AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998

REGISTRATION NO. 333-45377
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3

ON FORM S-1 TO

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
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DELAWARE 51-0255124
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
(305) 579-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MARC N. BELL
VICE PRESIDENT AND GENERAL COUNSEL
BROOKE GROUP LTD.
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305) 579-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
MARK L. WEISSLER
MILBANK, TWEED, HADLEY & MCCLOY
1 CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time following the effective date of the Registration Statement.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, MAY 15, 1998

PROSPECTUS

1,500,000 SHARES

BROOKE GROUP LTD.

COMMON STOCK
(PAR VALUE $.10)

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This Prospectus relates to 1,500,000 shares of common stock, par value $.10
per share (the "Shares"), of Brooke Group Ltd. (the "Company") which may be
offered for sale from time to time by High River Limited Partnership (the
"Selling Stockholder"), or by such Selling Stockholder's pledgees, donees,
transferees or other successors in interest, to or through underwriters or
directly to other purchasers or through agents in one or more transactions at
varying prices determined at the time of sale or at negotiated prices. The
Company will not receive any of the proceeds from any such sales. See "Selling
Stockholder" and "Plan of Distribution".

The Company's common stock is listed on The New York Stock Exchange under
the symbol "BGL". The last reported sale price of the common stock on The New
York Stock Exchange on May 14, 1998 was $10.94 per share.

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SEE "RISK FACTORS" (LOCATED ON PAGES 4-8 OF THIS PROSPECTUS) FOR A
DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY POTENTIAL PURCHASERS OF
THE SHARES.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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The date of this Prospectus is May __, 1998

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Reports, proxy statements and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the SEC in Washington, D.C., and at the SEC's
Regional Offices at 7 World Trade Center, New York, New York and 500 West
Madison Street, Chicago, Illinois. Copies of such information can be obtained
from the Public Reference Section of the SEC, Washington, D.C. 20549 at
prescribed rates. The SEC maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information filed
by the Company with the SEC through its Electronic Data Gathering Analysis and
Retrieval (EDGAR) system. In addition, reports, proxy statements and other
information concerning the Company may be inspected and copied at the offices of
The New York Stock Exchange, 20 Broad Street, New York, New York. Any interested
parties may inspect the Registration Statement, without charge, at the public
reference facilities at the SEC, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549-1004 or through the SEC's Web site (http://www.sec.gov),
and may obtain copies of all or any part of it from the Public Reference Section
of the SEC at the above address upon payment of the fees prescribed by the SEC.

The Company has filed with the SEC a registration statement under the
Securities Act of 1993, as amended (together with any amendments thereto, the
"Registration Statement"), with respect to the Shares being offered pursuant to
this Prospectus. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. For further information, reference is
hereby made to the Registration Statement and the exhibits and schedules
thereto.

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SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors".

THE COMPANY

Brooke Group Ltd. (the "Company"), a Delaware corporation founded in 1980,
is a holding company for a number of businesses. The Company is principally
engaged, through its subsidiary Liggett Group Inc. ("Liggett"), in the
manufacture and sale of cigarettes in the United States; through its subsidiary
Brooke (Overseas) Ltd. ("BOL"), in the manufacture and sale of cigarettes in
Russia; and through its investment in New Valley Corporation ("New Valley"), in
the investment banking and brokerage business, in real estate development in
Russia and the Ukraine, in the ownership and management of commercial real
estate in the United States and in the acquisition of operating companies. The
Company holds such businesses through its wholly-owned subsidiary, BGLS Inc.
("BGLS").

The Company is controlled by Bennett S. LeBow, the Chairman and Chief
Executive Officer of the Company, BGLS and New Valley, who beneficially owns
approximately 44.9% of the Company's common stock. The principal executive
offices of the Company and BGLS are located at 100 S.E. Second Street, Miami,
Florida 33131 and the telephone number is (305) 579-8000.

THE OFFERING

Securities offered by the
Selling Stockholder........ 1,500,000 shares of Common Stock

Common Stock outstanding... 20,454,230 shares of Common Stock

NYSE symbol................ Common Stock: BGL

USE OF PROCEEDS

The net proceeds from the sale of the Shares will be received by the
Selling Stockholder. None of the proceeds from any sales by the Selling
Stockholder will be received by the Company.

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RISK FACTORS

Before purchasing the Shares offered hereby, a prospective investor should
consider, among other things, the following considerations set forth below, as
well as the other information set forth elsewhere in this Prospectus, in
evaluating the Company, its business prospects and the Shares.

HIGH DEGREE OF LEVERAGE; NET WORTH DEFICIENCY; SIGNIFICANT LOSSES

At December 31, 1997, the Company had total outstanding indebtedness of
$406,264,000 and a net worth deficiency of $488,397,000. The Company has
substantial debt service requirements on a consolidated basis, and has
experienced significant losses from continuing operations every year since 1991.
There can be no assurance that the Company will be able to satisfy its
obligations under the indebtedness. In addition, Liggett, the Company's
principal operating subsidiary, had a net worth deficiency and a working capital
deficiency at December 31, 1997 and experienced a net loss for the year ended
December 31, 1997. Accordingly, there can be no assurance that Liggett will be
able to satisfy its obligations under the Liggett Notes (as defined herein) and
the Liggett Facility (as defined herein). (For further discussion of the
Company's and Liggett's leverage, see "Certain Risks Regarding Liggett and the
Cigarette Industry" below.) Failure of the Company to satisfy these debt service
obligations would materially adversely affect the value of the Company's common
stock.

HOLDING COMPANY STRUCTURE; DEPENDENCE ON CASH FROM SUBSIDIARIES AND CERTAIN
INVESTMENTS

The Company is a holding company and has no operations of its own.
Accordingly, the ability of the Company to pay dividends on the Shares is
substantially dependent on the ability of New Valley (in which the Company
indirectly holds an approximately 42% voting interest) and of Liggett and the
Company's other subsidiaries to generate cash and the availability of that cash
to the Company. Certain covenants in Liggett's debt instruments impose
restrictions on, among other things, Liggett's ability to declare and pay
dividends or make other advances, payments or distributions to the Company. As a
result, Liggett has not paid dividends to the Company since November 1992 and is
not expected to pay dividends to the Company in the foreseeable future.
Additionally, certain covenants in an Indenture, dated as of January 1, 1996,
between BGLS and State Street Bank and Trust Company, as Trustee (the
"Indenture"), impose restrictions on, among other things, BGLS' ability to pay
or make dividends, distributions and other Restricted Payments (as defined in
the Indenture) and prohibit BGLS from disposing of Collateral (as defined in the
Indenture), including the stock of Liggett, BOL, New Valley and NV Holdings (as
defined herein), held by it, but such covenants are subject to important
qualifications and limitations.

New Valley's First Amended Joint Chapter 11 Plan of Reorganization, as
amended (the "Joint Plan"), and the Indenture impose certain restrictions on
transactions with the Company and certain of its affiliates, including
restrictions relating to payments and distributions to the Company from New
Valley (other than pro rata distributions to stockholders) and New Valley
Holdings, Inc., a wholly-owned subsidiary of BGLS ("NV Holdings"). Moreover, as
a significant stockholder (through BGLS and NV Holdings) of New Valley, the
Company is under a legal obligation to deal fairly with New Valley, which may
limit its ability to enter into transactions with New Valley that result in the
receipt of cash from New Valley and to influence New Valley's dividend policy in
certain respects.

In addition, the Company does not hold a majority of New Valley's voting
power and may not be able to control New Valley's dividend policy. Since the
Company indirectly owns (through BGLS and NV Holdings) a minority of each class
of New Valley capital stock (other than the Class A Preferred Shares) held
(directly and indirectly) by BGLS and NV Holdings, a majority of any cash and
other assets distributed by New Valley with respect to any such class (other
than the Class A Preferred Shares) will be distributed to persons other than the
Company and its subsidiaries.

The Company's receipt of income from its principal subsidiaries and
investees is an important source of its liquidity and capital resources, and, as
described above, its ability to receive such income is subject to a number of
restrictions, risks and uncertainties. If the Company does not generate
sufficient cash flow from continuing operations to satisfy its debt service
obligations, it will be required to secure additional funds from other sources.
There can be no assurance that the Company will be able to secure such
additional funds at all
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or on terms acceptable to the Company. The Company's inability to service these
obligations would materially adversely affect the value of the Company's common
stock.

CERTAIN RISKS REGARDING LIGGETT AND THE CIGARETTE INDUSTRY

Net Worth Deficiency; Recent Losses. At December 31, 1997, Liggett had a
net worth deficiency of $192,857,000 and a working capital deficiency of
$17,542,000. For the year ended December 31, 1997, Liggett incurred a net loss
of $14,179,000. Liggett's high degree of leverage could impair its ability to
withstand competitive pressures or adverse economic conditions and to take
advantage of business opportunities. At December 31, 1997, Liggett had
outstanding approximately $112,612,000 of 11.50% Liggett Series B Senior Secured
Notes due 1999 and $32,279,000 of 19.75% Series C Senior Secured Notes due 1999
(collectively, the "Liggett Notes"). The Liggett Notes required a mandatory
principal redemption of $37,500,000 on February 1, 1998 with the balance of the
Liggett Notes due on February 1, 1999, but the holders of the requisite majority
of Liggett Notes consented on January 30, 1998 to the deferral of that
$37,500,000 redemption payment until the final maturity date. In connection with
this deferral, the indenture under which the Liggett Notes are outstanding was
amended to prohibit, with limited exceptions, payments of dividends and
incurrence of new debt by Liggett and to tighten restrictions on the disposition
of proceeds of asset sales. The Company and BGLS also agreed to guarantee the
payment by Liggett of the August 1, 1998 interest payment on the Liggett Notes.
In addition, Liggett has a $40,000,000 revolving credit facility expiring March
8, 1999 (the "Liggett Facility"), under which $23,427,000 was outstanding at
December 31, 1997. Due to the many risks and uncertainties associated with the
cigarette industry, the impact of recent tobacco litigation settlements and
increased tobacco costs, there can be no assurance that Liggett will be able to
meet its future earnings or cash flow goals, and it is unlikely that Liggett
will be able to make the required payments on the Liggett Notes at maturity with
cash from operations. Consequently, if Liggett is unable to restructure the
terms of the Liggett Notes, or otherwise make all payments thereon,
substantially all of Liggett's long-term debt and the Liggett Facility would be
in default and holders of such debt could accelerate its maturity. In such
event, Liggett may be forced to seek protection from creditors under applicable
laws. These matters raise substantial doubt about Liggett meeting its liquidity
needs and its ability to continue as a going concern.

The Company has also engaged in negotiations with the principal holders of
the BGLS 15.75% Series B Senior Secured Notes (the "BGLS Notes"), $232,864,000
of which were outstanding on December 31, 1997 with respect to certain related
modifications to the terms of such debt. On March 2, 1998, BGLS entered into an
agreement with AIF II, L.P. and an affiliated investment manager on behalf of a
managed account (together, "the Apollo Holders"), who hold approximately 41.8%
of the $232,864,000 principal amount of the BGLS Notes. Pursuant to the terms of
the agreement, the Apollo Holders have agreed to defer the payment of interest
on the BGLS Notes held by them, commencing with the interest payment that was
due July 31, 1997, which they had previously agreed to defer, through the
interest payment due July 31, 2000. The deferred interest payments will be
payable at final maturity of the BGLS Notes on January 31, 2001 or upon an event
of default under the Indenture for the BGLS Notes.

Tobacco Industry Problems; Liggett's Competitive Position in
Industry. Liggett has suffered significant losses and has a significant working
capital deficiency as a result of, among other things, its highly leveraged
capital structure as well as adverse developments in the tobacco industry,
intense competition and changes in consumer preferences causing a substantial
decline in sales volume. Liggett is considerably smaller and has fewer resources
than all its major competitors and has a correspondingly limited ability to
respond to market developments. The United States cigarette market is highly
concentrated and has extremely high barriers to entry. Since the acquisition by
Brown & Williamson Tobacco Company ("B&W") of American Tobacco Company, three
firms control approximately 90% of the United States market. Philip Morris
Companies Inc. ("Philip Morris") is the largest and most profitable manufacturer
in the market, and its profits are derived principally from its sale of
lucrative premium cigarettes. According to published industry sources, Liggett's
management believes that Philip Morris had in excess of 57% of the premium
segment and in excess of 48% of the total domestic market for the 12 months
ended December 31, 1997. Philip Morris and R.J. Reynolds Tobacco Co. ("RJR"),
the two largest cigarette manufacturers, have historically, because of their
dominant market share, been able to determine cigarette prices for the various
pricing tiers within the industry. The

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other cigarette manufacturers historically have brought their prices into line
with the levels established by the two major manufacturers. Liggett is more
reliant upon sales in the discount segment of the market, relative to the
full-price premium segment, than its competitors. Since at least 1993, Liggett's
management believes that Philip Morris's market strategy has been to minimize
the actual price spread between discount and premium products and to curtail the
sales made by the makers of discount products. In part, Philip Morris sought to
minimize that spread by dropping its premium prices in early 1993. In addition,
that strategy has also been carried out through wholesale and retail trade
programs.

Based on published industry sources, Liggett's management believes that
Liggett's overall market share for the 12 months ended December 31, 1997 was
1.3%, down from 1.9% for the prior 12 months ended December 31, 1996. Based on
published industry sources, Liggett's management believes that Liggett's share
of the premium segment for the 12 months ended December 31, 1997 was .5%, down
from .7% for the prior 12-month period, and its share of the discount segment
for the 12 months ended December 31, 1997 was 3.5%, down from 4.9% for the prior
12-month period.

Industry-wide shipments of cigarettes in the United States have been
steadily declining for several years, although this trend reversed itself in
1996. Consistent with published industry sources estimating that domestic
industry-wide shipments decreased by .5% for the 12 months ended December 31,
1997, compared to the prior 12-month period, Liggett's management expects that
industry-wide unit sales of cigarettes in the United States will continue to
decline as a result of numerous factors, including health considerations,
diminishing social acceptance of smoking, legislative limitations on smoking in
public places and federal and state excise tax increases which have augmented
cigarette price increases.

Legislation, Regulation and Litigation. The cigarette industry continues
to be challenged on numerous fronts. New product liability cases continue to be
commenced against Liggett and the Company and other cigarette manufacturers. As
of December 31, 1997, there were approximately 250 individual suits, 40
purported class actions or actions where class certification has been sought and
75 state, municipality and other third-party payor health care cost
reimbursement actions pending in the United States in which Liggett is a named
defendant. As new cases are commenced, the costs associated with defending such
cases and the risks attendant to the inherent unpredictability of litigation
continue to increase. Recently, there have been a number of restrictive
regulatory actions from various Federal administrative bodies, including the
United States Environmental Protection Agency ("EPA") and the Food and Drug
Administration ("FDA"), adverse political and legal decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
including the commencement and certification of class actions and the
commencement of Medicaid reimbursement suits by various states' Attorneys
General. These developments generally receive widespread media attention. The
Company is not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation, but it
is possible that the Company's financial position, results of operations and
cash flows could be materially adversely affected by an ultimate unfavorable
outcome in any of such pending litigation. See Note 16 to the Consolidated
Financial Statements of the Company and BGLS (the "Company's Consolidated
Financial Statements") included elsewhere in this Prospectus for a description
of legislation, regulation and litigation.

The proposed Resolution would require participating manufacturers, among
other things, to make substantial payments in the year of implementation and
thereafter ("Industry Payments"). Participating manufacturers would be required
to make an aggregate $10 billion initial Industry Payment on the date that
federal legislation implementing the terms of the proposed Resolution is signed.
This Industry Payment would be based on relative market capitalization.
Thereafter, the participating companies would be required to make

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specified annual Industry Payments determined and allocated among the companies
based on volume of domestic sales as long as the companies continue to sell
tobacco products in the United States. These Industry Payments, which would
begin on December 31 of the first full year after implementing federal
legislation is signed, would be in the following amounts (at 1996 volume
levels) -- year 1: $8.5 billion; year 2: $9.5 billion; year 3: $11.5 billion;
year 4: $14 billion; and each year thereafter: $15 billion. These Industry
Payments would be adjusted to reflect changes from 1996 domestic sales volume
levels.

Under the proposed Resolution, the Company and Liggett would be deemed to
be a "non-participating manufacturer". The proposed Resolution provides, among
other things, that a non-participating manufacturer would be required to place
into escrow, each year, an amount equal to 150% of its share of the payment
required of participating manufacturers (other than the portion allocated to
public health programs and federal and state enforcement). These funds would be
earmarked for potential liability payments and could be reclaimed, with
interest, after 35 years, to the extent they had not been paid out in liability.

The proposals are currently being reviewed by the White House, Congress and
various public interest groups. Separately, the other tobacco companies
negotiated settlements of the Attorneys General health care cost recovery
actions in Mississippi, Florida and Texas. The Company is unable to predict the
ultimate effect, if any, of the enactment of legislation adopting the proposed
resolution. The Company is also unable to predict the ultimate content of any
such legislation. However, adoption of any such legislation could have a
material adverse effect on the business of the Company and Liggett.

The sale of cigarettes is subject to substantial federal excise taxes as
well as various state and local government excise taxes. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. A
substantial excise tax increase could accelerate the trend away from smoking and
could have an unfavorable effect on Liggett's sales.

CERTAIN AFFILIATE TRANSACTIONS

Certain affiliates of the Company have entered into various transactions
with the Company and other affiliates of the Company. Existing contracts with
such companies include services agreements under which Liggett receives
financial and administrative services from the Company, tax-sharing agreements
between various subsidiaries of the Company, including Liggett, and expense
sharing arrangements between New Valley and the Company. In addition, the
Company has entered into certain arrangements with individuals who serve as
officers or directors of companies affiliated with the Company, certain portions
of the cost of which have been charged by the Company to such affiliated
companies.

The BGLS indenture and the Liggett indenture contain certain restrictions
on the ability of the Company and Liggett to enter into additional transactions
with their respective affiliates. In addition, the Joint Plan imposes certain
restrictions on the ability of New Valley to enter into transactions with
affiliates, and the Company, as a controlling stockholder of New Valley, is
under a legal obligation to deal fairly with New Valley, which obligation may
limit the Company's ability to enter into certain transactions with New Valley
or to influence New Valley's dividend policy. The restrictions described in this
paragraph are subject to important limitations and qualifications.

UNCERTAINTY OF OTHER POTENTIAL ACQUISITIONS AND INVESTMENTS BY NEW VALLEY

New Valley currently holds a significant amount of marketable securities
and cash not committed to any specific investments. This subjects investors to
increased risk and uncertainty, because they are unable to evaluate the manner
in which this cash will be invested and the economic merits of particular
investments. There may be substantial delay in locating suitable investment
opportunities. In addition, New Valley may not have relevant management
experience in the areas in which New Valley may become involved. No assurance
can be given that New Valley will be successful in targeting, consummating or
managing any of these investments.

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UNCERTAINTIES RELATING TO OPERATIONS IN RUSSIA

The Company has significant investments in its cigarette manufacturing
operations in Russia and, through its investment in New Valley, in real estate
development operations in Russia. Business operations in Russia are subject to a
high level of risk. Since the breakup of the Soviet Union at the end of 1991,
Russia has experienced dramatic political, social and economic change, including
severe inflation. The political system in Russia is emerging from a long history
of extensive state involvement in economic affairs and is undergoing a rapid
transition from a centrally controlled command system to a more market-oriented
model. The Company may be affected unfavorably by political or diplomatic
developments, regional tensions, currency repatriation restrictions, foreign
exchange fluctuations, a relatively untested judicial system, a still evolving
taxation system subject to constant changes which may be retroactive in effect,
and other developments in the law or regulations in Russia and, in particular,
the risks of expropriation, nationalization and confiscation of assets and
changes in legislation relating to foreign ownership. In addition, an
undeveloped system of commercial laws (including the enforcement of laws) and
markets adds to the risk of investment in Russia. No assurance can be given as
to the potential profitability (if any) and effect on liquidity and cash flow
that investments in Russia may have on the Company.

DEPENDENCE ON CERTAIN MANAGEMENT

The Company is dependent upon the services of Bennett S. LeBow (the
"Chairman"), Chairman of the Board, President and Chief Executive Officer of
both the Company and BGLS. The loss to the Company of the Chairman could have a
material adverse effect on the Company. If the Chairman ceased to control the
Company (other than by reason of death or incapacity), each holder of the BGLS
Notes would have the option to cause BGLS to repurchase their respective
holdings of such debt securities. As defined in the Indenture, "control" of a
company means the power to direct the management and policies of the Company,
directly or indirectly, whether through the ownership of voting securities, by
contract, or otherwise. Although this definition of control is identical to
commonly used definitions of control in the federal securities laws, there could
nonetheless be uncertainty as to whether particular factual circumstances
constituted such a change of control.

DILUTION; SHARES AVAILABLE FOR RESALE

The Company entered into a Stock Purchase Agreement with the Selling
Stockholder (defined below) pursuant to which the Company issued 1,500,000
shares of the Company's common stock to the Selling Stockholder, which
represents 7.3% of the total outstanding shares and 13.3% of the float. In
addition, the Company issued 483,002 shares of the Company's common stock in
connection with the amendments to the Liggett Notes referred to above under
"Certain Risks Regarding Liggett and the Cigarette Industry" constituting an
additional 2.4% of the outstanding shares and 4.3% of the float. The issuance of
these shares will cause dilution which may adversely affect the market price of
the Company's common stock. In connection with the March 2, 1998 agreement with
the Apollo Holders relating to the BGLS Notes, the Company issued to the Apollo
Holders a five-year warrant to purchase 4,150,000 shares of the Company's common
stock, 2,000,000 of which are immediately exercisable, at a price of $5.00 per
share. On March 12, 1998, the Company granted an option for 1,250,000 shares of
the Company's common stock to a law firm that represents the Company and
Liggett, 250,000 of which became exerciseable on May 1, 1998. The availability
for sale of significant quantities of the Company's common stock could adversely
affect the prevailing market price of the Company's common stock.

USE OF PROCEEDS

The net proceeds from the sale of the Shares will be received by the
Selling Stockholder. None of the proceeds from any sales by the Selling
Stockholder will be received by the Company.

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DIVIDEND POLICY

During 1997 and 1996, the Company declared and paid regular quarterly cash
dividends of $.075 per share on its common stock. The declaration of future cash
dividends is within the discretion of the Board of Directors of the Company and
is subject to a variety of contingencies such as market conditions, earnings and
the financial condition of the Company as well as the availability of cash. The
payment of dividends and other distributions to the Company by BGLS are subject
to the Indenture for the BGLS Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity".

MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock, $.10 par value per share, is listed and traded
on the New York Stock Exchange ("NYSE") under the symbol "BGL". The high and low
sale prices for a share of the Company's common stock on the NYSE, as reported
by the NYSE, for each fiscal quarter of 1997 and 1996 were as follows:

YEAR HIGH LOW
- ---- ------- --------

1997:
Fourth Quarter.............................................. $11 1/8 $ 5 5/8
Third Quarter............................................... 6 3/4 3 1/16
Second Quarter.............................................. 5 1/4 3 1/2
First Quarter............................................... 5 3/8 4

1996:
Fourth Quarter.............................................. 5 3/4 4 1/4
Third Quarter............................................... 6 1/4 4 5/8
Second Quarter.............................................. 8 7/8 5 5/8
First Quarter............................................... 10 1/8 7 3/4

On May 14, 1998, the last reported sale price of the Company's common stock
on The New York Stock Exchange was $10.94 per share. At April 6, 1998, there
were 280 holders of record of the Company's common stock.

THE COMPANY

GENERAL

The Company, a Delaware corporation founded in 1980, is a holding company
for a number of businesses. The Company is principally engaged, through its
subsidiary Liggett, in the manufacture and sale of cigarettes in the United
States; through its subsidiary BOL, in the manufacture and sale of cigarettes in
Russia; and through its investment in New Valley, in the investment banking and
brokerage business, in real estate development in Russia and the Ukraine, in the
ownership and management of commercial real estate in the United States and in
the acquisition of operating companies. The Company holds such businesses
through its wholly-owned subsidiary, BGLS, a Delaware corporation organized in
1990.

The Company is controlled by Bennett S. LeBow, the Chairman and Chief
Executive Officer of the Company, BGLS and New Valley, who beneficially owns
approximately 44.9% of the Company's common stock.

LIGGETT GROUP INC.

General. The Company's tobacco business in the United States is conducted
through its indirect wholly-owned subsidiary Liggett, which is the operating
successor to the Liggett & Myers Tobacco Company.

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Substantially all of Liggett's manufacturing facilities are located in or near
Durham, North Carolina. Liggett is registered under the Exchange Act, and files
periodic reports and other information with the SEC.

Ligget is engaged in the manufacture and sale of cigarettes, primarily in
the United States. Liggett's management believes, based on published industry
sources, that Liggett's domestic shipments of approximately 6.45 billion
cigarettes during 1997 accounted for 1.3% of the total cigarettes shipped in the
United States during such year. This represents a market share decline of 0.5%
from 1996 and 0.9% from 1995. Liggett produces both premium cigarettes as well
as discount cigarettes (which include among others, control label, branded
discount and generic cigarettes). Premium cigarettes are generally marketed
under well-recognized brand names at full retail prices to adult smokers with
strong preference for branded products, whereas discount cigarettes are marketed
at lower retail prices to adult smokers who are more cost conscious. Liggett's
cigarettes are produced in approximately 300 combinations of length, style and
packaging.

Liggett produces four premium cigarette brands: L&M, CHESTERFIELD, LARK and
EVE. Liggett's premium cigarettes represented approximately 33%, 31% and 30% of
net sales (excluding federal excise taxes) in 1997, 1996 and 1995, respectively.
Liggett's management believes, based on published industry sources, that
Liggett's share of the premium market segment was approximately 0.5% for 1997,
compared to 0.7% and 0.8% for 1996 and 1995, respectively.

In 1980, Liggett was the first major domestic cigarette manufacturer to
successfully introduce discount cigarettes as an alternative to premium
cigarettes. In 1989, Liggett established a new price point within the discount
market segment by introducing PYRAMID, a branded discount product which, at that
time, sold for less than most other discount cigarettes. Liggett's management
believes, based on published industry sources, that Liggett held a share of
approximately 3.5% of the discount market segment for 1997, compared to 4.9% and
5.5% for 1996 and 1995, respectively. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations" for
additional information concerning Liggett's premium and discount product sales.

At the present time, Liggett has no foreign operations. Liggett does not
own the international rights to its premium cigarette brands, which are actively
marketed by other companies in foreign markets, thereby adversely affecting
Liggett's ability to penetrate such markets. Liggett does, however, export other
cigarette brands primarily to Eastern Europe and the Middle East. Export sales
of approximately 85 million units accounted for approximately 1% of Liggett's
1997 total unit sales volume. Revenues from export sales were $0.8 million for
1997, compared to $3.3 million and $5.4 million for 1996 and 1995, respectively.
Operating loss attributable to export sales in 1997 amounted to approximately
$0.1 million compared to operating losses of $1.8 million and $2.1 million in
1996 and 1995, respectively.

Business Strategy. Liggett's near-term business strategy is to reduce
further certain operating and selling costs in order to increase the
profitability of both its premium and discount products, and to reduce its
investment in working capital. As part of this strategy, Liggett reorganized its
sales force in early 1994, reducing its field sales force by 150 permanent
positions and adding approximately 300 part-time positions. Liggett has also
reduced costs in both administrative and manufacturing functions by making
additional modifications to its manufacturing operations and significantly
curtailing employee benefit programs. In 1995, Liggett continued its efforts
towards reducing costs by, among other things, offering voluntary retirement
programs to eligible employees and reducing headcount by an additional 120
positions.

In January 1997, Liggett underwent a major restructuring from a centralized
organization to a decentralized enterprise with four Strategic Business Units,
each a profit center, and a corporate headquarters. This restructuring is
intended to more closely align sales and marketing strategies with the unique
requirements of regional markets as well as reduce working capital by improved
production planning and inventory control. As a result of this reorganization,
Liggett further reduced its salaried, hourly and part-time headcount by a total
of 108 positions (18%) over the succeeding twelve months.

Liggett's long-term business strategy in the premium segment of the market
is to maintain or improve its profit margins in the face of declining unit sales
and market share by improving operating efficiencies and implementing further
cost reduction programs. Liggett's long-term business strategy in the discount
segment

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of the market is to maintain its market share or improve its profit margins by
consistently providing high-quality products and services at prices and on terms
comparable to those available elsewhere in the market.

Sales, Marketing and Distribution. Liggett's products are distributed from
a central distribution center in Durham, North Carolina to 26 public warehouses
located throughout the United States. These warehouses serve as local
distribution centers for Liggett's customers. Liggett's products are transported
from the central distribution center to the warehouses via third-party trucking
companies to meet pre-existing contractual obligations to its customers.

Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett offers
its customers discount payment terms, traditional rebates and promotional
incentives. Customers typically pay for purchased goods within two weeks
following delivery from Liggett. Liggett's largest single customer, Speedway
SuperAmerica LLC, accounted for approximately 19.4% of net sales in 1997,
approximately 13.9% of net sales in 1996, and approximately 11.6% of net sales
in 1995. Sales to this customer were primarily in the private label discount
segment and constituted approximately 29.1%, 20.3% and 16.8% of Liggett's
discount segment sales in 1997, 1996 and 1995, respectively. Liggett is
currently negotiating the renewal of its contract with this customer, which
contract is due to expire on June 30, 1998.

Following the January 1997 restructuring, Liggett's marketing and sales
functions were performed by approximately 110 direct sales representatives
calling on national and regional customer accounts, together with approximately
90 part-time retail sales consultants who service retail outlets. In addition,
Liggett employs food broker groups in certain geographic locations to perform
these marketing and sales functions.

Trademarks. All of the major trademarks used by Liggett are federally
registered or are in the process of being registered in the United States and
other markets where Liggett's products are sold. Trademarks registrations
typically have a duration of ten years and can be renewed at Liggett's option
prior to their expiration date. In view of the significance of cigarette brand
awareness among consumers, management believes that the protection afforded by
these trademarks is material to the conduct of its business. All of Liggett's
trademarks are owned by its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve")
and Cigarette Exporting Company of America, Ltd. ("CECOA"). Liggett does not own
the international rights to its premium cigarette brands.

Manufacturing. Liggett purchases and maintains leaf tobacco inventory to
support its cigarette manufacturing requirements. Liggett believes that there is
a sufficient supply of tobacco within the worldwide tobacco market to satisfy
its current production requirements. Liggett stores its leaf tobacco inventory
in warehouses in North Carolina and Virginia. There are several different types
of tobacco, including flue-cured leaf, burley leaf, Maryland leaf, oriental
leaf, cut stems and reconstituted sheet. Leaf components of cigarettes are
generally the flue-cured and burley tobaccos. While premium and discount brands
use many of the same tobacco products, input ratios of tobacco products account
for the differences between premium and discount products. Domestically grown
tobacco is an agricultural commodity subject to United States government
production controls and price supports which can substantially affect its market
price. Foreign flue-cured and burley tobaccos, some of which are used in the
manufacture of Liggett's cigarettes, are generally 10% to 15% less expensive
than comparable domestic tobaccos. Liggett normally purchases all of its tobacco
requirements from domestic and foreign leaf tobacco dealers, much of it under
long-term purchase commitments. As of December 31, 1997, approximately 64% of
Liggett's commitments were for the purchase of foreign tobacco. Increasing
tobacco costs due to reduced worldwide supply of tobacco and a reduction in the
average discount available to Liggett from leaf tobacco dealers on tobacco
purchased under prior years' purchase commitments will have an unfavorable
impact on Liggett's operations during 1998.

Liggett's cigarette manufacturing facilities are designed for the execution
of short production runs in a cost-effective manner, which enables Liggett to
manufacture and market a wide variety of cigarette brand styles. Liggett's
cigarettes are produced in approximately 300 different brand styles under Eve's
and CECOA's trademarks and brand names as well as private labels for other
companies, typically retail or wholesale distributors who supply supermarkets
and convenience stores. Liggett believes that its existing facilities are
sufficient to accommodate a substantial increase in production.
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While Liggett pursues product development, its total expenditures for
research and development on new products have not been financially material over
the past three years.

Competition. Liggett is the smallest of the five major manufacturers of
cigarettes in the United States. The four largest manufacturers of cigarettes
are Philip Morris, Inc. ("Philip Morris"), R.J. Reynolds Tobacco Company
("RJR"), Brown & Williamson Tobacco Corporation, and Lorillard Tobacco Company,
Inc.

There are substantial barriers to entry into the cigarette business,
including extensive distribution organizations, large capital outlays for
sophisticated production equipment, substantial inventory investment, costly
promotional spending, regulated advertising and strong brand loyalty. In this
industry, the major cigarette manufacturers compete among themselves for market
share on the basis of brand loyalty, advertising and promotional activities and
trade rebates and incentives. Liggett's four major competitors all have
substantially greater financial resources than Liggett, and most of these
competitors' brands have greater sales and consumer recognition than Liggett's
brands.

Liggett's management believes, based on published industry sources, that
Philip Morris' and RJR's sales together accounted for approximately 72.9% of the
domestic cigarette market in 1997. Liggett's domestic shipments of approximately
6.45 billion cigarettes during 1997 accounted for 1.3% of the approximately 485
billion cigarettes shipped in the United States during such year, compared to
8.95 billion cigarettes (1.9%) and 10.52 billion cigarettes (2.2%) during 1996
and 1995, respectively.

Industry-wide shipments of cigarettes in the United States have been
declining for a number of years although this trend reversed itself in 1996.
Consistent with published industry sources that domestic industry-wide shipments
declined by approximately 0.5% in 1997, Liggett's management believes that
industry-wide shipments of cigarettes in the United States will continue to
decline as a result of numerous factors, including health considerations,
diminishing social acceptance of smoking, legislative limitations on smoking in
public places and federal and state excise tax increases which have augmented
cigarette price increases.

Historically, because of their dominant market share, Philip Morris and RJR
have been able to determine cigarette prices for the various pricing tiers
within the industry, and the other cigarette manufacturers have brought their
prices into line with the levels established by the two industry leaders.
Off-list price discounting by manufacturers, however, has substantially affected
the average price differential at retail, which can be significantly greater
than the manufacturers' list price gap.

Legislation, Regulation and Litigation. Reports with respect to the
alleged harmful physical effects of cigarette smoking have been publicized for
many years and, in the opinion of Liggett's management, have had and may
continue to have an adverse effect on cigarette sales. Since 1964, the Surgeon
General of the United States and the Secretary of Health and Human Services have
released a number of reports which claim that cigarette smoking is a causative
factor with respect to a variety of health hazards, including cancer, heart
disease and lung disease, and have recommended various government actions to
reduce the incidence of smoking. In 1997, Liggett publicly acknowledged that, as
the Surgeon General and respected medical researchers have found, smoking causes
health problems, including lung cancer, heart vascular disease and emphysema.

Since 1966, federal law has required that cigarettes manufactured, packaged
or imported for sale or distribution in the United States include specific
health warnings on their packaging. Since 1972, Liggett and the other cigarette
manufacturers have included the federally required warning statements in print
advertising, on billboards and on certain categories of point-of-sale display
materials relating to cigarettes.

The Comprehensive Smoking Education Act ("CSEA"), which became effective in
October 1985, requires that packages of cigarettes distributed in the United
States and cigarette advertisements (other than billboard advertisements) in the
United States bear one of the following four warning statements on a quarterly
rotating basis: "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, and May Complicate Pregnancy"; "SURGEON GENERAL'S WARNING:
Quitting Smoking Now Greatly Reduces Serious Risks to Your Health"; "SURGEON
GENERAL'S WARNING: Smoking by Pregnant Women May Result in Fetal Injury,
Premature Birth, and Low Birth Weight"; and "SURGEON GENERAL'S WARNING:
Cigarette Smoke Contains Carbon Monoxide". Shortened versions

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of these statements are also required, on a rotating basis, on billboard
advertisements. By a limited eligibility amendment to the CSEA, for which
Liggett qualifies, Liggett is allowed to display all four required package
warnings for the majority of its brand packages on a simultaneous basis (such
that the packages at any time may carry any one of the four required warnings),
although it rotates the required warnings for advertising on a quarterly basis
in the same manner as do the other major cigarette manufacturers. The law also
requires that each person who manufactures, packages or imports cigarettes
annually provide to the Secretary of Health and Human Services a list of
ingredients added to tobacco in the manufacture of cigarettes. Annual reports to
the United States Congress are also required from the Secretary of Health and
Human Services as to current information on the health consequences of smoking
and from the Federal Trade Commission on the effectiveness of cigarette labeling
and current practices and methods of cigarette advertising and promotion. Both
federal agencies are also required annually to make such recommendations as they
deem appropriate with regard to further legislation. In addition, since 1997,
Liggett has included the warning: "SMOKING IS ADDICTIVE" on its packages.

In August 1996, the Food and Drug Administration ("FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of tobacco
products and imposing restrictions on the sale, advertising and promotion of
tobacco products. Litigation has been commenced in the United States District
Court for the Middle District of North Carolina challenging the legal authority
of the FDA to assert such jurisdiction, as well as challenging the
constitutionality of the rules. The court, after argument, granted plaintiffs'
motion for summary judgment prohibiting the FDA from regulating or restricting
the promotion and advertising of tobacco products and denied plaintiffs' motion
for summary judgment on the issue of whether the FDA has the authority to
regulate access to, and labeling of, tobacco products. The other four major
cigarette manufacturers and the FDA have filed notices of appeal. The Company
and Liggett support the FDA Rule and have begun to phase in compliance with
certain of the proposed interim FDA regulations. See discussions of the tobacco
litigation settlements in Note 16 to the Company's Consolidated Financial
Statements included elsewhere in this Prospectus.

In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. In December 1997, the
United States District Court for the District of Massachusetts enjoined this
legislation from going into effect on the grounds that it is preempted by
federal law, however, on December 15, 1997, Liggett began complying with this
legislation by providing ingredient information to the Massachusetts Department
of Public Health. The enactment of this legislation has encouraged efforts to
enact similar legislation in other states.

In 1993, the United States Congress amended the Agricultural Adjustment Act
of 1938 to require each United States cigarette manufacturer to use at least 75%
domestic tobacco in the aggregate of the cigarettes manufactured by it in the
United States, effective January 1, 1994, on an annualized basis or pay a
domestic marketing assessment ("DMA") 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. After an audit, the United States Department of
Agriculture ("USDA") informed Liggett that it did not satisfy the 75% domestic
tobacco usage requirement in 1994 and was subject to a DMA of approximately $5.5
million. Liggett agreed to pay this assessment in quarterly installments, with
interest, over a five-year period. Since the levels of domestic tobacco
inventories on hand at the tobacco stabilization organizations are below reserve
stock levels, Liggett was not obligated to make purchases of domestic tobacco
from the tobacco stabilization cooperatives.

In February 1996, the United States Trade representative issued an "advance
notice of rule making" concerning how tobaccos imported under a previously
established tobacco rate quota ("TRQ") should be allocated. Currently, tobacco
imported under the TRQ is allocated on a "first-come, first-served" basis,
meaning that entry is allowed on an open basis to those first requesting entry
in the quota year. Others in the cigarette industry have suggested an "end-user
licensing" system under which the right to import tobacco under the quota would
be initially assigned on the basis of domestic market share. Such an approach,
if adopted, could have a material adverse effect on Liggett.

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In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban smoking
in the workplace. Hearings were completed during 1995 and the period for
post-hearing submissions ended in February 1996. OSHA has not yet issued a final
rule or a proposed revised rule. While the Company cannot predict the outcome,
some form of federal regulation of smoking in workplaces may result.

In January 1993, the United States Environmental Protection Agency ( "EPA")
released a report on the respiratory effect of environmental tobacco smoke
("ETS") which concluded that ETS is a known human lung carcinogen in adults and,
in children, causes increased respiratory tract disease and middle ear disorders
and increases the severity and frequency of asthma. In June 1993, the two
largest domestic cigarette manufacturers, together with other segments of the
tobacco and distribution industries, commenced a lawsuit against the EPA seeking
a determination that the EPA did not have the statutory authority to regulate
ETS and that given the current body of scientific evidence and the EPA's failure
to follow its own guidelines in making the determination, the EPA's
classification of ETS was arbitrary and capricious. Whatever the outcome of this
litigation, issuance of the report may encourage efforts to limit smoking in
public areas.

The Company understands that a grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District of New York
(the "Eastern District Investigation") regarding possible fraud by the tobacco
industry relating to smoking and health research undertaken or administered by
The Council for Tobacco Research -- USA, Inc. (the "CTR"). Liggett was a sponsor
of the CTR at one time. In May 1996, Liggett received a subpoena from a Federal
grand jury sitting in the Eastern District of New York, to which Liggett has
responded.

In March 1996, and in each of March, July, October and December 1997, the
Company and/or Liggett received subpoenas from a Federal grand jury in
connection with an investigation by the United States Department of Justice (the
"DOJ Investigation") involving the industry's knowledge of the health
consequences of smoking cigarettes; the targeting of children by the industry;
and the addictive nature of nicotine and the manipulation of nicotine by the
industry. Liggett has responded to the March 1996, March 1997 and July 1997
subpoenas and is in the process of responding to the October and December 1997
subpoenas. The Company understands that the Eastern District Investigation and
the DOJ Investigation have, for all intents and purposes, been consolidated into
one investigation being conducted by the Department of Justice. The Company and
Liggett are unable, at this time, to predict the outcome of this investigation.

On April 28, 1998, the Company announced that Liggett had reached an
agreement with the United States Department of Justice (the "DOJ") to cooperate
with its ongoing criminal investigation of the tobacco industry. The agreement
does not constitute an admission of any wrongful behavior by Liggett. The DOJ
has not provided immunity to Liggett and has full discretion to act or refrain
from acting with respect to Liggett in the investigation.

There are various other legislative efforts pending on the federal and
state level which seek, among other things, to restrict or prohibit smoking in
public buildings and other areas, increase excise taxes, require additional
warnings on cigarette packaging and advertising, ban vending machine sales,
curtail affirmative defenses of tobacco companies in product liability
litigation, place cigarettes under the regulatory jurisdiction of the FDA and
require that cigarettes meet certain fire safety standards. If adopted, at least
certain of the foregoing legislative proposals could have a material adverse
impact on Liggett's operations. In addition, the industry is facing increased
pressure from anti-smoking groups and an extraordinary increase in smoking and
health litigation, including private class action litigation, and health care
cost recovery actions brought by states, local governments and other third
parties.

While attitudes toward cigarette smoking vary around the world, a number of
foreign countries have also taken steps to discourage cigarette smoking, to
restrict or prohibit cigarette advertising and promotion and to increase taxes
on cigarettes. Such restrictions are, in some cases, more onerous than
restrictions imposed in the United States. Due to Liggett's lack of foreign
operations, and minimal export sales to foreign countries, the risks of foreign
limitations or restrictions on the sale of cigarettes are limited to entry
barriers into additional foreign markets and the inability to grow the existing
markets.

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As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. Since then,
several bills have been introduced in the Senate that purport to propose
legislation along these lines. Management is unable to predict the ultimate
content of any such legislation, however, adoption of any such legislation could
have a material adverse effect on the business of the Company and Liggett.

The cigarette industry continues to be challenged on numerous fronts. New
cases continue to be commenced against Liggett and other cigarette
manufacturers. As of December 31, 1997, there were approximately 250 individual
suits, 40 purported class actions or actions where class certification has been
sought and 75 state, municipality and other third-party payor health care
reimbursement actions pending in the United States in which Liggett is a named
defendant. The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practice laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. Defenses raised
by defendants in these cases include lack of proximate cause, assumption of the
risk, comparative fault and/or contributory negligence, lack of design defect,
statutes of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.

On April 29, 1998, a group known as the "Coalition for Tobacco
Responsibility", which represents Blue Cross and Blue Shield Plans in more than
35 states, filed federal lawsuits against the industry seeking payment of
health-care costs allegedly incurred as a result of cigarette smoking and ETS.
The lawsuits were filed in Federal District courts in New York, Chicago and
Seattle and seek billions of dollars in damages. The lawsuits allege conspiracy,
fraud, misrepresentation, violation of federal racketeering and antitrust laws
as well as other claims.

On May 12, 1998, Liggett settled an individual tobacco-related action
entitled WIDDICK V. BROWN & WILLIAMSON, Duval County Circuit Court, Florida. The
settlement will not have a material affect on the Company's or Liggett's
financial condition, results of operations or cash flows.

The claims asserted in the health care cost recovery actions vary. In most
of these cases, plaintiffs assert the equitable claim that the tobacco industry
was "unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other claims made
by some but not all plaintiffs include the equitable claim of indemnity, common
law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and federal
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under RICO.

In March 1996, Liggett and the Company entered into an agreement to settle
the CASTANO class action tobacco litigation and an agreement with the Attorneys
General of West Virginia, Florida, Mississippi, Massachusetts and Louisiana to
settle certain actions brought against Liggett and the Company by such states.
In March 1997, Liggett and the Company entered into a comprehensive settlement
of tobacco litigation through parallel agreements with the Attorneys General of
17 states and with a nationwide class of individuals and entities that allege
smoking-related claims. Thereafter, during 1997, settlements were reached with
four more states through their respective Attorneys General. On March 12, 1998,
the Company and Liggett reached a settlement agreement resolving the
tobacco-related Medicaid reimbursement claims of 14 additional states, the
District of Columbia and U.S. Virgin Islands. On March 27, 1998, a settlement
with Georgia's Attorney General was reached. The Company and Liggett now have
settlement agreements with the Attorneys General of 43 states and territories
accounting for more than 85% of the nation's potential Medicaid claims. The
settlements cover all smoking-related claims, including both addiction-based and
tobacco injury claims against Liggett and the Company brought by the states and,
upon court approval, the nationwide class.

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Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett's current operations are conducted in accordance with all
environmental laws and regulations. Management is unaware of any material
environmental conditions affecting its existing facilities. Compliance with
federal, state and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
have not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.

Management believes that Liggett is in compliance in all material respects
with the laws regulating cigarette manufacturers.

See "Legal Proceedings", "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments in the Cigarette
Industry -- Legislation and Litigation" and Note 16 to the Company's
Consolidated Financial Statements for a description of legislation, regulation
and litigation and of the Company's and Liggett's settlements.

BROOKE (OVERSEAS) LTD.

Liggett-Ducat Ltd. BOL, a wholly-owned subsidiary of BGLS, is engaged in
the manufacture and sale of cigarettes in Russia through Liggett-Ducat, a
Russian joint stock company. BOL owns a 95.9% equity interest in Liggett-Ducat.
On February 2, 1998, BOL acquired the 19.97% interest in, and options to acquire
additional shares of, Liggett-Ducat previously owned by Liggett. See Note 4 to
the Company's Consolidated Financial Statements.

Liggett-Ducat, one of Russia's leading cigarette producers since 1892,
manufactured and marketed 14.5 billion cigarettes in 1997. Liggett-Ducat
produces or has rights to produce 19 different brands of cigarettes, including
Russian brands such as PEGAS, PRIMA, NOVOSTI and BALOMORKANAL.

Liggett-Ducat manufactures three types of cigarettes: filter, non-filter
and papirossi. Papirossi is a traditional type of Russian cigarette featuring a
long paper filter comprising two-thirds of the cigarette with tobacco filling up
the balance. In 1997, Liggett-Ducat sold 4.4 billion filter cigarettes (30%),
7.6 billion non-filter cigarettes (52%) and 2.6 billion papirossi (18%).

The long-term strategy of Liggett-Ducat is to upgrade the quality of its
traditional Russian cigarette brands to international standards and to expand
the range of cigarettes it offers to include the higher-margin American blend
and international blend cigarettes. The new types of cigarettes should appeal to
the growing segment of the market that prefers American blend cigarettes over
traditional Russian blended cigarettes. Russian blend cigarettes have a very
strong flavored oriental tobacco blend with a heavy pungent odor, while the
American blend is a lighter flavored Virginia tobacco blend. The international
blend will be a mix between Russian and American blends. As markets have
developed in Eastern Europe, consumer preferences have typically shifted toward
international and American blend cigarettes.

Liggett-Ducat produces its cigarettes in a 150,000 square foot factory
complex located on Gasheka Street in downtown Moscow and operates a 150,000
square foot warehouse outside of the city. Liggett-Ducat is currently building a
new cigarette factory on the outskirts of Moscow on land it has leased for a
term of 49 years. The new factory, which will utilize Western cigarette making
technology and have a capacity of approximately 30 billion units per year, will
produce American and international blend cigarettes, as well as traditional
Russian cigarettes. Construction of the new factory is currently scheduled for
completion by the end of 1998, although no assurances thereof can be given.

Liggett-Ducat currently manufactures its cigarettes on four production
lines, comprised of both Russian-made and imported machinery. Liggett-Ducat has
recently upgraded the equipment at the existing factory to improve its
operations, and all upgraded equipment will be utilized at the new factory.
During 1996 and 1997, Liggett-Ducat installed an upgraded primary processing
complex manufactured by GBE Tobacco which will enable the factory to produce
international standard cigarettes. In addition, Liggett-Ducat acquired a new
filter-making complex from Hoechst Celanese which allows Liggett-Ducat to
produce Western quality filters, previously purchased from outside vendors, and
installed a new rejected cigarette tobacco reclamation machine to reduce waste.
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The Russian cigarette market is one of the largest and fastest growing
cigarette markets in the world. Annual consumption of cigarettes is estimated at
300 billion units in Russia (1997 estimate), making the market the third largest
in the world after the United States and China. The potential size of the market
is estimated by management at up to 450 billion units per year. Approximately
61% of Russian men and 17% of Russian women are estimated to smoke cigarettes.
The market has been growing rapidly over the past several years (particularly
the female market) as imported cigarettes have become available to satisfy
increasing demand.

While growth in consumption had been restrained historically by static
domestic cigarette making capacity, recent increases in domestic production
capacity resulted in an estimated 20% increase in domestic production to
approximately 170 billion cigarettes (57% of the market) in 1997. Excess demand
and demand for Western style cigarettes were satisfied by approximately 130
billion units of imported cigarettes (43% of the market).

Russian customs legislation continues to support local producers. During
1996 and 1997, the Russian Government raised the duties on imported cigarettes
several times to a current effective rate of 115% of cost. In the past, many
imported cigarettes were sold illegally without payment of required duties.
Recent efforts to improve enforcement of import duties has maintained the
differential between the price of imported and domestic cigarettes. Imported
cigarettes currently range in price at retail from approximately 2 to 18 rubles
($.50 to $3.00) per pack, as compared to domestically produced cigarettes which
sell for approximately 1 to 3 rubles ($.16 to $.50) per pack.

Liggett-Ducat's brands currently compete primarily against those of other
Russian cigarette makers. Liggett-Ducat as well as other Russian producers sell
their cigarettes at the lowest price points in the market. Competition in this
sector of the market is generally based on price and name recognition of the
producing factory. There is very limited advertising of these products,
typically only in trade publications and wholesale catalogs. Liggett-Ducat's
brands also compete to a lesser extent against lower priced imported cigarettes
from Eastern Europe and Asia.

In order to increase their presence in the Russian market and avoid import
duties, several of the major international cigarette manufacturers have begun to
produce American and international blend cigarettes domestically. Such
activities by companies with well established, international brands will provide
significant additional competition to Liggett-Ducat as its seeks to increase its
sales of such higher margin products upon completion of the new factory.

In January 1997, the Company recognized a gain of $4.1 million in
settlement of an arbitration proceeding relating to an expropriation and forced
abandonment insurance claim. The claim arose from the actions of the Moscow City
government in January 1993 repealing a January 1992 decree which had authorized
the City of Moscow to lease the land underlying the Liggett-Ducat factory and
the Ducat Place real estate development to BOL and sell the buildings on the
land to a joint venture between BOL and Factory Ducat (the predecessor to
Liggett-Ducat). Before expending substantial sums to develop the land, BOL
obtained insurance coverage for political risks such as expropriation and forced
abandonment. In January 1993, after the Moscow City government repealed those
sections of the January 1992 decree which had authorized the lease of the land
and the sale of the buildings, the local authorities and BOL negotiated a
settlement proposal that was entered into effective October 1, 1993. As part of
the settlement, the joint venture was transformed into a joint stock company
owned 58% by BOL and 42% by its Russian employees, thereby triggering a loss to
BOL of $3.7 million (based on the loss of 42% of its investment in the project).
As a result, BOL tendered formal notice of loss under its insurance policy and
advised the insurer of the proposed resolution. The insurer denied the claim
and, in July 1994, arbitration proceedings were commenced in the United Kingdom.
In January 1997, shortly after a favorable decision by the arbitrators, the
parties negotiated a settlement of $4.1 million.

Sale of BrookeMil Ltd. Until January 31, 1997, BOL was also engaged in the
real estate development business in Moscow through its subsidiary BrookeMil Ltd.
("BML"). On January 31, 1997, BOL entered into a stock purchase agreement (the
"Purchase Agreement") with New Valley, pursuant to which BOL sold 10,483 shares
of the common stock of BML to New Valley, comprising 99.1% of the outstanding
shares of
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BML (the "BML Shares"). New Valley paid to BOL, for the BML Shares, a purchase
price of $55 million, consisting of $21.5 million in cash and a $33.5 million 9%
promissory note of New Valley (the "Note"). The Note, which was collateralized
by the BML Shares, was paid during 1997. The transaction was approved by the
independent members of the Board of Directors of the Company. The Company
retained independent legal counsel in connection with the evaluation and
negotiation of the transaction. See Notes 4 and 16 to the Company's Consolidated
Financial Statements for a discussion of the transaction and information
regarding a pending lawsuit relating to New Valley's purchase of the BML Shares.

The site of the proposed third phase of the Ducat Place project being
developed by BML is currently used by Liggett-Ducat as the site for its existing
cigarette factory. In connection with the sale of the BML Shares, Liggett-Ducat
entered into a Use Agreement with BML whereby Liggett-Ducat is permitted to
continue to utilize the site on the same basis as in the past. The Use Agreement
is terminable by BML on 270 days' prior notice. In addition, New Valley has the
right under the Purchase Agreement to require BOL and BGLS to repurchase this
site for the then appraised fair market value, but in no event less than $13.6
million, during the period Liggett-Ducat operates the factory on such site.

NEW VALLEY CORPORATION

General. New Valley is engaged, through its ownership of Ladenburg
Thalmann & Co. Inc. ("Ladenburg"), in the investment banking and brokerage
business, through its ownership of BML, in the real estate development business
in Russia and the Ukraine, through its New Valley Realty division, in the
ownership and management of commercial real estate in the United States, and in
the acquisition of operating companies. New Valley is registered under the
Exchange Act and files periodic reports and other information with the SEC.

The Company indirectly holds, through BGLS and BGLS' wholly-owned
subsidiary, New Valley Holdings, Inc. ("NV Holdings"), approximately 42% of the
voting interest in New Valley. This approximate 42% interest consists, as of
March 31, 1998, of (i) 19,748 shares of common stock (the "New Valley Common
Shares") (approximately 0.2% of the class) and 250,885 shares of $3.00 Class B
Cumulative Convertible Shares (the "Class B Preferred Shares") (approximately
9.0% of the class) held directly by BGLS and (ii) 3,969,962 New Valley Common
Shares (approximately 41.4% of the class) and 618,326 $15.00 Class A Increasing
Rate Cumulative Senior Preferred Shares (the "Class A Preferred Shares")
(approximately 57.7% of the class) held by NV Holdings. See Note 2 to the
Company's Consolidated Financial Statements.

Bennett S. LeBow, Chairman of the Board, President and Chief Executive
Officer of the Company and of BGLS and the controlling stockholder of the
Company, serves as Chairman of the Board and Chief Executive Officer of New
Valley. Howard M. Lorber, a consultant to the Company and its subsidiaries and a
stockholder of the Company, serves as President and Chief Operating Officer, and
is a director, of New Valley. Richard J. Lampen, Executive Vice President of the
Company and of BGLS, serves as Executive Vice President, and is a director, of
New Valley. Marc N. Bell, Vice President, General Counsel and Secretary of the
Company and of BGLS, serves as Vice President, Associate General Counsel and
Secretary of New Valley.

On January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors under its
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the "Joint
Plan"). The Joint Plan was confirmed by the United States Bankruptcy Court for
the District of New Jersey, Newark Division on November 1, 1994, and pursuant
thereto, New Valley effected certain related asset dispositions.

Joint Plan Provisions; Dispositions Pursuant to the Joint Plan. The Joint
Plan of New Valley places restrictions on and requires approvals for certain
transactions with the Company and its affiliates to which New Valley or a
subsidiary of, or entity controlled by, New Valley may be party, including the
requirements, subject to certain exceptions for transactions involving less than
$1 million in a year or pro rata distributions on New Valley's capital stock, of
approval by not less than two-thirds of the entire Board, including at least one
of the directors elected by the holders of New Valley's preferred shares, and
receipt of a fairness opinion from an investment banking firm. In addition, the
Joint Plan requires that, whenever New Valley's Certificate of Incorporation
provides for the vote of the holders of the Class A Senior Preferred Shares
acting as a single
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class, such vote must, in addition to satisfying all other applicable
requirements, reflect the affirmative vote of either (x) 80% of the outstanding
shares of that class or (y) a simple majority of all shares of that class voting
on the issue exclusive of shares beneficially owned by the Company.

Pursuant to the Joint Plan, on November 15, 1994, New Valley sold the
assets and operations with which it provided domestic and international money
transfer services, bill payment services, telephone cards, money orders and bank
card services (collectively, the "Money Transfer Business") which included the
capital stock of its subsidiary, Western Union Financial Services, Inc. ("FSI")
and certain related assets, to First Financial Management Corporation ("FFMC"),
and, on January 13, 1995, it sold to FFMC all of the trademarks and trade names
used in the Money Transfer Business and constituting the Western Union name and
trademark. The aggregate purchase price was approximately $1.193 billion,
including $893 million in cash and $300 million representing the assumption by
FFMC of substantially all of New Valley's obligations under its pension plan.
Pursuant to the Joint Plan, all of New Valley's debt and allowed claims were
satisfied in full and all classes of equity and other equity interests were
reinstated and retained all of their legal, equitable and contractual rights.

Through October 1, 1995, New Valley was engaged in the messaging services
business through its wholly-owned subsidiary, Western Union Data Services
Company, Inc. ("DSI"). On October 31, 1995, New Valley completed the sale of
substantially all of the assets (exclusive of certain contracts) and conveyance
of substantially all of the liabilities of DSI to FFMC for $20 million, subject
to certain adjustments. This transaction was effective as of October 1, 1995.

Ladenburg Thalmann & Co. Inc. On May 31, 1995, New Valley acquired all of
the outstanding shares of common stock and other equity interests of Ladenburg
for $25.8 million, net of cash acquired, subject to adjustment. Ladenburg is a
full service broker-dealer which has been a member of the New York Stock
Exchange since 1876. Its specialties include investment banking, trading,
research, market making, private client services, institutional sales and asset
management.

Ladenburg's investment banking area maintains relationships with businesses
and provides them with research, advisory and investor relations support.
Services include merger and acquisition consulting, management of and
participation in underwriting of equity and debt financing, private debt and
equity financing, and rendering appraisals, financial evaluations and fairness
opinions. Ladenburg's listed securities, fixed income and over-the-counter
trading areas include trading a variety of financial instruments. Ladenburg's
client services and institutional sales departments serve over 20,000 accounts
worldwide and its asset management area provides investment management and
financial planning services to numerous individuals and institutions.

Ladenburg is a wholly-owned subsidiary of Ladenburg Thalmann Group Inc.
("Ladenburg Group"), which has other subsidiaries specializing in merchant
banking, venture capital and investment banking activities on an international
level. Ladenburg Thalmann International ("LTI"), a wholly-owned subsidiary of
Ladenburg Group, is engaged in corporate finance and capital markets activities
in Russia and Ukraine, seeking, among other things, mandates to raise capital
for local corporate issuers in the international capital markets. LTI,
headquartered in New York City, has an office in Kiev, Ukraine.

In July 1997, LTI, together with Societe Generale, formed a fund with an
initial capitalization of U.S.$90.5 million for investment in public and private
equity securities in Ukraine. LTI's Kiev office serves as investment advisor to
the fund.

BrookeMil Ltd. On January 31, 1997, New Valley acquired the BML Shares,
representing 99.1% of the outstanding shares of BML, from BOL. New Valley paid
to BOL a purchase price of $55 million, consisting of $21.5 million in cash and
the $33.5 million 9% Note of New Valley. The Note, which was collateralized by
the BML Shares, was paid during 1997. The source of funds used by New Valley for
the acquisition, including the payment of the Note, was general working capital
including cash and cash equivalents and proceeds from the sale of investment
securities available for sale. The amount of consideration paid by New Valley
was determined based on a number of factors including current valuations of the
assets, future development plans, local real estate market conditions and
prevailing economic and political conditions in Russia.

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New Valley retained independent legal counsel and financial advisors in
connection with the evaluation and negotiation of the transaction, which was
approved by a special committee of the independent directors of New Valley. In
accordance with the terms of the Joint Plan, the transaction was approved by not
less than two-thirds of the entire Board of Directors, including the approval of
at least one of the directors elected by the holders of New Valley's preferred
shares, and a fairness opinion from an investment banking firm was obtained. The
shareholders of New Valley did not vote on the BML transaction (nor the
acquisition of Ladenburg or the Office Buildings and Shopping Centers described
below) as their approval was not required by applicable corporate law or New
Valley's constituent documents.

BML is developing the three-phase Ducat Place complex on 2.2 acres of land
in downtown Moscow, for which it has a 49-year lease. The first phase of the
project, Ducat Place I, a 46,500 square foot Class-A office building, was
successfully built and leased in 1993, and sold by BML to a tenant in April
1997. In 1997, BML completed construction of Ducat Place II, a premier 150,000
square foot office building. Ducat Place II has been leased to a number of
leading international companies including Motorola, Conoco, Lukoil-Arco and
Morgan Stanley. The third phase, Ducat Place III, is planned as a 350,000 square
foot mixed-use complex, with construction anticipated to commence in 1999. For
further information with respect to this transaction, see "Brooke (Overseas)
Ltd. -- Sale of BrookeMil Ltd.".

Western Realty. In February 1998, New Valley and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, New Valley agreed, among other
things, to contribute to Western Realty the real estate assets of BML, including
Ducat Place II and the site for Ducat Place III, and Apollo agreed to contribute
up to $58 million.

Under the terms of the agreement governing Western Realty (the "LLC
Agreement"), the ownership and voting interests in Western Realty will be held
equally by Apollo and New Valley. Apollo will be entitled to a preference on
distributions of cash from Western Realty to the extent of its investment,
together with a 15% annual rate of return, and New Valley will then be entitled
to a return of $10 million of BML-related expenses incurred by New Valley since
March 1, 1997, together with a 15% annual rate of return; subsequent
distributions will be made 70% to New Valley and 30% to Apollo. Western Realty
will be managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and New Valley. All material corporate
transactions by Western Realty will generally require the unanimous consent of
the Board of Managers. Accordingly, New Valley will account for its
non-controlling interest in Western Realty on the equity method. See Note 3 to
the New Valley's Consolidated Financial Statements included elsewhere in this
Prospectus.

The Company, New Valley and their affiliates have other business
relationships with affiliates of Apollo. On January 11, 1996, New Valley
acquired from an affiliate of Apollo the Shopping Centers for $72.5 million. New
Valley and pension plans sponsored by BGLS have invested in investment
partnerships managed by an affiliate of Apollo. Affiliates of Apollo own a
substantial amount of debt securities of BGLS and warrants to purchase common
stock of the Company. See Note 9 to the Company's Consolidated Financial
Statements.

On February 27, 1998, at an initial closing under the LLC Agreement, Apollo
made a $11 million loan (the "Loan") to Western Realty. The Loan, which bore
interest at the rate of 15% per annum and was due September 30, 1998, was
secured by a pledge of New Valley's shares of BML. On April 28, 1998, the Loan
and the accrued interest thereon were converted into a capital contribution by
Apollo to Western Realty and the BML pledge released.

Western Realty will seek to make additional real estate and other
investments in Russia. New Valley and Apollo have agreed to invest, through
Western Realty or another entity, up to $25 million in the aggregate for the
potential development of a real estate project in Moscow. In addition, Western
Realty has made a $20 million participating loan to, and payable out of a 30%
profits interest in, a company organized by BOL which will hold BOL's interests
in Liggett-Ducat and the industrial site and manufacturing facility being
constructed by Liggett-Ducat on the outskirts of Moscow.

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New Valley Realty Division. On January 10 and January 11, 1996, New Valley
acquired four commercial office buildings (the "Office Buildings") and eight
shopping centers (the "Shopping Centers"), respectively, for an aggregate
purchase price of $183.9 million, consisting of $23.9 million in cash and $160
million in non-recourse mortgage financing provided by the sellers. The Office
Buildings and Shopping Centers are being operated through New Valley's New
Valley Realty division.

The Office Buildings consist of two adjacent commercial office buildings in
Troy, Michigan and two adjacent commercial office buildings in Bernards
Township, New Jersey. New Valley acquired the Office Buildings in Michigan from
Bellemead of Michigan, Inc. ("Bellemead Michigan") and the Office Buildings in
New Jersey from Jared Associates, L.P. (each, a "Seller"), for an aggregate
purchase price of $111.4 million. Each Seller was an affiliate of Bellemead
Development Corporation, which was indirectly wholly-owned by The Chubb
Corporation. The purchase price was paid for the Office Buildings as follows:
(i) $23.5 million for the 700 Tower Drive property, located in Troy, Michigan;
(ii) $28.1 million for the 800 Tower Drive property, located in Troy, Michigan;
(iii) $48.3 million for the Westgate I property, located in Bernards Township,
New Jersey; and (iv) $11.4 million for the Westgate II property, located in
Bernards Township, New Jersey. The two Michigan buildings were constructed in
1987 and the two New Jersey buildings were constructed in 1991. The gross square
footage of the Office Buildings ranges from approximately 50,300 square feet to
approximately 244,000 square feet.

New Valley acquired a fee simple interest in each Office Building (subject
to certain rights of existing tenants), together with a fee simple interest in
the land underlying three of the Office Buildings and a 98-year ground lease
(the "Ground Lease") underlying one of the Office Buildings. Under the Ground
Lease, Bellemead Michigan, as lessor, is entitled to receive rental payments of
a fixed monthly amount and a specified portion of the income received from the
700 Tower Drive property. Space in the Office Buildings is leased to commercial
tenants and, as of March 20, 1998, the Office Buildings were fully occupied.

Concurrently with the acquisition of the Office Buildings, New Valley
engaged a property-management affiliate of Sellers that had previously managed
the Office Buildings to act as the managing agent and leasing agent for the
Office Buildings. The agreement for the New Jersey Office Buildings has a
fifteen-year term and the agreement for the Michigan Office Buildings expires
June 30, 1998, but the agreements may be terminated by either party on 60 days'
notice without cause or economic penalty. Effective November 1997, the
agreements were assigned to Gale & Wentworth, a national real estate company.

On January 11, 1996, New Valley acquired the Shopping Centers from various
limited partnerships (AP Century I., L.P., AP Century II, L.P., AP Century III,
L.P., AP Century IV, L.P., AP Century V, L.P., AP Century VI, L.P., AP Century
VIII, L.P., and AP Century IX, L.P.) (each, a "Partnership") for an aggregate
purchase price of $72.5 million. Each Partnership is an affiliate of Apollo. The
Shopping Centers are located in Marathon and Royal Palm Beach, Florida; Lincoln,
Nebraska; Santa Fe, New Mexico; Milwaukee, Oregon; Richland and Marysville,
Washington; and Charleston, West Virginia. New Valley acquired a fee simple
interest in each Shopping Center and the underlying land for each property.
Space in the Shopping Center is leased to a variety of commercial tenants and,
as of March 20, 1998, the aggregate occupancy of the Shopping Centers was
approximately 92%. The Shopping Centers were constructed at various times during
the period 1963-1988. The gross square footage of the Shopping Centers ranges
from approximately 108,500 square feet to approximately 222,500 square feet.

The purchase price paid for the Shopping Centers was as follows: (i) $3.9
million for the Marathon Shopping Center property, located in Marathon, Florida;
(ii) $9.8 million for the Village Royale Plaza Shopping Center property, located
in Royal Palm Beach, Florida; (iii) $6.0 million for the University Place
property, located in Lincoln, Nebraska; (iv) $9.6 million for the Coronado
Shopping Center property, located in Santa Fe, New Mexico; (v) $7.3 million for
the Holly Farm Shopping Center property, located in Milwaukee, Oregon; (vi)
$10.6 million for the Washington Plaza property, located in Richland,
Washington; (vii) $12.4 million for the Marysville Towne Center property,
located in Marysville, Washington; and (viii) $12.9 million for the Kanawha Mall
property, located in Charleston, West Virginia (the properties described in
clauses (i), (ii), (v), (vii) and (viii) are subject to an underlying mortgage
in favor of a single

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lender and are referred to collectively as the "Properties"). See Notes 3 and 7
to New Valley's Consolidated Financial Statements included elsewhere in this
Prospectus.

Concurrently with the acquisition of the Shopping Centers, New Valley
engaged a property-management firm, whose principals were the former minority
partners in the Partnerships, that had previously operated the Shopping Centers
to act as the managing agent and leasing agent for the Shopping Centers.
Effective December 31, 1996, such firm's engagement was terminated, and Kravco
Company was engaged as managing agent and leasing agent for the Kanawha Mall and
Insignia Commercial Group, Inc. as managing agent and leasing agent for the
remaining Shopping Centers.

The acquisition of the Office Buildings was effected pursuant to a purchase
agreement dated January 10, 1996. The acquisition of the Shopping Centers was
effected pursuant to a purchase agreement dated January 11, 1996. For
information concerning other business relationships with affiliates of Apollo,
see "Western Realty".

On November 10, 1997, New Valley sold its Marathon, Florida Shopping Center
for $5.4 million and recognized a gain of $1.3 million on the sale.

Thinking Machines Corporation. On January 11, 1996, Ladenburg Thalmann
Capital Corp., the merchant banking subsidiary of Ladenburg Group, in connection
with the First Amended Joint Plan of Reorganization (the "TMC Plan") of Thinking
Machines Corporation ("Thinking Machines") made a $10.6 million convertible
bridge loan (the "Loan") to TMCA Acquisition Corp. ("TMCA"). TMCA is an entity
formed to invest the Loan proceeds (net of certain expenses) in Thinking
Machines, currently a developer and marketer of data mining and knowledge
discovery software and, through April 1997, of parallel software for high-end
and networked computer systems.

On February 8, 1996, the date of confirmation of the TMC Plan, Thinking
Machines emerged from bankruptcy and merged with TMCA pursuant to the TMC Plan.
As a result of the merger, the Loan was converted into a controlling interest in
a partnership which held approximately 61% of the outstanding common stock of
Thinking Machines. Thinking Machines used the Loan proceeds to help fund its
advanced product development and marketing. In December 1997, New Valley
acquired for $3.15 million additional shares in Thinking Machines pursuant to a
rights offering by Thinking Machines to its existing shareholders which
increased its ownership to approximately 73% of the outstanding Thinking
Machines shares.

Thinking Machines designs, develops, markets and supports software offering
prediction-based management solutions under the name LoyaltyStream(TM) for
businesses such as financial services and telecommunications providers to help
reduce customer attrition, control costs, more effectively cross-sell or bundle
products or services and manage risks. Incorporated in LoyaltyStream is
Darwin(R), a data mining software tool set with which a customer can analyze
vast amounts of its pre-existing data as well as external demographics data to
predict behavior or outcomes, and then send this information through systems
integration to those divisions of the customer which can use it to more
effectively anticipate and solve business problems. To date, no material
revenues have been recognized by Thinking Machines with respect to the sale or
licensing of such software and services.

During the fourth quarter of 1996, Thinking Machines announced its
intention to dispose of its parallel processing computer sales and service
business. As a result, Thinking Machines wrote-down certain assets, principally
inventory, related to these operations to their net realizable value by $6.1
million. Thinking Machines sold its parallel processing software business on
November 19, 1996 for $4.3 million and sold its remaining parallel processing
service business in April 1997 for $2.4 million in cash and a percentage of
certain future operating profits. During 1997, Thinking Machines received
profit participation payments totalling $1.2 million.

Miscellaneous Investments. At December 31, 1997, New Valley owned 50.1% of
the outstanding shares of PC411, Inc. ("PC411"), a development stage company
which completed an initial public offering in May 1997 with net proceeds of $5.9
million. PC411, which provides on-line electronic directory assistance to
personal computer users, is currently offering a limited version of the PC411
service over the Internet.

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In addition, as of December 31, 1997, New Valley's long-term investments
consisted primarily of investments in limited partnerships of $27.2 million. See
Note 8 to New Valley's Consolidated Financial Statements included elsewhere in
this Prospectus.

New Valley may acquire additional operating businesses through merger,
purchase of assets, stock acquisition or other means, or seek to acquire control
of operating companies through one of such means. There can be no assurance that
New Valley will be successful in targeting or consummating any such
acquisitions.

EMPLOYEES

At December 31, 1997, the Company and its subsidiaries had approximately
1,994 full-time employees, of whom approximately 476 were employed by Liggett,
approximately 1,063 were employed by Liggett-Ducat and approximately 438 were
employed by New Valley. Approximately 12% of the Company's (including its
subsidiaries) employees are hourly employees and are represented by unions. The
Company and its subsidiaries have not experienced any significant work stoppages
since 1977, and the Company believes that relations with its employees and their
unions are satisfactory.

PROPERTIES

The Company's and BGLS' principal executive offices are located in Miami,
Florida. The Company subleases 12,356 square feet of office space from an
unaffiliated company in an office building in Miami, which it shares with BGLS
and New Valley and various of their subsidiaries. New Valley has entered into an
expense-sharing arrangement for use of such office space. The sublease expires
on February 28, 1999.

Substantially all of Liggett's tobacco manufacturing facilities, consisting
principally of factories, distribution and storage facilities, are located in or
near Durham, North Carolina. Such facilities are both owned and leased. As of
December 31, 1997, the principal properties owned or leased by Liggett are as
follows:

APPROXIMATE
OWNED TOTAL
OR SQUARE
TYPE LOCATION LEASED FOOTAGE
- ---- -------- ------ -----------

Office and Manufacturing Complex................ Durham, NC Owned 932,000
Warehouse....................................... Durham, NC Owned 203,000
Storage Facilities.............................. Danville, VA Owned 578,000
Distribution Center............................. Durham, NC Leased 260,000

Liggett's Durham, North Carolina complex consists of 10 major structures
over approximately 17 acres. Included are Liggett's manufacturing plant,
research facility and corporate offices. Liggett's management believes its
property, plant and equipment are well maintained and in good condition and that
its existing facilities are sufficient to accommodate a substantial increase in
production.

Liggett leases the Durham, North Carolina distribution center pursuant to a
lease which expires in May 1999. Liggett has an option to purchase the leased
property at any time during the term of the lease. Liggett utilizes
approximately 40% of the distribution center. Liggett also leases excess space
in its research facility to third parties.

On March 11, 1997, Liggett sold to Blue Devil Ventures, a North Carolina
limited liability partnership, certain surplus realty in Durham, North Carolina,
for a sale price of $2.2 million. The Company recognized a gain of approximately
$1.1 million on the sale.

Liggett-Ducat has a 49-year land lease on a site on the outskirts of
Moscow, Russia where Liggett-Ducat plans to build a new cigarette factory.
Liggett-Ducat utilizes the site for its existing cigarette factory in Moscow
pursuant to a Use Agreement with BML. See "Brooke (Overseas) Ltd. -- Sale of
BrookeMil Ltd."

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LEGAL PROCEEDINGS

Reference is made to Note 16 to the Company's Consolidated Financial
Statements, which contains a general description of certain legal proceedings to
which the Company and/or BGLS or their subsidiaries are a party and certain
related matters. Reference is also made to Exhibit 99.1 to the Company's 1997
Annual Report on Form 10-K, as amended, a copy of which is included elsewhere in
this Prospectus, for additional information regarding the pending material legal
proceedings to which the Company, BGLS and/or Liggett are party.

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SELECTED FINANCIAL DATA

The selected financial data presented in the following table for and as of
the end of each year in the five-year periods ended December 31, 1997, 1996,
1995, 1994 and 1993 have been derived from the financial statements of the
Company, which financial statements have been audited by Coopers & Lybrand
L.L.P., independent accountants. Balance Sheets at December 31, 1997 and 1996
and the related Statements of Operations and Statements of Cash Flows for each
of the three fiscal years ended December 31, 1997, 1996 and 1995 and notes
thereto appear elsewhere in this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS DATA:
Revenues(1)............................ $ 389,615 $ 460,356 $ 461,459 $ 479,343 $ 493,041
Loss from continuing operations........ (51,421) (65,515) (45,344) (17,991) (69,228)
Income from discontinued
operations(2)........................ 1,536 2,982 21,229 174,683 --
(Loss) income from extraordinary
items(4)............................. -- -- (9,810) (46,597) 153,741
Net (loss) income...................... (49,885) (62,533) (33,925) 110,095 106,780
Basic/diluted loss from continuing
operations per share(3).............. (2.83) (3.44) (1.56) (1.02) (4.19)
Basic/diluted income from discontinued
operations per share................. 0.09 0.16 1.16 9.92 3.45
Basic/diluted (loss) income from
extraordinary items per share........ -- -- (0.54) (2.65) 8.55
Basic/diluted net (loss) income per
share(3)............................. (2.74) (3.28) (0.94) 6.25 5.60
Cash distributions declared per common
share................................ 0.30 0.30 0.30 -- --

BALANCE SHEET DATA:
Current assets......................... $ 67,985 $ 80,552 $ 96,615 $ 87,504 $ 114,411
Total assets........................... 126,460 177,677 225,620 229,425 164,819
Current liabilities.................... 140,504 204,463 119,177 144,351 220,207
Notes payable, long-term debt and other
obligations, less current portion.... 399,835 378,243 406,744 405,798 389,671
Noncurrent employee benefits, deferred
credits and other long-term
liabilities.......................... 74,518 49,960 55,803 54,128 69,623
Stockholders' equity (deficit)......... (488,397) (454,989) (356,104) (374,852) (514,682)

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

(1) Revenues include federal excise taxes of $87,683, $112,218, $123,420,
$131,877 and $127,341, respectively.
(2) See Note 5 to the Company's Consolidated Financial Statements.
(3) Per share computations include the impact of New Valley's repurchase of
Class A Preferred Shares in 1996 and 1995.
(4) In 1995 and 1994, extraordinary items represent loss resulting from the
early extinguishment of debt. In 1993, such items represent gain resulting
from the early extinguishment of debt as well as gain on foreclosure and
gain on reorganization of MAI Systems, Inc.

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27

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

INTRODUCTION

The following discussion provides an assessment of the results of
operations, capital resources and liquidity of the Company and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus. The operating results of the
periods presented were not significantly affected by inflation. The consolidated
financial statements include the accounts of BGLS, Liggett, BOL, NV Holdings,
other less significant subsidiaries and, as of December 29, 1995, Liggett-Ducat.

The Company holds an equity interest in New Valley. At December 31, 1997,
the Company accounts for its share of earnings based on its ownership of New
Valley Common Shares (42%), Class B Preferred Shares (9%) and Class A Preferred
Shares (58%). The Common Shares are accounted for pursuant to the equity method;
the Class A Preferred Shares and the Class B Preferred Shares are accounted for
under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".

On January 31, 1997, BOL sold its interest in BML, a real estate
development company doing business in Russia, to New Valley. See "The
Company -- Brooke (Overseas) Ltd. -- Sale of BrookeMil Ltd." and Note 4 to the
Company's Consolidated Financial Statements.

For purposes of this discussion and other consolidated financial reporting,
the Company's significant business segment is tobacco for the year ended
December 31, 1997 and tobacco and real estate for the years ended December 31,
1996 and 1995.

RECENT DEVELOPMENTS

The Company

Standstill Agreement. On March 5, 1998, BGLS entered into an agreement
(the "Standstill Agreement") with AIF II, L.P. and an affiliated investment
manager on behalf of a managed account (the "Apollo Holders"), who together hold
approximately 41.8% of the $232,864 principal amount of BGLS' 15.75% Senior
Secured Notes due 2001 (the "BGLS Notes")

Pursuant to the terms of the Standstill Agreement, the Apollo Holders
agreed to defer the payment of interest on the BGLS Notes held by them,
commencing with the interest payment that was due July 31, 1997, which they had
previously agreed to defer, through the interest payment due on July 31, 2000.
The deferred interest payments will be payable at final maturity of the BGLS
Notes on January 31, 2001 or upon an Event of Default under the Indenture for
the BGLS Notes. In connection with the Standstill Agreement, the Company issued
to the Apollo Holders a five-year warrant to purchase 2,000,000 shares of the
Company's common stock at a price of $5.00 per share. The Apollo Holders were
also issued a second warrant expiring October 31, 2004 to purchase an additional
2,150,000 shares of the Company's common stock at a price of $0.10 per share.
The second warrant will become exercisable on October 31, 1999 and the Company
will have the right under certain conditions prior to that date to substitute
for that warrant a new warrant for 9.9% of the common stock of Liggett.

On February 6, 1998, the holder of 41.9% of the BGLS Notes, who had
previously been a party to the Standstill Agreement, was paid its pro-rata share
of the July 31, 1997 interest payment on the BGLS Notes. On March 2, 1998, BGLS
made the interest payment due on January 31, 1998 to all holders of the BGLS
Notes other than the Apollo Holders.

Sale of Stock. On January 16, 1998, the Company entered into a Stock
Purchase Agreement with High River Limited Partnership ("High River"), the
Selling Stockholder under this Prospectus, in which High River purchased
1,500,000 shares of the Company's common stock for $9,000. See "Selling
Stockholder".

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28

Liggett

Notes Restructuring. On January 30, 1998, with the consent of the required
majority of the holders of the Liggett 11.50% Series B and 19.75% Series C
Senior Secured Notes due 1999 (the "Liggett Notes"), Liggett entered into
various amendments to the Indenture governing the Liggett Notes which provided,
among other things, for a deferral of the February 1, 1998 mandatory redemption
payment of $37,500 to the date of final maturity of the Liggett Notes on
February 1, 1999. In connection with the deferral, the Company agreed to issue
482,970 shares of the Company's common stock to the holders of record on January
15, 1998 of the Liggett Notes. The Indenture under which the Liggett Notes are
outstanding was also amended to prohibit, with limited exceptions, payments of
dividends and incurrence of new debt by Liggett and to tighten restrictions on
the disposition of proceeds of asset sales. The Company and BGLS also agreed to
guarantee the payment by Liggett of the August 1, 1998 interest payment on the
Liggett Notes.

New Valley

Western Realty. In February 1998, New Valley and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty to make real
estate and other investments in Russia. In connection with the formation of
Western Realty, New Valley agreed, among other things, to contribute the real
estate assets of BrookeMil Ltd. ("BML") to Western Realty and Apollo agreed to
contribute up to $58,000. Western Realty will seek to make additional real
estate and other investments in Russia. New Valley and Apollo have agreed to
invest, through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In addition,
Western Realty has made a $20,000 participating loan to, and payable out of a
30% profits interest in, a company organized by BOL which will, among other
things, acquire an interest in an industrial site and manufacturing facility
being constructed on the outskirts of Moscow by a subsidiary of BOL.

Investment in RJR Nabisco. At December 31, 1997, New Valley held 612,650
shares of common stock of RJR Nabisco Holdings corp. ("RJR Nabisco") with a
market value of $22,898 (cost of $18,780). New Valley expensed $100 in 1997,
$11,724 in 1996 and $3,879 in 1995 relating to the RJR Nabisco investment.

In June 1996, various agreements between High River, the Company and New
Valley were terminated by mutual consent. Pursuant to these agreements the
parties had agreed to take certain actions during late 1995 and throughout 1996
designed to cause RJR Nabisco to effectuate a spinoff of its food business,
Nabisco Holdings Corp. The terminations of the High River agreements left in
effect for one year certain provisions concerning payments to be made to High
River in the event New Valley achieved a profit (after deducting certain
expenses) on the sale of the shares of RJR Nabisco common stock which were held
by it or they were valued at the end of such year at higher than their purchase
price or in the event the Company or its affiliates engaged in certain
transactions with RJR Nabisco. Based on the market price of RJR Nabisco common
stock, no amounts were payable by New Valley under these agreements.

Pursuant to a December 27, 1995 agreement between the Company and New
Valley whereby New Valley agreed to reimburse the Company and its subsidiaries
for certain reasonable out-of-pocket expenses in connection with RJR Nabisco,
New Valley paid the Company and its subsidiaries a total of $17 and $2,370 in
1997 and 1996.

shares of RJR Nabisco common stock subject to the Swap plus the value of any
dividends with a record date occurring during the Swap period. If the Final
Price was less than the Initial Price, then New Valley was required to pay the
Counterparty at the termination of the transaction an amount in cash equal to
the amount of such decline with respect to the shares of RJR Nabisco common
stock subject to the Swap, offset by the value of any dividends, provided that,
with respect to approximately 225,000 shares of RJR Nabisco common stock, New
Valley was not required to pay any amount in excess of an approximate 25%
decline in the value of the shares. The potential obligations of the
Counterparty under the Swap were guaranteed by the Counterparty's parent, a
large foreign bank, and New Valley pledged certain collateral in respect of its
potential obligations under the Swap and agreed to pledge additional collateral
under certain conditions. New Valley marked its obligation with respect to the
Swap to fair value with unrealized gains or losses included in income. During
the third quarter of 1996, the Swap was terminated in connection with New
Valley's reduction of its holdings of RJR Nabisco common stock, and New Valley
recognized a loss on the Swap of $7,305 for the year ended December 31, 1996.

BOL

Sale of BML. On January 31, 1997, New Valley acquired from BOL 10,483
shares (99.1%) of common stock of BML for a purchase price of $55,000,
consisting of $21,500 in cash and a $33,500 9% promissory note of New Valley
(the "Note"). The Note was paid during 1997. The Company recognized a gain of
approximately $21,300 on the sale in 1997. See Note 4 to the Company's
Consolidated Financial Statements.

Year 2000 Costs

The Company has evaluated the costs to implement century date change
compliant systems conversions and is in the process of executing a planned
conversion of its systems prior to the year 2000. Although such costs may be a
factor in describing changes in operating profit for one or more of the
Company's business segments in any given reporting period, the Company currently
does not believe that the anticipated costs of year 2000 systems conversions
will have a material impact on its future consolidated results of operations or
cash flows. However, due to the interdependent nature of computer systems, the
Company may be adversely impacted in the year 2000 depending on whether it or
entities not affiliated with the Company have addressed this issue successfully.

New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income. The purpose of reporting comprehensive income is to present a measure of
all changes in equity that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. SFAS No. 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. For the Company, other components of stockholders' equity include such
items as minimum pension liability adjustments, unearned compensation expense
related to stock options and the Company's proportionate interest in New
Valley's capital transactions. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company does not anticipate that implementation of SFAS No. 130 will have a
material impact on the consolidated financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS No. 131 provides for a two-tier
test for determining those operating segments that would need to be disclosed
for external reporting purposes. In addition to providing the required
disclosures for reportable segments, SFAS No. 131 also requires disclosure of
certain "second level" information by geographic area and for products/services.
SFAS No. 131 also makes a number of changes to existing disclosure requirements.
Management believes that the adoption of this pronouncement will not have a
material effect on the Company's financial statement disclosures. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, with earlier
application encouraged.
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30

In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," was issued which revises required disclosures
about pensions and postretirement benefit plans. SFAS No. 132 is effective for
the Company for the year ended 1998. The Company has not yet determined the
impact of its implementation.

RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY

Pricing Activity. On March 7, 1997, R. J. Reynolds Tobacco Company ("RJR")
initiated a list price increase on all brands of $.40 per carton (approximately
4%). Brown & Williamson Tobacco Corporation ("B&W"), Lorillard Tobacco Company
("Lorillard") and Liggett matched this increase, and, on March 21, 1997, Philip
Morris Incorporated ("Philip Morris") announced a price increase of $.50 per
carton. Subsequently, Liggett and the other manufacturers matched Philip Morris'
price increase. On August 29, 1997, Philip Morris announced a second price
increase of $.70 per carton. During the first week of September, all other major
United States cigarette makers, including Liggett, matched this increase.

On January 23, 1998, Philip Morris and RJR announced a list price increase
of $.25 per carton (approximately 2 1/2%). This action was matched by Liggett
and the other manufacturers during the following week. On April 3, 1998, Philip
Morris announced a second list price increase of $.50 per carton (approximately
4.5%). This action, the fourth in 13 months, was matched by Liggett and the
other manufacturers.

Legislation, Regulation and Litigation. The cigarette industry continues
to be challenged on numerous fronts. New cases continue to be commenced against
Liggett and the Company and other cigarette manufacturers. As of December 31,
1997, there were approximately 250 individual suits, 40 purported class actions
and 75 state, municipality and other third-party payor health care reimbursement
actions pending in the United States in which Liggett is a named defendant. As
new cases are commenced, the costs associated with defending such cases and the
risks attendant to the inherent unpredictability of litigation continue to
increase. Recently, there have been a number of restrictive regulatory actions
from various Federal administrative bodies, including the United States
Environmental Protection Agency ("EPA") and the Food and Drug Administration
("FDA"), adverse political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of Medicaid
reimbursement suits by various states' Attorneys General. These developments
generally receive widespread media attention. The Company is not able to
evaluate the effect of these developing matters on pending litigation or the
possible commencement of additional litigation, but it is possible that
Company's financial position, results of operations and cash flows could be
materially adversely affected by an ultimate unfavorable outcome in any of such
pending litigation. (See "The Company -- Legal Proceedings" and Note 16 to the
Company's Consolidated Financial Statements for a description of legislation,
regulation and litigation.)

The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, RICO and antitrust statutes. In
many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including disgorgement of profits and punitive damages.
Defenses raised by defendants in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence, lack
of design defect, statutes of limitations or repose, equitable defenses such as
"unclean hands" and lack of benefit, failure to state a claim and federal
preemption.

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31

negligent misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust, deceptive trade practices
and false advertising, and claims under the RICO.

Settlements. In March 1996, Liggett and the Company entered into an
agreement to settle the Castano class action tobacco litigation and an agreement
with the Attorneys General of West Virginia, Florida, Mississippi, Massachusetts
and Louisiana to settle certain actions brought against Liggett and the Company
by such states (the "March 1996 Settlements"). Liggett and the Company, while
neither consenting to FDA jurisdiction nor waiving their objections thereto,
agreed to withdraw their objections and opposition to the proposed FDA
regulations and to phase in compliance with certain of the proposed interim FDA
regulations.

Under the CASTANO settlement agreement, upon final court approval of the
settlement, the CASTANO class would be entitled to receive up to 5% of Liggett's
pretax income (income before income taxes) each year (up to a maximum of $50,000
per year) for the next twenty-five years, subject to certain reductions provided
for in the agreement, and a $5,000 payment from Liggett if the Company or
Liggett fails to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of the
settlement. The Company and Liggett have the right to terminate the CASTANO
settlement under certain circumstances. On May 11, 1996, the CASTANO Plaintiffs
Legal Committee filed a motion with the United States District Court for the
Eastern District of Louisiana seeking preliminary approval of the CASTANO
settlement. On May 23, 1996, the Court of Appeals for the Fifth Circuit reversed
the February 17, 1995 order of the District Court certifying the CASTANO suit as
a nationwide class action and instructed the District Court to dismiss the class
complaint. (For additional information concerning the Fifth Circuit's decision,
see Note 16 to the Company's Consolidated Financial Statements.) On September 6,
1996, the CASTANO plaintiffs withdrew the motion for approval of the Castano
settlement.

On March 14, 1996, the Company, the CASTANO Plaintiffs Legal Committee and
the CASTANO plaintiffs entered into a letter agreement. According to the terms
of the letter agreement, for the period ending nine months from the date of
Final Approval (if granted) of the CASTANO settlement or, if earlier, the
completion by the Company or Liggett of a combination with any defendant in
CASTANO, except Philip Morris, the CASTANO plaintiffs and their counsel agree
not to enter into any more favorable settlement agreement with any CASTANO
defendant which would reduce the terms of the CASTANO settlement agreement. If
the CASTANO plaintiffs or their counsel enter into any such settlement during
this period, they shall pay the Company $250,000 within thirty days of the more
favorable agreement and offer the Company and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the CASTANO settlement agreement has not been earlier terminated
by the Company in accordance with its terms, the Company and its affiliates will
not enter into any business transaction with any third party which would cause
the termination of the CASTANO settlement agreement. If the Company or its
affiliates enter into any such transaction, then the CASTANO plaintiffs will be
entitled to receive $250,000 within thirty days from the transacting party.

Under the Attorneys General settlement, the five states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March 22,
1996, with the balance payable over nine years and indexed and adjusted for
inflation), provided that any unpaid amount will be due 60 days after either a
default by Liggett in its payment obligations under the settlement or a merger
or other similar transaction by the Company or Liggett with another defendant in
the lawsuits. In addition, Liggett will be required to pay the states a
percentage of Liggett's pretax income (income before income taxes) each year
from the second through the twenty-fifth year. This annual percentage is 2 1/2%
of Liggett's pretax income, subject to increase to 7 1/2% depending on the
number of additional states joining the settlement. No additional states have
joined this settlement to date. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to the
states $5,000 if the Company or Liggett fails to consummate a merger or other
similar transaction with another defendant in the lawsuits within three years of
the date of the settlement.

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more states through their respective Attorneys General (collectively, the "March
1997 Settlements"). The settlements cover all smoking-related claims, including
both addiction-based and tobacco injury claims against the Company and Liggett
brought by the states and, upon court approval, the nationwide class. On March
12, 1998, the Company and Liggett entered into additional settlements with the
Attorneys General of 14 states, the District of Columbia and the U. S. Virgin
Islands (the "March 1998 Settlements") and, on March 26, 1998, the Company and
Liggett settled with the Attorney General of Georgia.

As mentioned above, in March 1997, Liggett, the Company and plaintiffs
filed the mandatory class settlement agreement in an action entitled FLETCHER,
ET AL. V. BROOKE GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama,
where the court granted preliminary approval and preliminary certification of
the class, and on May 15, 1997, a similar mandatory class settlement agreement
was filed in an action entitled WALKER, ET AL. V. LIGGETT GROUP INC., ET AL.,
United States District Court, Southern District of West Virginia. The Walker
court also granted preliminary approval and preliminary certification of the
nationwide class; however, on August 5, 1997, the court vacated its preliminary
certification of the settlement class, which decision is currently on appeal.

In the FLETCHER action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a later
court hearing. Effectiveness of the mandatory settlement is conditioned on final
court approval of the settlement after a fairness hearing. There can be no
assurance as to whether or when court approval will be obtained. (For additional
information concerning the FLETCHER action, see Note 16 to the Company's
Consolidated Financial Statements.)

Under the March 1998 Settlements, Liggett is required to pay each of the 14
settling states and territories their relative share (based on the Medicaid
population of each state over the total Medicaid population of the United
States) of between 27.5% and 30% of Liggett's pre-tax income each year for 25
years, with a minimum payment guarantee of $1,000 per state over the first nine
years of the agreement. The annual percentage is subject to increase, pro rata
from 27.5% up to 30%, depending on the number of additional states joining the
settlement. Pursuant to the "most favored nation" provisions under the March
1996 Settlements and the March 1997 Settlements, each of the states settling
under those settlements could benefit from the economic terms of the March 1998
Settlements.

At December 31, 1995, the Company had accrued approximately $4,000 for the
present value of the fixed payments under the initial Attorneys General
settlement. At December 31, 1997, in connection with the March 1998 Settlements,
the Company accrued $16,421 for the present value of the fixed payments under
the March 1998 Settlements. No additional amounts have been accrued with respect
to the settlements discussed above. The Company cannot quantify the future costs
of the settlements at this time as the amount Liggett must pay is based, in
part, on future operating results. Possible future payments based on a
percentage of pretax income, and other contingent payments based on the
occurrence of a business combination, will be expensed when considered probable.
(See the discussions of the tobacco litigation settlements appearing in Note 16
to the Company's Consolidated Financial Statements.)

Other Matters. On June 20, 1997, Philip Morris, RJR, B&W, Lorillard and
the United States Tobacco Company, along with the Attorneys General for the
States of Arizona, Connecticut, Florida, Mississippi, New York and Washington
and the CASTANO Plaintiffs' Litigation Committee executed a Memorandum of
Understanding to support the adoption of federal legislation and necessary
ancillary undertakings, incorporating the features described in a proposed
resolution. The proposed resolution mandates a total reformation and
restructuring of how tobacco products are manufactured, marketed and distributed
in the United States. (For additional information concerning the proposed
resolution, see Note 16 to the Company's Consolidated Financial Statements.) The
proposals are currently being reviewed by the White House, Congress and various
public interest groups. Separately, the other tobacco companies negotiated
settlements of the Attorneys General health care cost recovery actions in
Mississippi, Florida and Texas. Management is unable to predict the ultimate
effect, if any, of the enactment of legislation adopting the proposed
resolution. Management is also unable to predict the ultimate content of any
such legislation. However, adoption of any such legislation could have a
material adverse effect on the business of the Company and Liggett.

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33

In a speech on September 17, 1997, President Clinton called for federal
legislation that, among other things, would raise cigarette prices by up to
$1.50 per pack. Since then, several bills have been introduced in the Senate
that purport to propose legislation along these lines. Management is unable to
predict the ultimate content of any such legislation; however, adoption of any
such legislation could have a material adverse effect on the business of the
Company and Liggett.

RESULTS OF OPERATIONS

REVENUES OPERATING INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ---------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- -------

Liggett............................... $312,268 $401,062 $455,666 $ 3,688 $ 6,753 $24,619
Liggett-Ducat......................... 77,115 54,160 8,642 (6,825)
Other................................. 232 5,134 5,793 (4,301) (3,855) (16,559)
-------- -------- -------- ------- ------- -------
Total....................... $389,615 $460,356 $461,459 $ 8,029 $(3,927) $ 8,060
======== ======== ======== ======= ======= =======

1997 compared to 1996

Revenues. Consolidated revenues were $389,615 for the year ended December
31, 1997 compared to $460,356 for the year ended December 31, 1996, a decrease
of $70,741 primarily due to a decline in sales of $88,794 at Liggett offset by
an increase in tobacco revenues at Liggett-Ducat of $22,955. Revenues in 1996
also included real estate rental income of $2,675 and sales of microfiche
products of $2,459.

Net sales at Liggett decreased in total by 22.1% ($88,794) due primarily to
a decline in unit sales volume of 30.9% ($124,029) partially offset by price
increases of $23,237 and improved product mix of $11,998 (see "Recent
Developments in the Cigarette Industry -- Pricing Activity"). The decline in
Liggett's sales volume was due to certain competitors' continuing leveraged
rebate programs tied to their products and increased promotional activity by
certain other manufacturers. In the premium segment, revenues declined in 1997
by 16.4% ($20,158) to $102,440 as a result of a 21.4% decline in unit sales
volume of $26,184 which was partially offset by price increases of $6,026. In
the discount segment, revenues declined in 1997 by 24.6% ($68,636) to $209,828
due to a 33.8% decline in unit sales volume of $85,846 which was partially
offset by price increases of $17,210. In 1997, fixed manufacturing costs on a
basis comparable to 1996 were $1,428 lower although costs per thousand units
increased $0.56 per thousand due to higher fixed costs per unit.

Net sales at Liggett-Ducat increased 42.8% ($22,955) to $77,115 over 1996
due primarily to higher unit sales volume ($13,211), price increases ($5,087)
and the effect of excise tax increases ($4,667).

Gross Profit. Consolidated gross profit of $187,494 for the year ended
December 31, 1997 decreased $29,529 from gross profit of $217,023 for the same
period in 1996, reflecting a decrease in gross profit at Liggett of $40,305
offset by an increase at Liggett-Ducat of $11,720 for the year ended December
31, 1997 compared to the same period in the prior year. The 1997 decline in
consolidated gross profit was due primarily to the decline in unit sales volume
discussed above. In 1997, Liggett's premium and discount brands contributed
33.8% and 58.5%, respectively, to the Company's gross profit while Liggett-Ducat
contributed 7.22%. The improved performance at Liggett-Ducat during 1997 is due
to lower tobacco and material prices resulting from purchases in higher volume
($6,600) and the effect of price increases ($5,500). In 1996, Liggett's premium
and discount brands contributed 34.4% and 63.9%, respectively, to the Company's
gross margin and Liggett-Ducat and BML contributed .7%. As a percent of revenues
(excluding federal excise taxes), gross profit at Liggett increased to 73.0% for
1997 compared to 72.0% for 1996 with gross profit for the premium segment at
77.1% both in 1997 and 1996 and gross profit for the discount segment at 70.8%
and 69.4% in 1997 and 1996, respectively. This increase is the result of the
March and September 1997 list price increases and improved production variances.
These increases were partially offset by increased tobacco costs at Liggett due
to a reduction in the average discount available to Liggett from leaf tobacco
dealers on tobacco purchased under prior years' purchase commitments. Gross
profit margin was further reduced by restructuring

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charges of $407 in cost of sales in 1997. As a percent of revenues (excluding
Russian excise taxes), gross profit at Liggett-Ducat increased to 17.0% for 1997
compared to 3.0% in 1996.

Expenses. Consolidated operating, selling, general and administrative
expenses were $179,465 for the year ended December 31, 1997 compared to $220,950
for the same period for the prior year, a decrease of $41,485. The decrease was
due primarily to Liggett's decrease in unit sales volume with corresponding
reductions in spending on promotional programs and marketing programs of $43,657
as well as reductions in administrative costs of approximately $7,000 over the
prior year. Such reductions were somewhat offset by increases in legal expenses
of $19,368, which includes the legal settlement discussed above of $16,421 and
also reflects, in part, the end of joint defense arrangements. (See Note 16 to
Company's Consolidated Financial Statements.) Expenses at BOL also declined
approximately $4,700 primarily due to workforce reductions at Liggett-Ducat in
late 1996 and the sale of BML in January of 1997.

Other Income (Expense). Consolidated interest expense was $61,778 for the
year ended December 31, 1997 compared to $60,556 for the same period for the
prior year. The increase of $1,222 relates to additional interest expense
incurred as a result of deferred payments during negotiations with BGLS
Noteholders (see "Capital Resources and Liquidity"). Equity in loss of affiliate
in 1997 and 1996 of $26,646 and $7,808, respectively, represents the Company's
proportionate share of losses from continuing operations at New Valley and the
decline in value of the New Valley Class A Preferred Shares. This is partially
offset by discontinued operations in which the Company reflected its portion of
New Valley's income from discontinued operations which was $1,536 in 1997 and
$2,982 in 1996 reflecting the Company's proportionate interest in the sale of
the messaging service business, sold in 1995. Other income also includes the
sale of assets, primarily the sale of the BML shares by BOL to New Valley in
1997 and the sale of surplus realty at Liggett and the assets of COM Products
Inc. ("COM") in 1996.

Loss from Continuing Operations. The loss from continuing operations for
the year ended December 31, 1997 was $51,810 compared with a loss of $64,918 for
the same period in the prior year. A tax provision of $1,123 in 1997 and $1,402
in 1996 relates to foreign income taxes at the subsidiary level.

Other. At December 31, 1997, the Company and its consolidated group had
net operating loss carryforwards for tax purposes of approximately $125,000
which may be subject to certain restrictions and limitations and which will
generally expire in the years 2006 to 2017.

1996 compared to 1995

Revenues. Consolidated revenues were $460,356 for the year ended December
31, 1996 compared to $461,459 for the year ended December 31, 1995, a decrease
of $1,103 primarily due to a decline in sales of $54,604 at Liggett offset by an
increase in tobacco revenues at Liggett-Ducat of $53,377. Results of operations
for Liggett-Ducat were not included in 1995 since consolidation occurred as of
December 29, 1995.

Net sales at Liggett decreased in 1996 12.0% ($54,604) from the prior year,
due primarily to a 17.9% decline in unit sales volume of $81,644, partially
offset by the effects of the April 1996 list price increase of $16,975 and
improved product mix of $10,065. The decline in premium and discount unit sales
volume was due to certain competitors continuing leveraging rebate programs tied
to their products and increased promotional activity by certain other
manufacturers. Liggett experienced a significant increase in volume at the end
of the fourth quarter of 1996, in part due to ongoing trade programs based on
quarterly volume targets for its customers and to consumer promotional programs
consisting of coupons and variable price reductions. In the premium segment,
revenues declined in 1996 by 10.8% ($14,925) to $122,598 as a result of a 13.7%
decline in unit sales volume ($18,893) which was partially offset by price
increases of $3,968. In the discount segment, revenues declined in 1996 by 12.5%
($39,679) to $278,464 as a result of a 19.1% decline in unit sales volume
($52,640) which was partially offset by price increases of $13,007. In 1996,
fixed manufacturing costs on a basis comparable to 1995 were $203 lower although
costs per thousand units increased $0.29 due to higher fixed costs per unit.

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35

Liggett-Ducat (not included in the prior year's results) increased unit
sales volume over the prior year by 8.7% to approximately 11.4 billion units and
increased revenues by $9,832 driven by the expanding market in Russia.

Gross Profit. Consolidated gross profit of $217,023 for the year ended
December 31, 1996 decreased $28,249 from gross profit of $245,272 for the same
period in 1995, reflecting a decrease in gross profit at Liggett of $30,089 for
the year ended December 31, 1996 compared to the same period in the prior year.
The 1996 decline in consolidated gross profit was due primarily to the decline
in unit sales volume discussed above. In 1996, Liggett's premium and discount
brands contributed 34.4% and 63.9%, respectively, to the Company's gross profit
while Liggett-Ducat contributed 0.7% and BML 1.0%. This was somewhat offset by
gross margin at Liggett-Ducat of $4,036 which margins were not included in the
prior year's results. As a percent of revenues (excluding federal excise taxes),
Liggett's gross profit decreased to 72.0% for 1996 compared to 73.2% for 1995
with gross profit for the premium segment at 77.1% and 79.7% in 1996 and 1995,
respectively, and gross profit for the discount segment at 69.5% and 72.4% in
1996 and 1995, respectively. This decrease in gross profit in 1996 is the result
of increased tobacco costs due to reduced worldwide supply of tobacco, and a
reduction in the average discount available to Liggett from leaf tobacco dealers
on tobacco purchased under prior years' purchase commitments, partially offset
by the April 1996 list price increase. Gross profit for 1995 was also reduced by
an accrual of approximately $4,900 for the United States Department of
Agriculture ("USDA") domestic marketing assessment. (See Note 16 to the
Company's Consolidated Financial Statements.)

Expenses. Consolidated operating, selling, general and administrative
expenses were $220,950 for the year ended December 31, 1996 compared to $237,212
for the same period for the prior year, a decrease of $16,262. The decrease was
due primarily to Liggett's decrease in sales volume with corresponding
reductions in spending on promotional programs ($8,838) offset by charges for
restructuring of $3,428 for severance programs ($132 of which is included in
cost of sales). The anticipated savings of the restructuring related primarily
to reduced payroll and benefits expenses in future periods. Of the total
restructuring expense recorded during 1996, $1,416 was funded during 1996 and
$2,012 remained to be funded in subsequent years. In addition, corporate
expenses, primarily legal fees, decreased by approximately $4,000. In 1995,
expenses increased due to increased spending on trade and promotional programs
and the accrual of approximately $4,000 for the settlement of certain tobacco
litigations with the Attorneys General of certain states. (See Note 16 to the
Company's Consolidated Financial Statements.)

Other Income (Expense). Consolidated interest expense was $60,556 for
the year ended December 31, 1996 compared to $57,505 for the same period for the
prior year. The increase of $3,051 relates to interest expense at Liggett-Ducat
not reflected in the prior year's consolidation, increased interest accrued for
the USDA domestic marketing assessment expense at Liggett partially offset by
redemption of $7,000 of the Liggett Senior Secured Notes (the "Liggett Series B
Notes") and an increase in interest expense at corporate due to an increase in
outstanding indebtedness of approximately $9,000. Equity in loss of affiliate of
$7,808 in 1996 represents the Company's proportionate share of losses from
continuing operations at New Valley. This is partially offset by discontinued
operations in which the Company reflected its portion of New Valley's gain on
disposal of $2,982. In 1995, equity in earnings of affiliate was $678 with
income from discontinued operations of $2,860 and gains in discontinued
operations of $18,369 attributable to New Valley. Other income in 1996 includes
the sale of assets of COM and the sale of surplus realty at Liggett as a result
of which the Company realized gains of $3,047 and $3,669, respectively.

Loss from Continuing Operations. The loss from continuing operations for
the year ended December 31, 1996 was $64,918 compared with a loss of $45,344 for
the same period in the prior year. A tax provision of $1,402 in 1996 and $342 in
1995 relates to foreign income taxes at the subsidiary level in 1996 and state
income taxes at the subsidiary level in 1995.

Other. At December 31, 1996, the Company and its consolidated group had
net operating loss carryforwards for tax purposes of approximately $114,000
which may be subject to certain restrictions and limitations and which will
generally expire in the years 2006 to 2009.

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36

Discontinued Operations. Income from discontinued operations of $2,982 for
the year ended December 31, 1996 and $21,229 for the prior year reflects the
Company's proportionate interest in the discontinued operations of New Valley's
messaging service business in 1996 and the redemption/sale of SkyBox preferred
and common stock and the sale of the messaging service business in 1995.

CAPITAL RESOURCES AND LIQUIDITY

Net cash and cash equivalents increased $2,813 and decreased $1,429 and
$906 for the twelve months ended December 31, 1997, 1996 and 1995, respectively.

Net cash used in operations in 1997 was $25,063 compared to cash used in
1996 of $3,705 primarily due to decreases in trade payables, promotional
spending and taxes payable offset by decreasing trade receivables, decreasing
inventories and increasing corporate accruals for interest charges.

Net cash used in operations in 1996 of $3,705 was lower than cash used in
1995 of $22,986, primarily due to the declining sales volume at Liggett
resulting in lower working capital requirements, decreasing trade receivables
and increases in accrual of promotional expense. This is compared to net cash
used in 1995 of $22,986, primarily the impact of non-cash adjustments relating
to discontinued operations and an increase in inventory levels. Such effects on
the uses of cash were offset by an increase in liabilities for various legal
settlements, debt issuance costs and unearned revenue.

Net cash provided by investing activities in 1997 of $36,327 was
principally due to the sale of BML by BOL for $55,000 on January 30, 1997 and
the sale of used equipment by Liggett offset by capital expenditures of $20,142
principally costs for construction and equipment by Liggett-Ducat for the new
cigarette factory in Russia. This is compared to net cash used in investing
activities in 1996 of $4,279 which was principally due to continuing capital
expenditures for real estate development in Russia of $29,800 by BML and
expenditures at Liggett of $4,300 for equipment modernization partially offset
by dividends received from New Valley on the Class A Preferred Shares held by
the Company and the proceeds from the sale of assets at both Liggett and the
Company.

Net cash provided by investing activities was $66,874 for the year ended
December 31, 1995. In the year ended December 31, 1995, cash was provided
through dividends from New Valley on the Class A Preferred Shares of $61,832,
the redemption of SkyBox preferred stock for $4,000 and the sale of the SkyBox
common stock for $9,282. These amounts were offset by capital expenditures,
particularly for building improvements related to real estate development by BML
in Russia.

Net cash used in financing activities of $8,532 in 1997 was comprised of
repurchase of $7,500 principal amount of Liggett Notes, repayment of credit
facilities in Russia, repayments of Liggett's revolving credit facility (the
"Liggett Facility") and distributions on the Company's common stock partially
offset by proceeds from credit facilities in Russia and proceeds from the
Liggett Facility at Liggett.

Net cash provided by financing activities in 1996 was $6,680, primarily due
to bank loans for Russian real estate development, the sale by BGLS of
additional 15.75% Series A Senior Secured Notes Due 2001 (the "Series A Notes")
later exchanged for the 15.75% Series B Senior Secured Notes Due 2001 (the
"Series B Notes") and an increase in borrowings under the Liggett Facility. Cash
provided was offset by redemption of BGLS' 16.125% Senior Subordinated Reset
Notes Due 1997 (the "Reset Notes"), a decrease in the cash overdraft and
distributions to the Company's stockholders of $4,162.

Cash used in financing activities in 1995 was $44,794 reflecting the
redemption of BGLS' Series 1 Senior Secured Notes on June 12, 1995 in the amount
of $23,594, repayments and redemptions of Liggett's long-term debt of $7,983,
repayments under Liggett's revolver of $3,830, distributions by the Company of
$5,475 to stockholders and a decrease in cash overdraft of $594 partially offset
by proceeds from debt of $2,568.

Liggett. Liggett had a net capital deficiency of $192,857 as of December
31, 1997, is highly leveraged and has substantial near-term service
requirements. Due to the many risks and uncertainties associated with the
cigarette industry, the impact of recent tobacco litigation settlements (see
"Recent Developments in the Cigarette Industry -- Legislation and Litigation")
and increased tobacco costs, there can be no assurance that

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37

Liggett will be able to meet its future earnings goals. Consequently, Liggett
could be in violation of debt covenants in the Liggett Facility, including
covenants limiting the maximum permitted adjusted net worth and net working
capital deficiencies, and if its lenders were to exercise acceleration rights
under the Liggett Facility or the Liggett Notes' Indenture or refuse to lend
under the Liggett Facility, Liggett would not be able to satisfy such demands or
its working capital requirements. (See below for additional information
concerning these covenants.)

The Liggett Series B Notes ($150,000) and Liggett C Notes ($32,279) issued
in 1992 and in 1994, respectively, pay interest semiannually at an annual rate
of 11.5% and 19.75%, respectively. The Liggett Notes required mandatory
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 Liggett Notes due
on February 1, 1999. The Liggett Notes are collateralized by substantially all
of the assets of Liggett, excluding accounts receivable and inventory. Eve is
guarantor for the Liggett Notes. The Liggett Notes may be redeemed, in whole or
in part, at a price equal to 100% of the principal amount, at the option of
Liggett. The Liggett 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. At December 31, 1997, Liggett was in
compliance with all debt covenants under the Liggett Notes' Indenture.

During 1997, Liggett engaged in negotiations with its note holders to
restructure the terms of the Liggett Notes. During such negotiations, Liggett
postponed making the interest payment of approximately $9,700 due on August 1,
1997 on the Liggett Notes. As discussed below, on August 29, 1997, the Facility
was amended to permit Liggett to borrow an additional $6,000 which was used on
that date to make the August 1, 1997 interest payment. The indenture governing
the Liggett Notes provides for a 30-day grace period before the failure to pay
interest will be an event of default.

On January 30, 1998, Liggett obtained the consents of the required majority
of the holders of the Liggett Notes to various amendments to the Indenture
governing the Liggett Notes. The amendments provide, among other things, for a
deferral of the February 1, 1998 mandatory redemption of $37,500 principal
amount of the Liggett Notes to the date of final maturity, February 1, 1999. In
addition, the amendments prohibit, with limited exceptions, payments of
dividends and incurrence of new debt by Liggett and tighten restrictions on the
disposition of proceeds of asset sales. The Company and BGLS also agreed to
guarantee the payment by Liggett of the August 1, 1998 interest payment on the
Liggett Notes. (See Note 9 to the Company's Consolidated Financial Statements.)
At maturity, the Liggett Notes will require a principal payment of $144,891.
Based on Liggett's results of operations for 1997, Liggett does not anticipate
it will be able to generate sufficient cash from operations to make such
payments.

Liggett also has the Liggett Facility, a $40,000 revolving credit facility
expiring March 8, 1999 under which $23,428 was outstanding at December 31, 1997.
On August 29, 1997, the Liggett Facility was amended to permit Liggett to borrow
an additional $6,000 which was used on that date in making the interest payment
of $9,700 due on August 1, 1997 to the holders of the Liggett Notes. BGLS
guaranteed the additional $6,000 advance under the Liggett Facility and
collateralized the guarantee with $6,000 in cash, deposited with Liggett's
lender. At December 31, 1997, this amount is classified in other assets on the
balance sheet. Availability under the Liggett Facility was approximately $7,728
based on eligible collateral at December 31, 1997. The Liggett Facility is
collateralized by all inventories and receivables of Liggett. Borrowings under
the Liggett Facility, whose interest is calculated at a rate equal to 1.5% above
Philadelphia National Bank's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate, bear a rate of 10% at December 31,
1997. The Liggett Facility contains certain financial covenants similar to those
contained in the Liggett Notes' Indenture including 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. In addition, the
Liggett Facility, as amended on April 8, 1998 in connection with the March 1998
Settlements, imposes requirements with respect to Liggett's adjusted net worth
(not to fall below a deficit of $195,000 as computed in accordance with the
agreement) and working capital (not to fall below a deficit of $17,000 as
computed in accordance with the agreement). At December 31, 1997, Liggett was in
compliance with all covenants under the Liggett Facility; Liggett's adjusted net
worth and net working capital deficiencies, as computed in accordance with the
agreement and giving effect to the March 1998 Settlements, were $187,959 and
$12,616, respectively.

On May 14, 1996, Liggett sold certain surplus realty in Durham, North
Carolina to the County of Durham for a sale price of $4,300. A gain of
approximately $3,600 was recognized on this sale.

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38

On March 11, 1997, Liggett sold certain surplus realty in Durham, North
Carolina to Blue Devil Ventures, a North Carolina limited liability partnership,
for a sale price of $2,200. A gain of approximately $1,600 was recognized on
this sale.

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.

The Company believes, and has been so advised by counsel handling the
respective cases, that the Company and Liggett have a number of valid defenses
to the claim or claims asserted against them. 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. (See
"Recent Developments in the Cigarette Industry -- Legislation, Regulation and
Litigation" and "-- Settlements" above and Note 16 to the Company's Consolidated
Financial Statements.)

The Company 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 the Company and Liggett. It is possible that the Company's consolidated
financial position, results of operations or cash flows could be materially
affected by an ultimate unfavorable outcome in any such pending litigation.

BGLS. At December 31, 1997, BGLS' long-term debt was approximately
$233,664.

On November 27, 1995, BGLS commenced an offer to exchange a total of
$232,864 principal amount of 15.75% Senior Secured Notes due January 31, 2001,
for all its outstanding 13.75% Series 2 Senior Secured Notes Due 1997 ("Series 2
Notes"), Reset Notes and 14.50% Subordinated Debentures Due 1998 ("Subordinated
Debentures"). The exchange ratio was $1,087.47 principal amount of new Series A
Notes for each $1,000 principal amount of Series 2 Notes exchanged, $1,132.28
principal amount of Series B Notes for each $1,000 principal amount of Reset
Notes exchanged and $1,000 principal amount of new Series B Notes for each
$1,000 principal amount of Subordinated Debentures exchanged. The new Series A
Notes and the new Series B Notes were identical except that the Series B Notes
were not subject to restrictions on transfer.

The exchange offer closed on January 30, 1996. All $91,179 of the Series 2
Notes and $125,495 of the Subordinated Debentures were exchanged. In addition,
BGLS cancelled all of the Subordinated Debentures ($13,705) held by the Company.
Subordinated Debentures in the amount of $800 remained outstanding and were paid
at maturity on April 1, 1998. As part of the exchange offer, substantially all
of the covenants and events of default were eliminated pertaining to the
Subordinated Debentures.

Holders of Reset Notes did not exchange, and the Reset Notes were redeemed
on March 29, 1996 for a total amount of $5,785, including premium, together with
accrued interest of $452. On March 7, 1996, an additional $7,397 face amount of
Series A Notes were sold for $6,300 including accrued interest with the proceeds
being used for the redemption of the Reset Notes.

Pursuant to a registered exchange offer, holders of the Series A Notes
exchanged all of the $107,373 outstanding principal amount for an equal
principal amount of Series B Notes. The exchange closed March 21, 1996. BGLS has
cancelled all the Series A Notes.

The new Series B Notes are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and NV
Holdings as well as a pledge of all of the New Valley securities held by BGLS
and NV Holdings. The BGLS Series B Notes Indenture contains certain covenants,
which among other things, limit the ability of BGLS to make distributions to the
Company to $6,000 per year

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($12,000 if less than 50% of the Series B Notes remain outstanding), limit
additional indebtedness of BGLS to $10,000, limit guarantees of subsidiary
indebtedness by BGLS to $50,000, and restrict certain transactions with
affiliates that exceed $2,000 in any year subject to certain exceptions which
include payments to the Company not to exceed $6,500 per year for permitted
operating expenses, payment of the Chairman's salary and bonus and certain other
expenses, fees and payments. In addition, the Indenture contains certain
restrictions on the ability of the Chairman and certain of his affiliates to
enter into certain transactions with, and receive payments above specified
levels from, New Valley. Interest is payable at the rate of 15.75% per annum on
January 31 and July 31 of each year, except for the period ended July 31, 1996
when interest was payable at 13.75% from October 1, 1995 to January 30, 1996 and
at 15.75% from January 31, 1996 through July 31, 1996.

The Company recorded an extraordinary charge of approximately $9,700 for
the year ended December 31, 1995 relating to the exchanged debt securities
discussed above.

On March 5, 1998, BGLS entered into the Standstill Agreement whereby the
Apollo Holders agreed to the deferral of interest payments, commencing with the
interest payment due July 31, 1997 through the interest payment due July 31,
2000. (See "Recent Developments -- The Company -- Standstill Agreement".)

BOL. On January 31, 1997, BOL sold its 99.1% interest in BML to New Valley
for $55,000. The purchase price paid was $21,500 in cash and a 9% promissory
note of $33,500, which was paid during 1997. (See "The Company -- Brooke
(Overseas) Ltd. -- Sale of BrookeMil Ltd.".)

In October 1995, Liggett-Ducat entered into a loan agreement with a Russian
bank to borrow up to $20,400 to fund real estate development. The Company
guaranteed the payment of the note. In December 1996, the loan was assigned by
Liggett-Ducat to BML which has pledged Ducat Place II, the second phase of BML's
Ducat Place real estate development, as collateral for the loan. On January 31,
1997, New Valley purchased BOL's 99.1% interest in BML and indemnified the
Company and its subsidiaries with respect to the loan. BML paid the balance of
the loan in full during the third quarter 1997.

Liggett-Ducat is building a new cigarette factory on the outskirts of
Moscow. The new factory, which will utilize Western cigarette making technology
and have a capacity of 30 billion units per year, will produce American and
international blend cigarettes, as well as traditional Russian cigarettes.
Western Realty has made a $20,000 participating loan to, and payable out of a
30% profits interest in, a company organized by BOL which will, among other
things, acquire an interest in the manufacturing facility. (See "Recent
Developments -- New Valley".) In addition, BOL has entered into equipment
purchases of approximately $35,400, of which $28,800 will be financed over five
years beginning in 1998. The Company is a guarantor of one of the purchases for
which the remaining obligation is approximately $7,000.

The Company. Prior to the 1995 exchange offer, the Company had substantial
near-term consolidated debt service requirements, with aggregate required
principal payments of $318,106 due in the years 1995 through 1998. As a result
of the 1995 exchange offer, the redemption of the Reset Notes in 1996 and the
sale of the BML shares to New Valley in January 1997 and the 1998 Liggett
restructuring, the Company has decreased its scheduled debt maturities to $6,427
due in the year 1998; approximately $5,000 of this debt relates to credit lines
established by Liggett-Ducat. Liggett has a payment at maturity on February 1,
1999 of approximately $145,000. The Company believes that it will continue to
meet its liquidity requirements through 1998, although the BGLS Notes Indenture
limits the amount of restricted payments BGLS is permitted to make to the
Company during the calendar year. At December 31, 1997, the remaining amount
available through December 31, 1998 in the Restricted Payment Basket related to
BGLS' payment of dividends to the Company (as defined by BGLS' Series B Notes
Indenture) is $11,086. Company expenditures (exclusive of Liggett and
Liggett-Ducat) in 1998 for current operations include debt service estimated at
$30,715, dividends on the Company's shares (currently at an annual rate of
approximately $6,100) and corporate expense. The Company anticipates funding
1998 current operations and long-term growth with the proceeds from public
and/or private debt and equity financing, management fees and other payments
from subsidiaries of approximately $3,600 and distributions from New Valley. New
Valley may acquire or seek to acquire

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additional operating businesses through merger, purchase of assets, stock
acquisition or other means, or to make other investments, which may limit its
ability to make such distributions.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in this Prospectus
and in other filings with the Securities and Exchange Commission and in its
reports to shareholders, which reflect management's current views with respect
to future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties and, in connection with the
"safe-harbor" provisions of the Reform Act, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company. Liggett continues to be subject to risk factors endemic to the domestic
tobacco industry including, without limitation, health concerns relating to the
use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations and litigation. Each of the Company's
operating subsidiaries, namely Liggett and Liggett-Ducat, are subject to intense
competition, changes in consumer preferences, the effects of changing prices for
its raw materials and local economic conditions. Furthermore, the performance of
Liggett-Ducat's operations in Russia are affected by uncertainties in Russia
which include, among others, political or diplomatic developments, regional
tensions, currency repatriation restrictions, foreign exchange fluctuations,
inflation, and an undeveloped system of commercial laws and legislative reform
relating to foreign ownership in Russia. In addition, the Company has a high
degree of leverage and substantial near-term debt service requirements, as well
as a net worth deficiency and recent losses from continuing operations. The
Indenture for BGLS' Series B Notes provides for, among other things, the
restriction of certain affiliated transactions between the Company and its
affiliates, as well as for certain restrictions on the use of future
distributions received from New Valley. Due to such uncertainties and risks,
readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date on which such statements are made.
The Company does not undertake to update any forward-looking statement that may
be made from time to time by or on behalf of the Company. See "Risk Factors".

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table, together with accompanying text, sets forth the name
and age of all current directors and executive officers of the Company, all
positions and offices with the Company held by such persons and the period
served. The directors hold office until the next annual meeting of shareholders
and until their respective successors are duly elected and qualified. Officers
of the Company hold their offices at the pleasure of the Board of Directors of
the Company.

NAME POSITION AGE
- ---- -------- ---

Bennett S. LeBow..................................... Chairman of the Board, President 60
and Chief Executive Officer
Richard J. Lampen.................................... Executive Vice President 44

Joselynn D. Van Siclen............................... Vice President, Chief Financial 57
Officer and Treasurer

Marc N. Bell......................................... Vice President, General Counsel 37
and Secretary

Ronald S. Fulford.................................... Chairman of the Board, President 64
and Chief Executive Officer of
Liggett

Robert J. Eide....................................... Director 45

Jeffrey S. Podell.................................... Director 57

Jean E. Sharpe....................................... Director 51

There are no family relationships among the executive officers or directors
of the Company.

BENNETT S. LEBOW has been the Chairman of the Board, President and Chief
Executive Officer of the Company, a New York Stock Exchange-listed holding
company, since June 1990, and has been a director of the Company since October
1986. Since November 1990, he has been Chairman of the Board, President and
Chief Executive Officer of BGLS, which directly or indirectly holds the
Company's equity interests in several private and public companies.

Mr. LeBow has been a director of Liggett since June 1990 and Chairman of
the Board of Liggett from July 1990 to May 1993. He served as one of three
interim Co-Chief Executive Officers from March 1993 to May 1993.

He has been Chairman of the Board of New Valley, in which the Company holds
an indirect voting interest of approximately 42%, since January 1988, and Chief
Executive Officer since November 1994. In November 1991, an involuntary petition
seeking an order for relief under Chapter 11 of Title 11 of the United States
Code was commenced against New Valley by certain of its bondholders. New Valley
emerged from bankruptcy reorganization proceedings in January 1995. He has been
Chairman of the Board, President and Chief Executive Officer of NV Holdings
since September 1994.

He was a director of MAI Systems Corporation ("MAI"), the Company's former
indirect majority-owned subsidiary, from September 1984 to October 1995,
Chairman of the Board from November 1990 to May 1995 and the Chief Executive
Officer from November 1990 to April 1993. In April 1993, MAI filed for
protection under Chapter 11 of Title 11 of the United States Code. In November
1993, MAI emerged from bankruptcy reorganization proceedings. MAI is engaged in
the development, sale and service of a variety of computer and software
products.

RICHARD J. LAMPEN has served as the Executive Vice President of the Company
and of BGLS since July 1996. Since October 1995, Mr. Lampen has been the
Executive Vice President of New Valley. From May 1992 to September 1995, Mr.
Lampen was a partner at Steel Hector & Davis, a law firm located in Miami,
Florida. From January 1991 to April 1992, Mr. Lampen was a Managing Director at
Salomon Brothers Inc, an investment bank, and was an employee at Salomon
Brothers Inc from 1986 to April 1992.

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Mr. Lampen is a director of New Valley, Thinking Machines, PC411 and Spec's
Music, Inc. Mr. Lampen has served as a director of a number of other companies,
including U.S. Can Corporation and The International Bank of Miami, N.A., as
well as a court-appointed independent director of Trump Plaza Funding, Inc.

JOSELYNN D. VAN SICLEN has been Vice President, Chief Financial Officer and
Treasurer of the Company and of BGLS since May 1996, and currently holds various
positions with certain of BGLS' subsidiaries, including Vice President and
Treasurer of Eve Holdings, Inc., a wholly-owned subsidiary of Liggett, since
April 1994 and May 1996, respectively. Prior to May 1996, Ms. Van Siclen served
as Director of Finance of the Company and was employed in various accounting
capacities for various subsidiaries of the Company since 1992. Since before 1990
to November 1992, Ms. Van Siclen was an audit manager for the accounting firm of
Coopers & Lybrand L.L.P.

MARC N. BELL has been the Vice President of the Company and of BGLS since
January 1998 and has served as General Counsel and Secretary of the Company and
of BGLS since May 1994. Since November 1994, Mr. Bell has served as Associate
General Counsel and Secretary of New Valley and since February 1998, as Vice
President. Prior to May 1994, Mr. Bell was with the law firm of Zuckerman,
Spaeder, Taylor & Evans, in Miami, Florida and from June 1991 to May 1993, with
the law firm of Fischbein - Badillo - Wagner - Harding in New York, New York.

RONALD S. FULFORD has served as Chairman of the Board, President and Chief
Executive Officer of Liggett since September 1996. Mr. Fulford has also served
as a consultant to the Company from March 1996 to March 1997. From June, 1986
until February 1996, Mr. Fulford served as Executive Chairman of Imperial
Tobacco ("Imperial"), the British tobacco unit of the British conglomerate
Hanson PLC ("Hanson"). Before Imperial, Mr. Fulford was chief executive of three
other Hanson companies: London Brick, British EverReady UK & South Africa and
United Gas Industries UK & Europe.

ROBERT J. EIDE has been a director of the Company since November 1993. Mr.
Eide has been a director of BGLS since November 1993, a director of NV Holdings
since September 1994 and Secretary and Treasurer of Aegis Capital corp., a
registered broker-dealer, since before 1988. Mr. Eide also serves as a director
of Nathan's Famous, Inc., a restaurant chain.

JEFFREY S. PODELL has been a director of the Company since November 1993.
Mr. Podell has been a director of BGLS since November 1993, a director of NV
Holdings since September 1994 and the Chairman of the Board and President of
Newsote, Inc., a privately-held holding company, since 1989.

JEAN E. SHARPE has been a director of the Company since May 1998. Ms.
Sharpe is a private investor and has engaged in various philanthropic activities
since her retirement in September 1993 as Executive Vice President and Secretary
of the Company and as an officer of various of its subsidiaries. Ms. Sharpe
previously served as a director of the Company from July 1990 until September
1993.

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EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation awarded
to, earned by or paid during the past three years to those persons who were, at
December 31, 1997, the Company's Chief Executive Officer, the other two
executive officers of the Company and an executive officer of a subsidiary of
the Company whose cash compensation exceeded $100,000 (collectively, the "named
executive officers"):

SUMMARY COMPENSATION TABLE(1)

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------- ---- --------- ------- ------------ ------------
($) ($) ($) (#)

Bennett S. LeBow................. 1997 3,113,281(2) 667,969(3) -- --
Chairman of the Board, 1996 3,484,375(2) 890,626(3) -- --
President and Chief 1995 3,082,823(2) 712,500(3) -- --
Executive Officer

Richard J. Lampen(4)............. 1997 650,000 -- 260,000(5)
Executive Vice President 1996 600,000 100,000 -- --

Joselynn D. Van Siclen(6)........ 1997 140,000 -- --
Vice President, Chief 1996 131,667 10,000 -- --
Financial Officer and Treasurer

Ronald S. Fulford(7)............. 1997 425,000 -- 247,961(8)(9) --
Chairman of the Board, 1996 157,530 -- 552,832(9) --
President and Chief Executive
Officer of Liggett

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

(1) Unless otherwise stated, the aggregate value of perquisites and other
personal benefits received by the named executive officers are not reflected
because the amounts were below the reporting requirements established by the
rules of the SEC.
(2) Includes salary paid by New Valley of $2,000,000, $2,000,000 and $1,894,823
during 1997, 1996 and 1995, respectively.
(3) Includes payments equal to 10% of base salary ($111,328, $148,438 and
$118,750 during 1997, 1996 and 1995, respectively) in lieu of certain other
executive benefits. See "Employment Agreements".
(4) Effective July 1, 1996, Mr. Lampen was appointed Executive Vice President of
the Company. In 1997 and 1996, all of Mr. Lampen's salary and bonus were
paid by New Valley and 25% (or $162,500 and $175,000 in 1997 and 1996,
respectively) was subsequently reimbursed to New Valley by the Company. The
table reflects 100% of Mr. Lampen's salary and bonus.
(5) Represents options to purchase the Company's common stock. See "Stock Option
Grants in 1997".
(6) Effective May 6, 1996, Ms. Van Siclen was appointed Vice President, Chief
Financial Officer and Treasurer of the Company.
(7) Effective September 5, 1996, Mr. Fulford was appointed Chairman of the
Board, President and Chief Executive Officer of Liggett.
(8) Represents an automobile allowance, living allowance and group term life
insurance provided to Mr. Fulford.
(9) Includes payments ($163,155 and $552,832 in 1997 and 1996, respectively)
made pursuant to a consulting agreement between Mr. Fulford and the Company,
which payments were reimbursed to the Company by New Valley. See "Employment
Agreements".

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44

The following table sets forth all grants of stock options to the named
executive officers during 1997.

STOCK OPTION GRANTS IN 1997

NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT
OPTIONS EMPLOYEES IN PRICE EXPIRATION DATE PRESENT
NAME GRANTED(#) 1997 ($/SHARE) DATE VALUE($)(2)
- ---- ---------- ------------- --------- ---------- ------------

Richard J. Lampen...................... 260,000(1) 61.6% $5.00 12/31/06 $1,118,000

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

(1) Represents options to purchase shares of the Company's common stock, which
were granted at fair market value on January 1, 1997. Subject to earlier
vesting upon a change of control (as defined), the options vest and become
exercisable in six equal annual installments commencing on January 1, 1998.
(2) The estimated present value at grant date of options granted during 1997 has
been calculated using the Black-Scholes option pricing model, based upon the
following assumptions: volatility of 81.46%, a risk-free rate of 6.44%, an
expected life of 10 years, and no expected dividends or forfeiture. The
approach used in developing the assumptions upon which the Black-Scholes
valuation was done is consistent with the requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation".

The following table sets forth certain information concerning unexercised
options held by the named executive officers as of December 31, 1997. There were
no stock options exercised by any of the named executive officers during 1997.

AGGREGATED FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------

Richard J. Lampen............................... -0- 260,000 -- $942,500*

* Calculated using the closing price of $8 5/8 per share on December 31, 1997
less the option exercise price.

COMPENSATION OF DIRECTORS

Outside directors of the Company each receive $7,000 per annum as
compensation for serving as a director, $1,000 per annum for each Board
committee membership, $1,000 per meeting for each Board meeting attended, and
$500 per meeting for each committee meeting attended. In addition, each outside
director of BGLS receives $28,000 per annum as compensation for serving as a
director, $500 per annum for each Board committee membership, $500 per meeting
for each Board meeting attended, and $500 for each committee meeting attended.
Each outside director is reimbursed for reasonable out-of-pocket expenses
incurred in serving on the Board of the Company and/or BGLS.

In the second quarter of 1998, each outside director of the Company
received an award of 10,000 shares of the Company's common stock for services as
a director. Subject to earlier vesting upon a change of control (as defined),
the shares vest one-quarter on the date of grant and the remaining shares vest
in three equal annual installments commencing on the first anniversary of the
date of grant.

EMPLOYMENT AGREEMENTS

The Company. Bennett S. LeBow is a party to an employment agreement with
the Company dated February 21, 1992. The agreement has a one-year term with
automatic renewals for additional one-year terms unless notice of non-renewal is
given by either party six months prior to the termination date. As of January 1,
1998, Mr. LeBow's annual base salary was $1,391,601. He is also entitled to an
annual bonus for 1998 of $695,800 payable quarterly and an annual payment equal
to 10% of his base salary in lieu of certain other executive benefits such as
club memberships, company-paid automobiles and other similar perquisites.

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45

Following termination of his employment without cause (as defined), he would
continue to receive his then current base salary and bonus for 24 months.
Following termination of his employment within two years of a change of control
(as defined) or in connection with similar events, he is entitled to receive a
lump sum payment equal to 2.99 times his then current base salary and bonus.
Under the terms of the Indenture governing the BGLS Notes, Mr. LeBow's salary
and bonus may not be increased from one year to the next by more than 10% per
annum, except that his salary and bonus may be increased in the same percentage
amount as any increase in the price of the Company's Common Stock during a
calendar year, subject to a maximum increase of 25% per annum. His salary and
bonus are subject to decrease if the price of the Common Stock decreases by more
than 10% during a calendar year, up to a maximum decrease of 25% per annum, but
in no event lower than compensation earned in 1994 ($1,425,000).

Ronald S. Fulford, Chairman of the Board, President and Chief Executive
Officer of Liggett, is a party to an employment agreement with Liggett, dated
September 5, 1996. As of September 5, 1996, Mr. Fulford's annual salary was
$425,000. Bonus payments are at the sole discretion of the Board of Liggett.
Effective as of March 1, 1996, the Company entered into an agreement with Mr.
Fulford. Pursuant to this agreement, Mr. Fulford agreed to provide various
services in connection with the Company's investment in RJR Nabisco (including,
without limitation, consulting services, attendance at and participation in
meetings related to the Company's solicitation of proxies at RJR Nabisco's 1996
annual meeting and presentations to financial analysts and institutional
investors). During the term of the agreement, which ended on March 31, 1997, Mr.
Fulford received compensation equal to UK(pound)33,417 (or approximately
$54,000) per month and reimbursement for all reasonable business and travel
expenses incurred in performing services under the agreement. The Company also
agreed to reimburse Mr. Fulford for any reduction in pension benefits (currently
estimated at approximately UK(pound)14,400 (or approximately $23,000 per annum)
which resulted from his terminating his employment with Imperial Tobacco to
enter into the agreement.

There are no employment agreements between BGLS and the named executive
officers.

New Valley. Mr. LeBow is a party to an employment agreement with New
Valley dated as of June 1, 1995, as amended effective as of January 1, 1996. The
agreement has an initial term of three years effective as of January 18, 1995
(the "Effective Date"), with an automatic one year extension on each anniversary
of the Effective Date unless notice of non-extension is given by either party
within the sixty-day period prior to such anniversary date. As of January 1,
1998, Mr. LeBow's annual base salary was $2,000,000. Following termination of
his employment without cause (as defined therein), he would continue to receive
his base salary for a period of 36 months commencing with the next anniversary
of the Effective Date following the termination notice. Following termination of
his employment within two years of a change of control (as defined therein), he
is entitled to receive a lump sum payment equal to 2.99 times his then current
base salary. The BGLS Indenture and New Valley's Joint Plan provide that the
annual compensation paid to Mr. LeBow for services rendered in his capacity as
an officer or director of New Valley shall not exceed $2,000,000.

Richard J. Lampen is a party to an employment agreement with New Valley
dated September 22, 1995. The agreement has an initial term of two and a quarter
years from October 1, 1995 with automatic renewals after the initial term for
additional one-year terms unless notice of non-renewal is given by either party
within the ninety-day period prior to the termination date. As of January 1,
1998, his annual base salary was $750,000. In addition, the Board of Directors
may award an annual bonus to Mr. Lampen at its sole discretion. The Board shall
review such base salary annually and may increase (but not decrease) it from
time to time, in its sole discretion. Following termination of his employment
without cause (as defined therein), he shall receive severance pay in a lump sum
equal to the amount of his base salary he would have received if he was employed
for one year after termination of his employment term.

STOCK OPTION PLAN

On May 8, 1998, the Company adopted its 1998 Long-Term Incentive Plan (the
"Incentive Plan"), subject to approval by the shareholders of the Company at the
next annual meeting. The Incentive Plan authorizes the granting of up to five
million shares of the Company's common stock through awards of stock options
(which may include incentive stock options and/or nonqualified stock options),
stock appreciation

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46

rights and shares of restricted Company common stock. All officers, employees
and consultants of the Company and its subsidiaries are eligible to receive
awards under the Incentive Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1997, Messrs. Eide, LeBow and Podell were members of the Company's
compensation committee. Messrs. Eide and Podell serve as directors of BGLS and
NV Holdings. Mr. Eide is a stockholder, and serves as the Secretary and
Treasurer of Aegis Capital Corp. ("ACC"), a registered broker-dealer, that has
performed services for the Company and/or its affiliates since before January 1,
1995. During 1995, 1996 and 1997, ACC received commissions and other income in
the aggregate amount of approximately $585,000, $317,000 and $522,000,
respectively from the Company and/or its affiliates. ACC, in the ordinary course
of its business in 1997, engaged in brokerage activities with Ladenburg Thalmann
& Co. Inc., a subsidiary of New Valley, on customary terms. In connection with
the acquisition of the Office Buildings by New Valley on January 10, 1996, Mr.
Eide received a commission of $220,000 from the seller.

Effective July 1, 1990, a former executive of the Company transferred his
equity in the Company to Mr. LeBow and resigned from substantially all of his
positions with the Company and its affiliates. In consideration for this
transfer, LLP, a partnership controlled by Mr. LeBow, agreed, among other
things, to make certain payments to the Company on account of the former
executive's outstanding indebtedness of $5,477,000. On March 7, 1997, LLP
satisfied its obligation with respect to the loan by transferring to the Company
400,000 shares of the Company's common stock, which shares had been pledged to
secure the non-recourse obligation, except as to the pledged shares.

Mr. LeBow is a director of Liggett. He is Chairman of the Board and Chief
Executive Officer of New Valley, BGLS and NV Holdings. Mr. Lampen, an executive
officer of the Company and BGLS, is an executive officer and director of New
Valley.

DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE

BGLS sponsors the Retirement Plan For Salaried Non-Bargaining Unit
Employees (the "Retirement Plan") of Liggett, which is a noncontributory,
defined benefit plan. Each salaried employee of the participating companies
becomes a participant on the first day of the month following one year of
employment with 1,000 hours of service and the attainment of age 21. A
participant becomes vested as to benefits on the earlier of his attainment of
age 65, or upon completion of five years of service. Benefits become payable on
a participant's normal retirement date, age 65, or, at the participant's
election, at his early retirement after he has attained age 55 and completed ten
years of service. A participant's annual benefit at normal retirement date is
equal to the sum of: (A) the product of: (1) the sum of: (a) 1.4% of the
participant's average annual earnings during the five-year period from January
1, 1986 through December 31, 1990 not in excess of $19,500 and (b) 1.7% of his
average annual earnings during such five-year period in excess of $19,500 and
(2) the number of his years of credited service prior to January 1, 1991; (B)
1.55% of his annual earnings during each such year after December 31, 1990, not
in excess of $16,500; and (C) 1.85% of his annual earnings during such year in
excess of $16,500. The maximum years of credited service is 35. If hired prior
to January 1, 1983, there is no reduction for early retirement. If hired on or
after January 1, 1983, there is a reduction for early retirement equal to 3% per
year for the number of years prior to age 65 (age 62 if the participant has at
least 20 years of service) that the participant retires. The Retirement Plan
also provides benefits to disabled participants and to surviving spouses of
participants who die prior to retirement. Benefits are paid in the form of a
single life annuity, with optional actuarially equivalent forms of annuity
available. Payment of benefits is made beginning on the first day of the month
immediately following retirement. As of December 31, 1993, the accrual of
benefits under the plan for Liggett employees was frozen.

As of December 31, 1997, none of the named executive officers was eligible
to receive any benefits under the Retirement Plan.

Under certain circumstances, the amount of retirement benefit payable under
the Retirement Plan to certain employees may be limited by the federal tax laws.
Any Retirement Plan benefit lost due to such a

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47

limitation will be made up by BGLS through a non-qualified supplemental
retirement benefit plan. BGLS has accrued, but not funded, amounts to pay
benefits under this supplemental plan.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On January 25, 1995, the Company entered into a Non-qualified Stock Option
Agreement (the "1995 Option Agreement") with Howard M. Lorber, a consultant to
the Company and a subsidiary who also serves as a director and President of New
Valley. The 1995 Option Agreement granted such consultant non-qualified stock
options to purchase 500,000 shares of the Company's common stock at an exercise
price of $2.00 per share. The options are exercisable over a ten-year period,
with 20% vesting on the grant date and 20% vesting on each of the four
anniversaries of the grant date. On December 16, 1996, the Company entered into
a Stock Option Agreement (the "1996 Option Agreement") with such consultant. The
1996 Option Agreement granted such consultant non-qualified stock options to
purchase 1,000,000 shares of the Company's common stock at an exercise price of
$1.00 per share. The options, which have a ten-year term, vest and become
exercisable in six equal annual installments beginning on July 1, 1997. Pursuant
to the 1995 Option Agreement and the 1996 Option Agreement, common stock
dividend equivalents are paid on each vested and unexercised option. During
1995, the consultant received $320,000 of consulting fees from the Company.
Since January 1, 1996, the consultant has received consulting fees of $40,000
per month from the Company and a subsidiary. In January 1998, the consultant and
the Company entered into an amendment to his consulting agreement whereby he is
entitled on an annual basis to receive additional payments in an amount
necessary to reimburse him, on an after-tax basis, for all applicable taxes
incurred by him during the prior calendar year as a result of the grant to him,
or vesting, of a 1994 award of 500,000 restricted shares of the Company's common
stock, the award of 500,000 options under the 1995 Option Agreement and the
award of 1,000,000 options under the 1996 Option Agreement. The consultant
received an additional consulting payment of $425,000 in January 1998, which the
consultant and the Company have agreed will constitute full satisfaction of the
Company's obligations under the amendment with respect to 1997.

In 1995, the Company and New Valley entered into an expense sharing
agreement pursuant to which certain lease, legal and administrative expenses are
allocated to the entities incurring the expense. Expense reimbursements amounted
to approximately $571,000, $462,000 and $375,000 under this agreement for the
years ended December 31, 1995, 1996 and 1997, respectively.

During 1995 and 1996, Orchard Capital Corporation, an affiliate of Richard
S. Ressler, the beneficial owner of more than 5% of the Company's Common Stock
and a director of New Valley until September 1997, served as a consultant to the
Company and its subsidiaries and received consulting fees of $270,000 and
$220,000, respectively.

Mr. Ressler, is Chairman of the Board and the beneficial owner of more than
10% of the shares of MAI Systems Corporation ("MAI"), which in 1996 entered into
certain arrangements with Ladenburg, whereby MAI has sold computer and software
products and has been providing related professional and support services to
Ladenburg. During 1996 and 1997, Ladenburg paid MAI, in the aggregate,
approximately $100,000 and $610,000, respectively, for such products and
services. In addition, during 1996 and 1997, Ladenburg paid another company
controlled by the former director approximately $10,000 and $143,000,
respectively, for communications consulting services.

In March 1997, the Company acquired a membership interest in Orchard/JFAX
Investors, LLC, of which Mr. Ressler serves as a managing member, for $1
million. The LLC holds a controlling interest in a provider of telecommunication
services.

During 1996, the Company and BGLS entered into a court-approved Stipulation
and Agreement (the "Settlement") with New Valley relating to the Company's and
BGLS's application under the Federal Bankruptcy Code for reimbursement of legal
fees and expenses incurred by them in connection with New Valley's bankruptcy
reorganization proceedings. Pursuant to the Settlement, New Valley reimbursed
the Company and BGLS $655,217 for such legal fees and expenses. The terms of the
Settlement were substantially similar to the terms of previous settlements
between New Valley and other applicants who had sought reimbursement of
reorganization-related legal fees and expenses.

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48

On December 18, 1996, New Valley loaned BGLS $990,000 under a short-term
promissory note due January 31, 1997 and bearing interest at 14% per annum. On
January 2, 1997, New Valley loaned BGLS an additional $975,000 under another
short-term promissory note due January 31, 1997 and bearing interest at 14% per
annum. Both loans, including interest, were repaid on January 31, 1997.

On January 31, 1997, BOL sold New Valley the BML Shares, representing 99.1%
of the shares of the common stock of BML. New Valley paid a purchase price of
$55 million, consisting of $21.5 million in cash and a $33.5 million 9%
promissory note of New Valley. The note has been paid in full. See "The
Company -- Brooke (Overseas) Ltd. -- Sale of BrookeMil Ltd." as well as Notes 4
and 16 to the Company's Consolidated Financial Statements for information
concerning the transaction and a pending lawsuit relating to New Valley's
purchase of the BML Shares.

As of May 8, 1998, the Apollo Holders are the beneficial owners of 8.9% of
the Company's Common Stock and held $97,239,000 principal amount of BGLS' 15.75%
Senior Secured Notes due 2001 (the "BGLS Notes"). For information concerning the
Standstill Agreement with the Apollo Holders and the issuance of warrants to
purchase shares of the Company's common stock to the Apollo Holders in
connection with the Standstill Agreement, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments -- The Company", as well as Note 9 to the Company's Consolidated
Financial Statements. The Company, New Valley and their affiliates have other
business relationships with affiliates of the Apollo Holders. For additional
information concerning such business relationships, see "The Company -- New
Valley Corporation -- Western Realty" and "-- New Valley Realty Division", as
well as Note 2 to the Company's Consolidated Financial Statements.

As of May 8, 1998, High River, the Selling Stockholder under this
Prospectus, is the beneficial owner of 7.3% of the Company's common stock and an
affiliate, Tortoise Corp., held $97,551,000 principal amount of the BGLS Notes.
On January 16, 1998, the Company entered into a Stock Purchase Agreement in
which High River purchased 1,500,000 shares of the Company's common stock at
$6.00 per share for an aggregate purchase price of $9,000,000. The Company has
agreed to use its best efforts to file with the SEC a registration statement to
cover resales of the shares by High River to be declared effective by May 15,
1998. If the registration statement has not been declared effective by such
date, liquidated damages on the shares of Common Stock will accrue at the rate
of $25,000 per day for the first 60-day period, and thereafter at the rate of
$50,000 per day, provided that the aggregate liquidated damages shall not exceed
$9,000,000. See "Selling Stockholder".

For information concerning certain agreements and transactions between the
Company, BGLS and New Valley relating to RJR Nabisco, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments -- New Valley -- Investment in RJR Nabisco"
and Notes 3 and 17 to the Company's Consolidated Financial Statements.

See, also, "Executive Compensation -- Compensation Committee Interlocks and
Insider Participation".

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of May 8, 1998, the beneficial ownership
of the Company's common stock (the only class of voting securities) by (i) each
person known to the Company to own beneficially more than five percent of its
common stock, (ii) each of the Company's directors, (iii) each of the Company's
named executive officers and (iv) all directors and executive officers as a
group. Unless otherwise indicated, each person possesses sole voting and
investment power with respect to the shares indicated as beneficially owned, and
the business address of each person is 100 S.E. Second Street, Miami, Florida
33131.

NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS
------------------- --------- ----------

Bennett S. LeBow(1)(5)(6)................................... 9,180,008 44.9%

Richard S. Ressler(2)....................................... 1,824,999 8.9
Orchard Capital Corporation
10960 Wilshire Boulevard
Los Angeles, CA 90024

AIF II, L.P. and Lion Advisors, L.P.(3)..................... 2,000,000 8.9
Two Manhattanville Road
Purchase, NY 10577

High River Limited Partnership(4)........................... 1,500,000 7.3
Riverdale LLC
Carl C. Icahn
100 South Bedford Road
Mt. Kisco, NY 10549

Robert J. Eide(5)........................................... 20,000 (*)
Aegis Capital Corp.
70 East Sunrise Highway
Valley Stream, NY 11581

Jeffrey S. Podell(5)........................................ 20,000 (*)
Newsote, Inc.
26 Jefferson Street
Passaic, NJ 07055

Jean E. Sharpe(5)........................................... 10,000 (*)
462 Haines Road
Mt. Kisco, NY 10549

Richard J. Lampen(6)........................................ 33 (*)

Joselynn D. Van Siclen(6)................................... -- --

Ronald S. Fulford(7)........................................ -- --
Liggett Group Inc.
700 West Main Street
Durham, NC 27702

All directors and executive officers as a group
(8 persons).................................................. 9,230,041 45.1%

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

(*) The percentage of shares beneficially owned does not exceed 1% of the Common
Stock.
(1) Includes 8,633,008 shares of the Company's common stock held by LeBow
Limited Partnership, a Delaware limited partnership ("LLP"), and 547,000
shares of common stock held by The Bennett and Geraldine LeBow Foundation,
Inc., a Florida not-for-profit corporation (the "Foundation"). Mr. LeBow
indirectly exercises sole voting power and sole dispositive power over the
shares of the Company's common stock held by LLP, 8,191,800 shares of which
are pledged to U.S. Clearing Corp. to secure a margin loan to Mr. LeBow. Mr.
LeBow is a director, officer and sole shareholder of LeBow Holdings, Inc., a
Nevada corporation ("LHI"), the general partner of LLP. Mr. LeBow and family
members serve as directors and executive officers of the Foundation, and Mr.
LeBow possesses shared voting power and shared dispositive power with the
other directors of the Foundation with respect to the Foundation's

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50

shares of the Company's common stock. The Foundation's principal business
and office address is 1221 Brickell Avenue, 21st Floor, Miami, Florida
33131.
(2) Based upon Amendment No. 6 to Schedule 13D dated April 15, 1998, filed by
the named individual.
(3) Based upon Schedule 13D dated March 26, 1998, filed by the named entities.
These shares are issuable upon exercise of currently exercisable warrants to
purchase the Company's common stock expiring March 3, 2003. See
"Management -- Certain Relationships and Related Transactions".
(4) Based upon Schedule 13D dated January 28, 1998, filed by the named entities.
Riverdale LLC is the general partner of High River Limited Partnership and
is wholly owned by Mr. Icahn. See "Management -- Certain Relationships and
Related Transactions".
(5) The named individual is a director of the Company or a nominee.
(6) The named individual is an executive officer of the Company.
(7) The named individual is an executive officer of the Company's subsidiary
Liggett.

In addition, by virtue of his controlling interest in the Company, Mr.
LeBow may be deemed to own beneficially the securities of the Company's
subsidiaries, including BGLS and Liggett, and securities of New Valley, in which
the Company holds an indirect voting interest of approximately 42%. The
disclosure of this information shall not be construed as an admission that Mr.
LeBow is the beneficial owner of any securities of the Company's subsidiaries or
New Valley under Rule 13d-3 of the Exchange Act, or for any other purpose, and
such beneficial ownership is expressly disclaimed. None of the Company's other
directors or executive officers beneficially owns any equity securities of any
of the Company's subsidiaries or New Valley.

DESCRIPTION OF CAPITAL STOCK

The Company's Restated Certificate of Incorporation, as amended (the
"Restated Certificate"), authorizes the Company to issue 40,000,000 shares of
common stock, par value $.10 per share, and 10,000,000 shares of preferred
stock, par value $1.00 per share (the "Preferred Stock"). As of the date of this
Prospectus, there are 20,454,230 shares of the Company's common stock, and no
shares of Preferred Stock, issued and outstanding.

COMMON STOCK

Holders of the Company's common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders.
Subject to preferences that may be applicable to any then outstanding Preferred
Stock, holders of the Company's common stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Company's common stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of the Company's common stock have no right to convert their
common stock into any other securities. The Company's common stock has no
preemptive or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Company's common stock. All outstanding shares of
the Company's common stock are duly authorized, validly issued, fully paid and
nonassessable.

PREFERRED STOCK

The Restated Certificate expressly authorizes the Board of Directors of the
Company (the "Board") to issue up to 10,000,000 shares of Preferred Stock from
time to time in one or more series and for such consideration as the Board may
determine and subject to certain restrictions, with such designations,
preferences and rights, and such qualifications, limitations or restrictions, as
the Board may determine with respect thereto by duly adopted resolution or
resolutions. The issuance of Preferred Stock may delay, defer or prevent a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of holders of the Company's
common stock. As of the date hereof, no shares of Preferred Stock are issued and
outstanding.

49
51

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's common stock is American
Stock Transfer & Trust Company, New York, New York.

SELLING STOCKHOLDER

The Shares registered pursuant to the Registration Statement are being
offered for the account of High River Limited Partnership ("High River"), a
Delaware limited partnership (the "Selling Stockholder"). The Selling
Stockholder acquired the 1,500,000 shares of the Company's common stock (the
"Shares") offered hereby from the Company pursuant to a Stock Purchase Agreement
by and between the Company and the Selling Stockholder dated January 16, 1998,
incorporated by reference herein (the "Agreement"). The closing price per share
of the Company's common stock on The New York Stock Exchange on January 16, 1998
was $10.25 per share. The consideration received by the Company from the Selling
Stockholder in connection with the sale of the Shares was $9,000,000 in the
aggregate, or $6.00 per share, representing a discount of $4.25 per share
($6,375,000 in total) from the closing price of the Company's common stock on
January 16, 1998. The Company used the net proceeds from the sale of the Shares
pursuant to the Agreement to make a capital contribution to BOL. Such
contribution was thereafter used by BOL to reduce inter-company debt to BGLS,
and the funds were available for general corporate purposes including debt
service. Pursuant to the Agreement, the Company agreed to pay the Selling
Stockholder Liquidated Damages in the event that the Registration Statement has
not been declared effective on or prior to May 15, 1998. The parties agreed that
such Liquidated Damages would accrue at a rate of $0.016667 per Share per day
for the first 60-day period, and thereafter at a rate of $.033334 per Share per
day, but that in any event, the aggregate Liquidated Damages payable on the
Shares would not exceed $9,000,000. The Selling Stockholder will own no shares
of the Company's common stock after completion of the offering.

The Selling Stockholder is an entity owned by Carl C. Icahn ("Mr. Icahn").
On October 17, 1995, the Selling Stockholder and New Valley entered into an
agreement, as amended (the "NV Agreement"), pursuant to which New Valley sold
approximately 1,600,000 shares of RJR Nabisco common stock to the Selling
Stockholder for an aggregate purchase price of $51,000,000. Also on October 17,
1995, the Selling Stockholder entered into a separate agreement with the Company
and BGLS (the "High River Agreement"). Pursuant to both the NV Agreement and the
High River Agreement, High River agreed to support certain actions taken by the
Company designed to cause RJR Nabisco to effectuate a spinoff of its food
business, Nabisco Holdings Corp. Subsequently, the Company and its affiliates
engaged in an unsuccessful proxy contest to replace the incumbent Board of
Directors of RJR Nabisco at the 1996 annual meeting of stockholders with a slate
of directors committed to effectuate the spinoff.

In addition, Tortoise Corp., also owned by Mr. Icahn, holds approximately
41.9% of the BGLS Notes. For further information regarding the BGLS Notes, see
"Risk Factors -- Certain Risks Regarding Liggett and the Cigarette
Industry -- Net Worth Deficiency; Recent Losses".

PLAN OF DISTRIBUTION

Any distribution of the Shares by the Selling Stockholder, or by pledgees,
donees, transferees or other successors in interest, may be effected from time
to time in one or more of the following transactions: (a) to underwriters who
will acquire the Shares for their own account and resell them in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale (any public offering
price and any discount or concessions allowed or reallowed or paid to dealers
may be changed from time to time); (b) through brokers, acting as principal or
agent, in transactions (which may involve block transactions) on The New York
Stock Exchange, in special offerings, exchange distributions pursuant to the
rules of the applicable exchanges or in the over-the-counter market, or
otherwise, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices, at negotiated prices or at fixed prices; or (c)
directly or through brokers or agents in private sales at negotiated prices, or
by any other legally available means. Unless otherwise set forth in any
prospectus supplement, (i) the obligations of any

50
52

underwriter to purchase any of the Shares will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all of such Shares,
if any are purchased and (ii) any such agent will be acting on a best efforts
basis for the period of its appointment.

The Selling Stockholder and such underwriters, brokers, dealers or agents,
upon effecting the sale of the Shares, may be considered "underwriters" as that
term is defined by the Securities Act.

Underwriters participating in any offering made pursuant to this Prospectus
(as amended or supplemented from time to time) may receive underwriting
discounts and commissions, and discounts or concessions may be allowed or
reallowed or paid to dealers, and brokers or agents participating in such
transactions may receive brokerage or agent's commissions or fees.

At the time a particular offering of Shares is made, to the extent
required, a Prospectus Supplement will be distributed which will set forth the
amount of Shares being offered and the terms of the offering, including the
purchase price or public offering price, the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for Shares
purchased from the Selling Stockholder, any discounts, commissions and other
items constituting compensation from the Selling Stockholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers.

In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless the Shares have been registered or qualified for
sale in such state or an exemption from registration or qualification is
available and complied with.

All costs, expenses and fees in connection with the registration of the
Shares will be borne by the Company. Commissions and discounts, if any,
attributable to the sale of the Shares will be borne by the Selling Stockholder.
The Selling Stockholder may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Shares
against certain liabilities, including liabilities arising under the Securities
Act. The Company and the Selling Stockholder have agreed to indemnify each other
and certain other persons against certain liabilities in connection with the
offering of the Shares, including liabilities arising under the Securities Act.

EXPERTS

The consolidated balance sheets of Brooke Group Ltd. and Subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1997 included in this Prospectus and in
the Registration Statement of which this Prospectus is a part have been audited
by Coopers & Lybrand L.L.P., independent accountants, as stated in their report
appearing herein. The consolidated balance sheets of New Valley Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of operations, changes in shareholders' equity (deficit), and cash
flows for the years then ended included in this Prospectus, have been so
included in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

VALIDITY OF SHARES

The validity of the Shares offered hereby is being passed upon for the
Company by Marc N. Bell, Esq., Vice President and General Counsel of the
Company. Mr. Bell has an outstanding option to purchase 67,000 shares of the
Company's common stock at an exercise price of $5.00 per share.

51
53

INDEX TO FINANCIAL STATEMENTS

PAGE
----

BROOKE GROUP LTD.

Reports of Independent Accountants...................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995...................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995................................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................................... F-6
Notes to Consolidated Financial Statements.............................................. F-8

NEW VALLEY CORPORATION

Reports of Independent Accountants...................................................... F-46
Consolidated Balance Sheets as of December 31, 1997 and 1996............................ F-47
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995...................................................... F-48
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................................... F-50
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................................... F-51
Notes to Consolidated Financial Statements.............................................. F-53

F-1
54
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Brooke Group Ltd.

We have audited the accompanying consolidated balance sheets of Brooke Group
Ltd. and Subsidiaries (the "Company") as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholder's equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Brooke
Group Ltd. and Subsidiaries at December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND L.L.P.

Miami, Florida
April 8, 1998

F-2
55

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)

December 31, December 31,
1997 1996
------------ ------------

ASSETS:

Current assets:
Cash and cash equivalents ......................................................... $ 4,754 $ 1,941
Accounts receivable - trade ....................................................... 10,462 19,475
Other receivables ................................................................. 1,239 1,217
Receivables from affiliates ....................................................... 1,978 47
Inventories ....................................................................... 39,312 53,691
Other current assets .............................................................. 10,240 4,181
--------- ---------
Total current assets ............................................................ 67,985 80,552

Property, plant and equipment, at cost, less accumulated
depreciation of $33,187 and $31,047 ............................................... 45,943 80,282
Intangible assets, at cost, less accumulated amortization
of $19,302 and $17,457 ............................................................ 2,610 4,421
Investment in affiliate ............................................................. 3,051
Other assets ........................................................................ 9,922 9,371
--------- ---------
Total assets .................................................................... $ 126,460 $ 177,677
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):

Current liabilities:
Notes payable and current portion of long-term debt ............................... $ 6,429 $ 55,242
Accounts payable .................................................................. 10,461 32,017
Due to affiliates ................................................................. 1,226 990
Dividends payable ................................................................. 1,387
Cash overdraft .................................................................... 945 6
Accrued promotional expenses ...................................................... 26,993 30,257
Accrued taxes payable ............................................................. 19,998 26,379
Accrued interest .................................................................. 39,782 24,354
Other accrued liabilities ......................................................... 34,670 33,831
--------- ---------
Total current liabilities........................................................ 140,504 204,463

Notes payable, long-term debt and other obligations, less current portion ........... 399,835 378,243
Noncurrent employee benefits ........................................................ 29,366 25,220
Other liabilities ................................................................... 45,152 24,740

Commitments and contingencies........................................................

Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized
10,000,000 shares
Series G Preferred Stock, 2,184,834 shares, convertible, participating,
cumulative, each share convertible to 1,000 shares of common stock and cash
or stock distribution, liquidation preference of $1.00 per share
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,097,096 ........................ 1,850 1,850
Additional paid-in capital ........................................................ 88,290 94,169
Deficit ........................................................................... (538,791) (490,706)
Other ............................................................................. (5,607) (27,963)
Less: 6,900,947 shares of common stock in treasury, at cost ...................... (34,139) (32,339)
--------- ---------
Total stockholders' equity (deficit) .......................................... (488,397) (454,989)
--------- ---------

Total liabilities and stockholders' equity (deficit) .......................... $ 126,460 $ 177,677
========= =========

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

F-3
56

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)

-------------------------------------------
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------

Revenues* ................................................... $ 389,615 $ 460,356 $ 461,459
Cost of goods sold* ......................................... 202,121 243,333 216,187
------------ ------------ ------------

Gross profit ................................................ 187,494 217,023 245,272
Operating, selling, administrative and general expenses ..... 162,938 220,950 233,236
Settlement charges .......................................... 16,527 3,976
------------ ------------ ------------

Operating income (loss) ..................................... 8,029 (3,927) 8,060

Other income (expenses):
Interest income ......................................... 553 220 989
Interest expense ........................................ (61,778) (60,556) (57,505)
Equity in (loss) earnings of affiliate .................. (26,646) (7,808) 678
Sale of assets .......................................... 23,086 6,716
Other, net .............................................. 6,458 1,242 2,776
------------ ------------ ------------

Loss from continuing operations before income taxes ......... (50,298) (64,113) (45,002)
Provision for income taxes .................................. 1,123 1,402 342
------------ ------------ ------------

Loss from continuing operations ............................. (51,421) (65,515) (45,344)
------------ ------------ ------------

Discontinued operations:
Income (loss) from discontinued operations .............. -- -- 2,860
Gain on disposal ........................................ 1,536 2,982 18,369
------------ ------------ ------------
Income from discontinued operations ......................... 1,536 2,982 21,229
------------ ------------ ------------

(Loss) before extraordinary items ........................... (49,885) (62,533) (24,115)
------------ ------------ ------------
Extraordinary items:
Loss from extraordinary items-early extinguishment of debt (9,810)
------------ ------------ ------------

Net loss .................................................... (49,885) (62,533) (33,925)
Proportionate share of New Valley capital transactions,
retirement of Class A Preferred Shares .................. 1,782 16,802
------------ ------------ ------------

Net loss applicable to common shares ........................ $ (49,885) $ (60,751)$ (17,123)
============ ============ ============

Per basic and diluted common share:

Loss from continuing operations ......................... $ (2.83) $ (3.44)$ (1.56)
============ ============ ============
Income from discontinued operations ..................... $ 0.09 $ 0.16 $ 1.16
============ ============ ============
Extraordinary items ..................................... $ $ $ (0.54)
============ ============ ============
Net loss applicable to common shares .................... $ (2.74) $ (3.28)$ (0.94)
============ ============ ============

Weighted average common shares outstanding .................. 18,168,329 18,497,096 18,301,186
============ ============ ============

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

*Revenues and Cost of goods sold include excise taxes of $87,683, $112,218 and
$123,420 for ended the years ended December 31, 1997, 1996 and 1995,
respectively.

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

F-4
57

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands, Except Per Share Amounts)

----------------------------------------------------------------------------------
Additional
Common Stock 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 ....................................... (33,925) (33,925)
Consolidation of foreign subsidiary ............ 14,435 14,435
Distributions on common stock
($0.30 per share) ............................ (5,474) (5,474)
Stock grant to directors ....................... 20,000 2 (2) 94 94
Stock grant to consultant ...................... 250,000 25 (800) 1,244 (563) 469
Stock options granted to consultant ............ 938 (201) 375
MAI spin-off ................................... 27,286 (2,332) 27,085
Unrealized holding loss on investment in
New Valley ................................... 1,103 (2,332)
Effect of New Valley capital transactions ...... 17,043 18,146
Treasury stock, at cost ........................ (33,748) (3) 3 (135) (135)
Other, net ..................................... (2) 12 10
----------- -------- -------- --------- -------- -------- ---------

Balance, December 31, 1995 ..................... 18,497,096 1,850 93,186 (428,173) (32,339) 9,372 (356,104)

Net loss ....................................... (62,533) (62,533)
Distributions on common stock
($0.30 per share) ............................ (5,549) (5,549)
Amortization of deferred compensation .......... 252 252
Stock options granted to consultant ............ 4,750 (4,750)
Unrealized holding loss on investment in
New Valley ................................... (33,936) (33,936)
Effect of New Valley capital transactions ...... 1,782 1,099 2,881
----------- -------- -------- --------- -------- -------- ---------

Balance, December 31, 1996 ..................... 18,497,096 1,850 94,169 (490,706) (32,339) (27,963) (454,989)

Net loss ....................................... (49,885) (49,885)
Distributions on common stock
($0.30 per share) ............................ (5,504) (5,504)
Amortization of deferred compensation .......... 1,311 1,311
Stock options granted to consultant ............ (375) (375)
Unrealized holding loss on investment in
New Valley ................................... 16,842 16,842
Effect of New Valley capital transactions ...... 3,190 3,190
Pension-related minimum liability adjustment ... 1,013 1,013
Settlement of loan ............................. (400,000) 1,800 (1,800)
----------- --------- -------- --------- -------- -------- ---------

Balance, December 31, 1997 ..................... 18,097,096 $ 1,850 $ 88,290 $(538,791) $(34,139) $ (5,607) $(488,397)
=========== ======== ======== ========= ======== ======== =========

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

F-5
58

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)

-------------------------------------
Year Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------

Cash flows from operating activities:
Net (loss) income ................................................ $(49,885) $(62,533) $(33,925)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization ................................ 8,135 8,819 9,076
Noncash compensation expense ................................. 1,311 252 559
Deferred income taxes ........................................ 1,061
Gain on sale of assets ....................................... (26,247) (6,716) (1,042)
Extraordinary item ........................................... 9,810
Impact of discontinued operations ............................ (1,536) (2,982) (21,229)
Equity in loss (earnings) of affiliates ...................... 26,646 7,808 (678)
Other, net ................................................... 4,845
Changes in assets and liabilities (net of effect of dispositions):
Receivables .................................................. 8,839 6,222 6,561
Inventories .................................................. 14,379 6,830 (7,490)
Accounts payable and accrued liabilities ..................... 7,585 27,716 (5,445)
Deferred Gain ................................................ (6,459)
Other assets and liabilities, net ............................ (7,831) 9,818 15,972
-------- -------- --------

Net cash used in operating activities .............................. (25,063) (3,705) (22,986)
-------- -------- --------

Cash flows from investing activities:
Proceeds from sale of business and assets ........................ 56,494 8,040 14,152
Investments ...................................................... (25) (2,811) (1,965)
Capital expenditures ............................................. (20,142) (34,241) (8,805)
Dividends from New Valley ........................................ 24,733 61,832
Other, net ....................................................... 1,660
-------- -------- --------

Net cash provided by (used in) investing activities ................ 36,327 (4,279) 66,874
-------- -------- --------

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

F-6
59

BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in Thousands, Except Per Share Amounts)

------------------------------------
Year Ended December 31,
------------------------------------
1997 1996 1995
------------------------------------

Cash flows from financing activities:
Proceeds from debt ............................................... 10,305 20,702 2,568
Repayments of debt ............................................... (11,516) (8,864) (37,196)
Borrowings under revolver ........................................ 278,442 353,365 397,873
Repayments on revolver ........................................... (279,435) (350,105) (401,703)
Increase (decrease) in cash overdraft ............................ 938 (4,256) (594)
Series G preferred dividend ...................................... (75)
Distributions on common stock .................................... (7,266) (4,162) (5,475)
Treasury stock purchases ......................................... (135)
Other, net ....................................................... (57)
-------- -------- --------

Net cash (used in) provided by financing activities ................ (8,532) 6,680 (44,794)
-------- -------- --------

Effect of exchange rate changes on cash and cash equivalents ....... 81 (125)
-------- -------- --------

Net increase (decrease) in cash and cash equivalents ............... 2,813 (1,429) (906)
Cash and cash equivalents, beginning of period ..................... 1,941 3,370 4,276
-------- -------- --------

Cash and cash equivalents, end of period ........................... $ 4,754 $ 1,941 $ 3,370
======== ======== ========

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

F-7
60

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation:

The consolidated financial statements of Brooke Group Ltd. (the
"Company") include the accounts of BGLS Inc. ("BGLS"), Liggett
Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley
Holdings, Inc. ("NV Holdings") and other less significant
subsidiaries. Based on the Company's ability to assert sufficient
control, the Company consolidated the accounts of Liggett-Ducat Ltd.
("Liggett-Ducat") at December 31, 1995. (Refer to Note 4.) Liggett is
engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. Liggett-Ducat is engaged in the
manufacture and sale of cigarettes in Russia. All significant
intercompany balances and transactions have been eliminated.

(b) Liquidity:

During the years ended December 31, 1996 and 1995, the Company relied
primarily on dividends received from New Valley Corporation ("New
Valley") and in 1997, proceeds received on the sale of its indirect
subsidiary, BrookeMil Ltd. ("BML"), to New Valley to meet its
liquidity needs.

The Company's potential sources of liquidity for 1998 include, among
other things, additional public and/or private debt and equity
financing, management fees and certain funds available from New
Valley subject to limitations imposed by BGLS' indenture agreements.
New Valley may acquire or seek to acquire additional operating
businesses through merger, purchase of assets, stock acquisition or
other means, or to make other investments, which may limit its
ability to make such distributions. New Valley's ability to make such
distributions is subject to risk and uncertainties attendant to its
business. (Refer to Note 2.)

Liggett had net capital and working capital deficiencies of $192,857
and $17,542, respectively, at December 31, 1997, is highly leveraged
and has substantial near-term debt service requirements. On January
30, 1998, Liggett obtained the consents of the required majority of
the holders of Liggett's 11.50% Series B and 19.75% Series C Senior
Secured Notes due 1999 (the "Liggett Notes") to various amendments to
the Indenture governing the Liggett Notes. The amendments provide,
among other things, for a deferral of the February 1, 1998 mandatory
redemption of $37,500 principal amount of the Liggett Notes to the
date of final maturity, February 1, 1999. (Refer to Note 9.) At
maturity, the Liggett Notes will require a principal payment of
$144,891. Liggett does not anticipate it will be able to generate
sufficient cash from operations to make such payments. In addition,
Liggett has a $40,000 revolving credit facility expiring March 8,
1999 (the "Facility"), under which $23,427 was outstanding at
December 31, 1997. If Liggett is unable to refinance or restructure
the terms of the Liggett Notes or otherwise make all payments
thereon, substantially all of Liggett's long-term debt and the
Facility would be in default and holders of such debt could
accelerate the maturity of such debt. In such event, Liggett may be
forced to seek protection from creditors under applicable laws. Due
to the many risks and uncertainties associated with the cigarette
industry and the impact of tobacco litigation, there can be no
assurance that Liggett will be able to meet its future earnings
or cash flow goals. These matters raise substantial doubt about
Liggett meeting its liquidity needs and its ability to continue as a
going concern and may negatively impact the Company's liquidity.

F-8

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

The Company has also engaged in negotiations with the principal
holders of the BGLS 15.75% Series B Senior Secured Notes (the "BGLS
Notes") with respect to certain modifications to the terms of such
debt. On March 2, 1998, BGLS entered into an agreement with AIF II,
L.P. and an affiliated investment manager on behalf of a managed
account (together, "the Apollo Holders"), who hold approximately
41.8% of the $232,864 principal amount of the BGLS Notes. Pursuant to
the terms of the agreement, the Apollo Holders have agreed to defer
the payment of interest on the BGLS Notes held by them, commencing
with the interest payment that was due July 31, 1997, which they had
previously agreed to defer, through the interest payment due July 31,
2000. The deferred interest payments will be payable at final
maturity of the BGLS Notes on January 31, 2001 or upon an event of
default under the Indenture for the BGLS Notes. (Refer to Notes 9 and
14.)

BOL is in the process of constructing a new tobacco factory in
Moscow, Russia currently scheduled to be operational in early 1999.
The remaining construction costs are expected to be financed
primarily by equipment lease financing currently in place and bank or
other loans. (Refer to Note 4.)

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Significant estimates
subject to material changes in the near term include deferred tax
assets, allowance for doubtful accounts, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans and
litigation and defense costs. Actual results could differ from those
estimates.

(d) Cash and Cash Equivalents:

For purposes of the statements of cash flows, cash includes cash on
hand, cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or
less. Interest on short-term investments is recognized when earned.

(e) Financial Instruments:

The estimated fair value of the Company's long-term debt is as
follows:

At December 31, 1997 1996
---- ----

Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----

Long-term debt $406,264 $314,108 $433,485 $294,451

Short-term debt - The carrying amounts reported in the Consolidated
Balance Sheets are a reasonable estimate of fair value.

Long-term debt - Fair value is estimated based on current market
quotations, where available, or based on an evaluation of the debt in
relation to market prices of the Company's publicly traded debt.

F-9

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

The methods and assumptions used by the Company's management in
estimating fair values for financial instruments presented herein are
not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair values.

(f) Significant Concentrations of Credit Risk:

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its temporary
cash in money market securities (investment grade or better) with
what management believes are high credit quality financial
institutions.

Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. One
customer accounted for approximately 19.4% of net sales in 1997,
13.7% of net sales in 1996 and 11.6% of net sales in 1995. Sales to
this customer were primarily in the private label discount segment.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers, located primarily
throughout the United States, comprising Liggett's customer base.
Ongoing credit evaluations of customers' financial condition are
performed and, generally, no collateral is required. Liggett
maintains reserves for potential credit losses and such losses, in
the aggregate, have generally not exceeded management's expectations.

Liggett-Ducat sells its products primarily to companies in the
wholesale distribution and retail industries in the Russian
Federation. Two distributors accounted for 24.9% and 22.0% of sales
in 1997. Prepayment for goods and services is a customary business
practice in Russia and Liggett-Ducat receives payment in advance for
the majority of its sales. Although Liggett-Ducat does not require
collateral and, as a consequence, is exposed to credit risk,
Liggett-Ducat does perform ongoing credit evaluations of its
customers and believes that its trade accounts receivable risk
exposure is limited.

(g) Accounts Receivable:

The allowance for doubtful accounts and cash discounts was $1,383 and
$1,280 at December 31, 1997 and 1996, respectively.

(h) Inventories:

Liggett tobacco inventories, which comprise 92.6% and 95.0% of total
inventory in 1997 and 1996, respectively, are stated at the lower of
cost or market and are determined primarily by the last-in, first-out
(LIFO) method. Although portions of leaf tobacco inventories may not
be used or sold within one year because of the time required for
aging, they are included in current assets, which is common practice
in the industry. It is not practicable to determine the amount that
will not be used or sold within one year.

All other inventories are determined primarily on a first-in,
first-out (FIFO) basis.

F-10

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

(i) Property, Plant and Equipment:

Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets,
which are 20 years for buildings and 3 to 10 years for machinery and
equipment.

Interest costs are capitalized in connection with the construction of
major facilities. Capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated
useful life. In 1997, 1996 and 1995, interest costs of $693, $6,387
and $1,004, respectively, were capitalized.

Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are
capitalized. The cost and related accumulated depreciation of
property, plant and equipment are removed from the accounts upon
retirement or other disposition and any resulting gain or loss is
reflected in operations.

(j) Intangible Assets:

Intangible assets, consisting principally of trademarks and goodwill,
are amortized using the straight-line method over 10-12 years.
Amortization expense for the years ended December 31, 1997, 1996 and
1995 was $1,845, $1,778 and $1,725, respectively. Management
periodically reviews the carrying value of such assets to determine
whether asset values are impaired.

(k) Impairment of Long-Lived Assets:

Impairment losses on long-lived assets are recognized when expected
future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and estimates of
future cash flows of the underlying business.

(l) Employee Benefits:

Liggett sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such
benefits involves an estimate of unpaid claims as of December 31,
1997 and 1996 which are subject to significant fluctuations in the
near term.

(m) Postretirement Benefits other than Pensions:

The cost of providing retiree health care and life insurance benefits
is actuarially determined and accrued over the service period of the
active employee group.

(n) Stock Options:

The Company measures compensation expense for stock-based employee
compensation plans using the intrinsic value method and provides pro
forma disclosures of net income as if the fair value-based method had
been applied in measuring compensation expense.

F-11

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

(o) Income Taxes:

Deferred taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for tax purposes as
well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates.
A valuation allowance reduces deferred tax assets when it is deemed
more likely than not that some portion or all of the deferred tax
assets will not be realized.

(p) Revenue Recognition:

Revenues from sales are recognized upon the shipment of finished
goods to customers. The Company provides an allowance for expected
sales returns, net of related inventory cost recoveries. Since the
Company's primary line of business is tobacco, the Company's
financial position and its results of operations and cash flows have
been and could continue to be materially adversely affected by
significant unit sales volume declines, litigation and defense costs,
increased tobacco costs or reductions in the selling price of
cigarettes in the near term.

(q) Advertising and Promotional Costs:

Advertising and promotional costs are expensed as incurred.
Advertising expenses were $40,534, $74,238 and $75,713 for the years
ended December 31, 1997, 1996 and 1995, respectively.

(r) Legal Costs:

The Company's policy is to accrue legal and other costs related to
contingencies as services are performed.

(s) Earnings Per Share:

In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". SFAS No. 128 specifies new standards designed
to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements and increasing the
comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that common stock
equivalents are not considered in computing basic EPS, (b)
eliminating the modified treasury stock method and the three percent
materiality provision and (c) revising the contingent share
provisions and the supplemental EPS data requirements. SFAS No. 128
also makes a number of changes to existing disclosure requirements.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Prior
period EPS information is restated to conform to the provisions of
SFAS No. 128. For the years ended December 31, 1996 and 1995 per
share calculations include the Company's proportionate share of
excess carrying value of New Valley redeemable preferred shares over
the cost of shares repurchased of $1,782 and $16,802, respectively.

F-12

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

(t) Foreign Currency Translation:

The Company's Russian subsidiary operates in a "highly inflationary"
economy and uses the U.S. dollar as the functional currency.
Therefore, certain assets of this entity (principally inventories and
property and equipment) are translated at historical exchange rates
with all other assets and liabilities translated at year end exchange
rates and all translation adjustments are reflected in the
consolidated statements of operations.

(u) Reclassifications:

Certain amounts in prior years' financial statements have been
reclassified to conform to the current year's presentation.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display
of comprehensive income. The purpose of reporting comprehensive income
is to present a measure of all changes in equity that result from
recognized transactions and other economic events of the period other
than transactions with owners in their capacity as owners. SFAS No. 130
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of the balance sheet. For the Company, other components of
stockholders' equity include such items as minimum pension liability
adjustments, unearned compensation expense related to stock options and
the Company's proportionate interest in New Valley's capital
transactions. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company does not anticipate that
implementation of SFAS No. 130 will have a material impact on the
consolidated financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and
the type and level of financial information to be disclosed. SFAS No.
131 provides for a two-tier test for determining those operating
segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for
reportable segments, SFAS No. 131 also requires disclosure of certain
"second level" information by geographic area and for
products/services. SFAS No. 131 also makes a number of changes to
existing disclosure requirements. Management believes that the adoption
of this pronouncement will not have a material effect on the Company's
financial statement disclosures. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997.

In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," was issued which revises required
disclosures about pensions and postretirement benefit plans. SFAS No.
132 is effective for the Company for the year ended 1998. The Company
has not yet determined the impact of its implementation.

2. INVESTMENT IN NEW VALLEY CORPORATION

At December 31, 1997 and 1996, the Company's investment in New Valley
consisted of an approximate 42% voting interest. At December 31, 1997 and
1996, the Company owned 57.7% of

F-13

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

the outstanding $15.00 Class A Increasing Rate Cumulative Senior Preferred
Shares ($100 Liquidation Value), $.01 par value (the "Class A Preferred
Shares"), 9.0% of the outstanding $3.00 Class B Cumulative Convertible
Preferred Shares ($25 Liquidation Value), $.10 par value (the "Class B
Preferred Shares") and 41.7% of New Valley's common shares, $.01 par value
(the "Common Shares").

The Class A Preferred Shares and the Class B Preferred Shares are
accounted for as debt and equity securities, respectively, pursuant to the
requirements of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", and are classified as available-for-sale. The
Common Shares are accounted for pursuant to APB No. 18, "The Equity Method
of Accounting for Investments in Common Stock".

The Company determines the fair value of the Class A Preferred Shares and
Class B Preferred Shares based on the quoted market price. Through
September 1996, earnings on the Class A Preferred Shares were comprised of
dividends accrued during the period and the accretion of the difference
between the Company's basis and their mandatory redemption price. During
the quarter ended September 30, 1996, the decline in the market value of
the Class A Preferred Shares, the dividend received on the Class A
Preferred Shares and the Company's equity in losses incurred by New Valley
caused the carrying value of the Company's investment in New Valley to be
reduced to zero. Beginning in the fourth quarter of 1996, the Company
suspended the recording of its earnings on the dividends accrued and the
accretion of the difference between the Company's basis in the Class A
Preferred Shares and their mandatory redemption price.

The Company's and BGLS' investment in New Valley at December 31, 1997 and
1996, respectively, is summarized below:

Unrealized
Number of Fair Carrying Holding
1997 Shares Value Amount Gain (Loss)
- ---- ------ ----- ------ -----------

Class A Preferred Shares....... 618,326 $59,359 $59,359 $ (5,494)
Class B Preferred Shares....... 250,885 941 941 (913)
Common Shares.................. 3,989,710(A) 1,995 (60,300)
------- ------- --------
$62,295 $ $ (6,407)
======= ======= ========

1996
- ----

Class A Preferred Shares....... 618,326 $72,962 $72,962 $(24,881)
Class B Preferred Shares....... 250,885 1,631 1,631 (223)
Common Shares.................. 3,989,710(A) 5,985 (71,542)
------- ------ --------
$80,578 $ 3,051 $(25,104)
====== ======= ========

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

(A) Gives effect to July 1996 one-for-twenty stock split.

In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of the
United States Bankruptcy Court for the District of New Jersey and on
January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors
under the Joint Plan. Pursuant to the Joint Plan, among other things, the
Class A Preferred Shares, the Class B Preferred Shares,

F-14

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

the Common Shares and other equity interests were reinstated and retained
all of their legal, equitable and contractual rights.

In February 1995, New Valley repurchased 54,445 Class A Preferred Shares
pursuant to a tender offer made as part of the Joint Plan. During 1995,
New Valley repurchased 339,400 additional Class A Preferred Shares on the
open market at an aggregate cost of $43,405. During 1996, New Valley
repurchased 72,104 Class A Preferred Shares for a total amount of $10,530.
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 $1,782 and $16,802
for the years ended December 31, 1996 and 1995, respectively, along with
other New Valley capital transactions of $241 for the year ended December
31, 1995.

The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per
annum. At December 31, 1997 and 1996, respectively, the accrued and unpaid
dividends arrearage was $163,302 ($152.41 per share) and $117,117 ($109.31
per share). The Company received $24,733 ($40.00 per share) and $61,832
($100.00 per share) in dividend distributions in 1996 and 1995,
respectively.

Holders of the Class B Preferred Shares are entitled to receive a
quarterly dividend, as declared by the Board, at a rate of $3.00 per
annum. At December 31, 1997 and 1996, respectively, the accrued and unpaid
dividends arrearage was $139,412 ($49.95 per share) and $115,944 ($41.55
per share). No dividends on the Class B Preferred Shares have been
declared since the fourth quarter of 1988.

Summarized financial information for New Valley follows:

1997 1996 1995
---- ---- ----

Current assets, primarily cash and marketable securities.. $118,642 $183,720
Noncurrent assets......................................... 322,749 222,820
Current liabilities....................................... 128,128 98,110
Noncurrent liabilities.................................... 185,024 170,223
Redeemable preferred stock................................ 258,638 210,571
Shareholders' equity (deficit)............................ (130,399) (72,364)

Revenues.................................................. 114,568 130,865 $ 67,730
Costs and expenses........................................ 139,989 149,454 66,064
(Loss) income from continuing operations.................. (24,260) (14,648) 1,374
Income from discontinued operations....................... 3,687 7,158 16,873
Net loss applicable to Common Shares(A)................... (89,048) (65,160) (13,714)

Company's share of discontinued operations................ 1,536 2,982 7,031

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

(A) Considers all preferred accrued dividends, whether or not declared
and, in 1995 and 1996, the excess of carrying value of redeemable
preferred shares over cost of shares purchased.

On January 31, 1997, New Valley acquired substantially all the common
shares of BML from BOL for $55,000. (Refer to Note 4.)

F-15

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

On February 20, 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC ("Western
Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, New Valley agreed, among
other things, to contribute to Western Realty the real estate assets of
its subsidiary BML and Apollo agreed to contribute up to $58,000.

Under the terms of the agreement governing Western Realty (the "LLC
Agreement"), the ownership and voting interests in Western Realty will be
held equally by Apollo and New Valley. Apollo will be entitled to a
preference on distributions of cash from Western Realty to the extent of
its investment, together with a 15% annual rate of return, and New Valley
will then be entitled to a return of $10,000 of BML-related expenses
incurred by New Valley since March 1, 1997, together with a 15% annual
rate of return; subsequent distributions will be made 70% to New Valley
and 30% to Apollo. Western Realty will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and New
Valley. All material corporate transactions by Western Realty will
generally require the unanimous consent of the Board of Managers.
Accordingly, New Valley will account for its non-controlling interests in
Western Realty on the equity method.

The organization of Western Realty was effected pursuant to the LLC
Agreement. On January 11, 1996, New Valley acquired from an affiliate of
Apollo eight shopping centers for $72,500. New Valley and pension plans
sponsored by BGLS have invested in investment partnerships managed by an
affiliate of Apollo. Apollo's affiliate owns a substantial amount of debt
securities of BGLS and warrants to purchase common stock of the Company.

On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made an $11,000 loan (the "Loan") to Western Realty. The Loan,
which bears interest at the rate of 15% per annum and is due September 30,
1998, is collateralized by a pledge of New Valley's shares of BML. Upon
completion of the transfer of Ducat Place II and the satisfaction of other
conditions under the LLC Agreement, the Loan and the accrued interest
thereon will be converted into a capital contribution by Apollo to Western
Realty and the BML pledge released.

Western Realty will seek to make additional real estate and other
investments in Russia. New Valley and Apollo have agreed to invest,
through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In
addition, Western Realty has agreed to acquire for $20,000, a 30% profits
interest in a company organized by BOL which will, among other things,
acquire an interest in a new factory being constructed on the outskirts of
Moscow by a subsidiary of BOL. (Refer to Note 4.)

3. RJR NABISCO HOLDINGS CORP.

As of December 31, 1997 and 1996, New Valley held approximately 612,650
and 1,700,000 shares of RJR Nabisco Holdings Corp. ("RJR Nabisco") common
stock, respectively, with a market value of $22,898 and $59,200 (cost of
approximately $18,780 and $53,400). During 1997, 1996 and 1995, New Valley
expensed $100, $11,724 and $3,879, respectively, for costs relating to its
RJR Nabisco investment.

In June 1996, various agreements between High River Limited Partnership
("High River"), the Company, BGLS and New Valley were terminated by mutual
consent. Pursuant to these agreements, the parties had agreed to take
certain actions during late 1995 and in 1996 designed to cause RJR Nabisco
to effectuate a spinoff of its food business, Nabisco Holdings Corp.
("Nabisco").

F-16

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

The terminations of the High River agreements left in effect for one year
certain provisions concerning payments to be made to High River in the
event New Valley achieved a profit (after deducting certain expenses) on
the sale of the shares of RJR Nabisco common stock which were held by it
or they were valued at the end of such year at higher than their purchase
price or in the event the Company or its affiliates engaged in certain
transactions with RJR Nabisco. Based on the market price of RJR Nabisco
common stock, no amounts were payable by New Valley under these
agreements.

Pursuant to an agreement between the Company and New Valley whereby New
Valley agreed to reimburse the Company and its subsidiaries for reasonable
out-of-pocket expenses in connection with RJR Nabisco, New Valley paid the
Company and its subsidiaries a total of $17 and $2,370 in 1997 and 1996.

On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to
750,000 shares of RJR Nabisco common stock as of August 13, 1996). New
Valley entered into the Swap in order to be able to participate in any
increase or decrease in the value of the RJR Nabisco common stock during
the term of the Swap. The transaction was for a period of up to six
months, unless extended by the parties, subject to earlier termination at
the election of New Valley, and provided for New Valley to make a payment
to the Counterparty of $1,537 upon commencement of the Swap. At the
termination of the transaction, if the price of the RJR Nabisco common
stock during a specified period prior to such date (the "Final Price")
exceeded $34.42, the price of the RJR Nabisco common stock during a
specified period following the commencement of the Swap (the "Initial
Price"), the Counterparty was required to pay New Valley an amount in cash
equal to the amount of such appreciation with respect to the shares of RJR
Nabisco common stock subject to the Swap plus the value of any dividends
with a record date occurring during the Swap period. If the Final Price
was less than the Initial Price, then New Valley was required to pay the
Counterparty at the termination of the transaction an amount in cash equal
to the amount of such decline with respect to the shares of RJR Nabisco
common stock subject to the Swap, offset by the value of any dividends,
provided that, with respect to approximately 225,000 shares of RJR Nabisco
common stock, New Valley was not required to pay any amount in excess of
an approximate 25% decline in the value of the shares. The potential
obligations of the Counterparty under the Swap were guaranteed by the
Counterparty's parent, a large foreign bank, and New Valley pledged
certain collateral in respect of its potential obligations under the Swap
and agreed to pledge additional collateral under certain conditions. New
Valley marked its obligation with respect to the Swap to fair value with
unrealized gains or losses included in income. During the third quarter of
1996, the Swap was terminated in connection with New Valley's reduction of
its holdings of RJR Nabisco common stock, and New Valley recognized a loss
on the Swap of $7,305 for the year ended December 31, 1996.

4. INVESTMENT IN BROOKE (OVERSEAS) LTD.

On January 31, 1997, BOL sold all its shares of BML to New Valley for
$21,500 in cash and a promissory note of $33,500 payable $21,500 on June
30, 1997 and $12,000 on December 31, 1997 with interest at 9%. The note
was paid in full as of December 31, 1997. The consideration received
exceeded the carrying value of its investment in BML by $43,700. The
Company recognized a gain on the sale in 1997 in the amount of $21,300.
The remaining $22,400 was deferred in recognition of the fact that the
Company retains an interest in BML through its 42% equity ownership in New
Valley and that a portion of the property sold (the site of the third
phase of the Ducat Place real estate

F-17

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

project being developed by BML, which is currently used by Liggett-Ducat
for its existing cigarette factory), is subject to a put option held by
New Valley. The option allows New Valley to put this site back to the
Company at the greater of the appraised fair value of the property at the
date of exercise or $13,600, during the period Liggett-Ducat operates the
factory on such site. During the second quarter 1997, BML sold one of its
office buildings, Ducat Place I, to a third party. Accordingly, the
Company recognized $1,240 of its deferred gain.

In connection with the sale of its BML shares to New Valley, certain
specified liabilities aggregating $40,800 remained with BML, including a
Russian bank loan with a balance of $20,418, which was paid in full during
the third quarter, 1997.

At December 31, 1997 and 1996, the Company's subsidiaries owned
approximately 96% of the stock of Liggett-Ducat through purchases of stock
in 1997 and 1996 from other shareholders.

Prior to December 29, 1995, the Company did not consolidate Liggett-Ducat
due to certain events continuing through 1995 which impaired the Company's
ability to control the operations of Liggett-Ducat. Such events included
political restrictions on the Company's ability to influence and control
the management and operating policies of Liggett-Ducat and the risks of
loss of ownership.

During the second quarter of 1996, BOL entered into stock purchase
agreements with the former chairman of Liggett-Ducat and the former
Director of Liggett-Ducat's tobacco operations (the "Sellers"). Under the
stock purchase agreements, BOL acquired 142,558 shares held by the Sellers
for $2,143. The purchase price was payable in installments during 1996 and
certain shares of Liggett-Ducat collateralize the Company's obligation
under both the purchase agreements and the consulting agreements
(described below).

Concurrently, the Company entered into consulting and non-compete
agreements with the Sellers. Under the terms of these agreements, the
Company will pay the Sellers a total of approximately $8,357 over five
years. At December 31, 1997, the liability remaining under these
agreements was $4,875.

In 1996, Russian tax authorities assessed Liggett-Ducat $7,600 for
outstanding tax liabilities relating to 1995. The liability is payable in
two parts, 50% within 2-1/2 years, the remaining 50% over the succeeding
five years. The remaining liability at December 31, 1997 was $4,405.

Liggett-Ducat is in the process of constructing a new cigarette factory on
the outskirts of Moscow which is currently scheduled to be operational in
early 1999. A 49-year land lease was renegotiated in 1996 for the site on
which Liggett-Ducat plans to build the new factory. In addition,
Liggett-Ducat has entered into a construction contract for the plant. The
remaining liability under that contract at December 31, 1997 is
approximately $11,500. Equipment purchase agreements in place at December
31, 1997 total $26,955 of which $22,950 will be financed by the
manufacturers. In February 1998, the Company agreed to guarantee payment
for additional equipment purchased by Liggett-Ducat in the amount of
$7,400 of which $5,841 will be financed by the manufacturers.

The performance of Liggett-Ducat's cigarette operations in Russia is
affected by uncertainties in Russia which may include, among others,
political or diplomatic developments, regional tensions, currency
repatriation restrictions, foreign exchange fluctuations, inflation, and
an undeveloped system of commercial laws and legislative reform relating
to foreign ownership in Russia.

F-18

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

Subsequent Event:

In February 1998, Western Realty agreed to acquire for $20,000, a 30%
profits interest in a company organized by BOL, which will, among other
things, acquire an interest in the new factory discussed above.

5. DISCONTINUED OPERATIONS

A summary of discontinued operations follows:

Year Ended December 31,
1997 1996 1995
-------------------------------------

Income (loss) from discontinued operations:
New Valley........................................ $ -- $ -- $ 1,800
MAI............................................... 698
SkyBox............................................ 362
------ ------- -------
-- -- 2,860
------ ------- -------

Gain from disposal of operations:
New Valley........................................ 1,536 2,982 5,231
SkyBox............................................ 13,138
------ ------- -------
1,536 2,982 18,369
------ ------- -------

Income from discontinued operations................... $1,536 $2,982 $21,229
====== ======= =======

New Valley:

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 for $17,540 in cash and
$2,460 in cancellation of intercompany indebtedness. The financial
statements of the Company reflect its portion of the gain on disposal of
discontinued operations in 1997, 1996 and 1995.

MAI:

In February 1995, the Company distributed to its stockholders a special
dividend (the "MAI Distribution") of the 65.2% equity interest it held in
MAI Systems Corporation ("MAI"). The MAI Distribution reduced the
Company's stockholders' equity (deficit) by $27,085 in the first quarter
of 1995.

In addition, in connection with a transaction wherein MAI's United States
and Canadian bank lenders took title to the stock of MAI's European
subsidiaries in satisfaction of a total of approximately $84,000 of
indebtedness owed by MAI to such bank lenders, the Company may be
required, under certain limited circumstances, to purchase an equity
interest of up to $7,500 in a holding company controlled by the bank
lenders. The $7,500 is recorded as a liability.

F-19

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

SkyBox:

During the first quarter of 1995, the Company sold all of its remaining
common stock of its former subsidiary, SkyBox International Inc.
("SkyBox"), for $9,138. In addition, during the same period, SkyBox
redeemed the 40 shares of SkyBox Series A Preferred Stock which the
Company held for $4,000.

6. INVENTORIES

Inventories consist of:

December 31,
1997 1996
---- ----

Finished goods............................. $13,273 $15,304
Work-in-process............................ 1,976 4,435
Raw materials.............................. 24,495 34,002
Replacement parts and supplies............. 4,466 4,406
------- -------
Inventories at current cost................ 44,210 58,147
LIFO adjustments........................... (4,898) (4,456)
------- -------
$39,312 $53,691
======= =======

The Company has a leaf inventory management program whereby, among other
things, it is committed to purchase certain quantities of leaf tobacco.
The purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at
the date of the commitment. At December 31, 1997, Liggett and
Liggett-Ducat had leaf tobacco purchase commitments of approximately
$10,200 and $27,800, respectively. In addition, Liggett-Ducat had leaf
tobacco prepayments of $9,290.

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

December 31,
1997 1996
---- ----

Land and improvements...................... $ 411 $ 455
Buildings.................................. 6,521 14,205
Machinery and equipment.................... 53,717 49,401
Leasehold improvements..................... 302 302
Construction-in-progress................... 18,179 46,966
------- --------
79,130 111,329

Less accumulated depreciation.............. (33,187) (31,047)
------- --------
$45,943 $ 80,282
======= ========

The amounts provided for depreciation for the years ended December 31,
1997, 1996 and 1995 were $4,513, $4,412 and $4,699, respectively.

F-20

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

The amount of capitalized interest included in property, plant and
equipment was $693 and $6,387 in 1997 and 1996, respectively.

8. SALE OF ASSETS

On January 31, 1997, BOL sold BML to New Valley for $21,500 in cash and a
promissory note of $33,500 which was paid in 1997. (Refer to Note 4.)

On March 11, 1997, Liggett sold to Blue Devil Ventures, a North Carolina
limited liability partnership, surplus realty for $2,200. The Company
recognized a gain of approximately $1,100.

On May 14, 1996, Liggett sold to the County of Durham surplus realty for
$4,300. The Company recognized a gain of approximately $3,600.

On July 15, 1996, the Company sold substantially all of the non-cash
assets and certain liabilities of COM Products, Inc., a subsidiary engaged
in the business of selling micrographics equipment and supplies, for
approximately $3,700 cash and a promissory note for $500. The Company
recognized a gain of approximately $3,000 on this transaction.

9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS

Notes payable, long-term debt and other obligations consist of:

December 31,
1997 1996
---- ----

15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $1,141 and $1,511...... $231,723 $231,353
14.500% Subordinated Debentures due 1998.................. 800 800
Notes payable - Foreign................................... 5,000 22,668
Other..................................................... 629 2,425

Liggett:
11.500% Senior Secured Series B Notes due 1999, net of
unamortized discount of $206 and $424................. 112,406 119,688
Variable Rate Series C Senior Secured Notes due 1999...... 32,279 32,279
Revolving credit facility................................. 23,427 24,272
-------- --------

Total notes payable and long-term debt.................... 406,264 433,485

Less:
Current maturities.................................... 6,429 55,242
-------- --------

Amount due after one year................................. $399,835 $378,243
======== ========

Standstill Agreement - BGLS:

During negotiations with the holders of more than 83% of the BGLS Notes
concerning certain modifications to the terms of such debt, BGLS entered
into a standstill agreement with such holders on August 28, 1997. Pursuant
to the standstill agreement, as amended, such holders agreed that they
would be entitled to receive their portion of the July 31, 1997 interest
payment on the BGLS Notes (in total, $15,340) only after giving BGLS 20
days' notice but in any event by February 6, 1998.

F-21

74
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

On February 6, 1998, BGLS entered into a further amendment to the
standstill agreement with the Apollo Holders who hold approximately 41.8%
of the BGLS Notes which extended the termination date of such agreement
with respect to the Apollo Holders to March 2, 1998. Also on February 6,
1998, the holder of 41.9% of the BGLS Notes, who had previously been a
party to the standstill agreement, was paid its pro rata share of the July
31, 1997 interest payment on the BGLS Notes. The Company also sold stock
on January 16, 1998 to an affiliate of this holder in which it recorded an
expense of $2,531 for the first quarter 1998, representing the difference
between the cost and fair market value of the shares sold. (Refer to Note
13.)

On March 2, 1998, the Company entered into an agreement with the Apollo
Holders in which the Apollo Holders agreed to defer the payment of
interest on the BGLS Notes held by them, commencing with the interest
payment that was due July 31, 1997, which they had previously agreed to
defer, through the interest payment due July 31, 2000. The deferred
interest payments will be payable at final maturity of the BGLS Notes on
January 31, 2001 or upon an event of default under the Indenture for the
BGLS Notes.

In connection with the March 2, 1998 agreement with the Apollo Holders,
the Company issued to the Apollo Holders a five-year warrant to purchase
2,000,000 shares of the Company's common stock at a price of $5.00 per
share. The Apollo Holders were also issued a second warrant expiring
October 31, 2004 to purchase an additional 2,150,000 shares of the
Company's common stock at a price of $0.10 per share. The second warrant
will become exercisable on October 31, 1999, and the Company will have the
right under certain conditions prior to that date to substitute for that
warrant a new warrant for 9.9% of the common stock of Liggett.

Based on the fair value of the equity instruments given to the holders of
the debt, and the difference between the fair value of the modified debt
and the carrying value of the debt held by the Apollo Holders prior to the
transaction, no gain or loss is anticipated to be recorded on the
transaction. Imputed interest of approximately $23,000 will be accreted
over the term of the modified debt based on its recorded fair value.

In connection with the consents of the Liggett bondholders to the
restructuring of the Liggett Notes, on February 2, 1998, the Company
issued 482,970 shares of treasury stock to the Liggett bondholders of
record as of January 15, 1998. The Company recorded a deferred charge of
$4,105 at January 31, 1998 reflecting the fair value of the instruments
issued. The Company has agreed to use its best efforts to file with the
Securities and Exchange Commission (the "SEC") a shelf registration
statement on Form S-3 to be declared effective by May 31, 1998. If the
registration statement has not been declared effective by such date,
liquidated damages on the shares of common stock will accrue at the daily
rate of $25, provided that the number of days on which damages shall
accrue shall not exceed 300 days. Liquidated damages would be payable, at
the option of the Company, in cash or in shares of common stock of the
Company.

15.75% Series B Senior Secured Notes Due 2001

An exchange offer wherein BGLS offered to exchange all its outstanding
Series 2 Notes, Reset Notes and Subordinated Debentures for 15.75% Series
A Senior Secured Notes ("Series A Notes") and Series B Notes closed on
January 30, 1996. All $91,179 of the Series 2 Notes and $125,495 of the
Subordinated Debentures were exchanged. In addition, BGLS cancelled all of
the Subordinated Debentures ($13,705) held by the Company. Subordinated
Debentures in the amount of $800 remained outstanding and were paid at
maturity on April 1, 1998. As part of the exchange offer, substantially
all of the covenants and events of default were eliminated pertaining to
the Subordinated Debentures.

Holders of Reset Notes did not exchange, and the Reset Notes were redeemed
on March 29, 1996 for a total amount of $5,785, including premium,
together with accrued interest of $452. On March 7,

F-22

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

1996, an additional $7,397 face amount of Series A Notes were sold for
$6,300 including accrued interest with the proceeds being used for the
redemption of the Reset Notes.

The Series B Notes are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and
NV Holdings as well as a pledge of all of the New Valley securities held
by BGLS and NV Holdings. The BGLS Series B Notes Indenture contains
certain covenants, which among other things, limit the ability of BGLS to
make distributions to the Company to $6,000 per year ($12,000 if less than
50% of the Series B Notes remain outstanding), limit additional
indebtedness of BGLS to $10,000, limit guaranties of subsidiary
indebtedness by BGLS to $50,000, and restrict certain transactions with
affiliates that exceed $2,000 in any year subject to certain exceptions
which include payments to the Company not to exceed $6,500 per year for
permitted operating expenses, payment of the Chairman's salary and bonus
and certain other expenses, fees and payments. In addition, the Indenture
contains certain restrictions on the ability of the Chairman and certain
of his affiliates to enter into certain transactions with, and receive
payments above specified levels from, New Valley. The Series B Notes may
be redeemed, in whole or in part, through December 31, 1999, at a price of
101% of the principal amount and thereafter at 100%. Interest is payable
at the rate of 15.75% per annum on January 31 and July 31 of each year,
except for the period from October 1, 1995 to January 30, 1996 when
interest was payable at 13.75%.

The Company recorded an extraordinary charge of approximately $9,700 for
the year ended December 31, 1995 relating to the exchanged debt securities
discussed above.

Liggett 11.500% Senior Secured Series B Notes due 1999:

On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Liggett Series B Notes"). Interest on the Liggett Series B Notes is
payable semiannually on February 1 and August 1 at an annual rate of
11.5%. The Liggett Series B Notes and Series C Notes referred to below
(collectively, the "Liggett Notes") required mandatory 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 Liggett Notes due
on February 1, 1999. In February 1997, $7,500 of Liggett B Notes were
purchased using the Facility and credited against the mandatory redemption
requirements. The transaction resulted in a net gain of $2,963. The
Liggett Notes are collateralized by substantially all of the assets of
Liggett, excluding inventories and receivables. Eve Holdings Inc. is a
guarantor for the Liggett Notes. The Liggett Notes may be redeemed, in
whole or in part, at a price equal to 100% of the principal amount at the
option of Liggett. The Liggett 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.

During 1997, Liggett engaged in negotiations with its note
holders to restructure the terms of the Liggett Notes. During such
negotiations, Liggett postponed making the interest payment of
approximately $9,700 due on August 1, 1997, on the Liggett Notes. As
discussed below, on August 29, 1997, the Facility was amended to permit
Liggett to borrow an additional $6,000 which was used on that date to make
the August 1, 1997 interest payment. The indenture governing the Liggett
Notes provides for a 30-day grace period before the failure to pay
interest will be an event of default.

On January 30, 1998, with the consent of the required majority of the
holders of the Liggett Notes, Liggett entered into various amendments to
the Indenture governing the Liggett Notes, which provided, among other
things, for a deferral of the February 1, 1998 mandatory redemption
payment of $37,500 to the date of final maturity of the Liggett Notes on
February 1, 1999. In connection with the deferral, the Company agreed to
issue 482,970 shares of the Company's common stock to the holders of
record on January 15, 1998 of the Liggett Notes. The Indenture under which
the Liggett Notes are outstanding was also amended to prohibit, with
limited exceptions, payments of dividends and incurrence of new debt by
Liggett and to tighten restrictions on the disposition of proceeds of

F-23

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

asset sales. The Company and BGLS also agreed to guarantee the payment by
Liggett of the August 1, 1998 interest payment on the Liggett Notes. In
addition, Liggett Noteholders were granted additional collateral in the
form of a security interest in 16% of the stock of Liggett-Ducat or a
successor entity held by BOL.

On February 1, 1999, all of the Liggett Notes, approximately $144,900,
will reach maturity. There are no refinancing or restructuring
arrangements in place at this time for the notes and no assurances can be
given in this regard. (Refer to Note 1(b).)

Issuance of Liggett Series C Variable Rate Notes:

The Series C Notes have the same terms (other than interest rate, which is
19.75%) and stated maturity as the Liggett Series B Notes.

Revolving Credit Facility - Liggett:

On March 8, 1994, Liggett entered into the Facility for $40,000 with a
syndicate of commercial lenders. The Facility is collateralized by all
inventories and receivables of Liggett. At December 31, 1997, $7,728 was
available under the Facility based on eligible collateral. Borrowings
under the Facility, whose interest is calculated at a rate equal to 1.5%
above the Philadelphia National Bank's prime rate, bear a rate of 10.0% at
December 31, 1997. The Facility requires Liggett's compliance with certain
financial and other covenants. The Facility also limits the amount of cash
dividends and distributions by Liggett and imposes requirements with
respect to Liggett's permitted maximum adjusted net worth and net working
capital deficiencies. In January 1997, the Facility was extended for one
year and, in November 1997, was extended for an additional year until
March 8, 1999.

During the first quarter of 1997, Liggett violated the working capital
covenant contained in the Facility. This violation occurred during
February 1997 when $37,500 of the Liggett Notes were reclassified from
long-term to current as a result of the February 1, 1998 mandatory
redemption requirement of such Notes, which redemption has now been
extended to the maturity date, February 1, 1999. On March 19, 1997, the
lead lender agreed to waive this covenant default, and the Facility was
amended as follows: (i) the working capital definition was changed to
exclude the current portion of the Liggett Notes; (ii) the maximum
permitted working capital deficit was reduced to $12,000 (as computed in
accordance with the agreement); (iii) the maximum permitted adjusted net
worth deficit was increased to $180,000 (as computed in accordance with
the agreement); and (iv) the permitted advance rates under the Facility
for eligible inventory were reduced by five percent. On April 8, 1998, the
Facility was further amended to increase the maximum permitted adjusted
net worth and net working capital deficiencies to $195,000 and $17,000,
respectively. The Facility, as amended, also provides that a default by
Liggett or its subsidiaries under the March 96 Settlements, March 97
Settlements and March 98 Settlements (all as defined below in Note 16)
shall constitute an event of default under the Facility.

On August 29, 1997, the Facility was amended to permit Liggett to borrow
an additional $6,000 which was used on that date in making the interest
payment of $9,700 due on August 1, 1997 to the holders of the Liggett
Notes. BGLS guaranteed the additional $6,000 advance under the Facility
and collateralized the guarantee with $6,000 in cash, deposited with
Liggett's lender. At December 31, 1997, this amount is classified in other
assets on the consolidated balance sheet.

Foreign Loans:

In October, 1995, Liggett-Ducat, a subsidiary of BOL, entered into a
construction loan agreement with a Russian Bank for a period of two years
on behalf of BML for $20,400. The loan was paid in full by BML in the
third quarter of 1997. Deferred financing fees of approximately $4,044
were recorded and were amortized over the term of the loan. (Refer to Note
4.)

F-24

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

At December 31, 1997, Liggett-Ducat had two 6-month credit facilities open
with a Russian bank. The first, for $2,000, expires on April 30, 1998,
initially bore an interest rate of 21%, subsequently raised to 28% on
December 2, 1997. The second, for $3,000, expires on May 16, 1998,
initially bore an interest rate of 25%, subsequently raised to 28% on
December 2, 1997.

Scheduled Maturities:

Scheduled maturities of long-term debt for each of the next five years are
as follows:

1998.................................... $ 6,429
1999.................................... 168,112
2000....................................
2001.................................... 231,723
2002....................................
Thereafter..............................
----------
$ 406,264
==========

10. COMMITMENTS

Certain of the Company's subsidiaries lease certain facilities and
equipment used in its operations under both month-to-month and fixed-term
agreements. The aggregate minimum rentals under operating leases with
noncancelable terms for one year or more are as follows:

Year ending December 31:

1998...................................... $2,144
1999...................................... 735
2000...................................... 280
2001...................................... 267
2002...................................... 143
Thereafter................................ 2,155
------
$5,724
======

Lease commitments for 2002 and thereafter relate primarily to the
remaining 45 years of a land lease and 23 years of an equipment lease in
Russia.

The Company's rental expense for the years ended December 31, 1997, 1996
and 1995 was $3,625, $5,471 and $4,449, respectively.

11. EMPLOYEE BENEFIT PLANS

Defined Benefit Retirement Plans:

The Company sponsors several defined benefit pension plans, covering
virtually all of Liggett's full-time employees. These plans provide
pension benefits for eligible employees based primarily on their
compensation and length of service. Contributions are made to the pension
plans in amounts necessary to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 ("ERISA").

F-25

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

In a continuing effort to reduce operating expenses, all defined benefit
plans were frozen between 1993 and 1995 and several early retirement
windows were offered in 1995 and 1996. As a result of these actions, the
Company recorded a curtailment charge (see table below).

The Company's net pension expense consists of the following components:

Year Ended December 31,
1997 1996 1995
---- ---- ----

Service cost - benefits earned during the period.......... $ 350 $ 350 $ 454
Interest cost on projected benefit obligation............. 12,255 12,241 12,850
Actual return on assets................................... (42,511) (21,143) (23,501)
Curtailment related to plan restructuring................. 484 1,463 1,550
Net amortization and deferral............................. 27,430 7,384 9,547
-------- -------- --------
$ (1,992) $ 295 $ 900
======== ======== ========

In accordance with SFAS No. 87, "Employers' Accounting for Pensions", the
overfunded and underfunded plans with respect to the accumulated benefit
obligation at December 31, 1996 have been segregated for financial
statement presentation. All plans were underfunded with respect to the
accumulated benefit obligation at December 31, 1995. An analysis of the
funded status of the Company's defined benefit pension plans and amounts
recognized in the balance sheets at December 31, 1997 and 1996 for the
pension plans are as follows:

December 31, December 31,
1997 1996
----------------------------------------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
Benefits Assets Benefits Assets

Actuarial present value of benefit obligations:
Vested benefit obligation ...................... $ 157,193 $ 3,843 $ 155,612 $ 2,900
========= ========= ========= =======
Accumulated benefit obligation ................. $ 161,614 $ 3,860 $ 160,587 $ 2,915
========= ========= ========= =======
Projected benefit obligation ................... $ 161,614 $ 3,860 $ 160,587 $ 2,915
Plan assets at fair value ............................ 194,732 169,845
--------- --------- --------- -------
Projected benefit obligation (less than) in
excess of plan assets .......................... (33,118) 3,860 (9,258) 2,915
Unrecognized net gain (loss) ......................... 51,017 (2,058) 28,221 (976)
Curtailment liability ................................ 1,463
Adjustment required to recognize minimum liability ... 2,058 976
--------- --------- --------- -------
Pension liability before purchase accounting
valuation adjustments .......................... 17,899 3,860 20,426 2,915
Purchase accounting valuation adjustments related
to income taxes ................................ (3,077) (3,425)
--------- --------- --------- -------
Net pension liability included in the balance sheets . $ 14,822 $ 3,860 $ 17,001 $ 2,915
========= ========= ========= =======

Assumptions used in the determination of net pension expense and the
actuarial present value of benefit obligations for the years ended
December 31, 1997 and 1996 follow:

Discount rates.................................. 6.25 - 8.00%
Accrued rates of return on invested assets...... 9.0%
Salary increase assumptions..................... N/A

F-26

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

Plan assets consist of commingled funds, marketable equity securities and
corporate and government debt securities.

Postretirement Medical and Life Insurance Plans:

BGLS and Liggett

Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Effective January 1, 1995, retirees are required to fund 100% of
participant medical premiums.

The components of net periodic postretirement benefit cost for the years
ended December 31, 1997, 1996 and 1995 are as follows:

1997 1996 1995
---- ---- ----

Service cost, benefits attributed to employee
service during the year............................ $ 24 $ 68 $ 68
Interest cost on accumulated postretirement
benefit obligation................................. 703 829 970
Charge for special termination benefits................. 47 137 489
Amortization of net (gain) loss......................... (193) (92) (26)
---- ---- ------
Net periodic postretirement benefit expense............. $581 $942 $1,501
==== ==== ======

The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") at December 31, 1997 and 1996
applicable to each employee group for benefits:

1997 1996
---- ----

Retired employees................................................. $ 6,870 $ 7,899
Active employees - fully eligible................................. 498 674
Active employees - not fully eligible............................. 810 515
------- -------
APBO......................................................... 8,178 9,088
Unrecognized net gain............................................. 3,992 3,324
Purchase accounting valuation adjustment related to
income taxes................................................. (963) (1,072)
------- -------
Postretirement liability.......................................... $11,207 $11,340
======= =======

The APBO at December 31, 1997 and 1996 was determined using discount rates
of 7.5% and 8%, respectively, and a health care cost trend rate of 4% in
1997 and 1996. A 1% increase in the trend rate for health care costs would
have increased the APBO and net periodic postretirement benefit cost by
$360 and $26, respectively, for the year ended December 31, 1997. The
Company does not hold any assets reserved for use in the plan.

F-27

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

Profit Sharing Plan:

Liggett

The 401(k) plans originally called for Liggett contributions matching up
to a 3% employee contribution, plus additional Liggett contributions of up
to 6% of salary based on the achievement of Liggett's profit objectives.
Effective January 1, 1994, Liggett suspended the 3% match for the salaried
employees' 401(k) Plan, but reinstated it on April 1, 1996. Liggett
contributed and expensed $497, $591 and $900 to the 401(k) plans for the
years ended December 31, 1997, 1996 and 1995, respectively.

12. INCOME TAXES

The Company files a consolidated federal income tax return that includes
its more than 80%-owned United States subsidiaries. At December 31, 1997,
the Company had $99,861 of unrecognized net deferred tax assets, comprised
primarily of net operating loss carryforwards, available to offset future
taxable income for federal tax purposes. The Company established a
valuation allowance against this deferred tax asset as it is presently
deemed more likely than not that the benefit of the tax asset will not be
utilized. The Company continues to evaluate the realizability of its
deferred tax assets and its estimate is subject to change.

The amounts provided for income taxes are as follows:

Year Ended December 31,
1997 1996 1995
---- ---- ----

Current:
U.S. Federal.....................................
Foreign.......................................... $1,134 $ 1,454
State............................................ (11) (52) $ 342
------ ------- -----
Total provision (benefit) for continuing operations. $1,123 $ 1,402 $ 342
====== ======= =====

The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets and liabilities are as follows:

December 31, 1997 December 31, 1996
----------------- -----------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------

Sales and product allowances....... $ 3,102 $ 2,504
Inventory.......................... 457 $1,568 1,270 $ 683
Coupon accruals.................... 2,369 4,492
Property, plant and equipment...... 5,760 5,218
Employee benefit plan accruals..... 12,698 13,193
Debt restructuring charges......... 19,105 22,334
Excess of tax basis over book basis-
non-consolidated entities....... 9,467 9,467
Excess of book basis over tax basis-
non-consolidated entities....... 5,166
Legal settlements.................. 9,840 2,910
Net operating loss carryforwards... 50,151 45,543
Valuation allowance................ (99,861) (90,646)
Reclassifications.................. (7,328) (7,328) (11,067) (11,067)
--------- ------ ------- -------
$ $ $ $
========= ====== ======= =======

F-28

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

Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rate are summarized as follows:

Year Ended December 31,
1997 1996 1995
---- ---- ----

Loss from continuing operations
before income taxes ......................... $(50,687) $(63,516) $(45,002)
-------- -------- --------

Federal income tax (benefit) at statutory rate (17,740) (22,231) (15,751)

Increases (decreases) resulting from:
State income taxes, net of federal income tax
benefits ................................... (8) (34) 342
Foreign taxes ............................... 1,134 1,454
Changes in valuation allowance .............. 9,215 21,471 11,810
Other ....................................... 8,522 742 3,941
-------- -------- --------
Provision for income tax .................... $ 1,123 $ 1,402 $ 342
======== ======== ========

The Company's tax years from 1993 to 1995 are presently under audit with
the Internal Revenue Service. The Company believes it has adequately
reserved for any potential adjustments which may occur.

At December 31, 1997, the Company and its consolidated group had net
operating loss carryforwards for tax purposes of approximately $125,000
which may be subject to certain restrictions and limitations and which
will expire in the years 2006 to 2017.

13. EQUITY

Treasury Stock:

On March 7, 1997, a partnership controlled by the Company's Chairman,
President and Chief Executive Office and controlling stockholder (the
"Chairman") transferred 400,000 shares of common stock to the Company in
satisfaction of an obligation. (Refer to Note 17.)

In 1995, pursuant to a Stock Grant Agreement, the Company purchased 33,748
shares of common stock from a former employee at market price. During
1995, the Company issued, in the aggregate, 270,000 shares from treasury.

On January 16, 1998, the Company entered into a Stock Purchase Agreement
in which High River purchased 1,500,000 shares of BGL common stock for
$9,000. The Company has agreed to use its best efforts to file with the
SEC,a shelf registration statement on Form S-3 to be declared effective by
May 15, 1998. If the registration statement has not been declared
effective by such date, liquidated damages on the shares of common stock
will accrue at the rate of $25 per day for the first 60-day period, and
thereafter at the rate of $50 per day, provided that the aggregate
liquidated damages shall not exceed $9,000.

On March 12, 1998, the Company granted an option for 1,250,000 shares of
the Company's common stock to a law firm that represents the Company and
Liggett. On May 1, 1998 and April 1, 1999, options for 250,000 and an
additional 1,000,000 shares of common stock are exercisable at $17.50 per
share, respectively. The option expires on March 31, 2003.

F-29

82
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

14. STOCK PLANS

On December 16, 1996, the Company entered into a Stock Option Agreement
(the "Agreement") with a consultant who serves as a director and President
of New Valley. The Agreement granted such consultant non-qualified stock
options to purchase 1,000,000 shares of the Company's common stock at an
exercise price of $1.00 per share. The options, which have a ten-year
term, vest and become exercisable in six equal annual installments
beginning on July 1, 1997. Pursuant to the Agreement, common stock
dividend equivalents are paid on each vested and unexercised option. The
Company estimated the fair value of such grant on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: a
risk-free interest rate of 6.4%, expected option life of 10 years,
volatility of 81.4% and no expected dividends or forfeiture. Under this
model, the fair value of stock options granted in 1996 was $4,750. The
Company recognized expense of $1,127 and $64 for the years ended 1997 and
1996, respectively.

As of January 1, 1994, the Company had granted 500,000 shares of
restricted common stock to the same consultant. Of the total number of
shares granted, 250,000 were immediately vested and issued during the
third quarter. The remaining 250,000 shares were issued in 1995 and vested
in 1997. In addition, on January 25, 1995, the Company entered into a
non-qualified stock option agreement with the same consultant. Under the
agreement, options to purchase 500,000 shares were granted at $2.00 per
share. The options are exercisable over a ten-year period, beginning with
20% on the grant date and 20% on each of the four anniversaries of the
grant date. The grant provides for dividend equivalent rights on all the
shares underlying the options. During 1997, 1996 and 1995, the Company
recorded charges to income of $205, $222, and $557, respectively, for
compensation based on estimates of the fair market value for the shares
and options granted. In 1997, 1996 and 1995, the Company also recorded
charges to income of $188, $150 and $150, respectively, for the dividend
equivalent rights.

As of January 1, 1998 and 1997, the Company granted to employees of the
Company non-qualified stock options to purchase 42,500 and 422,000,
respectively, shares of the Company's common stock at an exercise price of
$5.00 per share. The options have a ten-year term and vest in six equal
annual installments. The Company will recognize compensation expense of
$154 over the vesting period.

The fair value of option grants to employees is estimated on the date of
grant using the Black-Scholes option-pricing model for pro forma footnote
disclosure purposes with the following assumptions used for grants in
1997: a risk-free interest rate of 6.44%, expected option life of 10
years, volatility of 81.46% and no expected dividends or forfeitures.

A summary of stock options granted to employees follows:

Weighted
Number of Exercise Average
Shares Price Fair Value
------ ----- ----------

Outstanding on December 31, 1996 0
Granted ................... 422,000 $5.00 $4.30
Exercised ................. 0
Cancelled ................. 0
Outstanding on December 31, 1997 422,000 $5.00 4.30
Exercisable .................... 89,165

F-30

83
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

The Company has chosen to continue accounting for stock options at their
intrinsic value. Had the fair value method of accounting been applied to
the Company's stock options granted to employees, the pro forma effect
would be as follows:

1997
----

Net loss as reported..................................... $(49,885)
Estimated fair value of the year's option grants......... 383
Net loss adjusted........................................ (50,268)
Adjusted net loss per share - Basic and Diluted.......... (2.81)

15. SUPPLEMENTAL CASH FLOW INFORMATION

In accordance with the requirements of SFAS No. 95, "Statement of Cash
Flows," supplemental cash flow information is disclosed below:

Year Ended December 31,
1997 1996 1995
---- ---- ----

I. Cash paid during the period for:
Interest .................................... $ 43,028 $ 57,362 $ 60,158
Income taxes, net of refunds ................ 462 582 1,735

II. Non-cash investing and financing activities:
Dividends payable ........................... $ 1,387
Distribution of MAI to stockholders ......... $ 27,085
Exchange of Series 2 Senior Secured Notes
for Series A Notes ........................ 99,154
Exchange of 14.50% Subordinated Debentures
for Series B Notes ........................ 125,495
Issuance of Series A Notes for options ...... 822
Exchange of Series A Notes for Series B Notes 99,976
Issuance of promissory notes for shares
of Liggett-Ducat .......................... 1,643
Promissory Note from New Valley ............. 33,500

16. CONTINGENCIES

Tobacco-Related Litigation:

Overview. Since 1954, Liggett 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 exposure to secondary smoke
(environmental tobacco smoke, "ETS") from cigarettes. These cases are
reported hereinafter as though having been commenced against Liggett
(without regard to whether such cases were actually commenced against the
Company or Liggett). There has been a noteworthy increase in the number of
cases pending against both Liggett and the other tobacco companies. The
cases generally fall into three categories: (i) smoking and health cases
alleging personal injury brought on behalf of individual smokers
("Individual Actions"), (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of plaintiffs
("Class Actions") and (iii) health care cost recovery actions brought by
state and local

F-31
84
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

governments, although recently numerous health care cost recovery actions
have been commenced on behalf of other third-party payors including
asbestos manufacturers, unions and taxpayers ("Attorneys General
Actions"). As new cases are commenced, the costs associated with defending
such cases and the risks attendant to the inherent unpredictability of
litigation continue to increase. Liggett had been receiving assistance
from others in the industry in defraying the costs and other burdens
incurred in the defense of smoking and health litigation and related
proceedings, which, for the most part, consisted of the payment of counsel
fees and costs, but this assistance terminated in 1997. In 1995 and 1996,
approximately $1,500 and $6,500, respectively, in counsel fees and costs
were paid by others. In 1995 and 1996, Liggett incurred additional fees
and costs in connection with tobacco-related litigation in the amount of
approximately $4,500 and $3,500, respectively. In 1997, Liggett incurred
fees and costs in the amount of approximately $5,750. The future financial
impact on the Company of the termination of this assistance and the
effects of the tobacco litigation settlements discussed below is not
quantifiable at this time.

On June 24, 1992, in an action entitled Cipollone v. Liggett Group Inc.,
et al., the United States Supreme Court issued an opinion concluding that
The Federal Cigarette Labeling and Advertising Act did not preempt state
common law damage claims but that The Public Health Cigarette Smoking Act
of 1969 (the "1969 Act") did preempt certain, but not all, state common
law damage claims. 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. 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.

Individual Actions. As of December 31, 1997, there were approximately 250
cases pending against Liggett, and in most cases the other tobacco
companies, where individual plaintiffs allege injury resulting from
cigarette smoking, addiction to cigarette smoking or exposure to ETS and
seek compensatory and, in some cases, punitive damages. Of these, 108 are
pending in the State of Florida, 82 are pending in the State of New York
and 19 are pending in the State of Texas. The balance of individual cases
are pending in 16 states. There are four individual cases pending where
Liggett is the only named defendant.

The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by
cigarette smoking are based on various theories of recovery, including
negligence, gross negligence, special duty, voluntary undertaking, strict
liability, fraud, misrepresentation, design defect, failure to warn,
breach of express and implied warranties, conspiracy, aiding and abetting,
concert of action, unjust enrichment, common law public nuisance,
indemnity, market share liability and violations of deceptive trade
practices laws, the Federal Racketeer Influenced and Corrupt Organization
Act ("RICO") and antitrust statutes. In many of these cases, in addition
to compensatory damages, plaintiffs also seek other forms of relief
including disgorgement of profits and punitive damages. Defenses raised by
defendants in these cases include lack of proximate cause, assumption of
the risk, comparative fault and/or contributory negligence, lack of design
defect, statute of limitations, equitable defenses such as "unclean hands"
and lack of benefit, failure to state a claim and federal preemption.

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. On October 6, 1997, the
parties settled this matter.

F-32

85
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

Class Actions. As of December 31, 1997, there were approximately 40
actions pending, for which either a class has been certified or plaintiffs
are seeking class certification, where Liggett, among others, was a named
defendant. Two of these cases, Fletcher, et al. v. Brooke Group Ltd., et
al. and Walker, et al. v. Liggett Group Inc., et al., have been settled,
subject to court approval. These two settlements are more fully discussed
below under the "Settlements" section.

On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Incorporated, et al., Circuit Court of the Eleventh Judicial District in
and for Dade County, Florida, was filed against Liggett and others. This
case 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 they
have been damaged by involuntary exposure to ETS. On October 10, 1997, the
other major tobacco companies settled this matter which settlement
provides for a release of the Company and Liggett. In February 1998, the
Circuit Court approved the settlement, however, a Notice of Appeal was
filed in the Third District Court of Appeal by an objector to the
settlement.

On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company Inc., et al., United States District Court, Eastern
District of Louisiana, was filed against Liggett and others. The class
action complaint sought relief for a nationwide class of smokers based on
their alleged addiction to nicotine. On February 17, 1995, the District
Court granted plaintiffs' motion for class certification (the "Class
Certification Order").

On May 23, 1996, the Court of Appeals for the Fifth Circuit reversed the
Class Certification Order and instructed the District Court to dismiss the
class complaint. The Fifth Circuit ruled that the District Court erred in
its analysis of the class certification issues by failing to consider how
variations in state law affect predominance of common questions and the
superiority of the class action mechanism. The appeals panel also held
that the District Court's predominance inquiry did not include
consideration of how a trial on the merits in Castano would be conducted.
The Fifth Circuit further ruled that the "addiction-as-injury" tort is
immature and, accordingly, the District Court could not know whether
common issues would be a "significant" portion of the individual trials.
According to the Fifth Circuit's decision, any savings in judicial
resources that class certification may bring about is speculative and
would likely be overwhelmed by the procedural problems certification
brings. Finally, the Fifth Circuit held that in order to make the class
action manageable, the District Court would be forced to bifurcate issues
in violation of the Seventh Amendment.

The extent of the impact of the Castano decision on tobacco-related class
action litigation is still uncertain, although the decertification of the
Castano class by the Fifth Circuit may preclude other federal courts from
certifying a nationwide class action for trial purposes with respect to
tobacco-related claims. The Castano decision has had to date, however,
only limited effect with respect to courts' decisions regarding narrower
tobacco-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, courts in
New York, Louisiana and Maryland have certified "addiction-as-injury"
class actions that covered only citizens in those states. Two class
actions pending in state court in Florida have also been certified and one
of the actions, the Broin case, had begun trial before settling in 1997.
The Castano decision has had no measurable impact on litigation brought by
or on behalf of single individual claimants.

Attorneys General Actions. As of December 31, 1997, 39 Attorneys General
actions were filed against Liggett and the Company. In February 1998, one
additional action was commenced. As more fully discussed below, through
March 1998, Liggett and the Company have settled 37 of these actions. In
addition, the Company and Liggett have reached settlements with six
Attorneys General representing states or territories which have not yet
commenced litigation. As of December 31, 1997, there were

F-33
86
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

approximately 35 additional third-party payor actions pending. In certain
of the pending proceedings, state and local government entities and others
seek reimbursement for Medicaid and other health care expenditures
allegedly caused by use of tobacco products. The claims asserted in these
health care cost recovery actions vary. In most of these cases, plaintiffs
assert the equitable claim that the tobacco industry was "unjustly
enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other
claims made by some but not all plaintiffs include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, violation of a voluntary undertaking or
special duty, fraud, negligent misrepresentation, conspiracy, public
nuisance, claims under state and federal statutes governing consumer
fraud, antitrust, deceptive trade practices and false advertising, and
claims under RICO.

Settlements. In March 1996, the Company and Liggett entered into an
agreement, subject to court approval, to settle the Castano class action
tobacco litigation. Under the Castano settlement agreement, upon final
court approval of the settlement, the Castano class would be entitled to
receive up to five percent of Liggett's pretax income (income before
income taxes) each year (up to a maximum of $50,000 per year) for the next
25 years, subject to certain reductions provided for in the agreement and
a $5,000 payment from Liggett if the Company or Liggett fail to consummate
a merger or similar transaction with another non-settling tobacco company
defendant within three years of the date of settlement. The Company and
Liggett have the right to terminate the Castano settlement under certain
circumstances. On March 14, 1996, the Company, the Castano Plaintiffs
Legal Committee and the Castano plaintiffs entered into a letter
agreement. According to the terms of the letter agreement, for the period
ending nine months from the date of Final Approval (as defined in the
letter), if granted, of the Castano settlement or, if earlier, the
completion by the Company or Liggett of a combination with any defendant
in Castano, except Philip Morris, the Castano plaintiffs and their counsel
agree not to enter into any more favorable settlement agreement with any
Castano defendant which would reduce the terms of the Castano settlement
agreement. If the Castano plaintiffs or their counsel enter into any such
settlement during this period, they shall pay the Company $250,000 within
30 days of the more favorable agreement and offer the Company and Liggett
the option to enter into a settlement on terms at least as favorable as
those included in such other settlement. The letter agreement further
provides that during the same time period, and if the Castano settlement
agreement has not been earlier terminated by the Company in accordance
with its terms, the Company and its affiliates will not enter into any
business transaction with any third party which would cause the
termination of the Castano settlement agreement. If the Company or its
affiliates enter into any such transaction, then the Castano plaintiffs
will be entitled to receive $250,000 within 30 days from the transacting
party. On May 11, 1996, the Castano Plaintiffs Legal Committee filed a
motion with the United States District Court for the Eastern District of
Louisiana seeking preliminary approval of the Castano settlement. On
September 6, 1996, shortly after the class was decertified, the Castano
plaintiffs withdrew the motion for approval of the Castano settlement.

In March 1996, the Company and Liggett entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida,
Louisiana, Massachusetts, Mississippi and West Virginia (the "March 1996
Settlements"). The March 1996 Settlements release the Company and Liggett
from all tobacco-related claims including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors. Certain
of the terms of the March 1996 Settlements are summarized below.

Under the March 1996 Settlements, the five settling states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March
22, 1996, with the balance payable over nine years

F-34
87
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

and indexed and adjusted for inflation), provided that any unpaid amount
will be due 60 days after either a default by Liggett in its payment
obligations under the settlement or a merger or other similar transaction
by the Company or Liggett with another defendant in the lawsuits. In
addition, Liggett will be required to pay the settling states a percentage
of Liggett's pretax income (income before income taxes) each year from the
second through the twenty-fifth year. This annual percentage is 2-1/2% of
Liggett's pretax income, subject to increase to 7-1/2% depending on the
number of additional states joining the settlement. No additional states
have joined this settlement to date. All of Liggett's payments are subject
to certain reductions provided for in the agreement. Liggett has also
agreed to pay to the settling states $5,000 if the Company or Liggett
fails to consummate a merger or other similar transaction with another
defendant in the lawsuits within three years of the date of the March 1996
Settlement.

Settlement funds received by the Attorneys General will be used to
reimburse the states for smoking-related health care costs. The Company
and Liggett also have agreed to phase in compliance with certain of the
proposed interim FDA regulations on the same basis as provided in the
Castano settlement. The Company and Liggett have the right to terminate
the March 1996 Settlements with respect to any settling state if any of
the remaining defendants in the litigation succeed on the merits in that
state's respective Attorney General action. The Company and Liggett may
also terminate the March 1996 Settlements if they conclude that too many
states have filed Attorney General actions and have not settled such cases
with the Company and Liggett.

On March 20, 1997, Liggett, the Company and the five settling states
executed an addendum pursuant to which Liggett and the Company agreed to
provide to the five settling states, among other things, the additional
cooperation and compliance with advertising restrictions that is provided
for in the March 1997 Settlements (discussed below). Also, pursuant to the
addendum, the initial settling states agreed to use best efforts to ensure
that in the event of a global tobacco settlement enacted through federal
legislation or otherwise, Liggett's and the Company's financial
obligations under such a global settlement would be no more onerous than
under this settlement.

At December 31, 1995, the Company had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Settlements. At
December 31, 1997, in connection with the March 1998 Settlements, the
Company accrued $16,421 for the present value of the fixed payments under
the March 1998 Settlements. No additional amounts have been accrued with
respect to the recent settlements discussed below. The Company cannot
quantify the future costs of the settlements at this time as the amount
Liggett must pay is based, in part, on future operating results. Possible
future payments based on a percentage of pretax income, and other
contingent payments based on the occurrence of a business combination,
will be expensed when considered probable.

In March 1997, Liggett and the Company entered into a comprehensive
settlement of tobacco litigation through parallel agreements with the
Attorneys General of 17 states and with a nationwide class of individuals
and entities that allege smoking-related claims. Thereafter, during 1997,
settlements were reached with four more states through their respective
Attorneys General (settlements with these 21 Attorneys General and with
the nationwide class are hereinafter referred to as the "March 1997
Settlements"). On March 12, 1998, Liggett and the Company, announced
settlements with the Attorneys General of 14 states, the District of
Columbia and the U.S. Virgin Islands (the "March 1998 Settlements"). On
March 26, 1998, the Company and Liggett settled with the Attorney General
of Georgia. The foregoing settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against the
Company and Liggett, brought by the Attorneys General and, upon court
approval, the nationwide class.

F-35
88
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

The states and territories where settlements have been reached with
Attorneys General are: Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah,
U.S. Virgin Islands, Washington, West Virginia, Wisconsin and Wyoming.
Other states have either recently filed health care cost recovery actions
or indicated intentions to do so. Both Liggett and the Company will
endeavor to resolve those actions on substantially the same terms and
conditions as the March 1998 Settlements, however, there can be no
assurance that any such settlements will be completed.

As mentioned above, in March 1997, Liggett, the Company and plaintiffs
filed a mandatory class settlement agreement in an action entitled
Fletcher, et al. v. Brooke Group Ltd., et al., Circuit Court of Mobile
County, Alabama, where the court granted preliminary approval and
preliminary certification of the class, and on May 15, 1997, a similar
mandatory class settlement agreement was filed in an action entitled
Walker, et al. v. Liggett Group Inc., et al., United States District
Court, Southern District of West Virginia. The Company anticipates that
should the court in Fletcher, after dissemination of notice to the class
of the pending limited fund class action settlement and a full fairness
hearing with respect thereto, issue a final order and judgment approving
the settlement, such an order would preclude further prosecution by class
members of tobacco-related claims against both Liggett and the Company.
Under the Full Faith and Credit Act, a final judgment entered in a
nationwide class action pending in a state court has a preclusive effect
against any class member with respect to the claims settled and released.
As the class definition in Fletcher encompasses all persons in the United
States who would claim injury as a result of cigarette or ETS and any
third-party payor claimants, it is anticipated that, upon final order and
judgment, all such persons and third-party payor claimants would be barred
from further prosecution of tobacco-related claims against Liggett and the
Company.

In the Fletcher action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a
later court hearing. Effectiveness of the mandatory settlement is
conditioned on final court approval of the settlement after a fairness
hearing. There can be no assurance as to whether, or when, such court
approval will be obtained.

The Walker court also granted preliminary approval and preliminary
certification of the nationwide class, however, in August 1997, the court
vacated its preliminary certification of the settlement class, which
decision is currently on appeal. The Walker court relied on the Supreme
Court's decision in Amchem Products Inc. v. Windsor in reaching its
decision to vacate preliminary certification of the class. In Amchem, the
Supreme Court affirmed a decision of the Third Circuit vacating the
certification of a settlement class that involved asbestos-exposure
claims. The Supreme Court held that the proposed settlement class did not
meet the requirements of Rule 23 of the Federal Rules of Civil Procedure
for predominance of common issues and adequacy of representation. The
Third Circuit had held that, although classes could be certified for
settlement purposes, Rule 23's requirements had to be satisfied as if the
case were going to be litigated. The Supreme Court agreed that the
fairness and adequacy of the settlement are not pertinent to the
predominance inquiry under Rule 23(b)(3), and thus, the proposed class
must have sufficient unity so that absent class members can fairly be
bound by decisions of class representatives.

After the Amchem opinion was issued by the Supreme Court in June 1997,
objectors to Liggett's settlement in Walker moved for decertification.
Although Liggett's settlement in the Walker action is a "limited fund"
class action settlement proceeding under Rule 23(b)(1) and Amchem was a
Rule 23 (b)(3) case, the court in the Walker action, nonetheless,
decertified the Walker class. Applying Amchem to the Walker case, the
District Court, in a decision issued in August 1997, determined that

F-36
89
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

while plaintiffs in Walker have a common interest in "maximizing the
limited fund available from the defendants," there remained "substantial
conflicts among class members relating to distribution of the fund and
other key concerns" that made class certification inappropriate.

The Amchem decision's ultimate affect on the viability of both the Walker
and Fletcher settlements remains uncertain given the Fifth Circuit's
recent ruling reaffirming a limited fund class action settlement in In re
Asbestos Litigation ("Ahearn"). In June 1997, the Supreme Court remanded
Ahearn to the Fifth Circuit for consideration in light of Amchem. On
remand, the Fifth Circuit made two decisive distinctions between Amchem
and Ahearn. First, the Ahearn class action proceeded under Rule 23(b)(1)
while Amchem was a Rule 23(b)(3) case, and second, in Ahearn, there was no
allocation or difference in award, according to nature or severity of
injury, as there was in Amchem. The Fifth Circuit concluded that all
members of the class and all class representatives share common interests
and none of the uncommon questions, abounding in Amchem, exist.

The remaining material terms of the March 1996 Settlements, the March 1997
Settlements and the March 1998 Settlements are described below.

Pursuant to each of the settlements, both the Company and Liggett agreed
to cooperate fully with the Attorneys General and the nationwide class in
their respective lawsuits against the tobacco industry. The Company and
Liggett agreed to provide to these parties all relevant tobacco documents
in their possession, other than those subject to claims of joint defense
privilege, and to waive, subject to court order, certain attorney-client
privileges and work product protections regarding Liggett's
smoking-related documents to the extent Liggett and the Company can so
waive these privileges and protections. The Attorneys General and the
nationwide class agreed to keep Liggett's documents under protective order
and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may
be subject to a joint defense privilege with other tobacco companies will
not be produced to the Attorneys General or the nationwide class, but will
be, pursuant to court order, submitted to the appropriate court and placed
under seal for possible in camera review. Additionally, under similar
protective conditions, the Company and Liggett agreed to offer their
employees for witness interviews and testimony at deposition and trial.
Pursuant to the settlement agreements, Liggett also agreed to place an
additional warning on its cigarette packaging stating that "Smoking is
Addictive" and to issue a public statement, as requested by the Attorneys
General. Liggett has commenced distribution of cigarette packaging which
displays the new warning label.

Pursuant to the March 1996 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or the
Company, prior to the third anniversary of the settlement, would receive
certain settlement benefits, including limitations on potential liability.
Pursuant to the agreement, any such combining tobacco company would be
released from the lawsuits brought by the five initial settling states.
Such combining tobacco company would be obligated to pay into the
settlement fund within sixty days of becoming bound to the agreement
$135,000, and make annual payments of 2.5% of the combining company's
pre-tax income (but not less than $30,000 per year). Such combining
tobacco company would also have to comply with the advertising and access
restrictions provided for in the agreement, and would have to withdraw
their objections to the FDA rule.

Pursuant to the March 1997 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or the
Company, prior to the fourth anniversary of the settlements, would receive
certain settlement benefits, including limitations on potential liability
for affiliates not engaged in domestic tobacco operations and a waiver of
any obligation to post a bond to

F-37
90
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

appeal any future adverse judgment. In addition, within 120 days following
any such combination, Liggett would be required to pay the settlement fund
$25,000. Under all settlements, the plaintiffs have agreed not to seek an
injunction preventing a defendant tobacco company combining with Liggett
or the Company from spinning off any affiliate which is not engaged in the
domestic tobacco business.

Pursuant to the March 1998 Settlements, Liggett is required to pay each of
the settling states and territories their relative share (based on the
Medicaid population of each state over the total Medicaid population of
the United States) of between 27.5% and 30% of Liggett's pre-tax income
each year for 25 years, with a minimum payment guarantee of $1,000 per
state over the first nine years of the agreement. The aggregate liability
under the March 1996 Settlements, the March 1997 Settlements and the March
1998 Settlements is $39,556, the present value of which, when discounted
at the rate of 18% per annum, is $19,365 at December 31, 1997. Minimum
payments to be made for these settlements over the next five years and
thereafter are: 1998: $4,044; 1999: $4,406; 2000: $4,406; 2001: $4,465;
2002: $4,518; thereafter: $17,717. The annual percentage is subject to
increase, pro rata from 27.5% up to 30%, depending on the number of
additional states joining the settlement. Pursuant to the "most favored
nation" provisions under the March 1996 Settlement and the March 1997
Settlements, each of the states settling under those settlements could
benefit from the economic terms of the March 1998 Settlements. In the case
of the March 1997 Settlements, in the event that the Fletcher class is
approved, monies collected in the settlement fund will be overseen by a
court-appointed committee and utilized to compensate state health care
programs and settlement class members and to provide counter-market
advertising. In all settlements, Liggett agreed to phase-in compliance
with certain proposed FDA regulations regarding smoking by children and
adolescents, including a prohibition on the use of cartoon characters in
tobacco advertising and limitations on the use of promotional materials
and distribution of sample packages where minors are present. The March
1998 Settlements provide for additional restrictions and regulations on
Liggett's advertising, including a prohibition on outdoor advertising and
product advertising on the Internet and on payments for product placement
in movies and television.

Under all settlements, the Company and Liggett are also entitled to most
favored nation treatment in the event any settling Attorney General
reaches a settlement with any other defendant tobacco company. Under the
March 1996 Settlement and March 1997 Settlements, in the event of a global
settlement involving federal legislation with any other defendant tobacco
company, the settling Attorneys General agreed to use their "best efforts"
to ensure that the Company and Liggett's liability under such legislation
should be no more onerous than under these settlements. Under the March
1998 Settlements, the settling Attorneys General agreed to write letters
to Congress and the President of the United States to ensure that the
Company and Liggett's liability under any such legislation should be no
more onerous than under these settlements.

Copies of the various settlement agreements are filed as exhibits to the
Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.

Trials. Liggett is a defendant in trials currently proceeding in the State
of Minnesota by Hubert H. Humphrey, III, its Attorney General and Blue
Cross and Blue Shield of Minnesota v. Philip Morris Incorporated, et al.,
District Court of the Second Judicial District, Ramsey County, Minnesota,
which commenced on January 20, 1998. Liggett settled the claims of the
State of Minnesota on March 20, 1997, but still remains a defendant in the
case with respect to the State's co-plaintiff, Blue Cross and Blue Shield
of Minnesota. Liggett is also a defendant in Dunn and Wiley v. RJR Nabisco
Holdings Corp., et al., Superior Court, Delaware County, Indiana, which
trial commenced on February 9, 1998.

F-38
91
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

There are several other trial dates scheduled during 1998 for individual
cases; however, trial dates are subject to change.

Proposed Resolution. In June 1997, Philip Morris Incorporated ("Philip
Morris"), R. J. Reynolds Tobacco Company ("RJR"), B&W, Lorillard Tobacco
Company ("Lorillard") and the United States Tobacco Company, along with
the Attorneys General for the States of Arizona, Connecticut, Florida,
Mississippi, New York and Washington and the Castano Plaintiffs'
Litigation Committee executed a Memorandum of Understanding to support the
adoption of federal legislation and necessary ancillary undertakings,
incorporating the features described in a proposed resolution (the
"Resolution"). The proposed Resolution mandates a total reformation and
restructuring of how tobacco products are manufactured, marketed and
distributed in the United States.

The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access
restrictions, licensing of tobacco retailers, the adoption and enforcement
of "no sales to minors" laws by states, surcharges against the industry
for failure to achieve underage smoking reduction goals, regulation of
tobacco products by the FDA, public disclosure of industry documents and
research, smoking cessation programs, compliance programs by the industry,
public smoking and smoking in the workplace, enforcement of the proposed
Resolution, industry payments and litigation.

The proposed Resolution would require the FDA to impose annual surcharges
on the industry if targeted reductions in underage smoking incidence are
not achieved in accordance with a legislative timetable. The surcharge
would be based upon an approximation of the present value of the profit
the companies would earn over the lives of all underage consumers in
excess of the target, and would be allocated among participating
manufacturers based on their market share of the United States cigarette
industry.

The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter
("Industry Payments"). Participating manufacturers would be required to
make an aggregate $10 billion initial Industry Payment on the date that
federal legislation implementing the terms of the proposed Resolution is
signed. This Industry Payment would be based on relative market
capitalization. Thereafter, the participating companies would be required
to make specified annual Industry Payments determined and allocated among
the companies based on volume of domestic sales as long as the companies
continue to sell tobacco products in the United States. These Industry
Payments, which would begin on December 31 of the first full year after
implementing federal legislation is signed, would be in the following
amounts (at 1996 volume levels) -- year 1: $8.5 billion; year 2: $9.5
billion; year 3: $11.5 billion; year 4: $14 billion; and each year
thereafter: $15 billion. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate, and would be adjusted
to reflect changes from 1996 domestic sales volume levels.

The Industry Payments would be separate from any surcharges. The Industry
Payments would receive priority and would not be dischargeable in any
bankruptcy or reorganization proceeding and would be the obligation only
of entities selling tobacco products in the United States (and not their
affiliated companies). The proposed Resolution provides that all payments
by the industry would be ordinary and necessary business expenses in the
year of payment, and no part thereof would be either in settlement of an
actual or potential liability for a fine or penalty (civil or criminal) or
the cost of a tangible or intangible asset. The proposed Resolution would
provide for the pass-through to consumers of the annual Industry Payments
in order to promote the maximum reduction in underage use.

F-39
92
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

If enacted, the federal legislation provided for in the proposed
Resolution would settle present attorney general health care cost recovery
actions (or similar actions brought by or on behalf of any governmental
entity other than the federal government), parens patriae and smoking and
health class actions and all "addiction"/dependence claims, and would bar
similar actions from being maintained in the future. However, the proposed
Resolution provides that no stay applications will be made in pending
governmental actions without the mutual consent of the parties. The
proposed Resolution would not affect any smoking and health class action
or any health care cost recovery action that is reduced to final judgment
before implementing federal legislation is effective.

Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, except as expressly changed by
implementing federal legislation. Claims, however, could not be maintained
on a class or other aggregated basis, and could be maintained only against
tobacco manufacturing companies (and not their retailers, distributors or
affiliated companies). In addition, all punitive damage claims based on
past conduct would be resolved as part of the proposed Resolution, and
future claimants could seek punitive damages only with respect to claims
predicated upon conduct taking place after the effective date of
implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could
be maintained only if based on subrogation of individual claims. Under
subrogation principles, a payor of medical costs can seek recovery from a
third party only by "standing in the shoes" of the injured party and being
subject to all defenses available against the injured party.

The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil
liabilities relating to past conduct. Judgments and settlements arising
from tort actions would be paid as follows: The proposed Resolution would
set an annual aggregate cap of up to 33% of the annual base Industry
Payment (including any reductions for volume declines). Any judgments or
settlements exceeding the cap in a particular year would roll over into
the next year. While judgments and settlements would run against the
defendant, they would give rise to an 80-cents-on-the-dollar credit
against the annual Industry Payment. Finally, any individual judgments in
excess of $1 million would be paid at the rate of $1 million per year
unless every other judgment and settlement could first be satisfied within
the annual aggregate cap. In all circumstances, however, the companies
would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in
the litigation settled by the proposed Resolution.

Under the proposed Resolution, the Company and Liggett would be deemed to
be a "non-participating manufacturer". The proposed Resolution provides,
among other things, that a non-participating manufacturer would be
required to place into escrow, each year, an amount equal to 150% of its
share of the payment required of participating manufacturers (other than
the portion allocated to public health programs and federal and state
enforcement). These funds would be earmarked for potential liability
payments and could be reclaimed, with interest, after 35 years, to the
extent they had not been paid out in liability.

The proposals are currently being reviewed by the White House, Congress
and various public interest groups. Separately, the other tobacco
companies negotiated settlements of the Attorneys General health care cost
recovery actions in Mississippi, Florida and Texas. Management is unable
to predict the ultimate effect, if any, of the enactment of legislation
adopting the proposed resolution. Management is also unable to predict the
ultimate content of any such legislation; however, adoption of any such
legislation could have a material adverse effect on the business of the
Company and Liggett.

F-40
93
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

Other Related Matters. On March 20, 1997, RJR, Philip Morris, B&W and
Lorillard obtained a temporary restraining order from a North Carolina
state court preventing the Company and Liggett and their agents,
employees, directors, officers and lawyers from turning over documents
allegedly subject to the joint defense privilege in connection with the
settlements, which restraining order was converted to a preliminary
injunction by the court on April 9, 1997. This ruling is currently on
appeal by the Company and Liggett. On June 5, 1997, the North Carolina
Supreme Court denied Liggett's Motion to Stay the case pending appeal. On
March 24, 1997, the United States District Court for the Eastern District
of Texas and state courts in Mississippi and Illinois each issued orders
enjoining the other tobacco companies from interfering with Liggett's
filing with the courts, under seal, those documents.

The Company understands that a grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District of
New York (the "Eastern District Investigation") regarding possible fraud
by the tobacco industry relating to smoking and health research undertaken
or administered by The Council for Tobacco Research - USA, Inc. (the
"CTR"). Liggett was a sponsor of the CTR at one time. In May 1996, Liggett
received a subpoena from a Federal grand jury sitting in the Eastern
District of New York, to which Liggett has responded.

In March 1996, and in each of March, July, October and December 1997, the
Company and/or Liggett received subpoenas from a Federal grand jury in
connection with an investigation by the United States Department of
Justice (the "DOJ Investigation") involving the industry's knowledge of:
the health consequences of smoking cigarettes; the targeting of children
by the industry; and the addictive nature of nicotine and the manipulation
of nicotine by the industry. Liggett has responded to the March 1996,
March 1997 and July 1997 subpoenas and is in the process of responding to
the October and December 1997 subpoenas. The Company understands that the
Eastern District Investigation and the DOJ Investigation have, for all
intents and purposes, been consolidated into one investigation being
conducted by the Department of Justice. The Company and Liggett are
unable, at this time, to predict the outcome of this investigation.

Litigation is subject to many uncertainties, and it is possible that some
of the aforementioned actions could be decided unfavorably against the
Company or Liggett. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation.
The Company is unable to evaluate the effect of these developing matters
on pending litigation or the possible commencement of additional
litigation.

The Company is unable to make a meaningful estimate with respect to the
amount of loss that could result from an unfavorable outcome of the cases
pending against the Company, because the complaints filed in these cases
rarely detail alleged damages. Typically, the claims set forth in an
individual's complaint against the tobacco industry pray for money damages
in an amount to be determined by a jury, plus punitive damages and costs.
These damage claims are usually stated as being for at least the minimum
necessary to invoke the jurisdiction of the court.

Third-party payor claimants and others have set forth several additional
variations on relief sought: funding of corrective public education
campaigns relating to issues of smoking and health; funding for clinical
smoking cessation programs; disgorgement of profits from sales of
cigarettes; restitution; treble damages; and attorneys' fees.
Nevertheless, no specific amounts are provided. It is, however, understood
that requested damages against the tobacco company defendants in these
cases may be in the billions of dollars.

F-41
94
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

It is possible that the Company's consolidated financial position, results
of operation and cash flow could be materially adversely affected by an
unfavorable outcome in any of such pending tobacco-related litigation.

Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett's management believes that current operations are
conducted in material compliance with all environmental laws and
regulations. Management is unaware of any material environmental
conditions affecting its existing facilities. Compliance with federal,
state and local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
has not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.

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

Legislation and Regulation:

On August 28, 1996, the FDA filed in the Federal Register a Final Rule
(the "FDA Rule") classifying tobacco as a drug, asserting jurisdiction by
the FDA over the manufacture and marketing of tobacco products and
imposing restrictions on the sale, advertising and promotion of tobacco
products. Litigation was commenced in the United States District Court for
the Middle District of North Carolina challenging the legal authority of
the FDA to assert such jurisdiction, as well as challenging the
constitutionality of the rules. The court, after argument, granted
plaintiffs' motion for summary judgment prohibiting the FDA from
regulating or restricting the promotion and advertising of tobacco
products and denied plaintiffs' motion for summary judgment on the issue
of whether the FDA has the authority to regulate access to, and labeling
of, tobacco products. The four major cigarette manufacturers and the FDA
have filed notices of appeal. The Company and Liggett support the FDA Rule
and have begun to phase in compliance with certain of the proposed interim
FDA regulations. See discussions of the Castano and Attorneys General
settlements above.

In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the
ingredients in cigarettes and other tobacco products sold in that state.
In December 1997, the United States District Court for the District of
Massachusetts enjoined this legislation from going into effect, however,
on December 15, 1997, Liggett began complying with this legislation by
providing ingredient information to the Massachusetts Department of Public
Health.

On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("TRQ") should be allocated.
Currently, tobacco imported under the TRQ is allocated on a "first-come,
first-served" basis, meaning that entry is allowed on an open basis to
those first requesting entry in the quota year. Others in the cigarette
industry have suggested an "end-user licensing" system under which the
right to import tobacco under the quota would be initially assigned on the
basis of domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company and Liggett.

F-42
95
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings were completed during 1995. OSHA has
not yet issued a final rule or a proposed revised rule. While the Company
cannot predict the outcome, some form of federal regulation of smoking in
workplaces may result.

In January 1993, the United States Environmental Protection Agency ("EPA")
released a report on the respiratory effect of ETS which concludes that
ETS is a known human lung carcinogen in adults and in children, causes
increased respiratory tract disease and middle ear disorders and increases
the severity and frequency of asthma. In June 1993, the two largest of the
major domestic cigarette manufacturers, together with other segments of
the tobacco and distribution industries, commenced a lawsuit against the
EPA seeking a determination that the EPA did not have the statutory
authority to regulate ETS, and that given the current body of scientific
evidence and the EPA's failure to follow its own guidelines in making the
determination, the EPA's classification of ETS was arbitrary and
capricious. Whatever the outcome of this litigation, issuance of the
report may encourage efforts to limit smoking in public areas.

As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would
rise 10 cents in the year 2000 and 5 cents more in the year 2002. In a
speech on September 17, 1997, President Clinton called for federal
legislation that, among other things, would raise cigarette prices by up
to $1.50 per pack. Since then, several bills have been introduced in the
Senate that purport to propose legislation along these lines. Management
is unable to predict the ultimate content of any such legislation;
however, adoption of any such legislation could have a material adverse
effect on the business of the Company and Liggett.

In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco
industry, the effects of which, at this time, the Company is not able to
evaluate.

Other Matters:

In June 1993, the Company obtained expropriation and forced abandonment
insurance coverage for its investment in its Ducat Place I real estate
project in Moscow, Russia. Shortly thereafter, the Company submitted a
Notice of Loss to the insurer, under and pursuant to the policy. The
insurer denied the claim and, in July 1994, arbitration proceedings were
commenced in the United Kingdom. In January 1997, the Company recognized a
gain of $4,125 in settlement of the dispute.

On or about March 13, 1997, a shareholder derivative suit was filed
against New Valley, as a nominal defendant, its directors and the Company
in the Delaware Chancery Court, by a shareholder of New Valley. The suit
alleges that New Valley's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by New Valley. The plaintiff seeks (i) a declaration that
New Valley's directors breached their fiduciary duties, the Company aided
and abetted such breaches and such parties are therefore liable to New
Valley, and (ii) unspecified damages to be awarded to New Valley. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit. Although there
can be no assurances, management is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.

F-43
96
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

17. RELATED PARTY TRANSACTIONS

On March 7, 1997, a partnership controlled by the Chairman transferred to
the Company the remaining 400,000 pledged shares of the Company's common
stock with a market value of $1,800 in final satisfaction of an obligation
to make certain payments to the Company on account of a former executive's
outstanding indebtedness of $5,477 (deducted from equity).

On December 16, 1996, the Company entered into a Stock Option Agreement
relating to 1,000,000 shares of the Company's common stock with a
consultant who serves as a director and President of New Valley. In
addition, the Company granted the same consultant options to purchase
500,000 shares in 1995. (Refer to Note 15.) During 1997 and 1996, the
consultant received consulting fees of $480 per year from the Company and
a subsidiary.

An outside director of the Company is a stockholder of and serves as the
secretary and treasurer of a registered broker-dealer that has performed
services for the Company and its affiliates since before December 31,
1994. The broker-dealer received brokerage commissions and other income of
approximately $522, $317 and $584 from the Company and/or its affiliates
during 1997, 1996 and 1995, respectively. The broker-dealer, in the
ordinary course of its business, engages in brokerage activities with New
Valley's broker-dealer subsidiary on customary terms. In connection with
the acquisition of certain office buildings by New Valley on January 10,
1996, this director received a commission of $220 from the seller.

During 1995, the Company and New Valley entered into an expense sharing
agreement whereby certain lease, legal and administrative expenses are
allocated to the entity incurring the expense. Expense reimbursements
amounted to $375, $462 and $571 for the years ended December 31, 1997,
1996 and 1995, respectively.

During 1996, the Company and BGLS entered into a court-approved
Stipulation and Agreement (the "Settlement") with New Valley relating to
the Company's and BGLS' application under the Federal Bankruptcy Code for
reimbursement of legal fees and expenses incurred by them in connection
with New Valley's bankruptcy reorganization proceedings. Pursuant to the
Settlement, New Valley reimbursed the Company and BGLS $655 for such legal
fees and expenses. The terms of the Settlement were substantially similar
to the terms of previous settlements between New Valley and other
applicants who had sought reimbursement of reorganization-related legal
fees and expenses.

On December 18, 1996, New Valley loaned BGLS $990 under a short-term
promissory note due January 31, 1997 and bearing interest at 14%. On
January 2, 1997, New Valley loaned BGLS an additional $975 under another
short-term promissory note due January 31, 1997 and bearing interest at
14%. Both loans including interest were repaid on January 31, 1997. At
December 31, 1996, the loan and accrued interest thereon of $996 was
included in current liabilities as notes payable.

In connection with their agreement to serve as the Company's nominees at
RJR Nabisco's 1996 annual meeting of stockholders, two directors of New
Valley were each paid $30 by the Company during the fourth quarter of
1995. As discussed in Note 3, the Company has entered into certain other
agreements with New Valley in connection with RJR Nabisco.

On January 31, 1997, New Valley entered into a stock purchase agreement
with BOL pursuant to which New Valley acquired 10,483 shares of BML common
stock (99.1%) for a purchase price of

F-44
97
BROOKE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)

$55,000, consisting of $21,500 in cash and a $33,500 promissory note with
an interest rate of 9%. The note was paid in full in 1997. (Refer to Note
4.)

18. SEGMENT INFORMATION

On January 31, 1997, BOL sold all of its shares in BML to New Valley.
(Refer to Note 4). In 1997, there is only one industry segment, tobacco and,
accordingly, there is no industry segment disclosure. Information about the
Company's operations by industry in the tobacco and real estate segments in 1996
follows:

Industry Segment:

Real Corporate
1996 Tobacco Estate and Others Consolidated
---- ------- ------ ---------- ------------

Net sales.................. $455,222 $ 2,675 $ 2,459 $460,356
Operating income (loss).... 4,805 99 (8,831) (3,927)
Identifiable assets........ 114,648 55,012 8,017 177,677
Capital expenditures....... 8,861 25,318 62 34,241
Depreciation and
amortization............. 8,185 253 381 8,819

Geographic Area:

United
1997 States Russia Consolidated
---- ------ ------ ------------

Net sales.............................. $312,268 $77,347 $389,615
Operating income....................... 3,794 4,235 8,029
Identifiable assets.................... 80,235 46,222 126,457

United
1996 States Russia Consolidated
---- ------ ------ ------------

Net sales.............................. $403,521 $56,835 $460,356
Operating income (loss)................ 6,045 (9,972) (3,927)
Identifiable assets.................... 105,381 72,296 177,677

F-45
98

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and the
Shareholders of New Valley Corporation

We have audited the accompanying consolidated balance sheets of New Valley
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years for the period ended
December 31, 1997. We have also audited the financial statement schedule of New
Valley Corporation (Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1997 and 1996) listed in the index on page 29 of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We did not audit the financial statements of Thinking Machines
Corporation, a consolidated subsidiary, which statements reflect total assets
constituting 1% and 3% of consolidated total assets at December 31, 1997 and
1996, respectively and a net loss (net of minority interest therein)
constituting 25% and 90% of the consolidated net loss for the years ended
December 31, 1997 and 1996, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Thinking Machines Corporation, are based
solely upon the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provides a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of New Valley Corporation
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.

COOPERS & LYBRAND L.L.P.

Miami, Florida
March 31, 1998

F-46
99
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

DECEMBER 31,
-----------------------
1997 1996
-------- ------

ASSETS
Current assets:
Cash and cash equivalents............................................. $ 11,606 $ 57,282
Investment securities available for sale.............................. 51,993 61,454
Trading securities owned.............................................. 49,988 29,761
Restricted assets..................................................... 232 2,080
Receivable from clearing brokers...................................... 1,205 23,870
Other current assets.................................................. 3,618 9,273
--------- ---------
Total current assets.............................................. 118,642 183,720
--------- ---------

Investment in real estate, net............................................. 256,645 179,571
Furniture and equipment, net............................................... 12,194 --
Investment securities available for sale................................... -- 2,716
Restricted assets.......................................................... 5,484 6,766
Long-term investments, net................................................. 27,224 13,270
Other assets............................................................... 21,202 20,497
--------- ---------
Total assets...................................................... $ 441,391 $ 406,540
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
Margin loan payable................................................... $ 13,012 $ --
Current portion of notes payable and long-term obligations............ 760 2,310
Accounts payable and accrued liabilities.............................. 57,722 44,888
Prepetition claims and restructuring accruals......................... 12,611 15,526
Income taxes.......................................................... 18,413 18,243
Securities sold, not yet purchased.................................... 25,610 17,143
--------- ---------
Total current liabilities......................................... 128,128 98,110
--------- ---------

Notes payable.............................................................. 173,814 157,941
Other long-term liabilities................................................ 11,210 12,282
Redeemable preferred shares................................................ 258,638 210,571

Commitments and contingencies.............................................. -- --

Shareholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: 1997 - $139,412; 1996 - $115,944.............. 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding............................ 96 96
Additional paid-in capital............................................ 604,215 644,789
Accumulated deficiency................................................ (742,427) (721,854)
Unearned compensation on stock options................................ (158) (731)
Unrealized gain on investment securities.............................. 7,596 5,057
--------- ---------
Total shareholders' equity (deficiency).................................... (130,399) (72,364)
--------- ---------

Total liabilities and shareholders' equity (deficiency)........... $ 441,391 $ 406,540
========= =========

See accompanying Notes to Consolidated Financial Statements

F-47
100
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ---------- ----------

Revenues:
Principal transactions, net.................................. $ 16,754 $ 28,344 $ 18,237
Commissions.................................................. 16,727 17,755 9,888
Corporate finance fees....................................... 12,514 10,230 5,942
Gain on sale of investments.................................. 20,492 10,014 7,078
Real estate leasing.......................................... 27,067 23,559 --
Interest and dividends....................................... 9,417 16,951 21,047
Computer sales and service................................... 3,947 15,017 --
Other income................................................. 7,650 8,995 5,538
--------- --------- --------

Total revenues.......................................... 114,568 130,865 67,730
--------- --------- --------

Costs and expenses:
Selling, general and administrative expenses................. 119,205 140,399 54,216
Interest..................................................... 16,988 17,760 2,102
Recovery of restructuring charges............................ -- (9,706) (2,044)
Write-down of long-term investments ......................... 3,796 1,001 11,790
--------- --------- --------

Total costs and expenses................................ 139,989 149,454 66,064
--------- --------- --------

(Loss) income from continuing operations before income
taxes, minority interests.................................... (25,421) (18,589) 1,666

Income tax provision............................................. 186 300 292
Minority interests in loss from continuing operations of
consolidated subsidiary...................................... 1,347 4,241 --
--------- --------- --------

(Loss) income from continuing operations......................... (24,260) (14,648) 1,374

Discontinued operations (Note 4):
Income from discontinued operations, net of
income taxes of $480 in 1995............................... -- -- 4,315
Gain on disposal of discontinued operations, net of income
taxes of $1,400 in 1995.................................... 3,687 7,158 12,558
--------- --------- --------

Income from discontinued operations..................... 3,687 7,158 16,873
--------- --------- --------

Net (loss) income................................................ (20,573) (7,490) 18,247

Dividend requirements on preferred shares........................ (68,475) (61,949) (72,303)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased......................... -- 4,279 40,342
--------- --------- --------

Net (loss) applicable to Common Shares........................... $ (89,048) $ (65,160) $(13,714)
========== ========= ========

See accompanying Notes to Consolidated Financial Statements

F-48
101
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ---------- ----------

Income (loss) per common share (Basic):

Continuing operations ............... $ (9.68) $ (7.55) $ (3.20)
Discontinued operations ............. .38 .75 1.77
------------- ------------- -------------

Net income (loss) .............. $ (9.30) $ (6.80) $ (1.43)
============= ============= =============

Number of shares used in computation .... 9,578,000 9,578,000 9,554,000
============= ============= =============

Income (loss) per common share (Diluted):

Continuing operations ............... $ (9.68) $ (7.55) $ (3.20)
Discontinued operations ............. .38 .75 1.77
------------- ------------- -------------

Net income (loss) .............. $ (9.30) $ (6.80) $ (1.43)
============= ============= =============

Number of shares used in computation .... 9,578,000 9,578,000 9,554,000
============= ============= =============

Supplemental information:
Additional interest expense, absent
the Chapter 11 filing ............. $ 2,314
=============

See accompanying Notes to Consolidated Financial Statements

F-49

102
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

UNEARNED
CLASS B ADDITIONAL COMPENSATION
PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK UNREALIZED
SHARES SHARES CAPITAL DEFICIT OPTIONS GAINS
------ ------ ------- ------- ------- -----

Balance, December 31, 1994...................... $ 279 $ 1,887 $692,001 $(732,611)
Net income................................... 18,247
Undeclared dividends and accretion on
redeemable preferred shares................ (53,821)
Purchase of redeemable preferred shares 40,342
Exercise of stock options.................... 29 536
Unrealized gain on investment securities,
net of taxes............................... $2,650
----- ------- -------- --------- ------

Balance, December 31, 1995...................... 279 1,916 679,058 (714,364) 2,650

Net loss..................................... (7,490)
Undeclared dividends and accretion on
redeemable preferred shares................ (41,123)
Purchase of redeemable preferred shares 4,279
Effect of 1-for-20 reverse stock split (1,820) 1,820
Issuance of stock options.................... 755 $ (755)
Compensation expense on stock option grants.. 24
Unrealized gain on investment securities..... 2,407
----- -------- -------- --------- ------- ------
Balance, December 31, 1996...................... 279 96 644,789 (721,854) (731) 5,057

Net loss..................................... (20,573)
Undeclared dividends and accretion on
redeemable preferred shares................ (45,148)
Unrealized gain on investment securities 2,539
Compensation expense on stock option grants 15
Adjustment to unearned compensation
on stock options........................... (558) 558
Public sale of subsidiaries' common
stock, net................................. 5,132
----- -------- -------- --------- ------- ------
Balance, December 31, 1997...................... $ 279 $ 96 $604,215 $(742,427) $ (158) $7,596
===== ======== ======== ========= ======= ======

F-50
103
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- --------- ---------

Cash flows from operating activities:
Net income (loss) ................................................... $ (20,573) $ (7,490) $ 18,247
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Gain on disposal of business ...................................... (3,687) (7,158) (12,558)
(Income) loss from discontinued operations ........................ -- -- (4,315)
Depreciation and amortization ..................................... 9,414 4,757 608
Provision for loss on long-term investments ....................... 3,796 1,001 11,790
Reversal of restructuring accruals ................................ (9,706) (2,044)
Stock compensation expense ........................................ 2,934 384 --
Changes in assets and liabilities, net of effects from acquisition:
Decrease (increase) in receivables and other assets.............. 3,184 (13,813) 11,684
Decrease in income taxes payable and deferred taxes.............. 170 (2,040) (32,517)
Increase (decrease) in securities sold not yet purchased ........ 8,467 4,096 (9,359)
Increase (decrease) in accounts payable and accrued
liabilities ................................................... (3,954) 7,270 5,223
--------- --------- ---------

Net cash used for continuing operations ................................ (249) (22,699) (13,241)
Net cash provided from discontinued operations ......................... -- -- 6,105
--------- --------- ---------

Net cash used for operating activities ................................. (249) (22,699) (7,136)
--------- --------- ---------

Cash flows from investing activities:
Sale or maturity of investment securities ......................... 45,472 160,088 250,129
Purchase of investment securities ................................. (30,756) (12,825) (458,017)
Sale or liquidation of long-term investments ...................... 2,807 18,292 36,109
Purchase of long-term investments ................................. (18,707) (3,051) (77,411)
Decrease (increase) in restricted assets .......................... 3,130 29,159 341,634
Purchase of furniture and equipment ............................... (3,478) (5,240) --
Purchase of and additions to real estate .......................... (7,454) (24,496) --
Sale of real estate ............................................... 8,718 -- --
Payment of prepetition claims and restructuring accruals .......... (828) (8,160) (584,397)
Payment for acquisitions, net of cash acquired .................... (20,014) 1,915 (25,750)
Collection of contract receivable ................................. -- -- 300,000
Net proceeds from disposal of business ............................ -- 10,174 17,540
--------- --------- ---------

Net cash (used for) provided from investing activities ................. (21,110) 165,856 (200,163)
--------- --------- ---------

Cash flows from financing activities:
Payment of preferred dividends .................................... -- (41,419) (132,162)
Purchase of redeemable preferred shares ........................... -- (10,530) (47,761)
Increase (decrease) in margin loan payable ........................ 13,012 (75,119) 75,119
Payment of long-term notes and other liabilities .................. (62,739) (10,549) (12,890)
Increase in long term borrowings .................................. 19,993 -- --
Issuance of subsidiary stock ...................................... 5,417 -- --
Exercise of stock options ......................................... -- -- 565
--------- --------- ---------

Net cash used for financing activities ................................. (24,317) (137,617) (117,129)
--------- --------- ---------

Net (decrease) increase in cash and cash equivalents ................... (45,676) 5,540 (324,428)
Cash and cash equivalents, beginning of year ........................... 57,282 51,742 376,170
--------- --------- ---------

Cash and cash equivalents, end of year ................................. $ 11,606 $ 57,282 $ 51,742
========= ========= =========

See accompanying Notes to Consolidated Financial Statements

F-51
104
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- ------

Supplemental cash flow information:
Cash paid during the year for:
Interest.............................................................. $ 16,667 $17,482 $ 2,105
Income taxes.......................................................... 116 2,341 33,662

Detail of acquisitions:
Fair value of assets acquired........................................... $ 94,114 $27,301 $59,066
Liabilities assumed..................................................... 74,100 16,701 32,316
-------- -------- --------
Cash paid............................................................... 20,014 10,600 26,750
-------- -------- --------
Less cash acquired...................................................... -- (12,515) (1,000)
-------- -------- --------
Net cash (paid) received for acquisition................................ $(20,014) $ 1,915 $(25,750)
======== ======== ========

See accompanying Notes to Consolidated Financial Statements

F-52

105
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. BASIS OF PRESENTATION

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of New
Valley Corporation and its majority owned subsidiaries (the "Company"). All
significant intercompany transactions are eliminated in consolidation.

Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.

NATURE OF OPERATIONS

The Company and its subsidiaries are engaged in the investment banking
and brokerage business, in the ownership and management of commercial real
estate, and in the acquisition of operating companies. As discussed in Note 21,
the investment banking and brokerage segment accounted for 49% and 55% of the
Company's revenues and 39% and 2% of the Company's operating loss from
continuing operations for the years ended December 31, 1997 and 1996,
respectively. The Company's investment banking and brokerage segment provides
its services principally for middle market and emerging growth companies through
a coordinated effort among corporate finance, research, capital markets,
investment management, brokerage and trading professionals.

REORGANIZATION

On November 15, 1991, an involuntary petition under Chapter 11 of Title
11 of the United States Code (the "Bankruptcy Code") was commenced against the
Company in the United States Bankruptcy Court for the District of New Jersey
(the "Bankruptcy Court"). On March 31, 1993, the Company consented to the entry
of an order for relief placing it under the protection of Chapter 11 of the
Bankruptcy Code.

On November 1, 1994, the Bankruptcy Court entered an order confirming
the First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"). The terms of the Joint Plan provided for, among other things, the
sale of Western Union Financial Services Company, Inc. ("FSI"), a wholly-owned
subsidiary of the Company, and certain other Company assets related to FSI's
money transfer business, payment in cash of all allowed claims, payment of
postpetition interest in the amount of $178,000 to certain creditors, a $50 per
share cash dividend to the holders of the Company's $15.00 Class A Increasing
Rate Cumulative Senior Preferred Shares ($100 Liquidation Value), $.01 par value
per share (the "Class A Senior Preferred Shares"), a tender offer by the Company
for up to 150,000 shares of the Class A Senior Preferred Shares, at a price of
$80 per share, and the reinstatement of all of the Company's equity interests.

On November 15, 1994, pursuant to the Asset Purchase Agreement, dated
as of October 20, 1994, as amended (the "Purchase Agreement"), by and between
the Company and First Financial Management Corporation ("FFMC"), FFMC purchased
all of the common stock of FSI and other assets relating to FSI's money transfer
business for $1,193,000 (the "Purchase Price"). The Purchase Price consisted of
$593,000 in cash, $300,000 representing the assumption of the Western Union
Pension Plan obligation, and $300,000 paid on January 13, 1995 for certain
intangible assets of FSI. The Purchase Agreement contained various terms and
conditions, including the escrow of $45,000 of the Purchase Price, a put option
by the Company to sell to FFMC, and a call option by FFMC to purchase, Western
Union Data Services Company, Inc., a wholly-owned subsidiary of the Company
engaged in the messaging service business (the "Messaging Services Business"),
for $20,000, exercisable during the first quarter of 1996, and various services
agreements between the Company and FFMC.

On January 18, 1995, the effective date of the Joint Plan, the Company
paid approximately $550,000 on account of allowed prepetition claims and emerged
from bankruptcy. At December 31, 1997, the Company's remaining accruals totaled
$12,611 for unsettled prepetition claims and restructuring accruals (see
Note 17). The Company's accounting policy is to evaluate the remaining
restructuring accruals on a quarterly basis and adjust liabilities as claims
are settled or dismissed by the Bankruptcy Court.

F-53

106
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

On October 31, 1995, the Company completed the sale of substantially
all of the assets (exclusive of certain contracts), and conveyed substantially
all of the liabilities, of the Messaging Services Business to FFMC for $20,000,
which consisted of $17,540 in cash and $2,460 in cancellation of intercompany
indebtedness. The sale of the Messaging Services Business was effective as of
October 1, 1995, and the Company recognized a gain on the sale of such business
of $12,558, net of income taxes of $1,400.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

REINCORPORATION AND REVERSE STOCK SPLIT. On July 29, 1996, the Company
completed its reincorporation from the State of New York to the State of
Delaware and effected a one-for-twenty reverse stock split of the Company's
Common Shares. In connection with the reverse stock split, all per share data
have been restated to reflect retroactively the reverse stock split.

CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
financial instruments with an original maturity of less than three months to be
cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS. Investments in securities and
securities sold, not yet purchased traded on a national securities exchange or
listed on NASDAQ are valued at the last reported sales prices of the reporting
period. Futures contracts are valued at their last reported sales price.
Investments in securities, principally warrants, which have exercise or holding
period restrictions, are valued at fair value as determined by the Company's
management based on the intrinsic value of the warrants discounted for such
restrictions. For cash and cash equivalents, restricted assets, receivable from
clearing brokers, and short-term loan, the carrying value of these amounts is a
reasonable estimate of their fair value. The fair value of long-term debt,
including current portion, is estimated based on current rates offered to the
Company for debt of the same maturities. The fair value of the Company's
redeemable preferred shares is based on their last reported sales price.

INVESTMENT SECURITIES. The Company classifies investments in debt and
marketable equity securities as either trading, available for sale, or held to
maturity. Trading securities are carried at fair value, with unrealized gains
and losses included in income. Investments classified as available for sale are
carried at fair value, with net unrealized gains and losses included as a
separate component of shareholders' equity (deficit). Debt securities classified
as held to maturity are carried at amortized cost. Realized gains and losses are
included in other income, except for those relating to the Company's
broker-dealer subsidiary which are included in principal transactions revenues.
The cost of securities sold is determined based on average cost.

RESTRICTED ASSETS. Restricted assets at December 31, 1997 consisted
primarily of $5,484 pledged as collateral for a $5,000 letter of credit which is
used as collateral for a long-term lease of commercial office space. Restricted
assets at December 31, 1996 consisted primarily of $5,266 pledged as collateral
for a $5,000 letter of credit which is used as collateral for a long-term lease
of commercial office space, and $3,275 pledged as collateral for a letter of
credit which is used as collateral for an insurance policy.

PROPERTY AND EQUIPMENT. Office buildings are depreciated over periods
approximating 40 years, the estimated useful life, using the straight-line
method (see Note 7). Shopping centers are depreciated over periods approximating
25 years, the estimated useful life, using the straight-line

F-54

107
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

method. Furniture and equipment (including equipment subject to capital leases)
is depreciated over the estimated useful lives, using the straight-line method.
Leasehold improvements are amortized on a straight-line basis over their
estimated useful lives or the lease term, if shorter. The cost and the related
accumulated depreciation are eliminated upon retirement or other disposition and
any resulting gain or loss is reflected in operations. Depreciation and
amortization expense was $9,414, $4,757, and $608 in 1997, 1996, and 1995,
respectively.

INCOME TAXES. Under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", deferred taxes reflect the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for tax
purposes as well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates. A valuation
allowance reduces deferred tax assets when it is deemed more likely than not
that some portion or all of the deferred tax assets will not be realized.

SECURITIES SOLD, NOT YET PURCHASED. Securities sold, not yet purchased
represent obligations of the Company to deliver a specified security at a
contracted price and thereby create a liability to repurchase the security in
the market at prevailing prices. Accordingly, these transactions involve, to
varying degrees, elements of market risk, as the Company's ultimate obligation
to satisfy the sale of securities sold, not yet purchased may exceed the amount
recognized in the consolidated balance sheet.

REAL ESTATE LEASING REVENUES. The real estate properties are being
leased to tenants under operating leases. Base rental revenue is generally
recognized on a straight-line basis over the term of the lease. The lease
agreements for certain properties contain provisions which provide for
reimbursement of real estate taxes and operating expenses over base year
amounts, and in certain cases as fixed increases in rent. In addition, the lease
agreements for certain tenants provide additional rentals based upon revenues in
excess of base amounts, and such amounts are accrued as earned. The future
minimum rents scheduled to be received on non-cancelable operating leases at
December 31, 1997 are $29,130, $25,796, $21,138, $14,156, $12,341 for
the years 1998, 1999, 2000, 2001 and 2002, respectively, and $30,259 for
subsequent years.

BASIC INCOME (LOSS) PER COMMON SHARE. Basic net income (loss) per
common share is based on the weighted average number of Common Shares
outstanding. Net income (loss) per common share represents net income (loss)
after dividend requirements on redeemable and non-redeemable preferred shares
(undeclared) and any adjustment for the difference between excess of carrying
value of redeemable preferred shares over the cost of the shares purchased.
Diluted net income (loss) per common share assuming full dilution is based on
the weighted average number of Common Shares outstanding plus the additional
common shares resulting from the conversion of convertible preferred shares and
the exercise of stock options and warrants if such conversion was dilutive.

Options to purchase 330,000 common shares at $.58 per share and 40,417
common shares issuable upon the conversion of Class B Preferred Shares were not
included in the computation of diluted loss per share as the effect would have
been anti-dilutive.

In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards
designed to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Prior years' EPS have been restated to conform
with standards established by SFAS No. 128.

RECOVERABILITY OF LONG-LIVED ASSETS. An impairment loss is recognized
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Beginning in 1995 with the adoption of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", assets are grouped and evaluated at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the estimated
future cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected undiscounted future cash flows,
the Company measures the amount of the impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows at the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the best information available making whatever estimates, judgments and
projections are considered necessary.

F-55

108
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NEW ACCOUNTING PRONOUNCEMENTS.

In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income). SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of SFAS No. 130 will not have a
material impact on the Company's financial statements.

In October 1997, the AICPA issued SOP 97-2, "Software Revenue
Recognition". SOP 97-2 provides guidance in recognizing revenue on software
transactions when persuasive evidence of an arrangement exists, delivery has
occurred, the vendor's fee is fixed or determinable and collectibility is
probable. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company believes that adoption of SOP
97-2 will not have a material impact on the Company's financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
way that public business enterprises report information about operating
segments. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company is currently reviewing its
operating segments disclosures and will adopt SFAS No. 131 in the fourth quarter
of 1998.

The SEC recently issued new rules which will require the Company,
commencing with filings which include financial statements for fiscal year 1998,
to provide disclosure of quantitative and qualitative information relating to
derivative financial instruments, derivative commodity instruments and other
financial instruments. These disclosures are intended to provide investors with
information relating to market risk exposure, including the Company's
objectives, strategies and instruments used to manage exposures. The disclosures
are required to be presented outside of, and not incorporated into, the
Company's consolidated financial statements. This disclosure requirement will be
applicable principally to the Company's Ladenburg Thalmann broker-dealer
subsidiary. The impact of the implementation of this new disclosure requirement
is not yet determinable.

3. ACQUISITIONS

On May 31, 1995, the Company consummated its acquisition of Ladenburg,
Thalmann & Co. Inc. ("Ladenburg"), a registered broker-dealer and investment
bank, for $25,750, net of cash acquired. The acquisition was treated as a
purchase for financial reporting purposes and, accordingly, these consolidated
financial statements include the operations of Ladenburg from the date of
acquisition. The excess of the consideration paid over the estimated fair value
of net assets acquired of $1,342 has been recorded as goodwill to be amortized
on a straight-line basis over 15 years.

On January 10 and January 11, 1996, the Company acquired four
commercial office buildings (the "Office Buildings") and eight shopping centers
(the "Shopping Centers") for an aggregate purchase price of $183,900, consisting
of $23,900 in cash and $160,000 in non-recourse mortgage financing provided by
the sellers. In addition, the Company has capitalized approximately $800 in
costs related to the acquisitions. The Company paid $11,400 in cash and executed
four promissory notes aggregating $100,000 for the Office Buildings. The
Shopping Centers were acquired for an aggregate purchase price of $72,500,
consisting of $12,500 in cash and $60,000 in eight promissory notes. In November
1997, the Company sold one of the Shopping Centers for $5,400 and realized a
gain of $1,200.

On January 11, 1996, the Company provided a $10,600 convertible bridge
loan to finance Thinking Machines Corporation ("Thinking Machines"), a developer
and marketer of data mining and knowledge discovery software and services. In
February 1996, the bridge loan was converted into a controlling interest in a
partnership which held approximately 61.4% of Thinking Machines' outstanding
common shares. In December 1997, the Company acquired for $3,150 additional
shares in Thinking Machines pursuant to a rights offering by Thinking Machines
to its existing shareholders which increased the Company's ownership to
approximately 72.7% of the outstanding Thinking Machines shares. As a result of
the rights offering, the Company recorded $2,417 as additional paid-in-capital
which represented its interest in the increase in Thinking Machines'
shareholders' equity. The acquisition of Thinking Machines through the
conversion of the bridge loan was accounted for as a purchase for financial
reporting purposes, and accordingly, the operations of Thinking Machines
subsequent to January 31, 1996 are included in the operations of the Company.
The fair value of assets acquired, including goodwill of $1,726, was $27,301 and
liabilities assumed totaled $7,613. In addition, minority interests in the
amount of $9,088 were recognized at the time of acquisition. To date, no
material revenues have been recognized by Thinking Machines with respect to the
sale or licensing of such software and services. Thinking Machines is also
subject to uncertainties relating to, without limitation, the development and
marketing of computer products, including customer acceptance and required
funding, technological changes, capitalization, and the ability to utilize and
exploit its intellectual property and propriety software technology.

F-56

109
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

On January 31, 1997, the Company entered into a stock purchase
agreement (the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-owned subsidiary of Brooke Group Ltd. ("Brooke"), an
affiliate of the Company, pursuant to which the Company acquired 10,483 shares
(the "BML Shares") of the common stock of BrookeMil Ltd. ("BML") from Brooke
(Overseas) for a purchase price of $55,000, consisting of $21,500 in cash and a
$33,500 9% promissory note of the Company (the "Note"). The BML Shares comprise
99.1% of the outstanding shares of BML, a real estate development company in
Russia. The Note, which was collateralized by the BML Shares, was paid during
1997.

BML is developing a three-phase complex on 2.2 acres of land in
downtown Moscow. In 1993, the first phase of the project, Ducat Place I, a
46,500 sq. ft. Class-A office building, was constructed and leased. On April 18,
1997, BML sold Ducat Place I to one of its tenants for approximately $7,500,
which purchase price had been reduced to reflect prepayments of rent. In 1997,
BML completed construction of Ducat Place II, a 150,000 sq. ft. office building.
Ducat Place II has been leased to a number of leading international companies.
The third phase, Ducat Place III, is planned as a 350,000 sq. ft. mixed-use
complex, with construction anticipated to commence in 1999. The site of Ducat
Place III, which is currently used by a subsidiary of Brooke (Overseas) as the
site for a factory, is subject to a put option held by the Company. The option
allows the Company to put this site back to Brooke (Overseas) and BGLS Inc., a
subsidiary of Brooke, at the greater of the appraised fair value of the
property at the date of exercise or $13,600, during the period the subsidiary of
Brooke (Overseas) operates the factory on such site.

In connection with the Purchase Agreement, certain specified
liabilities of BML aggregating approximately $40,000 remained as liabilities of
BML after the purchase of the BML Shares by the Company. These liabilities
included a $20,400 loan to a Russian bank for the construction of Ducat Place II
(the "Construction Loan"). In addition, the liabilities of BML at the time of
purchase included approximately $13,800 of rents and related payments prepaid by
tenants of Ducat Place II for periods generally ranging from 15 to 18 months.

The fair value of the assets acquired, including goodwill of $12,400,
was $95,500. The Company is amortizing the goodwill over a five year period.

The following table presents unaudited pro forma results of continuing
operations as if the acquisition of BML had occurred on January 1, 1996. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had this acquisition been
consummated as of such date.
Pro Forma
Year Ended December 31, 1996
----------------------------

Revenues.............................. $133,540
========

Loss from continuing operations....... $ 16,811
========

Loss from continuing operations
applicable to common shares......... $ 74,481
========

Loss from continuing operations per
common share........................ $ (7.77)
========

In August 1997, BML refinanced all amounts due under the Construction
Loan with borrowings under a new credit facility with another Russian bank. The
new credit facility bears interest at 16% per year, matures no later than August
2002, with principal payments commencing after the first year, and is
collateralized by a mortgage on Ducat Place II and guaranteed by the Company. At
December 31, 1997, borrowings under the new credit facility totaled $20,078.

In February 1998, the Company entered into a joint venture to make real
estate and other investments in Russia to which the real estate assets of BML,
including Ducat Place II and the site for Ducat Place III, will be contributed
(see Note 22).

4. DISCONTINUED OPERATIONS

As noted above, the Company sold the Messaging Services Business
effective October 1, 1995. Accordingly, the financial statements reflect the
financial position and the results of operations of the discontinued operations
of FSI and the Messaging Services Business separately from continuing
operations.

Summarized operating results of the discontinued operations of the
Messaging Services Business for the nine months ended September 30, 1995.

F-57
110
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Revenues........................................... $37,771
======
Operating (loss) income............................ $ 4,795
=====
Income before income taxes and minority
interests..................................... $ 4,795
Provision for income taxes......................... 480
Minority interests................................. --
-------
Net (loss) income.................................. $ 4,315
=====

During the fourth quarter of 1996, the Company received $5,774 in cash
and $600 in a promissory note (paid in 1997) in settlement of a receivable claim
originally began by Western Union Telegraph Company. In addition, the Company
reduced its liability related to certain Western Union retirees by $784. The
Company recorded the gain on settlement of $6,374 and liability reduction of
$784 as gain on disposal of discontinued operations. During 1997, the Company
recorded a gain on disposal of discontinued operations of $3,687 related to
reversals in estimates of certain pre-petition claims under Chapter 11 and
restructuring which resulted from the Company's Money Transfer business.

5. INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had net unrealized gains on sales of
investment securities available for sale of $7,596 ($12,431 of unrealized gains
and $4,835 of unrealized losses) for the year ended December 31, 1997 and $1,347
($6,114 of unrealized gains and $4,767 of unrealized losses) for the year ended
December 31, 1996.

F-58
111
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The components of investment securities available for sale are as
follows:

GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----

1997
----
Short-term investments......................... $ 6,218 -- -- $ 6,218
Marketable equity securities................... 34,494 $ 7,492 $ 2,101 39,885
Marketable warrants............................ -- 4,939 -- 4,939
Marketable debt securities .................... 3,685 -- 2,734 951
------- --------- ----- -------
Investment securities.......................... $ 44,397 $ 12,431 $ 4,835 $ 51,993
====== ====== ===== ======

1996
----
Marketable equity securities................... $ 55,429 $ 6,501 $ 476 $ 61,454
Marketable debt securities (long-term)......... 3,685 -- 969 2,716
------ ------- ------ ------
Total securities available for sale............ 59,114 6,501 1,445 64,170
Less long-term portion of investment
securities............................... (3,685) -- (969) (2,716)
------- ------- ----- -------
Investment securities - current portion........ $ 55,429 $ 6,501 $ 476 $ 61,454
====== ===== ====== ======

Included in marketable debt securities are acquired securities with
a face amount of $14,900 (cost of $3,185) of a company that was in default
at the time of purchase and is currently in default under its various debt
obligations.

INVESTMENT IN RJR NABISCO

As of December 31, 1997 and 1996, the Company held 612,650 and
1,741,150, respectively, shares of common stock of RJR Nabisco Holdings Corp.
("RJR Nabisco") with a market value of $22,898 (cost of $18,780) and $59,199
(cost of $53,372), respectively. The Company expensed $100 in 1997, $11,724 in
1996 and $3,879 in 1995 relating to the RJR Nabisco investment.

In June 1996, various agreements between High River Limited Partnership
("High River"), the Company and Brooke were terminated by mutual consent.
Pursuant to these agreements the parties had agreed to take certain actions
during late 1995 and throughout 1996 designed to cause RJR Nabisco to effectuate
a spinoff of its food business, Nabisco Holdings Corp. The termination of the
High River agreements left in effect for one year certain provisions concerning
payments to be made to High River in the event the Company achieved a profit
(after deducting certain expenses) on the sale of the shares of RJR Nabisco
common stock which were held by it or they were valued at the end of such year
at higher than their purchase price or in the event Brooke or its affiliates
engaged in certain transactions with RJR Nabisco. Based on the market price of
RJR Nabisco common stock, no amounts were payable by the Company under these
agreements.

Pursuant to a December 31, 1995 agreement between the Company and
Brooke whereby the Company agreed to reimburse Brooke and its subsidiaries for
certain reasonable out-of-pocket expenses relating to RJR Nabisco, the Company
paid Brooke and its subsidiaries a total of $17 and $2,370 in 1997 and 1996.

On February 29, 1996, the Company entered into a total return equity
swap transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to 750,000
shares of RJR Nabisco common stock as of August 13, 1996). The Company entered
into the Swap in order to be able to participate in any increase or decrease in
the value of the RJR Nabisco common stock during the term of the Swap. The
transaction was for a period of up to six months, unless extended by the
parties, subject to earlier termination at the election of the Company, and
provided for the Company to make a payment to the Counterparty of $1,537 upon
commencement of the Swap. At the termination of the transaction, if the price of
the RJR Nabisco common stock during a specified period prior to such date (the
"Final Price") exceeded $34.42,

F-59

112
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

the price of the RJR Nabisco common stock during a specified period following
the commencement of the Swap (the "Initial Price"), the Counterparty was
required to pay the Company an amount in cash equal to the amount of such
appreciation with respect to the shares of RJR Nabisco common stock subject to
the Swap plus the value of any dividends with a record date occurring during the
Swap period. If the Final Price was less than the Initial Price, then the
Company was required to pay the Counterparty at the termination of the
transaction an amount in cash equal to the amount of such decline with respect
to the shares of RJR Nabisco common stock subject to the Swap, offset by the
value of any dividends, provided that, with respect to approximately 225,000
shares of RJR Nabisco common stock, the Company was not required to pay any
amount in excess of an approximate 25% decline in the value of the shares. The
potential obligations of the Counterparty under the Swap were guaranteed by the
Counterparty's parent, a large foreign bank, and the Company pledged certain
collateral in respect of its potential obligations under the Swap and agreed to
pledge additional collateral under certain conditions. The Company marked its
obligation with respect to the Swap to fair value with unrealized gains or
losses included in income. During the third quarter of 1996, the Swap was
terminated in connection with the Company's reduction of its holdings of RJR
Nabisco common stock, and the Company recognized a loss on the Swap of $7,305
for the year ended December 31, 1996.

6. TRADING SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

The components of trading securities owned and securities sold, not yet
purchased are as follows:

DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
TRADING SECURITIES TRADING SECURITIES
SECURITIES SOLD, NOT YET SECURITIES SOLD, NOT YET
OWNED PURCHASED OWNED PURCHASED
----- --------- ----- ---------

Common stock................. $ 16,208 $ 4,513 $21,248 $ 5,900
Equity and index options..... 5,290 17,494 6,241 11,243
Other........................ 28,490 3,603 2,272 --
------- ------- ------- ----------
$ 49,988 $ 25,610 $29,761 $17,143
====== ====== ====== ======

7. INVESTMENT IN REAL ESTATE AND NOTES PAYABLE

The components of the Company's investment in real estate and the
related non-recourse notes payable collateralized by such real estate at
December 31, 1997 are as follows:

U.S. RUSSIAN
OFFICE OFFICE SHOPPING
BUILDINGS BUILDINGS CENTERS TOTAL
--------- --------- ------- -----

Land........................................ $ 19,450 $ 19,300 $ 16,087 $ 54,837
Buildings................................... 92,332 66,688 51,430 210,450
-------- --------- -------- --------
Total.................................. 111,782 85,988 67,517 265,287
Less accumulated depreciated................ (4,616) (879) (3,147) (8,642)
-------- --------- -------- --------
Net investment in real estate.......... $107,166 $ 85,109 $ 64,370 $256,645
======== ========= ======== ========
Notes payable............................... $ 99,302 $ 20,078 $ 54,801 $174,181
Current portion of notes payable............ 336 424 760
-------- --------- -------- --------
Notes payable - long-term portion........... $ 98,966 $ 19,654 $ 54,801 $173,421
======== ========= ======== ========

F-60

113
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

At December 31, 1997, the Company's investment in real estate
collateralized four promissory notes aggregating $99,302 related to the Office
Buildings and eight promissory notes aggregating $54,801 related to the Shopping
Centers. The Office Building notes bear interest at 7.5%, require principal
amortization over approximately 40 years, with maturity dates ranging from 2006
to 2011. The Office Building notes have fixed monthly principal and interest
payments aggregating $648. Each Shopping Center note has a term of five years,
requires no principal amortization, and bears interest payable monthly at the
rate of 8% for the first two and one-half years and at the rate of 9% for the
remainder of the term. In November 1997, the Company sold one of the Shopping
Centers for $5,400 and realized a gain of $1,200.

Required principal payments on the notes payable over the next five
years are $760 in 1998, $5,675 in 1999, $7,243 in 2000, $62,741 in 2001 and $462
in 2002 and $97,300 thereafter.

8. LONG-TERM INVESTMENTS

Long-term investments consisted of investments in the following:

DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----

Limited partnerships....... $ 27,224 $ 33,329 $ 7,054 $ 7,914
Foreign corporations....... -- -- 2,000 2,000
Joint venture.............. -- -- 3,796 3,796
Other...................... -- -- 420 420
------- ------- -------- --------

Total ..................... $ 27,224 $ 33,329 $13,270 $14,130
====== ====== ====== ======

The principal business of the limited partnerships is investing in
investment securities. The estimated fair value of the limited partnerships was
provided by the partnerships based on the indicated market values of the
underlying investment portfolio. The Company is required under certain limited
partnership agreements to make additional investments up to an aggregate of
$5,740 as of December 31, 1997. The Company's investments in limited
partnerships are illiquid, and the ultimate realization of these investments is
subject to the performance of the underlying partnership and its management by
the general partners. During 1997, the Company sold for an amount which
approximated its $2,000 cost an investment in a foreign corporation which owned
an interest in a Russian bank. During 1997, the Company determined that an other
than temporary impairment in the value of its investment in a joint venture had
occurred and wrote-down this investment to zero with a charge to operations of
$3,796.

In January 1997, the Company converted an investment in preferred stock
made in 1995 into a majority equity interest in a small on-line directory
assistance development stage company and, accordingly, began consolidating the
results of this company. This long-term investment of $1,001 was written off in
1996 due to continuing losses of this company. In May 1997, this development
stage company completed an initial public offering and, as a result, the Company
recorded $2,715 as additional paid-in capital which represented its 50.1%
ownership in this company's shareholders' equity after this offering.

The Company's estimate of the fair value of its long-term investments
are subject to judgment and are not necessarily indicative of the amounts that
could be realized in the current market.

F-61

114
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

9. PENSIONS AND RETIREE BENEFITS

Ladenburg has a Profit Sharing Plan (the "Plan") for substantially all
its employees. The Plan includes two features: profit sharing and a deferred
compensation vehicle. Contributions to the profit sharing portion of the Plan
are made by Ladenburg on a discretionary basis. The deferred compensation
feature of the Plan enables non-salaried employees to invest up to 15% of their
pre-tax annual compensation. For the years ended December 31, 1996 and 1995,
employer contributions to the Plan were approximately $200 in each year,
excluding those made under the deferred compensation feature described above.
The Plan was inactive in 1997.

The Company maintains 401(k) plans for substantially all employees,
except those employees of Thinking Machines. These 401(k) plans allow eligible
employees to invest a percentage of their pre-tax compensation. The Company
committed to contribute $500 of matching contributions in 1997. The Company did
not make discretionary contributions to these 401(k) plans in 1996.

10. COMMITMENT AND CONTINGENCIES

LEASES

The Company, Thinking Machines and Ladenburg are currently obligated
under three noncancelable lease agreements for office space, expiring in
September 2000, October 1998 and December 2015, respectively. The following is a
schedule by fiscal year of future minimum rental payments required under the
agreements that have noncancelable terms of one year or more at December 31,
1997:

1998...................................... $ 5,966
1999...................................... 5,597
2000...................................... 5,360
2001...................................... 4,001
2002...................................... 3,795
2003 and thereafter....................... 50,246
--------

Total................................ $ 74,965
========

Rental expense for operating leases during 1997, 1996 and 1995 was
$4,076, $3,914 and $1,677, respectively.

LAWSUITS

On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in the
Delaware Chancery Court, by a shareholder of the Company. The suit alleges that
the Company's purchase of the BML Shares constituted a self-dealing transaction
which involved the payment of excessive consideration by the Company. The
plaintiff seeks (i) a declaration that the Company's directors breached their
fiduciary duties, Brooke aided and abetted such breaches and such parties are
therefore liable to the Company, and (ii) unspecified damages to be awarded to
the Company. The Company's time to respond to the complaint has not yet expired.
The Company believes that the allegations were without merit. Although there can
be no assurances, management is of the opinion, after consultation with counsel,
that the ultimate resolution of this matter will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.

The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a securities
broker-dealer and participation in public underwritings. These lawsuits involve
claims for substantial or indeterminate amounts and are in varying stages of
legal proceedings. In the opinion of management, after consultation with
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.

F-62

115
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

11. FEDERAL INCOME TAX

At December 31, 1997, the Company had $97,444 of unrecognized net
deferred tax assets, comprised primarily of net operating loss carryforwards,
available to offset future taxable income for federal tax purposes. A valuation
allowance has been provided against this deferred tax asset as it is presently
deemed more likely than not that the benefit of the tax asset will not be
utilized. The Company continues to evaluate the realizability of its deferred
tax assets and its estimate is subject to change. The provision for income
taxes, which represented the effect of the Alternative Minimum Tax and state
income taxes, for the three years ended December 31, 1997, 1996 and 1995, does
not bear a customary relationship with pre-tax accounting income from continuing
operations principally as a consequence of the change in the valuation allowance
relating to deferred tax assets. The provision for income taxes on continuing
operations differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate (35%) to pretax income from
continuing operations as a result of the following differences:

1997 1996 1995
---- ---- ----

(Loss) income from continuing operations.................. $(24,074) $(14,348) $1,666
------- ------- ------

(Credit) provision under statutory U.S. tax rates......... (8,426) (5,022) 583
Increase (decrease) in taxes resulting from:
Nontaxable items...................................... 2,603 (224) 543
State taxes, net of Federal benefit................... 55 195 180
Foreign Taxes......................................... 108
Increase (decrease) in valuation reserve.................. 5,846 5,351 (1,014)
------- ------- ------
Income tax provision............................ $ 186 $ 300 $ 292
======= ======= ======

Income taxes associated with discontinued operations and extraordinary
items have been shown net of the utilization of the net operating loss
carryforward and the change in other deferred tax assets.

Deferred tax amounts are comprised of the following at December 31:

1997 1996
---- ----

Deferred tax assets:
Net operating loss carryforward:
Restricted net operating loss........................... $15,561 $18,675
Unrestricted net operating loss......................... 70,216 65,237
Other..................................................... 17,209 10,399
-------- --------

Total deferred tax assets................................. 102,986 94,311
-------- --------

Deferred tax liabilities:

Other..................................................... (5,542) (3,039)
-------- --------

Total deferred tax liabilities................................ (5,542) (3,039)
-------- --------

Net deferred tax assets....................................... 97,444 91,272
Valuation allowance........................................... (97,444) (91,272)
-------- --------

Net deferred taxes............................................ $ -- $ --
======== ========

F-63
116
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

In December 1987, the Company consummated certain restructuring
transactions that included certain changes in the ownership of the Company's
stock. The Internal Revenue Code restricts the amount of future income that may
be offset by losses and credits incurred prior to an ownership change. The
Company's annual limitation on the use of its net operating losses is
approximately $7,700, computed by multiplying the "long-term tax exempt rate" at
the time of change of ownership by the fair market value of the company's
outstanding stock immediately before the ownership change. The limitation is
cumulative; any unused limitation from one year may be added to the limitation
of a following year. Operating losses incurred subsequent to an ownership change
are generally not subject to such restrictions.

As of December 31, 1997, the Company had consolidated net operating
loss carryforwards of approximately $213,000 for tax purposes, which expire at
various dates through 2008. Approximately $38,700 net operating loss
carryforwards constitute pre-change losses and $174,300 of net operating losses
were unrestricted.

12. OTHER LONG-TERM LIABILITIES

The components of other long-term liabilities, excluding notes payable,
are as follows:

DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
LONG-TERM CURRENT LONG-TERM CURRENT
PORTION PORTION PORTION PORTION
--------- ------- --------- -------

Retiree and disability obligations.............. $ 3,638 $ 2,000 $ 6,774 $1,700
Minority interests.............................. 6,112 -- 4,775 --
Other long-term liabilities..................... 1,460 -- 733 300
------ ------ ------- ------

Total other long-term liabilities............... $ 11,210 $ 2,000 $12,282 $2,000
====== ===== ====== =====

13. REDEEMABLE PREFERRED SHARES

At December 31, 1997 and 1996, the Company had authorized and
outstanding 2,000,000 and 1,071,462, respectively, of its Class A Senior
Preferred Shares. At December 31, 1997 and 1996, respectively, the carrying
value of such shares amounted to $258,638 and $210,571, including undeclared
dividends of $163,302 and $117,117, or $152.41 and $109.31 per share.

The holders of Class A Senior Preferred Shares are currently entitled
to receive a quarterly dividend, as declared by the Board, payable at the rate
of $19.00 per annum. The Class A Senior Preferred Shares are mandatorily
redeemable on January 1, 2003 at $100 per share plus accrued dividends. The
Class A Senior Preferred Shares were recorded at their market value ($80 per
share) at December 30, 1987, the date of issuance. The discount from the
liquidation value is accreted, utilizing the interest method, as a charge to
additional paid-in capital and an increase to the recorded value of the Class A
Senior Preferred Shares, through the redemption date. As of December 31, 1997,
the unamortized discount on the Class A Senior Preferred Shares was $4,918.

In the event a required dividend or redemption is not made on the Class
A Senior Preferred Shares, no dividends shall be paid or declared and no
distribution made on any junior stock other than a dividend payable in junior
stock. If at any time six quarterly dividends payable on the Class A Senior
Preferred Shares shall be in arrears or such shares are not redeemed when
required, the number of directors will be increased by two and the

F-64

117
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

holders of the Class A Senior Preferred Shares, voting as a class, will have the
right to elect two directors until full cumulative dividends shall have been
paid or declared and set aside for payment. Such directors were designated
pursuant to the Joint Plan in November 1994.

Pursuant to the Joint Plan, the Company declared a cash dividend in
December 1994 on the Class A Senior Preferred Shares of $50 per share which was
paid in January 1995. The Company declared and paid cash dividends on the Class
A Senior Preferred Shares of $40 per share in 1996 and $50 per share in 1995.
Undeclared dividends are accrued quarterly and such accrued and unpaid dividends
shall accrue additional dividends in respect thereof compounded monthly at the
rate of 19% per annum, both of which accruals are included in the carrying
amount of redeemable preferred shares, offset by a charge to additional paid-in
capital.

On April 6, 1995, the Company's Board of Directors (the "Board")
authorized the Company to repurchase as many as 200,000 shares of its Class A
Senior Preferred Shares. The Company completed the repurchase for an aggregate
consideration of $18,674 and thereafter, on June 21, 1995, the Board authorized
the Company to repurchase as many as 300,000 additional shares. The Company
repurchased in the open market 33,000 of such shares in July 1995 and 106,400 of
such shares in September 1995 for an aggregate consideration of $24,732. During
the first quarter of 1996, the Company repurchased 72,104 of such shares for an
aggregate consideration of $10,530. The repurchase of the Class A Senior
Preferred Shares increased the Company's additional paid-in capital by $4,279
for the 72,104 shares acquired in 1996 and by $32,984 for the 339,400 shares
acquired in 1995 based on the difference between the purchase price and the
carrying values of the shares.

On November 18, 1996, the Company granted to an executive officer and
director of the Company 36,000 Class A Senior Preferred Shares (the "Award
Shares"). The Award Shares are identical with all other Class A Senior Preferred
Shares issued and outstanding as of July 1, 1996, including undeclared dividends
of $3,776 and declared dividends of $1,080. The Award Shares vested one-sixth on
July 1, 1997 and one-sixth on each of the five succeeding one-year anniversaries
thereof through and including July 1, 2002. The Company recorded deferred
compensation of $5,436 representing the fair market value of the Award Shares on
November 18, 1996 and $3,020 of original issue discount representing the
difference between the book value of the Award Shares on November 18, 1996 and
their fair market value. The deferred compensation will be amortized over the
vesting period and the original issue discount will be accreted, utilizing the
interest method, through the redemption date, both through a charge to
compensation expense. During 1997 and 1996, the Company recorded $2,934 and
$359, respectively, in compensation expense related to the Award Shares and, at
December 31, 1997 and 1996, the balance of the deferred compensation and the
unamortized discount related to the Award Shares was $6,890 and $8,097,
respectively.

For information on Class A Senior Preferred Shares owned by Brooke, see
Note 18.

14. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS

The holders of the $3.00 Class B Cumulative Convertible Preferred
Shares ($25 Liquidation Value), $.10 par value per share (the "Class B Preferred
Shares"), 12,000,000 shares authorized and 2,790,776 shares outstanding as of
December 31, 1997 and 1996, are entitled to receive a quarterly dividend, as
declared by the Board, at a rate of $3.00 per annum. Undeclared dividends are
accrued quarterly at a rate of 12% per annum, and such accrued and unpaid
dividends shall accrue additional dividends in respect thereof, compounded
monthly at the rate of 12% per annum.

Each Class B Preferred Share is convertible at the option of the holder
into .41667 Common Shares based on a $25 liquidation value and a conversion
price of $60 per Common Share.

F-65

118
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

At the option of the Company, the Class B Preferred Shares are
redeemable in the event that the closing price of the Common Shares equals or
exceeds 140% of the conversion price at a specified time prior to the
redemption. If redeemed by New Valley, the redemption price would equal $25 per
share plus accrued dividends.

In the event a required dividend is not paid on the Class B Preferred
Shares, no dividends shall be paid or declared and no distribution made on any
junior stock other than a dividend payable in junior stock. If at any time six
quarterly dividends on the Class B Preferred Shares are in arrears, the number
of directors will be increased by two, and the holders of Class B Preferred
Shares and any other classes of preferred shares similarly entitled to vote for
the election of two additional directors, voting together as a class, will have
the right to elect two directors to serve until full cumulative dividends shall
have been paid or declared and set aside for payment. Such directors were
designated pursuant to the Joint Plan in November 1994.

No dividends on the Class B Preferred Shares have been declared since
the fourth quarter of 1988. The undeclared dividends, as adjusted for
conversions of Class B Preferred Shares into Common Shares, cumulatively
amounted to $139,412 and $115,944 at December 31, 1997 and 1996, respectively.
These undeclared dividends represent $49.95 and $41.55 per share as of the end
of each period. No accrual was recorded for such undeclared dividends as the
Class B Preferred Shares are not mandatorily redeemable.

15. COMMON SHARES

On November 18, 1996, the Company granted an executive officer and
director of the Company nonqualified options to purchase 330,000 Common Shares
at a price of $.58 per share and 97,000 Class B Preferred Shares at a price of
$1.85 per share. These options may be exercised on or prior to July 1, 2006 and
vest one-sixth on July 1, 1997 and one-sixth on each of the five succeeding
anniversaries thereof through and including July 1, 2002. The Company recognized
compensation expense of $15 in 1997 and $24 in 1996 from these option grants and
recorded deferred compensation of $158 and $755 representing the intrinsic value
of these options at December 31, 1997 and December 31, 1996, respectively.

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock options. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which, if fully adopted, changes the
methods of recognition of cost on certain stock options. Had compensation cost
for the nonqualified stock options been determined based upon the fair value at
the grant date consistent with SFAS No. 123, the Company's net loss in 1997 and
1996 would have been increased by $316 and $33, respectively. The fair value of
the nonqualified stock options was estimated at $1,774 using the Black-Scholes
option-pricing model with the following assumptions: volatility of 171% for the
Class B Preferred Shares and 101% for the Common Shares, a risk free interest
rate of 6.2%, an expected life of 10 years, and no expected dividends or
forfeiture.

16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The composition of accounts payable and accrued liabilities is as
follows:

DECEMBER 31,
---------------------
1997 1996
---- ----

Accounts payable and accrued liabilities:
Accrued compensation......................................... $11,202 $10,378
Excise tax payable (a)....................................... 4,400 6,000
Subordinated loan payable (b)................................ 2,500 4,000
Deferred rent................................................ 4,560 4,388
Unearned revenues............................................ 10,163
Taxes (property and miscellaneous)........................... 5,029 2,637

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119
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Accrued expenses and other liabilities....................... 19,868 17,485
------ ------
Total.................................................... $57,722 $44,888
====== ======

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

(a) Represents an estimated liability related to excise taxes imposed
on annual contributions to retirement plans that exceed a certain
percentage of annual payroll. The Company intends to vigorously
contest this tax liability. Management's estimate of such amount is
potentially subject to material change in the near term.

(b) Represents a subordinated note payable held by Ladenburg's clearing
broker.

17. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

On January 18, 1995, approximately $550,000 of the approximately
$620,000 of prepetition claims were paid pursuant to the Joint Plan. Another
$57,000 of prepetition claims and restructuring accruals have been settled and
paid or adjusted since January 18, 1995. The remaining prepetition claims may be
subject to future adjustments depending on pending discussions with the various
parties and the decisions of the Bankruptcy Court.

DECEMBER 31,
-------------------------
1997 1996
---- ----

Restructuring accruals(a)....................... $ 8,196 $ 9,024
Money transfer payable(b)....................... 4,415 6,502
----- -----

Total..................................... $12,611 $15,526
====== ======

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

(a) Restructuring accruals at December 31, 1997 consisted of $6,907 of
disputed claims, primarily related to leases and former employee
benefits, and $1,289 of other restructuring accruals. In 1997, 1996
and 1995, the Company reversed $0, $9,706 and $2,044, respectively,
of prior year restructuring accruals as a result of settlements on
certain of its prepetition claims and vacated real estate lease
obligations.

(b) Represents unclaimed money transfers issued by the Company prior to
January 1, 1990. The Company is currently in litigation in Bankruptcy
Court seeking a determination that these monies are not an obligation
of the Company. There can be no assurance as to the outcome of the
litigation.

18. RELATED PARTY TRANSACTIONS

At December 31, 1997, Brooke, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, held 3,989,710 Common
Shares (approximately 41.7% of such class), 618,326 Class A Senior Preferred
Shares (approximately 57.7% of such class), and 250,885 Class B Preferred Shares
(approximately 8.9% of such class) which represented in the aggregate 42.1% of
all voting power. Several of the other officers and directors of the Company are
also affiliated with Brooke. In 1995, the Company signed an expense sharing
agreement with Brooke pursuant to which certain lease, legal and administrative
expenses are allocated to the entity incurring the expense. The Company expensed
approximately $312, $462 and $571 under this agreement in 1997, 1996 and 1995,
respectively.

F-67

120
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The Joint Plan imposes a number of restrictions on transactions between
the Company and certain affiliates of the Company, including Brooke.

On December 18, 1996, the Company loaned BGLS Inc. ("BGLS"), a
wholly-owned subsidiary of Brooke, $990 under a short-term promissory note due
January 31, 1997 and bearing interest at 14%. On January 2, 1997, the Company
loaned BGLS an additional $975 under another short-term promissory note due
January 31, 1997 and bearing interest at 14%. Both loans including interest were
repaid on January 31, 1997. At December 31, 1996, the loan and accrued interest
thereon of $996 was included in other current assets.

Two directors of the Company are or have been affiliated with law firms
that rendered legal services to the Company. The Company paid these firms $568
and $4,141 during 1997 and 1996, respectively, for legal services. An executive
officer and director of the Company is a shareholder and registered
representative in a broker-dealer to which the Company paid $522 and $317 in
1997 and 1996, respectively, in brokerage commissions and other income, and is
also a shareholder in an insurance company that received ordinary and customary
insurance commissions from the Company and its affiliates of $133 and $136 in
1997 and 1996, respectively. The broker-dealer, in the ordinary course of its
business, engages in brokerage activities with Ladenburg on customary terms.

As discussed in Note 5, the Company has entered into certain other
agreements with Brooke in connection with its investment in RJR Nabisco.
Further, two directors of the Company were each paid $30 by Brooke during the
fourth quarter of 1995 in connection with their agreement to serve as Brooke
nominees of RJR Nabisco's 1996 annual meeting.

During 1996, the Company entered into a court-approved Stipulation and
Agreement (the "Settlement") with Brooke and BGLS relating to Brooke's and
BGLS's application under the Federal Bankruptcy code for reimbursement of legal
fees and expenses incurred by them in connection with the Company's bankruptcy
reorganization proceedings. Pursuant to the Settlement, the Company reimbursed
Brooke and BGLS $655 for such legal fees and expenses. The terms of the
Settlement were substantially similar to the terms of previous settlements
between the Company and other applicants who had sought reimbursement of
reorganization-related legal fees and expenses.

In connection with the acquisition of the Office Buildings by the
Company in 1996, a director of Brooke received a commission of $220 from the
seller.

See Note 3 for information concerning the purchase by the Company on
January 31, 1997 of BML from a subsidiary of Brooke.

19. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

LADENBURG - As a nonclearing broker, Ladenburg's transactions are
cleared by other brokers and dealers in securities pursuant to clearance
agreements. Although Ladenburg clears its customers through other brokers and
dealers in securities, Ladenburg is exposed to off-balance-sheet risk in the
event that customers or other parties fail to satisfy their obligations. In
accordance with industry practice, agency securities transactions are recorded
on a settlement-date basis. Should a customer fail to deliver cash or securities
as agreed, Ladenburg may be required to purchase or sell securities at
unfavorable market prices.

The clearing operations for Ladenburg's securities transactions are
provided by several brokers. At December 31, 1997, substantially all of the
securities owned and the amounts due from brokers reflected in the consolidated
balance sheet are positions held at and amounts due from one clearing broker.
Ladenburg is subject to credit risk should this broker be unable to fulfill its
obligations.

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121
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

In the normal course of its business, Ladenburg enters into
transactions in financial instruments with off-balance-sheet risk. These
financial instruments consist of financial futures contracts and written index
option contracts. Financial futures contracts provide for the delayed delivery
of a financial instrument with the seller agreeing to make delivery at a
specified future date, at a specified price. These futures contracts involve
elements of market risk in excess of the amounts recognized in the consolidated
statement of financial condition. Risk arises from changes in the values of the
underlying financial instruments or indices. At December 31, 1997, Ladenburg had
commitments to purchase and sell financial instruments under futures contracts
of $37,552 and $1,494, respectively.

Equity index options give the holder the right to buy or sell a
specified number of units of a stock market index, at a specified price, within
a specified time from the seller ("writer") of the option and are settled in
cash. Ladenburg generally enters into these option contracts in order to reduce
its exposure to market risk on securities owned. Risk arises from the potential
inability of the counterparties to perform under the terms of the contracts and
from changes in the value of a stock market index. As a writer of options,
Ladenburg receives a premium in exchange for bearing the risk of unfavorable
changes in the price of the securities underlying the option. Financial
instruments have the following notional amounts as December 31, 1997:

LONG SHORT
--------- -----------

Equity and index options................. $60,448 $70,500
Financial futures contracts.............. 37,317 1,475

The table below discloses the fair value at December 31, 1997 of these
commitments, as well as the average fair value during the year ended December
31, 1997, based on monthly observations.

DECEMBER 31, 1997 AVERAGE
------------------------ ----------------------
LONG SHORT LONG SHORT
- --------- --------- --------- --------- --------

Equity and index options.................. $ 5,290 $17,495 $8,850 $18,988
Financial futures contracts............... 37,552 1,494 6,206 1,454

For the years ended December 31, 1997, 1996 and 1995, the net loss
arising from options and futures contracts included in net gain on
principal transactions was $2,399, $6,012 and $4,504, respectively. The
Company's accounting policy related to derivatives is to value these
instruments, including financial futures contracts and written index option
contracts, at the last reported sales price. The measurement of market risk is
meaningful only when related and offsetting transactions are taken into
consideration.

20. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company's financial instruments have
been determined by the Company using available market information and
appropriate valuation methodologies described below. However, considerable
judgment is required to develop the estimates of fair value and, accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that could be realized in a current market exchange.

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122
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----

Financial assets:
Cash and cash equivalents........... $ 11,606 $ 11,606 $ 57,282 $ 57,282
Investments available for sale...... 51,993 51,993 64,170 64,170
Trading securities owned............ 49,988 49,988 29,761 29,761
Restricted assets................... 5,716 5,716 8,846 8,846
Receivable from clearing brokers.... 1,205 1,205 23,870 23,870
Long-term investments (Note 8)...... 27,224 33,329 13,270 14,130
Financial liabilities:
Notes payable....................... 174,574 174,574 158,251 158,251
Redeemable preferred shares......... 258,638 102,860 210,571 132,908

21. BUSINESS SEGMENT INFORMATION

The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of and
for the years ended December 31, 1997 and 1996:

BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----

1997
----
Revenues.................... $ 56,197 $27,067 $3,947 $27,357 $114,568
Operating (loss) income .... (9,958) (7,827) (8,156) 520 (25,421)
Identifiable assets......... 77,511 276,770 5,604 81,506 441,391
Depreciation and
amortization............. 1,035 7,469 815 95 9,414
Capital expenditures........ 1,627 7,454 466 1,385 10,932

1996
----
Revenues.................... $71,960 $ 23,559 $ 15,017 $ 20,329 $130,865
Operating loss.............. (345) (745) (15,082) (2,417) (18,589)
Identifiable assets......... 76,302 182,645 11,686 135,787 406,540
Depreciation and
Amortization............. 600 3,622 532 3 4,757
Capital expenditures........ 3,644 183,193 1,596 18 188,451

22. SUBSEQUENT EVENTS

WESTERN REALTY. In February 1998, the Company and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, the Company agreed, among other
things, to contribute the real estate assets of BML, including Ducat Place II
and the site for Ducat Place III, to Western Realty and Apollo agreed to
contribute up to $58,000.

Under the terms of the agreement governing Western Realty, the
ownership and voting interests in Western Realty will be held equally by Apollo
and the Company. Apollo will be entitled to a preference on

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123
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

distributions of cash from Western Realty to the extent of its investment,
together with a 15% annual rate of return, and the Company will then be entitled
to a return of $10,000 of BML-related expenses incurred by the Company since
March 1, 1997, together with a 15% annual rate of return; subsequent
distributions will be made 70% to the Company and 30% to Apollo. Western Realty
will be managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. All material corporate
transactions by Western Realty will generally require the unanimous consent of
the Board of Managers. Accordingly, the Company will account for its
non-controlling interest in Western Realty on the equity method.

On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made a $11,000 loan (the "Loan) to Western Realty. The Loan, which bears
interest at the rate of 15% per annum and is due September 30, 1998, is
collateralized by a pledge of the Company's shares of BML. Upon completion of
the transfer of Ducat Place II and the satisfaction of other conditions under
the LLC Agreement, the Loan and the accrued interest thereon will be converted
into a capital contribution by Apollo to Western Realty and the BML pledge
released.

Western Realty will seek to make additional real estate and other
investments in Russia. The Company and Apollo have agreed to invest, through
Western Realty or another equity, up to $25,000 in the aggregate for the
potential development of a real estate project in Moscow. In addition, Western
Realty has agreed to acquire for $20,000 a 30% profits interest in a company
organized by Brooke (Overseas) which will, among other things, acquire an
interest in an industrial site and manufacturing facility being constructed on
the outskirts of Moscow by a subsidiary of Brooke (Overseas).

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124

Appendix
--------

EXHIBIT 99.1

MATERIAL LEGAL PROCEEDINGS

STATE MEDICAID REIMBURSEMENT CASES

State of Minnesota, et al. v. Philip Morris, et al., Case No. C1-94-8565,
District Court, County of Ramsey, 2nd Judicial District (case filed on August
18, 1994). This case was settled by Liggett and Brooke as to the State of
Minnesota on March 20, 1997. The case remains pending as to claims by Blue
Cross/Shield of Minnesota.

Commonwealth of Puerto Rico, et al. v. Brown & Williamson, et al., Case
No. 97-1910 (JAF), USDC, District Court of Puerto Rico (case filed on June 27,
1997). This case brought on behalf of the Commonwealth of Puerto Rico seeks
compensatory and injunctive relief for damages incurred by the Commonwealth in
paying for the medicaid expenses of indigent smokers. This case is presently
stayed.

State of South Carolina v. Brown & Williamson, et al., Case No.
97-CP-40-1686, Court of Common Pleas, Richland County (case filed on May 12,
1997). This case brought on behalf of the State of South Carolina seeks
compensatory and injunctive relief for damages incurred by the state in paying
for the medicaid expenses of indigent smokers. This case is presently stayed
pending the outcome of Congressional debate concerning national tobacco policy.

State of South Dakota, et al. v. Philip Morris, et al., Case No. 98-65,
Circuit Court of 6th Circuit, Hughes County (case filed on February 23, 1998).
This case brought on behalf of the State of South Dakota seeks compensatory and
injunctive relief for damages incurred by the state in paying for the medicaid
expenses of indigent smokers. This case is presently stayed pending the outcome
of Congressional debate concerning national tobacco policy.

State of Vermont v. Philip Morris, et al., Case No. 744-97CnC, Chittenden
County Superior Court (case filed on May 29, 1997). This case brought on behalf
of the State of Vermont seeks compensatory and injunctive relief for damages
incurred by the state in paying for the medicaid expenses of indigent smokers.
This case has a trial date of November 13, 1999.

CLASS ACTION CASES

Fletcher, et al. v. Brooke Group, Ltd., et al., Case No. CV-97-913,
Circuit Court of Mobile County, Alabama (case filed on March 20, 1997).
Nationwide class certified and limited fund class action settlement
preliminarily approved with respect to Liggett and Brooke Group on March 20,
1997.

Hansen, et al. v. The American Tobacco Company, et al., Case No.
LR-C-96-881, USDC, Eastern District of Arkansas (case filed on April 4, 1997).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Arkansas.
Plaintiffs filed a motion for class certification on September 15, 1997, which
motion remains pending.

Brown, et al. v. The American Tobacco Company, et al., Case No. 711400,
Superior Court of San Diego, California (case filed on October 1, 1997). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in California. No motion for class
certification has been brought by plaintiff.

Finelli, et al. v. Philip Morris, et al., Case No. 96-04348, DC, Superior
Court of District of Columbia. Liggett is named as a defendant in this putative
class action, but has not been served.

Reed, et al. v. Philip Morris, et al., Case No. 96-05070, DC, Superior
Court of District of Columbia (case filed on June 21, 1996). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in the District of
Columbia. On August 18, 1997, the court issued an order declining to certify the
class.

Broin, et al. v. Philip Morris, et al., Case No. 91-49738 CA 22, FL,
Circuit Court Dade County (case filed on October 31, 1991). This action brought
on behalf of all flight attendants that have been injured by

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exposure to environmental tobacco smoke was certified as a class action on
December 12, 1994. This case was settled with respect to all defendants on
October 10, 1997, which settlement was finally approved by the court on February
2, 1998. A notice of appeal is currently pending.

Engle, et al. v. R.J. Reynolds, et al., Case No. 94-08273 CA 20, FL,
Circuit Court, Dade County (case filed on May 5, 1994). This personal injury
class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Florida. The case was certified as a class action on
October 31, 1994, and trial is expected to commence on July 6, 1998.

Peterson, et al. v. The American Tobacco Company, et al., Case No.
97-0490-02, First Circuit Court, Honolulu, Hawaii (case filed on February 6,
1997). This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Hawaii.

Clay, et al. v. The American Tobacco Company, et al., Case No.
97-4167-JPG, USDC, Southern District of Illinois (case filed on May 22, 1997).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in 34 states. No
motion for class certification has been brought by plaintiff.

Norton, et al. v. R.J. Reynolds, et al., Case No. 48-D01-9605-CP-0271,
Superior Court, Madison County, Indiana (case filed on May 3, 1996). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in Indiana. No motion for class certification
has been brought by plaintiff.

Brammer, et al. v. R.J. Reynolds, et al., Case No. 4-97-CV-10461, USDC,
Southern District of Iowa, (case filed on June 30, 1997). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Iowa. To date, no motion
for class certification has been filed by plaintiff.

Emig, et al. v. The American Tobacco Company, et al., Case No.
97-1121-MLB, USDC, District of Kansas (case filed on April 11, 1997). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Kansas. Plaintiff's
motion for class certification currently is pending.

Castano, et al. v. The American Tobacco Company, et al., Case No.
95-30725, USDC, Eastern District of Louisiana (case filed on March 29, 1994).
This case was certified as a class action by the district court on February 17,
1995. This case was settled by Liggett and Brooke on March 12, 1996. The class
was decertified by the Fifth Circuit in May 1996. Plaintiffs' motion for
approval of the settlement was withdrawn on September 6, 1996.

Granier, et al. v. The American Tobacco Company, et al., USDC, Eastern
District of Louisiana (case filed on September 29, 1994). This case currently is
stayed pursuant to a decision in Castano.

Young, et al. v. The American Tobacco Company, et al., Case No.
2:97-CV-03851, Civil District Court, Parish of Orleans, Louisiana (case filed on
November 12, 1997). This personal injury class action is brought on behalf of
plaintiff and all similarly situated injured smokers resident in Louisiana. No
motion for class certification has been brought by plaintiff.

Richardson, et al. v. Philip Morris, et al., Case No. 96145050/CL212596,
Circuit Court, Baltimore City, Maryland (case filed on May 29, 1996). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Maryland. This class
action was certified by the court on January 28, 1998. Trial is set for
September 15, 1999.

Geiger, et al. v. The American Tobacco Company, et al., Index No.
10657/97, Supreme Court, Queens County, New York (case filed on January 12,
1997). This personal injury class action is brought on behalf of plaintiff and
all similarly situated injured smokers resident in New York. The case was
certified as a class action on May 1, 1997, and currently is stayed pending
appeal.

Nwanze, et al. v. Philip Morris, et al., Case No. 97-CIV-7344, USDC,
Southern District of New York (case filed on October 17, 1997). This action is
brought on behalf of all prisoners nationwide that have been

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126

injured by exposure to environmental tobacco smoke. No motion for class
certification has been brought by plaintiff.

Chamberlain, et al. v. The American Tobacco Company, Case No. 1:96CV2005,
USDC, Northern District of Ohio (case filed on August 20, 1997). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Ohio. To date, no motion
for class certification has been filed by plaintiff.

Barnes, et al. v. The American Tobacco Company, et al.5 Case No. 96-5903,
USDC, Eastern District of Pennsylvania (case filed on August 8, 1996). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Pennsylvania. The
district court decertified the class in this case on October 17, 1997.
Plaintiff's appeal of decertification is pending.

Aksamit, et al. v. Brown & Williamson, et al., Case No. 6:97-3636-21, SC,
USDC, Dist. of South Carolina, Greenville Division (case filed on November 24,
1997). This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in South
Carolina. To date, no motion for class certification has been filed by
plaintiff.

Newborn, et al. v. Brown & Williamson, et al., Case No. 97-2938 GV, USDC,
Western District of Tennessee (case filed on October 1, 1997). This personal
injury class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Tennessee. No motion for class certification has
been brought by plaintiff.

Mason, et al. v. The American Tobacco Company, et al., Case No.
7-97CV-293-X, USDC, Northern District of Texas (case filed on December 23,
1997). This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Texas. To
date, no motion for class certification has been filed by plaintiff.

Herrera, et al. v. The American Tobacco Company, et al., Case No.
2:98-CV-00126, USDC, District of Utah (case filed on January 28, 1998). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in Utah. No motion for class certification has
been brought by plaintiff.

Jackson et al. v. Philip Morris Inc., Case No. 980901634PI, 3rd Judicial
Court, Salt Lake City County, Utah (case filed on March 10, 1998). This personal
injury class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Utah. No motion for class certification has been
brought by plaintiff.

Ingle, et al. v. Philip Morris, et al., Case No. 97-C-21-S, Circuit Court
of McDowell County, West Virginia (case filed on February 4, 1997). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in west Virginia. No motion for class
certification has been brought by plaintiff.

McCune, et al. v. The American Tobacco Company, et al., Case No. 97-C-204,
Circuit Court of Kanawha County, West Virginia (case filed on January 30, 1997).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in West Virginia.
To date, no motion for class certification has been filed by plaintiff.

Walker, et al. v. Liggett Group Inc., et al., Case No. 2:97-0102, USDC,
Southern District of West Virginia (case filed on February 12, 1997). Nationwide
class certified and limited fund class action settlement preliminarily approved
with respect to Liggett and Brooke Group on May 15, 1997. Class decertified and
preliminary approval of settlement withdrawn by order of district court on
August 5, 1997, which order currently is on appeal to the Fourth Circuit.

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Insolia, et al. v. Philip Morris, et al., Case No. 97-CV-230-J, Rock
County Circuit Court, Wisconsin (case filed on April 4, 1997). This personal
injury class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Wisconsin. No motion for class certification has
been brought by plaintiff.

Parsons, et al. v. Liggett Group Inc., et al., Case No. 98-C-388, Circuit
Court, Kanawha County, West Virginia (case filed on February 27, 1998). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated injured smokers resident in West Virginia. No motion for
class certification has been brought by plaintiff.

OTHER REIMBURSEMENT ACTIONS

City of Birmingham, et al. v. The American Tobacco Co., et al., Case No.
CV97-081, Greene County, Alabama, Circuit Court (case filed on 5/28/97). City of
Birmingham seeks to recover money damages resulting from payment by the City to
hospitals and other medical providers on behalf of their employees for
tobacco-related disease and death. The City's amended complaint was dismissed by
the court on March 4, 1998, holding that, under the common law of Alabama, the
City lacked standing to recover damages from alleged third-party tortfeasors for
amounts paid on behalf of the plaintiffs' injured employees. The court has,
however, permitted the City to amend its complaint to bring a claim under an
Alabama statute which, the court held, provided a limited authority to recover
such damages under certain circumstances.

County of Los Angeles v. R.J.Reynolds, et al., Case No. 707651, Superior
Court of San Diego (case filed on 8/5/97). County seeks to obtain declaratory
and equitable relief and restitution as well as to recover money damages
resulting from payment by the County for tobacco-related medical treatment for
its citizens and health insurance for its employees. Case is set for trial
February 5, 1999.

Ellis, on Behalf of the General Public v. R.J. Reynolds, et al., Case No.
00706458, Superior Court of San Diego (case filed on 12/13/96). Plaintiffs, two
individuals, seek equitable and injunctive relief for damages incurred by the
State of California in paying for the expenses of indigent smokers.

County of Cook v. Philip Morris, et al., Case No. 97L04550, Circuit Court,
Cook County (case filed on 7/21/97). County of Cook seeks to obtain declaratory
and equitable relief and restitution as well as to recover money damages
resulting from payment by the County for tobacco-related medical treatment for
its citizens and health insurance for its employees.

City of New York, et al. v. The Tobacco Institute, et al., Case No.
97-CIV-0904, Supreme Court of New York, New York County (case filed on
10/17/96). City of New York seeks to obtain declaratory and equitable relief and
restitution as well as to recover money damages resulting from payment by the
City for tobacco-related medical treatment for its citizens and health insurance
for its employees.

State of Tennessee v. The American Tobacco Co., et al., Case No. 12,263,
Monroe County Chancery Court (case filed on 5/7/97). Individual seeks equitable
and injunctive relief for damages incurred by the State of Tennessee in paying
for the expenses of indigent smokers.

The Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Case
No. CV 97-09-082, Tribal Court of The Crow Creek Sioux Tribe (case filed on
9/26/97). Indian tribe seeks equitable and injunctive relief for damages
incurred by the tribe in paying for the expenses of indigent smokers.

The Republic of Marshall Islands v. The American Tobacco Co., et al., Case
No. 1997-261, Republic of the Marshall Islands, The High Court (case filed on
10/30/97). Republic seeks equitable and injunctive relief for damages incurred
by the Republic in paying for the expenses of indigent smokers.

Screen Actors Guild -- Producers Health Plan, et al. v. Philip Morris, et
al., Case No. DC181603, Superior Court of Los Angeles County (case filed on
11/20/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Stationary Engineers Local 39 Health & Welfare Trust Fund v. Philip Morris,
et al., Case No. C-97-1519-DLJ, USDC, Northern District of California (case
filed on 4/25/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.

Steamfitters Local Union No. 614 Health and Welfare Fund v. Philip Morris,
et al., Case No. 92260-2, Circuit Court for 30th Judicial District at Memphis
(case filed on 1/7/98). Union Health and Welfare Fund

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seeks injunctive relief and economic reimbursement to recover moneys expended by
Fund to provide medical treatment to its participants and benefactors suffering
from smoking-related illnesses.

Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, et
al., Case No. 1:97C0625, USDC, Eastern District of Texas (case filed on
11/7/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Northwest Laborers-Employers Health & Security Trust Fund, et al. v. Philip
Morris, et al., Case No. C97-849-WD, WA, USDC, Western District (case filed on
6/26/97). Health and Welfare Trust Fund seeks economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.

Iron Workers Local Union No.17 Insurance Fund, et al. v. Philip Morris, et
al., Case No. 1:97CV 1422, USDC, Northern District of Ohio, Eastern Div. (case
filed on 5/20/97). Union Insurance Trust Fund seeks economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.

Rhode Island Laborers' Health & Welfare Fund v. The American Tobacco
Company, et al., Case No. 97-500L, USDC, District of Rhode Island (case filed
on 10/24/97). Union Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Teamsters Union No. 142, et al. v. Philip Morris, et al., Case No.
71C019709CP01281, USDC, Northern District of Indiana (case filed on 9/15/97).
Union seeks injunctive relief and economic reimbursement to recover moneys
expended by Union Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.

Kentucky Laborers District Council Health & Welfare Trust Fund v. Philip
Morris, et al., Case No.3-97-394, USDC, Western District of Kentucky (case
filed on 6/20/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Trust Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.

Ark-LA-Miss Laborers Welfare Fund, et al. v. Philip Morris, et al., Case
No. 97-1944, USDC, Eastern District of Louisiana (case filed on 6/20/97).
Welfare Fund seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.

New Jersey Carpenters Health Fund, et al. v. Philip Morris, et al., Case
No. 97-3421, USDC, District of New Jersey (case filed on 10/7/97). Health Fund
seeks injunctive relief and economic reimbursement to recover moneys expended by
Fund to provide medical treatment to its participants and benefactors suffering
from smoking-related illnesses.

Laborers' Local 17 Health Benefit Fund, et al. v. Philip Morris, et
al., Case No. 97-CIV-4550, USDC, Southern District of New York (case filed on
7/17/97). Health Fund seeks injunctive relief and economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.

Operating Engineers Local 12 Health and Welfare Trust v. The American
Tobacco Company, et al., Case No. CV-97-7620 TJH, USDC, Central District of
California (case filed on 11/6/97). Health and Welfare Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.

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Connecticut Pipe Trades Health Fund, et al. v. Philip Morris, et al., Case
No. 397CV01305CT, USDC, District of Connecticut (case filed on 7/17/97). Health
Fund seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.

Central Illinois Laborers Health & Welfare Trust Fund, et al. v. Philip
Morris, et al., Case No. 97-L516, USDC, Southern District of Illinois (case
filed on 5/22/97). Laborers' Union Health Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.

Laborers' and Operating Engineers Utility Agreement v. Philip Morris, et
al., Case No. CIV97-1406 PHX, USDC, District of Arizona (case filed on
7/29/97). Union Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Arkansas Carpenters Health & Welfare Fund v. Philip Morris, et al., Case
No. LR-C-97-0754, USDC, Eastern District of Arkansas (case filed on 9/4/97).
Union's Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

West Virginia Laborers' Pension Trust Fund v. Philip Morris, et al., Case
No. 397-0708, USDC, Southern District of West Virginia (case filed on 8/27/97).
Laborers' Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

West Virginia-Ohio Valley Area I.B.E.W., et al. v. Liggett Group Inc., et
al., Case No. 97-C-2135, USDC, Southern District of West Virginia (case filed
on 9/19/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Massachusetts Laborers' Health & Welfare Fund, et al. v. Philip Morris, et
al., Case No. C.A. 97-2892G, Superior Court, Suffolk County (case filed on
6/2/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

B.A.C. Local No. 32 Insurance Trust Fund, et al. v. Philip Morris, et
al., Case No. 97-75675MI, USDC, Eastern District of Michigan (case filed on
11/18/97). Health Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.

Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris,
Inc., et al., Case No. 598--CV-60020, Circuit Court, Wayne County (case filed
on 3/9/98). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et al.
v. Philip Morris, et al., Case No. CV97 0009118NM, Second Judicial District
Court, Bernalillo County (case filed on 1/29/98). Health Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.

Oregon Laborers-Employers Health & Welfare Trust Fund, et al. v. Philip
Morris, et al., Case No. 97-1051-HA, USDC, District of Oregon (case filed on
6/18/97). Health and Welfare Trust Fund seeks

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injunctive relief and economic reimbursement to recover moneys expended by Fund
to provide medical treatment to its participants and benefactors suffering from
smoking-related illnesses.

Central States Joint Board Health & Welfare Fund v. Philip Morris, et
al., Case No. 97L12855, USDC, Northern District of Illinois (case filed on
10/30/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

International Brotherhood of Teamsters, Local 734 Health & Welfare Trust
Fund v. Philip Morris, et al., Case No. 97L12852, USDC, Northern District of
Illinois (case filed on 10/30/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended by Fund
to provide medical treatment to its participants and benefactors suffering from
smoking-related illnesses.

Seafarers Welfare Plan and United Industrial Workers Welfare Plan v. Philip
Morris, et al., Case No. MJG-97-2127MD, USDC, District of Maryland (case filed
on 8/8/97). Welfare Plan seeks injunctive relief and economic reimbursement to
recover moneys expended by Plan to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.

Carpenters & Joiners Welfare Fund, et al. v. Philip Morris, et al., Case
No. 60,633-001, USDC, District of Minnesota (case filed on 12/31/97). Health and
Welfare Trust Plan seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.

United Federation of Teachers Welfare Fund, et al. v. Philip Morris, et
al., Case No. 97-CIV-4676, USDC, Southern District of New York (case filed on
7/17/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

United Food and Commercial Workers Unions, et al. v. Philip Morris, et
al., Case No. CV-97-1340, Circuit Court of Tuscaloosa, Alabama (case filed on
11/13/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Day Care Council-Local 205 D.C. 1707 Welfare Fund v. Philip Morris, et
al., Case No. 97-CIV-606240, USDC, Southern District of New York (case filed on
12/4/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

Eastern States Health and Welfare Fund, et al. v. Philip Morris, et
al., Case No. 97-CIV-7346, USDC, Southern District of New York (case filed on
7/28/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.

IBEW Local 25 Health and Benefit Fund v. Philip Morris, et al., Case No.
97-CIV-9400, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.

IBEW Local 363 Welfare Fund v. Philip Morris, et al., Case No.
97-CIV-9396, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.

Local 1199 Home Care Industry Benefit Fund v. Philip Morris, et al., Case
No. 97-606249, USDC, Southern District of New York (case filed on 12/4/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.

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Local 1199 National Benefit Fund for Health & Human Services Employees v.
Philip Morris, et al., Case No. 97-606-241, USDC, Southern District of New York
(case filed on 12/4/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.

Local 138, 138A & 138B International Union of Operating Engineers Welfare
Fund v. Philip Morris, et al., Case No. 97-CIV-9402, USDC, Southern District of
New York (case filed on 11/25/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended by Fund
to provide medical treatment to its participants and benefactors suffering from
smoking-related illnesses.

Local 840 International Brotherhood of Teamsters Health & Insurance Fund v.
Philip Morris, et al., Case No. 97-CIV-9398, USDC, Southern District of New York
(case filed on 11/25/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.

Long Island Regional Council of Carpenters Welfareocal 840 International
Brotherhood of Teamsters Health & Insurance Fund v. Philip Morris, et al., Case
No. 97-CIV-9397, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.

Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris, et al., Case
No. 97-CIV-8462, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.

Fibreboard Corporation, et al. v. The American Tobacco Company, et
al., Case No. 791919-8, CA, Superior Court of Alameda (case filed on 11/10/97).
Asbestos company seeks reimbursement for damages paid to asbestos victims for
medical and other relief, which damages allegedly are attributable to the
tobacco companies.

Keene Creditors Trust v. Brown & Williamson Tobacco Corp., et al., Case
no. 606479/97, Supreme Court of New York, New York County (case filed on
12/19/97). Asbestos company seeks reimbursement for damages paid to asbestos
victims for medical and other relief, which damages allegedly are attributable
to the tobacco companies.

Conwed Corp., et al. v. R.J. Reynolds Tobacco Co., et al ., Case No.
C1-98-3620, District Court. Ramsey County, Minnesota (case filed on April 9,
1998). Employer seeks injunctive relief and economic reimbursement to recover
moneys expended by employer to provide medical treatment to its employees
suffering from smoking-related illnesses.

Nat'l Asbestos Workers Medical Fund, et al., v. Philip Morris Inc., et
al., CV-98-1492, USDC. Eastern District of New York (case filed on March 23,
1998). Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants suffering from smoking-related illnesses.

Milwaukee Carpenters' District Council Health Fund, et al, v. Philip
Morris Inc., et al., 98CV002394, Circuit Court, Milwaukee County, Wisconsin
(case filed on March 30, 1998). Health and Welfare Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants suffering from smoking-related
illnesses.

Williams & Drake Co., et al. v. American Tobacco Co., et al., Case No.
98-553, USDC, Western District of Pennsylvania (case filed on March 23, 1998).
Employer seeks injunctive relief and economic reimbursement to recover moneys
expended by employer to provide medical treatment to its employees suffering
from smoking-related illnesses.

Blue Cross and Blue Shield of New Jersey, et al. v. Phillip Morris Inc., et
al., CV 98 3287, USDC, Eastern District of New York (case filed April 29, 1998).
Health insurer seeks injunctive relief and economic reimbursement to recover
moneys expended by insurer to provide medical treatment to its members suffering
from smoking-related illnesses.

Arkansas Blue Cross and Blue Shield, et al. v. Phillip Morris Inc., et al.,
Case No.98 C 2612, USDC, Northern District of Illinois (case filed April 29,
1998). Health insurer seeks injunctive relief and economic reimbursement to
recover moneys expanded by insurer to provide medical treatment to its members
suffering from smoking-related illnesses.

Regence Blueshield, et al. v. Phillip Morris Inc., et al., Case No.
C98-0559R, USDC, Western District of Washington (case filed April 29, 1998).
Health insurer seeks injunctive relief and economic reimbursement to recover
moneys expended by insurer to provide medical treatment to its members suffering
from smoking-related illnesses.

INDIVIDUAL ACTIONS

(The following is a list of actions by the named individual plaintiffs
pending against Liggett and, except as other wise noted, other tobacco
companies. The actions have been brought in state court, except as otherwise
noted.)

Crozier, AL, USDC (case filed on August 2, 1996). Case is pending.

Cordova, CA, San Diego County. Trial begins February 5, 1999.

Pavolini, CA, San Francisco County (case filed on December 9, 1997). Case is
pending.

Stern, CA, Monterey County (case filed on April 28, 1997). Case is pending.

Adams, FL, Broward County (case filed on April 10,1997). Case is pending.

Allman, FL, Volusia County (case filed on June 2, 1997). Case is pending.

Altieri, FL, Orange County, (case filed on August 12, 1997). Case is pending.

Armand, FL, Volusia County (case filed on July 9, 1997). Case is pending.

Atcheson, FL, Volusia County (case filed on July 29, 1997). Case is pending.

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Akins, FL, Orange County (case filed on September 16, 1997). Case is pending.

Bailey, FL, Dade County (case filed on August 18, 1997). Case is pending.

Bartley, FL, Broward County (case filed on June 21, 1997). Case is pending.

Blair, FL, Volusia County (case filed on July 29, 1997). Case is pending.

Blank, FL, Broward County (case filed on April 10, 1997). Case is pending.

Bouchard, FL, Bouchard County (case filed on June 2, 1997). Case is pending.

Bronstein, FL, Broward County (case filed on June 10, 1997). Case is pending.

Brown, FL, Orange County (case filed on September 16, 1997). Case is pending.

Burns, Fl, Broward County (case filed on April 3, 1998). Case is pending.

Campbell, FL, Hillsborough County (case filed on April 18, 1997). Case is
pending.

Chamberlain, FL, Duval County Circuit Court (case filed on March 4, 1998). Case
is pending.

Childress, FL, Hillsborough County (case filed on August 28, 1995). Case is
pending.

Chutz-Reymers, FL, USDC, Middle District (case filed on March 21, 1996). Case
is pending.

Clark, FL, Dade County (case filed on July 18, 1995). Case is pending. Liggett
is the only named defendant.

Davis, FL, Broward County (case filed on July 21, 1997). Case is pending.

Davison, FL, Broward County (case filed on June 10, 1997). Case is pending.

De La Torre, FL, Broward County (case filed on July 21, 1997). Case is pending.

Dell, FL, Seminole County (case filed on July 29, 1997). Case is pending.

Dick, FL, Orange County (case filed on August 21, 1997). Case is pending.

Dickman, FL, Pinellas County (case filed December 20, 1996). Case is pending.

Dill, FL, Broward County (case filed on April 10, 1997). Case is pending.

Doyle, Joseph, FL, Flagler County (case filed on September 16, 1997). Case is
pending.

Doyle, Philip, FL, Pinellas County (case filed on December 20, 1996). Case is
pending.

Driscoll, FL, Seminole County (case filed on July 29, 1997). Case is pending.

Ferguson, FL, Volusia County, (case filed on October 10, 1997). Case is
pending.

Fischetti, FL, Orange County (case filed on November 17, 1997). Case is
pending.

Flaks, FL, Broward County (case filed on June 10, 1997). Case is pending.

Gardner, FL, USDC, Middle Dist. (case filed on December 2, 1996). Case is
pending.

Garretson, FL, Volusia County (case filed on October 22, 1996). Case is
pending.

Gatto, FL, Citrus County (case filed on October 14, 1997). Case is pending.

Goldberg, FL, Broward County (case filed on June 10, 1997). Case is pending.

Gonzalez, FL, Hillsborough County (case filed on January 2, 1996). Case is
pending.

Gray, FL, Dade County (case filed on October 15, 1997). Case is pending.

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Habib, FL, Volusia County (case filed on July 10, 1997). Case is pending.

Halen, FL, Palm Beach County (case filed on June 19, 1996). Case is pending.

Harris, FL, Broward County (case filed on July 21, 1997). Case is pending.

Hart, FL, Broward County (case filed on June 10, 1997). Case is pending.

Hayes, FL, Volusia County (case filed on June 30, 1997). Case is pending.

Henin, FL, Dade County (case filed on December 26, 1997). Case is pending.

Henning, FL, Broward County (case filed on July 21, 1997). Case is pending.

Higginbotham, FL, Duval County (case filed on September 19, 1996). Case is
pending.

Hirth, FL, Dade County (case filed in 1996). Case is pending.

Hitchens, FL, Broward County (case filed on June 10, 1997). Case is pending.

Humpal, FL, Volusia County (case filed on June 30, 1997). Case is pending.

Johnson, FL, Duval County (case filed on November 30, 1995). Case is pending.

Kaloustian, FL, Hillsborough County (case filed August 28, 1995). Case is
pending.

Katz, FL, USDC, Southern Dist. (case filed on August 3, 1995). Case is pending.
Plaintiffs have dismissed all defendants except Liggett Group Inc.

Kearney, FL, Hillsborough County (case filed April 18, 1997). Case is pending.

Krueger, FL, USDC, Middle Dist. (case filed August 30, 1996). Case is pending.

Lappin, FL, Volusia (case filed June 2, 1997). Case is pending.

Laschke, FL, Pinellas County (case filed December 20, 1996). Case is pending.

Lass, FL, Duval County (case filed December 23, 1996). Case is pending.

Lehman, FL, Volusia County (case filed on June 2, 1997). Case is pending.

Leombruno, FL, Orange County (case filed on September 16, 1997). Case is
pending.

Levine, FL, Palm Beach County (case filed on July 24, 1996). Case is pending.

Levy, FL, USDC, Middle Dist. (case filed on August 30, 1996). Trial is
scheduled for June 1, 1998.

Lobley, FL, Seminole County (case filed on July 29, 1997). Case is pending.

Lustig, FL, Broward County (case filed on July 21, 1997). Case is pending.

Magliarisi, FL, Broward County (case filed on June 11, 1997). Case is pending.

Manley, Fl, Broward County (case filed on April 3, 1998). Case is pending.

McMahon, FL, Polk County (case filed on April 29, 1997). Case is pending.

Meagher, FL, Orange County (case filed on May 22, 1997). Case is pending.

Meckler, FL, Duval County (case filed July 10, 1997). Case is pending.

Merkow, FL, Pinellas County (case filed May 30, 1997). Case is pending.

Mullin, FL, Dade County (case filed November 7, 1995). Case is pending.

Mullins, FL, Orange County (case filed September 16, 1997). Case is pending.

O'Rourke, FL, Volusia County (case filed June 2, 1997). Case is pending.

Passer, FL, Pinellas County (case filed June 2, 1997). Case is pending.

Perez, FL, USDC, Middle Dist. (case filed August 20, 1996).

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Phillips, FL, Volusia County (case filed on May 27, 1997). Case is pending.

Pipolo, FL, Broward County (case filed on April 10, 1997). Case is pending.

Poythress, FL, Volusia County (case filed on May 5, 1997). Case is pending.

Rauch, FL, Broward County (case filed July 21, 1997). Case is pending.

Rawls, FL, Duval County (case filed March 6, 1997). Case is pending.

Reilly, FL, Lake County (case filed October 22, 1997). Case is pending.

Rix, FL, Duval County (case filed April 29, 1996). Case is pending.

Ross, FL, Hillsborough County (case filed on November 3, 1995). Trial is
scheduled for June 29, 1998.

Sas, FL, Pinellas County (case filed on June 2, 1997). Case is pending.

Shaw, FL, Broward County (case filed on June 10, 1997). Case is pending.

Shira, FL, Orange County (case filed on May 30, 1997). Case is pending.

Spotts, FL, Volusia County (case filed on September 16, 1997). Case is pending.

Sprague, FL, Dade County (case filed July 28, 1995). Case is pending.

Stafford, FL, Pinellas County (case filed November 14, 1997). Case is pending.

Stewart, FL, Lake County (case filed September 16, 1997). Case is pending.

Stone, FL, Volusia County (case filed July 29, 1997). Case is pending.

Strickland, FL, Dade County (case filed January 8, 1998). Case is pending.

Swank-Reich, FL, Broward County (case filed June 10, 1997). Case is pending.

Szewczyk, FL, Hillsborough County (case filed December 12, 1995). Case is
pending.

Thomas, FL, Broward County (case filed June 10, 1997). Case is pending.

Thomson, Barry, FL, Flagler County (case filed September 2, 1997). Case is
pending.

Thomson, Eileen, FL, Broward County (case filed July 21, 1997). Case is
pending.

Uffner, FL, Broward County case filed December 31, 1996). Case is pending.

Unkel, FL, USDC, Middle Dist. Trial is scheduled for June 1, 1998.

Ventura, Fl, Dade County (case filed on April 3, 1998). Case is pending.

Washington, FL, Volusia County (case filed September 16, 1997). Case is
pending.

Weiffenbach, FL, USDC, Tampa Dist. Case is pending.

Westmoreland, FL, Hillsborough County. Trial is scheduled for November 25,
1999. Liggett is the only named defendant.

Wisch, FL, Broward County (case filed June 10, 1997). Case is pending.

Young, FL, Duval County (case filed November 30, 1995). Case is pending.

Albert, GA, USDC, Middle Dist. (case filed January 24, 1997). Complaint has not
been served.

Brown-Jones, GA, Richmond County (case filed January 13, 1998). Case is
pending.

Daley, IL, USDC, Northern Dist. (case filed on August 13, 1997). Case is
pending.

A-11
135

Badon, LA, USDC, Western Dist. (case filed on December 29, 1997). Case is
pending.

Bird, LA, Jefferson Parish (case filed April 10, 1997). Case is pending.

Brakel, LA, USDC, Eastern Dist. (case filed August 30, 1996). Case is pending.

Hebert, LA, Calcasieu Parish (case filed May 8, 1996). Case is pending.

Higgins, LA, Orleans Parish (case filed June 1, 1996). Case is pending.

Oser, LA, Orleans Parish (case filed May 27, 1997). Case is pending.

Picard, LA, USDC, Eastern Dist. (case filed March 24, 1995). Case is pending.

Pitre, LA, East Baton Rouge Parish (case filed August 7, 1992). Case is
pending.

Thomas, MI, USDC, Eastern Dist. (case filed May 29, 1997). Trial is scheduled
for September 1, 1998. Liggett is the only named defendant.

Blythe, MS, Jackson County (case filed August 23, 1996). Case is pending.

Butler, MS, Jones County (case filed on May 12, 1994). Trial is scheduled for
June 8, 1998.

Evans, MS, Jasper County (case filed June 10, 1997). Case is pending.

Murphy, NV, USDC (case filed January 6, 1998). Liggett has not yet been served.

Rivenburgh, NV, USDC (case filed January 6, 1998). Liggett has not yet been
served.

Ulrich, NV, USDC (case filed January 6, 1998). Liggett has not yet been served.

Haines, NJ, USDC (case filed February 2, 1994). Case is pending.

Altman, NY, Supreme Court, New York County (December 16, 1997). Case is
pending.

Anderson, NY, Supreme Court, Kings County (case filed November 13, 1997). Case
is pending.

Bellows, NY, Supreme Court, New York County (case filed November 26, 1997).
Case is pending.

Caiazzo, NY, Supreme Court, Richmond County (case filed October 27, 1997). Case
is pending.

Cameron, NY, Supreme Court, Nassau County (case filed July 18, 1997). Case is
pending.

Carll, NY, Supreme Court, New York County (case filed August 12, 1997). Case is
pending.

Cavanagh, NY, Supreme Court, Richmond County (case filed April 23, 1997). Case
is pending.

Collins, NY, Supreme Court, Westchester County (case filed July 2, 1997). Case
is pending.

Condon, NY, Supreme Court, New York County (case filed February 4, 1997). Case
is pending.

Crane, NY, USDC, Southern Dist. (case filed March 6, 1997). Case is pending.

Creech, NY, Supreme Court, Richmond County (case filed January 14, 1997). Case
is pending.

Cresser, NY, Supreme Court, Kings County (case filed October 4, 1996). Case is
pending.

Da Silva, NY, Supreme Court, New York County (case filed January 14, 1997).
Case is pending.

Dougherty, NY, Supreme Court, Suffolk County (case filed April 18, 1997). Case
is pending.

Dzak, NY, Supreme Court, Queens County (case filed December 2, 1996). Case is
pending.

Evans, NY, Supreme Court, Kings County (case filed August 23, 1996). Case is
pending.

Falise, NY, USDC, Eastern District (case filed November 31, 1997). Case is
pending.

Fink, NY, Supreme Court, New York County (case filed April 25, 1997). Case is
pending.

Golden, NY, Supreme Court, New York County (case filed August 11, 1997). Case
is pending.
A-12
136

Greco, NY, Supreme Court, Queens County (case filed July 18, 1997). Case is
pending.

Gruder, NY, Supreme Court, New York County (case filed December 8, 1997). Case
is pending.

Guilloteau, NY, Supreme Court, Kings County (case filed November 26, 1997).
Case is pending.

Hansen, NY, Supreme Court, Suffolk County (case filed in April 12, 1997). Case
is pending.

Hellen, NY, Supreme Court, Kings County (case filed August 23, 1996). Case is
pending.

Inzerilla, NY, Supreme Court, Queens County (case filed July 16, 1996). Case is
pending.

Jaust, NY, Supreme Court, New York County (case filed October 14, 1997). Case
is pending.

Juliano, NY, Supreme Court, Richmond County (case filed August 12, 1996). Case
is pending.

Keenan, NY, Supreme Court, New York County (case filed October 6, 1997) Case is
pending.

Kestenbaum, NY, Supreme Court, New York County (case filed June 4, 1997). Case
is pending.

Knutsen, NY, Supreme Court, Kings County (case filed April 25, 1997). Case is
pending.

Kotlyar, NY, Supreme Court, Queens County (case filed November 26, 1997). Case
is pending.

Kristich, NY, Supreme Court, Suffolk County (case filed October 12, 1997). Case
is pending.

Labroila, NY, Supreme Court, Suffolk County (case filed July 20, 1997). Case is
pending.

Lehman, NY, Supreme Court, New York County (case filed August 11, 1997). Case
is pending.

Leibstein, NY, Supreme Court, Nassau County (case filed July 25, 1997). Case is
pending.

Leiderman, NY, Supreme Court, Kings County (case filed July 23, 1997). Case is
pending.

Lennon, NY, Supreme Court, New York County (case filed November 19, 1997). Case
is pending.

Levinson, NY, Supreme Court, Kings County (case filed 1997). Case is pending.

Lien, NY, Supreme Court, Suffolk County (case filed 1997). Case is pending.

Litke, NY, Supreme Court, Kings County (case filed May 1, 1997). Case is
pending.

Lombardo, NY, Supreme Court, Nassau County (case filed 1997). Case is pending.

Long, NY, Supreme Court, Bronx County (case filed October 22, 1997). Case is
pending.

Lopardo, NY, Supreme Court, Nassau County (case filed October 27, 1997). Case
is pending.

Lucca, NY, Supreme Court, Kings County (case filed January 27, 1997). Case is
pending.

Lynch, NY, Supreme Court, New York County (case filed October 22, 1997). Case
is pending.

Maisonet, NY, Supreme Court, Kings County (case filed 1997). Case is pending.

Margolin, NY, Supreme Court, New York County (case filed November 22, 1996).
Case is pending.

Martin, NY, Supreme Court, Queens County (case filed July 18, 1997). Case is
pending.

McGuinness, NY, Supreme Court, New York County (case filed July 28, 1997). Case
is pending.

McLane, NY, Supreme Court, Richmond County (case filed 1997). Case is pending.

Mednick, NY, Supreme Court, Kings County (case filed September 19, 1997). Case
is pending.

Mishk, NY, Supreme Court, New York County (case filed May 1, 1997). Case is
pending.

Newell, NY, Supreme Court, New York County (case filed November 19, 1997). Case
is pending.

Nociforo, NY, Supreme Court, Suffolk County (case filed July 12, 1996). Case is
pending.

A-13
137

Ornstein, NY, Supreme Court, New York County (case filed September 29, 1997).
Case is pending.

Paw, NY, US Court of Appeals (case filed 1997). Case is pending.

Perez, NY, Supreme Court, Kings County (case filed August 26, 1997). Case is
pending.

Perri, NY, Supreme Court, Nassau County (case filed November 24, 1997). Case is
pending.

Piccione, NY, Supreme Court, Kings County (case filed October 27, 1997). Case
is pending.

Portnoy, NY, Supreme Court, Suffolk County (case filed July 16, 1996). Case is
pending.

Reitano, NY, Supreme Court, Kings County (case filed August 22, 1996). Case is
pending.

Rinaldi, NY, Supreme Court, Kings County (case filed December 11, 1996). Case
is pending.

Rose, NY, Supreme Court, New York County (case filed December 18, 1996). Trial
is scheduled for February 2, 1998.

Roseff, NY, Supreme Court, New York County (case filed December 10, 1997). Case
is pending.

Rubinobitz, NY, Supreme Court, Nassau County (case filed 1997). Case is
pending.

Schulhoff, NY, Supreme Court, Queens County (case filed November 21, 1997).
Case is pending.

Schwartz, Irwin, NY, Supreme Court, Nassau County (case filed 1997). Case is
pending.

Schwartz, Pearl, NY, Supreme Court, Kings County (case filed December 2, 1996).
Case is pending.

Senzer, NY, Supreme Court, Queens County (case filed 1997). Case is pending.

Shapiro, NY, Supreme Court, New York County (case filed July 21, 1996). Case is
pending.

Siegel, NY, Supreme Court, Kings County (case filed October 8, 1996). Case is
pending.

Smith, NY, Supreme Court, Queens County (case filed September 19, 1997). Case
is pending.

Sola, NY, Supreme Court, Bronx County (case filed on July 16, 1996). Case is
pending.

Sprung, NY, Supreme Court, Kings County (case filed 1997). Case is pending.

Standish, NY, Supreme Court, Bronx County (case filed July 28, 1997). Case is
pending.

Stern, NY, USDC, Southern Dist. (case filed January 29, 1997). Case is pending.

Valentin, NY, Supreme Court, Queens County (case filed September 16, 1997).
Case is pending.

Walgreen, NY, Supreme Court, New York County (case filed 1997). Case is
pending.

Werner, NY, Supreme Court, Queens County (case filed December 12, 1997). Case
is pending.

Zarudsky, NY, Supreme Court, New York County (case filed 1997). Case is
pending.

Zimmerman, NY, Supreme Court of NY, Queens County (case filed 1997). Case is
pending.

Zuzalski, NY, Supreme Court of NY, Queens County (April 3, 1997). Case is
pending.

Tompkin, OH, USDC, Northern Dist. (case filed July 25, 1994). Case is set for
trial on August 31, 1998.

Hall, PA, USDC, Middle District of Pennsylvania (case filed on February 9,
1998). Case is pending.

Nicolo, RI, USDC (case filed September 24, 1996). Case is pending. Perry, TN,
Knox County (case filed July 20, 1995). Case is pending.

Adams, TX, Harris County (case filed April 30, 1996). Case is pending.

Blanchard, TX, Galveston County (case filed July 31, 1992). Case is dormant.

Bush, TX, USDC, Eastern Dist. (case filed September 22, 1997). Case is pending.

Cole, TX, USDC, Eastern Dist. (case filed May 12, 1997). Case is pending.

A-14
138

Colunga, TX, Nueces County (case filed April 17, 1997). Case is pending.

Dieste, TX, USDC, Eastern Dist. (case filed November 3, 1997) Case is pending.

Gossett, TX, Cameron County (case filed November 14, 1996). Liggett has not yet
been served.

Hale, TX, Hidalgo County (case filed January 30, 1997). Case is pending.

Hamilton, TX, USDC, Southern Dist. (case filed February 26, 1997). Case is
pending.

Harris, TX, Nueces County (case filed December 27, 1996). Case is pending.

Luna, TX, USDC, Southern Dist. (case filed February 18, 1997). Case is pending.

McLean, TX, USDC, Eastern Dist. (case filed August 30, 1996). Case is pending.

Mireles, TX, Nueces County (case filed February 14, 1997). Case is pending.

Misell, TX, Nueces County (case filed January 3, 1997). Case is pending.

Ramirez, TX, USDC, Southern Dist. (case filed December 23, 1996). Case is
pending.

Rogers, TX, Jefferson County (case filed February 28, 1995). Case is pending.

Roland, TX, Nueces County, third party complaint filed against Liggett on
Jaunary 12, 1998. Case is pending.

Sanchez, TX, USDC, Southern Dist. (case filed July 22, 1997). Trial is
scheduled for January 4, 1999.

Thompson, TX, Nueces County (case filed on December 15, 1997). Case is pending.

Weingarten, VT, USDC (case filed July 19, 1997). Trial is scheduled for July 8,
1998. Liggett is the only named defendant.

Ball, WV, USDC, Southern District of West Virginia (case filed on April 28,
1998). Case is pending.

Hissom, WV, Kanawha County (case filed September 13, 1997). Trial is scheduled
for January 4, 1999.

Huffman, WV, Kanawha County (case filed February 13, 1998). Liggett has not yet
been served.

Morris, WV, Kanawha County (case filed March 3, 1998). Liggett has not yet been
served.

Russell, WV, USDC, Southern District of West Virginia (case filed on April 28,
1998). Case is pending.

Stephens, WV, USDC, Southern Dist. Trial is scheduled for March 2, 1999.

A-15
139

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE SHARES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, SHARES IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

PAGE
----

Available Information................. 2
Summary............................... 3
Risk Factors.......................... 4
Use of Proceeds....................... 8
Dividend Policy....................... 9
Market For Common Equity and Related
Stockholder Matters................. 9
The Company........................... 9
Selected Financial Data............... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Management............................ 40
Security Ownership of Certain
Beneficial Owners and Management.... 48
Description of Capital Stock.......... 49
Selling Stockholder................... 50
Plan of Distribution.................. 50
Experts............................... 51
Validity of Shares.................... 51
Index to Financial Statements......... F-1
Appendix - Material Legal Proceedings. A-1

======================================================
======================================================

1,500,000 SHARES

BROOKE GROUP LTD.

COMMON STOCK
(PAR VALUE, $.10 PER SHARE)
--------------------
PROSPECTUS
--------------------
MAY , 1998

======================================================
140

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth various expenses, payable by the Company on
behalf of the Selling Stockholder in connection with the offering. Other than
the SEC registration fee, the amounts set forth below are estimates:

SEC registration fee........................................ $ 4,564
Legal fees and expenses..................................... 15,000
Accounting fees and expenses................................ 15,000
Miscellaneous............................................... 2,436
-------
Total............................................. $37,000
=======

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law and Article VI of the
Company's Amended and Restated By-Laws provide for indemnification of the
Company's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933 (the "Securities Act").

Section 102 of the Delaware General Corporation Law allows a corporation to
eliminate the personal liability of a director of a corporation to the
corporation or to any of its stockholders for monetary damage for a breach of
his fiduciary duty as a director, except in the case where the director (i)
breaches his duty of loyalty, (ii) fails to act in good faith, engages in
intentional misconduct or knowingly violates a law, (iii) authorized the payment
of a dividend or approves a stock repurchase in violation of the Delaware
General Corporation Law or (iv) obtains an improper personal benefit. Article
Ninth of the Company's Restated Certificate in Incorporation includes a
provision which eliminates directors' personal liability to the full extent
permitted under the Delaware General Corporation Law, as the same exists or may
hereafter be amended.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

No securities of the Company which were not registered under the Securities
Act have been issued or sold by the Company during the past three years, except
as follows:

(i) On December 16, 1996, the Company granted a consultant to the
Company a stock option to purchase 1,000,000 shares of its common stock at
purchase price of $1.00 per share.

(ii) As of January 1, 1997 and January 1, 1998, the Company granted to
officers of the Company stock options to purchase 422,000 and 42,500
shares, respectively, of the Company's common stock at a price of $5.00 per
share.

(iii) On January 16, 1998, the Selling Stockholder purchased 1,500,000
shares of the Company's common stock at a price of $6.00 per share (an
aggregate of $9,000,000).

(iv) On February 2, 1998, the Company issued 483,002 shares of its
common stock to the holders of the Liggett Notes in connection with
amendments to the Indenture governing the Liggett Notes.

(v) On March 12, 1998, the Company granted a law firm that represents
the Company and Liggett an option for 1,250,000 shares of the Company's
common stock at a purchase price of $17.50 per share.

(vi) Between March 6, 1998 and April 16, 1998, a consultant to the
Company purchased 250,000 shares of the Company's common stock upon
exercise of options at a price of $2.00 per share (as aggregate of
$500,000).

II-1
141

(vii) Between March 16, 1998 and April 27, 1998, employees of the
Company purchased 94,132 shares of the Company's common stock upon exercise
of options at a price of $5.00 per share (an aggregate of $470,660).

(viii) On April 28, 1998 and May 1, 1998, the Company awarded each of
the three outside directors of the Company 10,000 shares of its common
stock for services as a H director.

The foregoing transactions were effected in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act or did not involve a
"sale" under the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits. The following is a list of exhibits filed as a part of this
Registration Statement or incorporated by reference herein:

INDEX OF EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*2.1 -- Stock Purchase Agreement dated as of January 31, 1997 among
BrookeMil Ltd. ("BML"), Brooke (Overseas) Ltd. ("BOL"), BGLS
Inc. ("BGLS") and New Valley Corporation ("New Valley")
(incorporated by reference to exhibit 2.1 in New Valley's
Current Report on Form 8-K dated January 31, 1997,
Commission File No. 1-2493 (the "New Valley Form 8-K")).
*3.1 -- Restated Certificate of Incorporation of Liggett Group Inc.
(the predecessor to Brooke Group Ltd. (the "Company"))
(incorporated by reference to the Company's Registration
Statement on Form S-1, Commission File No. 33-16868).
*3.2 -- Certificate of Amendment of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 1990,
Commission File No. 1-5759).
*3.3 -- Amended and Restated By-Laws of the Company, effective
December 5, 1995 (incorporated by reference to the Company's
current Report on Form 8-K dated December 5, 1995,
Commission File No. 1-5759).
*3.4 -- Certificate of Designations of Series A Junior Convertible
Participating PIK Preferred Stock, Series B Junior
Convertible Participating Reset Preferred Stock, Series C
Junior Convertible Participating Reset Preferred Stock and
Series D Junior Convertible Participating Reset Preferred
Stock (incorporated by reference to the Company's Form 10-Q
for the quarter ended September 30, 1990, Commission File
No. 1-5759).
*3.5 -- Certificate of Designation of Series E Junior Convertible
Participating Preferred Stock of the Company (incorporated
by reference to the Company's Report on Form 8-K dated
October 29, 1993).
*3.6 -- Certificate of Designation of Series F Junior Convertible
Participating Preferred Stock of the Company (incorporated
by reference to the Company's Report on Form 8-K dated
October 29, 1993, Commission File No. 1-5759).
*3.7 -- Certificate of Designation of Series G Junior Convertible
Participating Preferred Stock of the Company (incorporated
by reference to the Company's Form 10-K for the fiscal year
ended 1993, Commission File No. 1-5759).
*3.8 -- Certificate of Incorporation of BGLS (incorporated by
reference to exhibit 3.1 in BGLS' Registration Statement on
Form S-4 dated December 19, 1995, Commission File Number
33-80593).
*3.9 -- By-Laws of BGLS (incorporated by reference to exhibit 3.2 in
BGLS' Registration Statement on Form S-4 dated December 19,
1995, Commission File Number 33-80593).

II-2
142

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*4.1 -- Indenture, dated as of January 1, 1996, between BGLS Inc.
("BGLS") and Fleet National Bank of Massachusetts ("Fleet"),
as Trustee, relating to the "Series A Notes" and the 15.75%
Series B Senior Secured Notes due 2001 (the "Series B
Notes"), including the form of Series A Note and the form of
Series B Note (the "Series A and Series B Indenture")
(incorporated by reference to exhibit 4.1 in BGLS'
Registration Statement on Form S-4 dated December 19, 1995,
Commission File No. 33-80593).
*4.2 -- Pledge and Security Agreement, dated as of January 1, 1996,
between BGLS and Fleet, as Trustee, under the Series A and
Series B Indenture (incorporated by reference to exhibit 4.2
in BGLS' Registration Statement on Form S-4 dated December
19, 1995, Commission File No. 33-80593).
*4.3 -- A/B Exchange and Registration Rights Agreement, dated as of
November 21, 1995, among the Company, BGLS, AIF II L.P.,
Artemis America Partnership, Tortoise Corp., and Mainstay
High Yield Corporate Bond Fund (incorporated by reference to
exhibit 4.3 in BGLS' Registration Statement on Form S-4
dated December 19, 1995, Commission File No. 33-80593).
*4.4 -- Pledge and Security Agreement, dated as of January 1, 1996,
between New Valley Holdings, Inc. and Fleet, as Trustee,
under the Series A and Series B Indenture (incorporated by
reference to exhibit 4.4 in BGLS' Registration Statement on
Form S-4 dated December 19, 1995, Commission File No.
33-80593).
*4.5 -- Standstill Agreement and Consent, dated as of August 28,
1997, among BGLS, AIF II, L.P., Artemis America Partnership
and Tortoise Corp. (incorporated by reference to exhibit
99.2 in the Company's Form 8-K dated August 29, 1997,
Commission No. 1-5759).
*4.6 -- Standstill Agreement, dated as of March 3, 1998, among BGLS
and AIF II, L.P. ("AIF II") and Artemis America Partnership
("AAP" and collectively, with AIF, the "Apollo Holders")
(incorporated by reference to exhibit 10.1 in the Company's
Form 8-K dated March 2, 1998, Commission File No. 1-5759).
*4.7 -- Limited Recourse Guarantee Agreement, dated as of March 2,
1998, made by Brooke (Overseas) Ltd. ("BOL") for the benefit
of the Apollo Holders (incorporated by reference to exhibit
10.8 in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
*4.8 -- Pledge Agreement, dated as of March 2, 1998, between BOL and
AIF (incorporated by reference to exhibit 10.9 in the
Company's Form 8-K dated March 2, 1998, Commission File No.
1-5759).
*4.9 -- Pledge Agreement, dated as of March 2, 1998, between BOL and
AAP (incorporated by reference to exhibit 10.10 in the
Company's Form 8-K dated March 2, 1998, Commission File No.
1-5759).
*4.10 -- Indenture, dated February 14, 1992, among Liggett Group Inc.
("Liggett"), Eve Holdings Inc. ("Eve") and Bankers Trust
Company, as Trustee ("Bankers Trust"), including the Forms
of Series A Notes and Series B Notes and the Guaranty
thereon (the "Liggett Indenture") (incorporated by reference
to exhibit 4(m) in the Company's Form 10-K for the year
ended December 31, 1991, Commission File No. 1-5759).
*4.11 -- First Supplemental Indenture, dated January 26, 1994,
including the Form of Series C Variable Rate Senior Secured
Note and the Guaranty thereon (incorporated by reference to
exhibit 4.2 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
*4.12 -- Second Supplemental Indenture and Amendment to Series B and
Series C Senior Secured Notes, dated as of January 30, 1998,
between Liggett, Eve and Bankers Trust (incorporated by
reference to exhibit 99.2 in the Company's Form 8-K dated
February 2, 1998, Commission File No. 1-5759).

II-3
143

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*4.13 -- Security Agreement, dated February 14, 1992, among Liggett,
Eve and Bankers Trust (the "Security Agreement")
(incorporated by reference to exhibit 4(n) in the Company's
Form 10-K for the year ended December 31, 1991, Commission
File No. 1-5759).
*4.14 -- Amendment No. 1 to the Security Agreement, dated January 26,
1994 (incorporated by reference to exhibit 4.4 in Liggett's
Registration Statement on Form S-1, Commission File No.
33-75224).
*4.15 -- Amendment No. 2 to Security Agreement, dated as of January
30, 1998, among Liggett, Eve and Bankers Trust (incorporated
by reference to exhibit 99.3 in the Company's Form 8-K dated
February 2, 1998, Commission File No. 1-5759).
*4.16 -- Deed of Trust and Assignment of Rents, Leases and Leasehold
Interests, dated February 14, 1992, by Liggett to Bankers
Trust relating to each of the Virginia and North Carolina
properties (the "Deed of Trust") (incorporated by reference
to exhibit 4(o) in the Company's Form 10-K for the year
ended December 31, 1991, Commission File No. 1-5759).
*4.17 -- Amendment No. 1 to the Deed of Trust (North Carolina), dated
January 26, 1994 (incorporated by reference to exhibit 4.6
in Liggett's Registration Statement on Form S-1, Commission
File No. 33-75224).
*4.18 -- Amendment No. 1 to the Deed of Trust (Virginia), dated
January 26, 1994 (incorporated by reference to exhibit 4.7
in Liggett's Registration Statement on Form S-1, Commission
File No. 33-75224).
*4.19 -- Pledge Agreement, dated as of January 30, 1998, among BOL
and Bankers Trust (incorporated by reference to exhibit 99.6
in the Company's Form 8-K dated February 2, 1998, Commission
File No. 1-5759).
*4.20 -- Loan and Security Agreement, dated as of March 8, 1994, in
the amount of $40,000,000 between Liggett and Congress
Financial Corporation (incorporated by reference to exhibit
10 (xx) in the Company's Form 10-K for the year ended
December 31, 1993, Commission File No. 1-5759).
*4.21 -- First Amended Joint Chapter 11 Plan or Reorganization for
New Valley Corporation ("New Valley") dated September 27,
1994, Notice of Modification of the First Amended Joint
Chapter 11 Plan of Reorganization dated October 20, 1994 and
Plan Amendment dated October 28, 1994, as confirmed by the
United States Bankruptcy Court for the District of New
Jersey, Newark Division, on November 1, 1994 (incorporated
by reference to exhibit 2 in New Valley's Form 10-Q for the
quarter ended September 30, 1994, Commission File No.
1-2493).
*4.22 -- Order Confirming First Amended Joint Chapter 11 Plan of
Reorganization for New Valley entered by the Bankruptcy
Court on November 1, 1994 (incorporated by reference to
exhibit 99(b) in New Valley's Form 10-Q for the quarter
ended September 30, 1994, Commission File No. 1-2493).
*5.1 -- Opinion of Marc N. Bell, Esq. (filed as exhibit 5.1 to the
Company's Registration Statement on Form S-3, Commission
File No. 333-45377).
*10.1 -- Corporate Services Agreement, dated as of June 29, 1990,
between the Company and Liggett (incorporated by reference
to exhibit 10.10 in Liggett's Registration Statement on Form
S-1, Commission File No. 33-47482).
*10.2 -- Corporate Services Agreement, dated June 29, 1990, between
the Company and Liggett (incorporated by reference to
exhibit 10.11 in Liggett's Registration Statement on Form
S-1, Commission File No. 33-47482).
*10.3 -- Services Agreement, dated as of February 26, 1991, between
Brooke Management Inc. ("BMI") and Liggett (the "Liggett
Services Agreement") (incorporated by reference to exhibit
10.5 in BGLS' Registration Statement on Form S-1, Commission
File No. 33-93576).

II-4
144

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*10.4 -- First Amendment to Liggett Services Agreement, dated as of
November 30, 1993, between Liggett and BMI (incorporated by
reference to exhibit 10.6 of BGLS' Registration Statement on
Form S-1, Commission File No. 33-93576).
*10.5 -- Second Amendment to Liggett Services Agreement, dated as of
October 1, 1995, between BMI, the Company and Liggett
(incorporated by reference to exhibit 10(c) in the Company's
Form 10-Q for the quarter ended September 30, 1995,
Commission File No. 1-5759).
*10.6 -- Corporate Services Agreement, dated January 1, 1992, between
BGLS and Liggett (the "Liggett Services
Agreement")(incorporated by reference to exhibit 10.13 of
Liggett's Registration Statement on Form S-1, Commission
File No. 33-47482).
*10.7 -- Employment Agreement, dated February 21, 1992, between the
Company and Bennett S. LeBow (incorporated by reference to
exhibit 10(xx) in the Company's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).
*10.8 -- Tax-Sharing Agreement, dated June 29, 1990, among the
Company, Liggett and certain other entities (incorporated by
reference to exhibit 10.12 in Liggett's Registration
Statement on Form S-1, Commission File No. 33-47482).
*10.9 -- Lease with respect to Liggett's distribution center in
Durham, North Carolina, including letter agreement extending
term of Lease (incorporated by reference to exhibit 10.15 in
Liggett's Registration Statement on Form S-1, Commission
File No. 33-47482).
*10.10 -- Tax Indemnity Agreement, dated as of October 6, 1993, among
the Company, Liggett and certain other entities
(incorporated by reference to exhibit 10.2 in SkyBox
International Inc.'s Form 10-Q for the quarter ended
September 30, 1993, Commission File No. 0-22126).
*10.11 -- Exchange Agreement, dated as of November 21, 1995, among the
Company, BGLS, AIF, Artemis Partnership, Tortoise, Starfire
Holding Corporation and Mainstay (incorporated by reference
to exhibit 10.13 in BGLS' Registration Statement on Form S-4
dated December 19, 1995, Commission File No. 33-80593).
*10.12 -- Registration Rights Agreement, dated as of January 1, 1996,
among the Company, New Valley, BGLS and Fleet, as Trustee
(incorporated by reference to exhibit 10.14 in BGLS'
Registration Statement on Form S-4 dated December 19, 1995,
Commission File No. 33-80593).
*10.13 -- Agreement among BGLS, the Company and High River Limited
Partnership ("High River"), dated October 17, 1995
(incorporated by reference to exhibit 10(b) in the Company's
Form 10-Q for the quarter ended September 30, 1995,
Commission File No. 1-5759).
*10.14 -- Letter Agreement among BGLS, the Company and High River
dated November 5, 1995 (incorporated by reference to exhibit
10(a) in the Company's Form 10-Q for the quarter ended
September 30, 1995, Commission File No. 1-5759).
*10.15 -- Agreement between New Valley and the Company, dated as of
December 27, 1995 (incorporated by reference to exhibit
10.19 in BGLS' Registration Statement on Form S-4 dated
December 19, 1995, Commission File No. 33-80593).
*10.16 -- Expense Sharing Agreement, dated as of January 18, 1995,
between the Company and New Valley (incorporated by
reference to exhibit 10(d) in the Company's Form 10-Q for
the quarter ended September 30, 1995, Commission File No.
1-5759).
*10.17 -- Stock Option Agreement, dated January 25, 1995, between the
Company and Howard M. Lorber (incorporated by reference to
exhibit 10(g) in the Company's Form 10-K for the year ended
December 31, 1994, Commission File No. 1-5759).
*10.18 -- Agreement among New Valley, ALKI and High River, dated
October 17, 1995 (the "High River Agreement") (incorporated
by reference to exhibit 10(d) in New Valley's Form 10-Q for
the quarter ended September 30, 1995, Commission File No.
1-2493).

II-5
145

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*10.19 -- Letter Amendment, dated October 17, 1995, to the High River
Agreement (incorporated by reference to exhibit 10(e) in the
New Valley's Form 10-Q for the quarter ended September 30,
1995, Commission No. 1-2493).
*10.20 -- Letter Amendment, dated November 5, 1995, to the High River
Agreement (incorporated by reference to exhibit 10(f) in New
Valley's Form 10-Q for the quarter ended September 30, 1995,
Commission File No. 1-2493).
*10.21 -- Agreement of Termination, dated June 5, 1996, between New
Valley, ALKI, High River, the Company and BGLS (incorporated
by reference to exhibit 16 in the Schedule 13D filed by,
among others, the Company with the Commission on March
11,1966, as amended, with respect to the common stock of RJR
Nabisco Holdings Corp. (the "Schedule 13D")).
*10.22 -- Amended and Restated Consulting Agreement, dated as of March
1, 1996, between the Company and Howard M. Lorber (the
"Lorber Consulting Agreement") (incorporated by reference to
exhibit 10.25 in the Company's Form 10-K for the year ended
December 31, 1995, Commission File No. 1-5759).
*10.23 -- Amendment dated January 1, 1998 to the Lorber Consulting
Agreement (incorporated by reference to exhibit 10.23 in the
Company's Form 10-K for the year ended December 31, 1997,
Commission File No. 1-5759).
*10.24 -- Settlement Agreement, dated March 12, 1996, by and between
Dianne Castano and Ernest Perry, the putative representative
plaintiffs in Dianne Castano, et al. v. The American Tobacco
Company, Inc. et al., Civil No. 94-1044, United States
District Court for the Eastern District of Louisiana, for
themselves and on behalf of the plaintiff settlement class,
and the Company and Liggett, as supplemented by the letter
agreement dated March 14, 1996 (the "Settlement Agreement")
(incorporated by reference to exhibit 13 in the Schedule
13D).
*10.25 -- Addendum to Settlement Agreement (incorporated by reference
to exhibit 10.30 in the Company's Form 10-K/A No. 1 for the
year ended December 31, 1996, Commission File No. 1-5759).
*10.26 -- Settlement Agreement, dated March 15, 1996, by and among the
State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana, the Company and Liggett (incorporated by
reference to exhibit 15 in the Schedule 13D).
*10.27 -- Addendum to Initial States Settlement Agreement
(incorporated by reference to exhibit 10.43 in the Company's
Form 10-Q for the quarterly period ended March 31, 1997,
Commission File No. 1-5759).
*10.28 -- Settlement Agreement, dated March 20, 1997, by and among the
States listed in Appendix A thereto, the Company and Liggett
(incorporated by reference to exhibit 10.40 in the Company's
Form 10-K for the year ended December 31, 1996, Commission
File No. 1-5759).
*10.29 -- Settlement Agreement, dated March 20, 1997, by and between
the named and representative plaintiffs in Fletcher, et al.
v. Brooke Group Ltd., et al., for themselves and on behalf
of the plaintiff settlement class, and the Company and
Liggett (incorporated by reference to exhibit 10.41 in the
Company's Form 10-K for the year ended December 31, 1996,
Commission No. 1-5759).
*10.30 -- Settlement Agreement, dated April 14, 1997, by and among the
State of California, the Company and Liggett (incorporated
by reference to exhibit 10.44 in the Company's Form 10-Q for
the quarter ended March 31, 1997, Commission File No.
1-5759).
*10.31 -- Settlement Agreement, dated May 6, 1997, by and between the
State of Alaska, the Company and Liggett (incorporated by
reference to exhibit 10.44 in the Company's Form 10-Q for
the quarter ended March 31, 1997, Commission File No.
1-5759).

II-6
146

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

*10.32 -- Class Settlement Agreement, dated May 15, 1997, by and
between the named and representative plaintiff in Earl
William Walker, et. al., v. Liggett Group Inc., et. al., for
himself and on behalf of the plaintiff settlement class, and
the Company and Liggett (incorporated by reference to
exhibit 10.1 in the Company's Form 10-Q for the quarter
ended June 30, 1997, Commission File No. 1-5759).
*10.33 -- Settlement Agreement, dated June 9, 1997, by and between the
State of Oregon and the Company and Liggett (incorporated by
reference to exhibit 10.2 in the Company's Form 10-Q for the
quarter ended September 30, 1997, Commission File No.
1-5759).
*10.34 -- Settlement Agreement, dated September 15, 1997, by and among
the State of Nevada and the Company and Liggett
(incorporated by reference to exhibit 10.1 in the Company's
Form 10-Q for the quarter ended September 30, 1997,
Commission File No. 1-5759).
*10.35 -- Settlement Agreement, dated March 12, 1998, by and among the
States listed in Appendix A thereto, the Company and Liggett
(incorporated by reference to exhibit 10.35 in the Company's
Form 10-K for the year ended December 31, 1997, Commission
File No. 1-5759).
*10.36 -- Stock Purchase Agreement, dated April 3, 1996, among
Liggett-Ducat Ltd. ("Liggett-Ducat"), Belgrave Limited
("Belgrave"), Eduard Z. Nakhamkin ("Nakhamkin") and BOL
(incorporated by reference to exhibit 10.28 in the Company's
Form 10-K for the year ended December 31, 1995, Commission
File No. 1-5759).
*10.37 -- Consulting Agreement, dated April 3, 1996, among BOL,
Belgrave and Nakhamkin (incorporated by reference to exhibit
10.29 in the Company's Form 10-K for the year ended December
31, 1995, Commission File No. 1-5759).
*10.38 -- Pledge Agreement, dated April 3, 1996, between BOL and
Belgrave (incorporated by reference to exhibit 10.30 in the
Company's Form 10-K for the year ended December 31, 1995,
Commission File No. 1-5759).
*10.39 -- Stock Option Agreement, dated December 16, 1996, between the
Company and Howard M. Lorber (incorporated by reference to
exhibit 10.34 in the Company's Form 10-K for the year ended
December 31, 1996, Commission File No. 1-5759.
*10.40 -- Letter Agreement dated September 5, 1996 between Ronald S.
Fulford and Liggett (incorporated by reference to exhibit
10.23 in Liggett's Form 10-K for the year ended December 31,
1996, Commission File No. 33-75224).
*10.41 -- Stock Option Agreement, dated January 1, 1997, between the
Company and Richard J. Lampen (incorporated by reference to
exhibit 10.35 in the Company's Form 10-K for the year ended
December 31, 1996).
*10.42 -- Stock Option Agreement, dated January 1, 1997, between the
Company and Marc N. Bell (incorporated by reference to
exhibit 4.3 in the Company's Registration Statement on Form
S-8(No. 333-24217).
*10.43 -- Stock Option Agreement, dated January 1, 1998, between the
Company and Joselynn D. Van Siclen (incorporated by
reference to exhibit 10.43 in The Company's Form 10-K for
the year ended December 31, 1997, Commission File No.
1-5759).
*10.44 -- Promissory Note of New Valley dated January 31, 1997 in
favor of BOL (incorporated by reference to exhibit 10.1 in
the New Valley Form 8-K).
*10.45 -- Pledge Agreement dated as of January 31, 1997 entered into
by and between BOL and New Valley (incorporated by reference
to exhibit 10.2 in the New Valley Form 8-K).
*10.46 -- Use Agreement dated as of January 31, 1997, entered into by
and between BML and Liggett-Ducat Joint Stock Company
(incorporated by reference to exhibit 10.3 in the New Valley
Form 8-K).

II-7
147

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.47 -- Stock Purchase Agreement, dated as of January 16, 1998, by
and between the Company and High River Limited Partnership
(incorporated by reference to the Company's Form 8-K dated
January 16, 1998, Commission File No. 5759).
*10.48 -- Commitment, Contribution and Subordination Agreement, dated
as of January 30, 1998, by Liggett, the Company, BGLS, BOL
and Bankers Trust (incorporated by reference to exhibit 99.4
in the Company's Form 8-K dated February 2, 1998, Commission
File No. 1-5759).
*10.49 -- Registration Rights Agreement, dated as of January 30, 1998,
among the Company and the holders of record of the shares of
the Company's common stock referred to therein (incorporated
by reference to exhibit 99.5 in the Company's Form 8-K dated
February 2, 1998, Commission File No. 1-5759).
*10.50 -- Warrant to purchase common stock of the Company, dated March
2, 1998, issued to AIF (incorporated by reference to exhibit
10.2 in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
*10.51 -- Warrant to purchase common stock of the Company, dated March
2, 1998, issued to AAP (incorporated by reference to exhibit
10.3 in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
*10.52 -- Warrant to purchase common stock of the Company, dated March
2, 1998, issued to AIF (incorporated by reference to exhibit
10.4 in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
*10.53 -- Warrant to purchase common stock of the Company, dated March
2, 1998, issued to AAP (incorporated by reference to exhibit
10.5 in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
*10.54 -- Registration Rights Agreement, dated as of March 2, 1998,
among the Company and the Apollo Holders (incorporated by
reference to exhibit 10.6 in the Company's Form 8-K dated
March 2, 1998, Commission File No. 1-5759).
*10.55 -- Registration Rights Agreement, dated as of March 2, 1998,
among the Company and the Apollo Holders (incorporated by
reference to exhibit 10.7 in the Company's Form 8-K dated
March 2, 1998, Commission File No. 1-5759).
*10.56 -- Stock Option Agreement, dated as of March 12, 1998, by and
between the Company and Kasowitz, Benson, Torres & Friedman
LLP, Marc E. Kasowitz and Daniel R. Benson (incorporated by
reference to exhibit 10.56 in the Company's Form 10-K for
the year ended December 31, 1997, Commission File No.
1-5759).
*21 -- Subsidiaries of the Company (incorporated by reference to
exhibit 21 in the Company's Form 10-K/A No. 2 for the year
ended December 31, 1997, Commission No. 1-5759).
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Arthur Anderson LLP.
23.3 -- Consent of Marc N. Bell (included in exhibit 5.1)
(previously filed).
24.1 -- Power of Attorney (on signature page to the Company's
Registration Statement on Form S-3, Commission File No.
333-45377) (previously filed).
99.1 -- Material Legal Proceedings (included as part of Prospectus
included in this Registration Statement).

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

* Incorporated by reference

(b) Financial Statement Schedules.

Schedule II -- Valuation and Qualifying Accounts

II-8
148

COOPERS
& LYBRAND

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Brooke Group Ltd.

In connection with our audits of the consolidated financial statements of
Brooke Group Ltd. and Subsidiaries as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, which financial
statements are included in the Prospectus, we have also audited the financial
statement schedule listed in Item 16 herein.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.

Miami, Florida
April 8, 1998

II-9
149

BROOKE GROUP LTD.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

(Dollars in Thousands)

Additions
-------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------------------------------------------

Year ended December 31, 1997
Allowances for:
Doubtful accounts .................... $ 750 $ 226 $ 156 $ 820
Cash discounts ....................... 530 11,319 11,286 563
Sales returns ........................ 5,000 250 4,750
------ ------- -------- ------- ------
Total ............................. $6,280 $11,545 $ $11,692 $6,133
====== ======= ======== ======= ======

Provision for inventory obsolescence ....... $3,218 $ 221 $ $ 2,282 $1,157
====== ======= ======== ======= ======

Year ended December 31, 1996
Allowances for:
Doubtful accounts .................... $ 921 $ 903 $ 1,074 $ 750
Cash discounts ....................... 615 13,929 14,014 530
Sales returns ........................ 5,000 5,000
------ ------- -------- ------- ------
Total ............................. $6,536 $14,832 $ $15,088 $6,280
====== ======= ======== ======= ======

Provision for inventory obsolescence ....... $2,641 $ 1,341 $ $ 764 $3,218
====== ======= ======== ======= ======

Year ended December 31, 1995
Allowances for:
Doubtful accounts .................... $ 249 $ 260 $ 692(b) $ 280 $ 921
Cash discounts ....................... 720 14,579 14,684 615
Sales returns ........................ 5,800 1,030 (800)(a) 1,030 5,000
------ ------- -------- ------- ------
Total ............................. $6,769 $15,869 $ (108) $15,994 $6,536
====== ======= ======== ======= ======

Provision for inventory obsolescence ....... $1,369 $ 1,072 $ 630(b) $ 430 $2,641
====== ======= ======== ======= ======

(a) Charged to net sales.

(b) Amounts include impact of consolidating Liggett-Ducat.

II-10
150

Financial statement schedules not included in this Registration Statement
have been omitted because they are not applicable or the required information is
shown in the Company's Consolidated Financial Statements or the Notes thereto.

ITEM 17. UNDERTAKINGS

(a) The Company hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the SEC by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be governed by
the final adjudication of such issue.

II-11
151

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, and State of Florida, on the 15th day of May, 1998.

BROOKE GROUP LTD.

By: /s/ Joselynn D. Van Siclen
------------------------------------
Joselynn D. Van Siclen
Vice President, Treasurer and Chief
Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on May 15, 1998.

* Chairman of the Board of Directors,
- ----------------------------------- President and Chief Executive
Bernnett S. LeBow Officer (Principal Executive
Officer)

/s/ Joselynn D. Van Siclen
- ----------------------------------- Vice President, Treasurer and Chief
Joselynn D. Van Siclen Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)

* Director
- -----------------------------------
Rebert J. Eide

* Director
- -----------------------------------
Jeffrey S. Podell

*By: /s/ Joselynn D. Van Siclen
- -----------------------------------
Joselynn D. Van Siclen
Attorney-in-Fact

II-12