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Following is RAI Chairman Susan Ivey’s review of Reynolds American’s 2006 business performance and her discussion of the company’s Guiding Principles and Beliefs. These remarks were delivered during Reynolds American’s annual shareholders’ meeting in Winston-Salem on May 11, 2007.

    Good morning.  I’m Susan Ivey and I’d like to welcome you to Reynolds American’s 2007 annual shareholders meeting. 

     From every perspective, 2006 was another strong year for Reynolds American --  and I’ll start today’s meeting with a quick review of last year’s performance.  After that, I’m going to talk about the core principles and beliefs that guide the way Reynolds American and its operating companies approach our businesses. … So let’s begin.

     Our full-year 2006 results -- as well as the first quarter results we reported last month -- clearly demonstrate that Reynolds American has continued to build strength and momentum since we met here last year.

• In 2006, all of our operating companies posted full-year profit gains;
• Our companies’ key brands performed extremely well;
• And our acquisition of Conwood -- the nation’s second-largest smokeless-tobacco company -- significantly broadened our business and diversified our profit stream.

    Conwood is adding to our bottom line, and it continues to exceed our expectations.  Conwood’s Grizzly brand continues to be the growth leader in the moist snuff category, adding almost three-and-a-half share points in 2006.  Conwood now has more than a 25 percent share of the moist-snuff market.  And the company is well-positioned for continued, long-term growth.

    When we announced last year that we had agreed to buy Conwood for $3.5 billion some analysts questioned whether we’d paid too much.  But based on Conwood’s continued strong growth, I have no doubt that we’d pay a significantly higher price today for this powerful addition to the Reynolds American family.  So we’re very pleased with Conwood’s performance and results.

    We’re also seeing excellent financial and marketplace results from our largest subsidiary – R.J. Reynolds -- which continued to post strong growth-brand gains in 2006.  On a combined basis, the company’s three growth brands -- Camel, Kool and Pall Mall -- added more than a full share point in 2006.

    This year, R.J. Reynolds is continuing to enhance its growth-brand strength  with innovative products like Camel No. 9, Camel Signature, Kool XL and Pall Mall Ultra Lite’s unique orange pack.  And R.J. Reynolds remains on track to achieve overall share growth by the end of 2010.

     In 2006, Santa Fe Natural Tobacco Company again grew profit and share on the strength of its increasingly popular Natural American Spirit brand. And our Global Products subsidiary further strengthened its international businesses.

    On a consolidated basis, last year’s strong performance paid off with $8.5 billion in sales delivering:

• Reported operating income of $1.9 billion – which was up 32 percent;
• Net income of $1.2 billion – up 16 percent; and
• Full-year EPS of $4.10 – which was also up 16 percent from the prior year.

    Our shareholders also had a strong year – with a 43 percent return on their investment in 2006.  And that brings their total return on investment since the merger to more than 100 percent.

    Here are a few more highlights from last year:

• We split our stock two-for-one -- and increased our cash dividend by 20 percent;
• We delivered about $300 million in incremental merger-related synergies and productivity initiatives;
• And we increased our productivity goal to $500 million in savings by 2011.

    So 2006 was a year in which Reynolds American continued to build on its success and fortify its foundation for long-term growth.

     You’ll recall that last year we projected EPS growth in the low single-digits for the next several years.  But based on the strength we added in 2006 we now expect Reynolds American to deliver annual EPS percentage growth in the mid single-digits over the next several years.  However, this year, we project even stronger results, with EPS gains between 8 and 13 percent.

    So – as an employee and a shareholder -- I’m delighted to say that Reynolds American’s business model is driving growth and delivering results.

     So that’s what we’re achieving.  Now, let’s look at how we operate.  What I’d like to focus on for the next few minutes is the philosophical foundation for Reynolds American’s success. 

     Reynolds American is committed to building value through responsible growth.  And I emphasize the word “responsible” because we take that very seriously in terms of the products our companies manufacture and market, and in terms of the social, legal and political environments within which they operate.

     Reynolds American’s scorecard for 2006 includes significant achievements stemming from our core commitment to responsible growth:

• We continued to fulfill our commitment to shareholders by delivering superior returns on their investments;
• We enhanced our commitment to corporate citizenship, with R.J. Reynolds holding dialogues with key stakeholders and publishing its first Corporate Social Responsibility report; and
• We worked to improve the external environment for our shareholders, and our companies and their customers.

    Last year, our company, and the industry, saw continued progress in the external environment.  On the legal front, the environment continued to improve with favorable developments in the Engle, DOJ and lights class-action cases.  In fact, we recently received the refund of our $100 million Engle bond.

    And we’re working to make meaningful progress in the regulatory arena, as well.   

    As you know, Congress introduced bills in February that would give the FDA control of the domestic tobacco industry.  And the Senate held a hearing on this proposal.  The legislation that was introduced this year is basically the same legislation that’s been repeatedly rejected for the past decade.  And, interestingly, the FDA commissioner is among those who have voiced opposition to the current proposals.

    As we said when these bills were introduced, we continue to believe that the time has come for government, industry and others to work together to resolve the contentious issues surrounding the use and marketing of tobacco products.   We welcome the opportunity for broad-based discussion to determine effective public policy.  And we remain hopeful that objective, good-faith discussions can lead to a reasonable and realistic national regulatory structure.

    Our position is clear.  As we’ve stated before:

• We would support legislation under which tobacco products remain legal, consumer-acceptable and regulated in a reasonable and consistent manner;
• We would support legislation that permits effective competition, allows for communication and interaction with adult tobacco users regarding their brand choices, and which further minimizes exposure of minors to tobacco marketing; and
• We would oppose legislation that does not include these provisions or which provides any of our competitors with an unfair advantage.

    And we hope we can make progress on this front this year.

    Our position concerning the FDA bills, as well as our positions concerning smoking bans and other efforts at the state and local levels, are governed by a set of core principles and beliefs that guide the way we conduct our business.

    Our Guiding Principles and Beliefs detail our commitment to operate our businesses in a responsible manner that best balances the desires of our many stakeholders.   And they provide a framework that guides our actions in five areas that are critical to both our company and our society:

• Tobacco Use and Health;
• Tobacco Regulation;
• Tobacco Consumers;
• Harm Reduction; and
• Marketing and Communication.

        As you’ll see, our Guiding Principles and Beliefs closely align with the beliefs and interests of our society as a whole. 

     Let’s start by looking at Tobacco Use and Health.

     First, and foremost, we believe that:

• “Smoking causes serious disease.”

    Most scientists and public health officials believe that smoking is THE biggest public health threat in our society today.   But most of them also agree that prohibition is not the solution.  So here’s the dilemma we continue to face:  How do we minimize the potential for public harm while preserving the rights of adults to enjoy the pleasures that some find in tobacco?

     That question has arisen time and again in every part of the world for hundreds of years.  There are no easy answers.  But our guiding principles and beliefs represent a rational, reasonable and responsible approach to balancing both sides.

    So in terms of Tobacco Use and Health, we share the beliefs voiced by many scientists and policy advocates regarding public health.

    We believe that:

• “Smoking causes serious disease.”

    We believe that:

• “Nicotine in tobacco products is addictive but is not considered a significant threat to health.”

    We believe that:

• “No tobacco product has been shown to be safe.”

    And we believe that:  

• “An individual's level of risk for serious disease is significantly affected by the type of tobacco product used as well as the manner and frequency of use.”

    These principles inform, and form the foundation for, the rest of our beliefs.  So let’s look at what we believe in terms of Tobacco Regulation.   As I’ve already noted, we believe that:

• “Tobacco products should be regulated in a reasonable and consistent manner, and they should remain legal and consumer-acceptable.  The prohibition, in any form, of tobacco products is neither practical nor desirable.”

    We believe that:

• “Communication and interaction with adult tobacco users regarding their brand choices is essential for effective competition.”

    And we believe that:

• “Resolving the long-standing controversies regarding the marketing and use of tobacco products in an open and objective manner is critical to establishing an acceptable and cooperative environment for all.”

    Finally, regarding Tobacco Regulation, we believe that:

• “Smoking restrictions should exempt adult venues such as bars and taverns.”

    I want to talk about that last one for a minute because I think it exemplifies the balanced and responsible approach that Reynolds American takes concerning the core issues that affect our businesses.

     We recognize and respect the fact that many people prefer to work, shop and dine in smoke-free environments.   And we believe that people should rely on the conclusions of the Surgeon General and other health authorities when making any decisions regarding smoking and health.

     So that brings us back to the tobacco dilemma:  How do we minimize the potential for public harm while preserving the rights of adults to enjoy the pleasures that some find in tobacco?

     In our opinion, the best way to do that is to make sure that any proposals to restrict or ban smoking provide for common-sense exemptions that allow the owners of bars, taverns and other age-restricted venues the choice to set their own smoking policy.

     We do not oppose legislative proposals that ban smoking in offices, shopping centers, restaurants and other unrestricted areas.  But we do believe that age-restricted venues where adults gather to enjoy age-restricted products, like alcohol, should also permit adults to enjoy other age-restricted products, like tobacco, if that’s the wish of the establishment’s owner.  Banning the use of a legal age-restricted product in age-restricted establishments infringes on adult choice, and, quite frankly, defies common sense.

     And that brings us to our Guiding Principles and Beliefs concerning Tobacco Consumers.  As I said, we believe that:

• “Individuals should rely on the conclusions of the U.S. Surgeon General, the Centers for Disease Control and other public health and medical officials when making decisions regarding smoking.”

    We further believe that:

• “The best course of action for tobacco users concerned about their health is to quit.”

    That:

• “Minors should never use tobacco products and adults who do not use or have quit using tobacco products should not start.”

    And that:

• “Adults who smoke should avoid exposing minors to secondhand smoke.”

    Our beliefs in this area are consistent with the beliefs of our society as a whole.  And we are committed to operating our businesses in a manner that is consistent with these beliefs.  Which brings us to the issue of Harm Reduction.

     Reynolds American and its operating companies believe that:

• “Decreasing the health risks and harm directly associated with the use of tobacco products is in everyone's best interest.”

    We believe that:

• “Manufacturers, working in conjunction with governments, public health authorities and tobacco producers, should strive to reduce the harm caused by the use of tobacco products.”

    That:

• “Public policy should encourage the development of tobacco products that reduce harm or relative risk of serious disease.”

    And that:

• “Public policy should require population- and science-based standards that allow for consistent, accurate and verified communication about reduced harm and the relative risks of tobacco products.

    We further believe that:

• “Adult tobacco consumers should have access to  a range of tobacco, nicotine and cessation products and should be given information in order to make an informed choice on the relative risks of each product.”

    Adults should have the right to make informed choices about the risks they do or do not want to take.   And we believe that the manufacturers of products that present health risks have a responsibility to help the government provide the public with the information necessary to make informed choices.

     Which brings me to the fifth and final area of our Guiding Principles and Beliefs --  Marketing and Communication.  I think the points I’ve already made should clarify why we are guided by the following beliefs.

     We believe that:

• “Marketing standards for tobacco products should minimize the exposure of minors to tobacco advertising, be consistent with constitutional protections and provide information allowing adults to make an informed choice.”

    We believe:

• “Public policy should allow communication of the relative risks of tobacco products and encourage tobacco users to switch to lower-risk products.”

    And finally, we believe that: 

• “Preferential treatment (in terms of labeling, adult consumer communication, tax rates, etc.) should be given to tobacco products or categories established through scientific evaluation to be significantly less harmful than other available tobacco products or categories.”

    I’d like to spend just a minute talking about the basis for these beliefs -- and why we’re convinced that they must play a central role in any legislation that might be proposed.

     R.J. Reynolds has a long, well-documented history of efforts to develop products that present smokers with less risk.  But one thing that has hampered the company, and  others who share this  commitment to harm reduction, is the lack of clear, consistent standards to judge and communicate the relative risk of tobacco products.

     Let me give you an example.  There’s a large and growing body of scientific evidence suggesting that we could achieve major strides in public health if smokers who don’t want to quit -- or believe they can’t quit -- would switch to noncombustible tobacco products like moist snuff or snus. 

     But a lack of clear standards to judge and communicate potential benefits of making that switch prevents our companies from providing adult smokers with the facts they need to make an informed choice.  And it prevents tobacco companies -- and the government -- from providing them with incentives to try to switch.

     We strongly support informed choice as a bedrock of responsible public policy.  And an increasing number of scientists and health officials are also coming to believe that consumers deserve access to information that helps them make informed choices  concerning tobacco products and their use.

     So I repeat the point I made when I began this presentation of Reynolds American’s Guiding Principles and Beliefs:  We welcome the opportunity for broad-based discussion to determine effective public policy.  And we remain hopeful that we can make meaningful progress in this regard.

         So that gives you a good idea of how Reynolds American is doing  and how we’re achieving results.   At this meeting last year,  I told you that 2006 was already shaping up to be another exciting year at Reynolds American.  Looking back, I think you’ll agree that it was even more exciting -- and more successful -- than we could predict.   And I look forward to standing before you next year and saying the same about 2007.   Because, as you saw from our first-quarter results, Reynolds American is already off to another terrific start.

        Editor’s note: Ellipses indicate removal of introductions of various members of RAI’s management team who were present in the audience.