Research Department
                                           March 15, 1976

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I. THE GENERAL BUSINESS CLIMATE

   1. No sudden change will occur in the "system" or business
environment in which we operate, i.e. there will be no
catastrophic pestilence, disease, world war, revolution, major
depression, natural disaster, or the like.  There is a
possibility of renewed warfare in the Mid-East, probably again
accompanied by a petroleum crisis.

   2. As the present "under 35" age group becomes the dominant
power group in our society, the new personal and political values
of that group will exert a more predictable influence for change
upon most aspects of government, society, business, morality and
foreign policy.  The changes which occur are not expected to be
favorable to business.  However, this large consumer group will
have needs to be satisfied in terms of tobacco products.  This
offers a large market if we are sufficiently astute to identify
those needs and design and sell products to meet them.

   3. World leaders of morality, such as the Pope, will exert
great influence to modify the personal mores, and consequently
the civil and political values, of the present "under thirty" age
group.  There will be a strong swing toward wholesomeness,
integrity and decency which will affect the consumer outlook and
product expectations of this group.  Price, quality and
durability will become more important than fad, flamboyant
fashion or sex appeal.

   4. The "consumerism" movement will remain strong, and the
ability of consumers to objectively judge the quality and utility
of products may increase.  Product labeling will become more
definitive in terms of composition, date, hazards, and the like.

   5. Present socio-legal-governmental trends will continue.
Concern for "social justice", environment, energy, population
control, and product safety will remain high.  Governmental
regulation of almost all aspects of our society will increase.

   6. The energy shortage and to a lesser extent other material
shortages over the next decade will cause a change in the world
economy and politics, a change in national priorities and life
style, and increased cost and difficulty in doing business.
Concern for environment will remain high among certain groups;
and although energy needs will finally outweigh environment
considerations, the environmental groups will continue to fight
and delay.  These influences will continue beyond the projection
period and will intensify as energy needs and environment
consideration exert a greater effect on the average person.

   7. The U.S. standard of living will not increase at the rate
of the last decade.  The amount of discretionary income will
decrease.  The main squeeze will be on the middle economic class.

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                                2

I. THE GENERAL BUSINESS CLIMATE (cont'd)

   8. The health consciousness and technical understanding of the
population, as applied to products, will increase. [handwritten:
- ?]

   9. Price-wage-profit controls will remain a possibility for at
least several more years.

   10. Coping with the business cycle will remain difficult.  The
profit squeeze will remain a major problem unless periodic
"pass-through" price increases are competitively feasible and
allowable.

   11. Due in large part to political tampering with an economy
already under real stress, it was long thought that the economy
would cycle between high unemployment and high inflation at about
2 to 3-year intervals.  However, it is apparent from recent
experience that this idea should be abandoned.  For several years
unemployment and inflation have been cycling together.  As a
10-year average, inflation will probably run at about 8% and
unemployment at about 8%; i.e. politicians will continue, in
election years, to place more emphasis upon full employment than
upon price stability.  Also for complex reasons, the government
is committed to a continued policy of inflation.

   12. A key factor in the control of the economy's vigor is the
decreasing birth rate.  Even at current levels, every facet of
the juvenile market may expect to be depressed.  And only a few
years beyond the projection period looms a markedly reduced
generation of young adults who will need consumer goods.  This
may provide a built-in cooling of the economy, leading toward
less inflation and specialized areas of unemployment.

   13. More and more evidence of financial mishandling by cities,
states and national governments will leak through to the public
in the immediate future.  The root causes, such as overextending
in welfare programs, abuse of expenditures in such programs,
corruption, waste, unwise and expensive experimentation with
educational programs, and unnecessary services will become more
evident to the public and will elicit strong response and
possibly backlash.  Considerable instability in municipal, state
and federal spending policies and programs will result, with
attendant uncertainties in taxation outlook.

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                                4

II. THE TOBACCO INDUSTRY AND       III. THE RESEARCH DEPARTMENT
R.J. REYNOLDS TOBACCO COMPANY

                           A.  General

   2.  RJR-T has a great              2. Research Department will
opportunity to capitalize on       be involve [unclear] RJR-I on
the growing foreign market,        request (probably
particularly the market in         through[out])
"emerging nations".
Increasing trade barriers and      [handwritten comment]:
international monetary             Opportunity to upgrade tobacco
difficulties, increased            with in house technology [end
regulation and taxation of         handwritten comment]
tobacco products in foreign
countries, and increased
requirements that much of the
tobacco used be "home grown"
will add to the difficulty in
penetrating these markets.

   3. Over the long run the
influence and political power
of the industry will decrease.

   4. Total cigarette
consumption in the U.S.A. as
well as per capita cigarette
consumption will be affected
principally by the following
demand factors (listed in
order of estimated decreasing
importance).

   a. Total U.S. population
   (18 and over)

   b. Age distribution within
   this population.

   c. Taxation and other
   cigarette price factors

   d. The impact of the health
   controversy

   e. The per capita
   disposable income

   For the projection period,
   per capita consumption will
   stay level, at best, and
   may tend to decrease as the
   percentage of new smokers
   decreases.  It can be
   assumed that the other
   factors will have their
   "logical" impacts.  Thus,
   the long-range unit sales
   will increase no more than
   2% per year.  For RJR-T,
   the unit sales increase
   will exceed that of the
   industry at least in the
   first few years of the
   projection period.

   5. The public concern over
energy, inflation, political
integrity, unemployment, etc.
will create a period of
national psychological stress,
during which smoking-health
concerns may be overshadowed.

   6. The declining birthrate,
if continued, indicates
decreased cigarette sales in
15 to 20 years, due to the
reduced consumption by the
then large over-50 age group.

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                                5

II. THE TOBACCO INDUSTRY AND       III. THE RESEARCH DEPARTMENT
R.J. REYNOLDS TOBACCO COMPANY

                     B.  Smoking and Health

   1. The scientific                  1. Smoking-health research
controversy over the alleged       done on a collaborative basis
effects of smoking on the          by Company ???  and private or
health of the smoker will          academic groups will require
stabilize or abate, provided       the Research Department to to
industry, Government and other     provide inputs such as
groups begin to reach a truly      consultation analyses, and
constructive, collaborate          possibly various data
[sic] consensus and joint          laboratory studies.
effort; otherwise it may
intensify.  A hard-core            Research related to the
anti-tobacco group will always     smoking-health controversy
remain and will be joined by       will continue to require major
anti-big business groups in        short- and long-term emphasis.
attacks on the tobacco
industry.

   2. The negative effect of          2. Awareness will be
the smoking-health controversy     maintained by Research
on consumer behavior is            Department.
approaching a maximum; i.e.,
[remainder of sentence
underlined] no new adverse
data would be expected to
materially change the attitude
of the public toward smoking
and health.

3. The anti-tobacco lobby, in         3. Techniques to determine
addition to harping on the         composition and quality of
alleged association of             sidestream smoke to which
cigarette smoke with cancer        nonsmoker is exposed will be
and other diseases, will aim a     developed.
major long-range thrust at
smoking in an attempt to           [handwritten comment]: Low tar
stigmatize it as a socially        cigarettes generally ??? the
objectionable and lower class      ratio of the sidestream smoke
habit.  One of the major tools     released to the nonsmoker.
in this endeavor will be the
campaign against the effects       Control of sidestream smoke
of environmental smoke which       may be a future question.
is labeled "passive smoking".      [end handwritten comment]
"Passive smoking" is defined
as the exposure to tobacco
smoke by nonsmokers.  Three
related but distinct areas
need be considered:

a. Legislative activities of
anti-tobacco forces aimed at
prohibiting or restricting
smoking in public places such
as restaurants, semi-public
places such as the working
place in general, including
offices, factories, etc.  A
concerted effort to counteract
these activities is being made
by the Tobacco Institute; no
RJR initiative is needed.

b. The long-rage, more
important, second area is the
unequivocal declaration to
label smoking an objectionable
habit.  Very little is being
done to contest this
industry-wide, and an RJR-led
effort could be highly
important.

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II. THE TOBACCO INDUSTRY AND       III. THE RESEARCH DEPARTMENT
R.J. REYNOLDS TOBACCO COMPANY

                          E.  Products

   1. WINSTON and SALEM market        1. Work to improve smoke
shares will peak and then          quality and innovations
decline during the projection      directed toward establishment
period.  Marlboro will             of new brands will continue to
displace WINSTON as the            receive major short- and
leading domestic cigarette in      long-term ???  emphasis.
1976.  [next sentence
underlined] Our objective is
to maintain RJR-T as the
leading Company in our
industry.  Extremely important
are our related objectives to
have a leading product in each
category and to discover and
produce leading products in
new categories.

   2. The present large number        2. Work to improve smoke
of people in the 18 to 35 year     quality and innovations
old age group represents the       directed toward establishment
greatest opportunity for           of new brands will continue to
long-term cigarette sales          receive major short- and
growth.  Young people will         long-term [?] emphasis.
continue to become smokers at
or above the present rates
during the projection period.
The brands which these
beginning smokers accept and
use will become the dominant
brands in future years.
Evidence is now available to
indicate that the 14 to 18
year old group is an
increasing segment of the
smoking population.  RJR [next
2 words underlined] must soon
establish a successful [next
word underlined] new brand in
this market if our position in
the industry is to be
maintained over the long term.

   3. The total market for low     3. Work to improve smoke
"tar" and nicotine brands will     quality and innovations
continue to grow.  The 100-mm      directed toward establishment
(and 100-mm+) regular and          of new brands will continue to
menthol categories will also       receive major short- and
continue to grow.                  long-term [?] emphasis.
Combinations of these
categories (100-mm low "tar"
cigarette in the 4- to 6-mg
range, regular and menthol)
offer new opportunities.  The
market for very low "tar"
cigarettes (2 mg or less) will
remain limited for at least 5
years.  The low "tar"
cigarette opportunities in the
2- to 10-mg range will be
exploited in the next few
years and may become an
important market segment by
1981.