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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1995

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
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Commission file number 1-5759
-----------------
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)

DELAWARE 51-0255124
- ----------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 S.E. 2ND STREET, MIAMI, FLORIDA 33131
- ----------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)

(305) 579-8000
----------------------------------------------
(Registrant's telephone number, including area
code)

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

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

YES X NO
--- ---

As of November 13, 1995, there were outstanding 18,497,096 shares of
common stock, par value $0.10 per share.

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2

BROOKE GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

Page
----

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994 . . . . . . . . . . . . 3

Consolidated Statements of Operations for the three and nine months ended September 30,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Consolidated Statement of Stockholders' Equity (Deficit) for the nine months ended September
30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

- 2 -

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

September 30, December 31,
1995 1994
-------------------------------

ASSETS:

Current assets:
Cash and cash equivalents $ 16,998 $ 4,276
Accounts receivable - trade 20,253 31,325
Other receivables 1,085 1,558
Inventories 45,543 47,098
Other current assets 2,991 3,247
-------- --------
Total current assets 86,870 87,504

Property, plant and equipment, at cost, less
accumulated depreciation
of $26,795 and $24,460 27,716 25,806
Intangible assets, at cost, less accumulated
amortization of $15,230
and $13,936 5,464 6,728
Investment in affiliate 82,503 97,520
Other assets 8,728 11,867
-------- --------
Total assets $211,281 $229,425
======== ========

The accompanying notes are an integral part
of the consolidated financial statements.

- 3 -
4

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

September 30, December 31,
1995 1994
-------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):

Current liabilities:
Notes payable and current portion of long-term debt $ 10,082 $ 26,491
Accounts payable 11,539 12,415
Cash overdraft 2,043 4,860
Accrued promotional expenses 23,683 29,853
Unearned revenue 26 2,056
Net current liabilities of business held for disposition 4,974
Accrued taxes 17,863 19,126
Other accrued liabilities 34,098 44,576
--------- ----------
Total current liabilities 99,334 144,351

Notes payable, long-term debt and other obligations, less current
portion 397,236 405,798
Noncurrent employee benefits 31,850 31,119
Net long-term liabilities of business held for disposition 23,009
Other 9,286

Commitments and contingencies

Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized 10,000,000
shares
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,247,096 and
18,260,844 shares, respectively 1,825 1,826
Additional paid-in capital 80,121 66,245
Deficit (404,749) (420,746)
Other 29,961 11,365
Less: 6,750,947 and 6,737,199 shares of common stock in
treasury, at cost (33,583) (33,542)
--------- ---------
Total stockholders' equity (deficit) (326,425) (374,852)
--------- ---------

Total liabilities and stockholders' equity (deficit) $ 211,281 $ 229,425
========= =========

The accompanying notes are an integral part
of the consolidated financial statements.

- 4 -
5

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

Three Months Ended Nine Months Ended
-----------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1995 1994 1995 1994
-----------------------------------------------------

Revenues* $ 124,100 $ 124,446 $ 341,718 $ 357,628
Cost of goods sold* 54,626 57,847 158,766 173,091
---------- ----------- ----------- ----------
Gross profit 69,474 66,599 182,952 184,537
Selling, general and administrative expenses 58,818 57,564 173,322 162,220
---------- ----------- ----------- ----------
Operating income 10,656 9,035 9,630 22,317

Other income (expenses):
Interest income 43 49 893 119
Interest expense (13,952) (14,156) (43,369) (41,502)
Equity in earnings of affiliate 1,561 3,598
Other, net 962 (9,992) 2,039 (9,435)
---------- ----------- ----------- ----------
(Loss) from continuing operations before income taxes (730) (15,064) (27,209) (28,501)
Provision (benefit) for income taxes 394 (24,177) 464 (24,517)
---------- ----------- ----------- ----------
(Loss) income from continuing operations (1,124) 9,113 (27,673) (3,984)
---------- ----------- ----------- ----------
Discontinued operations:
Income (loss) from discontinued operations, net of
income taxes of $11 and $567 for the three and nine
months ended September 30, 1995, respectively,
and $(380) and $2,962 for the three and nine
months ended September 30, 1994, respectively 98 (654) 2,860 1,944
Gain on disposal 10,459 13,138 18,135
---------- ----------- ----------- ----------
Income from discontinued operations 98 9,805 15,998 20,079
---------- ----------- ----------- ----------
(Loss) income before extraordinary item (1,026) 18,918 (11,675) 16,095

Extraordinary (loss) from the early
extinguishment of debt (1,118)
---------- ----------- ----------- ----------
Net (loss) income (1,026) 18,918 (11,675) 14,977

Proportionate share of New Valley capital transaction,
retirement of Class A Preferred Shares 2,798 16,802
---------- ----------- ----------- ----------
Net income applicable to common shares $ 1,772 $ 18,918 $ 5,127 $ 14,977
=========== =========== =========== ==========
Per common share:

Income (loss) from continuing operations $ 0.09 $ 0.52 $ (0.60) $ (0.23)
=========== =========== =========== ==========
Income from discontinued operations $ 0.01 $ 0.55 $ 0.88 $ 1.15
=========== =========== =========== ==========
Extraordinary item $ $ $ $ (0.06)
=========== =========== =========== ==========
Net income applicable to common shares $ 0.10 $ 1.07 $ 0.28 $ 0.86
=========== =========== =========== ==========
Weighted average common shares and common
stock equivalents outstanding 18,247,094 17,617,629 18,248,673 17,483,163
=========== =========== =========== ==========

_____________________________
* Revenues and Cost of goods sold include federal excise taxes of
$32,643 and $33,932 for the three months ended September 30, 1995 and 1994,
respectively, and $92,238 and $99,450 for the nine months ended September 30,
1995 and 1994, respectively.

The accompanying notes are an integral part
of the consolidated financial statements.

- 5 -

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

Common Stock Additional
------------------- Paid-In Treasury
Shares Amount Capital Deficit Stock Other Total
---------------------------------------------------------------------------------

Balance, December 31, 1994 18,260,844 $1,826 $66,245 $(420,746) $(33,542) $11,365 $(374,852)

Net loss (11,675) (11,675)

Distributions on common stock of BGL
($0.075 per share,
per quarter) (4,106) (4,106)

Stock grant to directors 20,000 2 (2) 94 94

Stock grant to consultant 939 (609) 330

MAI spin-off 27,286 (201) 27,085

Net unrealized holding gain on
investment in New Valley 12,815 12,815

Effect of New Valley capital
transactions 17,043 6,591 23,634

Other, net (1) 386 385

Treasury stock, at cost (33,748) (3) 3 (135) (135)
---------- ------ ------- --------- -------- ------- ---------
Balance, September 30, 1995 18,247,096 $1,825 $80,121 $(404,749) $(33,583) $29,961 $(326,425)
========== ====== ======= ========= ======== ======= =========

The accompanying notes are an integral part
of the consolidated financial statements.

- 6 -
7

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

Nine Months Ended
------------------------------
September 30, September 30,
1995 1994
------------------------------

Net cash (used in) operating activities $(23,706) $(36,037)
-------- --------
Cash flows from investing activities:
Proceeds from sale of assets/equipment 14,149 17,334
Dividends from New Valley 61,832
Investment in New Valley (1,965)
Capital expenditures (5,008) (467)
Impact of discontinued operations (990)
-------- --------

Net cash provided by investing activities 69,008 15,877
-------- --------
Cash flows from financing activities:
Proceeds from debt 3,028 9,261
Deferred financing costs (2,397)
(Repayment) borrowing under revolver (3,449) 4,532
Repayments of debt (25,080) (1,303)
Decrease in cash overdraft (2,817) (12,477)
Dividends paid on Series G preferred stock (4,999)
CVR settlement, net 1,875
Distributions on common stock (4,107)
Treasury stock purchases (135) (82)
Stockholder loan and interest repayments 17,774
Impact of discontinued operations (2,644)
Other, net (20)
-------- --------
Net cash (used in) provided by financing activities (32,580) 9,540
-------- --------
Effects of exchange rate changes on cash and cash equivalents 3
-------- --------
Net increase (decrease) in cash and cash equivalents 12,722 (10,617)
Cash and cash equivalents, beginning of period 4,276 15,773
-------- --------
Cash and cash equivalents, end of period $ 16,998 $ 5,156
======== ========

The accompanying notes are an integral part
of the consolidated financial statements.

- 7 -
8

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

1. GENERAL

The consolidated financial statements included herein, prepared by Brooke
Group Ltd. (the "Company"), are unaudited and, in the opinion of management,
reflect all adjustments necessary (which are normal and recurring) to present
fairly the Company's consolidated financial position, results of operations
and cash flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
for the years ended December 31, 1994, 1993 and 1992, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, as
filed with the Securities and Exchange Commission ("SEC") on April 17, 1995.
The consolidated results of operations for interim periods should not be
regarded as necessarily indicative of the results that may be expected for
the entire year.

Certain amounts in the 1994 consolidated financial statements have
been reclassified to conform to the 1995 presentation.

2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Liggett
Group Inc. ("Liggett"), New Valley Holdings, Inc. ("NV Holdings") and other
less significant subsidiaries.

As a result of the spinoff of the Company's equity interest in MAI
Systems Corporation ("MAI") in February 1995 and the sale/redemption of the
Company's common and preferred stock of SkyBox International, Inc.
("SkyBox"), both entities are reported as discontinued operations for the
periods prior to their disposal by the Company. Results of discontinued
operations for the three and nine months ended September 30, 1995 also
reflect the Company's proportionate interest in the discontinued operations
of New Valley Corporation ("New Valley"). See Note 3. Revenues for MAI were
$6,652 for the period January 1, 1995 to February 6, 1995 and $49,766 for
the nine months ended September 30, 1994.

3. INVESTMENT IN NEW VALLEY CORPORATION

The Company's investment in New Valley as of and for the nine months ended
September 30, 1995 is summarized as follows:

Equity in Continuing
Number of Shares Carrying Value Operations
---------------- -------------- -----------

Common shares 79,794,229 $ (37,475) $(18,377)
Class A Preferred shares 618,326 115,492 21,975
Class B Preferred shares 250,885 4,486
--------- --------
$ 82,503 $ 3,598
========= ========

The $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares
($100 Liquidation Value), $.01 par value (the "Class A Preferred Shares"),
and the $3.00 Class B Cumulative Convertible Preferred ($25 Liquidation
Value), $.10 par value per share (the "Class B Preferred Shares"), are

- 8 -
9

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

accounted for pursuant to the requirements of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and are classified as
available-for-sale. Because the Class A Preferred Shares are thinly traded,
their fair value has been estimated with reference to the securities'
preference features, including dividend and liquidation preferences, and the
composition and nature of the underlying net assets of New Valley. The net
unrealized holding gain on these securities, in the amount of $23,979, is
accounted for as a separate component of stockholders' equity. Of this amount,
$21,347 relates to the Class A Preferred Shares and $2,632 relates to the
Class B Preferred Shares. At September 30, 1995, the Company's shares of New
Valley common stock, representing a 41.7% common interest and which are
accounted for under the equity method pursuant to APB 18, had a quoted market
value of $32,716.

Summarized income statement information for New Valley for the three
and nine month periods ended September 30, 1995 is as follows:

3 Months Ended 9 Months Ended
Sept. 30, 1995 Sept. 30, 1995
-------------- --------------

Revenues $21,514 $39,215
======= =======
Cost and expenses 18,436 28,233
======= =======
Income from continuing operations 2,784 11,699
======= =======
Net income 3,019 16,014
======= =======

In February 1995, New Valley repurchased 54,445 Class A Preferred Shares
pursuant to a tender offer made as part of the New Valley First Amended
Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan").
During the nine months ended September 30, 1995, New Valley's Board of
Directors authorized the repurchase of an additional 500,000 Class A
Preferred Shares. At September 30, 1995, 339,400 of such shares had been
repurchased on the open market at an aggregate cost of $43,405 or an
average cost of $127.89 per share. The Company has recorded its
proportionate interest in the excess of the carrying value of the shares over
the cost of the shares repurchased as a credit to additional paid-in
capital in the amount of $16,802, along with other New Valley capital
transactions of $241 for the nine months ended September 30, 1995.

In August 1995, New Valley received approval from the Federal Trade
Commission to purchase up to 15% of the voting securities of RJR Nabisco
Holdings Corp. ("RJR Nabisco"). As of September 30, 1995, New Valley held
approximately 3,300,000 shares of RJR Nabisco common stock, par value $.01
per share (the "RJR Nabisco Common Stock"), with a market value of $106,000
(cost of $97,000). New Valley's investment in RJR Nabisco collateralizes
margin loan financing of $54,900 at September 30, 1995.

As a result of recent asset dispositions pursuant to the Joint Plan,
New Valley has accumulated a significant amount of cash which it may be
required to reinvest in operating companies in the near future in order to
avoid potentially burdensome regulation under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Investment
Company Act and the rules and regulations thereunder require the
registration of, and impose various substantive restrictions on, companies
that engage primarily in the business of investing, reinvesting or trading
in securities or engage in the business of investing, reinvesting, owning,
holding or trading in securities and own or propose to acquire "investment
securities" having a value in excess of 40% of a company's "total assets".
New Valley, which is now above this threshold as a result of dispositions
of its operating businesses pursuant to the Joint Plan, is relying on
the temporary exemption from registration under

- 9 -
10

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

the Investment Company Act provided by Rule 3a-2 thereunder. New
Valley will attempt to be engaged, within the one-year period prescribed by
Rule 3a-2, primarily in a business of businesses other than that of
investing, reinvesting, owning, holding or trading in securities, or in
the alternative, if New Valley is unable to accomplish this, it will seek
to obtain an extension of such date or an exemption from the SEC or
no-action position from the SEC staff with respect to registration under the
Investment Company Act. However, no assurance can be given that New Valley
will be successful in becoming engaged in such business or in obtaining an
extension of such one-year period, and accordingly, there may be a risk
that New Valley will become subject to the Investment Company Act. If
either New Valley or the Company were required to register under the
Investment Company Act, such company would be subject to a number
of severe substantive restrictions on its operations, capital structure
and management, including without limitation entering into transactions
with affiliates. If New Valley were required to register under the
Investment Company Act, the Company (as well as BGLS) would also have to
register and, therefore, would be subject to the same substantive
restrictions described above. In addition, registration under the
Investment Company Act by BGLS would constitute a violation of certain of
the indentures to which BGLS is a party.

Subsequent Event: On October 17, 1995, New Valley entered into an
agreement, as amended (the "Agreement"), with High River Limited Partnership
("High River"), an entity owned by Carl C. Icahn. (The Company and BGLS
also entered into a separate agreement with High River (see Note 10)).
Pursuant to the agreement, New Valley sold approximately 1,600,000 shares
of RJR Nabisco Common Stock to High River for an aggregate purchase price
of $51,000 and the parties agreed that New Valley and High River would
each invest up to approximately $250,000 in shares of RJR Nabisco Common
Stock, subject to certain conditions and limitations. Any party to the
Agreement may terminate it at any time, although under certain
circumstances, the terminating party will be required to pay a fee of
$50,000 to the nonterminating party. The agreement also provides for the
parties to pay certain other fees to each other under certain
circumstances, including a fee to High River equal to 20% of New Valley's
profit in RJR Nabisco Common Stock, after certain expenses as defined in
the Agreement. As of November 1, 1995, New Valley held approximately
4,900,000 shares in RJR Nabisco Common Stock. New Valley's cost of such
shares and the amount of related margin loan financing were approximately
$148,900 and $74,200, respectively, at November 1, 1995.

On October 31, 1995, New Valley sold substantially all the assets of
its wholly owned subsidiary, Western Union Data Services Company, Inc.
(the "Messaging Service Business"), and conveyed substantially all of the
liabilities of the Messaging Service Business to First Financial Management
Corporation ("FFMC") for $20,000 in cash. New Valley estimates that it
will recognize a pre-tax gain on the sale of such business of approximately
$13,300 during the fourth quarter of 1995.

4. BROOKE (OVERSEAS) LTD.

During the third quarter of 1995, Brooke (Overseas) Ltd., a
wholly-owned subsidiary of the Company, increased its investment in
Liggett-Ducat Ltd., a Russian joint stock company ("LDJSC") from
approximately 58% to 68% through a direct purchase of stock from other
shareholders. LDJSC has not been consolidated due to certain events which
impair the ability of the Company to control LDJSC. Amounts invested in
the Russian subsidiary's tobacco operation in 1994 and the nine months
ended September 30, 1995, which totaled $5,723 and $8,500, respectively,
were expensed based on the determination that there was significant
uncertainty as to the recoverability of the amounts invested. In addition,
the Company has invested $4,000 in the nine months ended September 1995
relating to the Russian subsidiary's real estate operations which amount
has been

- 10 -

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

capitalized. The Company continues to monitor this foreign subsidiary and
may consolidate it in the near future.

Subsequent Event: In October 1995, LDJSC entered into a loan
agreement with the Russian Federation Foreign Trade Bank, Moscow, Russia,
to borrow up to $20,000 to fund real estate development. Interest on
the note is based on the London Interbank Offered Rate ("LIBOR") plus 10%.
Principal repayments are due over the period April through October of
1997. The loan agreement was arranged through a third party for a net fee
of $4,044 payable ratably over the term of the loan. The Company has
guaranteed the payment of the note and the broker's fee. All of the stock
of BrookeMil Ltd. ("BrookeMil"), a wholly-owned subsidiary of LDJSC, has
been pledged as collateral for the loan.

Also in October 1995, BrookeMil purchased certain buildings, which it
had previously leased from the Moscow Property Committee, for $4,369 net
of related transaction costs. BrookeMil has developed, or is in the
process of developing, these buildings for commercial use.

5. INVENTORIES

Inventories consist of:

September 30, December 31,
1995 1994
---------------------------

Finished goods $16,350 $18,374
Work in process 3,088 2,952
Raw materials 19,707 20,609
Replacement parts and supplies 3,846 3,754
------- -------
Inventories at current cost 42,991 45,689
LIFO adjustments 2,552 1,409
------- -------
$45,543 $47,098
======= =======

At September 30, 1995, the Company had leaf tobacco purchase commitments of
approximately $23,900.

6. CONTINGENCIES

Since 1954, the Company and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions predicated on the theory that they should be liable for
damages from cancer and other adverse health effects alleged to have been
caused by cigarette smoking or by exposures to secondary smoke
(environmental tobacco smoke, "ETS") from cigarettes. These cases are
generally described hereinafter as though having been commenced against
Liggett (without regard to whether such actually were commenced against
Liggett or the Company in its former name or in its present name), since
all involve the tobacco manufacturing and marketing activities currently
performed by Liggett. New cases continue to be commenced against Liggett
and other cigarette manufacturers. As new cases are commenced, the costs
associated with defending such cases and the risks attendant to the
inherent unpredictability of litigation continue. To date a number of such
actions, including several against Liggett, have been disposed of favorably
to the defendants; no plaintiff has ultimately prevailed on the merits of
any such action; and no payment

- 11 -
12

Item 1. Consolidated Financial Statements -(Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

in settlement of any such claim has been made by Liggett nor, to
Liggett's knowledge, any other cigarette manufacturer.

In the action entitled Cipollone v. Liggett Group Inc., et al., the
United States Supreme Court, on June 24, 1992, issued an opinion regarding
federal preemption of state law damage actions. The Supreme Court in
Cipollone concluded that The Federal Cigarette Labeling and Advertising
Act (the "1965 Act") did not preempt any state common law damage claims.
Relying on The Public Health Cigarette Smoking Act of 1969 (the "1969
Act"), however, the Supreme Court concluded that the 1969 Act preempted
certain, but not all, common law damage claims. Accordingly, the
decision bars plaintiffs from asserting claims that, after the effective
date of the 1969 Act, the tobacco companies either failed to warn
adequately of the claimed health risks of cigarette smoking or sought to
neutralize those claimed risks in their advertising or promotion of
cigarettes. It does permit, however, claims for fraudulent
misrepresentation (other than a claim of fraudulently neutralizing the
warning), concealment (other than in advertising and promotion of
cigarettes), conspiracy and breach of express warranty after 1969. The
Court expressed no opinion on whether any of these claims are viable under
state law, but assumed arguendo that they are viable.

In addition, bills have been introduced in Congress on occasion to
eliminate the federal preemption defense. Enactment of any federal
legislation with such an effect could result in a significant increase in
claims, liabilities and litigation costs.

On May 11, 1993, in the case entitled Wilks v. The American Tobacco
Company, et al., No. 91-12,355, Circuit Court of Washington County, State
of Mississippi (a case in which Liggett was not a defendant), the trial
court granted plaintiffs' motion to impose absolute liability on defendants
for the manufacture and sale of cigarettes and struck defendants'
affirmative defenses of assumption of risk and comparative
fault/contributory negligence. The trial court ruled that the only issues
to be tried in the case were causation and damages. No other court has
ever imposed absolute liability on a manufacturer of cigarettes. After
trial, the jury returned a verdict for defendants, finding no liability.
The Company is a defendant in other cases in Mississippi and it cannot be
stated that other courts will not apply the Wilks ruling as to absolute
liability.

On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et
al., Superior Court of the State of California, City of San Diego, was
filed against Liggett and others. In her complaint, plaintiff, purportedly
on behalf of the general public, alleges that defendants have been engaged
in unlawful, unfair and fraudulent business practices by allegedly
misrepresenting and concealing from the public scientific studies pertaining
to smoking and health funded by, and misrepresenting the independence of,
the Council for Tobacco Research and its predecessor. The complaint
seeks equitable relief against the defendants, including the imposition
of a corrective advertising campaign, restitution of funds, disgorgement of
revenues and profits, and the imposition of a constructive trust. The
case is presently in the discovery phase.

On October 31, 1991 an action entitled Broin et al. v. Philip
Morris Companies, Inc., et al., Circuit Court of the 11th Judicial
District in and for Dade County, Florida, was filed against Liggett and
others. This case was the first class action commenced against the
industry, and has been brought by plaintiffs on behalf of all flight
attendants that have worked or are presently working for airlines
based in the United States and who have never regularly smoked cigarettes
but allege that have been damaged by an involuntary exposure to ETS. On
December 12, 1994, plaintiffs' motion to certify the action as a class action
was granted. Defendants have appealed this ruling.

- 12 -

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
was brought on behalf of plaintiffs and residents of the United States who
claim to be addicted to tobacco products, and survivors who claim their
decedents were also addicted. The complaint is based upon the claim that
defendants manipulated the nicotine levels in their tobacco products with
the intent to addict plaintiffs and the class members and, inter alia,
fraud, deceit, negligent misrepresentation, breach of express and
implied warranty, strict liability and violation of consumer protection
statutes. Plaintiffs seek compensatory and punitive damages, equitable
relief including disgorgement of profits from the sale of cigarettes
and creation of a fund to monitor the health of class members and to pay for
medical expenses allegedly caused by defendants, attorneys' fees and costs.
On February 17, 1995, the Court issued an Order that granted in part
Plaintiffs' motion for class certification for certain claims together with
punitive damages to the end of establishing a multiplier to compute
punitive damage awards. Defendants made application for discretionary
appeal to the Court of Appeals for the Fifth Circuit, which appeal has been
granted.

On May 5, 1994, an action entitled Engle, et al. v. R. J. Reynolds
Tobacco Company, et al., Circuit Court of the 11th Judicial District in and
for Dade County, Florida, was filed against Liggett and others. The class
action complaint was brought on behalf of plaintiffs and all persons in
the United States who allegedly have become addicted to cigarette products
and allegedly have suffered personal injury as a result thereof. Plaintiff
seeks compensatory and punitive damages, equitable relief including but not
limited to establishing a medical fund for future health care costs. On
October 31, 1994, plaintiffs' motion to certify the action as a class
action was granted. Defendants have appealed this ruling.

On May 23, 1994, an action entitled Mike Moore, Attorney General, ex
rel State of Mississippi vs. The American Tobacco Company, et al.,
Chancery Court for the County of Jackson, State of Mississippi, was
filed against Liggett and others. The State of Mississippi seeks restitution
and indemnity for medical payments and expenses made or incurred by it on
behalf of welfare patients for tobacco related illnesses. Similar actions
(although not identical) have been filed recently by the State of Minnesota
(together with Minnesota Blue Cross-Blue Shield) and by the State of West
Virginia. In West Virginia, the trial Court, in a ruling issued on May 3,
1995, dismissed eight of the ten counts of the complaint filed therein,
leaving only two counts of an alleged conspiracy to control the market and
the market price of tobacco products and an alleged consumer protection
claim. In a recent ruling, the trial Court has adjudged the contingent fee
agreement entered into by the State of West Virginia and its counsel to be
unconstitutional under the Constitution of the State of West Virginia.

On September 10, 1993, an action entitled Sackman v. Liggett Group
Inc., United States District Court, Eastern District of New York, was filed
against Liggett alleging, as injury, lung cancer. Discovery is scheduled
to close on March 15, 1996. It is anticipated that the case will be
scheduled for trial during 1996.

- 13 -
14

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

legislation, and although the trial Court upheld portions of this
legislation, it adjudged the Agency For Health Care Administration to have
been unconstitutionally organized. All parties have taken an appeal from
the trial Court's rulings. On May 6, 1995, the Florida legislature voted
in favor of a bill to repeal this legislation, but the Governor of Florida
vetoed this repealer bill. It is uncertain at this time whether or not
and at what time the Florida legislature can or will take action to override
the Governor's veto. The Florida Legislature is not in session at this
time. On February 22, 1995, suit was commenced by the State of Florida
acting through the Agency For Health Care Administration, together with
others, against the five domestic cigarette manufacturers and their
respective parent companies, as well as others, seeking restitution of
monies expended in the past and which may be expended in the future by the
State of Florida to provide health care to Medicaid recipients for injuries
and ailments allegedly caused by the use of cigarettes and other tobacco
products. Plaintiffs also seek a variety of other forms of relief
including a disgorgement of all profits from the sales of cigarettes in
Florida.

The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the States of Mississippi, Minnesota
and West Virginia. Aside from the Florida and Massachusetts statutes,
legislation authorizing the state to sue a company or individual to recover
costs incurred by the state to provide health care to persons injured by
the company or individual also has been introduced in at least nine other
states. These bills contain some or all of the following provisions:
eliminating certain affirmative defenses, permitting the use of statistical
evidence to prove causation and damages, adopting market share liability
and allowing class action suits without notification to class members.

Currently, in addition to Cordova, approximately 56 product liability
lawsuits which have been filed in various jurisdictions, are pending and
active in which Liggett is a defendant. Of these, 34 are pending in the
State of Florida, with 32 of these 34 having been commenced during 1995.
In most of these lawsuits, plaintiffs seek punitive as well as compensatory
damages.

A Grand Jury investigation presently is being conducted by the office of
the United States Attorney for the Eastern District of New York regarding
possible violations of criminal law relating to the activities of The
Council for Tobacco Research - USA, Inc. The Company was a sponsor of
The Council for Tobacco Research - USA, Inc. at one time. The Company is
unable at this time to predict the outcome of the investigation.

Liggett has been responding to a Civil Investigative Demand from the
Antitrust Division of the United States Department of Justice, which
requests certain information from Liggett. The request appears to focus on
United States tobacco industry activities in connection with product
development efforts regarding, in particular, "fire-safe" or
self-extinguishing cigarettes. It also requests certain general
information addressing Liggett's involvement with, and relationship to, its
competitors. Liggett is unable to predict the outcome of this investigation.

In March and April 1994, the Health and the Environmental Subcommittee
of the Energy and Commerce Committee of the House of Representatives held
hearings regarding nicotine in cigarettes. On March 25, 1994, Commissioner
David A. Kessler of the Food and Drug Administration (the "FDA") gave
testimony as to the potential regulation of nicotine under the Food, Drug
and Cosmetic Act, and the potential for jurisdiction over the regulation
of cigarettes to be accorded to the FDA. In response to Commissioner
Kessler's allegations about manipulation of nicotine by cigarette
manufacturers, including Liggett, the chief executive of each of the major
cigarette manufacturers, including Liggett, testified before the subcommittee
on April 14, 1994, denying Commissioner

- 14 -
15

Item 1. Consolidated Financial Statements -(Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

Kessler's claims. An FDA advisory panel has stated that it believes
nicotine is addictive. On August 10, 1995, the FDA filed in the Federal
Register a Notice of Proposed Rule-Making which would classify tobacco as a
drug, assert jurisdiction by the FDA over the manufacture and marketing of
tobacco products and impose restrictions on the sale, advertising and
promotion of tobacco products. The FDA's stated objective and focus for
its initiative is to limit access to cigarettes by minors by measures beyond
the restrictions either mandated by existing federal, state and local laws or
voluntarily implemented by major manufacturers in the industry. Liggett and
the other four major cigarette manufacturers responded by filing a civil
action in the United States District Court for the Middle District of
North Carolina on that day challenging the legal authority of the FDA to
assert such jurisdiction. Management is unable to predict whether such a
classification will be made. Management is also unable to predict the
effects of such a classification or of such regulations, if implemented,
were it to occur, on Liggett's operations, but such actions could have an
unfavorable impact thereon.

The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required United
States cigarette manufacturers to use at least 75% domestic tobacco in the
aggregate of the cigarettes manufactured in the United States, effective
January 1, 1994, on an annualized basis or pay a "marketing assessment"
(penalty) based upon price differentials between foreign and domestic
tobacco and under certain circumstances make purchases of domestic tobacco
from the tobacco stabilization cooperatives organized by the United States
government. OBRA was repealed retroactively (as of December 31, 1994)
coincident in time with the recent issuance of a Presidential proclamation
effective September 13, 1995, imposing tariffs on imported tobacco in excess
of certain quotas.

On February 14, 1995, Liggett filed with the Department of Agriculture
its certification as to usage of domestic and imported tobaccos during 1994,
and an audit was conducted during August 1995 to verify this certification.
The audit has not yet been completed. Liggett is exploring avenues which
might be available to it to realize relief from any marketing assessment or
purchase requirement sanctions that may be imposed under OBRA. While
Liggett is of the opinion that there would be a realistic potential to
achieve such relief if sanctions were imposed, no assurance can be given that
Liggett would be successful in doing so, either in whole or in part. If
sanctions were to be imposed upon Liggett, such sanctions could have an
unfavorable effect upon Liggett's financial position, results of operations
and cash flows. No amount has been accrued.

The President of the United States, after negotiations with the
affected countries, on September 13, 1995, declared a Tariff Rate Quota on
certain imported tobacco, imposing prohibitive tariffs on imports of
flue-cured and burley tobacco in excess of certain levels which vary from
country to country. Oriental (or Turkish) tobacco is exempt from the quota,
and all tobacco originating from Canada, Mexico or Israel is exempt.
Management believes that the negotiated levels are sufficiently high to allow
the company to operate without material disruption to the business.

With regard to each of the above cases pending against Liggett, Liggett
believes, and has been so advised by counsel handling the respective cases,
that Liggett has a number of valid defenses to the claim or claims asserted
against Liggett. All cases are, and will continue to be, vigorously
defended. Litigation is subject to many uncertainties, and it is possible
that some of these actions could be decided unfavorably. An unfavorable
outcome of a pending smoking and health case could encourage the commencement
of additional similar litigation. Recently, there have been a number of
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco
industry, including the commencement of the purported class actions referred
to above. These developments generally receive widespread media

- 15 -

Item 1. Consolidated Financial Statements - (Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

attention. Liggett is not able to evaluate the effect of these
developing matters on pending litigation or the possible commencement of
additional litigation.

Liggett is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against Liggett. It is possible that Liggett's financial position, results
of operations or cash flows could be materially affected by an ultimate
unfavorable outcome in any of such pending litigation.

There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such proceedings,
lawsuits and claims should not materially affect Liggett's financial
position and results of operations.

On September 20, 1993, a group of Contingent Value Rights ("CVR")
holders and the CVR trustee filed an action in the Delaware Court of
Chancery, New Castle County, against the Company and certain of its present
and former directors, challenging and seeking to enjoin or rescind the
SkyBox Distribution. Pursuant to notice given on October 15, 1993, the
Company redeemed its CVRs on December 9, 1993 for a payment of $.36 per CVR.
On June 2, 1994, the Company entered into a Stipulation and Agreement of
Compromise and Settlement (the "Stipulation") pursuant to which a class of
CVR holders, which includes all persons who held CVRs at any time between
September 20, 1993 and June 2, 1994, were to receive a total of $4,000 plus
an award of attorneys' and experts' fees and expenses not to exceed $900
which expenses have been accrued. The $4,000 settlement fund has been
deposited into an escrow account for eventual disbursement to all eligible
CVR holders.

By order dated June 10, 1994, the Court of Chancery scheduled a
settlement hearing to be held on August 16, 1994 to determine, inter alia,
whether the Stipulation is fair, reasonable and adequate. That settlement
hearing was adjourned at the named plaintiff CVR holders' request because of
issues arising from filing of a motion for leave to amend the Company's
complaint in a separate lawsuit pending against the CVR trustee. The named
plaintiff CVR holders subsequently asked the court to rescind the
Stipulation, stating, in substance, that they had mistakenly entered into it
in the erroneous belief that the Company would be unable to assert claims
against the trustee which those CVR holders might have to indemnify. On
December 28, 1994, the court rescinded the Stipulation, finding that such a
mistake had been made; however, the named plaintiff CVR holders and the
defendants continued settlement discussions, seeking to address the named
plaintiff CVR holders' concerns over their obligation to indemnify the
trustee. On March 3, 1995, these parties advised the court that they had
reached an agreement in principle to settle the case on a class basis,
subject to the final resolution of certain remaining issues.

At September 30, 1995, there were several other proceedings, lawsuits
and claims pending against the Company and its subsidiaries. The Company is
of the opinion that the liabilities, if any, ultimately resulting from the
CVR action and other proceedings, lawsuits and claims should not materially
affect its consolidated financial position, results of operations or cash
flows.

7. LONG-TERM DEBT

On June 12, 1995, the Company redeemed all of the Series 1 Senior Secured
Notes due 1995 in the amount of $23,594 plus accrued interest of $670. In
addition, the Company filed a registration

- 16 -

Item 1. Consolidated Financial Statements -(Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

statement with the SEC for certain of its Series 2 Senior Secured Notes
due 1997 which was declared effective September 7, 1995. Accordingly, the
interest rate on these Notes reverted to 13.75%.

8. INCOME TAXES

BGL maintains a full valuation allowance of its deferred tax assets
based on the Company's determination that it is more likely than not that
such future tax benefits will not be realized. The provision for income
taxes for the three and nine months ended September 30, 1995 does not bear a
customary relationship with pre-tax accounting income due principally to
state income taxes. In addition, during the three and nine month periods
ended September 30, 1994, the Company determined its reserves for income
taxes payable exceeded its current requirements by $24,200. As a result, the
Company has recorded a tax benefit of $24,200 related to the completion of an
audit by the Internal Revenue Service ("IRS") through December 31, 1991.

9. RESTRUCTURING AND OTHER

Liggett reduced its field sales force on January 10, 1994 by 150
permanent positions and added approximately 300 part-time positions. This
restructuring has significantly reduced operating costs and enabled Liggett
to expand its retail base coverage.

During the nine months ended September 30, 1995, Liggett completed a
severance and benefit program to reduce personnel costs on an ongoing basis.
The effect of this program resulted in a charge to operations of the Company
amounting to $2,562 in the second quarter.

During the third quarter of 1995, Liggett adjusted certain accrual
estimates recorded in prior quarters which had the effect of increasing
operating income by approximately $1,352 for the three months ended September
30, 1995.

10. SUBSEQUENT EVENTS

On October 17, 1995, the Company and BGLS Inc., a wholly owned
subsidiary, entered into an agreement, as amended (the "High River
Agreement"), with High River, an entity owned by Carl C. Icahn. (New Valley
also entered into a separate agreement with High River at that time (see
Note 3)). Pursuant to each of these agreements, the parties agreed to take
certain actions designed to cause RJR Nabisco to effectuate a spinoff of
its food business, Nabisco Holdings Corp. ("Nabisco"), at the earliest
possible date. Among other things, the Company agreed to solicit the
holders of RJR Nabisco Common Stock to adopt a spinoff resolution, which is
an advisory resolution to the Board of Directors of RJR Nabisco seeking a
spinoff of the 80.5% of Nabisco held by RJR Nabisco to stockholders. Among
other things, High River agreed in the High River Agreement to grant a
written consent to the proposals with respect to all shares of RJR Nabisco
Common Stock held by it and to grant a proxy with respect to all such
shares in the event that the Company seeks to replace the incumbent Board
of Directors of RJR Nabisco at the 1996 annual meeting of stockholders with
a slate of directors committed to effect the spinoff. The Company and BGLS
agreed not to engage in certain transactions with RJR Nabisco (including a
sale of Liggett or a sale of its RJR Nabisco Common Stock to RJR Nabisco)
and not to take certain other actions to the detriment of RJR Nabisco

- 17 -
18

Item 1. Consolidated Financial Statements -(Continued)

BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)

stockholders. High River also agreed that it would not engage in such
transactions or take such other actions while the agreement was in effect. In
the event that any signatory engages in such transactions or takes such other
actions, the High River Agreement provides that the party so doing must pay a
fee of $50,000 to the other. Any party to the High River Agreement may
terminate it at any time, although under certain circumstances, the
terminating party will be required to pay a fee of $50,000 to the
nonterminating party. The High River Agreement also provides that BGLS pay
certain other fees to High River under certain circumstances.

On November 6, 1995 the Company filed preliminary copies of a
Solicitation of Written Consents with the SEC relating, among other things,
to the Spinoff Resolution.

- 18 -

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INTRODUCTION

The Company's Consolidated Financial Statements include
the accounts of Liggett Group Inc. ("Liggett"), New
Valley Holdings, Inc. ("NV Holdings") and other less
significant subsidiaries.

The Company believes it will have sufficient liquidity
for 1995. This is based on, among other things, the
redemption/sale of the SkyBox International, Inc.
("SkyBox") preferred and common stock and certain funds
available from New Valley Corporation ("New Valley")
as described in the Company's indenture agreements and
New Valley's Joint Plan. Forecasts of cash flow for
the principal operating companies indicate that they
will be self-sufficient; however, due to Liggett's
leverage, if Liggett were to experience significant
losses due to further adverse change in conditions in
the tobacco industry or otherwise, it is possible that
Liggett could be in violation of certain debt covenants.
If its lenders were to exercise acceleration rights or
refuse to advance under the revolving credit facility,
Liggett may not be able to satisfy such demands.

For purposes of this discussion and other consolidated
financial reporting, the Company's significant business
segment is Tobacco.

RECENT DEVELOPMENTS

On October 17, 1995, BGL and the Company entered into
an agreement, as amended, with High River, an entity
owned by Carl C. Icahn. New Valley also entered into a
separate agreement with High River at that time.
Pursuant to each of these agreements, the parties agreed
to take certain actions designed to cause RJR Nabisco to
effectuate a spinoff of Nabisco at the earliest possible
date. For additional information, see Notes 3 and 10 to
the Consolidated Financial Statements.

In October 1995, Liggett-Ducat Ltd. ("LDJSC"), a
subsidiary of Brooke (Overseas) Ltd. ("BOL"), entered
into a loan agreement with the Russian Federation
Foreign Trade Bank, Moscow, Russia, to borrow up to
$20,000 to fund real estate development. Interest on
the note is based on the London Interbank Offered Rate
("LIBOR") plus 10%. Principal repayments are due over the
period April through October of 1997. The loan agreement
was arranged through a third party for a net fee of
$4,044 payable ratably over the term of the loan. The
Company has guaranteed the payment of the note and the
broker's fee. All of the stock of BrookeMil Ltd.
("BrookeMil"), a subsidiary of LDJSC, has been pledged as
collateral for the loan. LDJSC intends to repay the loan
out of proceeds from leased office space.

Also in October 1995, BrookeMil purchased certain
buildings on Gasheka Street in Moscow, Russia, which it
had previously leased from the Moscow Property Committee
for $4,369. BrookeMil has developed or is in the
process of developing these buildings for commercial use.

The Company is currently in discussion with the
majority of holders of the 13.75% Series 2 Senior
Secured Notes due 1997 (the "Series 2 Notes"), who
are also holders of certain of the 14.50%
Subordinated Debentures due 1998, regarding possible
restructuring of the Company's debt.

- 19 -

RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY

Price Increase. On May 5, 1995, R.J. Reynolds
Tobacco Company ("RJR") initiated a list price increase
on all brands of $.30/carton. Philip Morris and Brown
& Williamson Tobacco Company ("B&W"), which together
with RJR comprise 90% of the market, matched the
price increase on the same day. Liggett followed on
May 9, 1995.

Competitive Activity. In April 1994, BAT
Industries, the parent of B&W, acquired American
Brands' American Tobacco Company subsidiary for $1
billion cash.

Recent Legislation. The Omnibus Budget
Reconciliation Act of 1993 ("OBRA") requires United
States cigarette manufacturers to use at least 75%
domestic tobacco in the aggregate of the cigarettes
manufactured in the United States, effective January
1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials
between foreign and domestic tobacco and under certain
circumstances make purchases of domestic tobacco from
the stabilization cooperatives organized by the United
States government. OBRA was repealed retroactively (as
of December 31, 1994) coincident in time with the recent
issuance of a Presidential proclamation effective
September 13, 1995, imposing tariffs on imported tobacco
in excess of certain quotas.

On February 14, 1995, Liggett filed with the Department
of Agriculture its certification as to usage of domestic
and imported tobaccos during 1994 and an audit was
commenced during August 1995 to verify this
certification. The audit has not yet been completed.
Liggett is exploring avenues which might be available
to it to realize relief from any marketing assessment
or purchase requirement sanctions that may be imposed
under the Act. While Liggett is of the opinion that
there would be a realistic potential to achieve such
relief if sanctions were imposed, no assurance can be
given that Liggett would be successful in doing so,
either in whole or in part. If sanctions were to be
imposed upon Liggett, such could have an unfavorable
effect upon Liggett's financial position, results of
operations and cash flows. No amount has been accrued.

The President of the United States, after negotiations
with the affected countries, on September 13, 1995,
declared a Tariff Rate Quota on certain imported
tobacco, imposing prohibitive tariffs on imports of
flue-cured and burley tobacco in excess of certain
levels which vary from country to country. Oriental
(or Turkish) tobacco is exempt from the quota and
all tobacco originating from Canada, Mexico or Israel
is exempt. Management believes that the negotiated
levels are sufficiently high to allow Liggett to operate
without material disruption to the business.

The State of Florida enacted legislation effective July
1, 1994 allowing certain state authorities or entities
to commence litigation seeking recovery of Medicaid
payments made on behalf of Medicaid recipients as a
result of diseases allegedly caused by liable third
parties. Though not limited to the tobacco industry,
the statutory scheme imposes ultimate liability, if
the issue of liability is adjudged against the
manufacturers, based upon market share and would
include diseases allegedly caused by the smoking of
cigarettes. The statute purportedly abrogates certain
defenses typically available to defendants. A suit was
commenced to challenge the constitutionality of the
legislation and, although the trial court upheld
portions of this legislation, it adjudged the Agency
For Health Care Administration to have been
unconstitutionally organized. All parties to this suit
have taken appeal from the trial court's rulings. On
May 6, 1995, the Florida legislature voted in favor of
a bill to repeal this legislation, but the Governor
of Florida vetoed this repealer bill. It is
uncertain at this time whether or not and at what time
the Florida legislature can or will take action to
override the Governor's veto. On February 22, 1995,
suit was commenced pursuant to the above-referenced
enabling statute by the State of Florida, acting
through the Agency For Health Care Administration
against Liggett and others, seeking restitution of monies
expended in the past and which may be

- 20 -

RECENT DEVEOPMENTS IN THE CIGARETTE INDUSTRY (CONTINUED)

expended in the future by the State of Florida to
provide health care to Medicaid recipients for
injuries and ailments allegedly caused by the use of
cigarettes and other tobacco products. Plaintiffs also
seek a variety of other forms of relief including a
disgorgement of all profits from the sale of cigarettes
in Florida.

Recent Litigation. In 1994, four class action
lawsuits were brought against Liggett and other
cigarette manufacturers, representing the first time
class actions were brought against the cigarette
industry. In the three of these cases which
remain pending, plaintiffs' motions for class
certification were granted in whole or in part, and the
defendants have appealed each of these rulings. In
addition, the states of Mississippi, Minnesota and West
Virginia brought actions against Liggett and other
cigarette manufacturers seeking restitution and
indemnity for certain Medicaid costs allegedly incurred
as a result of tobacco-related illnesses, and in 1995
Florida commenced a similar action.

In West Virginia, the trial court, in a ruling issued on
May 3, 1995, dismissed eight to the ten counts of the
complaint filed therein, leaving only two counts of an
alleged conspiracy to control the market and the market
price of tobacco products and an alleged consumer
protection claim. In a recent ruling, the trial Court
has adjudged the contingent fee agreement entered into
by the State of West Virginia and its counsel to be
unconstitutional under the Constitution of the State
of West Virginia. While Liggett is vigorously
contesting this litigation, litigation is subject to a
number of uncertainties, and accordingly there can be no
assurance that this litigation will be decided favorably
to Liggett and the industry in each instance.

Possible FDA Action. The Food and Drug
Administration ("FDA") has announced that it is
considering classifying tobacco as a drug, and an FDA
advisory panel has stated that it believes nicotine is
addictive. On August 10, 1995, the FDA announced that
it intended to propose regulations under which the FDA
would assert jurisdiction over the manufacture and
marketing of tobacco products. Liggett and the other
major manufacturers in the industry responded
immediately thereafter by the filing of a civil action
in United States District Court for the Middle
District of North Carolina challenging the legal
authority of the FDA to so assert such jurisdiction.
Management is unable to predict the effects of such a
classification or such regulations, if adopted, but such
a classification or such regulations, if adopted, could
have an unfavorable impact on Liggett's operations.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1994

Revenues. Consolidated total revenues were
$124,100 for the three months ended September 30, 1995
versus $124,446 for the same period last year. Liggett's
net sales were $122,648 for the three months ended
September 30, 1995 versus $121,380 for the same
period last year. The increase in revenues at Liggett
was primarily due to the May 9, 1995 list price increase
(see Recent Developments in the Cigarette Industry -
Price Increase) and additional increases in the
selling price of some of the Company's price/value
products, partially offset by a 1.1% decline in unit
sales volume. The decline in unit sales volume was
comprised primarily of declines in the full-price
branded, price/value (which includes generic, control
label and branded discount products) and military
categories. Both full-price branded and price/value
products suffered a decline, believed to be temporary,
in unit sales volume as a result of the
implementation of a new distribution and marketing
program in one of Liggett's sales zones during the
third quarter

- 21 -

RESULTS OF OPERATIONS (continued)

of 1995. Additionally, full-price branded volume
declined in light of heavy discounting of a
competitor's product within the same consumer segment as
Eve. Although there was an overall decline in the
price/value category, Pyramid volume increased as a
result of increased promotional spending, a reflection
of Liggett's renewed emphasis on this product as its
primary price/value product. The military category
decline was due to increased competition.

Gross profit. Consolidated gross profit was
$69,474 for the three months ended September 30, 1995,
an increase of $2,875 from $66,599 for the same period
last year. Liggett's gross profit was $69,018 for the
three months ended September 30, 1995, an increase of
$3,874 from $65,144 for the same period last year.
Liggett's gross profit as a percent of revenues
(excluding federal excise taxes) for the period increased
to 76.7% compared to 74.5% last year, due primarily to
the May 9, 1995 list price increase and lower per unit
cost of sales. The reduction in cost of sales is a
result of the effects of Liggett's continuing cost
reduction programs begun in 1993. Liggett expects to
continue its cost reduction programs.

Expenses. Consolidated selling, general and
administrative expenses were $58,818 for the three
months ended September 30, 1995 compared to $57,564
for the same period last year. The increase of $1,254
includes a $4,300 increase in marketing expenses at
Liggett compared with the same period in the prior year
offset by lower expenses at headquarters and other, small
subsidiaries.

Other income (expenses). Consolidated interest
expense was $13,952 for the three months ended
September 30, 1995 compared to $14,156 for the same
period last year. The equity in earnings of
affiliate of $1,561 and the income from discontinued
operations of $98 for the three months ended September
30, 1995 relates to the Company's investment in New
Valley.

Other, net of $9,992 for the three months ended
September 30, 1994 primarily relates to additional
expense incurred as part of the Exchange and Termination
Agreement entered into on September 30, 1994.

The tax benefit of approximately $24,000 for the three
months ended September 30, 1994 related to the
completion of an audit in 1994 by the Internal Revenue
Service through the year ended December 31, 1991. The
Company determined its reserves for income taxes payable
exceeded its current requirements.

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30,1994

Revenues. Consolidated revenues were $341,718
for the nine months ended September 30, 1995 compared
to $357,628 for the nine months ended September 30,
1994, a decrease of $15,950 primarily due to a decline
in sales at Liggett and other less significant
subsidiaries. Net sales at Liggett were $337,217 for
the nine months ended September 30, 1995 versus
$347,880 for the same period last year. This 3.1%
decrease in revenues was primarily due to a 7.1%
decline in unit sales volume, partially offset by the
effects of the May 9, 1995 list price increase and the
change in sales mix. The decline in unit sales volume
was comprised primarily of declines in the full-price
branded, price/value and military categories. Both
full-price branded and price/value products suffered a
decline, believed to be temporary, in unit sales
volume as a result of the implementation of a new
distribution and marketing program in one of Liggett's
sales zones during the third quarter of 1995. Also,
Liggett offered trade programs on full-price branded
and branded discount products to its direct customers
during the first quarter of 1994 with no comparable

- 22 -

RESULTS OF OPERATIONS (continued)

programs offered during 1995. Increased competition in
the form of heavy discounting of a competitor's product
within the same consumer segment as Eve also
contributed to the full-price branded volume decline.
The decline in the military category was due to increased
competition.

Gross profit. Consolidated gross profit of
$182,952 for the nine months ended September 30, 1995
decreased $1,585 from gross profit of $184,537 for the
same period in 1994, reflecting a decrease in gross
profit at smaller subsidiaries somewhat offset by Liggett
which had a slight increase in gross profit ($996) for
the nine months ended September 30, 1995 compared to
the same period in the prior year. Gross profit at
Liggett as a percent of revenue (excluding federal excise
taxes) for the period increased to 74.1% compared to
72.7% last year, due primarily to the May 9, 1995 list
price increase and lower per unit cost of sales. The
reduction in cost of sales is a result of the effects
of Liggett's continuing cost reduction programs begun
in 1993. In connection therewith, Liggett recorded a
$621 charge to manufacturing operations in 1995.
Liggett expects to continue its cost reduction
programs.

Expenses. Consolidated selling, general and
administrative expenses were $173,322 for the nine
months ended September 30, 1995 compared to $162,220
for the same period last year, an increase of $11,102.
The increase resulted from increased legal fees due to
the increasing number of suits pending against Liggett,
increased spending on trade and promotional programs,
severance charges recorded in connection with the 1995
cost reduction programs at Liggett and increased
expenses relating to the Company's Russian ventures.

Other income (expenses). Consolidated interest
expense was $43,369 for the nine months ended September
30, 1995 compared to $41,502 for the same period last
year. The increase of $1,867 relates to the incurrence
of additional indebtedness by the Company for the Series
1 Notes (which were redeemed on June 12, 1995) and by
Liggett for the Series C Notes in November 1994,
increases in the interest rate on the Series 1 Notes and
the Series 2 Notes from February 1 through September 6,
1995 (or, in the case of the Series 1 Notes, through June
12, 1995) and an increase in the interest rate of the
Liggett Series C Notes, which were reset from 16.50% to
19.75% on February 1, 1995.

For the nine months ended September 30, 1995, equity in
earnings of affiliate (New Valley) of $3,598 relates to
income of $21,975 of such Class A Preferred Shares
offset by a loss to common stock of $18,377.

The gain on disposal of discontinued operations of
$13,138 for the nine months ended September 30, 1995 and
$18,135 for the same period in the prior year
primarily reflects the redemption/sale of SkyBox
preferred and common stock.

CAPITAL RESOURCES AND LIQUIDITY

Net cash and cash equivalents increased $12,722 for
the nine months ended September 30, 1995 as compared
with a decrease of $10,617 for the nine months ended
September 30, 1994.

Net cash used in operations for the nine months ended
September 30, 1995 was $23,706 compared to net cash
used in operations of $36,037 for the comparable period
of 1994. The net loss for the nine months ended
September 30, 1995 of $11,675 includes interest
expense of $43,369 and a decrease in accounts payable
and accrued expenses offset by a lease prepayment from
a third party for space in an office building in Russia
and a decrease in receivables.

- 23 -

CAPITAL RESOURCES AND LIQUIDITY (continued)

In the period ended September 30, 1994, net cash used in
operations was $36,037 which included interest expense
of $41,502 and a decrease in accounts payable and
accrued expenses offset by a non-cash tax benefit of
approximately $24,500 in taxes.

Net cash provided by investing activities was $69,008
for the nine-month period ended September 30, 1995
compared to cash provided by investing activities of
$15,877 for the same period in 1994. Through the
nine-month period ended September 30, 1995, cash was
provided through a special $50.00 per share dividend in
January 1995, a $12.50 per share dividend in June 1995
and a $37.50 per share dividend in September 1995 on New
Valley's Class A Preferred Shares for a total of
$61,832, and the redemption of SkyBox preferred stock
for $4,000 and sale of the SkyBox common stock for
$9,282 slightly offset by capital expenditures,
particularly for leasehold improvements related to real
estate development in Russia. In the nine-month period
ended September 30, 1994, cash provided by investing
activities was largely the result of the sale/redemption
of SkyBox common and preferred stock offset by the
impact of the Company's discontinuation of investment in
MAI.

Cash used in financing activities for the nine months
ended September 30, 1995 was $32,580 reflecting the
redemption of the Series 1 Notes on June 12, 1995 in
the amount of $23,594, repayments under Liggett's
revolver of $3,449, distributions to stockholders of
$4,107 and a decrease in cash overdraft of $2,817
slightly offset by proceeds from debt of $3,028. Cash
provided for the same period in the prior year was
$9,540 consisting of proceeds from debt issuance at
Liggett, stockholder loan and interest repayments and
borrowings under the revolver offset by a decrease in
bank overdraft and dividends to preferred shareholders,
payments of financing costs and impact of discontinued
operations.

As discussed above, on June 12, 1995, the Company
redeemed the Series 1 Notes in the amount of $23,594
plus accrued interest of $670. Accordingly, the
Company's pledged equity interests in Liggett were
released and the Series 2 Notes now have a senior and
exclusive lien on the Pledged Collateral (as such term is
defined in the Indenture).

The interest rate on the Series 2 Notes is 13.75% per
annum, payable April 1 and October 1. Pursuant to the
Indenture and the terms of the Series 2 Notes, the
interest rate increased until a Registration Statement
relating to the Series 2 Notes was declared effective by
the SEC on September 7, 1995. As a result, interest on
the Series 2 Notes during the interest period ending on
October 1, 1995 (the first interest payment date
following the effectiveness of the Registration
Statement) reflects a blended rate of 14.17%.

The Series 2 Indenture places certain restrictions on
the application of any payment from NV Holdings. So
long as any Notes remain outstanding, the Company must
apply the amount received on account of any payment
paid out of current earnings of NV Holdings as follows:
(a) the first $5,000 in the aggregate of such amounts
may be retained by the Company for its own account
free of any restriction not expressly set forth in the
Indenture; (b) 50% of any payments in excess of the
amount set forth in the foregoing clause (a) may be
retained by the Company for its own account free of
any restriction not expressly set forth in the Indenture,
and the remaining 50% must be applied as follows: (i)
first, to the payment of any accrued and unpaid
interest then due on the Notes; (ii) second, to the
payment of any accrued and unpaid interest then due on
any other outstanding indebtedness of the Company; and
(iii) third, to the mandatory redemption of the Notes
until no Notes are outstanding. So long as any Notes
remain outstanding, the Company shall apply 100% of the
amount received on account of any payment which is paid
other than out of current earnings of NV Holdings solely
in accordance with clauses (i), (ii) and (iii) of the
preceding sentence.

- 24 -

CAPITAL RESOURCES AND LIQUIDITY (continued)

On January 18, 1995, certain amendments (the "Indenture Amendments")
to the 16.125% Senior Subordinated Reset Notes due 1997 (the "16
1/8% Reset Notes") and the 14.50% Subordinated Debentures due 1998
(the "14 1/2% Subordinated Debt") (collectively, the "Subordinated
Debt Indentures") were effected. Generally, the Indenture Amendments
require the Company to apply any amounts distributed to it (directly
or through NV Holdings) from New Valley (i) by dividend or other
distribution (other than equity securities of New Valley), (ii)
through loans, advances or other payments or (iii) in connection
with the repurchase or redemption of New Valley common stock or
Class A Preferred Shares (collectively, "New Valley Distributions")
in excess of $10,000, subject to the terms of the Indenture, first
to the payment of interest on, and then to principal of, the Notes,
the 16 1/8% Reset Notes and 14 1/2% Subordinated Debentures. The
$10,000 threshold is increased on a dollar-for-dollar basis in
the amount of payments made in respect of principal or interest on
the Series 2 Notes or the Subordinated Indebtedness from sources
other than New Valley Distributions. At September 30, 1995, the
$10,000 threshold had been increased to approximately $21,701.

Pursuant to the Indenture Amendments, the Company may direct
BGLS to make distributions of up to $38,000 between September 2,
1994 and January 18, 1996 (the "Initial Period"). Any portion not
distributed during the initial period may be carried over to the
subsequent periods discussed below. As of September 30, 1995,
$17,956 had been distributed of which $9,608 were non-cash
transactions. Following the Initial Period, the Company may
distribute the sum of $3,000 per month with any unpaid portion of
the monthly amount carried over to succeeding months. Additional
distributions will be made from time to time as directed by the
Company based on the Company's current quarterly dividend
distribution of $1,369 (or $.075 per share) and corporate expense
requirements. Commencing on January 1, 1995, any additional
distributions in excess of the above-described distributions are
computed on the basis of 50% of the Company's Modified Consolidated
Net Income (as defined in the Subordinated Indentures). No
distributions have been made on this basis.

The Company believes that it will have sufficient liquidity for
1995. Company expenditures in 1995 (excluding Liggett) include debt
service estimated at $32,500 and redemption of all outstanding
Series 1 Notes in the amount of $23,594 plus accrued interest on
June 12, 1995. Current operations and debt service are being
financed through funds received from the redemption/sale of SkyBox
preferred and common stock in the amount of $13,284 and management
fees and other charges to subsidiaries of approximately $5,000. In
addition, the Company, through its subsidiary, NV Holdings, has
received approximately $61,832 in distributions from New Valley
since January 1995. Such distributions are required by the
Subordinated Debt Indentures to be applied as described above. (See
discussion of Indenture Amendments above).

For information concerning the possible regulation under the
Investment Company Act of 1940, see footnote 3 to the Consolidated
Financial Statements.

On March 8, 1994, Liggett entered into a revolving credit facility
(the "facility") under which it can borrow up to $40,000 (depending
on the amount of eligible inventory and receivables as determined by
the lenders) from a syndicate of commercial lenders. Availability
under the facility was approximately $13,814 at September 30, 1995.
The facility expires on March 8, 1997 and is collateralized by all
inventories and receivables of Liggett. Borrowings under the
facility bear interest at a rate equal to 1.5% above Philadelphia
National Bank's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate, which was 8.75% at
September 30, 1995. The facility requires Liggett's compliance
with certain financial and other covenants and limits the amount of
cash dividends and payments which can be made by Liggett. Liggett's
management believes that the facility will continue to address
adequately Liggett's liquidity requirements.

- 25 -

CAPITAL RESOURCES AND LIQUIDITY (continued)

On February 14, 1992, Liggett issued $150,000 of Senior Secured
Notes (the "Series B Notes"). From the proceeds of $148,244, net of
an original issue discount, $144,054 was dividended to BGLS (which
reduced stockholder's equity) and $4,190 was paid as financing fees.
Interest on the Series B Notes is payable semiannually on February 1
and August 1 at an annual rate of 11.5%. The Series B Notes and the
Series C Notes, as defined below, require mandatory aggregate
principal redemptions of $7,500 on February 1 in each of the years
1993 through 1997 and $37,500 on February 1, 1998 with the balance
of the Notes due on February 1, 1999. The Series B and Series C
Notes are collateralized by substantially all of the assets of
Liggett, excluding accounts receivable and inventory. The Series B
and Series C Notes may be redeemed, in whole or in part, at a price
equal to 104%, 102% and 100% of the principal amount in the years
1996, 1997 and 1998, respectively, at the option of Liggett at any
time on or after February 1, 1996. The Series B and Series C Notes
contain restrictions on Liggett's ability to declare or pay cash
dividends, incur additional debt, grant liens and enter into any new
agreements with affiliates, among others.

On January 31, 1994, Liggett issued $22,500 of Series C Senior
Secured Notes (the "Series C Notes"). Liggett received $15,000 from
the issuance in cash and received $7,500 in Series B Notes which
were credited against the mandatory redemption requirements for
February 1, 1994. The Series C Notes have the same terms (other
than interest rate) and stated maturity as the Series B Notes. The
Series C Notes bore a 16.5% interest rate, which was reset on
February 1 1995 to 19.75%. Liggett had received the necessary
consents from the required percentage of holders of its Series B
Notes allowing for an aggregate principal amount up to but not
exceeding $32,850 of Series C Notes to be issued under the Series C
Notes indenture. In connection with the consents, holders of Series
B Notes received Series C Notes totaling two percent of their
current Series B Notes holdings. The total principal amount of such
Series C Notes issued was $2,842.

On November 20, 1994, Liggett issued the remaining $7,508 of
Series C Notes in exchange for an equal amount of Series B Notes and
cash of $375. The Series B Notes were credited against the
mandatory redemption requirements for February 1, 1995.

If Liggett were to experience significant losses due to further
adverse changes in conditions in the tobacco industry or otherwise,
it is possible that Liggett could be in violation of certain debt
covenants. If as a result of any such violations Liggett creditors
were to exercise acceleration rights or refuse to advance funds
under the Liggett Facility, Liggett may not be able to satisfy its
obligations. Liggett's ability to satisfy its debt service
obligations will depend on Liggett's liquidity, its ability to
improve its operating performance as well as on prevailing economic
conditions and on financial, business, industry and other factors
which may be largely beyond Liggett's control.

The Company and its subsidiaries have substantial near-term
debt service requirements with aggregate required principal payments
of $315,494 due in the years 1996 through 1998, they expect to
finance their long-term growth, working capital requirements,
capital expenditures and debt service requirements through a
combination of cash provided from operations, negotiation of secured
bank credit lines, additional public or private debt financing and
distributions from New Valley and possible restructuring of the
Company's debt (see "Recent Developments", above). New Valley plans
to use the cash from the sale of its money transfer business to
acquire operating businesses through merger, purchase of assets,
stock acquisition or other means, or to acquire control of operating
companies through one of such means, with the purpose of being
primarily engaged in a business or businesses other than that of
investing, reinvesting, owning, holding or trading in securities.

- 26 -

CAPITAL RESOURCES AND LIQUIDITY (continued)

Liggett (and, in certain cases, the Company) and other
United States cigarette manufacturers have been named as
defendants in a number of direct and third-party
actions (and purported class actions) predicated on
the theory that they should be liable for damages from
cancer and other adverse health effects alleged to
have been caused by cigarette smoking or by exposure
to so-called secondary smoke (environmental tobacco
smoke) from cigarettes. As new cases are commenced,
the costs associated with defending such cases and the
risk attendant on the inherent unpredictability of
litigation continue. To date, a number of such
actions, including several against Liggett, have been
disposed of favorably to the defendants; no plaintiff
has ultimately prevailed on the merits of any such
action; and no payment in settlement of any such claim
has been made by Liggett nor, to the Company's
knowledge, any other cigarette manufacturer.

Liggett believes, and has been so advised by counsel
handling the respective cases, that Liggett has a number
of valid defenses to the claim or claims asserted
against it. All cases are, and will continue to be
vigorously defended. Litigation is subject to many
uncertainties, and it is possible that some of these
actions could be decided unfavorably. An unfavorable
outcome of a pending smoking and health case could
encourage the commencement of additional similar
litigation. Recently, there have been a number of
adverse regulatory, political and other developments
concerning cigarette smoking and the tobacco industry,
including the commencement of the purported class
actions referred to above. These developments generally
receive widespread media attention. Neither the Company
nor Liggett is able to evaluate the effect of these
developing matters on pending litigation or the possible
commencement of additional litigation.

Liggett is unable to make a meaningful estimate of the
amount or range of loss that could result from an
unfavorable outcome of the cases pending against
Liggett. It is possible that Liggett's financial
position, results of operations or cash flows could be
materially affected by an ultimate unfavorable outcome
in any of such pending litigation.

- 27 -

PART II.
OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to information entitled "Contingencies" in
Note 6 to the Company's Consolidated Financial Statements included
elsewhere in this report on Form 10-Q.

Item 3. Defaults Upon Senior Securities

As of September 30, 1995, New Valley Corporation, the Company's
affiliate, had the following respective accrued and unpaid
dividend arrearages on its 1,107,566 outstanding shares of $15.00
Class A Increasing Rate Cumulative Senior Preferred Shares ($100
Liquidation Value), $.01 par value per share (the "Class A Shares")
and 2,790,776 outstanding shares of $3.00 Class B Cumulative
Convertible Preferred Shares ($25 Liquidation Value), $.10 par
value per share (the "Class B Shares"): (1) $111.2 million or
$100.42 per Class A Share; and (2) $90.3 million or $32.34 per
Class B Share.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10(a) Letter Agreement among Brooke Group
Ltd., BGLS Inc. and High River Limited
Partnership, dated November 5, 1995.

10(b) Agreement among Brooke Group Ltd., BGLS
Inc. and High River Limited
Partnership, dated October 17, 1995.

10(c) Second Amendment to Services
Agreement, dated as of October 1,
1995, by and between Brooke Management
Inc., Brooke Group Ltd. and Liggett
Group Inc.

10(d) Expense Sharing Agreement, made and
entered into as of January 18, 1995, by
and between Brooke Group Ltd. and New
Valley Corporation.

27 Financial Data Schedule (for SEC use
only)

(b) Reports on Form 8-K

No current reports on Form 8-K were filed during
the third quarter of 1995.

- 28 -

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

BROOKE GROUP LTD.
(Registrant)

Date: November 14, 1995 By: /s/ Gerald E. Sauter
------------------- ----------------------------------
Gerald E. Sauter
Vice President and Chief Financial
Officer

- 29 -