reduced rate of United
States withholding tax under such treaty, provided you comply with
certification and disclosure requirements necessary to obtain treaty benefits.

Sale or Other Disposition of Class A Common Stock

You generally will not be subject to United States federal income tax on any
gain realized upon the sale or other disposition of your shares of Class A
common stock unless:

. the gain is effectively connected with your conduct of a trade or
business within the United States (and, under certain income tax
treaties, is attributable to a United States permanent establishment you
maintain);

. you are an individual, you hold your shares of Class A common stock as
capital assets, you are present in the United States for 183 days or
more in the taxable year of disposition and you meet other conditions,
and you are not eligible for relief under an applicable income tax
treaty; or

. we are or have been a "United States real property holding corporation"
for United States federal income tax purposes (which we believe we are
not and have never been, and do not anticipate we will become) and you
hold or have held, directly or indirectly, at any time within the
shorter of the five-year period preceding disposition or your holding
period for your shares of Class A common stock, more than 5% of our
Class A common stock.

Gain that is effectively connected with your conduct of a trade or business
within the United States generally will be subject to United States federal
income tax, net of certain deductions, at the same rates applicable to United
States persons. If you are a corporation, the branch profits tax also may apply
to such effectively connected gain. If the gain from the sale or disposition of
your shares is effectively connected with your conduct of a trade or business
in the United States but under an applicable income tax treaty is not
attributable to a permanent establishment you maintain in the United States,
your gain may be exempt from United States tax under the treaty. If you are
described in the second bullet point above, you generally will be subject to
United States tax at a rate of 30% on the gain realized, although the gain may
be offset by some United States source capital losses realized during the same
taxable year.

Information Reporting and Backup Withholding

We must report annually to the IRS the amount of dividends or other
distributions we pay to you on your shares of Class A common stock and the
amount of tax we withhold on these distributions regardless of whether
withholding is required. The IRS may make copies of the information returns
reporting those dividends and amounts withheld available to the tax authorities
in the country in which you reside pursuant to the provisions of an applicable
income tax treaty or exchange of information treaty.

The United States imposes a backup withholding tax on dividends and certain
other types of payments to United States persons. You will not be subject to
backup withholding tax on dividends you receive on your shares of Class A
common stock if you provide proper certification (usually on an IRS Form W-
8BEN) of your status as a non-United States person or you are a corporation or
one of several types of entities and organizations that qualify for exemption
(an "exempt recipient").

Information reporting and backup withholding generally are not required with
respect to the amount of any proceeds from the sale of your shares of Class A
common stock outside the United States through a foreign office of a foreign
broker that does not have certain specified connections to the United States.
However, if you sell your shares of Class A common stock through a United
States broker or the United States office of a foreign broker, the broker will
be required to report the amount of proceeds paid to you to the IRS and also

backup withhold on that amount unless you provide appropriate certification
(usually on an IRS Form W-8BEN) to the broker of your status as a non-United
States person or you are an exempt recipient. Information reporting (and backup
withholding if the appropriate certification is not provided) also apply if you
sell your shares of Class A common stock through a foreign broker deriving more
than a specified percentage of its income from United States sources or having
certain other connections to the United States.

Any amounts withheld with respect to your shares of Class A common stock
under the backup withholding rules will be refunded to you or credited against
your United States federal income tax liability, if any, by the IRS if the
required information is furnished in a timely manner.

Estate Tax

Class A common stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of his or her death will be included in the
individual's gross estate for United States federal estate tax purposes and
therefore may be subject to United States federal estate tax unless an
applicable estate tax treaty provides otherwise. Recently enacted legislation
reduces the maximum federal estate tax rate over an 8-year period beginning in
2002 and eliminates the tax for estates of decedents dying after December 31,
2009. In the absence of renewal legislation, these amendments will expire and
the federal estate tax provisions in effect immediately prior to 2002 will be
restored for estates of decedents dying after December 31, 2010.

100

UNDERWRITING

Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. are
acting as joint book running managers of the offering and are acting as
representatives of the underwriters named below. Subject to the terms and
conditions contained in the underwriting agreement dated June 12, 2001, we have
agreed to sell to the underwriters the number of shares of Class A common stock
set forth opposite each underwriter's name below.

Number of
Underwriters Shares
------------ ----------

Credit Suisse First Boston Corporation.......................... 44,100,080
Salomon Smith Barney Inc. ...................................... 44,100,080
Deutsche Banc Alex. Brown Inc. ................................. 24,696,000
J.P. Morgan Securities Inc. .................................... 24,696,000
Morgan Stanley & Co. Incorporated............................... 24,696,000
UBS Warburg LLC................................................. 24,696,000
BNP Paribas..................................................... 11,592,000
HSBC Securities (USA) Inc. ..................................... 11,592,000
Lehman Brothers Inc. ........................................... 11,592,000
Blaylock & Partners, L.P. ...................................... 5,040,000
Dresdner Kleinwort Wasserstein Securities LLC................... 5,040,000
Prudential Securities Incorporated.............................. 5,040,000
Ramirez & Co., Inc. ............................................ 5,040,000
Sanford C. Bernstein & Co., Inc. ............................... 5,040,000
Utendahl Capital Partners, L.P. ................................ 5,040,000
ABN AMRO Rothschild LLC......................................... 775,000
Credit Lyonnais Securities (USA) Inc. .......................... 775,000
ING Barings Corp................................................ 775,000
Robertson Stephens, Inc. ....................................... 775,000
SG Cowen Securities Corporation................................. 775,000
Muriel Siebert & Co., Inc. ..................................... 775,000
BNY Capital Markets, Inc. ...................................... 775,000
Dain Rauscher Incorporated...................................... 775,000
Davenport & Co. LLC ............................................ 775,000
A.G. Edwards & Sons, Inc. ...................................... 775,000
Invemed Associates, LLC ........................................ 775,000
Adams, Harkness & Hill, Inc. ................................... 442,610
Advest Inc. .................................................... 442,610
Robert W. Baird & Co. Incorporated.............................. 442,610
Banca Akros S.p.A. - Gruppo Banca Popolare di Milano
S.c.a.r.l. .................................................... 442,610
BB&T Capital Markets, a Division of Scott & Stringfellow,
Inc. .......................................................... 442,610
BBVA Securities Inc. ........................................... 442,610
M.R. Beal & Company............................................. 442,610
William Blair & Company, L.L.C. ................................ 442,610
BOE Securities, Inc. ........................................... 442,610
The Chapman Company............................................. 442,610
Chatsworth Securities LLC....................................... 442,610
Crowell, Weedon & Co. .......................................... 442,610
CSFBdirect Inc. ................................................ 442,610
Danske Securities............................................... 442,610
D.A. Davidson & Co. ............................................ 442,610
Doley Securities, Inc. ......................................... 442,610
Fahnestock & Co. Inc. .......................................... 442,610
Gardner Rich & Company, Inc. ................................... 442,610
Gruntal & Co., L.L.C. .......................................... 442,610

101

Number of
Underwriters Shares
------------ -----------

Guzman & Company................................................. 442,610
Intesa Bci....................................................... 442,610
Jackson Securities Incorporated.................................. 442,610
Janney Montgomery Scott LLC...................................... 442,610
C.L. King & Associates, Inc. .................................... 442,610
Lebenthal & Co., Inc. ........................................... 442,610
Legg Mason Wood Walker, Incorporated............................. 442,610
Loop Capital Markets............................................. 442,610
May Davis Group.................................................. 442,610
McDonald Investments Inc., a KeyCorp Company..................... 442,610
Melvin Securities, LLC. ......................................... 442,610
Mizuho International plc......................................... 442,610
Neuberger Berman, LLC............................................ 442,610
Ormes Capital Markets, Inc. ..................................... 442,610
Parker/Hunter Incorporated....................................... 442,610
Pryor, Counts & Co., Inc. ....................................... 442,610
Raymond James & Associates, Inc. ................................ 442,610
Redwood Securities Group Inc. ................................... 442,610
Sanders Morris Harris............................................ 442,610
Santander Securities............................................. 442,610
Stephens Inc. ................................................... 442,610
Stifel, Nicolaus & Company, Incorporated......................... 442,610
Sturdivant & Co., Inc. .......................................... 442,610
Tucker Anthony Incorporated...................................... 442,610
The Williams Capital Group, L.P. ................................ 442,610
-----------
Total.......................................................... 280,000,000
===========

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of Class A common stock in the offering if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an
underwriter defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 28,000,000 additional shares of our Class A common stock at
the initial public offering price less the underwriting discounts and
commissions. The option may be exercised only to cover any over-allotments of
Class A common stock.

The underwriters propose to offer the shares of Class A common stock
initially at the public offering price on the cover page of this prospectus and
to selling group members at that price less a selling concession of $0.4844 per
share. The underwriters and selling group members may allow a discount of $0.10
per share on sales to other broker/dealers. After the initial public offering
the representatives may change the public offering price and concession and
discount to broker/dealers.

The following table summarizes the compensation and estimated expenses we
will pay:

Underwriting Discounts
and Commissions Expenses
------------------------- ---------------------
Without Without
Over- With Over- Over- With Over-
allotment allotment allotment allotment
------------ ------------ ---------- ----------

Per Share....................... $ 0.8471 $ 0.8471 $ 0.0300 $ 0.0273
Total........................... $237,181,000 $260,899,100 $8,400,000 $8,400,000

The underwriters have agreed to pay expenses related to meetings with
institutional investors in connection with this offering.

102

We and Philip Morris have agreed that we and Philip Morris will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Securities and Exchange Commission a registration statement
under the Securities Act of 1933 relating to, any shares of our Class A common
stock, any shares of our Class B common stock or any securities convertible
into or exchangeable or exercisable for any shares of our Class A or Class B
common stock, or, in the case of Philip Morris, enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our Class A or Class B common stock, or publicly
announce or disclose the intention to make any offer, sale, pledge, disposition
or filing, or, in the case of Philip Morris, to enter into any transaction,
swap, hedge or other arrangement, without the prior written consent of Credit
Suisse First Boston Corporation and Salomon Smith Barney Inc. as
representatives of the underwriters, for a period of 180 days after the date of
this prospectus. The following exceptions to the lock-up apply in the case of
Kraft:

. issuances of Class A common stock pursuant to the conversion, if any,
during the 180 day period of our Class B common stock that is
outstanding on the date of this prospectus;

. grants of employee stock options or stock appreciation rights with
respect to Class A common stock pursuant to the terms of a plan
described in this prospectus or otherwise described in this prospectus;

. issuances of Class A common stock pursuant to the exercise of any
employee stock options granted pursuant to the terms of a plan described
in this prospectus;

. issuances of Class A common stock pursuant to any of our employee
benefit plans described in this prospectus or our dividend reinvestment
plan;

. issuances of Class A common stock in connection with the merger with or
acquisition of another company or the acquisition of the assets or
property of a company and the related entry into a merger or acquisition
agreement, so long as recipients of the Class A common stock agree to be
bound by the lock-up restrictions described in this prospectus; and

. the public announcement and related filings of registration statements
with respect to any of these issuances;

however, if we are unable to obtain signed, written lock-up agreements from the
recipients of Class A common stock in connection with a merger or acquisition
as described in the fifth bullet point above, then we may only enter into a
merger or acquisition agreement, make a public announcement of the transaction
and make the related filing of a registration statement but we may not make the
related issuance of our Class A common stock.

The following exceptions to the lock-up apply in the case of Philip Morris:

. grants of employee stock options with respect to our Class A common
stock as described in this prospectus; and

. issuances of our Class A common stock pursuant to the exercise of
employee stock options as described in this prospectus.

Our senior officers and the senior officers of Philip Morris and its
subsidiaries who are purchasing Class A common stock in this offering have
agreed that they will not offer, sell, pledge or otherwise dispose of any
shares of our Class A common stock acquired by them from among the shares
reserved for sales to employees, enter into any transaction that would have the
same effect or enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of their ownership of our
Class A common stock acquired by them from among the reserved shares, whether
any of these transactions are to be settled by delivery of the Class A common
stock, in cash or otherwise, or publicly announce or disclose the intention to
make any offer, sale, pledge or disposition of Class A common stock acquired by
them from among the reserved shares, or to enter into any transaction, swap,
hedge or other arrangement, without the prior written consent of Credit Suisse
First Boston Corporation and Salomon Smith Barney Inc. as representatives of
the underwriters, for a period of 180 days after the date of this prospectus,
except that these officers may make gifts of the shares so long as the
recipients of the shares agree to be bound by the lock-up restrictions
described in this paragraph.

103

The underwriters have reserved for sale at the initial public offering price
up to 8,400,000 shares of our Class A common stock for employees who have
expressed an interest in purchasing Class A common stock in the offering. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.

We have agreed to indemnify the underwriters, and the underwriters have
agreed to indemnify us, against some liabilities, including liabilities under
the Securities Act of 1933, or to contribute to payments that may be required
to be made in that respect.

Our shares have been authorized for listing on the New York Stock Exchange
under the symbol "KFT." The underwriters have undertaken to sell shares of our
Class A common stock to a minimum of 2,000 beneficial owners in lots of 100 or
more shares to meet the New York Stock Exchange distribution requirements for
trading.

Prior to this offering, there has been no public market for our Class A
common stock. The initial public offering price for the shares was determined
by negotiations between us and the representatives. Among the factors
considered in determining the initial public offering price were:

. our record of operations;

. our current financial condition;

. our future prospects;

. our markets;

. the economic conditions in and future prospects for the industry in
which we compete;

. our management; and

. prevailing general conditions in the equity securities markets,
including market valuations of publicly traded companies we considered
comparable to us.

There can be no assurance, however, that the prices at which our shares will
sell in the public market after this offering will not be lower than the price
at which our shares are sold by the underwriters or that an active trading
market in our Class A common stock will develop and continue after this
offering.

In connection with the offering, the representatives, on behalf of the
underwriters, may engage in stabilizing transactions, over-allotment
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934:

. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the over-
allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.

. Syndicate covering transactions involve purchases of our Class A common
stock in the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the source of
shares to close out the short position, the underwriters will consider,
among other

104

things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could
be covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters
are concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.

. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when our Class A common stock originally sold by
the syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
Class A common stock or preventing or retarding a decline in the market price
of our Class A common stock. As a result, the price of our Class A common stock
may be higher than the price that might otherwise exist in the open market.
These transactions may be effected on the New York Stock Exchange or otherwise
and, if commenced, may be discontinued at any time.

A prospectus in electronic format, from which you can review a "Meet the
Management of Kraft" presentation through an embedded hyperlink--click here for
"Meet the Management of Kraft" presentation--will be made available on
www.kraftipo.com, www.csfb.com/ipo/us/ and www.csfbdirect.com. A description of
this "Meet the Management of Kraft" presentation is included in an appendix to
this prospectus. A prospectus in electronic format may be made available on the
websites maintained by one or more of the other underwriters participating in
this offering.

The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations. Credit Suisse First Boston Corporation may
effect an online distribution through its affiliate, CSFBdirect Inc., an online
broker dealer, as a selling group member. In addition, Morgan Stanley DW Inc.,
an affiliate of Morgan Stanley & Co. Incorporated, through Morgan Stanley
Online, its online service, may be a member of the syndicate and engage in
electronic offers, sales and distribution of the shares being offered.

The underwriters have informed us that they do not expect sales to
discretionary accounts to exceed 5% of the shares of Class A common stock being
offered.

Deutsche Banc Alex. Brown Inc. will assume the risk of any unsold allotment
that would otherwise be purchased by Utendahl Capital Partners, L.P.

The representatives and some of the underwriters have performed investment
banking and advisory services for us and Philip Morris from time to time for
which they have received customary fees and expenses. The underwriters may,
from time to time, engage in transactions with and perform services for us and
our affiliates in the ordinary course of their business. Banks affiliated with
the underwriters participating in this offering are lenders under Philip
Morris' credit facilities. In connection with the acquisition of Nabisco,
Philip Morris entered into a $9.0 billion, 364-day revolving credit agreement,
expiring in October 2001. Philip Morris may assign this credit agreement to us
following this offering upon fulfillment of conditions. Credit Suisse First
Boston, New York Branch, an affiliate of Credit Suisse First Boston Corporation
and The Chase Manhattan Bank, an affiliate of J.P. Morgan Securities Inc.,
acted as administrative agents, and Citibank, N.A., an affiliate of Salomon
Smith Barney Inc., and Deutsche Bank AG, New York Branch and/or Deutsche Bank
AG, Cayman Islands Branch, an affiliate of Deutsche Banc Alex. Brown Inc.,
acted as co-syndication agents in connection with this credit facility. These
companies received customary fees for their services.

105

NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

The distribution of our Class A common stock in Canada is being made only on
a private placement basis exempt from the requirement that we prepare and file
a prospectus with the securities regulatory authorities in each province where
trades of Class A common stock are made. Any resale of our Class A common stock
in Canada must be made under applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be
made under available statutory exemptions or under a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of our Class A common
stock.

Representations of Purchasers

By purchasing our Class A common stock in Canada and accepting a purchase
confirmation, a purchaser is representing to us and the dealer from whom the
purchase confirmation is received that:

. the purchaser is entitled under applicable provincial securities laws to
purchase our Class A common stock without the benefit of a prospectus
qualified under those securities laws;

. where required by law, that the purchaser is purchasing as principal and
not as agent; and

. the purchaser has reviewed the text above under "Resale Restrictions."

Rights of Action (Ontario Purchasers)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the United States federal securities laws.

Enforcement of Legal Rights

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.

Notice to British Columbia Residents

A purchaser of Class A common stock to whom the Securities Act (British
Columbia) applies is advised that the purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class A common stock acquired by the purchaser in this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed for Class A common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

Canadian purchasers of our Class A common stock should consult their own
legal and tax advisors with respect to the tax consequences of an investment in
our Class A common stock in their particular circumstances and about the
eligibility of our Class A common stock for investment by the purchaser under
relevant Canadian legislation.

106

VALIDITY OF CLASS A COMMON STOCK

The validity of our Class A common stock offered hereby and other legal
matters will be passed upon for us by Hunton & Williams, New York, New York.
The validity of our Class A common stock offered hereby will be passed upon for
the underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson
Thacher & Bartlett acts as counsel from time to time in matters for some
subsidiaries of Philip Morris.

EXPERTS

The combined financial statements of Kraft at December 31, 1999 and 2000 and
for each of the three years in the period ended December 31, 2000 included in
this prospectus and the related financial statement schedule included elsewhere
in the registration statement have been so included in reliance on the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.

The consolidated financial statements of Nabisco at December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-l under the Securities Act of 1933,
with respect to our Class A common stock offered hereby. This prospectus, which
forms a part of the registration statement, does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. Some items are omitted in accordance
with the rules and regulations of the SEC. For further information about us and
our common stock, we refer you to the registration statement and the exhibits
and schedules to the registration statement. Statements contained in this
prospectus as to the contents of any contract or other document filed as an
exhibit are qualified in all respects by reference to the actual text of the
exhibit. You may read and copy the registration statement, including the
exhibits and schedules to the registration statement, at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov, from which you can electronically access the registration
statement, including the exhibits and schedules to the registration statement.

As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934. We will
fulfill our obligations with respect to those requirements by filing periodic
reports and other information with the SEC. We intend to furnish our
shareholders with annual reports containing combined financial statements
audited by an independent public accounting firm.

107

INDEX TO FINANCIAL STATEMENTS

Page
Reference
Kraft Foods Inc. and Subsidiaries: ---------

Report of PricewaterhouseCoopers LLP, Independent Accountants...... F-2
Combined Balance Sheets At December 31, 1999 and 2000.............. F-3
Combined Statements of Earnings For the Years Ended December 31,
1998, 1999 and 2000............................................... F-4
Combined Statements of Shareholder's Equity For the Years Ended
December 31, 1998, 1999 and 2000.................................. F-5
Combined Statements of Cash Flows For the Years Ended December 31,
1998, 1999 and 2000............................................... F-6
Notes to Combined Financial Statements............................. F-7
Unaudited Condensed Combined Balance Sheets At December 31, 2000
and March 31, 2001................................................ F-30
Unaudited Condensed Combined Statements of Earnings For the Three
Months Ended March 31, 2000 and 2001.............................. F-31
Unaudited Condensed Combined Statements of Shareholder's Equity For
the Year Ended December 31, 2000 and the Three Months Ended March
31, 2001.......................................................... F-32
Unaudited Condensed Combined Statements of Cash Flows For the Three
Months Ended March 31, 2000 and 2001.............................. F-33
Unaudited Notes to Condensed Combined Financial Statements......... F-34

Nabisco Holdings Corp.:
Report of Deloitte & Touche LLP, Independent Auditors.............. F-40
Consolidated Balance Sheets At December 31, 1998 and 1999.......... F-41
Consolidated Statements of Income (Loss) For the Years Ended
December 31, 1997, 1998 and 1999.................................. F-42
Consolidated Statements of Comprehensive Income (Loss) For the
Years Ended December 31, 1997, 1998 and 1999...................... F-43
Consolidated Statements of Cash Flows For the Years Ended December
31, 1997, 1998 and 1999........................................... F-44
Consolidated Statements of Shareholders' Equity For the Years Ended
December 31, 1997, 1998 and 1999.................................. F-45
Notes to Consolidated Financial Statements......................... F-46
Unaudited Consolidated Condensed Balance Sheet At September 30,
2000.............................................................. F-70
Unaudited Consolidated Condensed Statements of Income For the Nine
Months Ended September 30, 1999 and 2000.......................... F-71
Unaudited Consolidated Condensed Statements of Comprehensive Income
For the Nine Months Ended September 30, 1999 and 2000............. F-72
Unaudited Consolidated Condensed Statements of Cash Flows For the
Nine Months Ended September 30, 1999 and 2000..................... F-73
Unaudited Notes to Consolidated Condensed Financial Statements..... F-74

F-1

REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder of
KRAFT FOODS INC. AND SUBSIDIARIES:

In our opinion, the accompanying combined balance sheets and the related
combined statements of earnings, shareholder's equity and cash flows present
fairly, in all material respects, the combined financial position of Kraft
Foods Inc. and its subsidiaries (the "Company") at December 31, 1999 and 2000,
and the combined results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
January 29, 2001

F-2

KRAFT FOODS INC. AND SUBSIDIARIES

COMBINED BALANCE SHEETS
(in millions of dollars)

At December 31,
----------------
1999 2000
------- -------

ASSETS
Cash and cash equivalents................................... $ 95 $ 191
Receivables (less allowances of $100 and $152).............. 2,755 3,231
Inventories:
Raw materials............................................. 1,158 1,175
Finished product.......................................... 1,405 1,866
------- -------
2,563 3,041
Deferred income tax benefits................................ 356 504
Other current assets........................................ 121 185
------- -------
Total current assets...................................... 5,890 7,152
Property, plant and equipment, at cost:
Land and land improvements................................ 272 419
Buildings and building equipment.......................... 2,395 2,949
Machinery and equipment................................... 6,851 8,858
Construction in progress.................................. 573 816
------- -------
10,091 13,042
Less accumulated depreciation............................. 3,565 3,637
------- -------
6,526 9,405
Goodwill and other intangible assets (less accumulated
amortization of $5,652 and $6,100)......................... 15,296 31,584
Prepaid pension assets...................................... 2,254 2,623
Assets held for sale........................................ 276
Other assets................................................ 370 1,031
------- -------
TOTAL ASSETS.............................................. $30,336 $52,071
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term borrowings....................................... $ 42 $ 146
Current portion of long-term debt........................... 63 713
Due to parent and affiliates................................ 688 865
Accounts payable............................................ 1,561 1,971
Accrued liabilities:
Marketing................................................. 1,310 1,601
Employment costs.......................................... 454 625
Other..................................................... 968 1,411
Income taxes................................................ 287 258
------- -------
Total current liabilities................................. 5,373 7,590
Long-term debt.............................................. 433 2,695
Deferred income taxes....................................... 1,145 1,446
Accrued postretirement health care costs.................... 1,239 1,867
Notes payable to parent and affiliates...................... 6,602 21,407
Other liabilities........................................... 2,083 3,018
------- -------
Total liabilities......................................... 16,875 38,023
------- -------
Contingencies (Note 15).....................................
Class A common stock, no par value (275,000,000 shares
issued and outstanding)....................................
Class B common stock, no par value (1,180,000,000 shares
issued and outstanding)....................................
Additional paid-in capital.................................. 15,230 15,230
Earnings reinvested in the business......................... 992
Accumulated other comprehensive losses (primarily currency
translation adjustments)................................... (1,769) (2,174)
------- -------
Total shareholder's equity................................ 13,461 14,048
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................ $30,336 $52,071
======= =======

See notes to combined financial statements.

F-3

KRAFT FOODS INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF EARNINGS
(in millions of dollars, except per share data)

For the Years Ended
December 31,
-----------------------
1998 1999 2000
------- ------- -------

Operating revenue...................................... $27,311 $26,797 $26,532
Cost of sales.......................................... 15,544 14,573 13,917
------- ------- -------
Gross profit......................................... 11,767 12,224 12,615
Marketing, administration and research costs........... 7,688 8,106 8,068
Amortization of goodwill............................... 544 539 535
------- ------- -------
Operating income..................................... 3,535 3,579 4,012
Interest and other debt expense, net................... 536 539 597
------- ------- -------
Earnings before income taxes......................... 2,999 3,040 3,415
Provision for income taxes............................. 1,367 1,287 1,414
------- ------- -------
Net earnings......................................... $ 1,632 $ 1,753 $ 2,001
======= ======= =======
Per share data:
Basic earnings per share............................. $ 1.12 $ 1.20 $ 1.38
======= ======= =======
Diluted earnings per share........................... $ 1.12 $ 1.20 $ 1.38
======= ======= =======

See notes to combined financial statements.

F-4

KRAFT FOODS INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY

For the Years Ended December 31, 1998, 1999 and 2000
(in millions of dollars)

Accumulated Other
Comprehensive Losses
Class --------------------------
A and B Additional Earnings Currency Total
Common Paid-in Reinvested in Translation Shareholder's
Stock Capital the Business Adjustments Other Total Equity
------- ---------- ------------- ----------- ----- ------- -------------

Balances, January 1,
1998................... $ -- $17,033 $ -- $(1,272) $ -- $(1,272) $15,761
Comprehensive earnings:
Net earnings........... 1,632 1,632
Other comprehensive
losses, net of income
taxes:
Currency translation
adjustments.......... (77) (77) (77)
Additional minimum
pension liability.... (10) (10) (10)
-------
Total other
comprehensive
losses............... (87)
-------
Total comprehensive
earnings............. 1,545
-------
Cash dividends
declared............... (540) (1,632) (2,172)
---- ------- ------ ------- ---- ------- -------
Balances, December 31,
1998.................. -- 16,493 -- (1,349) (10) (1,359) 15,134
Comprehensive earnings:
Net earnings........... 1,753 1,753
Other comprehensive
losses, net of income
taxes:
Currency translation
adjustments.......... (392) (392) (392)
Additional minimum
pension liability.... (18) (18) (18)
-------
Total other
comprehensive
losses............... (410)
-------
Total comprehensive
earnings............. 1,343
-------
Cash dividends
declared............... (1,263) (1,753) (3,016)
---- ------- ------ ------- ---- ------- -------
Balances, December 31,
1999.................. -- 15,230 -- (1,741) (28) (1,769) 13,461
Comprehensive earnings:
Net earnings........... 2,001 2,001
Other comprehensive
losses, net of income
taxes:
Currency translation
adjustments.......... (397) (397) (397)
Additional minimum
pension liability.... (8) (8) (8)
-------
Total other
comprehensive
losses............... (405)
-------
Total comprehensive
earnings............. 1,596
-------
Cash dividends
declared............... (1,009) (1,009)
---- ------- ------ ------- ---- ------- -------
Balances, December 31,
2000.................. $ -- $15,230 $ 992 $(2,138) $(36) $(2,174) $14,048
==== ======= ====== ======= ==== ======= =======

See notes to combined financial statements.

F-5

KRAFT FOODS INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS
(in millions of dollars)

For the Years Ended
December 31,
--------------------------
1998 1999 2000
------- ------- --------

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings..................................... $ 1,632 $ 1,753 $ 2,001
Adjustments to reconcile net earnings to
operating cash flows:
Depreciation and amortization.................. 1,038 1,030 1,034
Deferred income tax provision.................. 337 151 245
Gains on sales of businesses................... (62) (172)
Cash effects of changes, net of effects
from acquired and divested companies:
Receivables, net............................. (320) 156 204
Inventories.................................. 84 (95) 175
Accounts payable............................. (26) (18) 13
Income taxes................................. 177 127 35
Other working capital items.................. (491) (137) (195)
Increase in pension assets and postretirement
liabilities, net.............................. (57) (205) (215)
Other.......................................... (50) (7) 129
------- ------- --------
Net cash provided by operating activities...... 2,324 2,693 3,254
------- ------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Purchase of Nabisco, net of acquired cash........ (15,159)
Purchases of other businesses, net of acquired
cash............................................ (17) (14) (365)
Proceeds from sales of businesses................ 16 175 300
Capital expenditures............................. (841) (860) (906)
Other............................................ 79 30 (8)
------- ------- --------
Net cash used in investing activities.......... (763) (669) (16,138)
------- ------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net repayment of short-term borrowings........... (12) (22) (816)
Long-term debt proceeds.......................... 80 78 87
Long-term debt repaid............................ (195) (111) (112)
Proceeds from issuance of notes payable to parent
and affiliates.................................. 1,111 768 15,000
Repayment of notes payable to parent and
affiliates...................................... (178) (124)
(Decrease) increase in amounts due to parent and
affiliates...................................... (377) 450 143
Dividends paid................................... (2,172) (3,016) (1,009)
Other............................................ (187)
------- ------- --------
Net cash (used in) provided by financing
activities.................................... (1,565) (2,031) 12,982
------- ------- --------
Effects of exchange rate changes on cash and cash
equivalents....................................... (6) (10) (2)
------- ------- --------
Cash and cash equivalents:
(Decrease) increase.............................. (10) (17) 96
Balance at beginning of year..................... 122 112 95
------- ------- --------
Balance at end of year........................... $ 112 $ 95 $ 191
======= ======= ========
Cash paid:
Interest......................................... $ 522 $ 533 $ 605
======= ======= ========
Income taxes..................................... $ 807 $ 1,022 $ 1,051
======= ======= ========

See notes to combined financial statements.

F-6

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS

Note 1. Background and Basis of Presentation:

Kraft Foods Inc. (the "Company"), a wholly-owned subsidiary of Philip Morris
Companies Inc. ("Philip Morris"), was incorporated in 2000 in the Commonwealth
of Virginia. Following the Company's formation, Philip Morris transferred to
the Company its ownership interest in Kraft Foods North America, Inc., a
Delaware corporation, through a capital contribution. In addition, during 2000,
Philip Morris transferred management responsibility for its food businesses in
Latin America to Kraft Foods North America, Inc. and its wholly-owned
subsidiary, Kraft Foods International, Inc. The legal transfer of the Latin
American food businesses began in 2000 and is expected to be completed in 2001.
The Company, together with its subsidiaries, is engaged in the manufacture and
sale of retail packaged foods in the United States, Canada, Europe, Latin
America and Asia Pacific.

On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. See Note 5,
Acquisitions, for a complete discussion of this transaction.

Basis of presentation:

The combined financial statements include the Company and its subsidiaries,
as well as the Latin American food businesses, the managerial responsibility
for which was transferred from Philip Morris to the Company during 2000. The
combined financial statements have been prepared to present the combined
financial position and results of operations for the food businesses owned by
Philip Morris, in contemplation of a potential initial public offering of less
than 20% of the Company's common stock. Due to common control and ownership,
the combined financial statements have been prepared as if the Latin American
food entities, owned directly or indirectly by Philip Morris, were combined on
January 1, 1996, in a manner similar to a pooling of interests. The combined
financial statements have been prepared using historical results of operations
and the historical basis of the assets and liabilities.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of operating
revenue and expenses during the reporting periods. Actual results could differ
from those estimates. The Company's operating subsidiaries report year-end
results as of the Saturday closest to December 31 each year. This resulted in
fifty-three weeks of operating results in the Company's combined statement of
earnings for the year ended December 31, 2000.

Note 2. Summary of Significant Accounting Policies:

Cash and cash equivalents:

Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.

Inventories:

Inventories are stated at the lower of cost or market. The last-in, first-
out method is used to cost substantially all domestic inventories. The cost of
other inventories is principally determined by the average cost method.

Impairment of long-lived assets:

The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company performs undiscounted
operating cash flow analyses to determine if an impairment exists. If an
impairment is determined to exist, any related impairment loss is calculated
based on fair value. Impairment losses on assets to be disposed of, if any, are
based on the estimated proceeds to be received, less costs of disposal.

F-7

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Depreciation, amortization and goodwill valuation:

Property, plant and equipment are stated at historical cost and depreciated
by the straight-line method over the lives of the assets. Machinery and
equipment are depreciated over periods ranging from 3 to 20 years and buildings
and building improvements over periods up to 40 years. Goodwill and other
intangible assets substantially comprise brand names purchased through
acquisitions. In consideration of the long histories of these brands, goodwill
and other intangible assets associated with them are amortized on the straight-
line method over 40 years. The Company periodically evaluates the
recoverability of its intangible assets and measures any impairment by
comparison with estimated undiscounted operating cash flows.

Advertising costs:

Advertising costs are expensed as incurred.

Revenue recognition:

The Company recognizes operating revenue upon shipment of goods when title
and risk of loss pass to customers. Staff Accounting Bulletin No. 101, "Revenue
Recognition," issued by the Securities and Exchange Commission, did not have an
impact on the Company's operating revenue for any of the years presented.

During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement and statement of earnings classification for certain
sales incentives and will be effective in the second quarter of 2001. As a
result, certain items previously included in marketing, administration and
research costs on the combined statements of earnings will be recorded as
reductions of operating revenue. Due to anticipated additional consideration of
EITF No. 00-14 by the EITF, the Company is currently unable to quantify the
impact of adoption. The Company presently expects that adoption or subsequent
application of EITF No. 00-14 will not have a material effect on its financial
position or results of operations. Upon adoption, prior period amounts will be
reclassified to conform to the new requirements. In addition, the EITF issued
EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF No.
00-10 addresses the statement of earnings classification of shipping and
handling costs billed to customers and was effective for the fourth quarter of
2000. The Company classifies the cost of shipping and handling in cost of
sales. EITF No. 00-10 did not have an impact on the combined financial
statements of the Company for any of the years presented.

Hedging instruments:

The Company utilizes certain financial instruments to manage its commodity,
foreign currency and interest rate exposures. The Company does not engage in
speculative use of these financial instruments. For a financial instrument to
qualify as a hedge, the Company must be exposed to price, currency or interest
rate risk, and the financial instrument must reduce the exposure and be
designated as a hedge. Additionally, for hedges of anticipated transactions,
the significant characteristics and expected terms of the anticipated
transaction must be identified, and it must be probable that the anticipated
transaction will occur. Financial instruments qualifying for hedge accounting
must maintain a high correlation between the hedging instrument and the item
being hedged, both at inception and throughout the hedged period.

Commodity futures and forward contracts are used by the Company to procure
raw materials, primarily coffee, cocoa, sugar, milk, cheese, wheat and corn.
Commodity futures and options are also used to hedge the price of certain
commodities, primarily coffee and cocoa. Realized gains and losses on commodity
futures, forward contracts and options are deferred as a component of
inventories and are recognized when related raw material costs are charged to
cost of sales. If the anticipated transaction were not to occur, any gain or
loss would be recognized in earnings currently.

F-8

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The Company uses forward contracts and options to mitigate its foreign
currency exposure. The corresponding gains and losses on those contracts are
deferred and included in the basis of the underlying hedged transactions when
settled. Options are used to hedge anticipated transactions. Option premiums
are recorded generally as other current assets on the combined balance sheets
and amortized to interest and other debt expense, net, over the lives of the
related options. The intrinsic values of options are recognized as adjustments
to the related hedged items. If anticipated transactions were not to occur, any
gain or loss would be recognized in earnings currently.

The Company uses interest rate swaps to hedge certain interest rate
exposures. The differential to be paid or received is accrued and recognized as
interest expense. Any premium paid or received is amortized on a straight-line
basis over the duration of the hedged instrument. If an interest rate swap
agreement is terminated prior to maturity, the realized gain or loss is
recognized over the remaining life of the agreement if the hedged amount
remains outstanding, or immediately if the underlying hedged exposure does not
remain outstanding. If the underlying exposure is terminated prior to the
maturity of the interest rate swap, the unrealized gain or loss on the related
interest rate swap is recognized in earnings currently.

During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which had an initial adoption date of January 1, 2000.
During 1999, the FASB postponed the required adoption date of SFAS No. 133
until January 1, 2001. In addition, during 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which amends the requirements of SFAS No. 133. These standards require that all
derivative financial instruments be recorded on balance sheets at fair value as
either assets or liabilities. Changes in the fair value of derivatives will be
recorded each period in earnings or other comprehensive earnings, depending on
whether a derivative is designated and effective as part of a hedge transaction
and, if it is, the type of hedge transaction. Gains and losses on derivative
instruments reported in other comprehensive earnings will be reclassified as
earnings in the periods in which earnings are affected by the hedged item.
Initial adoption of these new standards on January 1, 2001 will have an
insignificant impact on the Company's combined financial position and results
of operations. Since the impact of SFAS No. 133 after adoption is dependent on
future market rates and outstanding derivative positions, the Company cannot
determine the impact that application subsequent to January 1, 2001 will have
on its combined financial position or results of operations.

Stock-based compensation:

Certain employees of the Company participate in Philip Morris' employee
stock compensation plans. Philip Morris accounts for these plans in accordance
with the intrinsic value-based method permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation," which does not result in compensation cost.

Income taxes:

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The accounts of the Company are included in the
consolidated federal income tax return of Philip Morris. Income taxes are
generally computed on a separate company basis. To the extent that foreign tax
credits, capital losses and other credits generated by the Company, which
cannot be utilized on a separate company basis, are utilized in Philip Morris'
consolidated federal income tax return, the benefit is recognized in the
calculation of the Company's provision for income taxes. The Company's
provision for income taxes included in the combined statements of earnings for
the years ended December 31, 1998, 1999 and 2000 were lower than provisions
calculated on a separate return basis by $156 million, $107 million and $139
million, respectively. The Company makes payments to, or is reimbursed by,
Philip Morris for the tax effects resulting from its inclusion in Philip
Morris' consolidated federal income tax return.

F-9

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Software costs:

The Company capitalizes certain computer software and software development
costs incurred in connection with developing or obtaining computer software for
internal use in accordance with Statement of Position No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," which
was adopted by the Company as of January 1, 1998. Capitalized software costs,
which are not significant, are amortized on a straight-line basis over the
estimated useful lives of the software, which do not exceed five years.

Foreign currency translation:

The Company translates the results of operations of its foreign subsidiaries
using average exchange rates during each period, whereas balance sheet accounts
are translated using exchange rates at the end of each period. Currency
translation adjustments are recorded as a component of shareholder's equity.
Transaction gains and losses for all periods presented were not significant.

Environmental costs:

The Company is subject to laws and regulations relating to the protection of
the environment. The Company provides for expenses associated with
environmental remediation obligations when such amounts are probable and can be
reasonably estimated. Such accruals, which are not discounted, are adjusted as
new information develops or circumstances change.

While it is not possible to quantify with certainty the potential impact of
actions regarding environmental remediation and compliance efforts that the
Company may undertake in the future, in the opinion of management,
environmental remediation and compliance costs, before taking into account any
recoveries from third parties, will not have a material adverse effect on the
Company's combined financial position, results of operations or cash flows.

Note 3. Related Party Transactions:

Philip Morris and certain of its affiliates provide the Company with various
services, including planning, legal, treasury, accounting, auditing, insurance,
human resources, office of the secretary, corporate affairs, information
technology and tax services. Billings for these services, which were based on
the cost to Philip Morris to provide such services, were $122 million, $165
million and $248 million for the years ended December 31, 1998, 1999 and 2000,
respectively. These costs were billed and paid to Philip Morris quarterly.
Although the cost of these services cannot be quantified on a stand-alone
basis, management believes that the billings are reasonable based on the level
of support provided by Philip Morris and its affiliates, that they reflect all
services provided and that, in the aggregate, the terms are at least as
favorable as the Company could have obtained from unrelated third parties. The
effects of these transactions are included in other operating cash flows in the
Company's combined statements of cash flows. In 2001, the Company intends to
enter into a formal agreement with Philip Morris providing for a continuation
of these services, the cost of which is expected to increase approximately $50
million as Philip Morris provides additional information technology and
financial services previously performed internally. Under the provisions of the
2001 agreement, assessments will be paid monthly.

In addition, the Company's daily net cash or overdraft position is
transferred to Philip Morris or a European subsidiary of Philip Morris. The
Company pays or receives interest based upon the applicable commercial paper
rate or the London Interbank Offered Rate, on the net amount payable to, or
receivable from, Philip Morris or its European subsidiary. The amounts due to
parent and affiliates consisted primarily of amounts payable for cash
transactions at December 31, 1999 and 2000.

F-10

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The Company also has long-term notes payable to its parent, Philip Morris,
and its affiliates as follows:

At December 31,
----------------
1999 2000
------- --------
(in millions)

Notes payable in 2002, interest at 7.75%................. $11,000
Notes payable in 2002, interest at 7.40%................. 4,000
Notes payable in 2009, interest at 7.00%................. $5,000 5,000
Swiss franc notes payable in 2008, interest at 4.58%..... 880 715
Swiss franc notes payable in 2006, interest at 3.58%..... 722 692
------ -------
$6,602 $21,407
====== =======

The two notes issued in 2000, maturing in 2002, were related to the
financing for the Nabisco acquisition and were at market interest rates
available to Philip Morris for debt with matching maturities. During 2001, the
Company intends to undertake an IPO of less than 20% of its common stock. If
completed as anticipated, the IPO proceeds will be used to retire a portion of
the notes payable to Philip Morris.

Based on interest rates available to the Company for issuances of debt with
similar terms and remaining maturities, the aggregate fair values of the
Company's long-term notes payable to Philip Morris and its affiliates at
December 31, 1999 and 2000 were $6,036 million and $21,357 million,
respectively. The fair values of the Company's current amounts due to parent
and affiliates approximate carrying amounts.

The amounts reported as due to parent and affiliates and as long-term debt
as of December 31, 1999 and 2000, as well as borrowings during each of the
three years in the period ended December 31, 2000, represent the amounts
required to finance the Company's operations on a stand alone basis.

Note 4. Divestitures:

During 1999, the Company sold several small international and domestic food
businesses. The aggregate proceeds received in these transactions were $175
million, on which the Company recorded pre-tax gains of $62 million.

During 2000, the Company sold a French confectionery business for proceeds
of $251 million, on which a pre-tax gain of $139 million was recorded. Several
small international and domestic food businesses were also sold in 2000. The
aggregate proceeds received in these transactions were $300 million, on which
the Company recorded pre-tax gains of $172 million.

The operating results of the businesses sold were not material to the
Company's combined operating results in any of the periods presented. Pre-tax
gains on these divestitures were included in marketing, administration and
research costs on the Company's combined statements of earnings.

Note 5. Acquisitions:

Nabisco:

On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco for $55 per share in cash. The purchase of the outstanding shares,
retirement of employee stock options and other payments totaled approximately
$15.2 billion. In addition, the acquisition included the assumption of
approximately $4.0 billion of existing Nabisco debt. The Company financed the
acquisition through the issuance of two long-term notes payable to Philip
Morris totaling $15.0 billion and short-term intercompany borrowings of $255
million. The acquisition has been accounted for as a purchase. Nabisco's
balance sheet has been consolidated with the Company as of December 31, 2000;
however, Nabisco's earnings subsequent to December 11, 2000 have not been
included in the combined operating results of the Company since such amounts
were insignificant to combined operating results for the year ended December
31, 2000. The Company's interest cost of $65 million

F-11

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

associated with acquiring Nabisco has been included in interest and other debt
expense, net, on the Company's combined statement of earnings for the year
ended December 31, 2000.

In order to address concerns raised by United States trade regulation
authorities, Nabisco sold its domestic dry packaged dessert and baking powder
businesses, as well as its intense mints and gum businesses in December 2000.
Since these businesses were sold at fair value, no gain or loss related to
these sales was recorded in the Company's combined statement of earnings for
the year ended December 31, 2000. In addition, the Company has announced that
it will sell Nabisco's Canadian grocery business. The Company also currently
plans to sell a number of Nabisco businesses that do not align strategically
with the Company's food operations. These businesses have been accounted for in
accordance with EITF No. 87-11 "Allocation of Purchase Price to Assets to be
Sold." Accordingly, the estimated selling prices of these businesses less costs
of disposal, plus the estimated results of operations through anticipated sales
dates, total $276 million and have been segregated as assets held for sale on
the Company's combined balance sheet at December 31, 2000. It is expected that
these assets will be disposed of within one year from the acquisition date.
Future operating results of these businesses through the sales dates will be
excluded from the Company's combined net earnings.

The excess of the purchase price over the estimated fair value of the net
assets purchased was approximately $16.8 billion and will be amortized over 40
years by the straight-line method. The allocation of excess purchase price is
based upon preliminary estimates and assumptions and is subject to revision
when appraisals and integration plans have been finalized. Accordingly,
revisions to the allocation, which may be significant, will be reported in a
future period as increases or decreases to amounts reported as goodwill, other
intangible assets (including trade names), deferred income taxes and
amortization of goodwill. Excess purchase price has been allocated to reflect
current estimates as follows:

At December 31, 2000
----------------------
Increase (Decrease) to
Excess Purchase Price
----------------------
(in millions)

Purchase price.......................................... $15,254
Historical value of assets acquired and liabilities
assumed................................................ (1,271)
-------
Excess of purchase price over assets acquired
and liabilities assumed at the date of acquisition..... 16,525
Adjustments for allocation of purchase price:
Inventories........................................... (4)
Property, plant and equipment......................... (45)
Assets held for sale.................................. (59)
Other intangibles (primarily workforce)............... (100)
Debt.................................................. 70
Other, principally benefit plans...................... 561
Deferred income taxes................................. (176)
-------
Unallocated excess purchase price at December 31, 2000.. $16,772
=======

In addition to the above, the Company is evaluating plans to close a number
of Nabisco domestic and international facilities, pending the completion of
logistical studies. It is currently estimated that the closure of these
facilities could result in additional severance and other exit liabilities (and
a corresponding increase to excess purchase price) of $500 million to $600
million. These amounts will be recorded on the combined balance sheet as
adjustments to excess purchase price when plans have been finalized and
announced to employees.

The integration of Nabisco into the operations of the Company may result in
the closure of a number of the Company's existing plants. These actions could
result in charges of $200 million to $300 million, which will be recorded as
expense in the Company's combined statement of earnings in the period during
which plans are finalized and announced.

F-12

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Had the acquisition of Nabisco occurred at the beginning of 1999 and 2000,
pro forma operating revenue, net earnings, basic earnings per share and diluted
earnings per share, after giving effect to the previously discussed preliminary
allocation of excess purchase price, Nabisco businesses sold or to be sold and
the interest expense on acquisition borrowings, would have been as follows:

For the Years Ended
December 31,
---------------------------
1999 2000
------------- -------------
(in millions, except
per share data, unaudited)

Operating revenue.............................. $34,339 $34,679
Net earnings................................... 1,116 1,404
Basic earnings per share....................... 0.77 0.96
Diluted earnings per share..................... 0.77 0.96

The pro forma results do not give effect to any synergies expected to result
from the merger of Nabisco's operations with those of the Company. Accordingly,
the pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been consummated at the beginning of each
year, nor are they necessarily indicative of future combined operating results.

The Nabisco condensed balance sheet at December 31, 2000, including the
previously discussed preliminary allocations of excess purchase price, has been
included in the Company's combined balance sheet as follows:

At December 31,
2000
---------------
(in millions)

Assets
Current assets........................................... $ 1,840
Property, plant and equipment............................ 2,851
Goodwill................................................. 16,772
Other assets............................................. 909
-------
Total assets........................................... $22,372
=======
Liabilities
Current liabilities...................................... $ 2,242
Long-term debt........................................... 2,392
Other long-term liabilities.............................. 1,464
-------
Total liabilities...................................... $ 6,098
=======

In 2001, the Company plans to undertake an IPO of less than 20% of its
common stock. If completed as anticipated, the IPO proceeds will be used to
retire a portion of the debt incurred as a result of the acquisition of
Nabisco.

Other acquisitions:

During 1998 and 1999, the Company purchased several small North American and
international food businesses for $17 million and $14 million, respectively.
The effects of these acquisitions were not material to the Company's combined
financial position or results of operations in any of the periods presented.

During 2000, the Company purchased the outstanding common stock of Balance
Bar Co., a maker of energy and nutrition snack products. In a separate
transaction, the Company also acquired Boca Burger, Inc., a

F-13

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

manufacturer and marketer of soy-based meat alternatives. The total cost of
these acquisitions was $358 million. The effects of these and other smaller
acquisitions were not material to the Company's combined financial position or
results of operations.

Note 6. Inventories:

The cost of approximately 46% and 56% of inventories in 1999 and 2000,
respectively, was determined using the LIFO method. The stated LIFO amounts of
inventories were approximately $102 million and $171 million higher than the
current cost of inventories at December 31, 1999 and 2000, respectively.

Note 7. Short-Term Borrowings and Borrowing Arrangements:

The Company's short-term borrowings and related average interest rates
consisted of the following:

At December 31,
-----------------------------------------
1999 2000
-------------------- --------------------
Average Average
Amount Year-end Amount Year-end
Outstanding Rate Outstanding Rate
----------- -------- ----------- --------
(in millions)

Bank loans......................... $42 19.6% $146 9.2%

The Company's short-term borrowings at December 31, 1999 were in certain
high interest rate Central and Eastern European markets and were used primarily
for working capital requirements.

The fair values of the Company's short-term borrowings at December 31, 1999
and 2000, based upon current market interest rates, approximate the amounts
disclosed above.

The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $430 million at December 31,
2000. Approximately $284 million of these facilities were unused at December
31, 2000. These facilities were used primarily to meet the working capital
requirements of certain international subsidiaries. In addition, in connection
with the acquisition of Nabisco, Philip Morris entered into a $9.0 billion 364-
day revolving credit agreement. This agreement enables Philip Morris to
transfer to the Company this revolving credit line and any outstanding
balances, provided certain conditions are met, after the consummation of an IPO
of the Company's common stock. At December 31, 2000, Philip Morris had no
borrowings under the agreement, which expires during October 2001.

Note 8. Long-Term Debt:

The Company's long-term debt consisted of the following:

At December 31,
----------------
1999 2000
------- --------
(in millions)

Notes, 6.00% to 7.86% (average effective rate 6.68%), due
through 2035............................................ $2,751
Debentures, 6.00% to 8.50% (average effective rate
10.45%), $465 million face amount, due through 2017..... $391 401
Foreign currency obligations............................. 68 173
Other.................................................... 37 83
---- ------
496 3,408
Less current portion of long-term debt................... (63) (713)
---- ------
$433 $2,695
==== ======

F-14

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Aggregate maturities of long-term debt are as follows:

(in millions)

2001........................................................... $713
2002........................................................... 443
2003........................................................... 383
2004........................................................... 95
2005........................................................... 736
2006-2010...................................................... 469
Thereafter..................................................... 633

Based on market quotes, where available, or interest rates then currently
available to the Company for issuance of debt with similar terms and remaining
maturities, the aggregate fair value of the Company's long-term debt, including
the current portion of long-term debt, at December 31, 1999 and 2000 was $552
million and $3,459 million, respectively.

Note 9. Capital Stock, Stock Plans and Earnings per Share:

Capital stock:

The Company's articles of incorporation authorize 3.0 billion shares of
Class A common stock, 2.0 billion shares of Class B common stock and 500
million shares of preferred stock. Philip Morris presently holds 275 million
Class A common shares and 1.18 billion Class B common shares of the Company,
representing all of the issued and outstanding common shares of the Company.
There are no preferred shares issued and outstanding. Class A common shares are
entitled to one vote each while Class B common shares are entitled to ten votes
each. During the three years ended December 31, 2000, the Company did not have
any stock option or other stock benefit plans.

Stock plans:

Certain employees of the Company participate in Philip Morris' stock
compensation plans. Philip Morris accounts for the plans in accordance with the
intrinsic value-based method permitted by SFAS No. 123, "Accounting for Stock-
Based Compensation," which does not result in compensation cost. Had
compensation cost for stock option awards under Philip Morris' plans been
determined by using the fair value at the grant date, the Company's net
earnings and earnings per share (basic and diluted) would have been $1,594
million and $1.10 for the year ended December 31, 1998; $1,713 million and
$1.18 for the year ended December 31, 1999; and $1,947 million and $1.34 for
the year ended December 31, 2000. The foregoing impact of compensation cost was
determined using a modified Black-Scholes methodology and the following
assumptions:

Weighted
Risk-Free Average Expected Expected Fair Value
Interest Rate Expected Life Volatility Dividend Yield at Grant Date
-------------- ------------- ---------- -------------- -------------

1998... 5.52% 5 years 23.83% 4.03% $7.78
1999... 5.81 5 26.06 4.41 8.21
2000... 6.58 5 31.71 9.00 3.19

The Company's employees held options to purchase the following number of
shares of Philip Morris' stock: 32,497,459 shares at an average exercise price
of $32.37 per share at December 31, 1998; 39,911,082 shares at an average
exercise price of $34.34 per share at December 31, 1999; and 56,977,329 shares
at an average exercise price of $30.46 per share at December 31, 2000. Of these
amounts, the following were exercisable at each date: 24,757,659 at an average
exercise price of $30.07 per share at December 31, 1998; 31,071,681 at an
average exercise price of $32.75 per share at December 31, 1999; and 38,444,963
at an average exercise price of $34.82 per share at December 31, 2000.

F-15

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

In addition, certain of the Company's employees held shares of Philip Morris
restricted stock and rights to receive shares of stock, giving these employees
in most instances all of the rights of shareholders, except that they may not
sell, assign, pledge or otherwise encumber such shares and rights. Such shares
are subject to forfeiture if certain employment conditions are not met. During
1998 and 2000, Philip Morris granted to certain of the Company's U.S. employees
restricted stock of 128,000 shares and 2,113,570 shares, respectively. Philip
Morris also issued to certain of the Company's non-U.S. employees rights to
receive 68,000 and 683,790 equivalent shares during 1998 and 2000,
respectively. During 1999, there were no restricted stock grants issued to the
Company's employees. At December 31, 2000, restrictions on the stock, net of
forfeitures, lapse as follows: 2001--21,188 shares; 2002--2,707,822 shares;
2003--177,040 shares and thereafter--12,000 shares. The fair value of the
restricted shares and rights at the date of grant is amortized to expense
ratably over the restriction period through a charge from Philip Morris. In
1998, 1999 and 2000, the Company recorded compensation expense related to
restricted stock awards of $2 million, $3 million and $23 million,
respectively.

Philip Morris does not currently intend to issue additional Philip Morris
stock compensation to the Company's employees. In future periods, the Company
intends to issue its own stock compensation to its employees in accordance with
a plan expected to be approved in 2001.

Earnings per share:

Basic and diluted earnings per share are calculated on the total shares
outstanding, which was 1.455 billion. Prior period earnings per share amounts
reflect the current capital structure of the Company.

Note 10. Pre-tax Earnings and Provision for Income Taxes:

Pre-tax earnings and provision for income taxes consisted of the following:

For the Years Ended
December 31,
---------------------
1998 1999 2000
------ ------ ------
(in millions)

Pre-tax earnings:
United States....................................... $2,020 $1,990 $2,188
Outside United States............................... 979 1,050 1,227
------ ------ ------
Total pre-tax earnings................................ $2,999 $3,040 $3,415
====== ====== ======
Provision for income taxes:
United States federal:
Current........................................... $ 430 $ 543 $ 572
Deferred.......................................... 290 164 218
------ ------ ------
720 707 790
State and local..................................... 169 144 120
------ ------ ------
Total United States................................. 889 851 910
------ ------ ------
Outside United States:
Current........................................... 431 449 477
Deferred.......................................... 47 (13) 27
------ ------ ------
Total outside United States......................... 478 436 504
------ ------ ------
Total provision for income taxes...................... $1,367 $1,287 $1,414
====== ====== ======

F-16

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

At December 31, 2000, applicable United States federal income taxes and
foreign withholding taxes have not been provided on approximately $972 million
of accumulated earnings of foreign subsidiaries that are expected to be
permanently reinvested. If these amounts were not considered permanently
reinvested, additional deferred income taxes of approximately $60 million would
have been provided.

The effective income tax rate on pre-tax earnings differed from the U.S.
federal statutory rate for the following reasons:

For the Years
Ended December 31,
----------------------
1998 1999 2000
------ ------ ------

U.S. federal statutory rate....................... 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of federal tax
benefit......................................... 3.5 3.0 2.2
Rate differences--foreign operations............. 2.8 (0.1) 0.1
Goodwill amortization............................ 6.1 5.9 5.2
Other............................................ (1.8) (1.5) (1.1)
------ ------ ------
Effective tax rate................................ 45.6% 42.3% 41.4%
====== ====== ======

The tax effects of temporary differences that gave rise to deferred income
tax assets and liabilities consisted of the following:

At December 31,
----------------
1999 2000
------- -------
(in millions)

Deferred income tax assets:
Accrued postretirement and postemployment benefits...... $ 559 $ 789
Other................................................... 497 539
------- -------
Total deferred income tax assets........................ 1,056 1,328
------- -------
Deferred income tax liabilities:
Property, plant and equipment........................... (1,171) (1,527)
Prepaid pension costs................................... (674) (743)
------- -------
Total deferred income tax liabilities................... (1,845) (2,270)
------- -------
Net deferred income tax liabilities....................... $ (789) $ (942)
======= =======

Note 11. Segment Reporting:

The Company manufactures and markets packaged retail food products,
consisting principally of beverages, cheese, snacks, convenient meals and
various packaged grocery products through its North American and international
food businesses. Reportable segments for the North American businesses are
organized and managed principally by product category. The North American food
segments are Cheese, Meals and Enhancers, which includes U.S. food service,
Canadian and Mexican operations; Biscuits, Snacks and Confectionery; Beverages,
Desserts and Cereals; and Oscar Mayer and Pizza. Kraft Foods North America's
food service business within the United States and its businesses in Canada and
Mexico are managed under the Cheese, Meals and Enhancers segment. International
operations are organized and managed by geographic location. The international
food segments are Europe, Middle East and Africa; and Latin America and Asia
Pacific.

F-17

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

amortization of goodwill. Interest and other debt expense, net and provision
for income taxes are managed in conjunction with Philip Morris and,
accordingly, such items are not presented by segment since they are excluded
from the measure of segment profitability reviewed by management. The Company's
assets, which are principally in the United States and Europe, are managed
geographically. The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies.

Reportable segment data were as follows:

For the Years Ended
December 31,
-------------------------
1998 1999 2000
------- ------- -------
(in millions)

Operating revenue:
Cheese, Meals and Enhancers........................ $ 9,322 $ 9,360 $ 9,405
Biscuits, Snacks and Confectionery................. 220 265 329
Beverages, Desserts and Cereals.................... 5,039 5,074 5,266
Oscar Mayer and Pizza.............................. 3,059 3,198 3,461
------- ------- -------
Total Kraft Foods North America.................. 17,640 17,897 18,461
------- ------- -------
Europe, Middle East and Africa..................... 8,307 7,676 6,824
Latin America and Asia Pacific..................... 1,364 1,224 1,247
------- ------- -------
Total Kraft Foods International.................. 9,671 8,900 8,071
------- ------- -------
Total operating revenue.......................... $27,311 $26,797 $26,532
======= ======= =======
Operating companies income:
Cheese, Meals and Enhancers........................ $ 1,599 $ 1,658 $ 1,845
Biscuits, Snacks and Confectionery................. 54 73 100
Beverages, Desserts and Cereals.................... 1,005 1,009 1,090
Oscar Mayer and Pizza.............................. 470 450 512
------- ------- -------
Total Kraft Foods North America.................. 3,128 3,190 3,547
------- ------- -------
Europe, Middle East and Africa..................... 884 895 1,019
Latin America and Asia Pacific..................... 170 168 189
------- ------- -------
Total Kraft Foods International.................. 1,054 1,063 1,208
------- ------- -------
Total operating companies income................. 4,182 4,253 4,755
Amortization of goodwill........................... (544) (539) (535)
General corporate expenses......................... (103) (135) (208)
------- ------- -------
Total operating income........................... 3,535 3,579 4,012
Interest and other debt expense, net............... (536) (539) (597)
------- ------- -------
Earnings before income taxes..................... $ 2,999 $ 3,040 $ 3,415
======= ======= =======

F-18

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

As previously noted, the Company's international operations are managed by
geographic location. International food's operating revenue by consumer sector
for each of the three years in the period ended December 31, 2000 is as
follows:

For the Years Ended
December 31,
--------------------
Consumer Sector 1998 1999 2000
- --------------- ------ ------ ------
(in millions)

Snacks........................................................ $3,174 $2,999 $2,723
Beverages..................................................... 4,054 3,551 3,201
Cheese........................................................ 1,346 1,316 1,259
Grocery....................................................... 648 664 584
Convenient Meals.............................................. 449 370 304
------ ------ ------
Total....................................................... $9,671 $8,900 $8,071
====== ====== ======

During 1999, the Company's North American food business announced that it
was offering voluntary retirement incentive or separation programs to certain
eligible hourly and salaried employees in the United States. Employees electing
to terminate employment under the terms of these programs were entitled to
enhanced retirement or severance benefits. Approximately 1,100 hourly and
salaried employees accepted the benefits offered by these programs and elected
to retire or terminate. As a result, the Company recorded a pre-tax charge of
$157 million during 1999. This charge was included in marketing, administration
and research costs in the combined statement of earnings for the following
segments: Cheese, Meals and Enhancers, $71 million; Oscar Mayer and Pizza, $38
million; Biscuits, Snacks and Confectionery, $2 million; and Beverages,
Desserts and Cereals, $46 million. Payments of pension and postretirement
benefits are made in accordance with the terms of the applicable benefit plans.
Severance benefits, which were paid over a period of time, commenced upon dates
of termination which ranged from April 1999 to March 2000. The program and
related payments were completed during 2000. Salary and related benefit costs
of employees prior to their retirement or termination date were expensed as
incurred.

F-19

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

See Notes 4 and 5 regarding divestitures and acquisitions. The acquisition
of Nabisco will primarily affect the reported results of the Biscuits, Snacks
and Confectionery and the Latin America and Asia Pacific segments.

For the Years
Ended
December 31,
--------------
1998 1999 2000
---- ---- ----
(in millions)

Depreciation expense:
Cheese, Meals and Enhancers................................. $127 $135 $150
Beverages, Desserts and Cereals............................. 100 102 109
Oscar Mayer and Pizza....................................... 44 49 51
---- ---- ----
Total Kraft Foods North America........................... 271 286 310
---- ---- ----
Europe, Middle East and Africa.............................. 189 175 163
Latin America and Asia Pacific.............................. 34 30 26
---- ---- ----
Total Kraft Foods International........................... 223 205 189
---- ---- ----
Total depreciation expense................................ $494 $491 $499
==== ==== ====
Capital expenditures:
Cheese, Meals and Enhancers................................. $233 $246 $247
Beverages, Desserts and Cereals............................. 171 204 193
Oscar Mayer and Pizza....................................... 141 125 148
---- ---- ----
Total Kraft Foods North America........................... 545 575 588
---- ---- ----
Europe, Middle East and Africa.............................. 251 255 239
Latin America and Asia Pacific.............................. 45 30 79
---- ---- ----
Total Kraft Foods International........................... 296 285 318
---- ---- ----
Total capital expenditures................................ $841 $860 $906
==== ==== ====

F-20

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Geographic data for operating revenue, total assets and long-lived assets
(which consists of all non-current assets, other than goodwill and other
intangible assets and prepaid pension assets) were as follows:

For the Years Ended
December 31,
-----------------------
1998 1999 2000
------- ------- -------
(in millions)

Operating revenue:
United States..................................... $16,170 $16,540 $16,910
Europe............................................ 8,127 7,500 6,642
Other............................................. 3,014 2,757 2,980
------- ------- -------
Total operating revenue......................... $27,311 $26,797 $26,532
======= ======= =======

At December 31,
-----------------------
1998 1999 2000
------- ------- -------
(in millions)

Total assets:
United States..................................... $19,243 $19,429 $40,454
Europe............................................ 9,281 8,292 7,351
Other............................................. 2,867 2,615 4,266
------- ------- -------
Total assets.................................... $31,391 $30,336 $52,071
======= ======= =======
Long-lived assets:
United States..................................... $ 3,691 $ 3,904 $ 6,684
Europe............................................ 2,192 2,021 1,837
Other............................................. 974 971 2,191
------- ------- -------
Total long-lived assets......................... $ 6,857 $ 6,896 $10,712
======= ======= =======

The excess purchase price associated with the acquisition of Nabisco is
presented above as an asset in the United States. However, the classification
of excess purchase price among geographic areas may change as appraisals and
integration plans are finalized.

F-21

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 12. Benefit Plans:

The Company and its subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all U.S. employees. Pension coverage for
employees of the Company's non-U.S. subsidiaries is provided, to the extent
deemed appropriate, through separate plans, many of which are governed by local
statutory requirements. In addition, the Company's U.S. and Canadian
subsidiaries provide health care and other benefits to substantially all
retired employees. Health care benefits for retirees outside the United States
and Canada are generally covered through local government plans.

Pension plans:

Net pension (income) cost consisted of the following:

U. S. Plans Non-U.S. Plans
------------------- -----------------
For the Years Ended December 31,
--------------------------------------
1998 1999 2000 1998 1999 2000
----- ----- ----- ---- ---- -----
(in millions)

Service cost........................... $ 74 $ 76 $ 69 $ 38 $ 40 $ 37
Interest cost.......................... 209 212 213 104 100 98
Expected return on plan assets......... (420) (511) (523) (89) (97) (103)
Amortization:
Net gain on adoption of SFAS No. 87.. (12) (11) (11) (1) (1) (1)
Unrecognized net (gain) loss from
experience differences.............. (2) (15) (36) (2) 2 (1)
Prior service cost................... 6 6 7 4 4 4
Settlements............................ (28) (41) (34)
----- ----- ----- ---- ---- -----
Net pension (income) cost............ $(173) $(284) $(315) $ 54 $ 48 $ 34
===== ===== ===== ==== ==== =====

During 1999, the Company instituted an early retirement and workforce
reduction program that resulted in settlement gains, net of additional
termination benefits of $41 million. In 1998 and 2000, retiring employees
elected lump-sum payments, resulting in settlement gains of $28 million and $34
million, respectively.

F-22

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The changes in benefit obligations and plan assets, as well as the funded
status of the Company's pension plans were as follows:

Non-U.S.
U.S. Plans Plans
-------------- --------------
At December 31,
------------------------------
1999 2000 1999 2000
------ ------ ------ ------
(in millions)

Benefit obligation at January 1................ $3,079 $2,766 $1,778 $1,740
Service cost................................. 76 69 40 37
Interest cost................................ 212 213 100 98
Benefits paid................................ (530) (258) (100) (94)
Acquisitions................................. 1,463 236
Settlements.................................. 155 11
Actuarial (gains) losses..................... (231) 51 11 91
Currency..................................... (93) (205)
Other........................................ 5 12 4 12
------ ------ ------ ------
Benefit obligation at December 31.............. 2,766 4,327 1,740 1,915
------ ------ ------ ------
Fair value of plan assets at January 1......... 5,937 6,282 1,213 1,314
Actual return on plan assets................. 818 (215) 97 103
Contributions................................ 3 33 32 32
Benefits paid................................ (494) (278) (63) (64)
Acquisitions................................. 1,226 265
Currency..................................... (53) (121)
Actuarial gains (losses)..................... 18 (9) 88 60
------ ------ ------ ------
Fair value of plan assets at December 31....... 6,282 7,039 1,314 1,589
------ ------ ------ ------
Excess (deficit) of plan assets versus
benefit obligations at December 31.......... 3,516 2,712 (426) (326)
Unrecognized actuarial gains................. (1,574) (691) (52) (42)
Unrecognized prior service cost.............. 48 54 30 27
Unrecognized net transition obligation....... (11) 8 7
------ ------ ------ ------
Net prepaid pension asset (liability).......... $1,979 $2,075 $ (440) $ (334)
====== ====== ====== ======

The combined U.S. and non-U.S. pension plans resulted in a net prepaid asset
of $1,539 million and $1,741 million at December 31, 1999 and 2000,
respectively. These amounts were recognized in the Company's combined balance
sheets at December 31, 1999 and 2000 as prepaid pension assets of $2,254
million and $2,623 million, respectively, for those plans in which plan assets
exceeded their accumulated benefit obligations and as other liabilities of $715
million and $882 million at December 31, 1999 and 2000, respectively, for plans
in which the accumulated benefit obligations exceeded their plan assets.

At December 31, 1999 and 2000, certain of the Company's U.S. plans were
unfunded, with projected benefit and accumulated benefit obligations of $100
million and $65 million, respectively, in 1999 and $156 million and $97
million, respectively, in 2000. For certain non-U.S. plans, which have
accumulated benefit obligations in excess of plan assets, the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were
$697 million, $652 million and $46 million, respectively, as of December 31,
1999 and $639 million, $596 million and $49 million, respectively, as of
December 31, 2000.

F-23

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The following weighted-average assumptions were used to determine the
Company's obligations under the plans:

U.S. Plans Non-U.S. Plans
------------ ---------------
1999 2000 1999 2000
----- ----- ------- -------

Discount rate.................................. 7.75% 7.75% 6.04% 5.88%
Expected rate of return on plan assets......... 9.00 9.00 8.50 8.51
Rate of compensation increase.................. 4.50 4.50 3.36 3.55

The Company and certain of its subsidiaries sponsor employee savings plans,
to which the Company contributes. These plans cover certain salaried, non-union
and union employees. The Company's contributions and costs are determined by
the matching of employee contributions, as defined by the plans. Amounts
charged to expense for defined contribution plans totaled $40 million, $41
million and $43 million in 1998, 1999 and 2000, respectively.

Postretirement benefit plans:

Net postretirement health care costs consisted of the following:

For the Years
Ended December 31,
--------------------
1998 1999 2000
------ ------ ------
(in millions)

Service cost............................................ $ 24 $ 27 $ 23
Interest cost........................................... 98 101 109
Amortization:
Unrecognized net loss from experience differences...... 2 3 2
Unrecognized prior service cost........................ (6) (7) (8)
Other expense........................................... 21
---- ---- ----
Net postretirement health care costs.................. $118 $145 $126
==== ==== ====

During 1999, the Company instituted early retirement and workforce reduction
programs that resulted in curtailment losses of $21 million.

F-24

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The Company's postretirement health care plans are not funded. The changes
in the benefit obligations of the plans were as follows:

At December 31,
----------------
1999 2000
------- -------
(in millions)

Accumulated postretirement benefit obligation at January 1.... $1,457 $1,380
Service cost................................................. 27 23
Interest cost................................................ 101 109
Benefits paid................................................ (97) (111)
Acquisitions................................................. 633
Termination, settlement and curtailment...................... 21
Plan amendments.............................................. (12) (7)
Actuarial (gains) losses..................................... (117) 75
------ ------
Accumulated postretirement benefit obligation at December 31.. 1,380 2,102
Unrecognized actuarial losses................................ (92) (159)
Unrecognized prior service cost.............................. 63 62
------ ------
Accrued postretirement health care costs...................... $1,351 $2,005
====== ======

The current portion of the Company's accrued postretirement health care
costs of $112 million and $138 million at December 31, 1999 and 2000,
respectively, are included in other accrued liabilities on the combined balance
sheets.

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 7.0% in 1999, 6.5% in 2000
and 6.0% in 2001, gradually declining to 5.0% by the year 2003 and remaining at
that level thereafter. For Canadian plans, the assumed health care cost trend
rate was 9.0% in 1999, 8.0% in 2000 and 7.0% in 2001, gradually declining to
4.0% by the year 2004 and remaining at that level thereafter. A one-percentage-
point increase in the assumed health care cost trend rates for each year would
increase the accumulated postretirement benefit obligation as of December 31,
2000 and postretirement health care cost (service cost and interest cost) for
the year then ended by approximately 9.7% and 12.9%, respectively. A one-
percentage-point decrease in the assumed health care cost trend rates for each
year would decrease the accumulated postretirement benefit obligation as of
December 31, 2000 and postretirement health care cost (service cost and
interest cost) for the year then ended by approximately 7.9% and 9.8%,
respectively.

The accumulated postretirement benefit obligations for U.S. plans at
December 31, 1999 and 2000 were determined using an assumed discount rate of
7.75%. The accumulated postretirement benefit obligations for Canadian plans at
December 31, 1999 and 2000 were determined using an assumed discount rate of
7.0%.

F-25

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Postemployment benefit plans:

The Company and certain of its affiliates sponsor postemployment benefit
plans covering substantially all salaried and certain hourly employees. The
cost of these plans is charged to expense over the working lives of the covered
employees. Net postemployment costs consisted of the following:

For the Years Ended
December 31,
--------------------
1998 1999 2000
------ ------ ------
(in millions)

Service cost............................................ $14 $12 $13
Amortization of unrecognized net gains.................. (1) (8) (4)
Other expense........................................... 19
--- --- ---
Net postemployment costs.............................. $13 $23 $ 9
=== === ===

The Company instituted a workforce reduction program in its North American
food business in 1999. This action resulted in incremental postemployment
costs, which are shown as other expense above.

The Company's postemployment plans are not funded. The changes in the
benefit obligations of the plans were as follows:

At December 31,
---------------
1999 2000
------- -------
(in millions)

Accumulated benefit obligation at January 1.................. $376 $333
Service cost............................................... 12 13
Benefits paid.............................................. (74) (76)
Acquisitions............................................... 74
Actuarial losses........................................... 29
Other expense.............................................. 19
---- ----
Accumulated benefit obligation at December 31................ 333 373
Unrecognized actuarial gains............................... 65 22
---- ----
Accrued postemployment costs................................. $398 $395
==== ====

The accumulated benefit obligation was determined using an assumed ultimate
annual turnover rate of 0.3% in 1999 and 2000, assumed compensation cost
increases of 4.5% in 1999 and 2000, and assumed benefits as defined in the
respective plans. Postemployment costs arising from actions that offer
employees benefits in excess of those specified in the respective plans are
charged to expense when incurred.

F-26

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 13. Additional Information:

For the Years Ended
December 31,
----------------------
1998 1999 2000
------ ------ ------
(in millions)

Research and development expense..................... $ 247 $ 262 $ 270
====== ====== ======
Advertising expense.................................. $1,271 $1,272 $1,198
====== ====== ======
Interest and other debt expense, net:
Interest expense, parent and affiliates............ $ 425 $ 458 $ 531
Interest expense, external debt.................... 124 89 84
Interest income.................................... (13) (8) (18)
------ ------ ------
$ 536 $ 539 $ 597
====== ====== ======
Rent expense......................................... $ 259 $ 285 $ 277
====== ====== ======

Minimum rental commitments under non-cancelable operating leases in effect
at December 31, 2000 were as follows (in millions):

2001.................................... $200
2002.................................... 166
2003.................................... 133
2004.................................... 113
2005.................................... 97
Thereafter.............................. 177
----
$886
====

Note 14. Financial Instruments:

Derivative financial instruments:

The Company operates internationally, with manufacturing and sales
facilities in various locations around the world. Derivative financial
instruments are used by the Company, principally to reduce exposures to market
risks resulting from fluctuations in interest rates and foreign exchange rates
by creating offsetting exposures. The Company is not a party to leveraged
derivatives.

The Company has interest rate swap agreements that were executed to reduce
the Company's borrowing costs. At December 31, 2000, the aggregate notional
principal amount of those agreements was $96 million. Aggregate maturities at
December 31, 2000 were $23 million in 2003 and $73 million in 2004.

Forward foreign exchange contracts and foreign currency options are used by
the Company to reduce the effect of fluctuating foreign currencies on foreign
currency denominated intercompany and third-party transactions. At December 31,
1999 and 2000, the Company had option and forward foreign exchange contracts,
principally for the Japanese yen, the Australian dollar and the Euro, with
aggregate notional amounts of $231 million and $237 million, respectively, for
both the purchase and sale of foreign currencies. Unrealized gains or losses on
foreign currency contracts were immaterial at December 31, 1999 and 2000.

F-27

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Commodities:

The Company is exposed to price risk related to anticipated purchases of
certain commodities used as raw materials in the various businesses.
Accordingly, the Company enters into commodity future, forward and option
contracts to manage the fluctuations in prices of anticipated purchases,
primarily coffee, milk, cheese, cocoa, sugar, wheat and corn. At December 31,
1999 and 2000, the Company had net long commodity positions of $163 million
and $617 million, respectively. Unrealized gains or losses on net commodity
positions were immaterial at December 31, 1999 and 2000.

Credit exposure and credit risk:

The Company is exposed to credit loss in the event of nonperformance by
counterparties. However, the Company does not anticipate nonperformance and
such exposure was not material at December 31, 2000.

Fair value:

The aggregate fair value, based on market quotes, of the Company's total
debt at December 31, 1999 was $594 million as compared to its carrying value
of $538 million. The aggregate fair value of the Company's total debt at
December 31, 2000 was $3,605 million as compared to its carrying value of
$3,554 million. Based on interest rates available to the Company for issuances
of debt with similar terms and remaining maturities, the aggregate fair values
and carrying value of the Company's long-term notes payable to Philip Morris
and its affiliates were $6,036 million and $6,602 million, respectively at
December 31, 1999 and $21,357 million and $21,407 million, respectively at
December 31, 2000.

The carrying values of the Company's derivative instruments, which did not
differ significantly from their fair values, were not material.

See Notes 3, 7 and 8 for additional disclosures of fair value for short-
term borrowings and long-term debt.

Note 15. Contingencies:

The Company and its subsidiaries are parties to a variety of legal
proceedings arising out of the normal course of business, including a few
cases in which substantial amounts of damages are sought. The Company believes
that it has valid defenses and is vigorously defending the litigation pending
against it. While the results of litigation cannot be predicted with
certainty, management believes that the final outcome of these proceedings
will not have a material adverse effect on the Company's combined financial
position or results of operations.

F-28

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Note 16. Quarterly Financial Data (Unaudited):

1999 Quarters
---------------------------
First Second Third Fourth
------ ------ ------ ------
(in millions, except per
share amounts)

Operating revenue.................................. $6,638 $6,830 $6,326 $7,003
====== ====== ====== ======
Gross profit....................................... $3,046 $3,197 $2,822 $3,159
====== ====== ====== ======
Net earnings....................................... $ 361 $ 526 $ 422 $ 444
====== ====== ====== ======
Per share data:
Basic earnings per share......................... $ 0.25 $ 0.36 $ 0.29 $ 0.30
====== ====== ====== ======
Diluted earnings per share....................... $ 0.25 $ 0.36 $ 0.29 $ 0.30
====== ====== ====== ======

During the first quarter of 1999, the Company recorded pre-tax charges of
$157 million primarily for voluntary retirement incentive or separation
programs.

2000 Quarters
---------------------------
First Second Third Fourth
------ ------ ------ ------
(in millions, except per
share amounts)

Operating revenue.................................. $6,460 $6,974 $6,215 $6,883
====== ====== ====== ======
Gross profit....................................... $3,079 $3,417 $2,958 $3,161
====== ====== ====== ======
Net earnings....................................... $ 470 $ 568 $ 548 $ 415
====== ====== ====== ======
Per share data:
Basic earnings per share......................... $ 0.32 $ 0.39 $ 0.38 $ 0.29
====== ====== ====== ======
Diluted earnings per share....................... $ 0.32 $ 0.39 $ 0.38 $ 0.29
====== ====== ====== ======

During the third quarter of 2000, the Company recorded a pre-tax gain of
$139 million on the sale of a French confectionery business.

F-29

KRAFT FOODS INC. AND SUBSIDIARIES

CONDENSED COMBINED BALANCE SHEETS
(in millions of dollars)
(Unaudited)

At
----------------------
December 31, March 31,
------------ ---------
2000 2001
------------ ---------

ASSETS
Cash and cash equivalents.............................. $ 191 $ 163
Receivables (less allowances of $152 and $149)......... 3,231 3,289
Inventories:
Raw materials........................................ 1,175 1,401
Finished product..................................... 1,866 1,856
------- -------
3,041 3,257
Deferred income tax benefits........................... 504 433
Other current assets................................... 185 290
------- -------
Total current assets................................. 7,152 7,432
Property, plant and equipment, at cost................. 13,042 13,088
Less accumulated depreciation.......................... 3,637 3,744
------- -------
9,405 9,344
Goodwill and other intangible assets (less accumulated
amortization of $6,100 and $6,375).................... 31,584 31,423
Prepaid pension assets................................. 2,623 2,700
Assets held for sale................................... 276 221
Other assets........................................... 1,031 933
------- -------
TOTAL ASSETS......................................... $52,071 $52,053
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Short-term borrowings.................................. $ 146 $ 203
Current portion of long-term debt...................... 713 290
Due to parent and affiliates........................... 865 1,616
Accounts payable....................................... 1,971 1,560
Accrued liabilities:
Marketing............................................ 1,601 1,503
Employment costs..................................... 625 413
Other................................................ 1,411 1,614
Income taxes........................................... 258 234
------- -------
Total current liabilities............................ 7,590 7,433
Long-term debt......................................... 2,695 2,721
Deferred income taxes.................................. 1,446 1,467
Accrued postretirement health care costs............... 1,867 1,871
Notes payable to parent and affiliates................. 21,407 21,390
Other liabilities...................................... 3,018 2,850
------- -------
Total liabilities.................................... 38,023 37,732
------- -------
Contingencies (Note 5).................................
Class A common stock, no par value (275,000,000 shares
issued and outstanding)................................
Class B common stock, no par value (1,180,000,000
shares issued and outstanding)........................
Additional paid-in capital............................. 15,230 15,230
Earnings reinvested in the business.................... 992 1,318
Accumulated other comprehensive losses (primarily
currency translation adjustments)..................... (2,174) (2,227)
------- -------
Total shareholder's equity........................... 14,048 14,321
------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........... $52,071 $52,053
======= =======

See notes to condensed combined financial statements.

F-30

KRAFT FOODS INC. AND SUBSIDIARIES

CONDENSED COMBINED STATEMENTS OF EARNINGS
(in millions of dollars, except per share data)
(Unaudited)

For the Three
Months Ended
March 31,
-------------
2000 2001
------ ------

Operating revenue................................................ $6,460 $8,367
Cost of sales.................................................... 3,381 4,267
------ ------
Gross profit................................................... 3,079 4,100
Marketing, administration and research costs..................... 2,017 2,768
Amortization of goodwill......................................... 133 240
------ ------
Operating income............................................... 929 1,092
Interest and other debt expense, net............................. 127 482
------ ------
Earnings before income taxes................................... 802 610
Provision for income taxes....................................... 332 284
------ ------
Net earnings................................................... $ 470 $ 326
====== ======
Per share data:
Basic earnings per share....................................... $ 0.32 $ 0.22
====== ======
Diluted earnings per share..................................... $ 0.32 $ 0.22
====== ======

See notes to condensed combined financial statements.

F-31

KRAFT FOODS INC. AND SUBSIDIARIES

CONDENSED COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY

For the Year Ended December 31, 2000 and
the Three Months Ended March 31, 2001
(in millions of dollars)
(Unaudited)

Balances, January 1,
2000................... $ -- $15,230 $ -- $(1,741) $(28) $(1,769) $13,461
Comprehensive earnings:
Net earnings........... 2,001 2,001
Other comprehensive
losses, net of income
taxes:
Currency translation
adjustments.......... (397) (397) (397)
Additional minimum
pension liability.... (8) (8) (8)
-------
Total other
comprehensive losses... (405)
-------
Total comprehensive
earnings............... 1,596
-------
Cash dividends
declared............... (1,009) (1,009)
----- ------- ------ ------- ---- ------- -------
Balances, December 31,
2000................... -- 15,230 992 (2,138) (36) (2,174) 14,048

Comprehensive earnings:
Net earnings........... 326 326
Other comprehensive
losses, net of income
taxes:
Currency translation
adjustments.......... (53) (53) (53)
-------
Total comprehensive
earnings............... 273
----- ------- ------ ------- ---- ------- -------
Balances, March 31,
2001................... $ -- $15,230 $1,318 $(2,191) $(36) $(2,227) $14,321
===== ======= ====== ======= ==== ======= =======

Total comprehensive earnings, which represents net earnings partially offset by
currency translation adjustments, were $386 million in the first quarter of
2000.

See notes to condensed combined financial statements.

F-32

KRAFT FOODS INC. AND SUBSIDIARIES

CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(in millions of dollars)
(Unaudited)

For the
Three Months
Ended
March 31,
--------------
2000 2001
------ ------

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings.................................................. $ 470 $ 326
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization................................ 260 425
Deferred income tax provision................................ 51 55
Loss on sale of a North American food factory................ 29
Cash effects of changes, net of effects from acquired and
divested companies:
Receivables, net............................................ 72 (100)
Inventories................................................. (114) (201)
Accounts payable............................................ (264) (408)
Income taxes................................................ 177 62
Other working capital items................................. (58) (306)
Increase in pension assets and postretirement liabilities,
net......................................................... (44) (78)
Increase in amounts due to parent and affiliates............. 18 234
Other........................................................ (20) (36)
------ ------
Net cash provided by operating activities.................... 548 2
------ ------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures.......................................... (120) (174)
Purchase of businesses, net of acquired cash.................. (358) (33)
Proceeds from a sale of a business............................ 32
Other......................................................... 6 13
------ ------
Net cash used in investing activities........................ (440) (194)
------ ------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net issuance of short-term borrowings......................... 10 61
Long-term debt proceeds....................................... 12 14
Long-term debt repaid......................................... (11) (430)
Repayment of notes payable to parent and affiliates........... (30)
(Decrease) increase in amounts due to parent and affiliates... (53) 519
------ ------
Net cash (used in) provided by financing activities.......... (72) 164
------ ------
Effects of exchange rate changes on cash and cash equivalents.. (1)
------ ------
Cash and cash equivalents:
Increase (decrease)........................................... 35 (28)
Balance at beginning of period................................ 95 191
------ ------
Balance at end of period...................................... $ 130 $ 163
====== ======

See notes to condensed combined financial statements.

F-33

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Background and Basis of Presentation:

The interim condensed combined financial statements of Kraft Foods Inc. (the
"Company") are unaudited. It is the opinion of the Company's management that
all adjustments necessary for a fair statement of the interim results presented
have been reflected therein. All such adjustments were of a normal recurring
nature. For interim reporting purposes, certain expenses are charged to results
of operations as a percentage of sales. Operating revenues and net earnings for
any interim period are not necessarily indicative of results that may be
expected for the entire year.

These statements should be read in conjunction with the Company's combined
financial statements and related notes as of December 31, 2000, and for the
three years then ended, which appear elsewhere in this Registration Statement.

Note 2. Related Party Transactions:

Philip Morris Companies Inc. ("Philip Morris") and certain of its affiliates
provide the Company with various services, including planning, legal, treasury,
accounting, auditing, insurance, human resources, office of the secretary,
corporate affairs, information technology and tax services. Billings to the
Company were $49 million and $70 million for the quarters ended March 31, 2000
and 2001, respectively. During 2001, the Company entered into a formal
agreement with Philip Morris providing for a continuation of these services,
the cost of which is expected to increase approximately $50 million in 2001
from $248 million in 2000 to approximately $300 million in 2001, as Philip
Morris provides additional information technology and financial services that
the Company previously performed internally.

Subsequent to March 31, 2001, we refinanced the two long-term Swiss franc
notes payable to Philip Morris with short-term Swiss franc borrowings from
Philip Morris at variable interest rates based on six-month LIBOR plus twenty-
five basis points.

Note 3. Acquisitions and Divestitures:

Nabisco:

On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. The acquisition
has been accounted for as a purchase. Nabisco's balance sheet has been
consolidated with the Company's balance sheet since December 31, 2000, and,
beginning January 1, 2001, Nabisco's earnings have been included in the
combined operating results of the Company.

Had the acquisition of Nabisco occurred on January 1, 2000, pro forma
operating revenue, net earnings, basic earnings per share and diluted earnings
per share would have been as follows:

For the Three
Months Ended
March 31, 2000
--------------
(in millions, except per share data)

Operating revenue.................... $8,352
======
Net earnings......................... $ 284
======
Basic earnings per share............. $ 0.20
======
Diluted earnings per share........... $ 0.20
======

F-34

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

The pro forma results do not give effect to any synergies expected to result
from the merger of Nabisco's operations with those of the Company. Accordingly,
the pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been consummated on January 1, 2000, nor
are they necessarily indicative of future combined operating results.

The excess of the purchase price over the estimated fair value of the net
assets purchased was approximately $16.8 billion and will be amortized over 40
years by the straight-line method. The allocation of excess purchase price is
based upon preliminary estimates and assumptions and is subject to revision
when appraisals and integration plans have been finalized. Accordingly,
revisions to the allocation, which may be significant, will be reported in a
future period as increases or decreases to amounts reported as goodwill, assets
held for sale, other intangible assets (including trade names), deferred income
taxes and amortization of goodwill.

The Company plans to sell a number of Nabisco businesses that do not align
strategically with its operations, including Nabisco's Canadian grocery
business. Accordingly, the estimated selling prices of these businesses, less
costs of disposal, plus the estimated results of operations through the sales
dates are shown as assets held for sale on the Company's condensed combined
balance sheets and total $221 million at March 31, 2001. Assets held for sale
decreased by $55 million as of March 31, 2001, due primarily to a revision of
estimated proceeds from the sales of these businesses. Interest allocated to
assets held for sale was offset by earnings of the related businesses for the
three month period ended March 31, 2001. During 2001, the Company will finalize
the Nabisco acquisition balance sheet, including the completion of fair value
appraisals of Nabisco's assets. During this process, the Company will also
finalize its plans to integrate the operations of Nabisco. The Company
anticipates closing a number of Nabisco manufacturing facilities. Charges to
close these facilities, estimated to be in a range of $500 million to $600
million, will be recorded as adjustments to excess purchase price when plans
are finalized and announced to employees.

The integration of Nabisco's operations may result in the closure of several
Kraft facilities. During the first quarter of 2001, the Company sold a North
American food factory which resulted in a pre-tax loss of $29 million. The
Company estimates that the closure of Kraft facilities could result in
aggregate charges to the 2001 combined statement of earnings in the range of
$200 million to $300 million. These charges will be recorded when the
integration plans have been finalized and announced.

Other acquisitions and divestitures:

During the first quarter of 2001, Kraft Foods International purchased coffee
businesses in Romania and Morocco and announced the acquisition of a coffee
company in Bulgaria. The aggregate cost of these acquisitions will be
approximately $80 million, of which $33 million was spent during the first
quarter of 2001. The operating results of these businesses were not material to
the combined operating results of the Company.

During the first quarter of 2000, the Company purchased the outstanding
common stock of Balance Bar Co., a maker of energy and nutrition snack
products. In a separate transaction, the Company also acquired Boca Burger,
Inc., a privately held manufacturer and marketer of soy-based meat
alternatives. The total cost of these acquisitions was $358 million. The
operating results of these businesses were not material to the combined
operating results in any of the periods presented.

During 2000, Kraft Foods North America and Kraft Foods International sold
several small domestic and international food businesses. The operating results
of businesses divested were not material to the combined operating results in
any of the periods presented.

F-35

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

Note 4. Earnings Per Share:

Basic and diluted earnings per share ("EPS") were calculated using the
following:

For the Three
Months Ended
March 31,
-------------
2000 2001
------ ------
(in millions)

Net earnings............................................... $ 470 $ 326
====== ======
Weighted average shares for basic and diluted EPS.......... 1,455 1,455
====== ======

Note 5. Contingencies:

The Company and its subsidiaries are parties to a variety of legal
proceedings arising out of the normal course of business, including a few cases
in which substantial amounts of damages are sought. The Company believes that
it has valid defenses and is vigorously defending the litigation pending
against it. While the results of litigation cannot be predicted with certainty,
management believes that the final outcome of these proceedings will not have a
material adverse effect on the Company's combined financial position or results
of operations.

Note 6. Segment Reporting:

The Company manufactures and markets packaged retail food products,
consisting principally of beverages, cheese, snacks, convenient meals and
various grocery products through its North American and international food
businesses. Reportable segments for the North American businesses are organized
and managed principally by product category. The North American food segments
are Cheese, Meals and Enhancers, which includes U.S. food service, Canadian and
Mexican operations; Biscuits, Snacks and Confectionery; Beverages, Desserts and
Cereals; and Oscar Mayer and Pizza. Kraft Foods North America's food service
business within the United States and its businesses in Canada and Mexico are
managed under the Cheese, Meals and Enhancers segment. International operations
are organized and managed by geographic location. The international food
segments are Europe, Middle East and Africa; and Latin America and Asia
Pacific.

The Company's management reviews operating companies income to evaluate
segment performance and allocate resources. Operating companies income excludes
general corporate expenses from Philip Morris and amortization of goodwill.
Interest and other debt expense, net and provision for income taxes are managed
in conjunction with Philip Morris and, accordingly, such items are not
presented by segment since they are excluded from the measure of segment
profitability reviewed by management.

F-36

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

Reportable segment data were as follows:

For the
Three Months Ended
March 31,
--------------------
2000 2001
--------- ---------
(in millions)

Operating revenue:
Cheese, Meals and Enhancers........................ $2,234 $2,494
Biscuits, Snacks and Confectionery................. 74 1,440
Beverages, Desserts and Cereals.................... 1,395 1,464
Oscar Mayer and Pizza.............................. 831 884
------ ------
Total Kraft Foods North America................ 4,534 6,282
------ ------
Europe, Middle East and Africa..................... 1,639 1,503
Latin America and Asia Pacific..................... 287 582
------ ------
Total Kraft Foods International................ 1,926 2,085
------ ------
Total operating revenue........................ $6,460 $8,367
====== ======
Operating companies income:
Cheese, Meals and Enhancers........................ $ 449 $ 491
Biscuits, Snacks and Confectionery................. 21 165
Beverages, Desserts and Cereals.................... 311 339
Oscar Mayer and Pizza.............................. 132 148
------ ------
Total Kraft Foods North America................ 913 1,143
------ ------
Europe, Middle East and Africa..................... 170 172
Latin America and Asia Pacific..................... 30 67
------ ------
Total Kraft Foods International................ 200 239
------ ------
Total operating companies income............... 1,113 1,382
Amortization of goodwill........................... (133) (240)
General corporate expenses......................... (51) (50)
------ ------
Total operating income......................... 929 1,092
Interest and other debt expense, net............... (127) (482)
------ ------
Earnings before income taxes................... $ 802 $ 610
====== ======

Kraft Foods International's operating revenue by consumer sector was as
follows:

For the
Three Months Ended
March 31,
-------------------
Consumer Sector 2000 2001
--------------- --------- ---------
(in millions)

Snacks................................................. $ 656 $ 794
Beverages.............................................. 758 713
Cheese................................................. 313 318
Grocery................................................ 137 201
Convenient Meals....................................... 62 59
------ ------
Total Kraft Foods International.................. $1,926 $2,085
====== ======

During the first quarter of 2001, the Company sold a North American food
factory which resulted in a pre-tax loss of $29 million. The loss was included
in the Cheese, Meals and Enhancers segment.

Note 7. Recently Adopted Accounting Standards:

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and its related amendment, Statement of

F-37

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("SFAS 133"). These standards
require that all derivative financial instruments be recorded on the combined
balance sheets at their fair value as either assets or liabilities. Changes in
the fair value of derivatives will be recorded each period in earnings or
accumulated other comprehensive losses, depending on whether a derivative is
designated and effective as part of a hedge transaction and, if it is, the type
of hedge transaction. Gains and losses on derivative instruments reported in
accumulated other comprehensive losses will be included in earnings in the
periods in which earnings are affected by the hedged item. The adoption of
these new standards did not have a material effect on net earnings (less than
$1 million) or accumulated other comprehensive losses (less than $1 million).

The Company operates internationally, with manufacturing and sales
facilities in various locations around the world and utilizes certain financial
instruments to manage its foreign currency and commodity exposures, primarily
related to forecasted transactions. For a derivative to qualify as a hedge at
inception and throughout the hedged period, the Company formally documents the
nature and relationships between the hedging instruments and hedged items, as
well as its risk-management objectives, strategies for undertaking the various
hedge transactions and method of assessing hedge effectiveness. Additionally,
for hedges of forecasted transactions, the significant characteristics and
expected terms of a forecasted transaction must be specifically identified, and
it must be probable that each forecasted transaction will occur. If it were
deemed probable that the forecasted transaction will not occur, the gain or
loss would be recognized in earnings currently. Financial instruments
qualifying for hedge accounting must maintain a specified level of
effectiveness between the hedging instrument and the item being hedged, both at
inception and throughout the hedged period. The Company does not engage in
trading or other speculative use of financial instruments.

The Company uses forward contracts to mitigate its exposure to changes in
foreign currency exchange rates on third-party and intercompany forecasted
transactions. The primary currencies to which the Company is exposed include
the Euro, Swiss franc and the British pound. The effective portion of
unrealized gains and losses associated with forward contracts are deferred as a
component of accumulated other comprehensive losses until the underlying hedged
transactions are reported on the Company's combined statement of earnings.

The Company uses commodity forward contracts, as cash flow hedges, to
procure raw materials, primarily coffee, cocoa, sugar, milk, cheese, wheat,
corn and beginning in 2000, energy. Commodity futures and options are also used
to hedge the price of certain commodities, primarily coffee and cocoa. In
general, commodity forward contracts qualify for the normal purchase exception
under SFAS 133 and are, therefore, not subject to the provisions of the
statement. When using a commodity option as a hedging instrument, the Company
excludes the time value from the assessment of effectiveness. The change in a
commodity option's time value is reported in cost of sales in the Company's
combined statement of earnings. The effective portion of unrealized gains and
losses on commodity futures contracts and options is deferred as a component of
accumulated other comprehensive losses and is recognized as a component of cost
of sales in the Company's combined statement of earnings when the related
inventory is sold.

The Company uses interest rate swaps to hedge the fair value of an
insignificant portion of its long-term debt. During the three months ended
March 31, 2001, there was no ineffectiveness relating to these fair value
hedges. Accordingly, there was no net impact on interest and other debt expense
for the three months ended March 31, 2001, from the use of these interest rate
swaps.

During the quarter ended March 31, 2001, ineffectiveness related to cash
flow and fair value hedges was not material (approximately $1 million). The
Company is hedging forecasted transactions for no more than the next twelve
months and expects all amounts reported in accumulated other comprehensive
losses to be reclassified to the combined statement of earnings within that
time frame.

During the quarter ended March 31, 2001, accumulated other comprehensive
losses increased by $5 million due to hedging transactions, offset by $5
million reclassified from accumulated other comprehensive losses to the
combined statement of earnings.

F-38

KRAFT FOODS INC. AND SUBSIDIARIES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)

Note 8. Stock Plans:

The Company's Board of Directors has adopted the 2001 Kraft Performance
Incentive Plan (the "Plan"), which will be established concurrently with this
offering. Under the Plan, the Company may grant stock options, stock
appreciation rights, restricted stock and other awards based on the Company's
Class A common stock, as well as performance-based annual and long-term
incentive awards. Up to 75 million shares of the Company's Class A common stock
may be issued under the Plan. The Company's Board of Directors has approved
total option grants of 22,719,298 shares of Class A common stock, which will be
awarded concurrently with the closing date of the initial public offering, at
an exercise price equal to the initial public offering price. A portion of the
shares to be granted (20,368,421) becomes exercisable on January 31, 2003, and
will expire ten years from the date of the grant. The remainder of the shares
to be granted (2,350,877) will become exercisable three to five years from the
date of grant and will also expire ten years from the date of the grant.

The Company's Board of Directors has also adopted the Kraft Director Plan.
Under the Kraft Director Plan, only members of the Board of Directors who are
not full-time employees of the Company or Philip Morris or their subsidiaries
are granted awards. Up to 500,000 shares of Class A common stock may be awarded
under the Kraft Director Plan. No awards will be granted under this plan until
after the completion of the initial public offering.

Note 9. Recently Issued Accounting Pronouncements:

The Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting
for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition,
measurement and statement of earnings classification for certain sales
incentives and will be effective in the first quarter of 2002. As a result,
certain items previously included in cost of sales and in marketing,
administration and research costs on the combined statement of earnings will be
recorded as a reduction of operating revenue. The Company has determined that
the impact of adoption or subsequent application of EITF Issue No. 00-14 will
not have a material effect on its combined financial position or results of
operations. Upon adoption, prior period amounts, which are not expected to be
significant, will be reclassified to conform to the new requirements. In April
2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration to a Purchaser of the Vendor's Products or
Services." EITF Issue No. 00-25 requires that certain expenses included in
marketing, administration and research costs be recorded as a reduction of
operating revenue and will be effective in the first quarter of 2002. The
Company is currently in the process of determining the impact of EITF Issue No.
00-25.

Note 10. Subsequent Event:

Prior to the effectiveness of the registration statement covering the shares
of the Company's Class A common stock being sold in this IPO, some of the
underwriters of this IPO provided written copies of a "pre-marketing feedback"
form to certain potential purchasers of the Company's Class A common stock. The
feedback form was for internal use only and was designed to elicit orally
certain information from designated accounts as part of designing strategy in
connection with this IPO. This form may constitute a prospectus that does not
meet the requirements of the Securities Act of 1933.

If the distribution of this form by the underwriters did constitute a
violation of the Securities Act of 1933, persons who received this form,
directly or indirectly, and who purchased the Company's Class A common stock in
this IPO may have the right, for a period of one year from the date of the
violation, to obtain recovery of the consideration paid in connection with
their purchase of the Company's Class A common stock or, if they had already
sold the stock, attempt to recover losses resulting from their purchase of the
Class A common stock. The Company cannot determine the amount of Class A common
stock that may be purchased by recipients of the "pre-marketing feedback" form.
However, the Company does not believe that any attempts to rescind these
purchases or to recover these losses will have a material adverse effect on its
financial position.

F-39

REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS

Nabisco Holdings Corp.:

We have audited the accompanying consolidated balance sheets of Nabisco
Holdings Corp. ("Nabisco Holdings") as of December 31, 1998 and 1999, and the
related consolidated statements of income (loss), comprehensive income (loss),
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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 Nabisco Holdings
at December 31, 1998 and 1999, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States of America.

DELOITTE & TOUCHE LLP

Parsippany, New Jersey
February 2, 2000

F-40

NABISCO HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS
(in millions of dollars)

At December 31,
----------------
1998 1999
------- -------
ASSETS

Current assets:
Cash and cash equivalents.................................... $ 111 $ 110
Accounts receivable, net of allowance for doubtful accounts
of $29 and $52, respectively................................ 506 681
Deferred income taxes........................................ 98 116
Inventories.................................................. 753 898
Prepaid expenses and other current assets.................... 70 79
------- -------
Total current assets....................................... 1,538 1,884
------- -------
Property, plant and equipment--at cost......................... 4,806 5,053
Less accumulated depreciation.................................. (1,859) (1,966)
------- -------
Net property, plant and equipment............................ 2,947 3,087
------- -------
Trademarks, net of accumulated amortization of $1,102 and
$1,214, respectively.......................................... 3,368 3,443
Goodwill, net of accumulated amortization of $910 and $1,007,
respectively.................................................. 3,182 3,159
Other assets and deferred charges.............................. 82 134
------- -------
$11,117 $11,707
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Notes payable................................................ $ 68 $ 39
Accounts payable............................................. 407 642
Accrued liabilities.......................................... 1,043 1,020
Current maturities of long-term debt......................... 118 158
Income taxes accrued......................................... 111 104
------- -------
Total current liabilities.................................. 1,747 1,963
------- -------
Long-term debt................................................. 3,619 3,892
Other noncurrent liabilities................................... 704 744
Deferred income taxes.......................................... 1,162 1,176
Contingencies (Note 11)........................................
Shareholders' equity:
Class A common stock (51,434,872 and 51,412,707 shares issued
and outstanding at December 31, 1998 and 1999,
respectively)............................................... 1 1
Class B common stock (213,250,000 shares issued and
outstanding at December 31, 1998 and 1999).................. 2 2
Paid-in capital.............................................. 4,092 4,093
Retained (deficit) earnings.................................. (5) 148
Treasury stock, at cost...................................... (18) (17)
Accumulated other comprehensive loss......................... (185) (293)
Notes receivable on common stock purchases................... (2) (2)
------- -------
Total shareholders' equity................................. 3,885 3,932
------- -------
$11,117 $11,707
======= =======

See notes to consolidated financial statements.

F-41

NABISCO HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions of dollars, except per share amounts)

For the Years Ended
December 31,
-------------------------
1997 1998 1999
------- ------- -------

Net sales.......................................... $8,734 $8,400 $8,268
Costs and expenses:
Cost of products sold............................ 4,950 4,683 4,502
Selling, advertising, administrative and general
expenses........................................ 2,476 2,672 2,747
Amortization of trademarks and goodwill.......... 226 221 213
Restructuring charges (credits) (Note 3)......... 530 (67)
------- ------- -------
Operating income............................... 1,082 294 873
Interest and other debt expense.................... (326) (296) (260)
Other expense, net................................. (32) (29) (31)
------- ------- -------
Income (loss) before income taxes.............. 724 (31) 582
Provision for income taxes......................... 293 40 222
------- ------- -------
Income (loss) before extraordinary item........ 431 (71) 360
Extraordinary item--loss on early extinguishment of
debt, net of income taxes (Note 10)............... (26) (3)
------- ------- -------
Net income (loss).............................. $ 405 $ (71) $ 357
======= ======= =======
Net income (loss) per common share--basic:
Income (loss) before extraordinary item.......... $ 1.63 $ (.27) $ 1.36
Extraordinary item............................... (.10) (.01)
------- ------- -------
Net income (loss).............................. $ 1.53 $ (.27) $ 1.35
======= ======= =======
Net income (loss) per common share--diluted:
Income (loss) before extraordinary item.......... $ 1.61 $ (.27) $ 1.35
Extraordinary item............................... (.10) (.01)
------- ------- -------
Net income (loss).............................. $ 1.51 $ (.27) $ 1.34
======= ======= =======
Dividends declared per common share................ $ .68 $ .70 $ .75
======= ======= =======
Average number of common shares outstanding (in
thousands):
Basic............................................ 265,057 264,547 264,670
======= ======= =======
Diluted.......................................... 267,374 264,547 266,757
======= ======= =======

See notes to consolidated financial statements.

F-42

NABISCO HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions of dollars)

For the
Years Ended
December 31,
-----------------
1997 1998 1999
---- ----- ----

Net income (loss)............................................ $405 $ (71) $357
---- ----- ----
Other comprehensive income (loss):
Cumulative translation adjustment.......................... (73) (57) (111)
Minimum pension liability adjustment....................... (6) 3 3
---- ----- ----
Other comprehensive loss before income taxes................. (79) (54) (108)
(Benefit) provision for income taxes....................... (2) 1 1
---- ----- ----
Other comprehensive loss, net of income taxes................ (77) (55) (109)
---- ----- ----
Comprehensive income (loss).................................. $328 $(126) $248
==== ===== ====

See notes to consolidated financial statements.

F-43

NABISCO HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)

For the Years
Ended December 31,
-----------------------
1997 1998 1999
------- ------- -----

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income (loss)................................... $ 405 $ (71) $ 357
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation of property, plant and equipment...... 277 273 265
Amortization of intangibles........................ 226 221 213
Deferred income tax provision (benefit)............ 11 (188) 48
Restructuring items, net of cash payments.......... (135) 491 (157)
Accounts receivable................................ 14 (139)
Inventories........................................ (12) 44 (102)
Prepaid expenses and other current assets.......... (6) (10) 3
Accounts payable................................... 10 (49) 174
Accrued liabilities................................ (192) (32) 77
Income taxes accrued............................... 19 (3) (15)
Other, net......................................... (55) (12) (1)
Extraordinary loss................................. 43 3
Gain on divestitures, net.......................... (32) (14)
------- ------- -----
Net cash flows from operating activities............ 573 650 726
------- ------- -----
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures................................ (392) (340) (241)
Acquisition of businesses........................... (46) (9) (578)
Other, net.......................................... 15 13 36
Proceeds from sale of businesses.................... 50 550
------- ------- -----
Net cash flows (used in) from investing
activities......................................... (373) 214 (783)
------- ------- -----
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net proceeds from the issuance of long-term debt.... 1,229 1,279 777
Repayments of long-term debt........................ (1,145) (1,893) (491)
Decrease in notes payable........................... (45) (103) (23)
Dividends paid on common stock...................... (175) (185) (195)
Repurchase of Class A common stock.................. (22) (38) (12)
Net proceeds from issuance of Class A common stock.. 25 8
Proceeds from the sale of call options on long-term
debt............................................... 41
------- ------- -----
Net cash flows (used in) from financing
activities......................................... (158) (874) 64
------- ------- -----
Effect of exchange rate changes on cash and cash
equivalents......................................... (8) (6) (8)
------- ------- -----
Net change in cash and cash equivalents............. 34 (16) (1)
Cash and cash equivalents at beginning of period..... 93 127 111
------- ------- -----
Cash and cash equivalents at end of period........... $ 127 $ 111 $ 110
======= ======= =====
Income taxes paid, net of refunds.................... $ 247 $ 231 $ 190
======= ======= =====
Interest paid........................................ $ 358 $ 276 $ 261
======= ======= =====

See notes to consolidated financial statements.

F-44

NABISCO HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended December 31, 1997, 1998 and 1999
(in millions of dollars and thousands of shares)

Accumulated
Common Stock Other
--------------- Paid-in Retained Comprehensive Treasury Notes
Shares Amount Capital Earnings Income Stock Receivable Total
------- ------ ------- -------- ------------- -------- ---------- ------

Balance at January 1,
1997................... 265,070 $3 $4,093 $ 43 $ (53) $ -- $(2) $4,084
Net income.............. 405 405
Cumulative translation
adjustment............. (73) (73)
Minimum pension
liability, net of tax
benefit of $1.......... (4) (4)
Dividends declared...... (180) (180)
Repurchase of Class A
shares................. (682) (32) (32)
Other................... 4 4
------- --- ------ ----- ----- ---- --- ------
Balance at December 31,
1997................... 264,388 3 4,097 268 (130) (32) (2) 4,204
Net loss................ (71) (71)
Cumulative translation
adjustment............. (57) (57)
Minimum pension
liability, net of tax
expense of $2.......... 2 2
Dividends declared...... (185) (185)
Repurchase of Class A
shares................. (568) (27) (27)
Class A treasury shares
issued................. 865 5 (17) 41 29
Other................... (10) (10)
------- --- ------ ----- ----- ---- --- ------
Balance at December 31,
1998................... 264,685 3 4,092 (5) (185) (18) (2) 3,885
Net income.............. 357 357
Cumulative translation
adjustment............. (111) (111)
Minimum pension
liability, net of tax
expense of $1.......... 2 2
Dividends declared...... (198) (198)
Repurchase of Class A
shares................. (300) (12) (12)
Class A treasury shares
issued................. 278 (5) 13 8
Other................... 1 (1) 1 1
------- --- ------ ----- ----- ---- --- ------
Balance at December 31,
1999................... 264,663 $3 $4,093 $ 148 $(293) $(17) $(2) $3,932
======= === ====== ===== ===== ==== === ======

See notes to consolidated financial statements.

F-45

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies:

The Summary of Significant Accounting Policies below and the other notes to
the consolidated financial statements on the following pages are integral parts
of the accompanying consolidated financial statements ("Consolidated Financial
Statements") of Nabisco Holdings Corp. ("Nabisco Holdings" or the "Company").

Consolidation and use of estimates:

The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. The preparation of 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 balance
sheet date and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the 1999
presentation.

Cash and 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. Cash equivalents at December 31, 1998 and 1999, valued
at cost (which approximated market value), totaled $71 million and $54 million,
respectively.

Inventories:

Inventories are stated at the lower of cost or market. Cost is determined
principally under the first-in, first-out method.

Commodity contracts:

Due to wide fluctuations in the market prices for various agricultural
commodities, the Company frequently enters into futures contracts to hedge the
price risk associated with anticipated purchases. The Company realizes changes
in the market value of futures contracts that qualify as hedges as an addition
to, or reduction from, the raw material inventory cost. Realized gains and
losses are recorded in cost of products sold when the related finished products
are sold. The amount of hedging losses deferred as of December 31, 1998 and
1999 was $5 million and $7 million, respectively. Any futures contracts that do
not qualify for hedge accounting treatment are marked-to-market each reporting
period with the resulting market change reflected in cost of products sold in
the current period.

Depreciation:

For financial reporting purposes, depreciation expense is generally provided
on a straight-line basis, using estimated useful lives of up to 20 years for
land improvements, 20 to 40 years for buildings and leasehold improvements and
3 to 30 years for machinery and equipment.

Trademarks and goodwill:

Values assigned to trademarks and goodwill are amortized on a straight-line
basis principally over a 40-year period.

F-46

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Long-lived assets:

Long-lived assets are comprised of intangible assets and property, plant and
equipment. Long-lived assets, including certain identifiable intangibles and
goodwill related to those assets to be held and used, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. An estimate of
undiscounted future cash flows produced by the asset, or the appropriate
grouping of assets, is compared to the carrying value to determine whether an
impairment exists. If an asset is determined to be impaired, the loss is
measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future
cash flows and fundamental analysis. Assets to be disposed of are reported at
the lower of their carrying value or estimated net realizable value.

Revenue recognition:

Revenue is recognized when title to finished product passes to the customer.
Revenue is recognized as the net amount to be received after deducting
estimated amounts for discounts and product returns.

Other income (expense), net:

Other expense, net includes interest income, certain foreign currency gains
and losses, expenses related to the sales of accounts receivable and fees
related to banking and borrowing programs.

Advertising:

Advertising costs are generally expensed as incurred. Advertising expense
was $223 million, $226 million and $250 million for the years ended December
31, 1997, 1998 and 1999, respectively.

Research and development:

Research and development expenses, which are expensed as incurred, were $95
million, $100 million and $96 million for the years ended December 31, 1997,
1998 and 1999, respectively.

Interest rate financial instruments:

Interest rate swaps and caps are used to effectively hedge certain interest
rate exposures. In both types of hedges, the differential to be paid or
received is accrued and recognized in interest expense and may change as market
interest rates change. Any premium paid or received is amortized over the
duration of the hedged instrument. If an arrangement is terminated or
effectively terminated prior to maturity, then the realized or unrealized gain
or loss is effectively recognized over the remaining original life of the
agreement if the hedged item remains outstanding, or immediately, if the
underlying hedged instrument does not remain outstanding. If the arrangement is
not terminated or effectively terminated prior to maturity, but the underlying
hedged instrument is no longer outstanding, then the unrealized gain or loss on
the related interest rate swap or cap is recognized immediately.

Foreign currency financial instruments:

The forward foreign exchange contracts and other hedging arrangements
entered into by the Company generally mature at the time the hedged foreign
currency transactions are settled. Gains or losses on forward foreign currency
transactions are determined by changes in market rates and are generally
included at

F-47

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

settlement in the basis of the underlying hedged transaction. To the extent
that the foreign currency transaction does not occur, gains and losses are
recognized immediately.

Recently issued accounting pronouncements:

During the second quarter of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was required to be adopted
by January 1, 2000, with early adoption permitted. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133, which amended SFAS
No. 133 to delay its effective date one year. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance sheet at their
fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Nabisco Holdings has not yet determined the impact, if
any, that adoption or subsequent application of SFAS No. 133 will have on its
financial position or results of operations.

Net income per share:

Per share data has been computed and presented pursuant to the provisions of
SFAS No. 128, Earnings per Share, which was adopted in the fourth quarter of
1997. Net income per common share--basic is calculated by dividing net income
by the weighted average number of common shares outstanding during the period.
Net income per common share--diluted is calculated by dividing net income by
the weighted average number of common shares and common equivalent shares for
stock options outstanding during the period.

Income taxes:

During the second quarter of 1999, the former direct and indirect parents of
Nabisco Holdings, RJR Nabisco, Inc., which has been renamed R.J. Reynolds
Tobacco Holdings, Inc. ("RJR") and RJR Nabisco Holdings Corp., which has been
renamed Nabisco Group Holdings Corp. ("NGH"), completed a series of
reorganization transactions as described in Note 2 to the Consolidated
Financial Statements. As part of those transactions, NGH, Nabisco Holdings and
RJR entered into a tax sharing agreement that sets forth, among other things,
each company's rights and obligations relating to tax payments and refunds for
periods before and after those transactions, certain tax indemnification
arrangements and other tax matters such as the filing of tax returns and the
handling of audits and other tax proceedings.

The Company calculates its income taxes on a separate basis from NGH;
however, the following modifications were made to the Company's income taxes
because federal income taxes are calculated and paid on a consolidated basis by
NGH. To the extent foreign tax credits of the Company cannot be used currently
on a consolidated basis, no current credit is given to the Company under the
tax sharing agreement with NGH, and other credits, losses or benefits of the
Company not used separately are recognized by the Company if they could be used
in filing a consolidated tax return. Deferred federal income taxes are recorded
on the Company's books, and current federal income taxes payable are remitted
to NGH. Generally, any adjustments to federal and state income tax liabilities
for years after 1989 will be paid by NGH and charged or credited to Nabisco
Holdings, as applicable. Any adjustments to federal and state income tax
liabilities for 1989 or earlier are the obligation of RJR. NGH will generally
pay to Nabisco Holdings any tax refund received by NGH and attributable to the
Company for years after 1989. Foreign income taxes generally are computed on a
separate company basis.

F-48

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 2. Reorganization of Nabisco Holdings' Parents:

During the second quarter of 1999, a series of reorganization transactions
was completed, as a result of which Nabisco Holdings and its subsidiaries are
no longer affiliated with RJR and its subsidiaries. The principal transactions
in this reorganization that affected Nabisco Holdings are the following:

. On May 18, 1999, RJR transferred all of the outstanding Class B common
stock of Nabisco Holdings to NGH through a merger transaction.

. On June 14, 1999, NGH distributed all of the outstanding shares of RJR
common stock to NGH common shareholders of record as of May 27, 1999.

NGH owns 100% of the outstanding Class B common stock of Nabisco Holdings,
which represents approximately 80.6% of the economic interest and 97.6% of the
combined voting power of all of the outstanding common stock as of March 15,
2000.

Note 3. Operations:

Acquisitions:

In recent years, subsidiaries of Nabisco Holdings have completed a number of
acquisitions to expand the domestic and international food businesses, all of
which have been accounted for using the purchase method of accounting for
business combinations. In December 1997, the Company acquired the stock of
Cornnuts, Inc., a manufacturer of crispy corn kernel snacks, for approximately
$51 million. As of December 31, 1997, the acquisition was carried in other
assets in the consolidated balance sheet pending completion of the purchase
price allocation. During 1998 the purchase price was allocated resulting in
goodwill of $30 million, including $4 million for a plant closure. In 1998, the
Company acquired the assets of the Jamaican biscuit and snacking company,
Butterkist, Ltd. for $9 million. The fair value of the assets acquired
approximated the purchase price. In September 1999, the Company acquired the
stock of Canale S.A., Argentina's fourth largest biscuit company for
approximately $134 million resulting in goodwill of $45 million. In November
1999, the Company also acquired certain assets and liabilities of Favorite
Brands International, Inc., the fourth largest non-chocolate candy company in
the United States for approximately $480 million. As of December 31, 1999, a
preliminary purchase price allocation was completed, resulting in goodwill of
approximately $68 million, subject to finalization of integration plans which
could result in an adjustment to goodwill in 2000.

The Consolidated Statements of Income and Comprehensive Income do not
include any revenues or expenses related to the acquisitions described above
prior to their respective closing dates. The acquisitions were financed through
commercial paper borrowings. The following are the Company's unaudited pro
forma results of operations for 1998 and 1999, assuming that the 1999
acquisition of certain assets and liabilities of Favorite Brands International,
Inc. had occurred on January 1, 1998.

For the Years
Ended December 31,
------------------
1998 1999
---- ----
(in millions, except
per share amounts,
unaudited)

Net sales.......................................... $9,146 $8,890
(Loss) income before extraordinary item............ (110) 317
(Loss) income per common share before
extraordinary item:
Basic............................................. (.42) 1.20
Diluted........................................... (.42) 1.19

F-49

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.

Divestitures and other charges:

In June 1997, the Company sold certain domestic regional brands for $50
million that resulted in a $32 million gain ($19 million after tax). In
addition, non-recurring expenses of $31 million ($18 million after tax) were
recognized. These included a $14 million additional provision to write-down
property, plant and equipment ($10 million), intangibles ($2 million) and
inventory ($2 million) of the Plush Pippin frozen pie business sold in 1998 at
its approximate carrying value of $5 million; $10 million of severance and
related benefits for approximately 80 sales persons in the U.S. Foods Group
sales organization; and $7 million of exit costs resulting from the relocation
of Nabisco International's headquarters from New York City to New Jersey
consisting of $6 million for lease abandonment costs and $1 million for
employee severance benefits. The net $1 million pre-tax gain from these items
is included in selling, advertising, administrative and general expenses in the
Consolidated Statements of Income. 1997 net sales from the Plush Pippin frozen
pie business were $40 million and operating income was not material.

The 1998 cost of products sold includes a $35 million net gain ($19 million
after tax) related to businesses sold and a $21 million charge ($17 million
after tax) to exit non-strategic businesses. Both items were recorded in the
third quarter. Businesses sold in 1998 include the College Inn brand of canned
broths, Plush Pippin frozen pies, the U.S. and Canadian tablespreads and U.S.
egg substitute businesses (formerly included in the U.S. Foods Group operating
segment) and the Del Monte brand canned vegetable business in Venezuela
(formerly included in the International Food Group operating segment) for net
proceeds of approximately $550 million.

Net sales for 1997 and 1998 from all divestitures in both years by the
Company were $632 million and $298 million, respectively. Operating income for
1997 and 1998 from the divested businesses was $87 million and $33 million,
respectively.

1998 restructuring charges:

In the second and fourth quarters of 1998, the Company recorded
restructuring charges of $406 million ($268 million after tax) and $124 million
($94 million after tax), respectively. These restructuring programs were
undertaken to streamline operations and improve profitability and will result
in a workforce reduction of approximately 6,900 employees of which 6,100
positions were eliminated as of December 31, 1999. The headcount reduction
represents a slight increase from the original projection of 6,500. The
increase resulted from higher than anticipated eliminations as projects were
completed and is primarily due to projects in International manufacturing
locations and to a lesser extent the Biscuit sales force reorganization. The
increase in the number of positions eliminated did not result in incremental
spending as higher costs for these projects were offset by lower costs and cash
outlays overall, as described below.

The June 1998 program was substantially completed in 1999 and the December
1998 program is expected to be substantially completed by mid-year 2000. The
restructuring programs when completed will require net cash expenditures of
approximately $140 million. In addition, the programs required additional
restructuring-related expenses of $132 million ($79 million after tax), of
which $76 million ($46 million after tax) was incurred in the twelve months
ended December 31, 1999, and are now completed. These additional expenses were
principally for implementation and integration of the programs and included
costs for relocation of employees and equipment and training.

F-50

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In 1999, the Company recorded a net restructuring credit of $67 million ($48
million after tax), related to the Biscuit, U.S. Foods Group and International
businesses of $30 million, $18 million and $19 million, respectively. The
credit primarily reflects higher than anticipated proceeds from the sale of
facilities closed as part of the 1998 restructuring programs, lower costs and
cash outlays than originally estimated for certain of these programs and minor
project cancellations offset to a minor extent by increased costs in certain
programs.

The major components of the credit were lower severance and benefit costs
for: the sales force reorganization of $21 million; staff reduction at
headquarters and operating units of $24 million; and distribution
reorganizations of $5 million. The reduced costs reflected unanticipated staff
reductions through voluntary separations rather than planned terminations and
other net changes in cost estimates. In addition, asset impairment costs were
lower by $14 million reflecting higher proceeds and anticipated proceeds from
the sales of facilities.

The key elements of the restructuring programs include:

Severance Contract Asset Other Exit
and Benefits Terminations Impairments Costs Total
------------ ------------ ----------- ---------- -----
(in millions)

Sales force
reorganizations........ $ 37 $ 3 $ 40
Distribution
reorganizations........ 16 8 $ 9 33
Staff reductions........ 83 3 86
Manufacturing costs
reduction initiatives.. 22 8 30
Plant closures.......... 46 3 217 $ 15 281
Product line
rationalizations....... 4 4 20 32 60
----- ---- ----- ---- -----
Total 1998
restructuring
reserves............. 208 18 257 47 530
1999 net restructuring
credit................. (50) 1 (14) (4) (67)
----- ---- ----- ---- -----
158 19 243 43 463
----- ---- ----- ---- -----
Charges and payments:
Year ended December 31,
1998................... (34) (3) (12) (12) (61)
Year ended December 31,
1999................... (98) (11) (221) (23) (353)
----- ---- ----- ---- -----
Total charges and
payments, net of
cash proceeds......... (132) (14) (233) (35) (414)
----- ---- ----- ---- -----
Reserve and valuation
account balances
as of December 31,
1999................... $ 26 $ 5 $ 10 $ 8 $ 49
===== ==== ===== ==== =====

. Sales force reorganizations consist of $35 million for the Nabisco
Biscuit Company to reorganize its direct store delivery sales force to
improve its effectiveness and $5 million for the International Food
Group, principally Latin America.

. Distribution reorganizations consist of plans to exit a number of
domestic and international distribution and warehouse facilities,
principally $19 million for the Nabisco Biscuit Company and $14 million
for the International Food Group.

. Staff reductions consist of headquarters and operating unit
realignments, functional consolidations and eliminations of positions
throughout the Company. Amounts are: $37 million for the U.S. Foods
Group; $26 million for Nabisco International headquarters, Canada and
other foreign units; $15 million for corporate headquarters; and $8
million for the Nabisco Biscuit Company.

F-51

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

. Manufacturing cost reduction initiatives consist of a number of domestic
and international programs to increase productivity, principally $19
million for the Nabisco Biscuit Company and $7 million for Canada.

. Plant closure accruals are for the closure and future sale of 18
production facilities in order to improve manufacturing efficiencies and
reduce costs. Amounts are: Nabisco Biscuit Company $217 million; U.S.
Foods Group $12 million; and International Food Group $52 million. Other
exit costs consist of carrying costs to be incurred prior to sale.

. Product line rationalizations consist of exit costs to discontinue a
number of domestic and international product lines. Other exit costs are
principally write-offs for disposals of various discontinued products.
Amounts are: U.S. Foods Group $34 million; Nabisco Biscuit Company
$14 million; and International Food Group $12 million.

The key elements of the restructuring programs, after the restructuring
credit of $67 million include:

Severance Contract Asset Other Exit
and Benefits Terminations Impairments Costs Total
------------ ------------ ----------- ---------- -----
(in millions)

Sales force
reorganizations........ $ 16 $ 3 $ 19
Distribution
reorganizations........ 11 4 $ 7 22
Staff reductions........ 59 1 4 64
Manufacturing costs
reduction initiatives.. 19 8 27
Plant closures.......... 51 6 203 $15 275
Product line
rationalizations....... 2 5 21 28 56
---- --- ---- --- ----
Total restructuring
charges.............. $158 $19 $243 $43 $463
==== === ==== === ====

Total charges and payments include cash expenditures, non-cash charges
primarily for asset impairments and committed severance and benefits to be
paid. The total cash payments, net of cash proceeds applied against the
restructuring reserves totaled $103 million, which is comprised of cumulative
cash expenditures of $124 million and cumulative cash proceeds of $21 million.
For the year ended December 31, 1999, cash payments, net of cash proceeds
totaled $65 million, which is comprised of $86 million of cash expenditures and
$21 million of cash proceeds which were applied against the restructuring
reserves.

Asset impairments in connection with the restructuring program were
identified and measured in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In
instances where the held and used method was applied, which includes all plant
closures, the fair value of impaired assets was determined using the discounted
cash flows generated from assets while still in use and the estimated proceeds
from their ultimate sale.

As of December 31, 1999, production had ceased in 16 of the 18 facilities
identified under the programs. Nabisco decided not to close the remaining two
small facilities in the International Food Group due to volatile economic
conditions and a highly inflationary economy which made the economic benefit
unachievable.

Note 4. Accounts Receivable:

Nabisco maintains an arrangement to sell for cash substantially all of its
eligible domestic trade accounts receivable to a financial institution pursuant
to a purchase and sale agreement. Eligible trade accounts receivable, which are
sold without recourse, are accounts that are not in excess of certain agreed-
upon

F-52

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

concentration amounts, and exclude amounts that may be delinquent, in default,
or disputed. Eligible accounts are sold on a daily basis and are settled
monthly. The maximum amount of outstanding eligible trade accounts receivable
sold at any time is $400 million. The Company provides ongoing credit and
collection services on the sold accounts. The current agreement will expire in
October 2001. The weighted-average discount rates were 5.8%, 5.8% and 5.6% for
the three years ended December 31, 1997, 1998 and 1999, respectively. These
rates were based upon the financial institution's commercial paper borrowing
rate plus participation fees of approximately 0.3% which are adjusted annually.
In addition, similar arrangements have been established for the sale of trade
accounts receivable by certain foreign subsidiaries. Eligible trade accounts
receivable balances sold were $381 million and $260 million at December 31,
1998 and 1999, respectively. The aggregate expenses related to the sales of
trade accounts receivable included in Other expense, net were $20 million in
1997, $19 million in 1998 and $17 million in 1999.

Note 5. Inventories:

The major classes of inventory are shown in the table below:

At December 31,
---------------
1998 1999
------- -------
(in millions)

Finished products......................................... $457 $551
Raw materials............................................. 164 199
Other..................................................... 132 148
---- ----
Total................................................... $753 $898
==== ====

Note 6. Property, Plant and Equipment:

Components of property, plant and equipment were as follows:

At December 31,
----------------
1998 1999
------- -------
(in millions)

Land and land improvements............................... $ 192 $ 196
Buildings and leasehold improvements..................... 937 962
Machinery and equipment.................................. 3,385 3,596
Construction-in-process.................................. 292 299
------- -------
4,806 5,053
Less accumulated depreciation............................ (1,859) (1,966)
------- -------
Net property, plant and equipment...................... $ 2,947 $ 3,087
======= =======

Note 7. Notes Payable:

Notes payable consist of notes payable to banks by foreign subsidiaries and
$9 million of commercial paper borrowings by certain foreign subsidiaries as of
December 31, 1998 and $5 million of commercial paper borrowings by certain
foreign subsidiaries as of December 31, 1999. The weighted average interest
rate on all notes payable and commercial paper borrowings was 8.0% and 8.2% at
December 31, 1998 and 1999, respectively. The weighted average interest rates
include borrowing rates in countries with high inflation, primarily in Latin
America and South Africa.

F-53

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 8. Accrued Liabilities:

Accrued liabilities consisted of the following:

At December 31,
---------------
1998 1999
------- -------
(in millions)

Payroll and employee benefits.............................. $ 274 $ 349
Marketing and advertising.................................. 237 272
Restructuring.............................................. 202 35
Insurance.................................................. 50 53
Taxes, other than income taxes............................. 47 53
Interest................................................... 70 69
Dividends payable on common stock.......................... 46 50
All other.................................................. 117 139
------ ------
Total accrued liabilities.................................. $1,043 $1,020
====== ======

Note 9. Income Taxes:

The provision (benefit) for income taxes before extraordinary item consisted
of the following:

For the Years Ended
December 31,
--------------------
1997 1998 1999
------ ------ ------
(in millions)

Current:
Federal............................................. $211 $158 $109
Foreign and other................................... 71 70 65
---- ---- ----
282 228 174
---- ---- ----
Deferred:
Federal............................................. 2 (172) 39
Foreign and other................................... 9 (16) 9
---- ---- ----
11 (188) 48
---- ---- ----
Provision for income taxes............................ $293 $ 40 $222
==== ==== ====

F-54

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The components of the deferred income tax (assets) and liabilities were as
follows:

At December 31,
----------------
1998 1999
------- -------
(in millions)

Current deferred income tax assets:
Accrued liabilities and other........................ $ (103) $ (121)
Valuation allowance.................................. 5 5
------ ------
Net current deferred income tax assets............. (98) (116)
------ ------
Non-current deferred income tax assets:
Pension liabilities.................................. (24) (14)
Other postretirement liabilities..................... (149) (149)
Other non-current liabilities........................ (134) (82)
------ ------
Total non-current deferred income tax assets before
valuation allowance............................... (307) (245)
Valuation allowance, primarily foreign net operating
losses.............................................. 82 85
------ ------
Net non-current deferred income tax assets........... (225) (160)
------ ------
Non-current deferred income tax liabilities:
Property, plant and equipment........................ 322 277
Trademarks........................................... 1,027 1,004
Other................................................ 38 55
------ ------
Total non-current deferred income tax liabilities.. 1,387 1,336
------ ------
Net non-current deferred income tax liabilities.... $1,162 $1,176
====== ======

Pre-tax income (loss) before extraordinary item for domestic and foreign
operations is shown in the following table:

For the Years Ended
December 31,
---------------------
1997 1998 1999
------ ------ ------
(in millions)

Domestic (includes U.S. exports)..................... $553 $(77) $371
Foreign.............................................. 171 46 211
---- ---- ----
Pre-tax income (loss)................................ $724 $(31) $582
==== ==== ====

F-55

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The differences between the provision for income taxes and income taxes
computed at statutory U.S. federal income tax rates are explained as follows:

For the Years Ended
December 31,
-----------------------
1997 1998 1999
------ ------- ------
(in millions)

Reconciliation from statutory rate to effective rate:
Income taxes computed at statutory U.S. federal income
tax rates............................................ $ 254 $ (11) $ 204
State taxes, net of federal benefit................... 21 17 15
Goodwill amortization................................. 30 30 30
Taxes on foreign operations at rates other than
statutory U.S. federal rate.......................... (10) 12 (24)
Other items, net...................................... (2) (8) (3)
----- ------- -----
Provision for income taxes............................ $ 293 $ 40 $ 222
===== ======= =====
Effective tax rate.................................... 40.5% (129.0)% 38.1%
===== ======= =====

The reported effective tax rate for 1997 was 40.5%. The reported effective
tax rate was (129.0)% in 1998 versus the 38.1% rate for 1999. The 38.1%
effective tax rate benefited from the 28.3% effective tax rate recorded on
restructuring credits. Excluding the tax related impact from restructuring
credits in 1999 and restructuring charges and the net gain from divestitures in
1998, the effective tax rates are 40.5% and 39.5% for 1998 and 1999,
respectively.

At December 31, 1999, there was $802 million 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.

Note 10. Long-term Debt:

Long-term debt consisted of the following:

At December 31,
----------------
1998 1999
------- -------
(in millions)

Commercial paper, average interest rates of 5.7% and 6.4%.... $ 174 $ 902
8.3% notes due April 15, 1999................................ 106
8.0% notes due January 15, 2000.............................. 148 148
6.24% pound sterling notes due August 12, 2001............... 163
6.8% notes due September 1, 2001............................. 80 80
6.7% notes due June 15, 2002................................. 400 400
6.85% notes due June 15, 2005................................ 400 400
7.05% notes due July 15, 2007................................ 400 400
5.38% notes due August 26, 2009.............................. 200
6.0% notes due February 15, 2011............................. 400 400
7.55% debentures due June 15, 2015........................... 399 399
6.13% notes due February 1, 2033............................. 299 299
6.38% notes due February 1, 2035............................. 299 299
Other long-term debt......................................... 269 323
Less current maturities...................................... (118) (158)
------ ------
Total........................................................ $3,619 $3,892
====== ======

F-56

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The payment of long-term debt through December 31, 2004 is due as follows
(in millions): 2001-$139; 2002-$1,399; 2003-$52 and 2004-$97.

Nabisco Holdings maintains a $1.5 billion revolving credit facility and a
364-day $1.10 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 the
Company's option. The commitments under the revolving credit facility decline
to approximately $1.46 billion on October 31, 2001 for 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. At December 31, 1999, the full
$1.5 billion was available under the revolving credit facility and $198 million
was available under the 364-day credit facility. Similar facilities were in
place during 1997 and 1998.

Commercial paper borrowings have been included under long-term debt based on
the Company's intention, and ability under its credit facilities, to refinance
these borrowings for more than one year.

The credit facilities restrict dividends and distributions after January 1,
1999 by Nabisco Holdings to holders of its equity securities by requiring a
minimum net worth amount. As of December 31, 1999, actual net worth, as
defined, exceeded required net worth by approximately $915 million.

The credit facilities also limit the ability of Nabisco Holdings and its
subsidiaries to incur indebtedness, engage in transactions with shareholders
and affiliates, create liens, acquire, sell or dispose of certain assets and
securities and engage in certain mergers or consolidations. Nabisco Holdings
believes that they are currently in compliance with all covenants and
restrictions imposed by the terms of their indebtedness.

In August 1997, the Company issued $200 million of floating rate (5.38% at
December 31, 1998) notes due August 2009. During the third quarter of 1999 the
Company exercised a call option to redeem these notes and recognized an after
tax extraordinary loss of approximately $3 million. This redemption was
refinanced with commercial paper.

In December 1997, the Company completed a tender offer and redeemed $432
million of its $538 million 8.3% notes due 1999 and $541 million of its $688
million outstanding 8% notes due 2000. An extraordinary loss of $43 million
($26 million after tax) was recorded for this transaction. The redemption of
these notes was financed with additional short-term borrowings, which in turn
were refinanced by the issuance of long-term debt in January 1998.

In January 1998, the Company issued $400 million of 6% notes due February
15, 2011 which are putable and callable on February 15, 2001; $300 million of
6 1/8% notes due February 1, 2033 which are putable and callable on February 1,
2003; and $300 million of 6 3/8% notes due February 1, 2035 which are putable
and callable on February 1, 2005. Unless the notes are put, the interest rates
on the 6% notes, the 6 1/8% notes and the 6 3/8% notes are reset on the
applicable put/call date at 5.75%, 6.07% and 6.07%, respectively, plus, in each
case, the Company's future credit spread on treasury notes of comparable
maturities. The Company no longer retains the right to call these notes as
these options were sold at issuance for $41 million. The net proceeds from
these notes and the sale of call options were used to repay commercial paper
borrowings.

The Company filed a shelf registration statement with the Securities and
Exchange Commission for $1.0 billion of debt which was declared effective on
December 10, 1999.

The estimated fair value of long-term debt, including current maturities at
December 31, 1998 and 1999 was approximately $4.0 billion for both years.
Considerable judgment was required in interpreting market data to develop the
estimates of fair value. In addition, the use of different market assumptions
and/or estimation

F-57

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

methodologies may have had a material effect on the estimated fair value
amounts. Accordingly, the estimated fair value of long-term debt as of December
31, 1998 and 1999 is not necessarily indicative of the amounts that the Company
could realize in a current market exchange.

Note 11. Contingencies:

Nabisco Holdings or certain of its subsidiaries have been named "potentially
responsible parties" with third parties under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") or may have indemnification
obligations with respect to 14 sites. Liability under CERCLA is joint and
several. Although it is difficult to identify precisely the estimated cost of
resolving these CERCLA matters, such expenditures or costs are not expected to
have a material adverse effect on Nabisco Holdings' financial condition or
results of operations.

In addition, a subsidiary of the Company may have indemnification
obligations to a third party with respect to certain lawsuits arising from a
CERCLA site although the subsidiary itself is not named in the lawsuits.
Management cannot currently predict the likelihood that it will have to perform
on these obligations or what the magnitude of the obligations would be.

Note 12. Related Party Transactions:

NGH, RJR and R.J. Reynolds Tobacco Company entered into several agreements
governing the relationships among the parties after the distribution of RJR's
shares to NGH shareholders, including the provision of intercompany services by
the Company to NGH, certain tax matters, indemnification rights and obligations
and other matters among the parties.

These agreements replaced a predecessor intercompany services agreement, a
predecessor tax sharing agreement and a predecessor corporate agreement that
had previously been in place between Nabisco Holdings and RJR. Nabisco Holdings
does not anticipate that its entry into these new agreements will have a
material effect on its financial condition or results of operations.

Note 13. Commitments:

At December 31, 1999, other commitments totaled approximately $239 million,
which included $28 million for capital commitments and $211 million related to
operating lease commitments. The operating lease amounts for each of the five
succeeding years are: 2000--$37 million; 2001--$29 million; 2002--$25 million;
2003--$20 million; 2004--$20 million; and in 2005 and thereafter--$80 million.
Rent expense, including operating leases was $84 million, $89 million and $102
million for the three years ended December 31, 1997, 1998 and 1999,
respectively.

Note 14. Financial Instruments:

Interest rate:

The Company manages its debt structure and interest rate risk through the
use of fixed and floating rate debt, and through the use of derivatives. The
Company uses interest rate swaps and caps to hedge its exposure to interest
rate changes, and also to lower its financing costs.

At December 31, 1999, outstanding interest rate caps had an aggregate
notional principal amount of $700 million and expire in June 2000. The
estimated fair values of these financial instruments as of December 31, 1999,
and similar financial instruments as of December 31, 1998, were favorable by
less than $1 million.

F-58

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 31, 1999, outstanding fixed to floating interest rate swaps for
$102 million notional principal amount had estimated fair values which were
unfavorable by approximately $4 million. These swaps expire as follows: $29
million in 2003; and $73 million in 2004. At December 31, 1998, similar
financial instruments for $565 million had estimated fair values which were
favorable by approximately $11 million.

Estimated fair values for all interest rate financial instruments were based
on calculations by independent third parties.

Foreign currency:

At December 31, 1998 and 1999, the Company had outstanding forward foreign
exchange contracts with banks to purchase and sell aggregate amounts of $21
million and $5 million, respectively. Such contracts were primarily entered
into to hedge certain international subsidiary debt. The purpose of the
Company's foreign currency hedging activities is to protect the Company from
risk that the eventual U.S. dollar cash flows resulting from transactions with
international parties will be adversely affected by changes in exchange rates.
Based on calculations from independent third parties, the estimated fair value
of these financial instruments as of December 31, 1998 was unfavorable by
approximately $1 million and as of December 31, 1999 was favorable by less than
$1 million.

Market and credit risk:

The outstanding interest rate and foreign currency financial instruments
involve, to varying degrees, elements of market risk as a result of potential
changes in 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 interest rates and foreign currency exchange rates on the
financial instruments entered into would offset the related impact on the items
being hedged. Also, the Company may be exposed to credit losses in the event of
non-performance by the counterparties to these financial instruments. However,
management continually monitors its positions and the credit rating of its
counterparties and therefore, does 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 15. Retirement Benefits:

The Company sponsors a number of non-contributory and contributory defined
benefit pension plans covering most U.S. and certain foreign employees and
former employees of Nabisco Holdings and NGH. Additionally, the Company
participates 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. The Company also provides
certain other postretirement health and life insurance benefits for retired
employees of Nabisco Holdings, NGH and their dependents.

In connection with the reorganization transactions described in Note 2 to
the Consolidated Financial Statements, the assets and liabilities of the
Retirement Plan for Employees of RJR Nabisco, Inc. (the "old plan") were split
into two plans. One plan covers employees and former employees of Nabisco
Holdings and NGH (the "Nabisco Plan") and the other plan covers employees and
former employees of RJR.

F-59

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The split of assets and liabilities of the old plan was in accordance with a
May 1999 agreement between the Pension Benefit Guaranty Corporation ("PBGC")
and RJR Nabisco Holdings Corp. (now known as NGH). Based on this agreement and
as required by Section 414(l) of the Internal Revenue Code, the assets of the
old plan were allocated in proportion to the benefit obligations of each of the
respective plans. The use of this methodology resulted in a lower actual net
transfer of assets to the Nabisco Plan of $69 million and assumption of higher
actual benefit obligations of $30 million than the allocated amounts used in
the December 31, 1998 consolidated financial statements. These amounts have
been reflected as transfers between other members of a controlled group in the
following disclosures. The impact of this change, an increase in the unfunded
pension liability of $99 million, will be recognized in net periodic benefit
costs over future periods. As a result, the 1999 net periodic benefit cost for
the Company increased by approximately $7 million. The PBGC agreement did not
require the Company to make additional contributions to the Nabisco Plan.

Effective in 1999, all assets and benefit obligations for Nabisco Holdings
and NGH were consolidated in the following disclosures. However, the net
periodic benefit cost for former employees of NGH continues to be accrued in
the financial statements of NGH.

In addition to the change in unfunded pension liability in the Nabisco Plan
described above, $28 million of unfunded benefit obligations were reflected as
a transfer from other members of a controlled group due to benefit obligations
attributable to former employees of NGH. All of the liabilities attributable to
these obligations are accrued in the financial statements of NGH.

F-60

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The portion of the unfunded (benefit) surplus obligation for pension
benefits attributable to the Company was $(117) million and $98 million as of
December 31, 1998 and 1999, respectively.

Pension Benefits Other Benefits
------------------ ----------------
At December 31, At December 31,
------------------ ----------------
1998 1999 1998 1999
-------- -------- ------- -------
(in millions)

Change in benefit obligation
Benefit obligation at January 1......... $1,718 $1,693 $ 531 $ 460
Service cost............................ 46 50 6 6
Interest cost........................... 114 112 33 32
Plan amendments......................... (6)
Actuarial gain.......................... (6) (206) (68) (31)
Foreign currency translation............ (15) 15 (2) 2
Benefits paid........................... (158) (158) (40) (44)
Transfer from other members of
controlled group....................... 58 4
-------- -------- ------- -------
Obligations at December 31.............. 1,693 1,564 460 429
-------- -------- ------- -------
Change in plan assets
Fair value of plan assets at January 1.. 1,568 1,576
Actual return on plan assets............ 141 247
Employer contributions.................. 40 36 40 44
Plan participants' contributions........ 1 1
Foreign currency translation............ (16) 17
Benefits paid........................... (153) (158) (40) (44)
Settlements............................. (5)
Transfer to other members of controlled
group.................................. (69)
-------- -------- ------- -------
Fair value of plan assets at
December 31............................ 1,576 1,650 -- --
-------- -------- ------- -------
Funded status
Funded status at December 31............ (117) 86 (460) (429)
Unrecognized transition asset........... (2) (1) (3) (2)
Unrecognized prior service cost......... 5 4
Unrecognized loss (gain)................ 35 (189) 37 8
-------- -------- ------- -------
Net amount recognized................... $ (79) $ (100) $(426) $(423)
======== ======== ======= =======
Amounts recognized in the Consolidated
Balance Sheets
Prepaid benefit cost.................... $ 19 $ 22
Accrued benefit liability............... (112) (135) $(426) $(423)
Intangible asset........................ 2 2
Accumulated other comprehensive income.. 12 11
-------- -------- ------- -------
Net amount recognized................... $ (79) $ (100) $(426) $(423)
======== ======== ======= =======

Of the net amount recognized at December 31, 1999, $(16) million for pension
benefits and $(6) million for other benefits was recorded by NGH.

F-61

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Plan assets consist primarily of a diversified portfolio of fixed-income
investments, debt and equity securities and cash equivalents. The projected
benefit obligation, accumulated benefit obligation, and fair value of plan
assets for the pension plans with accumulated benefit obligations in excess of
plan assets were as follows:

At December 31,
---------------
1998 1999
------- -------
(in millions)

Projected benefit obligation................................. $95 $67
Accumulated benefit obligation............................... 92 67
Fair value of plan assets.................................... 40 3

The components of net periodic benefit cost are as follows:

Pension Benefits Other Benefits
------------------- ----------------
For the Years Ended December 31,
-------------------------------------
1997 1998 1999 1997 1998 1999
----- ----- ----- ---- ---- ----
(in millions)

Service cost......................... $ 39 $ 46 $ 50 $ 7 $ 6 $ 6
Employee contributions............... (1)
Interest cost........................ 116 114 112 36 33 32
Expected return on plan assets....... (129) (135) (133)
Amortization of transition asset..... (1) (1) (1) (3) (2) (3)
Amortization of prior service cost... 3 3 3
Amortization of net (gain) loss...... (2) (2) 1 1
Settlement loss...................... 2
----- ----- ----- --- --- ---
Net periodic benefit cost............ 26 27 31 $40 $37 $36
=== === ===
Multi-employer and defined
contribution plans.................. 33 32 32
----- ----- -----
Total pension benefit cost........... $ 59 $ 59 $ 63
===== ===== =====

Of the 1999 net periodic benefit cost, approximately $1 million for pension
benefits and less than $1 million for other benefits was recorded by NGH.

The principal plans used the following weighted average actuarial
assumptions for accounting purposes:

Pension Benefits Other Benefits
----------------- ----------------
1998 1999 1998 1999
-------- -------- ------- -------

Discount rate............................ 6.9% 7.9% 6.8% 8.0%
Expected return on plan assets........... 9.3 9.3
Rate of compensation increase............ 4.7 4.6

F-62

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The assumed health care cost trend rate was 5.5% in 1999 and 5% in 2000 and
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one-percentage-point change in
the assumed health care cost trend rates would have had the following impact on
1999 amounts:

1-Percentage- 1-Percentage-
Point Point
Increase Decrease
------------- -------------
(in millions)

Increase (decrease) in postretirement benefit
cost.......................................... $ 3 $ (2)
Increase (decrease) in postretirement benefit
obligation.................................... 31 (27)

Note 16. Shareholders' Equity:

The authorized capital stock of Nabisco Holdings consists of (a) 1 billion
shares of common stock, par value $.01 per share, of which (i) 265,000,000
shares have been designated as Class A common stock, of which 51,819,653 shares
are issued, (ii) 213,250,000 shares have been designated as Class B common
stock, all of which are issued and outstanding, (iii) the remaining 521,750,000
shares may be designated by the board of directors as either Class A or Class B
common stock prior to issuance, and (b) 75,000,000 shares of preferred stock,
par value $.01 per share, of which no shares have been issued.

The holders of Class A common stock and Class B common stock generally have
identical rights except that holders of Class A common stock are entitled to
one vote per share while holders of Class B common stock are entitled to ten
votes per share on all matters to be voted on by shareholders. Each share of
Class B common stock is convertible, at the option of the holder, into one
share of Class A common stock.

NGH beneficially owns 100% of the Class B common stock of Nabisco Holdings
which represents 80.6% of the economic interest and 97.6% of the combined
voting power of the common stock as of December 31, 1999. Any shares of Class B
common stock disposed of by NGH shall automatically convert to shares of
Class A common stock on a share-for-share basis upon such disposition, except
for (i) a disposition to one of its subsidiaries or (ii) a disposition effected
in connection with a transfer of Class B common stock to the shareholders of
NGH as a dividend intended to be on a tax-free basis in which case the
conversion of the Class B common stock to Class A common stock will be
structured as necessary to preserve the tax-free status of the transfer.

In December 1997, Nabisco Holdings' board of directors authorized the
repurchase from time to time of up to 2 million shares of Class A common stock.
As of December 31, 1999, Nabisco Holdings had reacquired 1,550,000 shares, of
which 1,143,054 shares were used to satisfy awards under the Nabisco Holdings
Corp. 1994 Long Term Incentive Plan (the "Nabisco LTIP").

During 1996, 54,981 shares of Class A common stock were sold in connection
with purchase stock grants awarded under the Nabisco LTIP. The shares were
purchased at their fair market value for a total of approximately $2 million by
two then current members of the board of directors. The borrowings are
presented as notes receivable in the Consolidated Statement of Shareholders'
Equity.

Nabisco Holdings' dividends are funded from matching dividends paid on the
same dates by Nabisco, Inc., its wholly-owned subsidiary.

F-63

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock plans:

The Nabisco 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, or other stock-based
grants. Awards under the Nabisco LTIP may be granted to key employees of, or
other persons having a unique relationship to Nabisco Holdings and its
subsidiaries, all as determined by the compensation committee of the board of
directors. Members of the compensation committee are ineligible for grants. The
maximum number of shares which may be granted in respect of all awards during
the term of the Nabisco LTIP is 28.3 million shares of Class A common stock.
The Nabisco LTIP has limits as to the amount of shares which may be issued. The
annually granted stock options have a 15 year term for the 1995 grants and a 10
year term for grants made thereafter. Stock option grants vest over three
years, and are exercisable three years after the grant date. The exercise price
is the fair market value of the stock at the grant date.

Directors of Nabisco Holdings who have never been employees of NGH or any of
its subsidiaries are eligible to be granted options under a separate plan which
provides for the issuance of a maximum of 300,000 shares of Class A common
stock. The option terms are substantially similar to the Nabisco LTIP. Stock
option grants during 1997, 1998 and 1999 were 6,000, 3,600 and 4,700 shares,
respectively.

As of December 31, 1999, 9,108,434 shares were available for future grants
under the Nabisco Holdings stock plans. The changes in stock options under the
stock plans were as follows:

1997 1998 1999
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options in thousands Options Price Options Price Options Price
-------------------- ------- --------- ------- --------- ------- ---------

Balance at beginning of
year................... 11,728 $28.57 14,160 $30.15 15,514 $32.75
Granted................. 2,759 37.22 2,831 45.51 3,604 42.61
Exercised............... (833) 27.50 (278) 28.89
Cancelled............... (327) 33.13 (644) 38.59 (528) 42.62
------ ------ ------
Balance at end of year.. 14,160 30.15 15,514 32.75 18,312 34.46
====== ====== ======
Exercisable at end of
year................... -- 7,806 26.67 10,222 28.52
====== ====== ======

Options Outstanding
---------------------------------
Weighted-
Average Weighted-
Number Remaining Average
Options in thousands, life in years Outstanding Contractual Exercise
Range of Exercise Prices At 12/31/99 Life Price
----------------------------------- ----------- ----------- ---------

$24.50-$27.88.............................. 4,476 10.1 $25.61
$28.00-$32.94.............................. 3,237 10.0 28.26
$33.00-$36.94.............................. 2,516 6.2 33.99
$37.00-$43.31.............................. 5,700 8.3 40.44
$44.88-$52.88.............................. 2,383 8.1 45.69
------
18,312 8.7 34.46
======

F-64

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Nabisco Holdings recognizes and measures costs related to employee stock
plans utilizing the intrinsic value based method. Had compensation expense been
determined based upon the fair value of awards granted during 1997, 1998 and
1999, Nabisco Holdings' results would have been as indicated in the table
below.

For the Years Ended December 31,
-----------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------

Net income (loss) (in
millions).............. $ 405 $ 387 $ (71) $ (89) $ 357 $ 337
Net income (loss) per
share--basic........... 1.53 1.46 (.27) (.34) 1.35 1.27
Net income (loss) per
share--diluted......... 1.51 1.44 (.27) (.34) 1.34 1.27
Weighted-average fair
value of options
granted during the
year................... 12.55 14.27 13.17

For options granted, fair value was determined using the Black-Scholes
option pricing model with the following weighted-average assumptions:

1997 1998 1999
---- ---- ----

Dividend yield............................................. 1.7% 1.7% 1.9%
Expected volatility........................................ 23% 23% 26%
Risk-free interest rate.................................... 6.6% 5.7% 5.1%
Expected option life (years)............................... 7 7 7

Note 17. Segment Information:

Operating segment data:

Nabisco Holdings is a holding company whose subsidiaries are engaged in the
manufacture, distribution and sale of cookies, crackers, and other food
products. Nabisco Holdings is organized and reports its results of operations
in three business segments: Nabisco Biscuit, the U.S. Foods Group and the
International Food Group which are segregated by both product and geographic
area.

The Company evaluates performance and allocates resources based on ongoing
operating company contribution ("OCC"). Ongoing OCC for each reportable segment
is operating income before amortization of intangibles and exclusive of
restructuring charges and credits, restructuring-related expenses and net gains
on divested businesses. The accounting policies of the segments are the same as
those described in Note 1.

Nabisco Biscuit manufactures and markets cookies and crackers in the United
States. Its products are sold to major grocery and other large retail chains
through its own direct store delivery system. The U.S. Foods Group represents
other food operations in the United States and manufactures and markets sauces
and condiments, pet snacks, hot cereals, dry mix desserts, gelatins, non-
chocolate candy, gum, nuts and salty snacks. It sells to major grocery chains,
national drug and mass merchandisers, convenience channels and warehouse clubs
through a direct sales force. It also sells to small retail grocery chains and
regional mass merchandisers through independent brokers. The International Food
Group conducts the Company's international operations, outside the United
States, primarily in markets in Latin America, Canada, certain markets in
Europe, the Middle East, Africa and Asia. The International Food Group
primarily produces and markets biscuits, powdered dessert and dry mixes, baking
powder, pasta, juices, milk products and other grocery items.

F-65

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

No customer accounted for 10% or more of consolidated net sales in 1997 and
1998 and one of Nabisco's customers accounted for approximately 11% of
consolidated net sales in 1999. Sales to this customer are included in the net
sales amount for each of our business segments.

For the Years Ended
December 31,
----------------------
1997 1998 1999
------ ------ ------
(in millions)

Net sales from external customers:
Nabisco Biscuit.................................. $3,545 $3,542 $3,640
U.S. Foods Group................................. 1,988 2,047 2,246
International Food Group......................... 2,569 2,513 2,382
------ ------ ------
Total ongoing................................... 8,102 8,102 8,268
------ ------ ------
U.S. Foods Group................................. 616 287
International Food Group......................... 16 11
------ ------ ------
Total divested.................................. 632 298 --
------ ------ ------
Total........................................... $8,734 $8,400 $8,268
====== ====== ======
Segment operating company contribution:
Nabisco Biscuit.................................. $ 691 $ 542 $ 557
U.S. Foods Group................................. 281 301 338
International Food Group......................... 236 205 200
------ ------ ------
Total ongoing................................... 1,208 1,048 1,095
------ ------ ------
U.S. Foods Group................................. 97 38
International Food Group......................... 2 1
------ ------ ------
Total divested.................................. 99 39 --
------ ------ ------
Total segment operating company contribution....... 1,307 1,087 1,095
Restructuring-related expenses..................... 31 56 76
Net gain on divested businesses.................... (32) (14)
Amortization of trademarks and goodwill............ 226 221 213
Restructuring charges (credits).................... 530 (67)
------ ------ ------
Consolidated operating income...................... 1,082 294 873
Interest and debt expense.......................... 326 296 260
Other expense, net................................. 32 29 31
------ ------ ------
Income (loss) before income taxes.................. $ 724 $ (31) $ 582
====== ====== ======

For the Years Ended
December 31,
----------------------
1997 1998 1999
------ ------ ------
(in millions)

Depreciation:
Nabisco Biscuit.................................. $148 $146 $146
U.S. Foods Group................................. 49 46 42
International Food Group......................... 80 81 77
---- ---- ----
Total........................................... $277 $273 $265
==== ==== ====

F-66

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For the Years
Ended
December 31,
--------------
1997 1998 1999
---- ---- ----
(in millions)

Capital expenditures:
Nabisco Biscuit............................................ $206 $188 $128
U.S. Foods Group........................................... 64 49 42
International Food Group................................... 122 103 71
---- ---- ----
Total.................................................... $392 $340 $241
==== ==== ====

At December 31,
---------------
1998 1999
------- -------
(in millions)

Segment assets:
Nabisco Biscuit........................................... $ 2,124 $ 2,170
U.S. Foods Group.......................................... 840 1,506
International Food Group.................................. 2,579 2,644
------- -------
Total segment assets...................................... 5,543 6,320
Unallocated intangibles, net (1).......................... 5,574 5,387
------- -------
Consolidated assets....................................... $11,117 $11,707
======= =======

Geographic segment information:

Net
Net Sales For the Years Property At
Ended December 31, December 31,
----------------------- -------------
1997 1998 1999 1998 1999
------- ------- ------- ------ ------
(in millions)

United States.......................... $6,149 $5,876 $5,886 $2,023 $2,188
Latin America.......................... 1,438 1,428 1,249 550 499
Other.................................. 1,147 1,096 1,133 374 400
------ ------ ------ ------ ------
$8,734 $8,400 $8,268 $2,947 $3,087
====== ====== ====== ====== ======

- ---------------------
(1) Represents unallocated goodwill, trademarks and tradename resulting from
the 1989 acquisition of Nabisco Holdings' parent company.

F-67

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 18. Quarterly Results of Operations (Unaudited):

The following is a summary of 1998 and 1999 quarterly results of operations
and per share data for Nabisco Holdings:

First Second Third Fourth
--------- ---------- --------- ----------
(in millions, except per share amounts)

1998(1)
Net sales............. $ 1,962 $ 2,131 $ 2,098 $ 2,209
Gross profit.......... 837 944 932 1,004
Operating income
(loss)............... 182 (210) 184 138
Net income (loss)..... 55 (200) 55 19
Per share data:
Net income (loss)--
basic................ $ .21 $ (.76) $ .21 $ .07
Net income (loss)--
diluted.............. .21 (.76) .21 .07
Dividends declared.... .175 .175 .175 .175
Market price
High................ 50 3/8 54 1/4 39 3/16 42 3/8
Low................. 38 34 7/8 31 3/4 33 3/4

First Second Third Fourth
--------- ---------- --------- ----------
(in millions, except per share amounts)

1999(2)
Net sales............. $ 1,855 $ 2,023 $ 2,057 $ 2,333
Gross profit.......... 828 934 924 1,080
Operating income...... 134 177 252 310
Income before
extraordinary item... 36 65 117 142
Net income............ 36 65 114 142
Per share data:
Net income--basic..... $ .14 $ .25 $ .43 $ .54
Net income--diluted... .13 .24 .43 .53
Dividends declared.... .1875 .1875 .1875 .1875
Market price
High................ 45 13/16 43 1/2 43 15/16 38 1/8
Low................. 38 5/16 37 9/16 34 7/16 31 3/16

- ---------------------
(1) The second quarter of 1998 includes a $406 million ($268 million after tax
or $1.01 per share) restructuring charge and $6 million expense ($4 million
after tax or $.02 per share) of restructuring related expenses.

The third quarter of 1998 includes a net gain of $14 million ($2 million
after tax or $.01 per share) from divestitures and $15 million ($8 million
after tax or $.03 per share) of restructuring related expenses.

The fourth quarter of 1998 includes a $124 million ($94 million after tax
or $0.35 per share) restructuring charge and $35 million ($21 million after
tax or $.08 per share) of restructuring related expenses.

(2) The first quarter of 1999 includes $15 million ($9 million after tax or
$.04 per share) of restructuring related expenses.

The second quarter of 1999 includes $19 million ($11 million after tax or
$.04 per share) of restructuring related expenses.

The third quarter of 1999 includes $12 million ($8 million after tax or
$.03 per share) of restructuring related expenses and a credit of $59
million ($44 million after tax or $.16 per share) applicable to the June
and December 1998 restructuring programs.

The fourth quarter of 1999 includes $30 million ($18 million after tax or
$.07 per share) of restructuring related expenses and a credit of $8
million ($4 million after tax or $.02 per share) applicable to the June and
December 1998 restructuring programs.

F-68

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 19. Subsequent Event (Unaudited):

On December 14, 1999, the Company announced its participation in a joint
venture, Burlington Biscuits plc ("Burlington"), with Hicks, Muse, Tate & Furst
Limited ("HMTF"), an investment firm, to bid for 100% of United Biscuits
(Holdings) plc ("UB"). Subsequently, Burlington acquired 29.9% of UB. As
announced on March 20, 2000, the Company and HMTF have entered into definitive
agreements under which: (i) the Company and HMTF will join a consortium of
investors, Finalrealm Limited ("Finalrealm"), also bidding for UB; (ii) an
associate of Finalrealm will acquire Burlington's 29.9% interest in UB, giving
Finalrealm a 47.6% interest in UB; (iii) Finalrealm's cash offer of 265 pence
per UB share becomes a Final Offer under the City Code and is extended until
April 5, 2000; (iv) subject to Finalrealm being entitled to exercise compulsory
acquisition rights in respect of minority interests in UB and regulatory
competition clearance, the Company will contribute approximately $45 million in
cash and its operations in Spain, Portugal and the Middle East (in 1999, these
operations had net sales of approximately $290 million) to an associate of
Finalrealm; (v) Finalrealm has agreed to procure the sale to the Company of
UB's operations in China, Hong Kong and Taiwan conditional on the Final Offer
becoming or being declared wholly unconditional (in 1999, these operations had
net sales of approximately $66 million); and (vi) following completion of the
Final Offer and its related transactions, the Company would have an equity
interest of 24.6% in the joint venture.

Upon completion, the joint venture will be comprised of UB businesses in the
United Kingdom, France and the Benelux countries, the Company's operations
named above and HMTF's UK Horizon Biscuits business.

F-69

NABISCO HOLDINGS CORP.

CONSOLIDATED CONDENSED BALANCE SHEET
(in millions of dollars)
(unaudited)

At September 30,
2000
----------------

ASSETS
Current assets:
Cash and cash equivalents................................... $ 140
Accounts receivable, net of allowance for doubtful accounts
of $39..................................................... 555
Deferred income taxes....................................... 111
Inventories................................................. 951
Prepaid expenses and other current assets................... 72
-------
Total current assets...................................... 1,829
-------
Property, plant and equipment--at cost........................ 4,997
Less accumulated depreciation................................. (2,055)
-------
Net property, plant and equipment........................... 2,942
-------
Trademarks, net of accumulated amortization of $1,298......... 3,343
Goodwill, net of accumulated amortization of $1,060........... 3,045
Other assets and deferred charges............................. 451
-------
$11,610
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................... $ 80
Accounts payable............................................ 359
Accrued liabilities......................................... 1,089
Current maturities of long-term debt........................ 100
Income taxes accrued........................................ 173
-------
Total current liabilities................................. 1,801
-------
Long-term debt................................................ 3,834
Other noncurrent liabilities.................................. 783
Deferred income taxes......................................... 1,143
Contingencies.................................................
Shareholders' equity:
Class A common stock (51,819,593 shares issued and
outstanding)............................................... 1
Class B common stock (213,250,000 shares issued and
outstanding)............................................... 2
Paid-in capital............................................. 4,097
Retained earnings........................................... 224
Accumulated other comprehensive loss........................ (273)
Notes receivable on common stock purchases.................. (2)
-------
Total shareholders' equity................................ 4,049
-------
$11,610
=======

See notes to consolidated condensed financial statements.

F-70

NABISCO HOLDINGS CORP.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in millions of dollars, except per share amounts)
(unaudited)

For the
Nine Months Ended
September 30,
------------------
1999 2000
-------- --------

Net sales................................................. $5,935 $6,580
Costs and expenses:
Cost of products sold................................... 3,249 3,594
Selling, advertising, administrative and general
expenses............................................... 2,021 2,231
Amortization of trademarks and goodwill................. 161 165
Restructuring credit.................................... (59) (27)
-------- --------
Operating income...................................... 563 617
Interest and debt expense................................. (193) (213)
Other expense, net........................................ (22) (10)
-------- --------
Income before income taxes............................ 348 394
Provision for income taxes................................ 130 158
-------- --------
Income before extraordinary item...................... 218 236
Extraordinary item-loss on early extinguishment of debt,
net of $2 of income taxes................................ (3)
-------- --------
Net income............................................ $ 215 $ 236
======== ========
Basic net income (loss) per common share:
Income before extraordinary item........................ $ .82 $ .89
Extraordinary item...................................... (.01)
-------- --------
Net income............................................ $ .81 $ .89
======== ========
Diluted net income (loss) per common share:
Income before extraordinary item........................ $ .82 $ .88
Extraordinary item...................................... (.01)
-------- --------
Net income............................................ $ .81 $ .88
======== ========
Dividends declared per common share....................... $.5625 $.5625
======== ========
Average number of common shares outstanding (in
thousands):
Basic................................................... 264,676 264,843
======== ========
Diluted................................................. 266,867 268,001
======== ========

See notes to consolidated condensed financial statements.

F-71

NABISCO HOLDINGS CORP.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions of dollars)
(unaudited)

For the
Nine Months Ended
September 30,
-----------------
1999 2000
-------- --------

Net income................................................... $215 $236
---- ----
Other comprehensive (loss) income:
Reclassification of cumulative translation losses related
to businesses sold included in net income................. 51
Cumulative translation adjustment.......................... (133) (31)
---- ----
Other comprehensive (loss) income, net of income tax......... (133) 20
---- ----
Comprehensive income......................................... $ 82 $256
==== ====

Total comprehensive income for the quarters ended September 30, 1999 and 2000
was $97 and $74, respectively.

See notes to consolidated condensed financial statements.

F-72

NABISCO HOLDINGS CORP.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions of dollars)
(unaudited)

For the
Nine Months
Ended
September 30,
--------------
1999 2000
------ ------

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net income.................................................... $ 215 $ 236
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation of property, plant and equipment................ 198 200
Amortization of intangibles.................................. 161 165
Deferred income tax provision................................ 27 30
Restructuring credit......................................... (59) (27)
Restructuring payments....................................... (65) (46)
Accounts receivable, net..................................... (49) 49
Inventories.................................................. (184) (108)
Prepaid expenses and other current assets.................... (8) (8)
Accounts payable............................................. (109) (259)
Accrued liabilities.......................................... 94 72
Income taxes accrued......................................... (21) 75
Extraordinary loss on early retirement of debt, net.......... 3
Other, net................................................... (13) 25
------ ------
Net cash flows from operating activities...................... 190 404
------ ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures.......................................... (150) (131)
Proceeds from sale of assets.................................. 27 31
Acquisition of business....................................... (107)
Investment in Finalrealm transaction.......................... (151)
------ ------
Net cash flows used in investing activities................... (230) (251)
------ ------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net proceeds from the issuance of long-term debt.............. 497 111
Repayments of long-term debt.................................. (324) (222)
(Decrease) increase in notes payable.......................... (8) 133
Dividends paid on common stock................................ (146) (149)
Repurchases of Class A common stock........................... (12) (13)
Proceeds from exercise of Class A common stock options........ 7 20
------ ------
Net cash flows from (used in) financing activities............ 14 (120)
------ ------
Effect of exchange rate changes on cash and cash equivalents... (9) (3)
------ ------
Net change in cash and cash equivalents....................... (35) 30
Cash and cash equivalents at beginning of period............... 111 110
------ ------
Cash and cash equivalents at end of period..................... $ 76 $ 140
====== ======
Income taxes paid, net of refunds.............................. $ 126 $ 53
====== ======
Interest paid.................................................. $ 204 $ 211
====== ======

See notes to consolidated condensed financial statements.

F-73

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

Note 1. Interim Reporting and Results of Operations:

General:

For interim reporting purposes, certain costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred. The results for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the year ended
December 31, 2000.

In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of
Nabisco Holdings Corp. ("Nabisco Holdings" or the "Company") contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for the interim periods presented. The
Consolidated Condensed Financial Statements should be read in conjunction with
the consolidated financial statements and footnotes for the year ended December
31, 1999 included herein.

Business disposals:

In April 2000, Nabisco Holdings joined Finalrealm Limited ("Finalrealm"), a
consortium of investors, which acquired the equity of United Biscuits
(Holdings) plc ("UB"), a United Kingdom company. At that time, Nabisco Holdings
invested approximately $45 million in cash in DeluxeStar Limited
("DeluxeStar"), an affiliate of Finalrealm. In July 2000, Nabisco Holdings sold
its operations in Spain, Portugal and the Middle East, which included $10
million in cash and cash equivalents, to DeluxeStar and agreed to pay an
additional $41 million in cash to Finalrealm. In exchange for the total cash
consideration and businesses sold, Nabisco Holdings received mandatorily
redeemable discounted preferred stock from DeluxeStar and warrants from
Bladeland Limited ("Bladeland"), the indirect parent company of Finalrealm and
DeluxeStar. The discounted preferred stock and warrants were fair valued at
approximately $277 million based on a valuation opinion received from an
independent investment banker. The discounted preferred stock accretes non-cash
dividend income at an annual rate of 11.72% and is mandatorily redeemable in
2049. The discounted preferred stock converts into 26.51% of the common equity
of Bladeland upon the future exercise of the warrants. The warrants are
exercisable at maturity, which is in 25 years, upon an initial public offering
by Bladeland, or upon a change of control in Bladeland, in which the ownership
of the equity investors becomes less than 50%. These securities are being
accounted for on a cost basis.

The sale of operations resulted in the recognition of a pre-and-after tax
loss of approximately $18 million that was recorded in selling, advertising,
administrative and general expenses in the quarter ended June 30, 2000. In
1999, these operations had annual net sales of approximately $290 million.

As a result of the transaction, Nabisco Holdings recorded $12 million of
investor financing fee income during the third quarter of 2000 in other
expense, net.

Business acquisitions:

In November 1999, Nabisco Holdings acquired certain assets and liabilities
of Favorite Brands International, Inc., a company operating under Chapter 11 of
Title 11 of the U.S. Code. As of June 30, 2000, the purchase price allocation
was completed and resulted in total goodwill of $106 million, an increase of
$38 million from December 31, 1999. The after-tax net increase in goodwill
consisted of:

(in millions)

Fair value adjustments to:
Property, plant and equipment................................. $16
Certain working capital items................................. 12
Severance accruals............................................. 5
Contract exit cost accruals.................................... 5
---
$38
===

F-74

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)

In July 2000, Nabisco Holdings acquired UB's operations in China, Hong Kong
and Taiwan for approximately $99 million as part of its agreement to join the
consortium of investors discussed above. In 1999, these operations had annual
net sales of approximately $66 million.

Recently issued accounting pronouncements:

During the second quarter of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all
derivative instruments be recorded on the consolidated balance sheet at their
fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Nabisco Holdings will adopt SFAS No. 133, as amended, on
January 1, 2001 but has not yet determined the impact that such adoption or
subsequent application will have on its financial position or results of
operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
Nabisco Holdings is required to adopt SAB No. 101, as amended, in the fourth
quarter of 2000. SAB No. 101 provides additional guidance on revenue
recognition, as well as criteria for when certain revenue is generally realized
and earned, and also requires the deferral of incremental direct selling costs.
Nabisco Holdings has determined that the impact of adoption or subsequent
application of SAB No. 101 will not have a material effect on its financial
position or results of operations.

During the second quarter 2000, the Emerging Issues Task Force issued EITF
Issue No. 00-14, Accounting for Certain Sales Incentives. EITF No. 00-14
addresses the recognition, measurement and statement of income classification
of various sales incentives and will be effective for the fourth quarter of
2000. Nabisco Holdings has determined that the impact of adoption will be a
reduction of approximately 1% to 2% on its net sales, with no impact on Nabisco
Holdings' net income. Certain sales incentives, principally for consumer coupon
redemption expenses, currently included in selling, advertising, administrative
and general expenses will be reclassified as a reduction of net sales and, upon
adoption, prior period amounts will be restated for comparative purposes.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaced SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This statement revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. Nabisco Holdings will adopt SFAS
No. 140 for transactions occurring after March 31, 2001. Nabisco Holdings has
not yet determined the impact that such adoption or subsequent application will
have on its financial position or results of operations.

1998 restructuring charges:

In the second and fourth quarters of 1998, Nabisco Holdings recorded
restructuring charges of $406 million ($268 million after tax) and $124 million
($94 million after tax), respectively. In the second quarter of 2000, Nabisco
Holdings recorded a net reduction of $27 million in the previously recorded
restructuring expense due to higher than anticipated proceeds from assets sold
and lower than anticipated spending primarily in severance programs. This
restructuring credit combined with the $67 million net restructuring credit
recorded in 1999 resulted in a total net charge for the 1998 restructuring
programs of $436 million ($296 million after tax). These restructuring programs
were undertaken to streamline operations and improve profitability and have
resulted in the elimination of approximately 6,900 employee positions.

F-75

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)

The June 1998 program was completed in 1999 and the December 1998 program
was completed as of June 30, 2000.

The key elements of the restructuring programs were:

Severance Contract Asset Other Exit
and Benefits Terminations Impairments Costs Total
------------ ------------ ----------- ---------- -----
(in millions)

Sales force
reorganizations........ $ 37 $ 3 $ 40
Distribution
reorganizations........ 16 8 $ 9 33
Staff reductions........ 83 3 86
Manufacturing costs
reduction initiatives.. 22 8 30
Plant closures.......... 46 3 217 $ 15 281
Product line
rationalizations....... 4 4 20 32 60
----- ---- ----- ---- -----
Total 1998
restructuring
reserves............. 208 18 257 47 530
1999 net restructuring
credit................. (50) 1 (14) (4) (67)
2000 net restructuring
credit................. (4) (3) (21) 1 (27)
----- ---- ----- ---- -----
Total program
reserves............. 154 16 222 44 436
----- ---- ----- ---- -----
Charges and payments:
Cumulative through
December 31, 1999...... (132) (14) (233) (35) (414)
Six months ended June
30, 2000............... (22) (2) 11 (9) (22)
----- ---- ----- ---- -----
Total charges and
payments, net of cash
proceeds............. (154) (16) (222) (44) (436)
----- ---- ----- ---- -----
Program reserves as of
June 30, 2000.......... $ -- $ -- $ -- $ -- $ --
===== ==== ===== ==== =====

The key elements of the restructuring programs, after the restructuring
credits of $94 million were:

Severance Contract Asset Other Exit
and Benefits Terminations Impairments Costs Total
------------ ------------ ----------- ---------- -----
(in millions)

Sales force
reorganizations........ $ 16 $ 3 $ 19
Distribution
reorganizations........ 10 4 $ (2) 12
Staff reductions........ 56 1 3 60
Manufacturing costs
reduction initiatives.. 19 8 27
Plant closures.......... 51 3 192 $ 15 261
Product line
rationalizations....... 2 5 21 29 57
----- ---- ----- ---- -----
Total restructuring
charges.............. $ 154 $ 16 $ 222 $ 44 $ 436
===== ==== ===== ==== =====

Total charges and payments include net cash expenditures, non-cash charges
primarily for asset impairments and committed severance and benefits to be
paid. The total cash payments, net of cash proceeds applied against the
restructuring reserves totaled $122 million, which is comprised of cumulative
cash expenditures of $170 million and cumulative cash proceeds of $48 million.
For the nine months ended September 30, 2000, cash payments, net of cash
proceeds totaled $19 million, which is comprised of $46 million of cash
expenditures and $27 million of cash proceeds which were applied against the
restructuring reserves. Although projects have been completed, proceeds to be
collected and certain cash payments, primarily severance and benefits that are
paid over time, are being transacted after the program completion dates. This
is expected to result in a net cash inflow of approximately $7 million
subsequent to September 30, 2000.

F-76

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)

Note 2. Change of Control:

On June 25, 2000, the board of directors of Nabisco Group Holdings Corp.
("NGH") approved two major transactions: (1) the sale of NGH's 80.5% interest
in Nabisco Holdings to Philip Morris Companies Inc. (the "Nabisco Sale")
pursuant to a merger in which Philip Morris Companies Inc. will acquire all of
the outstanding Nabisco Holdings common stock for $55 per share (the "Nabisco
merger"), and (2) the subsequent acquisition of NGH by R. J. Reynolds Tobacco
Holdings, Inc. ("RJR") pursuant to a merger in which RJR will acquire all of
the outstanding NGH common stock for $30 per share (the "NGH merger").
Completion of the Nabisco merger is subject to customary closing conditions,
including receipt of regulatory approvals. Completion of the NGH merger is also
subject to customary closing conditions, including receipt of regulatory
approvals and is conditioned on the completion of the Nabisco Sale. There can
be no assurance that such approvals will be obtained. On October 27, 2000 the
shareholders of NGH approved the acquisition of Nabisco Holdings by Philip
Morris Companies Inc. and the subsequent acquisition of NGH by RJR as discussed
in Note 5--Subsequent Events. The transactions are expected to close during the
fourth quarter of 2000.

The sale of Nabisco Holdings requires approval by holders of a majority of
the outstanding shares of NGH common stock because the Nabisco Holdings shares
constitute substantially all of the assets of NGH. NGH has entered into a
voting and indemnity agreement with Philip Morris Companies Inc. with respect
to the sale of Nabisco Holdings which generally provides that, subject to
receiving approval of the sale of Nabisco Holdings from NGH shareholders, NGH
will promptly vote in favor of the Nabisco merger. The approval by NGH, as
discussed above, is the only Nabisco Holdings shareholder approval required to
complete the Nabisco merger.

All costs and expenses incurred in connection with the Nabisco merger
agreement and related transactions will be paid by the company incurring such
costs or expenses, except that Nabisco Holdings and NGH have agreed that
Nabisco Holdings will be responsible for fees and expenses of the financial,
legal and other advisors to Nabisco Holdings and NGH up to $50 million, and NGH
will be responsible for all such fees and expenses in excess of $50 million.

In connection with the Nabisco merger and the NGH merger, Nabisco Holdings
incurred costs during the third quarter and first nine months of 2000 of $21
million for financial, legal and other advisor fees. In addition, in accordance
with the terms of the Nabisco merger agreement, and upon depletion of its
existing treasury stock inventory, Nabisco Holdings paid cash to satisfy the
excess of the market price of Nabisco Holdings stock at the time of exercise,
over the exercise price of Nabisco Holdings stock options. As a result, Nabisco
Holdings recognized compensation expense of $28 million during the third
quarter and first nine months of 2000. These costs have been classified as
selling, advertising, administrative and general expenses in the accompanying
Consolidated Condensed Statement of Income.

Note 3. Inventories:

The major classes of inventory are shown in the table below:

At September 30,
2000
----------------
(in millions)

Finished products........................................ $605
Raw materials............................................ 211
Work in process.......................................... 32
Other.................................................... 103
----
Total.................................................. $951
====

F-77

NABISCO HOLDINGS CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(unaudited)

Note 4. Segment Reporting:

Nabisco Holdings is a holding company whose subsidiaries are engaged in the
manufacture, distribution and sale of cookies, crackers and other food
products. Nabisco Holdings is organized and reports its results of operations
in three business segments: Nabisco Biscuit Company, the Nabisco Foods Company
and the International Food Group which are segregated by both product and
geographic area.

Nabisco Holdings evaluates performance and allocates resources based on
operating company contribution ("OCC"). OCC for each reportable segment is
operating income before amortization of intangibles and exclusive of a
restructuring credit, loss on sale of businesses, restructuring-related
expenses and costs associated with the Nabisco merger and the NGH merger. Such
costs include the cash buyout of exercised Nabisco Holdings stock options and
financial, legal and other advisor fees.

For the
Nine Months
Ended
September 30,
--------------
(in millions)
1999 2000
------ ------

Net sales from external customers:
Nabisco Biscuit Company.................................... $2,688 $2,779
Nabisco Foods Company...................................... 1,527 2,112
International Food Group................................... 1,720 1,689
------ ------
Total.................................................... $5,935 $6,580
====== ======
Segment operating company contribution:
Nabisco Biscuit Company.................................... $ 386 $ 439
Nabisco Foods Company...................................... 196 271
International Food Group................................... 129 112
------ ------
Total segment operating company contribution................. 711 822
Cash buyout of exercised Nabisco Holdings stock options...... (28)
Financial, legal and other advisor fees...................... (21)
Loss on sale of businesses................................... (18)
Restructuring credit......................................... 59 27
Restructuring-related expenses............................... (46)
Amortization of trademarks and goodwill...................... (161) (165)
------ ------
Consolidated operating income................................ 563 617
Interest and debt expense.................................... (193) (213)
Other expense, net........................................... (22) (10)
------ ------
Income before income taxes................................... $ 348 $ 394
====== ======

Note 5. Subsequent Events:

On October 27, 2000, the shareholders of NGH approved the acquisition of
Nabisco Holdings by Philip Morris Companies Inc. and the subsequent acquisition
of NGH by RJR.

In November 2000, Nabisco Holdings signed definitive agreements for the sale
of its domestic breath mints, gum, dry mix dessert and baking powder
businesses. These transactions are conditioned on completion of the acquisition
of Nabisco Holdings by Philip Morris Companies Inc., and are subject to
customary closing conditions, including receipt of regulatory approvals. In
1999, these businesses had net sales and operating income of approximately $314
million and $96 million, respectively.

F-78

Appendix

"MEET THE MANAGEMENT OF KRAFT"
PRESENTATION FOR KRAFT FOODS INC.

Prospective investors will be able to log onto www.kraftipo.com,
www.csfb.com/ipo/us/, www.csfbdirect.com and www.salomonsmithbarney.com where a
prospectus will be available for review. Within designated sections of the
prospectus, including the "Table of Contents" and the "Underwriting" section of
the prospectus, an embedded hyperlink {click here for "Meet the Management of
Kraft" presentation} will provide exclusive access to the "Meet the Management
of Kraft" presentation. This presentation highlights selected information
contained elsewhere in the prospectus. This presentation does not contain all
of the information that you should consider before investing in our Class A
common stock. You should read the entire prospectus carefully, including the
"Risk Factors" and our financial statements and notes to those financial
statements, before making an investment decision.

I. Visual: Logo

Imagery: Large Kraft logo.

II. Visual: Meet the Management of Kraft

Imagery: Border and Kraft logo.

Visual Heading: "Meet the Management of Kraft." "Betsy Holden." "Roger
Text: Deromedi." "Co-CEOs, Kraft Foods Inc."

Script: (Betsy Holden): "Hello, I'm Betsy Holden, Co-Chief Executive
Officer of Kraft Foods Inc. and President and Chief Executive
Officer of Kraft Foods North America."

(Roger Deromedi): "Hello, I'm Roger Deromedi, Co-Chief Executive
Officer of Kraft Foods Inc. and President and Chief Executive
Officer of Kraft Foods International, and we're pleased to have
this opportunity to tell you about our company."

III. Visual: Disclaimer

Imagery: Border and Kraft logo.

Visual "Our 'Meet the Management of Kraft' presentation is part of our
Text: prospectus. This presentation highlights selected information
contained elsewhere in our prospectus. This presentation does not
contain all of the information that you should consider before
investing in our Class A common stock. You should be sure to read
our entire prospectus carefully, including the 'Risk Factors' and
our financial statements and notes to those financial statements,
before making an investment decision."

Script: (Betsy Holden): "Before we get started, I would like to remind you
that our 'Meet the Management of Kraft' presentation is part of
our prospectus. This presentation highlights selected information
contained elsewhere in our prospectus. This presentation does not
contain all of the information that you should consider before
investing in our Class A common stock. You should be sure to read
our entire prospectus carefully, including the 'Risk Factors' and
our financial statements and notes to those financial statements,
before making an investment decision.

With that, let's get started."

A-1

IV. Visual: Kraft Foods Worldwide

Imagery: Border and Kraft logo. Map of the world with textual overlay.

Visual Heading: "Kraft Foods Worldwide." Below the heading appears the
Text: following information: "$34.7 Billion Revenue*"; "$6.3 Billion
EBITDA*"; "Sales in Over 140 Countries"; and "*2000 Pro forma."

Script: (Betsy Holden): (see "Business--Overview") "Kraft is the largest
branded food and beverage company headquartered in the United
States and the second largest in the world based on 2000 pro forma
revenue. We generated 2000 pro forma revenue of $34.7 billion and
2000 pro forma earnings before interest, income taxes,
depreciation and amortization of $6.3 billion. Our brands are sold
in more than 140 countries and are enjoyed in 99.6% of the
households in the United States. Consumers of all ages around the
world enjoy our brands, whether at home or away from home, across
the entire spectrum of food and beverage occasions: breakfast,
lunch, dinner and snacks."

V. Visual: Our Mission

Imagery: Border and Kraft logo. Six square bullet points on the left of the
slide describing our goals.

Visual Heading: "Our Mission." "Undisputed Leader of the Global Food and
Text: Beverage Industry." The six bullet points are:

. First choice of our consumers

. Indispensable partner to our retailers and other customers

. Most desired partner for strategic alliances

. Employer of choice in our industry

. Responsible citizen in our communities

. Consistent producer of industry-leading financial performance
and returns for our investors

Script: (Betsy Holden): (see "Prospectus Summary--Our Goals, Strengths and
Strategies--Our Goals") "Our long-term mission is to be recognized
as the undisputed leader of the global food and beverage industry.
To that end, we strive to be:

. The first choice of our consumers;

. An indispensable partner to our retailers and other customers;

. The most desired partner for strategic alliances;

. The employer of choice in our industry;

. A responsible citizen in our communities; and

. A consistent producer of industry-leading financial performance
and returns for our investors."

VI. Visual: Our Strengths

Imagery: Border and Kraft logo. Five square bullet points on the left of
the slide describing our strengths.

Visual Heading: "Our Strengths." The five bullet points are:
Text:

. Superior brand portfolio

A-2

. Innovative products supported by worldclass marketing

. Successful portfolio management

. Global scale

. Management's proven ability to execute

Script: (Roger Deromedi): (see "Prospectus Summary--Our Goals, Strengths
and Strategies--Our Strengths") "We intend to achieve our goals by
leveraging our competitive strengths, which include:

. Our superior brand portfolio;

. Our innovative products supported by worldclass marketing;

. Our successful portfolio management;

. Our global scale; and

. Our management's proven ability to execute."

VII. Visual: Seven "Billion Dollar Brands"

Imagery: Border, Kraft logo and logos of our seven billion dollar brands:
Kraft, Nabisco, Philadelphia, Jacobs, Oscar Mayer, Maxwell House
and Post.

Visual Heading: "Seven 'Billion Dollar Brands.' "
Text:

Script: (Roger Deromedi): (see "Business--Overview") "We have a superior
brand portfolio that includes seven brands which had 2000 revenue
over $1 billion. These include: Kraft, the #1 cheese brand in the
world, as well as our best known brand for salad dressings,
packaged dinners and other products; Nabisco, the umbrella brand
for the #1 cookie and cracker business in the world; Philadelphia,
the #1 cream cheese brand in the world; Jacobs, the #1 roast and
ground coffee brand in Western Europe; Oscar Mayer, the #1
processed meats brand in the United States; Maxwell House, one of
the leading coffee brands in the world; and Post, the #3 brand of
ready-to-eat cereals in the United States."

VIII. Visual: Total of 61 Brands Over $100 Million

Imagery: Border, Kraft logo and brand logos: Life Savers, Kool-Aid, Crystal
Light, Planters, Lacta, Freia, Capri Sun All Natural, Kraft
Velveeta, Milka, Cool Whip, Nabisco Grahams, Polly-O, Cracker
Barrel, General Foods International Coffees, Jacques Vabre,
DiGiorno, Newtons, Louis Rich, Stove Top, Jack's Pizza, Marabou,
Sathers, Knudsen, Cheez Whiz, Oreo, Tang, A.1., Handi-Snacks,
Carte Noire, Ritz, Terry's, Claussen Cold Crisp Delicious, All
Natural Breakstone's, Gevalia, Kenco, Wheat Thins, Cote d'Or,
Oscar Mayer Lunchables Lunch Combinations, Jell-O, Miracle Whip,
Kraft Minute Brand, Balance, Kaffee HAG, Country Time, Premium,
Suchard, SnackWell's, Toblerone, Triscuit, Royal, Breyers All
Natural Yogurt, Tombstone, Original Milk-Bone Brand, Chips Ahoy!
and Altoids.

Visual Heading: "Total of 61 Brands Over $100 Million."
Text:

Script: (Roger Deromedi): (see "Business--Overview") "In total, we have 61
brands with 2000 revenue of over $100 million, accounting for 75%
of our 2000 pro forma revenue." (see "Business--Our Competitive
Strengths--Our Superior Brand Portfolio") "This portfolio is one
of the strongest in the food and beverage industry. Our brands
enjoy consumer

A-3

loyalty and trust and offer our retail customers a strong
combination of growth and profitability. Our established brands
also provide a powerful platform for growth driven by new
products, line extensions and geographic expansion."

IX. Visual: Category Leadership Advantages

Imagery: Border and Kraft logo. Two rectangular boxes labeled with the
headings "Strong Category Positions" and "Leadership Advantages."
Four square bullet points appear on the left side in the first
box, three square bullet points appear on the left side in the
second box and a large triangular arrow appears between the boxes
pointing from left to right from the first box to the second box.

Visual Heading: "Category Leadership Advantages." Above the first
Text: rectangular box, the heading "Strong Category Positions" appears.
The bullet points in the first box are:

. #1 in 11 global categories

. #1 in 23 of top 25 U.S. categories based on dollar shares

. #1 in 21 of top 25 U.S. categories based on volume or
equivalent unit shares

. #1 in 21 of top 25 international country categories based on
volume or equivalent unit shares

The arrow points to a second rectangular box. Above the second
rectangular box, the heading "Leadership Advantages" appears. The
bullet points in the second box are:

. Scale advantages

. Consumer loyalty

. Customer leverage

Script: (Roger Deromedi): (see "Business--Overview" and "--Strategies--
Drive Global Category Leadership") "Due to our superior brand
portfolio, we hold the #1 global share position in eleven product
categories, including coffee, cookies, crackers, cream cheese,
process cheese and snack nuts. In the United States, based on
dollar shares, we hold the #1 share position in 23 of our 25 most
profitable categories or, based on volume or equivalent unit
shares, in 21 of these 25 categories. In addition, based on volume
or equivalent unit shares, we hold the #1 share position in 21 of
our 25 most profitable international country categories. Category
leaders often achieve higher margins than other category
participants due to the benefits of scale, consumer loyalty and
retail customer emphasis that are frequently associated with
category leadership."

X. Visual: Kraft Global Consumer Sectors

Imagery: Border and Kraft logo. Pie chart showing 2000 pro forma revenue
contribution for Kraft's five consumer sectors: Snacks, Beverages,
Cheese, Grocery and Convenient Meals.

Visual Heading: "Kraft Global Consumer Sectors." "Total 2000 Pro Forma
Text: Revenue $34.7 Billion." Pie chart: Snacks--$10.6 billion;
Beverages--$6.6 billion; Cheese--$6.3 billion; Grocery--$5.7
billion; and Convenient Meals--$5.5 billion.

Script: (Roger Deromedi): (see "Business--Markets and Products") "Our
brand portfolio spans five core consumer sectors:

. Snacks: With 2000 pro forma revenue of $10.6 billion, consists
primarily of cookies, crackers, salty snacks and confectionery;

. Beverages: With 2000 pro forma revenue of $6.6 billion,
includes coffee, aseptic juice drinks and powdered soft drinks;

. Cheese: With 2000 pro forma revenue of $6.3 billion, includes
natural, process and cream cheeses;

A-4

. Grocery: With 2000 pro forma revenue of $5.7 billion, consists
primarily of ready-to-eat cereals, enhancers and desserts; and

. Convenient Meals: With 2000 pro forma revenue of $5.5 billion,
includes frozen pizza, packaged dinners, lunch combinations and
processed meats."

XI. Visual: New Products Drive Sales Growth

Imagery: Border and Kraft logo. Two column bar chart showing 2000 pro forma
revenue from new products since 1998 ($2.8 billion) and since 1996
($4.1 billion).

Visual Heading: "New Products Drive Sales Growth." "2000 Pro Forma
Text: Revenue from New Products."

Script: (Roger Deromedi): (see "Business--Our Competitive Strengths--
Innovative Products Supported by Worldclass Marketing") "We
maintain strong and vibrant brands and nurture their growth by
developing new and innovative products and line extensions that
appeal to consumer preferences. We also introduce to new
geographic markets products that have been successful in other
markets. We support all of these efforts with worldclass marketing
and a significant investment in research and development. As a
result, new products introduced from 1998 to 2000 contributed
nearly $3 billion to 2000 pro forma revenue, and new products
introduced since 1996 contributed over $4 billion to 2000 pro
forma revenue."

XII. Visual: New Product Growth: Lunchables

Imagery: Border and Kraft logo. Box containing a picture of Lunchables
products: packaged Lean Turkey Breast and Cheddar Lunchables meal,
packaged Lean Ham and Swiss Lunchables meal, five crackers, five
slices of cheese and four pieces of meat on a blue mat on top of a
checkered cloth. Two column bar chart showing Lunchables revenue
in 1989 ($60 million) and 2000 (>$600 million); within the bar for
2000 there is a dotted line separating the U.S. and international
portions. A diagonal dotted line connects the upper right side of
the bar for 1989 to the upper left side of the bar for 2000.

Visual Heading: "New Product Growth: Lunchables."
Text:

Script: (Roger Deromedi): (see "Business--Our Competitive Strengths--Our
Superior Brand Portfolio" and "--Innovative Products Supported by
Worldclass Marketing--Innovative Products with Consumer Appeal")
"Take for example our Oscar Mayer Lunchables ready-to-eat lunch
combinations. Here, we created a new category of conveniently
packaged meals, snacks, beverages, and desserts. Lunchables
remains #1 in the U.S. category with an 83.6% dollar share. We've
extended Lunchables to more than 50 varieties, including Pizza,
All Star Burgers and Hot Dogs and Mega Pack Lunchables, and we
recently extended Lunchables from the U.S. to Europe. As a result,
Lunchables revenue has increased from approximately $60 million in
the U.S. in 1989 to over $600 million worldwide in 2000, a
compound annual growth rate of nearly 25%."

XIII. Visual: Worldclass Marketing

Imagery: Border and Kraft logo. Three square bullet points on the left of
the slide. To the right of the bullet points is an example of an
advertisement for Cinnamon Altoids. The advertisement includes a
picture of a woman dressed in a red devil's outfit resting on top
of a package of Cinnamon Altoids mints. Above the picture in the
advertisement is the caption: "I've Got the Hots For You." Below
the picture in the advertisement is the caption: "The Curiously
Strong Mints."

A-5

Visual Heading: "Worldclass Marketing." The three bullet points are:
Text:

. Communicates benefits; builds brand equity

. 2000 pro forma advertising spending > $1.4 billion

. Award winning campaigns

Script: (Roger Deromedi): (see "Business--Our Competitive Strengths--
Innovative Products Supported by Worldclass Marketing--Worldclass
Marketing") "We use worldclass marketing and advertising to
communicate the benefits of our products to consumers and to build
brand equity, thus increasing demand for our products. Our 2000
pro forma advertising expenditures exceeded $1.4 billion. We
invest more in advertising in the U.S. than any other food and
beverage company and we are one of the largest food and beverage
advertisers in the world." (see "Business--Consumer Marketing and
Advertising") "During the past five years, the New York American
Marketing Association has presented us with 21 Effie awards, which
recognize advertising that is effective in growing brands. These
include top-level Gold awards for our Altoids, Balance Bar,
Gevalia Kaffe, Maxwell House, Miracle Whip and Wheat Thins
campaigns."

XIV. Visual: Successful Portfolio Management

Imagery: Border and Kraft logo. Two rectangular boxes labeled with the
headings "Acquisitions" and "Divestitures" appear side by side.
One square bullet point appears on the left side in the first box,
and two square bullet points appear on the left side in the second
box. In the first box, four company logos appear: General Foods,
Kraft, Jacobs Suchard and Nabisco.

Visual Heading: "Successful Portfolio Management." Above the first
Text: rectangular box, the heading "Acquisitions" appears. The bullet
points in the first box are:

. 4 major acquisitions

General Foods logo Kraft logo
Jacobs Suchard logo Nabisco logo

Above the second rectangular box, the heading "Divestitures"
appears.
The bullet points in the second box are:

. 50+ divestitures since 1990

. Businesses sold:

--$9.0 billion in revenue

--$0.5 billion in operating companies income

Script: (Betsy Holden): (see "Business--Our History") "We have a
successful track record in managing our portfolio. Our company was
created through a series of acquisitions, beginning with Philip
Morris' acquisitions of General Foods in 1985 and Kraft in 1988,
and our acquisition of Jacobs Suchard in 1990. In December 2000,
we acquired Nabisco to expand our global presence and to
strengthen our position in the growing snacks consumer sector."

(see "Business--Strategies--Optimize Our Portfolio") "Nabisco
improved Kraft's product mix and will accelerate growth by
increasing our share of the growing global snacks consumer sector.
The combination of Nabisco and Kraft also offers numerous
opportunities for new products, larger scale promotions and
expanded distribution."

(see "Business--Our History") "Since 1990, we have also acquired
more than 50 other U.S. and international food businesses, and we
have successfully integrated these businesses."

A-6

(see "Business--Competitive Strengths--Our Successful Portfolio
Management") "We also aggressively manage our portfolio by
divesting underperforming businesses to concentrate on our core
brands. Since 1990, we have divested businesses that had an
aggregate of $9.0 billion of revenue, but only $0.5 billion of
operating companies income, in the year before sale."

XV. Visual: Our Global Scale Supports: Customer Service

Imagery: Border and Kraft logo. One main square bullet point appears on the
left of the slide with four square sub-bullet points.

Visual Heading: "Our Global Scale Supports:." The bullet points are:
Text:

. Customer Service

. 20,000 salespersons

. Call on approximately 120,000 retail stores

. 60 countries

. Strengthen relationships with customers

Script: (Betsy Holden): (see "Business--Our Competitive Strengths--Our
Global Scale Drives Customer Service, Productivity and Geographic
Expansion") "Our global scale enables us to be more efficient and
effective in serving our customers, while reducing costs,
improving productivity and sustaining our high margins."

(see "Business--Our Competitive Strengths--Our Global Scale Drives
Customer Service, Productivity and Geographic Expansion--Customer
Service" and "Business--Sales, Retailer Relations and Food
Service") "We provide customer service through our more than
20,000 salespersons, who call on approximately 120,000 retail
stores in 60 countries. We also use our global scale to strengthen
our relationships with our retail customers, which is essential in
the face of ongoing global retailer consolidation. For example, we
help to improve retailers' profitability by providing them with
many leading brands, efficiently delivering products to their
warehouses and stores, including direct-store-delivery systems,
and helping them manage their inventory."

XVI. Visual: Our Global Scale Supports: Productivity

Imagery: Border and Kraft logo. Two main square bullet points appear on the
left of the slide with three sub-bullet points.

Visual Heading: "Our Global Scale Supports:." The bullet points are:
Text:

. Customer Service

. Productivity

. Averaged more than $450 million annual savings since 1996

. Target savings at 3.5% of cost of sales

. Nabisco cost synergies

Script: (Betsy Holden): (see "Business--Our Competitive Strengths--Our
Global Scale Drives Customer Service, Productivity and Geographic
Expansion--Productivity") "Our scale also helps us to improve
productivity, an area that has been a key contributor to our
financial performance. Excluding Nabisco, we averaged more than
$450 million per year in productivity savings over the last five
years. Our target is to realize productivity savings of

A-7

3.5% of cost of sales each year." (see "Business--Strategies--
Maximize Operating Efficiency"). "In addition, by combining
Nabisco's operations with Kraft's, we currently expect to generate
annual cost synergies in excess of $400 million in 2002, growing to
more than $550 million in 2003. After associated charges to obtain
these synergies, we expect to achieve net cost synergies of
approximately $100 million in 2001, $300 million in 2002 and $475
million in 2003."

XVII. Visual: Our Global Scale Supports: Geographic Expansion

Imagery: Border and Kraft logo. Three main square bullet points appear on
the left of the slide with two sub-bullet points.

Visual Heading: "Our Global Scale Supports:." The bullet points are:
Text:

. Customer Service

. Productivity

. Geographic expansion

. Fast adapt products to new markets

. Strong growth in developing markets

Script: (Betsy Holden): (see "Business--Our Competitive Strengths--Our
Global Scale Drives Customer Service, Productivity and Geographic
Expansion--Geographic Expansion") "We also use our global scale and
our local consumer insights to quickly adapt products popular in
one market for introduction into other markets. This has
contributed to our strong growth in developing markets, including
Central and Eastern Europe, the Middle East and Africa, Latin
America and Asia Pacific, where underlying volume was up 11.9% from
1999 to 2000."

XVIII. Visual: Experienced Management Team

Imagery: Border and Kraft logo. Two square bullet points on the left side of
the slide.

Visual Heading: "Experienced Management Team." The bullet points are:
Text:

. Top 25 Kraft executives

--Average 20 years of industry experience

--Multiple business, function and country experience

. Strong management development program

Centered at the bottom of the slide appears the italicized quote
from The Wall Street Journal on May 18, 2000 "In the food world,
Kraft is considered the Harvard of career management" and "The Wall
Street Journal May 18, 2000."

Script: (Betsy Holden): (see "Business--Our Competitive Strengths--Our
Management's Proven Ability to Execute") "Another key strength for
Kraft is management's proven ability to execute. Our top 25
executives have an average of 20 years industry experience. More
than one-half have worked outside their home country to gain global
experience. Kraft is renowned not only for the quality of its
senior management team, but also for its promotion of excellence at
all levels of the organization. According to The Wall Street
Journal, 'In the food world, Kraft is considered the Harvard of
career management.' "

A-8

XIX. Visual: 2000 Cannondale U.S. Retailer Survey

Imagery: Border and Kraft logo. Three square bullet points on the left of
the slide.

Visual Heading: "2000 Cannondale U.S. Retailer Survey." The three bullet
Text: points are:

. "Best Combination of Growth and Profitability"

. "Best Sales Force/Customer Teams"

. "Best of the Best" among food and beverage companies

Script: (Betsy Holden): (see "Business--Competitive Strengths--Our
Management's Proven Ability to Execute") "Our retail customers
have recognized our execution abilities in the 2000 annual
PoweRanking(TM) survey of retailers conducted by Cannondale
Associates, a sales and marketing consulting firm that surveys the
U.S.'s leading retailers to produce a benchmark rating of the
performance of food, beverage, household and personal care
products manufacturers. Among all consumer packaged goods
companies, we were ranked #1 in the category of 'Best combination
of growth and profitability' to retailers, and tied for #1 in the
'Best sales force/customer teams' category. We also ranked #1
among all food and beverage companies in the 'Best of the Best'
composite ranking and in every surveyed category."

XX. Visual: Our Strategies: Accelerate Growth of Our Core Brands

Imagery: Border and Kraft logo. Main square bullet point on the left of the
slide with four sub-bullet points.

Visual Heading: "Our Strategies." The bullet points are:
Text:

. Accelerate growth of our core brands

. Growing consumer sectors

--Snacks, beverages, convenient meals

. Health and wellness needs

. Growing distribution channels

. Attractive demographic and economic segments

Script: (Roger Deromedi): (see "Business--Strategies--Accelerate Growth of
Core Brands") "Turning now to our strategies, our first strategy
is to accelerate the growth of our core brands. We strive to grow
these brands by focusing on the growing consumer sectors of
snacks, beverages and convenient meals; addressing consumer health
and wellness needs; expanding our presence in faster growing
distribution channels; and targeting attractive demographic and
economic segments in each market."

XXI. Visual: Our Strategies: Drive Global Category Leadership

Imagery: Border and Kraft logo. Two main square bullet points on the left
of the slide with three sub-bullet points.

Visual Heading: "Our Strategies." The bullet points are:
Text:

. Accelerate growth of our core brands

. Drive global category leadership

A-9

. Attain/expand leading position in core categories across
key markets

. Capture category leadership benefits and greater share of
growth and profit

. Expand in developing markets

Script: (Roger Deromedi): (see "Business--Strategies--Drive Global
Category Leadership") "Our second strategy is to drive global
category leadership. Our strategy is to attain and expand the
leading position in core categories across our key markets. As a
category leader, with the benefits of scale, consumer loyalty and
retail customer emphasis, we are positioned to capture a
significant share of a category's growth and profit. A key element
of this strategy is to expand our sales in developing markets,
which contain 86% of the world's population with 18% of its
disposable income, but which accounted for only 9% of our 2000
underlying revenue, presenting a significant growth opportunity."

XXII. Visual: Our Strategies: Optimize Our Portfolio

Imagery: Border and Kraft logo. Three main square bullet points on the left
of the slide with three sub-bullet points.

Visual Heading: "Our Strategies." The bullet points are:
Text:

. Accelerate growth of our core brands

. Drive global category leadership

. Optimize our portfolio

. Acquisitions

. Licensing agreements

. Divestitures

Script: (Roger Deromedi): (see "Business--Strategies--Optimize our
Portfolio") "Our third strategy is to continue to optimize our
portfolio. We will actively manage our business and brand
portfolio through acquisitions, licensing arrangements, and
divestitures to improve our mix of growing, profitable, and high-
return businesses."

XXIII. Visual: Our Strategies: Maximize Operating Efficiency

Imagery: Border and Kraft logo. Four square bullet points on the left of
the slide with three sub-bullet points.

Visual Heading: "Our Strategies." The bullet points are:
Text:

. Accelerate growth of our core brands

. Drive global category leadership

. Optimize our portfolio

. Maximize operating efficiency

. Drive excess costs and unproductive assets out of system

. Reduce cost of sales and overhead

. Enhance earnings and cash flow

Script: (Roger Deromedi): (see "Business--Strategy--Maximize Operating
Efficiency") "Our fourth strategy is to maximize our operating
efficiency. We do this by driving excess costs and unproductive
assets out of our system, thus reducing our cost of sales and
overhead expenditures, while enhancing our earnings and cash
flow."

A-10

XXIV. Visual: Our Strategies: Build Employee and Organizational Excellence

Imagery: Border and Kraft logo. Five square bullet points on the left of
the slide with two sub-bullet points.

Visual Heading: "Our Strategies." The bullet points are:
Text:

. Accelerate growth of our core brands

. Drive global category leadership

. Optimize our portfolio

. Maximize operating efficiency

. Build employee and organizational excellence

. Training and development

. Measurement and reward systems

Script: (Roger Deromedi): (see "Business--Strategy--Build Employee and
Organizational Excellence") "Our final strategy is to build
employee and organizational excellence. We will continue to invest
in training, development and career management. We will also align
our measurement and reward systems with actions that drive our
success in the marketplace and create superior value for our
investors."

XXV. Visual: Our Operating Results

Imagery: Border and Kraft logo. Table showing selected pro forma 2000
financial and other data for Kraft.

Visual Heading: "Our Operating Results." Table showing the following pro
Text: forma 2000 operating results in dollars and pounds in billions:
Volume--17.6 lb; Operating Revenue--$34.7; EBITDA--$6.3; and Net
Earnings--$1.4.

Script: (Betsy Holden): (see "Prospectus Summary--Summary Historical and
Pro Forma Combined Financial and Other Data") "Turning now to our
financials, our overall 2000 pro forma results are shown here.

. We generated total volume of 17.6 billion pounds; and

. Operating revenue of $34.7 billion.

. Our earnings before interest, taxes, depreciation and
amortization were $6.3 billion; and

. Net earnings were $1.4 billion."

XXVI. Visual: Our Reported Segments

Imagery: Border and Kraft logo. Pie chart showing the 2000 pro forma
revenue contribution for each of Kraft's reported segments.
Summary box showing 2000 pro forma revenue for Kraft Foods North
America to the upper left of the pie chart and summary box showing
2000 pro forma revenue for Kraft Foods International to the lower
right of the pie chart.

Visual Heading: "Our Reported Segments." Text above the pie chart: "Total
Text: 2000 Pro Forma Revenue $34.7 Billion." Pie chart: Cheese Meals &
Enhancers--$10.3 billion; Europe, Middle East & Africa--
$7.0 billion, Latin America & Asia Pacific--$2.4 billion; Oscar
Mayer & Pizza--$3.5 billion; Beverages, Desserts & Cereals--$5.5
billion; and Biscuits, Snacks & Confectionery--$6.0 billion. First
summary box: KFNA--$25.3 billion. Second summary box: KFI--$9.4
billion.

A-11

Script: (Betsy Holden): (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview of Our
Business--General" and "--Combined Operating Results by Segment"
and "Business--Overview") "We conduct our global food business
through two units: Kraft Foods North America, or KFNA, and Kraft
Foods International, or KFI. KFNA had 2000 pro forma revenue of
$25.3 billion. KFNA's reported segments are Cheese, Meals &
Enhancers with $10.3 billion in revenue, Biscuits, Snacks &
Confectionery with $6.0 billion in revenue, Beverages, Desserts &
Cereals with $5.5 billion in revenue and Oscar Mayer & Pizza with
$3.5 billion in revenue.

KFI had 2000 pro forma revenue of $9.4 billion. Its reported
segments are Europe, Middle East & Africa with $7.0 billion in
revenue and Latin America & Asia Pacific with $2.4 billion in
revenue."

XXVII. Visual: Summary

Imagery: Border and Kraft logo. Three square bullet points on the left of
the slide.

Visual Heading: "Summary." The three bullet points are:
Text:

. Mission: Undisputed Global Food and Beverage Leadership

. Significant strengths and strategies to get there

. Strong track record of performance

Script: (Betsy Holden): "Now, let me summarize what we've said here today.
First, Kraft has a clear mission to become the undisputed global
food and beverage leader, and we are well on our way to achieving
this mission. Second, as you've heard today, we have significant
strengths and the right strategies to help us get there. Finally,
we have a strong track record of performance, both financially and
operationally."

XXVIII. Visual: Conclusion

Imagery: Large Kraft logo.

Script: (Roger Deromedi): "This concludes our presentation. Thank you for
your interest in Kraft. We strongly encourage you to refer back to
the prospectus, and in particular, the Risk Factors before making
any investment decisions. We hope that our presentation has added
to your understanding of our company."

A-12

[Inside Back Cover Artwork and Graphics:

The first 1 3/4 inches across the page from top to bottom have a blue
background with the Kraft logo appearing 2 1/4 inches down from the top,
followed by the text: "Delighting consumers with leading brands in five global
sectors." The balance of the page is a photograph of two children seated at a
table in the kitchen of a home, enjoying Kraft Macaroni & Cheese and Country
Time lemonade. Also shown is the father playfully interacting with the children,
while the mother prepares the meal. The mother is shown looking on with a smile
while reaching into a cupboard which is filled with Kraft products, including
Kraft Velveeta prepared cheese product, Premium crackers, Cream of Wheat cereal,
Ritz crackers, Wheat Thins crackers, Oreo cookies, Kraft Macaroni & Cheese
Dinners, Jell-O desserts, Maxwell House coffee, Triscuit crackers, A.1. steak
sauce and Grey Poupon mustard.]

[Back Gatefold Artwork and Graphics:

Across the page are six columns. The first column is approximately 1 1/2
inches wide and the Kraft logo appears approximately 1 3/4 inches from the top,
followed by the text "Delighting consumers with leading brands in five global
sectors." The second column is approximately 1 3/4 inches wide with a photograph
at the top of a girl dunking an Oreo cookie in a glass of milk, followed by the
heading "Snacks" centered in the column with a purple background. The remainder
of the column shows the logos of six of our brands in our snacks consumer
sector: Milka, Planters, Oreo, Ritz, Life Savers and Toblerone. The third column
is approximately 1 3/4 inches wide with a photograph at the top of a husband and
wife enjoying Jacobs Kronung coffee in the dining area of their home while the
husband reads the package and the wife reads the newspaper, followed by the
heading "Beverages" centered in the column with an orange background. The
remainder of the column shows the logos of six of our brands in our beverages
consumer sector: Maxwell House, Carte Noire, Jacobs, Capri Sun, Tang and Kool-
Aid. The fourth column is approximately 1 3/4 inches wide with a photograph at
the top of a smiling woman preparing to pour Kraft Ranch dressing over her salad
while sitting at a table talking with a man, followed by the heading "Grocery"
centered in the column with a light blue background. The remainder of the column
shows the logos of six of our brands in our grocery consumer sector: Post,
Miracle Whip, Jell-O, A.1., Cool Whip and Royal. The fifth column is
approximately 1 3/4 inches wide with a photograph at the top of a woman enjoying
a piece of bread with Philadelphia cream cheese spread across it, followed by
the heading "Cheese" centered in the column with a yellow background. The
remainder of the column shows the logos of six of our brands in our cheese
consumer sector: Philadelphia, Cracker Barrel, Kraft Velveeta, Kraft Dairylea,
Kraft Singles and Kraft Cheez Whiz Cheese Dip. The sixth column is approximately
1 3/4 inches wide with a photograph at the top of a person's hand taking a slice
of Tombstone Stuffed Crust Supreme flavored pizza, followed by the heading
"Convenient Meals" centered in the column with a red background. The remainder
of the column shows the logos of six of our brands in our convenient meals
consumer sector: Oscar Mayer, Kraft Macaroni & Cheese Dinner, Oscar Mayer
Lunchables Lunch Combinations, Tombstone, Boca and DiGiorno Rising Crust Pizza.]

[Kraft Logo]