Tobacco Documents Online

BROOKE GROUP LTD. 100 S.E. Second Street Miami, Florida 33131 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held July 18, 1996 To the Stockholders of Brooke Group Ltd.: The Annual Meeting of Stockholders of Brooke Group Ltd., a Delaware corporation (the "ComPany"), will be held at The Hyatt Regency Miami, 400 S.E. Second Avenue, Miami, Florida 33131 on Thursday, July 18, 1996, at 11:00 a.m. local time, and at any postponement or adjournment thereof, for the following purposes: 1. To elect three directors to hold office until the next annual meeting of stockholders and until their successors are elected and qualified. 2. To ratify the appointment of Coopers & Lybrand LoL.P. as independent auditors for the Company for the year ending December 31, 1996. 3. To transact such other business as properly may come before the meeting or any adjournments or postponements of the meeting. Every holder of record of common stock, par value $.10 per share (the "Common Stock"), of the Company at the close of business on June 17, 1996 is entitled to notice of the meeting and any adjournments or postponements thereof and to vote, in person or by proxy, one vote for each share of Common Stock held by such holder. A list of stockholders entitled to vote at the meeting will be available to any stockholder for any purpose g~rmane to the meeting during ordinary business hours from July 3, 1996 to July 18, 1996, at the headquarters of the Company located at 100 S.E. Second Street, 32nd Floor, Miami, Florida 33131. A proxy statement, form of proxy and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as amended, are enclosed herewith. By order of the Board of Directors, BENNETT S, LEBO'~W Chairman of the Board, President and Chief Executive Officer Miami, Florida June 18, 1996 IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU EXPECT TO A'I-rEND THE MEETING IN PERSON, PLEASE SIGN AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.

BROOKE GROUP LTD. 100 S.E. Second Street Miami, Florida 33131 PROXY STATEMENT INTRODUCTION The enclosed proxy is solicited on behalf of the Board of Directors (the "Board") of Brooke Group Ltd., a Delaware corporation (the "Company"). The proxy is solicited for use at the annual meeting of stockholders (the "Annual Meeting") to be held at The Hyatt Regency Miami, 400 S.E. Second Avenue, Miami, Florida 33131 on Thursday, July 18, 1996, at 11:00 a.m., local time, and at any postponement or adjournment thereof. The Company's principal executive offices are located at 100 S.E. Second Street, 32nd Floor, Miami, Florida 33131 and its telephone number is (305) 579-8000. VOTING RIGHTS AND SOLICITATION OF PROXIES Every holder of record of common stock, par value $.10 per share (the "Common Stock"), of the Company at the close of business on June 17, 1996 (the "Record Date") is entitled to notice of the meeting and any adjournments or postponements thereof and to vote, in person or by proxy, one vote for each share of Common Stock held by such holder. At the Record Date, the Company had outstanding 18,497,096 shares of Common Stock. The approximate date on which this proxy statement, accompanying notice and proxy and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as amended (the "Annual Report"), are first being mailed to stockholders is June 18, 1996. Any stockholder giving a proxy in the form accompanying this proxy statement has the power to revoke the proxy prior to its exercise. A proxy can be revoked by an instrument of revocation delivered at or prior to the Annual Meeting to the Secretary of the Company, by a duly executed proxy bearing a date or time later than the date or time of the proxy being revoked, or at the Annual Meeting if the stockholder is present and elects to vote in person. Mere attendance at the Annual Meeting will not serve to revoke a proxy. Abstentions and shares held of record by a broker or its nominee ("Broker Shares") that are voted on any matter are included in determining the number of votes present. Broker Shares that are not voted on any matter will not be included in determining whether a quorum is present. All proxies received and not revoked will be voted as directed. If no directions are specified, such proxies will be voted FOR the election of the Board's nominees and FOR ratification of the appointment of Coopers & Lybrand L.L.P. ("Coopers & Lybrand") to serve as independent auditors for the Company. The nominees receiving a plurality of the votes cast will be elected as directors. An affirmative vote of the majority of votes present at the meeting is necessary for approval of the other matters to be considered at the Annual Meeting. In all cases, shares with respect to which authority is withheld, abstentions and Broker Shares that are not voted will not be included in determining the number of votes cast. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of the Record Date, 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 the Common Stock, (ii) each of the Company's directors and nominees, (iii) each of the Company's named executive officers (as such term is defined in the Summary Compensation Table below) 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. 2

Name and Address of Beneficial Owner Bennett S. LeBow (1) ............................................ BSL Partners (2) ................................................ LeBow Limited Partnership (3) .................................... LeBow Family Partnership 1993, Ltd. (4) ........................... Richard S. Ressler(5) ............................................ Orchard Capital Corporation 1999 Avenue of the Stars Los Angeles, CA 90067 Robert Jo Eide (6) ............................................... Aegis Capital Corp. 70 East Sunrise Highway Valley Stream, NY 11581 Jeffrey S. Podell (6) ............................................. Newsote, Inc. 26 Jefferson Street Passaic, NJ 07055 Gerald E. Sauter (7) ............................................. Rouben V. Chakalian (8) ......................................... Liggett Group Inc. 700 West Main Street Durham, NC 27702 All directors and executive officers as a group (5 persons) ............ (*) (1) Number of Percent of Shares Class 10,451,208 56.5% 4,844,156 26.2% 1,681,715 9.1% 999,999 5.4% 1,824,999 9.9% 10,000 (*) 10,000 (*) 10,471,208 56.6% The percentage of shares beneficially owned does not exceed 1% of the Common Stock. Includes Common Stock held by BSL Partners, a New York general partnership ("BSL Partners"), LeBow Limited Partnership, a Delaware limited partnership ("LLP"), and LeBow Family Partnership 1993, Ltd., a Florida limited partnership ("LFP"). In January 1996, 2,874,129 of the shares of Common Stock owned by Bennett S. LeBow (the "Chairman") (together with shares of certain other affiliated holders specified below) were pledged to a financial institution (the "1996 Pledge"). (2) The Chairman holds an 80% interest in BSL Partners. The remaining interest is held by LLP. Pursuant to the 1996 Pledge, all shares of Common Stock owned by BSL Partners were pledged. (3) The Chairman is the 99.99% general partner of LLP. In 1990, 1,681,715 shares of Common Stock owned by LLP were pledged to secure its obligation to make certain payments to the Company on account of a former executive's outstanding indebtedness of $8,677,000, due in 1997. In May 1994, LLP paid $3,200,000 in partial satisfaction of the obligation. In consideration thereof, the Company released 1,281,715 of the pledged shares. These shares were subsequently pledged under the 1996 Pledge. (4) The Chairman is the general partner and a limited partner of LFP, and trusts for the benefit of the Chairman and certain family members hold the remaining partnership interests. (5) Based upon a Statement of Changes in Beneficial Ownership on Form 4 dated June 5, 1996, filed by the named individual. (6) The named individual is a director of the Company. (7) The named individual retired as Vice President, Chief Financial Officer and Treasurer of the Company in May 1996. (8) The named individual is an executive officer of the Company.

In addition, by virtue of his controlling interest in the Company, the Chairman may be deemed to own beneficially the securities of the Company's subsidiaries, including BGLS Inc. ("BGLS") and Liggett Group, Inc. ("Liggett"), and securities of New Valley Corporation ("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 the Chairman is the beneficial owner of any securities of the Company's subsidiaries or New Valley under Rule 13d-3 of the Securities Exchange Act of 1934, as amended (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. NOMINATION AND ELECTION OF DIRECTORS The By-Laws of the Company provide, among other things, that the Board, from time to time, shall determine the number of directors of the Company. The size of the Board is presently set at three. The present term of office of all directors will expire at the Annual Meeting. Three directors are to be elected at the Annual Meeting to serve until the next annual meeting of stockholders and until their respective successors are elected and qualified. It is intended that proxies received will be voted FOR election of the nominees named below unless marked to the contrary. In the event any such person is unable or unwilling to serve as a director, proxies may be voted for substitute nominees designated by the present Board. The Board has no reason to believe that any of the persons named below will be unable or unwilling to serve as a director if elected. The Board of Directors recommends that stockholders vote FOR election of the nominees named below. Information with Respect to Nominees The following table sets forth certain information, as of the Record Date, with respect to each of the nominees. Each nominee is a citizen of the United States. Name and Address Age Bennett S. LeBow 58 Brooke Group Ltd. 100 S.E. Second Street Miami, FL 33131 Principal Occupation Chairman of the Board, President and Chief Executive Officer of the Company Robert J. Eide Aegis Capital Corp. 70 E. Sunrise Highway Valley Stream, NY 11581 43 Secretary and Treasurer, Aegis Capital Corp. Jeffrey S. Podell Newsote, Inc. 26 Jefferson Street Passaic, NJ 07055 55 Chairman of the Board and President, Newsote, Inc. Each director is elected annually and serves until the next annual meeting of stockholders or until his successor is duly elected and qualified. Business Experience of Nominees Bennett S. LeBow (the "Chairman") has been Chairman of the Board, President and Chief Executive Officer of the 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, a wholly-owned subsidiary of the Company, which directly or indirectly holds the Company's equity interests in several private and public companies. 4

The Chairman has been a director of Liggett, an indirect wholly-owned subsidiary of the Company engaged in the manufacture and sale of cigarettes primarily in the United States, 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 of Liggett from March 1993 to May 1993. He has been Chairman of the Board of New Valley, a company engaged in the investment banking and brokerage business, ownership and management of commercial real estate and the acquisition of operating companies, 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 ofi3tle 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 New Valley Holdings, Inc., an indirect wholly-owned subsidiary of the Company ("NV Holdings"), which holds certain of the Company's equity interest in New Valley, 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. From June 1990 until August 1994, he was Chairman of the Board and/or a director of SkyBox International Inc. ("SkyBox"), the Company's former indirect wholly-owned subsidiary. SkyBox is a producer, marketer and distributor of collectible sports and trading cards and related products. 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, 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. Mr. Eide served as a director of VTX Electronics Corp., a wire and cable distributor, from September 1991 until November 1995 and served as Chairman of the Board thereof from April 1994 until November 1995. Mr. Eide has also been a stockholder of a corporate general partner of a limited partnership organized to acquire and operate real estate property. The limited partnership filed for protection under the Federal bankruptcy laws in 1991. 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. Mr. Podell was a director of VTX Electronics Corp. from 1991 until 1995, and was a registered representative at Aegis Capital Corp. from before 1988 to 1992. Board of Directors and Committees During 1995, the Board of Directors held two meetings, both of which were attended by all of the directors. During 1995, the Executive Committee (composed of Messrs. LeBow and Eide), and the Audit Committee (composed of Messrs. Eide and Podell) did not meet, while the Compensation Committee (composed of Messrs. Eide, LeBow and Podell) met once. The Executive Committee exercises, in the intervals between meetings of the Board of Directors, all the powers of the Board of Directors in the management and affairs of the Company. The Audit Committee reviews, with the Company's independent auditors, matters relating to the scope and plan of the audit, the adequacy of internal controls and the preparation of financial statements, and reports and makes recommendations to the Board of Directors with respect thereto. The Compensation Committee reviews, approves and administers management compensation and executive compensation plans. For information on the compensation of the Company's executive officers, see "Board Compensation Committee Report on Executive Compensation". 5

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, 1995, the Company's Chief Executive Officer and the other two executive officers of the Company whose cash compensation exceeded $100,000 (collectively, the "named executive officers"). Summary Compensation Table (1)(2) Annual Compensation Name and Principal Position Year Bennett S. LeBow .............. 1995 Chairman of the Board, 1994 President and Chief 1993 Executive Officer Gerald E. Sauter(5) ............. 1995 Vice President, Chief 1994 Financial Officer 1993 and Treasurer Rouben V. Chakalian(8) ......... 1995 Chairman of the Board, 1994 President and Chief 1993 Executive Officer of Liggett Other Annual All Other Salary Bonus Compensation Compensation ($) ($) (s) (s) 1,187,500 593,750 118,750(3) m 950,000 475,000 95,000(3) -- 950,000 475,000 95,000(3) 4,497(4) 278,534(5) -- -- -- 229,167 80,000 -- 12,040(7) 264,063(6) 50,000 -- 4,497(4) 432,000 285,120 -- 252,000 302,400 250,000(9) (1) 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 Securities and Exchange Commission (the "SEC"). (2) No restricted stock or stock options were granted in 1993, 1994 or 1995 to the named executive officers. (3) Represents an annual payment in lieu of certain other executive benefits. (4) Represents employer contributions under profit sharing (i.e., 401 (k)) and similar plans maintained by the Company. (5) In 1995, all of Mr. Sauter's salary was paid by New Valley, and 25% (or $69,633) was subsequently reimbursed to New Valley by the Company. The table reflects 100% of Mr. Sauter's 1995 salary. Mr. Sauter retired as Vice President, Chief Financial Officer and Treasurer of the Company in May 1996. (6) Includes $26,562 relating to a salary increase that was declared in May 1994, and retroactively effective as of April 1993. (7) Includes life insurance premiums paid by the Company. (8) Effective April 1, 1996, Mr. Chakalian assumed the title of Chairman of the Board of Liggett. (9) Represents payments made pursuant to a consulting agreement between Mr. Chakalian and Liggett. See "Employment Agreements". 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 January 1995, each outside director of the Company received an award of 10,000 shares of the Company's Common Stock for services as a director during 1994. Employment Agreements The Chairman 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, 1996, the Chairman's annual base salary was $1,484,375. He is entitled to a minimum annual bonus of $742,188, payable quarterly, in lieu of participation in Company stock incentive plans. He is also entitled to 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. Following termination of his employment without cause (as defined), he would continue to receive his then current base salary and minimum 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 minimum bonus. In connection with the settlement of a stockholder lawsuit against the Company and the Chairman, the Chairman has agreed that for a period of four years beginning January 1, 1994, his employment contract shall be adjusted on an annual basis on such terms as are established by a compensation committee consisting entirely of independent directors. In addition, the Chairman's salary and bonus may not be increased from one year to the next during the same four-year period 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 1993. Rouben V. Chakalian, Chairman of the Board of Directors and, prior to April 1, 1996, President and Chief Executive Officer of Liggett, is a party to an employment agreement with Liggett, dated and effective as of June 1,1994. The agreement, which terminated on May 31,1996, has been supplemented by a letter agreement dated January 9, 1996. Mr. Chakalian's annual base salary through May 31, 1996 was $432,000 and thereafter is at a rate of $240,000 per annum (plus $2,000 per day if his presence is required at certain locations over six days per month). He is also entitled to receive a 1996 target annual bonus of 60% of his base salary, prorated for the first five months of 1996, based upon the achievement of specified EBIT (earnings before interest and taxes) targets, and, effective January 1997, his bonus target will be 25% of annual salary. In case of termination, Mr. Chakalian is covered by Liggett's executive termination policy which provides for 24 months of termination pay at the current salary of an executive, if the executive officer's employment is terminated without cause (as defined). The definition of "cause" in such executive termination pay policy is willful and continued failure to perform employment duties or obligations, willful misconduct, material breach of any provision in the agreement, fraud or conviction of a felony. Prior to June 1994, Mr. Chakalian served as a consultant to Liggett advising on both Liggett's international and domestic operations. While acting as a consultant, and pursuant to a letter agreement dated June 15, 1993, Mr. Chakalian received payments of $250,000 and $196,000 for consulting services rendered during 1994 and 1993, respectively. Compensation Committee Interlocks and Insider Participation During 1995, the Chairman and Messrs. Eide 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 its affiliates since before January 1,1995.

During 1995, ACC received commissions and other income in the aggregate amount of $584,616 from the Company and/or its affiliates. In connection with the acquisition of certain office buildings by New Valley on January 10, 1996, Mr. Eide received a commission of $220,000 from the seller. The Chairman is a director of Liggett. He is Chairman of the Board and Chief Executive Officer of New Valley. The Chairman is a director of BGLS and NV Holdings. 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, 1995, 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 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. Stock Option Grants and Stock Option Exercises There were no stock options granted to or exercised by any of the named executive officers during 1995. Board Compensation Committee Report on Executive Compensation Compensation arrangements for the Company's executive officers are usually negotiated on an individual basis between the Chairman and each executive. The Company's executive compensation philosophy is to base management's pay, in part, on achievement of the Company's goals, to provide incentives to enhance stockholder value, to provide competitive levels of compensation, to recognize individual initiative and achievement, and to assist the Company in attracting talented executives to a challenging and demanding environment and to retain such executives for the benefit of the Company and its subsidiaries, as the case may be. Compensation arrangements for the Company's executive officers are determined initially by evaluating the responsibilities of the position held and the experience of the individual, and by reference to the competitive marketplace for management talent. Annual salary adjustments are determined by evaluating the competitive marketplace, the performance of the Company, the performance of the executive, and any increased responsibilities assumed by the executive. Bonus 8

arrangements of certain executive officers are fixed by contract and are not contingent. The Company, from time to time, considers the payment of discretionary bonuses to its executive officers. Bonuses are determined, first, upon the level of achievement by the Company of its goals and, second, upon the level of personal achievement by such executive officers. The compensation package of the Chairman was negotiated and approved by the Board of Directors in February 1992. The compensation of the Chairman is set forth in an employment agreement between the Chairman and the Company and is restricted by a settlement agreement between the parties to a stockholder lawsuit against the Company and Chairman. See "Employment Agreements", above. The compensation package of Mr. Chakalian, as Chairman of the Board, and prior to April 1,1996, as President and Chief Executive Officer of Liggett, was negotiated and approved by the Board of Directors of Liggett in June 1994. The compensation of Mr. Chakalian is set forth in an employment agreement, as supplemented, between Mr. Chakalian and Liggett. See "Employment Agreements", above. In 1993, Section 162(m) was added to the Internal Revenue Code of 1986, as amended (the "Code"). This Section generally provides that no publicly held company shall be permitted to deduct compensation in excess of $1 million paid in any taxable year to its chief executive officer or any of its four other highest paid officers unless: (i) the compensation is payable solely on account of the attainment of performance goals; (ii) the performance goals are determined by a compensation committee of two or more outside directors; (iii) the material terms under which compensation is to be paid are disclosed to and approved by the stockholders of the Company; and (iv) the compensation committee certifies that the performance goals were met. This limitation is applicable to compensation paid by the Company to the Chairman. The effect of the Code Section 162(m) limitation is substantially mitigated by the Company's net operating losses, although the amount of any deduction disallowed under Code Section 162(m) could increase the Company's alternative minimum tax by up to 2% of such disallowed amount. For information relating to the Company's net operating losses, see Note 11 (Income Taxes) to the Company's Consolidated Financial Statements, which Note is set forth in the Annual Report enclosed herewith and is incorporated herein by reference thereto. The foregoing information is provided by the Compensation Committee of the Company. Robert J. Eide Bennett S. LeBow Jeffrey S. Podell 9

Performance Graph The following graph compares the total annual return of the Company's Common Stock, the S&P 500 Index, the S&P MidCap 400 Index and the S&P Tobacco Index for the five years ended December 31, 1995. The graph assumes the value of the investment and each index was $100 on December 31, 1990 and that all dividends were reinvested. Information for the Company's Common Stock includes (i) the value of the Company's Contingent Value Rights ("CVRs") at December 31, 1991 and 1992; (ii) the value of the October 7, 1993 distribution to the Company's stockholders of SkyBox common stock assuming such stock was held by such stockholders until April 30, 1995 (the date on which Marvel Entertainment Group, Inc. completed its acquisition of SkyBox pursuant to, among other things, a cash tender offer of $16 per share); (iii) a cash distribution of $.36 per CVR on account of the Company's redemption of the CVRs on December 9, 1993; and (iv) the value of the February 13, 1995 distribution to the Company's stockholders of MAI common stock, assuming such stock was held by such stockholders until December 31, 1995. 7O0 600- 500- 400- 300- 200- 100- • Brooke Group Ltd. • S&P 500 • S&P MidCap • S&P Tobacco 12/91 12/92 12/93 1 2/94 12/95 12/96 12/90 1 2/91 12/92 12/93 1 2/94 12/95 Brooke Group Ltd ................. 100 138 146 118 206 689 S&P 500 ........................ 100 130 140 154 156 215 S&P MidCap ..................... 100 150 168 192 184 237 S&P Tobacco .................... 100 152 152 118 131 203 Certain Relationships and Related Transactions On January 25, 1995, the Company entered into a Non-qualified 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 500,000 shares of the Company's restricted 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. Pursuant to the Agreement, Common Stock dividend equivalents are paid on each 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. Effective July 1,1990, a former executive of the Company transferred his equity in the Company to the Chairman and resigned from substantially all of his positions with the Company and its affiliates. In consideration for this transfer, LLP, a partnership controlled by the Chairman, agreed, among other things, 10

to make certain payments to the Company on account of the former executive's outstanding indebtedness of $8,677,000. In connection with this transaction, LLP pledged 1,681,715 of the shares it held of Common Stock to secure its obligation. In May 1994, LLP paid $3,200,000 in partial satisfaction of the obligation. In consideration thereof, the Company released 1,281,715 of the pledged shares. During 1995, Orchard Capital Corporation, an affiliate of Richard Ressler, the beneficial owner of 9.9% of the Company's Common Stock and a director of New Valley, sewed as a consultant to the Company and its subsidiaries and received consulting fees of $270,000. During 1995, the Company and New Valley entered into an expense sharing agreement whereby New Valley agreed to reimburse the Company for its portion of certain operating expenses, rent and utilization of personnel. Expense reimbursements amounted to $571,000 for the year ended December 31, 1995. For information concerning certain agreements and transactions between the Company, BGLS and New Valley relating to R JR Nabisco Holdings Corp., see Item 7, "Management's Discussion and Analysis of Financia~ Condition and Results of Operations---Recent Developments Certain Matters Re~ating to R JR Holdings" and Note 3 (RJR Nabisco Holdings Corp.) and Note 17 (Related Party Transactions) to the Company's Consolidated Financial Statements, each of which is set forth in the Annual Report enclosed herewith and is incorporated herein by reference thereto. See also "Compensation Committee Interlocks and Insider Participation." APPOINTMENT OF INDEPENDENT ACCOUNTANTS The Board of Directors has appointed the firm of Coopers & Lybrand to serve as its independent auditors for 1996. Coopers & Lybrand has acted as the Company's independent accountants since December 1986. The stockholders will be requested to adopt the following resolution: "RESOLVED, that the appointment by the Board of Directors of Brooke Group Ltd. of Coopers & Lybrand L.L.P. as independent auditors for the year 1996 be ratified." The Board of Directors recommends a vote FOR this proposal. In the event the resolution is defeated, the adverse vote will be considered as a direction to the Board of Directors to select other auditors for the following year. However, because of the difficulty of substituting other auditors, it is contemplated that the appointment for the year 1996 will be permitted to stand unless the Board of Directors finds other good reason for a substitution. Representatives of Coopers & Lybrand are expected to be present at the Annual Meeting and will have an opportunity to make a statement should they desire to do so. Such representatives are also expected to be available to answer appropriate questions of stockholders. The services to be rendered to the Company by Coopers & Lybrand include examination of the consolidated financial statements of the Company and its subsidiaries, reviews of quarterly and other reports filed with the SEC, participation in meetings with the Audit Committee in connection with the performance of audit services, audits of the employee pension plans of the Company's subsidiaries, and other special audit, tax and accounting services. MISCELLANEOUS 1995 Annual Report on Form 10-K The Company has mailed, with this proxy statement, copies of the Annual Report to stockholders as of the Record Date. The Company will provide without charge, to each stockholder as of the Record Date, a copy of the Annual Report on the written request of any such stockholder addressed to the Company's Secretary at Brooke Group Ltd., 100 S.E. Second Street, Miami, Florida 33131. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Exchange Act requires directors and executive officers of the Company, as well as persons who own more than 10% of a registered class of the Company's equity securities (the "Reporting 11

Persons"), to file reports of initial beneficial ownership and changes in beneficial ownership on Forms 3, 4 and 5 with the SEC and the New York Stock Exchange. Such Reporting Persons are also required by SEC regulations to furnish the Company with copies of all such reports that they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and representations that no other reports were required, during and with respect to the fiscal year ended December 31, 1995, all Reporting Persons have timely complied with all filing requirements applicable to them, except Mr. Chakalian filed late his initial statement of beneficial ownership of securities on Form 3 after being designated an executive officer by the Company. Stockholder Proposals for the 1997 Annual Meeting Proposals of stockholders intended to be presented at the 1997 Annual Meeting of Stockholders of the Company must be received by the Company at its principal executive offices, 100 S.E. Second Street, Miami, Florida 33131, Attention: Marc N. Bell, Secretary, on or before March 20, 1997 in order to be included in the Company's proxy statement and accompanying proxy card relating to that meeting. Other Matters The cost of this solicitation of proxies will be borne by the Company. In addition to the use of the mails, some of the directors, officers and regular employees of the Company may, without additional compensation, solicit proxies personally or by telephone. The Company will reimburse brokerage houses, banks and other custodians, nominees and fiduciaries for customary expenses incurred in forwarding soliciting material to the beneficial owners of Common Stock. The Board knows of no other matters which will be presented at the Annual Meeting. If, however, any other matter is properly presented at the Annual Meeting, the proxy solicited by this proxy statement will be voted in accordance with the judgment of the person or persons holding such proxy. By order of the Board of Directors, Chairman of the Board, President and Chief Executive Officer Dated: June 18, 1996 12

International Place 100 S.E. Second Street 32rid Floor Miami, Florida 33131 305/579-8000 • Fax 305/579-8001 BROOKE GROUP LTD. Bennett S. LeBow Chairman June 18, 1996 Dear Fellow Stockholder: Overview 1995 was a year of important developments for Brooke Group and its stockholders. During the year, Brooke Group continued its contrarian investment approach, pursuing opportunities in a number of industries. In March 1996, Brooke Group entered into ground-breaking settlements of tobacco litigation. During 1996, we intend to focus on maximizing the value of our current operations while continuing to identify and capitalize on new investment opportunities in the U.S. and abroad. For the year, Brooke Group reported consolidated revenues of $461.5 million, with operating income of $8.1 million. The loss from continuing operations before income taxes was $45.0 million in 1995, with a net loss applicable to common shares of $17.1 million. In 1995, Brooke resumed payment of a regular quarterly dividend of $0.075, or $0.30 annually, to our common stockholders. Also during the year, Brooke successfully refinanced substantially all of its corporate debt with five-year notes due 2001, through its BGLS Inc. subsidiary. Liggett Group Inc. The most significant development since our last report occurred in March 1996, when Brooke's Liggett Group tobacco subsidiary, the fifth largest manufacturer of cigarettes in the U.S., announced that it had entered into comprehensive settlements of tobacco litigation with the nationwide Castano class and the Attorneys General of five states, Florida, Louisiana, Massachusetts, Mississippi and West Virginia. In May, a federal appeals court ruled that the Castano suit should not be certified as a class action. We believe that these settlements, together with the recent court decision, will help protect Liggett from addiction-based claims, the most serious litigation risks facing the industry. In our view, the settlements have also enhanced Liggett's potential value for all Brooke stockholders. As the first of the five major tobacco companies to settle tobacco litigation which has plagued the industry for over 45 years, Liggett was able to receive extremely favorable terms. These terms would also apply in the event that Liggett enters into a business combination with any of the other tobacco defendants (with the exception of Philip Morris). The tobacco industry has lived for too long with the possibility of financial catastrophe from product liability claims. These settlements engineered by Brooke mark a fresh and prudent approach to this problem while also positively addressing concerns about underage smoking. Brooke is leading the way to create a new economic model for the industry based on responsible coexistence instead of scorched earth confrontation. We believe these comprehensive settlements are good news for Brooke stockholders and are clearly in the long-term financial interests of the entire tobacco industry. During 1995, Liggett held its own in a difficult operating environment. The Company continued to focus on maximizing profitability in both the price/value and full-price branded tobacco segments. Liggett's four full-price cigarette brands are L&M, Chesterfield, Lark and Eve. 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 over 300 cigarette brand styles. Liggett-Ducat Ltd. Brooke's Russian operations, Liggett-Ducat Ltd.("LDL"), posted an operating profit in 1995 for the first time in its history. Brooke is engaged in the manufacture and sale of cigarettes and the real estate development business in Russia through LDL, in which we hold a controlling equity interest through a subsidiary. LDL, one of Russia's leading cigarette companies since 1892, manufactured and marketed over 10 billion cigarettes in 1995. The company produces some of the leading brands in the Russian market, including Pegas, Prima and Novosti. Brooke Group plans to build a new cigarette factory utilizing Western technology which will produce both American and Russian brands of cigarettes. It is anticipated that the new factory will be operational by the end of 1997. Liggett-Ducat's real estate development business holds a 98-year lease for 2.2 acres of land in downtown Moscow. LDL is in the midst of developing a planned 546,500 square foot American style mixed-use complex on the property in a three-phase program. The

BROOKE GROU ' LTD. first phase of the project, a 46,500 square foot office building, was completed in 1993 and is leased in its entirety to Citibank. LDL is in the process of constructing the second phase of the project, a 150,000 square foot office building, with an anticipated completion date of early 1997. LDL has already received letters of intent on approximately 25% of the second phase building. The third phase of the program is currently planned as a 350,000 square foot mixed-use complex and construction is scheduled to begin in 1998. R JR Nabisco Another significant development occurred in 1995 when Brooke, through our 42 percent ownership interest in New Valley Corporation, made a substantial investment in R JR Nabisco. We identified R JR Nabisco as a company whose value could be increased simply by separating the R JR Tobacco business and the Nabisco food business through a tax-free spinoff of Nabisco to RJR Nabisco stockholders. In October 1995, New Valley entered into an agreement with an affiliate of Carl Icahn and both entities purchased a significant stake in R JR Nabisco. We subsequently began soliciting consents from RJR Nabisco stockholders in support of a non-binding resolution to immediately spin offNabisco and to rescind a by-law change that R JR Nabisco's board had made eliminating the previous right of R JR Nabisco stockholders to call special meetings. In February 1996, we announced that we had won the consent solicitation, obtaining the votes of more than 50% of RJR Nabisco's total outstanding shares in support of both proposals. This marked the first time in the history of corporate America that a Fortune 100 company had lost a consent solicitation! When the R JR Nabisco board still refused to act, we nominated a slate of directors with a comprehensive economic and corporate governance platform to replace the RJR Nabisco Board at the company's annual stockholders' meeting. While Brooke's nominees were not elected, we believe our actions heightened the Board's awareness of the stockholders' desire to spin off Nabisco and our settlements demonstrated that such a spinoff is possible now. Moreover, we believe that our efforts prompted the RJR Nabisco Board to raise the dividend and commit to a share repurchase program. Brooke and its affiliates currently own approximately 5.2 million shares, or 1.9% of R JR Nabisco and Carl Icahn through an affiliate owns approximately 13 million shares, or 4.8% of RJR Nabisco. Although our agreement with Mr. Icahn was recently terminated, as a major stockholder of RJR Nabisco, Brooke intends to continue its efforts to cause the company to effect an immediate spinoff of Nabisco. New Valley Corporation Many important steps were also taken in 1995 by New Valley. In January 1995, New Valley successfully emerged from Chapter 11 after satisfying all creditor claims, with over $300 million in unrestricted cash resulting from the sale of the company's money transfer business. In October of 1995, we exercised our option to sell the Western Union messaging services business to First Financial Management Corporation for approximately $20 million and completed that sale. Last year, we said we would pursue an opportunistic acquisition program and we have done so. In May 1995, New Valley acquired Ladenburg, Thalmann & Co. Inc., a privately held investment banking firm and member of the New York Stock Exchange since 1876, for $26.8 million. In 1995 and early 1996, New Valley greatly improved its capital structure by repurchasing over 465,000 of its senior preferred shares and by retiring all of the accrued unpaid dividends on those shares in the process. New Valley has already made two additional investments in 1996. In January, New Valley acquired commercial real estate through its newly formed New Valley Realty division, consisting of four office buildings and eight shopping centers, for an aggregate purchase price of $184 million. In February 1996, New Valley's Ladenburg, Thalmann acquired through its merchant ban.king affiliate a controlling interest in Thinking Machines Corporation, a developer and marketer of parallel software for high-end network computing systems, for $10.6 million. As we move along in 1996, New Valley will continue to pursue an opportunistic acquisition program in various industries. Outlook We are confident that the investment decisions and strategic developments of 1995 will work to the long-term benefit of all Brooke stockholders. Investors who originally bought Liggett, Brooke Group's predecessor, at the initial public offering price of $12 per share in 1987 have now realized total value of over $30 per share-- thus outperforming the S&P 500 over the same period. We will continue to work diligently for you, our stockholders, in 1996 and beyond. Sincerely, BENNEaSr S. LEBow Chairman, President and Chief Executive Officer

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 Commission File Number 1-5759 BROOKE GROUP LTD. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 100 S.E. Second Street, Miami, Florida (Address of principal executive offices) 51-0255124 (I.R.S. Employer Identification No.) 33131 (Zip Code) Registrant's telephone number, including area code: (305) 579-8000 T.itle of each clas~ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered Common Stock, par value $.10 per share New York Stock Exchange Securities registered pursuant to 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent fliers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]Yes [ ] No The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 1, 1996 was approximately $52,726,529. Directors and officers and ten percent or greater stockholders are considered affiliates for purposes of this calculation but should not necessarily be deemed affiliates for any other purpose. At April 1, 1996, there were 18,497,096 shares of common stock outstanding. Documents Incorporated by Reference: None

TABLE OF CONTENTS PART I Item 1. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 8. Item 9. Item 10. Item 11. Item 12. Item 13. Business .................................................................................................... ................ 1 Properties .................................................................................................... .............. 14 Legal Proceedings .................................................................................................... . 15 Submission of Matter to a Vote of Security-Holders; Executive Officers of the Registrant .......................................................................... 15 PART II Market for Registrant's Common Equity and Related Stockholder Matters .............. 16 Selected Financial Data ............................................................................................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................................................ 17 Financial Statements and Supplementary Data ........................................................ 17 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ................................................................................................... 17 PART III Directors and Executive Officers of the Registrant .................................................... 18 Executive Compensation ........................................................................................... 19 Security Ownership of Certain Beneficial Owners and Management ........................ 23 Certain Relationships and Related Transactions ....................................................... 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................... 25 SIGNATURES .................................................................................................... ........................... 35

PART I Item 1. Business General Brooke Group Ltd. (the "Company" or "BGL"), 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, primarily in the United States; through its subsidiary Brooke (Overseas)Ltd. ("BOL"), in the manufacture and sale of cigarettes and the real estate development business in Russia; and through its investment in New Valley Corporation ("New Valley"), in the investment banking and brokerage business, ownership and management of commercial real estate and the acquisition of operating companies. In addition, the Company, through its subsidiary COM Products Inc. ("Com Products"), distributes computer output microfiche products. Liggett and BOL are wholly owned subsidiaries of BGLS Inc. ("BGLS"). BGLS is a wholly owned subsidiary of the Company. The Company is controlled by Bennett S. LeBow, the Chairman and Chief Executive Officer of the Company, BGLS and New Valley, who owns directly or indirectly approximately 57% of the Company's common stock. The principal executive office of the Company is located at 100 S.E. Second Street, Miami, FL 33131, and the telephone number is (305) 579-8000. Liggett's Tobacco Business 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. Liggett is headquartered in Durham, North Carolina. Liggett is registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and files periodic reports and other information with the Securities and Exchange Commission (the "SEC"). Liggett is engaged primarily in the manufacture and sale of cigarettes. According to The Maxwell Consumer Report, a recognized industry publication (the "Maxwell Report"), Liggett's domestic shipments of approximately 10.52 billion cigarettes during 1995 accounted for 2.2% of the total cigarettes shipped in the United States during such year. This represents a market share decline of 0.1% from 1994 and 0.2% from 1993. Liggett produces both premium cigarettes as well as discount cigarettes (which includes 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 over 300 combinations of lengths, styles and packaging. Liggett produces four premium cigarette brands: L&M, Chesterfield, Lark and Eve. Liggett's premium cigarettes represented approximately 32%, 33% and 42% of net sales (excluding federal excise taxes) in 1995, 1994 and 1993, respectively, and contributed a substantial portion of Liggett's operating profits for the respective periods. Liggett's share of premium market segment was approximately 0.8% for 1995, compared to 0.9% and 1.1% for 1994 and 1993, respectively, according to the Maxwell Report. In 1980, Liggett was the first major domestic cigarette manufacturer to introduce successfully 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 continues to produce discount cigarettes with a share of approximately 5.5% of the discount market segment for 1995 according to the Maxwell Report, compared to 5.4% and 4.7% for 1994 and 1993, respectively. Liggett's share of the discount market segment increased, despite a decline in discount unit sales volume. The increase in market share was due to an overall decline in the discount segment. At the present time, Liggett has no foreign operations, maintains only one international sales office with one employee and does not own the international rights to its premium cigarette brands. Liggett does, however, export cigarettes which are sold primarily in Eastern Europe and the Middle East. Export sales of approximately 900 million units accounted for approximately 8% of Liggett's 1995 total unit sales volume. Revenues from export sales were $5.4 million for 1995, compared to $4.7 million and $5.0 million for 1994 and 1993, respectively. Operating profit (loss) attributable to export sales for each of the years 1995, 1994 and 1993 were $(2.1) million, $(1.1) million and $0.5 million, respectively. Management's strategy is to increase volume in its foreign markets and increase its international brand acceptance in an effort to reverse this unprofitable trend. 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 at their current unit sales volume and to reduce further its investment in working capital. As part of this strategy, Liggett restructured its headquarters and manufacturing operations and reduced its workforce by 235 positions in 1993 and 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. During 1995, Liggett continued its efforts towards reducing costs by, among other things, offering voluntary retirement programs to eligible employees and reduced headcount by an additional 120 positions. Since the 1993 restructuring, Liggett has reduced its headcount by approximately 14% of its hourly employees and 11% of its salaried employees. These changes have significantly reduced operating costs. Liggett's long-term business strategy in the premium segment of the market is to maintain its market share by offering promotional programs with the objective of maximizing the profitability of its premium brands. Liggett's long-term business strategy in the discount segment of the market is to maintain its market share and increase its profitability by consistently providing high quality products and services at prices and 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 27 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. One of Liggett's customers accounted for approximately 11.6% of net sales in 1995. No single customer accounted for more than 10% of Liggett's net sales in 1994 and 1993. Liggett's marketing and sales functions are performed by approximately 95 direct sales representatives calling on national and regional customer accounts, together with approximately 325 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 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. The two largest components of cigarettes are 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 which expire principally in December 1996. As of December 31, 1995, approximately 87% of Liggett's commitments were for the purchase of foreign tobacco. On September 13, 1995, the President of the United States declared a tariff rate quota ("TRQ") on certain imported tobacco, imposing extremely high tariffs on imports of flue- cured and hurley tobacco in excess of certain levels. Management believes that the TRQ levels are sufficiently high to allow Liggett to operate without material disruption to its business. However, 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 could have an unfavorable impact on Liggett's operations during 1996. 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. 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 ("R JR"), Brown & Williamson Tobacco Corporation (which acquired American Tobacco Company, Inc. in April 1994) ("B&W"); 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. According to the Maxwell Report, Philip Morris' and RJR's sales together accounted for approximately 71.8% of the domestic cigarette market in 1995. Liggett's domestic shipments of approximately 10.52 billion cigarettes during 1995 accounted for 2.2% of the approximately 481.10 billion cigarettes shipped in the United States during such year, compared to 11.32 billion cigarettes (2.3%) and 11.17 billion cigarettes (2.4%) during 1994 and 1993, respectively. Prior to 1994, industry-wide shipments of cigarettes in the United States had steadily declined at an average annual rate of 2% to 3%. Although the Maxwell Report estimates that domestic industry-wide shipments increased by approximately 6.2% in 1994, such shipments declined by 1.7% during 1995. 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 R JR 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. Prior to 1993 there had been substantial regular price increases by all cigarette manufacturers, culminating in premium list prices in excess of $14.00 per carton. These increases widened the gap between prices of the premium and discount segments of the market, culminating in a price gap of $7.00 per carton in July 1993, at which time Philip Morris substantially reduced the price of its premium brands to 1989-1990 levels, forcing other cigarette manufacturers including Liggett to do likewise. This price decrease narrowed the gap between prices of the premium and discount segments to approximately 25%, which has had an effect on relative volumes. Liggett is more reliant upon sales in the discount segment of the market, relative to the premium segment, than its competitors. Since the July 1993 price decrease, list prices at all tiers have again increased and the relative volume of premium cigarettes has been increasing. 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. Government Regulation. Reports with respect to the alleged harmful physical effects associated with 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. 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, which became effective October 12, 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 4

statements, in lieu of the prior warning notice, 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 of these statements are also required, on a rotating basis, on billboard advertisements. By a limited eligibility amendment to the Comprehensive Smoking Education Act 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 manufacturers, 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 March and April 1994, the Health and the Environmental Subcommittee of the Energy and Commerce Committee of the House of Representatives held hearings regarding nicotine in cigarettes. On March 25, 1994, Commissioner David A. Kessler of the Food and Drug Administration (the "FDA") gave testimony as to the potential regulation of nicotine under the Food, Drug and Cosmetic Act, and the potential for jurisdiction over the regulation of cigarettes to be accorded to the FDA. In response to Commissioner Kessler's allegations about manipulation of nicotine by cigarette manufacturers, the chief executive of each of the major cigarette manufacturers, including Liggett, testified before the subcommittee on April 14, 1994, denying Commissioner Kessler's claims. An FDA advisory panel has stated that it believes nicotine is addictive. On August 10, 1995, the FDA filed in the Federal Register a Notice of Proposed Rule- Making (the "Proposed Rule-Making") which would classify tobacco as a drug, assert jurisdiction by the FDA over the manufacture and marketing of tobacco products and impose restrictions on the sale, advertising and promotion of tobacco products. The FDA's stated objective and focus for its initiative is to limit access to cigarettes by minors by measures beyond the restrictions either mandated by existing federal, state and local laws or voluntarily implemented by major manufacturers in the industry. Liggett and the other major cigarette manufacturers in the industry responded by filing a civil action in the United States District Court for the Middle District of North Carolina challenging the legal authority of the FDA to assert such jurisdiction. In addition thereto, Liggett and the other four major cigarette manufacturers, as well as others, have filed comments in opposition to the Proposed Rule-Making. Management is unable to predict whether such a classification will be made. Management is also unable to predict the effects of such a classification, were it to occur, or of such regulations, if implemented, on Liggett's operations, but such actions could have an unfavorable impact thereon. On March 12, 1996, Liggett, together with Brooke, entered into an agreement to settle the Castano class action tobacco litigation, and on March 15, 1996, Liggett, together with Brooke, entered into an agreement with the Attorneys General of the State of West Virginia, State of Florida, State of Mississippi, Commonwealth of Massachusetts and the State of Louisiana to settle certain actions brought against Liggett by such states. In these two settlements, Liggett and Brooke, while neither consenting to FDA jurisdiction nor waiving their objections thereto, agreed to withdraw their objections and opposition to the Proposed Rule-Making and to phase in compliance with certain of the proposed interim FDA regulations. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments in the Cigarette

Industry - Legislation and Litigation" for discussions of the Castano and the Attorneys General settlements. The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required 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 "marketing assessment" based upon price differentials between foreign and domestic tobacco and, under certain circumstances, make purchases of domestic tobacco from the tobacco stabilization cooperatives organized by the United States government. OBRA was repealed retroactively (as of December 31, 1994) coincident in time with the issuance of a Presidential proclamation, effective September 13, 1995, imposing tariffs on imported tobacco in excess of certain quotas. On February 14, 1995, Liggett filed with the United States Department of Agriculture (the "USDA") its certification as to usage of domestic and imported tobaccos during 1994, and an audit was conducted by the USDA to verify this certification. Liggett has received from the USDA the results of the audit, which states that Liggett did not satisfy the 75% domestic tobacco usage requirement for 1994 and therefore may be subject to a marketing assessment estimated at approximately $5.5 million, which amount is disputed by Liggett. It is the understanding of Liggett that the levels of domestic tobacco inventories currently on hand at the tobacco stabilization organizations are below reserve stock levels, and for such reason, Liggett is of the opinion that it will not be obligated to make such purchases of domestic tobacco from the tobacco stabilization cooperatives. Liggett is currently engaged in negotiations with the USDA in an effort to resolve this matter on satisfactory terms. On September 13, 1995, the President of the United States, after negotiations with the affected countries, declared a TRQ on certain imported tobacco, imposing extremely high tariffs on imports of flue-cured and hurley tobacco in excess of certain leve~s which levels vary from country to country. Oriental tobacco is exempt from the quota, as well as all tobacco originating from Canada, Mexico or Israel. Management believes that the TRQ levels are sufficiently high to allow Liggett to operate without material disruption to its business. On February 20, 1996, the United States Trade Representative issued an "advance notice of rule making" concerning how tobaccos imported under the 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. Liggett believes it is unlikely that an end-user licensing system will be adopted because it would likely lead to another GATT proceeding. The end-user licensing system has not been authorized by legislation and it could create significant problems for United States exports in other product markets. However, no assurances can be made that an end-user licensing system will not be adopted. In September 1991, the Occupational Safety and Health Administration ("OSHA") issued a Request for Information relating to indoor air quality, including environmental tobacco smoke ("ETS"), in occupational settings. OSHA announced in March 1994 that it would commence formal rulemaking during the year. Hearings were completed during 1995 but it is not anticipated that any regulation will issue prior to the end of 1996. 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 (the "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. VVhatever the outcome of this litigation, issuance of the report may encourage efforts to limit smoking in public areas. The State of Florida enacted legislation, effective July 1, 1994, allowing certain state authorities or entities to commence litigation seeking recovery of certain Medicaid payments made on behalf of Medicaid recipients as a result of diseases (including, but not limited to, diseases allegedly caused by cigarette smoking) allegedly caused by liable third parties (including, but not limited to, the tobacco industry). This statute purportedly abrogates certain defenses typically available to defendants. This legislation would impose on the tobacco industry, if ultimate liability of the industry is established in litigation, liability based upon market share for such payments made as a result of such smoking-related diseases. Although a suit has been commenced to challenge the constitutionality of the Florida legislation, no assurance can be given that it will be successful. On May 6, 1995, the Florida legislature voted in favor of a bill to repeal this legislation, but the Governor of Florida vetoed this repealer bill. On March 13, 1996, the Florida legislature considered taking certain action to override the veto of the repealer bill if the requisite vote could be attained, but decided not to take formal action when it was determined that it could not attain the requisite vote. Massachusetts has also recently enacted legislation authorizing lawsuits by the attorney general to recover certain medical assistance payments. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments in the Cigarette Industry - Legislation and Litigation" and Note 16 (Contingencies) to the Company's Consolidated Financial Statements for a discussion of such legislation and related litigation, and of Liggett's and Brooke's recent settlement with the Attorneys General of certain states covering certain of these lawsuits. All radio and television advertising of cigarettes has been prohibited by federal statute since 1971 and federal law now prohibits smoking aboard aircraft for domestic flights of six hours or less. The United States Interstate Commerce Commission has banned smoking on buses transporting passengers interstate. In addition, the United States Congress and a number of states and local government units have enacted or are considering legislation which is intended to discourage smoking through educational efforts or which imposes various restrictions or requirements relating to smoking including restrictions on public smoking. Certain employers have initiated programs restricting or eliminating smoking in the workplace. Other proposals previously presented to or currently before Congress and certain states and local government units include, but are not limited to, legislative efforts to further restrict or ban the advertising and promotion of cigarettes, to eliminate the income tax deductibility of expenses incurred for such advertising and promotion, to restrict or prohibit smoking in public buildings and other areas, to increase excise taxes, to require additional warnings on cigarette packaging and advertising, to ban vending machine sales, to eliminate the federal preemption defense in product liability actions, to place cigarettes under the regulatory jurisdiction of the FDA and to 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. 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 it not having significant 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. The price of cigarettes includes federal excise taxes at the rate of $12.00 per 1,000 cigarettes. A substantial excise tax increase could accelerate the trend away from smoking. 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 except as referred to above with respect to OBRA during 1994. Brooke (Overseas) Ltd. The Company is engaged in the manufacture and sale of cigarettes and the real estate development business in Russia through Liggett-Ducat Ltd. ("LDL"), in which BOL, at March 29, 1996, held a 68% equity interest. BOL is a wholly owned subsidiary of BGLS. In April 1996, BOL entered into a stock purchase agreement to acquire an additional 12% of the outstanding stock of LDL. See Notes 1 (Summary of Significant Accounting Policies) and 4 (Investment in Brooke (Overseas) Ltd.) to the Company's Consolidated Financial Statements. LDL, one of Russia's leading cigarette producers since 1892, manufactured and marketed 10.4 billion cigarettes in 1995. LDL produces some of the leading brands in the Russian market including Pegas, Prima and Novosti. The Company plans to build a new cigarette factory utilizing Western cigarette making technology with a capacity of 24 billion units per year. The new factory will produce both American and Russian brands of cigarettes. It is presently anticipated that the new factory will be operational by the end of 1997, although no assurance can be given that this will be the case. In addition to cigarette manufacturing, LDL is actively involved in the real estate development business in Moscow. LDL has a 98-year lease for 2.2 acres of land in downtown Moscow at the location of the current cigarette operations. LDL is developing a planned 546,500 square foot class-A American style mixed-use complex on the property in a three-phase program. In 1993, LDL successfully completed the initial phase of the program consisting of the construction and leasing of Ducat Place I, a 46,500 square foot class-A office building. LDL has leased the building to Citibank (on a triple net lease basis) for a five-year period, and prior to taking occupancy, Citibank paid LDL $5.4 million of advance rent for the first two years of the lease agreement. In June of.1995, Citibank paid LDL $6.25 million of advance rent for the remaining three years of the lease agreement. Citibank has subsequently subleased space in Ducat Place I to the European Bank for Reconstruction and Development and Morgan Stanley International. In August 1995, LDL commenced construction on its second building, Ducat Place II, a 150,000 square foot office building which is scheduled for completion during the first quarter of 1997. The third phase, Ducat Place Ill, is currently planned as a 350,000 square foot mixed-use complex. Construction is scheduled to begin in 1998.

Investment in New Valley New Valley is engaged, through its ownership of Ladenburg, Thalmann & Co. Inc. ("Ladenburg"), in the investment banking and brokerage business, through its New Valley Realty division, in the ownership and management of commercial real estate, 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 29, 1996, of (i) 394,975 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 Shares") (approximately 9.0% of the class) held directly by BGLS and (ii) 79,399,254 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 59.7% of the class) held by NV Holdings. See Note 2 (Investment in New Valley Corporation) to the Company's Consolidated Financial Statements. New Valley's Emergence from Bankruptcy Reorganization Proceedings On November 15, 1991, an involuntary petition seeking an order for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") was commenced against New Valley by certain of its bondholders. On March 31, 1993, New Valley consented to the entry of an order for relief under the Bankruptcy Code. On November 1, 1994, the United States Bankruptcy Court for the District of New Jersey entered an order confirming the First Amended Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan"), which Joint Plan became effective in January 1995. On January 18, 1995, New Valley emerged from bankruptcy reorganization proceedings and completed substantially all distributions to creditors under its Joint Plan. Dispositions Pursuant to the Joint Plan 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 tradenames 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")o 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 in cash, subject to certain adjustments. This transaction was effective as of October 1, 1995.

Acquisitions by New Valley 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, 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 unden~riting of equity and debt financing, private debt and equity financing, and rendering appraisals, financial evaluations and fairness opinions. Ladenburg's listed securities and over-the-counter trading areas include trading a variety of financial instruments in both national and international markets. Ladenburg's client services and institutional sales departments serve accounts worldwide and its asset management area provides investment management and financial planning services to 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. Since the acquisition of Ladenburg, through March 29, 1996 New Valley has contributed approximately $34 million to the capital of Ladenburg Group. See Note 2 (Acquisition) to New Valley's Consolidated Financial Statements attached to this report. 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. The Office Buildings and Shopping Centers are being operated through New Valley's recently established division, New Valley Realty. 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 is an affiliate of Bellemead Development Corporation, which is 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. 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 Ill, 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 Real Estate Investment Fund, L.P. ("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 31, 1996, the aggregate occupancy of the Shopping Centers was approximately 93%. 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 was paid for the Shopping Centers 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 lender and are referred to collectively as the "Properties"). See Note 21 (Subsequent Events) to New Valley's Consolidated Financial Statements attached to this report. 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. As of March 21, 1996, an affiliate of Apollo and the Partnerships was the holder of debt securities of BGLS. Thinking Machines Corporation. On January 11, 1996, Ladenburg, Thalmann Capital Corp. ("Ladenburg Capital"), the merchant banking subsidiary of Ladenburg Group, in connection with the First Amended Joint Plan of Reorganization (the "Plan") of Thinking Machines Corporation ("Thinking Machines"), a developer and marketer of parallel software for high-end and networked computer systems, made a $10.6 million convertible bridge loan (the "Loan") to TMCA Corp. ("TMCA"), an entity formed to invest the Loan proceeds (net of certain expenses) in Thinking Machines° On February 8, 1996, the date of confirmation of the Plan, Thinking Machines emerged from bankruptcy and pursuant to the Plan, TMCA merged into Thinking Machines thereby converting the Loan into a controlling interest in a partnership which holds approximately 61% of the outstanding common stock of Thinking Machines. Thinking Machines will use the Loan proceeds to help fund its advanced product development and marketing. See Note 21 (Subsequent Events) to New Valley's Consolidated Financial Statements attached to this report. R JR Nabisco Holdings Corp. In August, 1995, New Valley filed a notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the acquisition of up to 15% of the voting securities of R JR Nabisco Holdings Corp..("R JR Holdings") in the open market. On August 29, 1995, the waiting period under such notification expired. As of March 29, 1996, New Valley held approximately 5.2 million shares of R JR Holdings common stock, representing approximately 1.9% of R JR Holdings' outstanding common stock. As of March 29, 1996, New Valley's cost for such shares and the amount of related margin loan financing were approximately $158 million and approximately $83.5 million, respectively. For additional information concerning New Valley's investment in R JR Holdings and the Company's and BGLS's involvement with respect thereto and related matters, see "Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments - Certain Matters Relating to R JR Holdings". See Notes 5 (Investment Securities) and 21 (Subsequent Events) to New Valley's Consolidated Financial Statements attached to this report. 11

Miscellaneous Investments. On February 1, 1995, New Valley acquired, for $12.7 million, a 28.2% equity interest in a holding company that owned a 16.5% voting interest in Empresa Brasileira de Aeronautica, S.A., a Brazilian airplane manufacturer. In addition, as of December 31, 1995, New Valley had investments in limited partnerships of $18.7 million and an equity investment in a software company of $1.0 million. The principal business of such partnerships is investing in a variety of securities. New Valley is in the process of liquidating its interest in certain of the limited partnerships. During the fourth quarter of 1995, New Valley recognized an impairment loss of approximately $12 million on certain of its investments. See Note 6 (Long-Term Investments) to New Valley's Consolidated Financial Statements attached to this report. 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. The Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and regulations thereunder require the registration of, and impose various substantive restrictions on, companies that engage primarily in the business of investing, reinvesting or trading in securities or engage in the business of investing, reinvesting, owning, holding or trading in securities and own or propose to acquire "investment securities" having a "value" in excess of 40% of a company's "total assets" (exclusive of Government securities and cash items) on an unconsolidated basis. Following dispositions of its then operating businesses pursuant to the Joint Plan, New Valley was above this threshold and relied on the one-year exemption from registration under the Investment Company Act provided by Rule 3a-2 thereunder, which exemption expired on January 18, 1996. Prior to such date, through New Valley's acquisition of the investment banking and brokerage business of Ladenburg and its acquisition of the Office Buildings and Shopping Centers (see "Acquisitions by New Valley - Ladenburg, Thalmann & Co. Inc." and " New Valley Realty Division", above), New Valley was engaged primarily in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities, and the value of its investment securities was below the 40% threshold. Under the Investment Company Act, New Valley is required to determine the value of its total assets for purposes of the 40% threshold based on "market" or "fair" values, depending on the nature of the asset, at the end of the last preceding fiscal quarter and based on cost for assets acquired since that date. However, no assurance can be given that New Valley will continue to operate below the 40% threshold, and accordingly, there may be risk that New Valley will become subject to the Investment Company Act. If New Valley were required to register under the Investment Company Act, it would be subject to a number of material restrictions on its operations, capital structure and management, including without limitation its ability to enter into transactions with affiliates. If New Valley were required to register under the Investment Company Act, the Company may be in violation of the Investment Company Act and may be adversely affected by the restrictions of the Investment Company Act. In addition, registration under the Investment Company Act by New Valley would constitute a violation under the Indenture (as defined below). Corn Products The Company is involved in the microfilm products distribution business through Com Products, a wholly owned subsidiary of BGLS. Com Products is a distributor of microfilm and related supply products which are utilized in computer and camera recording systems. These products are used to record, store and retrieve business records. Com Products has customers in the banking, financial, insurance, and aerospace industries, among others, and services various government accounts. 12

The Series A/Series B Exchange Offer and Related Matters On January 30, 1996, BGLS exchanged (i) its 15.75% Series A Senior Secured Notes due 2001 (the "Series A Notes") for all of its outstanding 13.75% Series 2 Senior Secured Notes due 1997 and (ii) its 15.75% Series B Senior Secured Notes due 2001 (the "Series B Notes") for substantially all of its outstanding 14.500% Subordinated Debentures due 1998. Pursuant to a registered exchange offer under the Securities Act of 1933, as amended, all of the Series A Notes were exchanged for an equal principal amount of registered Series B Notes. The Series A Notes and the Series B Notes were issued under an indenture dated as of January 1, 1996 (the "Indenture") between BGLS, as issuer, and Fleet National Bank of Massachusetts, as trustee. As of March 29, 1996, approximately $233,000,000 of the Series B Notes were outstanding. See Note 8 (Notes Payable, Long-Term Debt and Other Obligations) to the Company's Consolidated Financial Statements. Certain Restrictions under the Indenture. The Indenture contains, among other things, restrictions on BGLS' ability to incur indebtedness, make certain payments and investments, and enter into certain transactions with affiliates. See Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Capital Resources and Liquidity". For further information concerning restrictions on BGLS under the Indenture, reference is made to the Indenture incorporated as an exhibit to this report and incorporated by reference herein. 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. Certain Dispositions and Other Matters Through 1994, the Company held a majority interest in MAI Systems Corporation ("MAI"). This interest was distributed in the form of a special dividend to the Company's common stockholders on February 13, 1995. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Introduction". The Company also previously owned SkyBox International, Inc. ("SkyBox"). Most of this interest was distributed to the Company's common stockholders in the form of a special dividend on October 6, 1993. On March 27, 1995, the Company divested its remaining indirectly held shares of SkyBox common stock through open market sales. On March 29, 1995, SkyBox redeemed the Company's remaining indirect holdings of its preferred stock. See Note 5 (Discontinued Operations) to the Company's Consolidated Financial Statements. The Company and BGLS are presently considering a reorganization in which, among other things, all of the assets of BGLS other than Liggett, would be transferred to a newly formed holding company that would hold all of the capital stock of the Company ("Holdco"). Holdco would retain an indirect interest in Liggett through its ownership of the Company. Employees At April 12, 1996, the Company and its consolidated subsidiaries had approximately 1,741 full-time employees, of whom approximately 637 were employed by Liggett and approximately 1,050 were employed by LDL. Additionally, Liggett employs approximately 376 people on a part- time basis. Approximately 36% of the Company's (including its consolidated subsidiaries) employees are hourly employees and are represented by unions. The Company and its consolidated subsidiaries have not experienced any significant work stoppages since 1977, and the Company believes that relations with its employees and their unions are satisfactory. 13

Item 2. Properties The Company's 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 the Company and New Valley pursuant to an expense-sharing arrangement. 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. The principal properties owned or leased by Liggett are as follows: Type Location Owned Approximate or Total Square Leased Footage Corporate Office/ Manufacturing Complex Warehouse Storage Facilities Distribution Center Durham, NC Owned 1,350,000 Durham, NC Owned 203,000 Danville, VA Owned 578,000 Durham, NC Leased 240,000 Liggett's Durhaml North Carolina complex consists of 16 major structures over approximately 25 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 and subleases the remaining 60% to a third party. Liggett also leases excess space in its research facility and corporate offices to third parties. On April 9, 1996 Liggett executed a definitive agreement with the County of Durham for the sale by Liggett to the County of Durham of certain surplus realty, for a sale price of $4.3 million. It is anticipated that closing will occur on or before May 31, 1996. LDL has a 98-year lease for 2.2 acres of land in downtown Moscow at the location of the current cigarette operations. In 1993, LDL leased Ducat Place 1, a 46,500 square foot class-A office building to Citibank (on a triple net lease basis) for a five-year period and has received advance rental payments for the full five-year term. In August 1995, LDL commenced construction on its second building Ducat Place II, a 150,000 square foot office building which is scheduled for completion during the first quarter of 1997. The third phase, Ducat Place III, is currently planned as a 350,000 square foot mixed-use complex. Construction is scheduled to begin in 1998. 14

Item 3. Legal Proceedings Reference is made to Note 16 (Contingencies) of the Company's Consolidated Financial Statements, set forth on pages C-35 through C-43 of this report, which contains a description of certain legal proceedings to which the Company or its subsidiaries is a party and certain related matters. Item 4. Submission of Matters to a Vote of Security-Holders; Executive Officers of the Registrant During the last quarter of 1995 no matter was submitted to stockholders for their vote or approval, through the solicitation of proxies or otherwise. Executive Officers of the Registrant The executive officers of the Company, their respective ages, and the positions held with the Company, are listed below. Each of the executive officers of the Company serves until the election and qualification of his successor or until his death, resignation or removal by the Board of Directors of the Company. Name Ag~ Bennett S. LeBow 58 Position Chairman of the Board, President and Chief Executive Officer Year individual became an executive officer 1990 Gerald E. Sauter 52 Vice President, Chief 1993 Financial Officer and Secretary Rouben V. Chakaiian 60 Chairman of the Board of Liggett 1993 Bennett S. LeBow (the "Chairman") 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. Each of the public companies have been, directly or indirectly, operating companies. The Chairman 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 subsequent to the United States Bankruptcy Court for the District of New Jersey's confirmation of New Valley's First Amended Joint Chapter 11 Plan of Reorganization, as amended, on November 1, 1994. He has been Chairman of the Board, President and Chief Executive Officer of NV Holdings, 15

an indirect wholly owned subsidiary of the Company which holds certain of the Company equity interest in New Valley, since September 1994. He was a director of MAI Systems Corporation ("MAI"), the Company's former indirect majority-owned subsidiary, of which the Company distributed its entire 65.2% equity interest in MAI (comprised of common stock) to the Company's stockholders in the form of a special dividend on or about February 13, 1995, from September 1984 to October 1995, its 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, the United States Bankruptcy Court for the District of Delaware confirmed MAI's First Amended Joint Chapter 11 Plan of Reorganization, and in November 1993 it emerged from bankruptcy reorganization proceedings. MAI is engaged in the development, sale and service of a variety of computer and software products. From June 1990 until August 1994, he was Chairman of the Board and/or a director of SkyBox International Inc. ("SkyBox"), the Company's former indirect wholly-owned subsidiary, of which the Company distributed approximately 81.5% of SkyBox's outstanding shares of common stock to the Company's stockholders in the form of a special dividend on or about October 6, 1993. SkyBox is a producer, marketer and distributor of collectible sports and trading cards and related products. Gerald E. Sauter has been Vice President and Chief Financial Officer of the Company since April 1993; Vice President and Chief Financial Officer of BGLS since April 1993; and currently holds various positions with certain BGLS subsidiaries, including Vice President and Treasurer of Eve Holdings, Inc., a wholly-owned subsidiary of Liggett ("Eve"), since October 1992 and a director of Eve since December 1992. Mr. Sauter has been Vice President, Treasurer and Chief Financial Officer of New Valley since November 1994 and currently holds various positions with New Valley's subsidiaries. Rouben V. Chakalian has served as a board member of Liggett since May 1993 and as Liggett's President and Chief Executive Officer from June 1994 until March 1996. Effective April 1, 1996, Mr. Chakalian assumed the title of Chairman of the Board of Liggett. Prior to June 1994, Mr. Chakalian had served as a consultant to Liggett. He assumed these duties after serving as one of three interim co-Chief Executive Officers of Liggett from March 1993 to May 1993. Mr. Chakalian was employed by R JR Holdings in various executive capacities from 1972 to 1987, including Executive Vice President of R.J. Reynolds Tobacco International. He served as a Senior Vice President for the Fine Wines division of Heublein, Inc., a subsidiary of R JR Holdings, between 1987 and 1989. Mr. Chakalian was Associate Dean of the School of Business at San Francisco State in 1989 and 1990. He served as a consultant exclusively to Liggett between January 1991 and January 1993 during which time he advised the company on expanding its international business segment. Mr. Chakalian also serves as a member of the Board of Directors of LDL. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's common stock, $.10 par value per share (the "Common Stock"), is listed and traded on the New York Stock Exchange ("NYSE") under the symbol "BGL"o The high and low sale prices for a share of Common Stock on the NYSE, as reported by the NYSE, for each fiscal quarter of 1995 and 1994 were as follows (in dollars): 16

Year High Low 1995: First Quarter 4 i/4 3 15/64 Second Quarter 5 1/2 3 1/8 Third Quarter 11 3/8 4 3/8 Fourth Quarter 9 7/8 6 5/8 1994: First Quarter 2 1/4 1 1/2 Second Quarter 2 1 1/4 Third Quarter 5 3/8 1 3/8 Fourth Quarter 4 1/2 2 5/8 Holders At April 12, 1996, there were 380 holders of record of the Common Stock. Dividends During 1995, the Company declared and paid regular quarterly cash dividends of $.075 per share on the 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. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity" and Note 8 (Notes Payable, Long-Term Debt and Other Obligations) to the Company's Consolidated Financial Statements. No cash dividends were paid on the Common Stock during 1994. Item 6. Selected Financial Data See "Consolidated Five-Year Financial Summary" on page A-1 of this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth on pages B-1 through B-16 of this report. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements and Notes thereto, together with the report thereon of Coopers & Lybrand L.L.P. ("Coopers & Lybrand") dated April 15, 1996, are set forth on pages C-1 through C-49 and quarterly financial results on page C-48 of this report. _ Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 17

PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information, as of April 24, 1996, with respect to each person who is a director of the Company. Each director is a citizen of the United States. For information concerning Bennett S. LeBow and the other executive officers of the Company, see Item 4, "Submission of Matters to a Vote of Security-Holders; Executive Officers of the Registrant." Name and Address Age Principal Occupation Bennett S. LeBow Brooke Group Ltd. 100 S.E. Second Street Miami, FL 33131 58 Chairman of the Board, President and Chief Executive Officer Robert J. Eide Aegis Capital Corp. 70 E. Sunrise Highway Valley Stream, NY 11581 43 Secretary and Treasurer, Aegis Capital Corp. Jeffrey S. Podell Newsote, Inc. 26 Jefferson Street Passaic, NJ 07055 55 Chairman of the Board and President, Newsote, Inc. Each director is elected annually and serves until the next annual meeting of stockholders or until his successor is duly elected and qualified. Business Experience of Directors (other than executive officers) 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, Secretary and Treasurer of Aegis Capital Corp., a registered broker-dealer, since before 1988 and President of Aegis Planning Inc., a real estate investment company, since before 1988. Mr. Eide also serves as a director of Nathan's Famous, Inc., a restaurant chain. Mr. Eide served as a director of V-I'X Electronics Corp., a wire and cable distributor, from September 1991 until November 1995 and served as Chairman of the Board thereof from April 1994 until November 1995. Mr. Eide has also been a stockholder of a corporate general partner of a limited partnership organized to acquire and operate real estate property. The limited partnership filed for protection under the Federal bankruptcy laws in 1991. 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., the parent of Pantasote, Inc., a former manufacturer of plastic products, since 1989. Mr. Podell was a director of V'i'X Electronics Corp. from 1991 until 1995, and was a registered representative at Aegis Capital Corp. from before 1988 to 1992. 18

Compliance with Section 16(a)of the Exchange Act Section 16(a) of the Exchange Act requires directors and executive officers of the Company, as well as persons who own more than 10% of a registered class of the Company's equity securities (the "Reporting Persons"), to file reports of initial beneficial ownership and changes in beneficial ownership on Forms 3, 4 and 5 with the SEC and the New York Stock Exchange. Such Reporting Persons are also required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and representations that no other reports were required, during and with respect to the fiscal year ended December 31, 1995, all Reporting Persons have timely complied with all filing requirements applicable to them, except Mr. Chakalian will file late his initial statement of beneficial ownership of securities on Form 3 after being designated an executive officer by the Company. Item 11. 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, 1995, the Company's (i) Chief Executive Officer and (ii) the other four most highly compensated executive officers of the Company whose cash compensation exceeded $100,000 (of which there are only two whose compensation exceeds the threshold amount) (collectively, the "named executive officers"). SUMMARY COMPENSATION TABLE Annual Compensation Name and Other Annual All Other Principal Position Year Salary Bonus Compensation Comperisation ($) ($) ($) ($) Bennett S. LeBow 1995 1,187,500 593,750 118,750(3) -- Chairman of the Board, 1994 950,000 475,000 95,000(3) - President and Chief 1993 950,000 475,000 95,000(3) 4,497(4) Executive Officer Gerald E. Sauter 1995 278,534(5) ...... Vice President, Chief 1994 229,167 80,000 -- 12,040(~) Financial Officer 1993 264,063(6) 50,000 -- 4,497(4) and Treasurer Rouben V. Chakalian(8) 1995 432,000 285,120 - Chairman of the Board, 1994 252,000 302,400 250,000(9) President and Chief 1993 ..... Executive Officer of Liggett 19

(1) (2) (3) (4) (5) (6) (7) (9) 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. No restricted stock or stock options were granted in 1993, 1994 or 1995 to the named executive officers. Includes an annual payment in lieu of certain other executive benefits. Represents employer contributions under profit sharing (i.e., 401(k)) and similar plans maintained by the Company. In 1995, all of Mr. Sauter's salary was paid by New Valley, 25% (or $69,633) of which was subsequently reimbursed to New Valley by the Company. The table reflects 100% of Mr. Sauter's 1995 salary. Includes $26,562 relating to a salary increase that was declared in May 1994, and retroactively effective as of April 1993. Includes life insurance premiums paid by the Company. Effective April 1, 1996, Mr. Chakalian assumed the title of Chairman of the Board of Liggett. Represents payments made pursuant to a consulting agreement between Mr. Chakalian and Liggett. See "Employment Agreements". 2O

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 also is reimbursed for reasonable out-of-pocket expenses incurred in serving on the Board of the Company and/or BGLS. In January 1995, each outside director of the Company also received an award of 10,000 shares of the Company's Common Stock for services as a director during 1994. Employment Agreements The Chairman 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, 1996, his annual base salary was $1,484,375. He is entitled to a minimum annual bonus of $742,188, payable quarterly, in lieu of participation in Company stock incentive plans. He is also entitled to 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. Following termination of his employment without cause (as defined), he would continue to receive his then current base salary and minimum 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 minimum bonus. In connection with the settlement of a stockholder lawsuit against the Company and the Chairman, the Chairman has agreed that for a period of four years beginning January 1, 1994, his employment contract shall be adjusted on an annual basis on such terms as are established by a compensation committee consisting entirely of independent directors. In addition, the Chairman's salary and bonus may not be increased from one year to the next during the same four-year period 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 is 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 1993. Rouben V. Chakalian, Chairman of the Board of Directors and, prior to April 1, 1996, President and Chief Executive Officer of Liggett, is a party to an employment agreement with Liggett, dated and effective as of June 1, 1994. The agreement, which terminates on May 31, 1996, has been supplemented by a letter agreement dated January 9, 1996. Mr. Chakalian's annual base salary through May 31, 1996 is $432,000 and thereafter is at a rate of $240,000 per annum (plus $2,000 per day if his presence is required at certain locations over six days per month). He is also entitled to receive a 1996 target annual bonus of 60% of his base salary, prorated for the first five months of 1996, based upon the achievement of specified EBIT (earnings before interest and taxes) targets, and, effective January 1997, his bonus target will be 25% of annual salary. In case of termination, Mr. Chakalian is covered by Liggett's executive termination policy which provides for 24 months of termination pay at the current salary of an executive, if the executive officer's employment is terminated without cause (as defined). The definition of "cause" in such executive termination pay policy is willful and continued failure to perform employment duties or obligations, willful misconduct, material breach of any provision in the agreement, fraud or conviction of any felony. 21

Prior to June 1994, Mr. Chakalian served as a consultant to the Company advising on both the Company's international and domestic operations. While acting as a consultant, and pursuant to a letter agreement dated June 15, 1993, Mr. Chakalian received payments of $250,000 and $196,000 for consulting services rendered during 1994 and 1993, respectively. Compensation Committee Interlocks and Insider Participation During 1995, the Chairman and Messrs. Eide 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 of and serves as the Secretary and Treasurer of Aegis Capital Corp. ("ACC"), a registered broker-dealer that has performed services for the Company and its affiliates since before January 1, 1995. During 1995, ACC received commissions and other income in the aggregate amount of $584,616 from the Company and/or its affiliates. In connection with the acquisition of certain office buildings by New Valley on January 10, 1996, Mr. Eide received a commission of $220,000 from the seller. The Chairman is a director of Liggett. He is Chairman of the Board and Chief Executive Officer of New Valley. The Chairman is a director of BGLS and NV Holdings. 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 December31, 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 exce~s 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 eady 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 t~nefits 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 folk,wing retirement. As of December 31, 1993, the accrual of benefits under the plan for Ligge~ empb/ees was frozen. As of December 31, 1995, none of the named e/.ecutive officers were eligible to receive any benefits under the Retirement Plan. Under certain circumstances, the amount of r~rement benefit payable under the Retirement Plan to certain employees may be limited by ~e federal tax laws. Any Retirement Plan benefit lost due to such a limitation will be made up by BGLS through a non-qualified supplemental retirement benefit plan. BGLS has accrued, but r~ fund~, amounts to pay benefits under this supplemental plan.

Stock Option Grants and Stock Option Exercises There were no stock options granted to or exercised by any of the named executive officers during 1995. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of April 24, 1996, the number and percentage of shares of the Company's Common Stock, the only class of the Company's voting securities, beneficially owned by (i) each person known to the Company to own beneficially more than five percent of the Common Stock, (ii) each director of the Company, (iii) each named executive officer 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 Beneficial Owner Bennett S. LeBow (1) BSL Partners (2) LeBow Limited Partnership (~) LeBow Family Partnership 1993, Ltd. Richard S. Ressler(~) Orchard Capital Corporation 1999 Avenue of the Stars Los Angeles, CA 90067 Robert J. Eide (6) Aegis Capital Corp. 70 East Sunrise Highway Valley Stream, NY 11581 Jeffrey S. Podell (6) Newsote, Inc. 26 Jefferson Street Passaic, NJ 07055 Gerald E. Sauter (z) Number of Percent of Shares Class 10,451,208 56.5% 4,844,156 26.2% 1,681,715 9.1% 999,999 5.4% 1,999,999 10.8% 10,000 (*) 10,000 (*) Rouben V. Chakalian (7) Liggett Group Inc. 700 West Main Street Durham, NC 27702 All directors and executive officers as a group (5 persons) 10,471,208 56.6% (*) The percentage of shares beneficially owned does not exceed 1% of the Common Stock. 23

(1) Includes Common Stock held by BSL Partners, a New York general partnership ("BSL Partners"), LeBow Limited Partnership, a Delaware limited partnership ("LLP"), and LeBow Family Partnership 1993, Ltd., a Florida limited partnership ("LFP"). In January 1996, 2,874,129 of the shares of Common Stock beneficially owned by Mr. LeBow (together with shares of certain other affiliated holders specified below) were pledged, among other securities, in favor of a financial institution (the "1996 Pledge"). (2) Bennett S. LeBow (the "Chairman") owns an 80% interest in BSL Partners and the remaining interest is owned by LLP. Pursuant to the 1996 Pledge, 4,844,156 shares of Common Stock owned by BSL Partners were pledged. (3) The Chairman is the general partner of LLP with a 99.99% interest. In 1990, 1,681,715 shares of Common Stock owned by LLP were pledged to secure its obligation to make certain payments to the Company on account of a former executive's outstanding indebtedness of $8,677,000, due in 1997. In May 1994, LLP paid $3,200,000 in partial satisfaction of the obligation. In consideration thereof, the Company released 1,281,715 of the pledged shares. Pursuant to the 1996 Pledge, these 1,281,715 shares of Common Stock owned by LLP were pledged. (4) The Chairman is the general partner and a limited partner of LFP, and trusts, for the benefit of the Chairman and certain family members, hold the remaining partnership interests, (5) Based upon Amendment No. 4 dated November 16, 1994, to a Schedule 13D filed by the named individual. (6) The named individual is a director of the Company. (7) The named individual is an executive officer of the Company. In addition, by virtue of his controlling interest in the Company, the Chairman might 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 the Chairman 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. Item 13. Certain Relationships and Related Transactions On January 25, 1995, the Company entered into a Non-qualified Stock Option Agreement (the "Agreement") with a consultant who serves as President and a director of New Valley pursuant to which it granted such consultant non-qualified stock options to purchase 500,000 shares of the Company's restricted Common Stock at an exercise price of $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. Pursuant to the Agreement, Common Stock dividend equivalents are paid on each 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. Effective July 1, 1990, a former executive transferred all of his equity in the Company to the Chairman and resigned from substantially all of his positions with the Company and its 24

affiliates. In consideration for this transfer, LLP, a partnership controlled by the Chairman, agreed, among other things, to make certain payments to the Company on account of the former executive's outstanding indebtedness of $8,677,000. In connection with this transaction, LLP pledged 1,681,715 of the shares it held of Common Stock to secure its obligation. In May 1994, LLP paid $3,200,000 in partial satisfaction of the obligation. In consideration thereof, the Company released 1,281,715 of the pledged shares. During 1995, Orchard Capital Corporation, an affiliate of Richard Ressler, the beneficial owner of 10.8% of the Company's common stock and a director of New Valley, served as a consultant to the Company and its subsidiaries and received consulting fees of $270,000. During 1995, the Company and New Valley entered into an expense sharing agreement whereby New Valley agreed to reimburse the Company for its portion of certain operating expenses, rent and utilization of personnel. Expense reimbursements amounted to $571,000 for the year ended December 31, 1995. For information concerning certain agreements and transactions between the Company, BGLS and New Valley relating to R JR Nabisco Holdings Corp., see Note 3 (R JR Nabisco Holdings Corp.) and Note 17 (Related Party Transactions) to the Company's Consolidated Financial Statements. See, also, Item 11, "Executive Compensation - Compensation Committee Interlocks and Insider Participation." PART IV Item t4. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Index to 1995 Consolidated Financial Statements: The Company's Consolidated Financial Statements and the Notes thereto, together with the report thereon of Coopers & Lybrand dated April 15, 1996, appears on pages C-1 through C- 49 of this report. Financial statement schedules not included in this report have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto. (a)(2) Financial Statement Schedules: Schedule II -Valuation and Qualifying Accounts ................................................. Page C-49 25

(a)(3) Exhibits (a) The following is a list of exhibits filed herewith as part of the report on Form 10-K: INDEX OF EXHIBITS Exhibit No, Description * 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). * 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). * 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). * 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). * 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). * 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's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33-80593). 26

Exhibit No. * 4.2 * 4.3 * 4.4 * 4.5 * 4.6 * 4.7 * 4.8 * 4.9 Description 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's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33-80593). 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's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33- 80593). 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's Registration Statement on Form $4 dated December 19, 1995, Commission File Number 33- 80593). Indenture, dated as of September 30, 1994, between BGLS and Shawmut Bank, N.A. ("Shawmut"), as Trustee, relating to the 13.75% Series 2 Senior Secured Notes due 1995 (the "Series 2 Notes"), including the form of Series 2 Note (the "Series 2 Indenture") (incorporated by reference to exhibit 4(ii) in the Company's Form 8-K dated September 2, 1994, Commission File Number 1-5759). Pledge Agreement, dated as of September 30, 1994, between BGLS and Shawmut, as Trustee under the Series 2 Indenture (incorporated by reference to exhibit 10(ae) in the Company's Form 8-K dated September 2,1994, Commission File Number 1-5759). Indenture, dated April 1, 1988, between BGLS and First Trust National Association ("First Trust"), as Trustee, relating to the Subordinated Debentures (the "14.5% Debenture Indenture") (incorporated by reference to exhibit 4(ff) in the Company's Form 10-Q for the quarter ended September 30, 1990, Commission File Number 1-5759). First Supplemental Indenture, dated September 4, 1990, to the 14.5% Debenture Indenture, between BGLS and First Trust, as Trustee (incorporated by reference to exhibit 4(f) in the Company's Form 10-K for the year ended December 31, 1990, Commission File Number 1-5759). Second Supplemental Indenture, dated November 19, 1990, to the 14.5% Debenture Indenture, between BGLS and First Trust, as Trustee (incorporated by reference to exhibit 4(g) in the Company's Form 10-K for the year ended December 31, 1990, Commission File Number 1-5759). 27

Exhibit No. * 4.10 * 4.11 * 4.12 * 4.13 * 4.14 * 4.15 * 4.16 * 4.17 Descri.Dtion Third Supplemental Indenture, dated November 19, 1990, to the 14.5% Debenture Indenture, between BGLS and First Trust, as Trustee (incorporated by reference to exhibit 4(i) in the Company's Form 10-K for the year ended December 31, 1990, Commission File Number 1-5759). Fourth Supplemental Indenture, dated October 22, 1993, to the 14.5% Debenture Indenture, between BGLS and First Trust, as Trustee (incorporated by reference to exhibit 4(y) in the Company's Form 10-Q for the quarter ended September 30, 1993, Commission File Number 1-5759). Fifth Supplemental Indenture, dated January 18, 1995, to the 14.5% Debenture Indenture, between BGLS and First Trust, as Trustee (incorporated by reference to exhibit 4(e) in the Company's Form 10-K for the year ended December 31, 1994, Commission File Number 1-5759). Sixth Supplemental Indenture, dated as of January 26, 1996, to the 14.5% Debenture Indenture, between BGLS and First Trust, as Trustee (incorporated by reference to exhibit 4.13 in BGLS's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 1-5759). 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). 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). 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). 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). 28

Exhibit No. * 4.18 4.19 * 4.20 * 4.21 * 4.22 * 4.23 * 10.1 * 10.2 Description 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). 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). 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). 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(yy) in the Company's Form 10-K for the year ended December 31, 1933, Commission File No. 1-5759). First Amended Joint Chapter 11 Plan of Reorganization for New Valley Corporation ("New Valley") dated September 27, 1994, Notice of Modification to the First Amended Joint Chapter 11 Plan of Reorganization dated October 20, 1994 and Plan Amendment dated October 28, 1994, all 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 the Company's Form 10-K for the year ended December 31, 1993, Commission File No. 1-2493). 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 quarterly period ended September 30, 1994). Corporate Services Agreement, dated as of June 29, 1990 between Brooke and Liggett (incorporated by reference to exhibit 10.10 in BGLS's Registration Statement on Form S-1, Commission File No. 33-47482). Corporate Services Agreement, dated June 29, 1990 between the Company and Liggett (incorporated by reference to exhibit 10.'t I in Liggett's Registration Statement on Form S-1, Commission File No. 33-47482). 29

Exhibit No. * 10.3 * 10.4 * 10.5 * 10,6 * 10.7 * 10.8 * 10.9 * 10.10 * 10.11 Description Services Agreement, dated January 1, 1992 between the Company 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). First Amendment, dated as of November 30, 1993, between the Company and Liggett, to the Liggett Services Agreement (incorporated by reference to exhibit 10.6 of BGLS's Registration Statement on Form S-1, Commission File No. 33-93576). 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). Employment Agreement, dated June 1, 1994, between Liggett and Rouben V. Chakalian (incorporated by reference to exhibit 10.13 of Liggett's Registration Statement on Form S-1, Commission File No. 33-75224). Tax-Sharing Agreement, dated June 29, 1990, among the Company, Liggett and certain other entities (incorporated by reference to exhibit 10.12 in BGLS's Registration Statement on Form S-1, Commission File No. 33-47482). 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 BGLS's Registration Statement on Form S-1, Commission File No. 33- 47482). 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's Form 10-Q for the quarter ended September 30, 1993, Commission File No. 0- 22126). Exchange and Termination Agreement, dated as of September 30, 1994, among the Company, BGLS, AIF, Artemis America LLC and Mainstay (incorporated by reference to exhibit 10(ac) in the Company's Form 8-K dated September 2, 1994, Commission File No. 1-5759). 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's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33-80593). 3o

Exhibit No. * 10.12 * 10,13 * 10.14 * 10.15 * 10.16 * 10.17 * 10.18 * 10.19 * 10.20 Description 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's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33-80593). Second Amendment to Services Agreement, dated as of October 1, 1995, by and between Brooke Management Inc., the Company and Liggett (incorporated by reference to Exhibit 10(c) in BGLS's Form 10-Q for the quarter ended September 30, 1995). 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). 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). Termination and Release Agreement, dated as of December 13, 1995, by and between BGLS, Gary Winnick Trust No. 3, CAL-W Associates and M.D.C. Holdings, Inc. (incorporated by reference to exhibit 10.18 in BGLS's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33-80593). Agreement between New Valley and the Company, dated as of December 27, 1995 (incorporated by reference to exhibit 10.19 in BGLS's Registration Statement on Form S-4 dated December 19, 1995, Commission File Number 33-80593). Expense Sharing Agreement, made and entered into as of January 18, 1995, by and 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). Stock Option Agreement, dated January 25, 1995, by and 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, 1995). Agreement among the Company, ALKI and High River, dated October 17, 1995 (the "High River Agreement") (incorporated by reference to Exhibit 10(d)in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995). 31

Exhibit No. * 10.21 0.22 * 10.23 * 10.24 * 10.25 * 10.26 * 10.27 10.28 10.29 10.30 Description Letter Amendment, dated October 17, 1995, to the High River Agreement (incorporated by reference to Exhibit 10(e) in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Letter Amendment, dated November 5, 1995, to the High River Agreement (incorporated by reference to Exhibit 10(f) in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). Agreement, dated December 28, 1995, between Jefferies, the Company, BGLS and Liggett (the "Jefferies Agreement") (incorporated by reference to Exhibit 7 in the Schedule 13D filed by, among others, the Company with the SEC on March 11, 1996, as amended, with respect to the common stock of R JR Nabisco Holdings Corp. (the "Schedule 13D")). Letter Amendment, dated February 28, 1996, to the Jefferies Agreement (incorporated by reference to Exhibit 7 in the Schedule 13D). Amended and Restated Consulting Agreement, dated as of March 1, 1996, between the Company and Howard M. Lorber. Settlement Agreement, dated March 12, 1996, by and between Dianne Castano and Earnest 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 (incorporated by reference to exhibit 13 in the Schedule 13D). 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 and the Company and Liggett (incorporated by reference to exhibit 15 in the Schedule 13D). Stock Purchase Agreement, dated April 3, 1996, among Liggett-Ducat Ltd. ("LDL"), Belgrave Limited ("Belgrave"), Edward Z. Nakhamkin ("Nakhamkin") and Brooke (Overseas) Ltd. ("BOL"). Consulting Agreement, dated April 3, 1996, among BOL, Belgrave and Nakhamkin. Pledge Agreement, dated April 3, 1996, between BOL and Belgrave. 32

Exhibit No. 21 27 * 99.1 Description Subsidiaries of the Company. Financial Data Schedule (for SEC use only). Stipulation and Agreement of Compromise and Settlement in connection with an action in the Court of Chancery of the State of Delaware in and for New Castle County entitled Gyetyan v. Bennett S. LeBow et al., Civil Action No. 12998 (incorporated by reference to the Company's Form 8-K dated June 2, 1994). Incorporated by reference (B) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the fourth quarter of 1995: Financial Date Items Statements 1. October 2, 1995 2. November 27, 1995 3. December 5, 1995 5,7 None 5,7 None 5,7 None 33

BROOKE GROUP LTD. Form 10-K for the Year Ended December 31, 1995 Items 6, 7, 8, 14(A) (1) and (2), and 14(D) Index To Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Financial Statement Schedules Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Schedules of the Registrant and its subsidiaries, required to be included in Items 6, 7, 8, 14(a) (1) and (2), and 14(d) are listed below: SELECTED FINANCIAL DATA ................................................................................ A-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................................. B-1 FINANCIAL STATEMENTS: Brooke Group Ltd. Report of Independent Accountants .................................................................. C-1 Consolidated Balance Sheets as of December 31, 1995 and 1994 .................. C-3 Consolidated Statements of Operations for the years ended ended December 31, 1995, 1994 and 1993 ................................................ C-5 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1994 and 1993 ................................ C-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993 .......................................................... C-7 Notes to Consolidated Financial Statements ..................................................... C-9 FINANCIAL STATEMENT SCHEDULE: Schedule II --Valuation and Qualifying Accounts .............................................. C-49 Financial Statement Schedules not listed above have been omitted because they are not applicable or the required information is contained in the Company's Consolidated Financial Statements or accompanying Notes New Valley Corporation Reports of Independent Accountants ................................................................ Consolidated Balance Sheets as of December 31, 1995 and 1994 .................. Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 ........................................................... Consolidated Statements of Changes in Non-redeemable Preferred Shares, Common Shares and Other Capital (Deficit) for the years ended December 31, 1995, 1994 and 1993 ............. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 ................................................ Notes to the Consolidated Financial Statements ............................................... C-50 C-52 C-53 C-55 C-56 C-58 MAI Systems Corporation Report of Independent Accountants .................................................................. C-81 34

Item 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere in this Report. I Year Ended December 31, 1995 I 1994 I 1993 l 1992 I 1991 (dollars in thousands, except per share amounts) Statement of Operations Information Revenues(1) ............................................. Restructuring charges ................................. (Loss) income from continuing operations .. Income (loss) from discontinued operations(2) ......................................... (Loss) income from extraordinary items ...... Net (loss) income ........................................ (Loss) income from continuing operations r (3) per sha e ............................................... Income (loss) from discontinued operations per share .................................................. (Loss) income from extraordinary items per share .................................................. Net (loss) income per share(3) ..................... Cash distributions declared per common share(4) ..................................................... $461,459 $479,343 $493,041 $632,791 $632,151 (11,913) (2,200) (45,344) (17,991 ) (69,228) (7,724) (36,381 ) 21,229 174,683 62,001 (232,397) (113,245) (9,810) (46,597) 153,741 7,994 (33,925) 110,095 106,780 (232,127) (149,626) (1.56) (1.02) (4.19) (1.10) (1.98) 1.16 9.92 3.45 (11.01) (4.93) (0.54) (2.65) 8.55 0.38 (0.94) 6.25 5.60 (11.73) (6.91) 0.30 0.42 0.70 Balance Sheet Information (At Period End): Current assets ............................................. Total assets ................................................ CVR liability, short-term(s) ............................ Current liabilities .......................................... Notes payable, long-term debt and other obligations, less current portion ...... Noncurrent employee benefits, deferred credits and other long-term liabilities ....... - .. CVR I~ab~llty, long-term ............................. Minority interest ........................................... Preferred stock of subsidiary ....................... Stockholders' equity (deficit) ....................... $ 95,902 $ 87,504 $114,411 $256,160 $299,552 225,620 229,425 164,819 366,206 581,252 44,943 119,177 144,351 220,207 493,631 467,019 406,744 405,798 389,671 452,188 329,845 55,803 54,128 69,623 65,332 89,328 23,971 2,150 7,288 (356,104) (374,852) (514,682) (644,945) (338,349) Revenues include federal excise taxes of $123,420, $131,877, $127,341, $147,701 and $171,029, respectively. (2) See Note 5 to the Consolidated Financial Statements, "Discontinued Operations". Per share computations include the impact of New Valley Corporation's repurchase of the Class A Preferred Shares in 1995 and the impact of the CVR liability as described in Note l(q) to the Consolidated Financial Statements in the years 1993, 1992 and 1991. ~'~ Cash dividends declared per common share exclude other distributions. See Consolidated Statements of Stockholders' Equity (Deficit). (s) See Notes 13 and 16 to the Consolidated Financial Statements for information regarding Contingent Value Rights ('CVRs"). A-1

Item 7. 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 document. 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, LDL. The Company holds an equity interest in New Valley, which sold its money transfer business in November 1994 and its messaging service business in 1995. (See Notes 2 and 5 to the Company's Consolidated Financial Statements). Accordingly, the Company's earnings from discontinued operations for the year ended December 31, 1994 and 1995 reflect its portion of the gains ($139,935 and $5,231, respectively) on disposal of those operations. The Company accounts for its share of earnings based on its ownership of New Valley common and preferred stock, which at December 31, 1995 was approximately 42% and 56%, respectively. The common shares are accounted for pursuant to the equity method; the Class A Preferred Shares and the Class B Preferred Shares (which Class B shares were acquired in 1995) are accounted for under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". On February 13, 1995, the Board of Directors of the Company distributed a special dividend of one share of MAI common stock for every six shares of the Company's common stock (the "MAI Distribution"). (See Note 5 to the Company's Consolidated Financial Statements). On October 6, 1993, the Company effected the SkyBox International Inc. ("SkyBox") distribution. On March 27, 1995, the Company sold its remaining common shares (593,572) of SkyBox for $9,284. In addition, on March 29, 1995 SkyBox redeemed the remaining preferred stock held by the Company in the amount of $4,000 plus accrued dividends. Results of these entities have been reclassified as discontinued operations for all periods presented. (See Note 5 to the Company's Consolidated Financial Statements). For purposes of this discussion and other consolidated financial reporting, the Company's significant business segments are tobacco and real estate. Recent Developments Certain Matters Relating to R JR Holdings. On August28, 1995, New Valley received approval from the Federal Trade Commission to purchase up to fifteen percent (15%) of the voting securities of R JR Holdings. On October 17, 1995, New Valley entered into an agreement, as amended (the "Agreement"), with High River Limited Partnership ("High River"), an entity owned by Carl C. Icahn. Pursuant to the Agreement, New Valley sold approximately 1,600,000 shares of R JR Holdings common stock to High River for an aggregate purchase price of $51,000 and the parties agreed that New Valley and High River would each invest up to approximately $150,000 in shares of R JR Holdings common stock and may invest up to $250,000 in shares of R JR Holdings' common stock, subject to certain conditions and limitations. Any party to the Agreement may terminate it at any time, although under certain circumstances, the terminating party will be required to B-1

Recent Developments (continued) pay a fee of $50,000 to the nonterminating party. The Agreement also provides for the parties to make certain other payments to each other under certain circumstances, including a net profit override to High River equal to 20% of New Valley's profit in R JR Holdings common stock, after certain expenses as defined in the Agreement. Similarly, on October 17, 1995, the Company and BGLS entered into an agreement, as amended (the "High River Agreement"), with High River. Pursuant to each of these agreements, the parties agreed to take certain actions designed to cause R JR Holdings to effectuate an immediate spinoff of its food business, Nabisco Holdings Corp. ("Nabisco"). Among other things, the Company agreed to solicit the holders of R JR Holdings common stock to adopt an advisory resolution approving an immediate spinoff of Nabisco to R JR stockholders (the "Spinoff Resolution"). Among other things, High River agreed in the High River Agreement to grant a written consent to, among others, the Spinoff Resolution with respect to all shares of R JR Holdings common stock held by it and to grant a proxy with respect to all such shares in the event that the Company seeks to replace R JR Holdings' incumbent Board of Directors at its 1996 annual stockholders' meeting with a slate of directors committed to effect the spinoff. The Company and BGLS agreed not to engage in certain transactions with R JR Holdings (including a sale of Liggett or a sale of its R JR Holdings common stock to R JR Holdings) and not to take certain other actions to the detriment of R JR Holdings shareholders. High River also agreed that it would not engage in such transactions or take such other actions while the agreement was in effect. In the event that any signatory engages in such transactions or takes such other actions, the High River Agreement provides that the party so doing must pay a fee of $50,000 to the other, except under certain limited circumstances. Any party to the High River Agreement may terminate it at any time, although under certain circumstances, the terminating party will be required to pay a fee of $50,000 to the nonterminating party. The High River Agreement also provides that BGLS pay certain other fees to High River under certain circumstances. On November 20, 1995, the Company, acting to preserve its right to nominate a slate of directors at R JR Holdings' 1996 annual stockholders' meeting, submitted to R JR Nabisco information with respect to nominees committed to an immediate spinoff of Nabisco. On December 27, 1995, New Valley entered into an agreement with the Company pursuant to which it agreed to pay directly or reimburse the Company and its subsidiaries for reasonable out-of-pocket expenses incurred in connection with pursuing the completed consent solicitation and the proxy solicitation (described below). New Valley has also agreed to pay to BGLS a fee of 20% of the net profit received by New Valley or its subsidiaries from the sale of shares of R JR Holdings' common stock after New Valley and its subsidiaries have achieved a rate of return of 20% and a~er deduction of certain expenses incurred by New Valley and its subsidiaries, including the costs of the consent solicitation, the proxy solicitation and of acquiring the shares of common stock. New Valley has also agreed to indemnify the Company and its affiliates against certain liabilities arising out of the completed consent solicitation and the proxy solicitation. On December 28, 1995, as amended on February 20, 1996 and April 9, 1996, New Valley, the Company and Liggett engaged Jefferies & Company, Inc. ("Jefferies") as financial advisor in connection with New Valley's investment in R JR Holdings and the Company's solicitation of consents and proxies from the shareholders of R JR Holdings. New Valley has (i) paid to Jefferies an initial fee of $1,500 and (ii) has agreed to pay to Jefferies for the period commencing January 1, 1996 and ending March 31, 1996 monthly fees of $250 (which increased to $500 on February 20, 1996) and, in addition, until March 31, 1996, an additional monthly fee of $100 and, for the month of April, 1996, a fee of $160. These companies also have agreed to pay Jefferies 10% of the net profit (up to a maximum of $15,000) with respect to R JR Holdings' common stock (including any distributions made by R JR Holdings) held or sold by these companies and their affiliates a~er B-2

Recent Developments (continued) deduction of certain expenses, including the costs of the solicitations, the proxy solicitation and the costs of acquiring the shares of the common stock. New Valley and the Company agreed to indemnify Jefferies against certain liabilities arising out of the solicitations. On December 29, 1995, the Company filed a definitive Consent Statement with the SEC and commenced solicitation of consents from stockholders of R JR Holdings seeking, among other things, the approval of the Spinoff Resolution. On March 13, 1996, the Company was informed by the independent inspectors of election that consents representing 142,237,880 votes (50.58%) were delivered in favor of the Spinoff Resolution and 150,926,535 votes (53.6%) were delivered in favor of the Bylaw Amendment. R JR Nabisco announced that it currently had no plans to contest the outcome of the vote. As of December 31, 1995, New Valley held approximately 4,900,000 shares of R JR Holdings common stock with a market value of $150,446. The cost for such shares and the amount of related margin loan financing were approximately $149,000 and approximately $75,100, respectively. On February 29, 1996, New Valley entered into a total return equity swap transaction with an unaffiliated company (the "Counterparty") relating to 1,000,000 shares of R JR Holdings common stock. The transaction is for a period of up to six months, subject to eadier termination at the election of New Valley, and provided for New Valley to make payment to the Counterparty of approximately $1,537 upon commencement of the swap. At the termination of the transaction, if the pdce of the common stock during a specified pedod prior to such date (the "Final Price") exceeds $34.42, the price of the common stock during a specified period following the commencement of the swap (the "Initial Price"), the Counterparty will pay New Valley an amount in cash equal to the amount of such appreciation with respect to 1,000,000 shares of common stock plus the value of any dividends with a record date occurring during the swap period. If the Final Price is less than the Initial Price, then New Valley will pay the Counterparty at the termination of the transaction an amount in cash equal to the amount of such decline with respect to the 1,000,000 shares of common stock, offset by the value of any dividends, provided that, with respect to approximately 225,000 shares of common stock, New Valley will not be 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 are being guaranteed by the Counterparty's parent, a large foreign bank, and New Valley has pledged certain collateral in respect of its potential obligations under the swap and has agreed to pledge additional collateral under certain conditions. As of March 29, 1996, New Valley had an unrealized loss on this swap transaction of approximately $4,200 and had pledged collateral of approximately $11,800. On March 4, 1996, the Company filed a definitive Proxy Statement with the SEC and commenced solicitation of proxies in favor of its previously nominated slate of directors to replace R JR Holdings incumbent Board of Directors at its annual meeting of stockholders. As of March 29, 1996, New Valley had expensed approximately $10,000 for costs relating to the investment in R JR Holdings common stock, of which approximately $4,000 was expensed in 1995. As of March 29, 1996, New Valley held approximately 5.2 million shares of R JR Holdings common stock. As of March 29, 1996, New Valley's costs for such shares and the amount of related margin loan financing were approximately $158,000 and approximately $83,500, respectively. As of March 29, 1996, New Valley had an unrealized loss of $2,082 on its investment in R JR Holdings common stock. New Valley. On January 11, 1996 a subsidiary of New Valley made a $10,600 convertible bridge loan to finance Thinking Machines, a developer and marketer of parallel software for high-end and networked computer systems. In February 1996, the loan was converted into a controlling interest in a partnership which holds approximately 61% of the outstanding common stock of Thinking Machines. B-3

Recent Developments (continued) On January 11, 1996, New Valley's newly formed division, New Valley Realty, completed the acquisition four office buildings and eight shopping centers for an aggregate purchase price of $183,900 which consisted of $23,900 in cash and $160,000 in mortgage financing. In the first quarter of 1996, New Valley repurchased 72,104 Class A Preferred Shares for a total amount of :$10,530. The Company now owns 59.72% of the New Valley Class A Preferred Shares. For fiscal years beginning after December 15, 1995, the Company will be required to review long-live{ assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the provisions of SFAS 121, "Accounting for the! Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Or'. The Company does anticipate a significant effect on its results of operations or its financial position from the adoption of 121. Recent Developments in the Cigarette Industry_ Pricing Activity. The United States cigarette industry had three or more list price tiers from 1989 to 1993, and as of 1993 had three list price tiers - premium, branded discount and generic. Cigarette prices in all tiers were raised several times annually, with the price differentials between the tiers increasing. Between March 1991 and November 1992, the price gap between premium and generic cigarettes increased from 49 cents to 76 cents per pack. As a result, during 1992 and continuing in'to the first half of 1993, the discount segment (branded discount and generic) increased market share from 24.9% to 35.8%. In July 1993, the two largest cigarette manufacturers announced significant changes in their list pricing structure and reduced the price of premium cigarettes by $.40 cents per pack to 1989-90 levels. They further announced that certain retail and trade discounts offered on certain discount cigarettes would be discontinued, resulting in a net price increase for those brands. Subsequently, the remaining cigarette manufacturers announced price changes identical to those of the two industry leaders. These changes consolidated the lower two price tiers into one list price tier and significantly reduced the price gap between premium and discount cigarettes from 43% to 24.5%. Other cigarette manufacturers and Liggett had a general list price increase in November 1993. There were no list price changes in 1994. On May 5, 1995, R JR initiated a list price increase on all brands of $.30 per carton. Philip Morris and B&W, which together with R JR comprise 90% of the market, matched the price increase on the same day. Liggett followed on May 9, 1995. On April 8, 1996, Philip Morris announced a list price increase on all brands of $.40 per carton. The other manufacturers, including Liggett, matched the price increase. Legislation and Litigation. New cases continue to be commenced against Liggett and other cigarette manufacturers. As new cases are commenced, the costs associated with defending such cases and the risks attendant to the inherent unpredictability of litigation continue to increase. Recently, there have been a number of restrictive regulatory actions, adverse political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, including the commencement of class actions. These developments generally receive B-4

Recent Developments in the Cigarette Industry (continued) widespread media attention. Liggett 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 Liggett'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 Company's consolidated financial statements for a description of legal proceedings. The Omnibus Reconciliation Act of 1993 ("OBRA") required United States cigarette manufacturers to use at least 75% domestic tobacco in the aggregate of the cigarettes manufactured in the United States, effective January 1, 1994, on an annualized basis or pay a "marketing assessment" based upon price differentials between foreign and domestic tobacco and, under certain circumstances, make purchases of domestic tobacco from the tobacco stabilization cooperatives organized by the United States government. OBRA was repealed retroactively (as of December 31, 1994) coincident in time with the recent issuance of a Presidential proclamation effective September 13, 1995, imposing tariffs on imported tobacco in excess of certain quotas. On February 14, 1995, Liggett filed with the Department of Agriculture its certification as to usage of domestic and imported tobaccos during 1994 and an audit was commenced during August 1995 to verify this certification. Liggett has received from the Department of Agriculture the results of the audit, which states that Liggett did not satisfy the 75% domestic tobacco usage requirement for 1994 and, therefore, may be subject to a marketing assessment estimated at approximately $5,500, which amount is disputed by Liggett. It is the understanding of Liggett that the levels of domestic tobacco inventories currently on hand at the tobacco stabilization organizations are below reserve stock levels, and for such reason, Liggett is of the opinion that it will not be obligated to make such purchases of domestic tobacco from the tobacco stabilization cooperatives. Liggett is currently engaged in negotiations with the Department of Agriculture to resolve this matter on satisfactory terms. At December 31, 1995 Liggett has accrued approximately $4,900 representing its best estimate of its obligation for the Department of Agriculture marketing assessment. The charge is included as a component of cost of sales in 1995. On September 13, 1995, the President of the United States, after negotiations with the affected countries, declared a Tariff Rate Quota ("TRQ") on certain imported tobacco, imposing prohibitive tariffs on imports of flue-cured and burley tobaccos in excess of certain levels which vary from country to country. Oriental tobacco is exempt from the quota as well as all tobacco originating from Canada, Mexico or Israel. Management believes that the TRQ levels are sufficiently high to allow Liggett to operate without material disruption to its business. On February 20, 1996, the United States Trade Representative issued an "advance notice of rule making" concerning how tobaccos imported under the 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 materially adverse effect on Liggett. Liggett believes it is unlikely that an end-user licensing system will be adopted because it would likely lead to another GATT proceeding. The end-user licensing system has not been authorized by legislation and it could create significant problems for United States exports in other product markets. However, no assurances can be made that an end-user licensing system will not be adopted. In January 1993, the United States Environmental Protection Agency (the "EPA") released a report on the respiratory effect of Environmental Tobacco Smoke ("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, B-5

Recent Developments in the Cigarette Industry (continued) 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 Food and Drug Administration (the "FDA") has announced that it is considering classifying tobacco as a drug, and an FDA advisory panel has stated that it believes nicotine is addictive. On August 10, 1995, the FDA announced that it intended to propose regulations (the "Proposed Rule-Making") under which the FDA would assert jurisdiction over the manufacture and marketing of tobacco products. Liggett and the other major manufacturers in the industry responded by the filing of a civil action in the United States District Court for the Middle District of North Carolina challenging the legal authority of the FDA to assert such jurisdiction. In addition thereto, Liggett and the other four major cigarette manufacturers, as well as others, have filed comments in opposition to the Proposed Rule-Making. Management is unable to predict whether such a classification will be made. Management is also unable to predict the effects of such a classification, were it to occur, or of such regulations, if implemented, on Liggett's operations, but such actions could have an unfavorable impact thereon. On March 12, 1996, Liggett, together with the Company, entered into an agreement to settle the Castano class action tobacco litigation, and on March 15, 1996, Liggett, together with the Company, entered into an agreement with the Attorneys General of the State of West Virginia, State of Florida, State of Mississippi, Commonwealth of Massachusetts and the State of Louisiana to settle the certain actions brought against Liggett by such states. In these two 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 Rule-Making and to phase in compliance with certain of the proposed interim FDA regulations. See discussions of the Cas~al~o and Attorneys General settlements appearing hereinafter. The settlement of the ..Castano class action undertakes to release the Company and Liggett from all current and future addiction-based claims, including claims by a nationwide class of smokers in the Castano class action pending in Louisiana federal court as well as claims by a narrower statewide class in the Er]g!e class action pending in Florida state court. The settlement is subject to and conditioned upon the approval of United States District Court for the Eastern District of Louisiana. The Company is unable to determine at this time when the Court will review the settlement, and no assurance can be given that the settlement will be approved by the Court. Certain terms of the settlement are summarized below. Under the settlement, the Castano class would 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, together with reasonable fees and expenses of the Castano Plaintiffs' Legal Committee. Settlement funds received by the class would be used to pay half the cost of smoking-cessation programs for eligible class members. While neither consenting to FDA jurisdiction nor waiving their objections thereto, the Company and Liggett also have agreed to phase in compliance with certain of the proposed interim 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 Company and Liggett have the right to terminate the Castano settlement if the remaining defendants succeed on the merits or in the event of a full and final denial of class action certification. The terms of the settlement would still apply if the Castano plaintiffs or their lawyers were to institute a substantially similar new class action against the tobacco industry. The Company and Liggett may also terminate the settlement B-6

Recent Developments in the Cigarette Industry (continued) if they conclude that too many class members have chosen to opt out of the settlement. In the event of any such termination by the Company and Liggett, the named plaintiffs would be at liberty to renew the prosecution of such civil action against the Company and Liggett. On March 14, 1996, the Company and the Castano Plaintiffs Legal Committee and the Castan0 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 of the Castano settlement or, if earlier, the completion of a combination by the Company or Liggett with certain defendants, or an affiliate thereof, in Castano, the Castan0 Plaintiffs agree not to enter into any settlement agreement with any Castano defendant which would reduce the terms of the Castano settlement agreement. If the Castano Plaintiffs 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 enters into any such transaction, then the Castano Plaintiffs will be entitled to receive $250,000 within thirty days from the transacting party. In 1994, four class action lawsuits were brought against Liggett and other cigarette manufacturers, representing the first time class actions were brought against the cigarette industry. In the three cases which remain pending against the industry, plaintiffs' motions for class certification were granted in whole or in part, and the defendants have appealed each of these rulings. In two of these cases, the rulings of the trial courts certifying a class have been affirmed by an intermediate appellate court. In both of these cases, defendants have filed petitions for rehearing, for rehearing en bane, and for further discretionary appellate review. The State of Florida enacted legislation effective July 1, 1994 allowing certain state authorities or entities to commence litigation seeking recovery of certain Medicaid payments made on behalf of Medicaid recipients as a result of diseases (including, but not limited to, diseases allegedly caused by cigarette smoking) allegedly caused by liable third parties (including, but not limited to, the tobacco industry)° This statute purportedly abrogates certain defenses typically available to defendants. This legislation would impose on the tobacco industry, if ultimate liability of the industry is established in litigation, liability based upon market share for such payments made as a result of such smoking-related diseases. Although a suit has been commenced to challenge the constitutionality of the Florida legislation, no assurance can be given that it will be successful. On May 6, 1995, the Florida legislature voted in favor of a bill to repeat this legislation, but the Governor of FIodda vetoed this repealer bill. On March 13, 1996, the Florida legislature considered taking certain action to override the veto of the repealer bill if the requisite vote could be attained, but decided not to take formal action when it was determined that it could not attain the requisite vote. On February 22, 1995, suit was commenced pursuant to the above-referenced enabling statute by the State of Florida acting through the Agency for Health Care Administration against Liggett and others, seeking restitution of monies expended in the past and which may be expended in the future by the State of Florida to provide health care to Medicaid recipients for injuries and ailments allegedly caused by the use of cigarettes and other tobacco products. Plaintiffs also seek a variety of other forms of relief including a disgorgement of all profits from the sale of cigarettes in Florida. The States of Mississippi, Minnesota, West Virginia, Massachusetts, Louisiana and Texas also have brought actions against Liggett and other cigarette manufacturers seeking restitution and indemnity for certain Medicaid costs allegedly incurred as a result of tobacco-related illnesses. Other states are contemplating initiating similar litigation. B-7

Recent Developments in the Cigarette Industry_ (continued) In West Virginia, the trial court, in a ruling issued on May 3, 1995, dismissed eight of the ten counts of the complaint filed therein, leaving only two counts of an alleged conspiracy to control the market and the market price of tobacco products and an alleged consumer protection claim. In a recent ruling, the trial court has adjudged the contingent fee agreement entered into by the State of West Virginia and its counsel to be unconstitutional under the Constitution of the State of West Virginia. In Mississippi, the Governor has recently commenced an action in the Mississippi Supreme Court against the Attorney General of the state, making application for a writ of prohibition to bar further prosecution and to seek dismissal of the suit brought by the Attorney General of the state for such restitution and indemnity, alleging that the commencement and prosecution of such a civil action by the Attorney General of the state was and is outside the authority of the Attorney General. The Commonwealth of Massachusetts has enacted legislation authorizing lawsuits similar to the suits filed by the States of Mississippi, Minnesota, West Virginia, Louisiana and Texas. Aside from the Florida and Massachusetts statutes, legislation authorizing the state to sue a company or individual to recover the costs incurred by the state to provide health care to persons allegedly injured by the company or individual also has been introduced in a number of other states. These bills contain some or all of the following provisions: eliminating certain affirmative defenses, permitting the use of statistical evidence to prove causation and damages, adopting market share liability and allowing class action suits without notification to class members. On November 28, 1995, each of the major manufacturers in the industry, including Liggett, filed suit in both the Commonwealth of Massachusetts and in the State of Texas seeking declaratory relief to the effect that the commencement of any such litigation (as had been filed by Florida, Mississippi, West Virginia and Minnesota and now by Massachusetts, Louisiana and Texas) seeking to recover Medicaid expenses against the manufacturers by either the Commonwealth of Massachusetts or the State of Texas would be unlawful. On January 22, 1996, a suit seeking substantially similar declaratory relief was filed in the State of Maryland. On March 15, 1996, the Company and Liggett entered into a settlement of tobacco litigation with the Attorneys General of the states of Florida, Louisiana, Massachusetts, Mississippi and West Virginia. The settlement with the Attorneys General releases the Company and Liggett from all tobacco-related claims by these states including claims for Medicaid reimbursement and concerning sales of cigarettes to minors. The settlement provides that additional states which commence similar Attorney General actions may agree to be bound by the settlement pdor to six months from the date thereof (subject to extension of such period by the settling defendants). Certain of the terms of the settlement are summarized below. Under the settlement, the states would share an initial $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 sixty days after either a default by Liggett in its payment obligations under the settlement or a merger or other transaction by 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 would range from 2-1/2% to 7-1/2% of Liggett's pretax income, depending on the number of additional states joining the settlement. 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 transaction with another defendant in the lawsuits within three years of the date of the settlement. At December 31, 1995, the Company has accrued approximately $4,000 for the settlement with the Attorneys General. B-8

Recent Developments in the Cigarette Industry (continued) Settlement funds received by the Attorneys General will be used to reimburse the states' smoking-related healthcare costs. VVhile neither consenting to FDA jurisdiction nor waiving their objections thereto, 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 settlement with respect to any state participating in the settlement if any of the remaining defendants in the litigation succeed on the merits in that state's Attorney General action. The Company and Liggett may also terminate the settlement if they conclude that too many states have filed Attorney General actions and have not resolved such cases as to the settling defendants by joining in the settlement. Results of Operations 1995 compared to 1994 Revenues. Consolidated revenues were $461,459 for the year ended December 31, 1995 compared to $479,341 for the year ended December 31, 1994, a decrease of $17,882 primarily due to a decline in sales at Liggett and other less significant subsidiaries. Net sales at Liggett were $455,666 for the year ended December 31, 1995 versus $465,676 for the same period for the prior year. This 2.1% decrease in revenues was primarily due to a 5.6% decrease in unit sales volume, partially offset by the effects of the May 9, 1995 list price increase. See "Recent Developments in the Cigarette Industry - Pdcing Activity" for a discussion of the May 1995 increase in selling prices. The decrease in unit sales volume was comprised of decreases in the premium, discount and military catagodes, partially offset by an increase in the international category. Both premium and discount products suffered a temporary decline in volume as a result of the implementation of a new distribution and marketing program in one of Liggett's sales zones during 1995. Also, heavy discounting of a competitor's product within the premium segment contributed to the premium volume decline. The decrease in discount volume was due to decreases in generic and branded discount brands as a result of leveraged rebate programs tied to the premium products of other cigarette manufacturers and trade and promotional programs for new brands offered by competitors on branded discount products. The decrease in discount volume was partially offset by the continued growth of Liggett's control label brands since their introduction in 1993. The decrease in the military volume is primarily due to heavy discounting of a competitor's product within this category. The overall decline in unit sales volume would have been much greater except for aggressive trade programs offered near the end of the fourth quarter of 1995. The effects of these trade programs may have a negative impact on sales in future periods. Gross Profit. Consolidated gross profit of $245,272 for the year ended December 31, 1995 decreased $4,266 from gross profit of $249,538 for the same period in 1994, reflecting a decrease in gross profit at smaller subsidiaries somewhat offset by Liggett which had a slight increase in gross profit ($450) for the year ended December 31, 1995 compared to the same period in the prior year. Gross profit at Liggett as a percent of revenue (excluding federal excise taxes) for the period increased to 73.2% compared to 72.8% for the prior year, due pdmadly to the May 9, 1995 list price increase and lower per unit cost of sales. The reduction in cost of sales is a result of the effects of Liggett's continuing cost reduction programs begun in 1993. Liggett expects to continue its cost reduction programs. The cost reductions were offset by the accrual of approximately $4,900 representing Liggett's best estimate of its obligation for the Department of Agriculture marketing assessment. See "Recent Developments in the Cigarette Industry - Legislation and Litigation" for a discussion of the Department of Agriculture marketing assessment. B-9

Results of Operations (continued) Expenses. Consolidated selling, general and administrative expenses were $237,212 for the year ended December 31, 1995 compared to $235,374 for the same period for the prior year, an increase of $1,838. The increase was primarily caused by increased spending on trade and promotional programs at Liggett to combat heavy competition by other cigarette manufacturers for unit sales volume along with the accrual of approximately $4,000 for the settlement of certain tobacco litigation. Such increases were partially offset by expense reductions at corporate which, in 1994, included charges of $7,500 for debt restructuring and $7,682 of stock compensation expense. See "Recent Developments in the Cigarette Industry - Legislation and Litigation" for a discussion of the settlement of certain tobacco litigation. Expenses in 1995 were only partially offset by the net effects of the 1995 restructuring at Liggett discussed above. Other Income (Expense). Consolidated interest expense was $57,505 for the year ended December 31, 1995 compared to $55,952 for the same period for the prior year. The increase of $1,553 relates to the incurrence of additional indebtedness by the Company for the Series 1 Notes (which were redeemed on June 12, 1995), increases in the interest rate on the Series 1 Notes and the Series 2 Notes from February 1 through September 6, 1995 (or, in the case of the Sedes 1 Notes, through June 12, 1995) and an increase in the interest rate of the Liggett Sedes C Notes, which were reset from 16.50% to 19.75% on February 1, 1995 as well as the issuance of additional Series C Notes in November 1994, such notes being outstanding for all of 1995. Loss from Continuing Operations. The loss from continuing operations for the year ended December 31, 1995 was $45,344 compared with a loss of $17,991 for the same period in the prior year. A tax provision of $342 in 1995 relating to state income taxes at the subsidiary level increased the 1995 loss while the loss in 1994 was mitigated by a tax benefit of $24,487 related to the completion of an audit by the Internal Revenue Service through December 31, 1991. Other. At December 31, 1995, the Company and its consolidated group had net operating loss carryforwards for tax purposes of approximately $135,000 which may be subject to certain restrictions and limitations and which will generally expire in 2006 and 2009. Discontinued Operations. Income of discontinued operations of $21,229 for the year ended December 31, 1995 and $174,683 for the prior year reflects the redemption/sale of SkyBox preferred and common stock and the sale of New Valley's message servicing business in 1995 and the redemption/sale of SkyBox preferred and common stock and New Valley's money transfer business in 1994. 1994 compared to 1993 Revenues. Net revenues for the year ended December 31, 1994 were $479,343 as compared with $493,041 for the year ended December 31, 1993. Of the approximately $13,700 decline, $7,700 is attributable to declines in revenues at Liggett, and $6,000 reflects declines at other, less significant subsidiaries. Liggett's net sales were $465,676 for the year ended December 31, 1994 versus $473,393 last year. This 1.6% decrease in revenues was primarily due to a 5.9% increase in unit sales, offset by a 7o1% decline in selling prices and the effects of the change in sales mix. See "Recent Developments in the Cigarette Industry - Competitive Activity" for a discussion on the decrease in selling prices in mid 1993. The increase in unit sales volume was comprised of an increase in the price/value cigarette segment (8.5%), partially offset by a decline in the full-price branded segment (8.0%). The increase in price/value cigarette volume was comprised of increases in control label brands partially offset by decreases in generic and branded discount volume. The decrease in generic volume was primarily due to the loss of significant accounts to other cigarette manufacturers who used their greater resources by leveragin9 rebate B-10

_Results of Operations (continued) programs tied to their full-price products and by providing large up-front payments which Liggett was unable to match. The increase in price/value cigarette volume is a reflection of Liggett's renewed emphasis on the price/value segment. The historical decline in full-price branded and branded discount unit sales volume was slowed during the current year due to expanded retail base coverage, reduced selling prices and more effective promotional programs. Gross Profit. Consolidated gross profit was $249,536 for the year ended December 31, 1994 compared to $259,655 for the same period last year. This $10.1 million decrease is largely due to a decrease of $13.2 million at Liggett offset by improved margins at less significant subsidiaries. Gross profit at Liggett was $242,902 for the year ended December 31, 1994, a decrease of $13,243 from $256,145 last year. Gross profit as a percentage of revenues (excluding federal excise taxes) for the year decreased to 72.8% compared to 74.0% for 1993, due primarily to sales mix and reduced selling prices, partially offset by lower per unit cost of sales. There were no list price changes in 1994. Expenses. Consolidated operating, selling, general and administrative expenses were $235,374 compared to $256,902 for the years ended December 31, 1994 and 1993, respectively. This decrease of $21.5 million from the prior year reflects reductions made at the corporate level and at Liggett in 1993, in which the Company took restructuring charges totaling $11.9 million. At Liggett, the reduction primarily results from lower marketing costs which include product price decreases and reorganization of the sales force. These 1994 decreases at Liggett were offset by corporate charges for debt restructuring of $7,500, stock compensation expense of $7,682 and pension curtailment of $691. Other Income (Expense). Consolidated interest expense was $55,952 and $54,915 for the years ended December 31, 1994 and 1993, respectively. The increase in interest expense was primarily due to the issuance of Series C Notes at Liggett partially offset by lower outstanding revolver balances. Loss from Continuing Operations. Loss from continuing operations in the year ended December 31, 1994 was $17,991 as compared to a loss of $69,228 in 1993. A tax benefit of $24,200 which relates to the completion of an audit by the Internal Revenue Service through December 31, 1991 mitigated 1994 losses. There was no tax benefit for 1993 as operating losses were required to be carried forward and realization is not assured due to historical losses. Capital Resources and LiquiditY Net cash used in operations for the year ended December 31, 1995 was $22,936 compared to net cash used in operations of $44,060 for the comparable period of 1994. The net loss for the year ended December 31, 1995 of $33,925 includes interest expense of $57,505. An increase in liabilities for various legal settlements, debt issuance costs and unearned revenue and a decrease in receivables were offset by an increase in inventory levels and the impact of non-cash adjustments for discontinued operations. In 1994, net income of $110,095 was due principally to earnings from discontinued operations at New Valley and SkyBox of $113,515. Other non-cash income included a tax benefit of $24,487 in which the Company adjusted its reserves upon completion of an audit by the Internal Revenue Service. This non-cash income was offset by cash interest payments of $39,429. For the year ended December 31, 1993, net cash provided by operations was $21,950. Net income of $106,574 was generated primarily by MAI, now a discontinued operation. With regard to MAI, non-cash extraordinary items amounted to $110,892 of its income. In addition, other non-cash income relates to the Company's extraordinary gain on early extinguishment of debt principally resulting from the repurchase of its 15.501% Junior Subordinated Secured Notes from Liberty Service Corporation. These non-cash income items were offset by interest B-11

Capital Resources and Liquidity (continued) paid of $56,217. The decrease in cash in 1994 when compared to 1993 was further caused by increased trade receivablesresulting from December sales, increased inventories resulting from increased customer demands in 1994 as compared with a decrease in receivables and inventories in 1993. The positive effects on cash flow from operations expected to result from the April 1996 price increase at Liggett discussed above, and Liggett's 1995 restructuring program will be offset by increased tobacco costs, the Department of Agriculture marketing assessment and settlement of certain tobacco litigation ($1,000 paid on March 22, 1966). Further, the settlement agreement commits Liggett to pay legal fees to the plaintiffs' attorneys in the Castano class action. In addition, the aggressive trade programs offered near the end of the fourth quarter of 1995 may have a negative impact on cash flows in future periods. Net cash provided by investing activities was $66,874 for the year ended December 31, 1995 compared to cash provided by investing activities of $23,861 for the same period in 1994. In the year ended December 31, 1995, cash was provided through dividends from New Valley on the Class A Preferred Shares held by NV Holdings in the total amount 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 leasehold improvements related to real estate development in Russia. At Liggett, capital expenditures in 1995, 1994 and 1993 to maintain production facilities and for operational efficiencies at Liggett were minimal although Liggett projects capital expenditures of $3,600 for 1996. Liggett's management believes capital expenditures have declined because of significant equipment modernization occurring in the 1980s and early 1990s and the effects of lower unit sales and does not anticipate that Liggett's future operations will be adversely affected by this decline. Liggett's management expects to fund its cash requirements with cash flows from operations, borrowings under the credit facility and proceeds from realty. On April 9, 1996, Liggett executed a definitive agreement for the sale of certain surplus realty for a sale price of $4,300. It is anticipated that closing will occur on or before May 31, 1996, In the year ended December 31, 1994, cash provided by investing activities was largely the result of the sale/redemption of SkyBox common and preferred stock (approximately $29,000) offset by the impact of the Company's discontinuation of its investment in MAI. In 1993, cash provided of $5,222 included proceeds from the redemption of SkyBox preferred stock and the sale of other assets which were offset by the impact of discontinued operations including the effect of changing to the equity method of accounting for SkyBox ($16,078). Cash used in financing activities for the year ended December 31, 1995 was $44,794 reflecting the redemption of the Series 1 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 shareholders and a decrease in cash overdraft of $594 partially offset by proceeds from debt of $2,343. Cash flows provided by financing activities in 1994 was $8,765 as compared with cash used in 1993 of $30,022. Proceeds from financing activities in 1994 included proceeds from issuance of the Liggett Series C Notes by Liggett, stockholder loan repayments with interest offset principally by decreases in cash overdrafts and payment of Series G Preferred dividends. Cash was used in financing activities in 1993 to repurchase bonds, repay debt, pay Series G Preferred dividends, purchase treasury stock and in discontinued operations. This was offset by the return of Contingent Value Rights ("CVR") collateral and an increase in cash overdraft. At December 31, 1995 and 1994, the Company's own long-term debt was approximately $238,000 and $261,000, respectively. The decrease was due to the redemption of the Series 1 Notes in the amount of $23,594 in June 1995. The outstanding debt at year end 1993 was $236,000. B-12

Capital Resources and Liquidity (continued) Exchange Agreement. On November 21, 1995, the Company, BGLS and the Majority Security Holders (as defined therein) entered into an Exchange Agreement (the "1995 Exchange Agreement") pursuant to which BGLS agreed to undertake the 1995 Exchange Offer and the Majority Security Holders agreed to tender in the 1995 Exchange Offer the Series 2 Notes and Subordinated Debentures owned by them and to consent to the Proposed Amendments to the Subordinated Debenture Indenture, in each case, subject to certain conditions. BGLS incurred expenses of approximately $9,700 related to the 1995 Exchange Offer which was consummated on January 30, 1996. At March 31, 1996, substantially all corporate long-term debt of BGLS had been exchanged for the 15.75% Senior Secured Notes due 2001 (the "Senior Notes") with the exception of the Reset Notes which were redeemed in full on March 29, 1996 and $800 of Subordinated Debt. In accordance with the terms of the 1995 Exchange Agreement, the Sixth Supplemental Indenture to the Subordinated Debenture Indenture which essentially removed all covenants under the original Indenture was effected. Interest on the Senior Secured Notes ($232,868 principal amount outstanding) is payable on July 31 and January 31 of each year, except in 1996 when interest payable on July 31 will cover the period from October 1, 1995 through July 31, 1996 in a total amount of approximately $29,000. Of the total principal amount outstanding at March 31, 1996, $7,397 of the Senior Notes were issued in March 1996 with the proceeds used to redeem the Reset Notes together with accrued interest as mentioned above. The Senior Notes Indenture contains certain covenants which include but are not limited to limitations on 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 for payments of permitted operating expenses, payment of the Chairman's salary, bonus and certain expenses and payments of up to $6,000 per year. Substantially all of BGLS' assets including investments in all of its wholly-owned subsidiaries and any securities of New Valley owned by the BGLS and its subsidiaries collateralize the Senior Notes. Pursuant to the 1994 Exchange and Termination Agreement, the Majority Security Holders exchanged notes held by them from certain prior agreements for Series 1 Notes which were redeemed by BGLS in June 1995. In addition, the same 1994 Exchange and Termination Agreement provided for the exchange of the Reset Notes for the Series 2 Notes. At December 31, 1994, only $5,670 (redeemed in 1996, see above) of the Reset Notes remained outstanding. The interest rate on the Series 1 and Series 2 Notes (the "Notes") was 13.75% per annum, payable April 1 and October 1. Pursuant to the Notes Indentures and the terms of the Notes, the interest rate on the Notes increased until, in the case of the Series 1 Notes, they were redeemed or, as to the Series 2 Notes, a registration statement with respect to resales of the Series 2 Notes was declared effective by the SEC on September 7, 1995. As a result, interest on the Notes during the interest period from October 3, 1994 through September 30, 1995 reflected a blended rate of 14.17% per annum. The amount that may be borrowed by Liggett under the Liggett Revolving Credit Facility (the "Facility") is determined by the amount of eligible inventory and receivables (as determined in good faith by the lenders) up to a maximum of $40,000. Availability under the Liggett Facility at December 31, 1995 was $13,340 based on eligible collateral at December 31, 1995. The Liggett Facility is collateralized by all inventories and receivables of Liggett. Borrowings under the Liggett Facility bear interest at a rate equal to 1.5% above Philadelphia National Bank's prime rate which was 8.75% at December 31, 1995. The Liggett Facility requires Liggett's compliance with certain financial and other covenants. The Liggett Facility also limits the amount of dividends and distributions by Liggett. At December 31, 1995, Liggett was in compliance with all debt covenants under the facility. Liggett anticipates that the facility will be refinanced with substantially similar terms in March 1997 although there can be no assurance that this will be accomplished. Management believes that the facility, along with cash flows from operations will continue to adequately address Liggett's liquidity requirements. B-13

i iiiiiii _ mmml II llml ii ii Capital Resources and Liquidity (continued) On January 31, 1994, Liggett issued a total of $22,500 of the Liggett Series C Notes. Liggett received $15,000 from the issuance in cash and received $7,500 in Liggett Series B Notes which were credited against the mandatory redemption requirements of Liggett Series B Notes required under the indenture for February 1, 1994. Liggett used the cash proceeds to satisfy working capital needs, which included payment of interest related to Liggett Series B Notes of $8,172. The Liggett Series C Notes have the same terms (other than interest rate) and stated maturity as the Liggett Series B Notes. The Liggett Series C Notes bore a 16.5% interest rate, which was reset on February 1, 1995 to 19.75%. Liggett had received the necessary consents from the required percentage of holders of its Liggett Series B Notes allowing for an aggregate principal amount up to but not exceeding $32,850 of notes to be issued under the Liggett Series C Indenture. In connection with the consents, holders of Liggett Series B Notes received Liggett Series C Notes totaling 2% of their current Liggett Series B Note holdings. The total principal amount of such Liggett Series C Notes issued was $2,842. On November 20, 1994, Liggett issued the remaining $7,508 of Liggett Series C Notes in exchange for an equal amount of Liggett Series B Notes and cash of $375. The Liggett Series B Notes were credited against the mandatory redemption requirements for February 1, 1995. 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") require 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 104%, 102% and 100% of the principal amount in the years 1996, 1997 and 1998, respectively, at the option of Liggett at any time on or after February 1, 1996. The 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, 1995, Liggett was in compliance with all debt covenants under the Liggett Notes indentures. In December 1995, $7,000 of Liggett Series B Notes were purchased using revolver availability and credited against the mandatory redemption requirements for February 1, 1996. The transaction resulted in a net gain of $1,114. The remaining $500 mandatory redemption requirement for February 1, 1996 was met by retiring the $500 Series C Notes held in treasury. Liggett anticipates that the 1997 mandatory redemption will be funded by cash flows from operations and borrowings under the facility. There are no definite plans as yet for funding the 1998 mandatory redemption requirement. As of December 31, 1995, Liggett had a net capital deficiency of $154,706 and is highly leveraged. Due to the many risks and uncertainties associated with the cigarette industry, impact of recent tobacco litigation settlements and anticipated increased tobacco costs, there can be no assurance that Liggett will be able to meet its future earnings goals. Consequently, Liggett could be in violation of certain debt covenants and if their lenders were to exercise acceleration dghts under the revolving credit facility or senior secured notes indentures or refuse to lend under the revolving credit facility, Liggett would not be able to satisfy such demands or its working capital requirements. In October 1995, LDL entered into a loan agreement with the Russian Federation Foreign Trade Bank, located in Moscow, Russia, to borrow up to $20,000 to fund real estate development. Interest on the note is based on the London Interbank Offered Rate ("LIBOR") plus 10%. Principal repayments are due over the period April through October of 1997. The loan agreement was arranged through an outside third party for a net fee of $4,044 payable ratably over the term of the loan. Brooke has guaranteed the payment of the note B-14

Capital Resources and Liquidity (continued) and the broker's fee. The bank has requested that the stock of BrookeMil Ltd. ("BrookeMil"), a wholly-owned subsidiary of LDL, be pledged as collateral for the loan. LDL intends to repay the loan out of proceeds from leased office space. Liggett (and, in certain cases, the Company) and other United States cigarette manufacturers have been named as defendants in a number of direct and third-party actions (and purported class actions) predicated on the theory that they should be liable for damages from cancer and other adverse health effects alleged to have been caused by cigarette smoking or by exposure to so-called secondary smoke (environmental tobacco smoke) from cigarettes. As new cases are commenced, the costs associated with defending such cases and the risk attendant on the inherent unpredictability of litigation continue. To date, a number of such actions, including several against Liggett, have been disposed of favorably to the defendants; no plaintiff has ultimately prevailed for recovery of damages in any such action. For discussion of recent settlements see "Recent Developments in the Cigarette Industry - Legislation and Litigation" and Note 16 to the Consolidated Financial Statements. Liggett believes, and has been so advised by counsel handling the respective cases, that Liggett has a number of valid defenses to the claim or claims asserted against it. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome of a pending smoking and health case could encourage the commencement of additional similar litigation. Recently, there have been a number of adverse regulatory, political and other developments concerning cigarette smoking and the tobacco industry, including the commencement of the purported class actions referred to above. These developments generally receive widespread media attention. Neither the Company nor Liggett is able to evaluate the effect of these developing matters on pending litigation or the possible commencement of additional litigation. Liggett is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett. It is possible that Liggett's financial position, results of operations or cash flows could be materially affected by an ultimate unfavorable outcome in any such pending litigation. The 1995 Exchange Offer was initiated to, among other things, extend the maturities of BGLS' debt to better accommodate the BGLS' working capital requirements and cash flow. Prior to the 1995 Exchange Offer, BGLS had substantial near-term 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 and the redemption of the Reset Notes pursuant to the terms of the Reset Note Indenture on March 29, 1996, BGLS decreased its scheduled debt maturities to $81,942 due in the years 1996-1998; approximately $79,000 of this debt relates to Liggett and LDL~ The Company believes that it will have sufficient liquidity for 1996. Company expenditures (exclusive of Liggett and LDL) in 1996 include debt service estimated at $29,000. Redemption of the remaining Reset Notes was effectuated on March 29, 1996 through use of proceeds from the sale of an additional $7,397 of Series A Notes on March 4, 1996. Current operations are being financed with management fees and other charges to subsidiaries of approximately $5,000. In March 1996, New Valley declared a dividend on its Class A Preferred Shares in which NV Holdings received $6,183. Distributions to BGLS and the Company are limited by terms of the Senior Notes Indenture as described above. The Company expects to finance its long-term growth, working capital requirements, capital expenditures and debt service requirements through a combination of cash provided from operations, additional public or private debt financing and distributions from New Valley. 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. B-15

Capital Resources and Liquidity (continued) For information concerning possible regulation under the Investment Company Act, see Note 2 to the Company's Consolidated Financial Statements. See also, Item 1, "Business - Investment in New Valley - Miscellaneous Investments". B-16

Coopers &Lybrand Coopers & Lybrand L.L.R a professional services firm REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Brooke Group Ltd. We have audited the accompanying consolidated balance sheets of Brooke Group Ltd. and Subsidiaries (the "Company") as of December 31, 1995 and 1994 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, 1995. 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 did not audit the financial statements of MAI Systems Corporation ("MAI"), a discontinued subsidiary (Note 5), which statements reflect total liabilities comprising 5% of consolidated total liabilities at December 3 I, 1994, and net income comprising 4% and 114% of consolidated net income for the years ended December 31, 1994 and 1993, respectively. Further, we did not audit the financial statements of New Valley Corporation ("New Valley") for the years ended December 31, 1994 and 1993, the investment in which is being accounted for by the Company using the equity method of accounting (Note 2). The Company's investment in New Valley represents 43% of consolidated total assets at December 31, 1994. The equity in the net income of New Valley represents 85% and 0% of consolidated net income for the years ended December 31, 1994 and 1993, respectively. Those statements were audited by other auditors whose reports have been furnished to us and our opinion on the consolidated financial statements, insofar as it relates to the amounts included for MAI and New Valley, are based solely upon the reports 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 f'mancial statement presentation. We believe that our audits and the reports of other' auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, 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, 1995 and 1994 and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its method of accounting for post-retirement benefits other than pensions to conform with Statement of Financial Accounting Standards No. 106. COOPERS & LYBRAND L.L.P. Miami, Florida April 15, 1996 C-1 Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland.

Coopers &Lybrand Coopers & Lybrand L.L.P. a professional services firm REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Brooke Group Ltd. Our report on the consolidated financial statements of Brooke Group Ltd. and Subsidiaries is included on Page c-lof this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule on page C-4 9 of this Form 10-K. 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 April 15, 1996 c-2 Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland.

BROOKE GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands. Except Per Share Amounts) ASSETS: December 31, 1995 1 1994 Current assets: Cash and cash equivalents ........................................................... $ 3,370 Accounts receivable - trade ........................................................... 23,844 Other receivables .......................................................................... 1,448 Receivables from affiliates ............................................................. 1,502 Inventories ..................................................................................... 60,522 Deferred tax assets ....................................................................... 1,061 Other current assets ...................................................................... 4.155 Total current assets ................................................................. 95,902 Property, plant and equipment, at cost, less accumulated depreciation of $27,868 and $24,460 ............................................ Intangible assets, at cost, less accumulated amortization of $15,679 and $13,936 ................................................................. Investment in affiliate .......................................................................... Other assets ........................................................................................ Total assets ............................................................................. $ 4,276 31,325 1,558 47,098 3.247 87,504 49,065 5,453 63,901 11.299 $ 225.620 25,806 6,728 97,520 11.867 $ 229.425 The accompanying notes are an integral part of the consolidated financial statements C-3

BROOKE GROUP LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued (Dollars in Thousands, Except Per Share Amounts) LIABILITIES AND STOCKHOLDERS' EQUII-Y (DEFICIT): Current liabilities: Notes payable and current portion of long-term debt ....................... Accounts payable ............................................................................. Cash overdraft .................................................................................. Accrued promotional expenses ........................................................ Accrued taxes payable ..................................................................... Accrued interest ............................................................................... Dividends payable ............................................................................ Net current liabilities of business held for disposition ....................... Other accrued liabilities .................................................................... Total current liabilities .................................................................... Notes payable, long-term debt and other obligations, less current portion .............................................................................................. Noncurrent employee benefits ............................................................ Net-long term liabilities of business held for disposition ...................... Other liabilities ..................................................................................... 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 18,497,096 and 18,260,844 shares, respectively .................................................... Additional paid-in capital .................................................................. Deficit ............................................................................................... Other ................................................................................................ Less: 6,500,947 and 6,737,199 shares of common stock in treasury, at cost ............................................................................. Total stockholders' equity (deficit) .............................................. Total liabilities and stockholders' equity (deficit) ......................... December 31, I 1995 I 1994 $ 2,387 $ 26,491 22,762 12,415 4,266 4,860 25,519 29,853 25,928 21,849 16,863 17,201 131 4,974 21,452 26,577 119,177 144,351 406,744 405,798 31,672 31,119 23,009 24,131 1,850 1,826 93,186 66,245 ~28,173) (420,746) 9,372 11,365 (32.339) (33.542) (356,104) (374.852) $225.620 $229,425 The accompanying notes are an integral part of the consolidated financial statements C-4

BROOKE GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands. Except Per Share Amounts) 1995 Revenues*. ...................................................................................... $461,459 Cost of goods sold*. ........................................................................ 216.187 Gross profit ...................................................................... 245,272 Operating, selling, administrative and general expenses ................. 237,212 Restructuring charges ..................................................................... Operating income (loss) ................................................... 8,060 Other income (expenses): Interest income .........................................................................989 Interest expense ....................................................................... (57,505) Equity in earnings of affiliate ..................................................... 678 Other, net .................................................................................. 2,776 (Loss) from continuing operations before income taxes ............................................................................. (45,002) Provision (benefit) for income taxes ................................................ :~42 (Loss) from continuing operations ................................................... (45,:~44) Discontinued operations: Income from discontinued operations ........................................ 2,860 Gain on disposal ....................................................................... 18.36~) Income from discontinued operations .............................................. 21,22~) (Loss) income before extraordinary items and accounting changes (24,115) Extraordinary items: (Loss) gain resulting from the early extinguishment of debt ....... (9,810) Gain on foreclosure of MAI ....................................................... Gain on reorganization of MAI ................................................... (Loss) income from extraordinary items ........................... (9.810) (Loss) income before cumulative effect of accounting changes ....... (33,925) Cumulative effect of accounting changes: Retiree health and life insurance benefits .................................. Cumulative effect of change in fiscal year end of MAI ............... Net (loss) income ............................................................ (33,925) Proportionate share of New Valley capital transaction, retirement of Class A Preferred Shares ..................................... 16.802 Net (loss) income applicable to common shares .............. $.(17,123) Per common share: Year Ended December 31, I 1994 I $479,343 229.807 249,536 235,374 14,162 1993 $493,041 233.386 259,655 256,902 11.913 (9,160) 533 2,292 (55,952) (54,915) (I ,221) (2,2,52) (42,478) (64,035) (24,487) 5.193 (17.991) (69.228) 23,693 62,001 150.990 174.683 62.001 156.692 (~227) (47,513) 42,849 64,452 916 4~,440 (46.597) 153.741 110,095 146,514 110,095 $110.095 (16,167) (23.567) 106,780 $.106.780 (Loss) from continuing operations ............................................. $(1.56) Income from discontinued operations ........................................ $1.16 Extraordinary items ................................................................... $(0,54) Cumulative effect of accounting changes .................................. $ . Net (loss) income applicable to common shares ................. $(0.94) Weighted average common shares and common stock equivalents outstanding ............................................................................... $(1,02) $3-~ $ 3.4,5 $(2.65) $.8.55 $ $(2.21) $ 5.25 18.301,186 17,610.898 17.977,487 * Revenues and Cost of goods sold include federal excise taxes of $123,420, $131,877 and $127,341 for the years ended December 31, 1995, 1994 and 1993, respectively. The accompanying notes are an integral part of the consolidated financial statements C-5

Balance, December 31, 1992 Common stock exchanged for Preferred stock Series E Series F and G Dividends on Sedes G preferred Stock issued to officer and employee Stock surrendered by former officers and employees Reduction of Contingent Value Rights liability SERP minimum liability adjustment Preferred stock exchanged for common stock Repayment of Chairman's loans Net income Treasury stock, at cost Balance, December 31, 1993 Foreign Currency Adjustment Preferred stock exchanged for common Reclassification of former Vice Chairman's loan to other receivables Contingent Value Rights Settlement Repayment by Chairman of Interest Waiver of dividends, shareholder settlement Transfer of pension liability to SkyBox Stock grant pursuant to consulting agreement Contract settlement Exercise of warrant Net income Unrealized gain on investment in New Valley Treasury stock, at cost Balance, December 31, 1994 Net loss Consolidation of foreign subsidiary Distributions on common stock of BGL ($0.075 per share per quarter) Stock grant to directors Stock grant to consultant Stock options granted to consultant MAI spin-off Net unrealized holding gain on investment in New Valley Effect of New Valley capital transactions Other, net Treasury stock, at cost Balance, December 31, 1995 BROOKE GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in Thousands, Except Per Share Amounts) Preferred Stock I Additional I Sedes E, F and G Common Stock Paid-In Shares Amount Shares Amount Capital Deficit 18,646,738 $ 1,865 $ 60,561 $ (672,823) 8,929.338 $ 9 (8,929,338) (893) 884 2,194,834 2 (2,194,834) (220) 218 (30,831) 375,000 38 (358) (1,345) (225,000) (23) 23 (863) 44,140 (1,695) (8,939.338) (9) 8,939,338 894 (885) 15,695 106,780 (1,352.142} (13_~) 135 2.184.834 2 15,259,762 1,526 60,578 (540,942) (2,184.834) (2) 2,184,834 218 (216) 6,250 250,000 25 (371) 607,889 61 (41,641) (4) 4 18,260,8441,826 66,245 20,000 2 250,000 25 (33,748) ___.~ 18.497.096 $1,850 14,435 (5,474) (2) 938 17,043 (2) $93,186 1,500 1,875 1,163 3,200 4,305 (739) (2,875) 110,095 1,672 (420,746) (33,925) (8oo) 27,286 12 $(428,173) The accompanying notes are an integral part of the consolidated financial statements Treasury Stock $ (34,548) 2,040 459 (3.797) (35,846) 1,182 2,875 (1,753) (33,542) 94 1,244 (135) $(32.339) Other $201 11,164 11,365 (563) (2Ol) (2,332) 1,103 $9,37~ To~l $ (644,945) (30,831) 375 (404) 44,140 (1,895) 15,695 106,780 (3,797) (514,682) 201 1,500 1,875 1,163 9,450 4,3O5 468 (371) 61 110,095 11,164 (81) (374,852) (33,925) 14,435 (5,474) 94 469 375 27,085 (2,332) 18,146 10 (135) $(356,104) C-6

BROOKE GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands, Except Per Share .Amounts) Cash flows from operating activities: Net (loss) income ........................................................................... Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................................................. Noncash compensation expense ............................................. Income taxes ........................................................................... Gain on sale of assets ............................................................. (Loss) gain on early extinguishment of debt ............................. Impact of discontinued operations ........................................... Other, net ................................................................................. Changes in assets and liabilities, net: Receivables ....................................................................... Inventories ......................................................................... Accounts payable and accrued liabilities ........................... Other assets and liabilities, net .......................................... Net cash (used in) provided by operating activities ............................ Cash flows from investing activities: Proceeds from sale of business and assets ................................... Impact of discontinued operations .................................................. Investments ................................................................................... Capital expenditures ...................................................................... Dividends from New Valley ............................................................ Other, net ....................................................................................... Net cash provided by investing activities ........................................... Year Ended December 31, 1995 I 1994 I 1993 $(33,925) $110,095 $106,780 9,076 6,821 559 8,463 (24,487) (1,042) (11,925) 9,810 (21,229) 4,167 11,041 9,287 (42,849) (117,275)(106,574) 6,265 89 6,561 (4,002) 42,585 (7,490) (9,574) 14,686 (5,445) (8,576) (25,282) 15.972 1~ 12.187 (22.986) (44.050) 21.950 14,152 29,542 21,372 (4,555) (16,078) (1,965) (8,805) (3,023) (443) 61,832 1.660 1,~97 :~71 65.874 23.861 5.222 The accompanying notes are an integral part of the consolidated financial statements C-7

BROOKE GROUP LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (Dollars in Thousands. Except Per Share Amounts) Year Ended December 31, 1995 I 1994 Cash flows from financing activities: Proceeds from debt ...................................................................... 2,343 Deferred financing costs ............................................................... Purchase of bonds ....................................................................... Repayments of debt ..................................................................... (40,801) (Decrease) increase in cash overdraft .......................................... (594) Series G preferred dividend ..........................................................(75) Distributions on common stock .................................................... (5,475) CVR Settlement (Redemption) ..................................................... Treasury stock purchases ............................................................ (135) Return (deposit) of CVR collateral ................................................ Stockholder loan and interest repayments ................................... Impact of discontinued operations ................................................ Other, net ............................................. " ........................................ Net cash (used in) provided by financing activities .......................... Effect of exchange rate changes on cash and cash equivalents ...... (57) (44.794) Net (decrease) in cash and cash equivalents .................................. (906) Cash and cash equivalents, beginning of period ............................. 4.276 Cash and cash equivalents, end of period ....................................... $ 3.370 12,523 (2,705) (2,027) (12,669) (5,923) 1,875 (21) 17,774 (437) 375 8.765 (63) (11,497) 15.773 $. 4,276 1993 6,498 (52O) (10,772) (26,059) 19,217 (15,695) (1,122) (3,797) 12,000 (8,297) (1.475) (30.022) 795 (2,055) 17.828 $15.773 The accompanying notes are an integral part of the consolidated financial statements C-8

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar~ In Thousands, Except Per Share Amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation: (b) 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"), other less significant subsidiaries and, as of December 29, 1995, Liggett-Ducat Ltd. ("LDL"). (Refer to Note 4). Liggett is engaged primarily in the manufacture and sale of cigarettes, principally in the United States. LDL is engaged both in real estate development and sale of cigarettes in Russia. Liquidity.: The Company believes it will have sufficient liquidity for 1996. This is based on, among other things, forecasts of cash flow for the principal operating companies which indicate that they will be self-sufficient, satisfactory resolution of the Contingent Value Rights ("CVR") suit (refer to Notes 13 and 16), the restructuring of the Company's debt which includes the exchange of the 13.75% Series 2 Senior Secured Notes due 1997 ("Series 2 Notes") for the 15.75% Series A Senior Secured Notes due 2001 ("Series A Notes"), the sale of $7,397 face value of additional Series A Notes, the proceeds of which were used for the redemption of the 16.125% Senior Subordinated Reset Notes due 1997 (the "Reset Notes") on March 29, 1996 and certain funds available from New Valley Corporation (=New Valley") subject to limitations imposed by the Company's indenture agreements. (Refer to Notes 2 and 8). (c) Estimates and Assumptions: 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 and the reported amounts of revenues and expenses. Actual results could differ from those estimates. (d) Cash and Cash E(~uivalents: 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, Long-term debt Carrying Amount $409,131 1995 Fair Value $343,517 Carrying Amount $432,289 1994 Fair .Value $347,912 C-9

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) Short-term debt - The ca[rying amounts reported in the Consolidated Balance Sheets approximate fair value because of the variable interest rates and the short maturity of these instruments. 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. The methods and assumptions used by the Company's management in estimating fair values for financial instruments as required by Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), 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 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 11.6% of net sales for the year ended December 31, 1995. No single customer accounted for more than 10% of the Company's net sales in 1994 and 1993. 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 not exceeded management's expectations. (g) Acoo~nts Receivable: The allowance for doubtful accounts and cash discounts was $1,536 and $969 at December 31, 1995 and 1994, respectively. (h) Inventories: Liggett tobacco inventories, which comprise 83.3% of total inventory, 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. Remaining inventories are determined primarily on a first-in, first-out (FIFO) basis. C-10

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands. Exce_ot 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. 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. For fiscal years beginning after December 15, 1995, the Company will be required to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Company does not anticipate a significant effect on its results of operations or its financial position from the adoption of SFAS 121. (j) Intangible Assets: Intangible assets, consisting of goodwill, trademarks and covenants not-to-compete, are amortized using the straight-line method over 10-12 years. Amortization expense for the years ended December31, 1995, 1994 and 1993 was $1,725, $1,722 and $1,971, respectively. Management periodically reviews the carrying value of such assets to determine whether asset values are impaired. (k) Other Assets: Other assets consist primarily of debt issuance costs and are being amortized over the life of the debt. (I) 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, 1995 and 1994 which are subject to significant fluctuations in the near term. (m) Postretirement Benefits other than Pensions: Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". Under SFAS 106, 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. As permitted by SFAS 106, the Company has elected to fully recognize the transition obligation (the excess of the accumulated postretirement benefit obligation as of January 1, 1993 over the accrued cost). This resulted in a one-time charge for the Company of $16,167 recorded in the first quarter of 1993. C-11

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) (n) Postemployment Benefits: SFAS No. 112, "Employers' Accounting for Postemployment Benefits", is effective for fiscal years beginning after December 15, 1993. SFAS 112 establishes standards of financial accounting and reporting for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. No expense was associated with the adoption since the Company's previous policies accounted for all items required by SFAS No. 112. (o) Income Taxes: Effective January 1, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes". Under the provisions of SFAS 109, the Company adjusted previously recorded deferred taxes to reflect currently enacted income tax rates. The Company has not retroactively adjusted for business combinations as it is impracticable. Under SFAS 109, a valuation allowance is provided against deferred tax assets when it is deemed more likely than not that future taxable income will be insufficient to realize the deferred tax assets. (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 could be materially adversely affected by significant unit sales volume declines, increased tobacco costs or reductions in the selling price of cigarettes in the near term. (q) Earnings Per Share: Per share calculations are based on the equivalent shares of common stock outstanding and include the impact of the CVR liability decretion for the year ended December 31, 1993 (Note 13). The decretion increased earnings by $1.37 for the year ended December 31, 1993. The Series G Preferred Stock are common stock equivalents; however, in making per-share calculations for 1993, they have been treated as preferred stock since treating them as common stock would be anti-diiutive (Note 14). The net income per share calculation for December 31, 1993 assumed conversion of the outstanding warrant (Note 15). For the year ended December 31, 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 $16,802. (r) Foreign Curren¢.v Translation: The Company accounts for translation of foreign currency in accordance with SFAS 52, "Foreign Currency Translation." The Company's Russian subsidiary operates in a "highly inflationary" economy and use 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. Because the Company only consolidated the operations of the Russian subsidiary from December 29, 1995, the translation adjustments were not material. (Refer to Note 4). C-12

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) (s) Reclassification s: Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. 2. INVESTMENT IN NEW VALLEY CORPORATION In November 1994, New Valley's First Amended Joint Chapter amended ("Joint Plan"), was confirmed by order of the United States of New Jersey and on January 18, 1995, New Valley emerged proceedings and completed substantially all distributions to creditors 11 Plan of Reorganization, as Bankruptcy Court for the District from bankruptcy reorganization under the Joint Plan. Pursuant to the Joint Plan, among other things, all of New Valley's $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares ($100 Liquidation Value), $.01 par value (the "Class A Preferred Shares"), all of New Valley's $3.00 Class B Cumulative Convertible Preferred Shares ($25 Liquidation Value), $.10 par value (the "Class B Preferred Shares"), and all of New Valley's Common Shares, $.01 par value (the "Common Shares") and other equity interests, were reinstated and retained all of their legal, equitable and contractual rights. Prior to December 31, 1994, under the equity method of accounting, the Company's investment was carried at $0 since the Company had no intention or commitment to fund New Valley's losses. As of December 31, 1994, the Company's investment in New Valley was $97,520, principally as a result of recording its share of New Valley's fourth quarter 1994 income. (Refer to Note 5). At December 31, 1994, the Company's investment in New Valley consisted of a 41.6% voting interest. The Company's investment was represented by 618,326 Class A Preferred Shares with an aggregate fair value of $145,963 and 79,399,254 common shares (42.1%) with a quoted market value of $13,498 at December 31, 1994. In addition, the Company held an irrevocable proxy to vote an additional 32,543 Class A Preferred Shares. These shares had been transferred to a third party in December 1994 resulting in compensation expense of $7,682. This proxy expired on December 31, 1995. Options to purchase up to an aggregate of 9,000,000 New Valley common shares owned by the Company were terminated on December 13, 1995 in exchange for $822 of Series A Notes issued by the Company pursuant to the 1995 Exchange Offer. (Refer to Note 8). During 1995, the Company acquired an additional 394,975 shares of New Valley common stock at an average price of $0.28 per share and 250,885 shares of Class B Preferred Shares at an average price of $7.39 per share. At December 31, 1995, the Company's voting interest is 41.9%. The Company's investment in the common shares (79,794,229 shares or 41.7%) has a quoted market value of $21,544 at December 31, 1995. The common shares are accounted for pursuant to APB 18, "The Equity Method of Accounting for Investments in Common Stock", and have a negative carrying value of approximately $48,747 and $48,443 at December 31, 1995 and 1994, respectively. The Company's investment represents its proportionate share of New Valley's common shareholders' deficit in addition to the accrued and unpaid dividends on the Class B Preferred Shares. Further, as a result of the Company's purchase of certain Class B Preferred Shares during 1995, the Company has recorded negative goodwill which is being amortized over 10 years. Negative goodwill at December 31, 1995 is approximately $3,000. C-13

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) The Company's investment in New Valley's stock at December 31, 1995 is summarized as follows: Class A Preferred Shares ..... Class B Preferred Shares ..... Common Shares .................. Number of Fair Amortized Unrealized Shares Value Cost Holding Gain Earnings 618,326 $109,386 $101,962 $7,424 $28,996 250,885 3,262 1,854 1,408 79,794,229 21.544 (21~287)(A) $134.192 $103.816 $8.832 $ 7.709 (A) Amount does not include $18,146 of New Valley capital transactions credited directly to equity. 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 Class A Preferred Shares' fair value has been estimated with reference to the securities' preference features, including dividend and liquidation preferences, and the composition and nature of the underlying net assets of New Valley. Earnings on the Class A Preferred Shares are comprised of dividends accrued during the period and the accretion of the difference between the Company's basis and their mandatory redemption price. Subsequent to December 31, 1995, however, New Valley became engaged in the ownership and management of commercial real estate and acquired a controlling interest in an operating company. Because these businesses affect the composition and nature of the underlying net assets of New Valley, the Company will determine the fair value of the Class A Preferred Shares based on the quoted market price commencing with the quarter ended March 31, 1996. Had the Company valued its investment in the Class A Preferred Shares using the quoted market price at December 31, 1995, the carrying value would have been decreased by approximately $19,100. 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 the twelve months ended December 31, 1995, at various times, New Valley's Board of Directors authorized the repurchase of up to 500,000 additional Class A Preferred Shares. At December 31, 1995, 339,400 of such shares had been repurchased on the open market at an aggregate cost of $43,405 or an average cost of $127.89 per share. The Company has recorded its proportionate interest in the excess of the carrying value of the shares over the cost of the shares repurchased as a credit to additional paid-in capital in the amount of $16,802, along with other New Valley capital transactions of $241 for the 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, 1995, the accrued and unpaid dividends arrearage was $121,893 or $110.06 per share. The Company received $61,832 ($100.00 per share) in dividend distributions in 1995. C-14

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO 'CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) 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, 1995, the accrued and unpaid dividends arrearage was $95,118 or $34.08 per share. No dividends on the Class B Preferred Shares have been declared since the fourth quarter of 1988. Each Class B Preferred Share is convertible at the option of the holder into 8.3333 Common Shares based on a $25 liquidation value and a conversion price of $3.00 per Common Share. 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. Summarized financial information for New Valley as of and for the years ended December 31, 1995 and 1994 follows: Current assets, primarily cash and marketable securities in 1995 and cash and cash equivalents in 1994 .............. Noncurrent assets ................................................ Current liabilities ................................................... Noncurrent liabilities ............................................. Redeemable preferred stock ................................ Common shareholders' deficit ............................. 1995 1994 $ 333,485 $1,039,209 52,337 30,682 177,920 754,360 11,967 36,177 226,396 317,798 (30,461) (38,444) Revenues ............................................................. Cost and expenses .............................................. Income (loss) from continuing operations ............ Income from discontinued operations .................. Extraordinary item ................................................ Net (loss) income applicable to common shares(c) 67,73O 10,381 66,064 26,146 1,374 (15,265) 16,873 1,135,706(A) (110,500) (13,714) 929,904 Company's share of discontinued operations .................................................... Company's share of extraordinary item ............... 7,031 139,935(B) (46,487)(BI (A) (B) Includes gain on sale of New Valley's money transfer business of $1,056,081, net of income taxes of $52,000. The Company's share of the extraordinary item, $46,487, was related to extinguishment of debt in 1994. The Company's share of income from discontinued operations in 1994 was determined after accounting for losses not recognized in prior years as follows: 42.1% of income from discontinued operations .................. Losses not recognized in prior periods ............................... Company's share of equity in discontinued operations of New Valley ............................................................... $ 477,791 (337.856) $139.935 (C) Considers all preferred accrued dividends, whether or not declared and, in 1995, the excess of carrying value of redeemable preferred shares over cost of shares purchased. C-15

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands Ex~_E~_~p~ Per Share Amounts ~ C~) ~zb~J;Zg~JtLE~Z~: On January 11, 1996, a subsidiary of New Valley made a $10,600 bridge loan to finance Thinking Machines Corporation, a developer and marketer of parallel software for high-end and networked computer systems. The loan was converted in February 1996 into a controlling interest in a partnership which holds approximately 61% of the outstanding common stock of Thinking Machines Corporation. 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 $183,900, consisting of $23,900 in cash and $160,000 in mortgage financing. As a result of asset dispositions pursuant to the Joint Plan, New Valley accumulated a significant amount of cash which it was required to reinvest in operating companies by January 18, 1996 in order to avoid potentially burdensome regulation under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Investment Company Act and the rules and regulations thereunder require the registration of, and impose various substantive restrictions on, companies that engage primarily in the business of investing, reinvesting or trading in securities or engage in the business of investing, reinvesting, owning, holding or trading in securities and own or propose to acquire "investment securities" having "a value" in excess of 40% of a company's "total assets (exclusive of Government securities and cash items)" on an unconsolidated basis. Following dispositions of its then operating businesses pursuant to the Joint Plan, New Valley was above this threshold and relied on the one-year exemption from registration under the Investment Company Act provided by Rule 3a-2 thereunder, which exemption expired on January 18, 1996. Prior to such date, through New Valley's acquisition of the investment banking and brokerage business of Ladenburg, Thalmann & Co., Inc. and its acquisition of the Office Buildings and the Shopping Centers, New Valley was engaged primarily in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities, and the value of its investment securities was below the 40% threshold. Under the Investment Company Act, New Valley is required to determine the value of its total assets for purposes of the 40% threshold based on "market" or "fair" values, depending on the nature of the asset, at the end of the last preceding fiscal quarter and based on cost for assets acquired since that date. If New Valley were required to register in the future, under the Investment Company Act, it would be subject to a number of severe restrictions on its operations, capital structure and management, including without limitation entering into transactions with affiliates. If New Valley were required to register under the Investment Company Act, the Company may be in violation of the Investment Company Act and may be adversely affected by the restrictions of the Investment Company Act. In addition, registration under the Investment Company Act by the Company would constitute a violation of the indenture to which the Company is a party. In the first quarter of 1996, New Valley repurchased 72,104 Class A Preferred Shares for a total amount of $10,530. The Company now owns 59.72% of the Class A Preferred Shares. On March 13, 1996, New Valley declared a cash dividend of $10.00 per share on its Class A Preferred Shares payable on March 27, 1996. The Company received $6,183 in the distribution. C-16

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) 3. R JR NABISCO HOLDINGS CORP. in August 1995, New Valley received approval from the Federal Trade Commission to purchase up to 15% of the voting securities of R JR Nabisco Holdings Corp. ("R JR Nabisco") in the open market. As of December 31, 1995, New Valley held approximately 4,900,000 shares of R JR Nabisco common stock, par value $.01 per share (the "R JR Nabisco Common Stock"), with a market value of $150,446 (cost of $149,005). New Valley's investment in R JR Nabisco collateralizes margin loan financing of $75,119 at December 31, 1995. On October 17, 1995, New Valley entered into an agreement, as amended (the "Agreement"), with High River Limited Partnership ("High River"), an entity owned by Carl C. Icahn. Pursuant to the Agreement, New Valley sold approximately 1,600,000 shares of R JR Nabisco Common Stock to High River for an aggregate purchase price of $51,000 and the parties agreed that New Valley and High River would each invest up to approximately $250,000 in shares of R JR Nabisco Common Stock, subject to certain conditions and limitations. Any party to the Agreement may terminate it at any time, although under certain circumstances, the terminating party will be required to pay a fee of $50,000 to the nonterminating party. The Agreement also provides for the parties to pay certain other fees to each other under certain circumstances, including a net profit override to High River equal to 20% of New Valley's profit on its R JR Nabisco Common Stock, after certain expenses as defined in the Agreement. On October 17, 1995, the Company and BGLS entered into a separate agreement, as amended (the "High River Agreement"). Pursuant to each of these agreements, the parties agreed to take certain actions designed to cause R JR Nabisco to effectuate a spinoff of its food business, Nabisco Holdings Corp. ("Nabisco"), at the earliest possible date. Among other things, the Company agreed to solicit the holders of R JR Nabisco Common Stock to adopt the Spinoff Resolution, which is an advisory resolution to the Board of Directors of R JR Nabisco seeking a spinoff of the 80.5% of Nabisco held by R JR Nabisco to stockholders. Among other things, High River agreed in the High River Agreement to grant a written consent to the Spinoff Resolution with respect to all shares of R JR Nabisco Common Stock held by it and to grant a proxy with respect to all such shares in the event that the Company seeks to replace the incumbent Board of Directors of R JR Nabisco at the 1996 annual meeting of stockholders with a slate of directors committed to effect the spinoff. The Company and BGLS agreed not to engage in certain transactions with R JR Nabisco (including a sale of Liggett or a sale of its R JR Nabisco Common Stock to R JR Nabisco) and not to take certain other actions to the detriment of R JR Nabisco stockholders. High River also agreed that it would not engage in such transactions or take such other actions while the agreement was in effect. In the event that any signatory engages in such transactions or takes such other actions, the High River Agreement provides that the party so doing must pay a fee of $50,000 to the other. Any party to the High River Agreement may terminate it at any time, although under certain circumstances, the terminating party will be required to pay a fee of $50,000 to the nonterminating party. The High River Agreement also provides that BGLS pay certain other fees to High River under certain circumstances. On November 20, 1995, the Company, acting to preserve its right to nominate a slate of directors at R JR Nabisco's 1996 annual stockholders' meeting, submitted to R JR Nabisco information with respect to nominees committed to an immediate spinoff of Nabisco. On December 27, 1995, New Valley entered into an agreement with the Company pursuant to which New Valley agreed to pay directly or reimburse the Company and its subsidiaries for reasonable out- of-pocket expenses incurred in connection with pursuing the completed consent solicitation and the proxy solicitation. New Valley has also agreed to pay to BGLS a fee of 20% of the net profit received by New Valley or its subsidiaries from the sale of shares of R JR Nabisco Common Stock after New C-17

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) Valley and its subsidiaries have achieved a rate of return of 20% and after deduction of certain expenses incurred by New Valley and its subsidiaries, including the costs of the consent solicitation, the proxy solicitation and of acquiring the shares of common stock. New Valley has also agreed to indemnify the Company and its affiliates against certain liabilities arising out of the completed consent solicitation and the proxy solicitation. On December 28, 1995, as amended on February 20, 1996 and April 9, 1996, New Valley, the Company and Liggett engaged Jefferies & Company, Inc. ("Jefferies") as financial advisor in connection with New Valley's investment in R JR Nabisco and the Company's solicitation of consents and proxies from the shareholders of R JR Nabisco. New Valley has (i) paid to Jefferies an initial fee of $1,500 and (ii) has agreed to pay to Jefferies for the period commencing January 1, 1996 and ending March 31, 1996, monthly fees of $250 (which increased to $500 on February 20, 1996) and, in addition, until March 31, 1996, an additional monthly fee of $100 and for the month of April 1996, a fee of $160. These companies also have agreed to pay Jefferies 10% of the net profit (up to a maximum of $15,000) with respect to R JR Nabisco Common Stock (including any distributions made by R JR Nabisco) held or sold by these companies and their affiliates after deduction of certain expenses, including the costs of the solicitations, the proxy solicitation and the costs of acquiring the shares of the common stock. In addition, New Valley and the Company agreed to indemnify Jefferies against certain liabilities arising out of the solicitations. On December 29, 1995, the Company filed a definitive Consent Statement with the SEC and commenced solicitation of consents from stockholders of R JR Nabisco seeking, among other things, the approval of the Spinoff Resolution. Subsequent Events: On February 29, 1996, New Valley entered into a total return equity swap transaction ("The Equity Swap Agreement") with an unaffiliated company (the "Counterparty") relating to 1,000,000 shares of R JR Nabisco Common Stock. The transaction is for a period of up to six months, subject to earlier termination at the election of New Valley and provides for New Valley to make payment to the Counterparty of approximately $1,537 upon commencement of the swap. At the termination of the transaction, if the price of the common stock during a specified period prior to such date (the "Final Price") exceeds $34.42, the price of the R JR Nabisco Common Stock during a specified period following the commencement of the swap (the "Initial Price"), the Counterparty will pay New Valley an amount in cash equal to the amount of such appreciation with respect to 1,000,000 shares of R JR Nabisco Common Stock plus the value of any dividends with a record date occurring during the swap period. If the Final Price is less than the Initial Price, then New Valley will pay the Counterparty at the termination of the transaction an amount in cash equal to the amount of such decline with respect to 1,000,000 shares of R JR Nabisco Common Stock, offset by the value of any dividends, provided that, with respect to approximately 225,000 shares of R JR Nabisco Common Stock, New Valley will not be 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 are being guaranteed by the Counterparty's parent, a large foreign bank, and New Valley has pledged certain collateral in respect of its potential obligations under the swap and has agreed to pledge additional collateral under certain conditions. As of March 29, 1996, New Valley had an unrealized loss on this swap transaction of approximately $4,200 and had pledged collateral of approximately $11,800. On March 4, 1996, the Company filed a definitive Proxy Statement with the SEC and commenced solicitation of proxies in favor of its previously nominated slate of directors to replace R JR Nabisco's incumbent Board of Directors at its 1996 annual meeting of stockholders. As of March 29, 1996, New Valley had expensed approximately $10,000 for costs relating to its R JR Nabisco investment, of which approximately $4,000 was expensed in 1995. C-18

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) On March 13, 1996, the Company was informed by the independent inspectors of election that consents representing 142,237,880 votes (50.58%) were delivered in favor of the Spinoff Resolution and 150,926,535 votes (53.67%) were delivered in favor of the Bylaw Amendment. R JR Nabisco announced that it currently had no plans to contest the outcome of the vote. At March 29, 1996, New Valley held approximately 5,200,000 shares of R JR Nabisco Common Stock with a market value $156,143 (cost of approximately $158,000) collateralizing margin loan financing of approximately $83,500. 4. INVESTMENT IN BROOKE (OVERSEAS) LTD. On October 1, 1993, the Company transferred the stock of its wholly-owned real estate development subsidiary, BrookeMil Ltd. ("BrookeMil"), to LDL in exchange for 58% of the stock of LDL and a promissory note from BrookeMil as part of the settlement of a dispute with employees of LDL's tobacco company. Also on October 1, 1993, BrookeMil entered into a long-term lease, as lessor, of a western style office building in Moscow and received prepaid rent from the lessee. Cash received from the lessee was used by BrookeMil to repay the promissory note together with accrued interest of $5,313 and $4,017 in 1993 and 1995, respectively. These payments have been deferred by the Company and are being recognized over the lease term. In prior years, the Company did not consolidate LDL due to certain events continuing through 1995 which impaired the Company's ability to control the operations of LDL. The amounts invested in Russian ventures of $5,723 and $2,878 in 1994 and 1993, respectively, were expensed, based on the determination that there was significant uncertainty as to the recoverability of these amounts. The Company has reexamined the issue of consolidating LDL and at December 29, 1995 determined that a series of events in the latter part of 1995 (see below) has enabled the Company to exert sufficient control so that the recoverability of its investment appears reasonable. In the third quarter of 1995, BOL increased its investment in LDL from approximately 58% to 68% through a direct purchase of stock from other shareholders. BOL recorded goodwill in the amount of $435 which is being amortized over a ten year period. In October 1995, LDL entered into a loan agreement with Rosvneshtorg Bank, Moscow, Russia, to borrow up to $20,000 to fund real estate development. Interest on the note is based on the London Interbank Offered Rate ("LIBOR") plus 10%. Principal repayments are due from April through October of 1997. The loan agreement was arranged through a third party for a net fee of $4,044 payable ratably over the term of the loan. The Company has guaranteed the payment of the note and the broker's fee. All of the stock of BrookeMil has been pledged as collateral for the loan. At December 31, 1995, BrookeMil has drawn approximately $8,000 of the loan and accrued approximately $3,000 of the broker's fee, which has been deferred and is being amortized over the life of the Ioano Also in October 1995, BrookeMil purchased certain buildings, which it had previously leased from the Moscow Property Committee, for $4,369 excluding related transaction costs. BrookeMil has developed, or is in the process of developing, these buildings for commercial use. Finally, on December 29, 1995, LDL relinquished its 59.4% ownership in a joint real estate venture in exchange for 100% ownership of a tobacco factory owned by the venture with the intention of constructing a new manufacturing facility on the outskirts of Moscow. LDL's cost basis in the joint real estate venture of $2,675 was transferred to its basis in the tobacco factory. C-19

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands; Except Per Share Amounts) - (Continued) The additional amounts included in the financial statements as a result of consolidating the Russian subsidiaries at December 31, 1995 are as follows: Current assets .......................... Total assets ............................... 35.359 Current liabilities ....................... 10.602 Total liabilities ........................... 20.924 Stockholders' equity .................. 14.435 $!2.321 Revenues during 1995 from the date of consolidation, December 29, 1995, are not material. Amounts invested in the Russian subsidiary during the year ended December 31, 1995 were approximately $18,000. Of this amount, approximately $7,300 was capitalized. S(~b$¢quent Event:. On April 3, 1996, the Company entered into a stock purchase agreement (the "purchase agreement") with the chairman of LDL (the "Seller"). Under the purchase agreement, the Company acquired the 84,540 shares held by the Seller for $15 per share ($1,268). The purchase price is payable in installments during 1996 and the 84,540 shares of LDL collateralize the Company's obligations under both the purchase agreement and consulting agreement (described below). This transaction is expected to increase the Company's ownership percentage in LDL from 68% to 80%. Concurrently, the Company entered into a consulting agreement with the Seller for services through December 31, 1997. Under the terms of the consulting agreement, the Company will pay the Seller approximately $5,232 over five years. Also, LDL extended the Seller's employment agreement with LDL for one year at $384. Additionally, certain obligations of the Seller totaling approximately $2,300 were assigned to an affiliate of the Seller and a note receivable from a third party for approximately $3,300 relating to the sale of a previously owned subsidiary in Russia, which receivables had been charged to operations in prior years, were assigned to the affiliate in exchange for a waiver of an additional $1,000 in payments under the consulting agreement. 5. DISCONTINUED OPERATIONS A summary of discontinued operations follows: Year Ended December 31, Income from discontinued operations: New Valley .............................................................. $1,800 MAI ......................................................................... 698 SkyBox ..................................................................... 362 2.860 3,628 $28,177 20.065 33.824 23.693 62.001 Gain from disposal of operations: New Valley(A) ........................................................... SkyBox .................................................................... 5,231 139,935 13,138 11,055 18,369 150.990 Income from discontinued operations ................................. $2.1,229 $174,683 (A) See Note 2 for discussion of discontinued operations related to New Valley. $62.001 C-20

BROOKE GROUP LTDo AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) Net revenues of MAI Systems Corporation ("MAI") for the period January 1, 1995 to February 6, 1995 were $6,652 and for the years ended December 31, 1994 and 1993 were $66,095 and $115,291, respectively. Net revenues of SkyBox were $65,119 for the nine months ended September 30, 1993. New Valley: During the fourth quarter of 1994, New Valley sold or was in the process of selling virtually all of its current operations. In connection with the implementation of the provisions of the Joint Plan, New Valley completed the sale of Western Union Financial Services Inc. and certain other assets to First Financial Management Corporation (°FFMC"). (Refer to Note 2). Accordingly, the financial statements of the Company reflect its portion of the gain, $139,935, in gain on disposal of discontinued operations in 1994. On October 31, 1995, New Valley sold substantially all the assets of its wholly owned subsidiary, Western Union Data Services Company, Inc. (the "Messaging Service Business"), and conveyed substantially all of the liabilities of the Messaging Service Business to FFMC 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, $5,231, in gain on disposal of discontinued operations in 1995. MAI: On January 25, 1995, the Board of Directors of BGLS determined to declare a dividend of the stock of MAI to the Company with the intention of the Company distributing a special dividend of MAI common stock to its stockholders (the "MAI Distribution"). Accordingly, the Company approved the MAI Distribution of the 65.2% equity interest in MAI through a special dividend to its stockholders of one share of MAI for every six shares of the Company's common stock. The distribution occurred on February 13, 1995. As a result, MAI has been treated as a discontinued operation in the financial statements for all periods presented. The assets and liabilities of MAI at December 31, 1994 are included in other accrued liabilities and net long-term liabilities of businesses held for disposition. The MAI Distribution reduced the stockholder's deficit by $27,085 in the first quarter of 1995. On April 12, 1993, MAI filed a voluntary petition under Chapter 11 of the Bankruptcy Code. MAI emerged from bankruptcy on November 18, 1993. Under the plan of reorganization, the Company did not receive any distribution for its original equity ownership but did receive a 44.9% common ownership interest for the MAI debt it held as MAI's largest single creditor. Further, on February 1, 1994, the Company renegotiated a December 21, 1992 agreement with an unrelated third party which enabled the Company to purchase additional MAI equity for $3,565 in the reorganized entity. When combined with the interest originally received in the reorganization, total common ownership held by the Company at December 31, 1994 was approximately 65.2%. The terms of the plan of reorganization provided for the issuance of new MAI common stock having an estimated fair market value of $50,000 in exchange for the cancellation of unsecured debt. In connection with the issuance of the new common stock, the Company recorded an extraordinary gain of $46,440 for the difference between the debt being forgiven and the fair market value of the new MAI common stock issued. On March 22, 1993, a syndicate of banks (the "Banks") foreclosed on all of the outstanding capital stock of certain of MAI's European subsidiaries, on certain intellectual property of MAI and on C-21

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) amounts due to MAI from certain of its European subsidiaries (the "Foreclosure"), in satisfaction of all amounts due under MAI's term loan facilities and revolving facilities with the Banks. Because management's estimated fair market value of assets surrendered was less than the amount of the debt satisfied, the Foreclosure was accounted for as a troubled debt restructuring. As a result, the difference between the book value and management's estimated fair market value of the assets surrendered of $22,187 is included in the gain from discontinued operations and the difference between the carrying amount of the debt satisfied and the fair market value of the assets surrendered of $64,452 is classified as an extraordinary gain on foreclosure. 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. In 1993 MAI changed its year end to December 31 from September 30 and, therefore, in 1993 MAI was no longer consolidated on a three month lag. This change, amounting to $23,567, is reported as a change in accounting in the first quarter of 1993. The condensed statement of operations for this three month period which ended December 31, 1992 follows: Total revenue ................................................... Direct costs ...................................................... Gross profit ................................................... $59,183 37,442 21,741 Selling, general and administrative expenses. Non-recurring charges ..................................... Operating loss ............................................. 22,792 15,340 (16,391) Interest, net ...................................................... Loss before taxes ............................................ Income taxes ................................................... Net loss ........................................................ (4,675) (21,066) 2,501 $(23.567) SkyBox: On October 6, 1993 the Company distributed (hereinafter referred to as the "Distribution") to holders of record of its common stock at September 20, 1993 one share of common stock of its subsidiary, SkyBox International Inc. ("SkyBox"), for each of its 6,522,929 shares of common stock then outstanding, representing 81.5% of the SkyBox common stock and 46.6% of its direct voting power. After October 1, 1993, SkyBox was no longer consolidated and was accounted for on the equity method. During the fourth quarter of 1993 and continuing throughout 1994 and the first quarter of 1995, the Company sold all of its remaining SkyBox common stock for approximately $20,000. In addition, during the same period SkyBox redeemed the 300 shares of SkyBox Series A Preferred Stock which the Company held at the stated redemption price of $100,000 per share for a total of $30,000. C-22

o = BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) INVENTORIES Inventories consist of: December 31, 1995 1994 Finished goods ............................................................. $19,129 $18,374 Work-in-process ........................................................... 3,570 2,952 Raw materials ............................................................... 29,021 20,609 Replacement parts and supplies .................................. 4.903 3,754 Inventories at current cost ............................................ 56,623 45,689 LIFO adjustments ......................................................... 3.899 1,409 $60.522 $47,098 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. Liggett normally purchases all of its tobacco requirements from domestic and foreign leaf tobacco dealers, much of it under long-term purchase commitments which expire principally in December 1996. At December 31, 1995, Liggett had leaf tobacco purchase commitments of approximately $25,500. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of: December 31, 1995 1994 Land and improvements ............................................... $ 541 Buildings ....................................................................... 31,947 Machinery and equipment ............................................ 42,877 Leasehold improvements ............................................. 309 Assets held for sale ...................................................... 1,259 Asset under capital lease ............................................. Less accumulated depreciation .................................... $ 716 8,703 35,069 82 5.696 76,933 50,266 (27,868) (24,460) $49.065 $ ~5.806 The amounts provided for depreciation for the years ended December 31, 1995, 1994 and 1993 were $4,699, $4,609 and $4,675, respectively. The amountp, rovided ~ramortization ofassets undercapitallease ~rthe yearended December31, 1994 was $551. Subsequent event. On April 9, 1996 Liggett executed a definitive agreement with the County of Durham for the sake by Liggett to the County of Durham of certain surplus realty for a sale price of $4,300. It is anticipated that closing will occur on or before May 31, 1996.

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amour~ts) - (Continued) o NOTES PAYABLE. LONG-TERM DEBT AND OTHER OBLIGATIONS Notes payable, long-term debt and other obligations consist of: December 31, 1995 1994 13.75% Series 1 Senior Secured Notes due 1995 ................ 13.75% Series 2 Senior Secured Notes due 1997 ................ $ 91,179 16.125% Senior Subordinated Reset Notes due 1997 ......... 5,670 14.500% Subordinated Debentures due 1998 ...................... 126,295 Notes Payable - Foreign ....................................................... 11,122 Other ..................................................................................... 2,084 $ 23,594 91,294 5,670 126,295 4,940 Liggett: 11.500% Senior Secured Series B Notes due 1993 - 1999.. 119,485 Variable rate Series C Senior Secured Notes due 1999 ....... 32,279 Revolving credit facility ......................................................... 21.017 Total notes payable and long-term debt ..................................... Less: Current maturities 409,131 2.387 126,234 29,415 432,289 Amount due after one year ......................................................... $406.744 $405.798 Offer to Exchange: 15.75% Series A Senior Secured Notes Due 2001 for 13.75% Series 2 Senior Secured Notes Due 1997, and 15.75% Series B Senior Secured Notes Due 2001 for 16.125% Senior Subordinated Reset Notes Due 1997 and 14.500% Subordinated Debentures: As a result of the Exchange Agreement, dated November 21, 1995 (the "1995 Exchange Agreement"), on November 27, 1995, BGLS commenced an offer to exchange a total of $232,868 principal amount of 15.75% Senior Secured Notes due January 31, 2001, for all its outstanding Series 2 Notes, Reset Notes and Subordinated Debentures. The exchange ratio was $1,087.47 principal amount of new 15.75% Series A Senior Secured Notes ("Series A Notes") for each $1,000 principal amount of Series 2 Notes exchanged, $1,132.28 principal amount of new 15.75% Series B Senior Secured Notes ("Series B Notes") for each $1,000 principal amount of Reset Notes exchanged and $1,000 principal amount of new Series B Senior Secured 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 holders of in excess of 99% of the Series 2 Notes and 88% of the Subordinated Debentures agreed, subject to certain conditions, to tender their securities in the exchange offer. 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 remain outstanding (see "14.500% Subordinated Debentures due 1998" below). Holders of Reset Notes did not exchange and, in accordance with the 1995 Exchange Agreement, BGLS issued an irrevocable notice of redemption for all of the outstanding Reset Notes which were redeemed on March, 29 1996 for a total amount of $5,785, including premium, together with accrued interest of $452. C-24

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) The new Series A and 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. 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 is payable at 13.75% from October 1, 1995 to January 30, 1996 and 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, based upon the binding agreement as of November 21, 1995. The Series B Notes Indenture contains certain covenants, which among other things, limit the ability of BGLS to make distributions to the Company, limit additional indebtedness to $10,000 and restrict certain transactions with affiliates. Subsequent even~. On March 7, 1996, an additional $7,397 face amount of Series A Notes were sold for $6,300 including accrued interest with proceeds being used for the redemption of the Reset Notes (see above). 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. The Company has cancelled all the Series A Notes. 13.75% Series 1 Senior Secured Notes due 1995 13.75% Series 2 Senior Secured Notes due 1997: An Exchange and Termination Agreement (the "1994 Exchange Agreement") was entered into as of September 30, 1994 among the Company, BGLS and certain holders ("Participating Holders") of the 16.125% Senior Subordinated Reset Notes due 1997 ("Reset Notes") and the 14.500% Subordinated Debentures due 1998 ("Subordinated Debentures") pursuant to which certain prior agreements among the parties were terminated. The Participating Holders had advanced $13,702 to BGLS under the prior agreements. Under the 1994 Exchange Agreement, on October 3, 1994 BGLS exchanged an aggregate of $49,900 of new BGLS 13.75% Series 2 Senior Secured Notes due 1997 ("Series 2 Notes") for an equal principal amount of Reset Notes. BGLS and the Company also agreed, subject to applicable securities laws, to offer the other holders of the Reset Notes the opportunity to exchange the Reset Notes for the Series 2 Notes. That offer commenced October 21, 1994 and was closed December 12, 1994. An additional $33,675 of the Reset Notes were exchanged. In related transactions with the same Participating Holders, BGLS issued $23,594 of 13.75% Series 1 Senior Secured Notes due 1995 ("Series 1 Notes") to the same Participating Holders in consideration of the transfer to BGLS of previously issued Senior Secured Notes, on account of new loans by the same holders in respect of certain interest payable and to cover certain expenses of the Participating Holders. On June 12, 1995, BGLS redeemed all the Series 1 Notes in the amount of $23,594 plus accrued interest of $670. In connection with the 1995 Exchange Offer, all of the Series 2 Notes were exchanged for Senior Secured Notes and no Series 2 Notes remain outstanding. C-25

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Exce_~t Per Share Amounts) - (Continued) 16.125% Senior Subordinated Reset Notes due 1997 1~4.500% Subordinated Debentures due 1998: Pursuant to the 1995 Exchange Offer, discussed above, the Reset Notes were redeemed on March 29, 1996. The Subordinated Debentures in face amount of $800 remain outstanding and, as part of the 1995 Exchange Agreement, the Sixth Supplemental Indenture dated January 26, 1996 was executed by the Company in which substantially all of the covenants and events of default were eliminated pertaining to the Subordinated Debentures. 15.501% Junior Subordinated Secured Notes due 2008: Pursuant to an agreement (the "Purchase Agreement") dated February23, 1989 among the Company, Liberty Service Corporation ("Liberty") and its parent, Columbia Savings & Loan Association ("Columbia"), Liberty purchased from the Company $48,560 of the Company's 15.501% Junior Subordinated Secured Notes due 2008 (the "Junior Secured Notes") which was utilized to purchase New Valley securities. In the year ended December 31, 1993, the Company repurchased $48,560 of the Junior Secured Notes for $10,198. As a result of this transaction, the Company recorded extraordinary gains on extinguishment of indebtedness of $38,362 in the year ended December 31, 1993. Liggett 11.500% Senior Secured Series B Notes due 1993 - 1999: During the first quarter 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 require 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 Series B Notes due on February 1, 1999. The Liggett Series B Notes are coIlateralized by substantially all of the assets of Liggett, excluding accounts receivable and inventory. The Liggett Series B Notes may be redeemed, in whole or in part, at a price equal to 104%, 102% and 100% of the principal amount in the years 1996, 1997 and 1998, respectively, at the option of Liggett at any time on or after February 1, 1996. The Liggett Series B Notes contain restrictions on Liggett's ability to pay dividends, incur additional debt, grant liens and enter into any new agreements with affiliates. Issuance of Series C Variable Rate Notes: On January 31, 1994, Liggett issued $22,500 of Variable Rate Series C Senior Secured Notes Due 1999 (the "Series C Notes"). Liggett received $15,000 from the issuance in cash and received $7,500 in Liggett Sedes B Notes which were credited against the mandatory redemption requirements of Liggett Series B Notes required under the indenture for February 1, 1994. Liggett had received the necessary consents from the required percentage of holders of Liggett Series B Notes allowing for an aggregate principal amount up to but not exceeding $32,850 of Series C Notes to be issued under the Liggett Series B Indenture. The Series C Notes have the same terms (other than interest rate) and stated maturity as the Liggett Series B Notes. In connection with the consents, holders of Liggett Series B Notes received Series C Notes totaling $2,842 or 2% of their then current Liggett Series B Notes holdings. Liggett issued the remaining $7,508 of Series C Notes in November 1994. The Series C Notes bore a 16.5% interest rate, which was reset on February 1, 1995 to 19.75%, the maximum reset rate. C-26

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) On January 26, 1995, the Company sold the Series C Notes it held in face amount of $2,935. Revolving Credit Facility. - Liggett: On March 8, 1994, Liggett entered into a revolving credit facility (the "facility") for $40,000 with a syndicate of commercial banks. The facility is collateralized by all inventories and receivables of Liggett. At December 31, 1995, $21,017 was outstanding and $13,340 was available under the facility. Borrowings under the facility bear interest at a rate equal to 1.5% above the Philadelphia National Bank's prime rate which was 8.75% at December 31, 1995. The facility requires Liggett's compliance with certain financial and other covenants. The facility also limits the amount of dividends and distributions by Liggett. At December 31, 1995, Liggett was in compliance with all covenants under the facility. In October, 1995, LDL, a subsidiary of BOL, entered into a construction loan agreement with Rosvneshtorg Bank, Moscow, Russia for a period of two years on behalf of BrookeMil for $20,000. The interest rate is LIBOR plus 10%. (Refer to Note 4). The outstanding balance at December 31 was $7,967. Broker's fees of approximately $3,000 were recorded end are payable ratably over the term of the loan. In January 1995, LDL entered into a revolving credit facility for $1,667.with the same bank. The facility is denominated in rubles and is due within 180 days with an automatic renewal. Because the credit facility exists in a hyperinflationary economy, it bears interest at a rate of 85% per annum. At December 31, 1995, the balance was $155. Scheduled Maturities: Subsequent to the closing of the 1995 Exchange Agreement on January 30, 1996 and the redemption of the Reset Notes, scheduled maturities of long-term debt for each of the next five years are as follows: 1996 .............$ 2,387 1997 ............. 38,519 1998 ............. 38,506 1999 ............. 107,375 2000 ............. Thereafter .... 232.868 $419.655 C-27

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - !Continued) E TRUC RING CHAR E In early 1993, Liggett restructured its headquarters operations to reduce operating costs. In connection with the restructuring, Liggett has recorded a non-recurring net charge to operating income of $5,565 ($2,531 is included in cost of sales). In January 1994, Liggett reduced its field sales force and recorded a charge of $3,000 against operating income in the fourth quarter of 1993. During the year ended December 31, 1995, Liggett offered a severance and benefit program to reduce personnel costs on an ongoing basis. This program resulted in a charge to operations of $2,548. In 1993, the Company restructured its domestic and foreign operations including reduction in personnel and subleasing of certain office spaces to reduce operating costs. In connection with the restructuring, the Company recorded non-recurring charges of approximately $5,879 for the year ended December 31, 1993. EMPL YEE BENEFIT PLANS fin ir m I : 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"). In a continuing effort to reduce operating expenses, all defined benefit plans were frozen between 1993 and 1995. As a result of this, the Company recorded a curtailment charge of $1,550, $691 and $4,766 in 1995, 1994 and 1993, respectively. The Company's net pension expense consists of the following components: Year Ended December 31, 1995 1 1994 1 1993 Service cost- benefits earned during the period .......... $ 454 $ 1,140 $ 2,065 Interest cost on projected benefit obligation ................. 12,850 12,363 13,746 Actual return on assets ................................................. (23,501) (5,144) (23,925) Curtailment related to plan restructuring ....................... 1,550 691 4,766 Net amortization and deferral ....................................... 9.547 (8.337) 8.727 $_____~0_0 $ 713 $ 5.379 In accordance with SFAS 87, "Employers' Accounting for Pensions", the overfunded and underfunded plans with respect to the accumulated benefit obligation at December 31, 1994 have been segregated for financial statement presentation. All plans were underfunded with re.spect to the C-28

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Exce_~t Per Share Amounts) - (Continued) 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, 1995 and 1994 for the pension plans are as follows: December 31, 1995 Accumulated Benefits Exceed Assets Actuarial present value of benefit obligations: Vested benefit obligation ................................ Accumulated benefit obligation ....................... Projected benefit obligation ............................. Plan assets at fair value ...........................................163.913 Projected benefit obligation in excess of (less than) plan assets ..................................................... 8,404 Unrecognized net gain ............................................. 14,449 Unrecognized prior service cost ............................... Adjustment required to recognize minimum liability.. 976 Pension liability before purchase accounting valuation adjustments ..................................... 23,829 Purchase accounting valuation adjustments related to income taxes ..............................................(3.773~ Net pension liability included in the balance sheets.. $ 20.056 $166.448 $172,317 $172,317 December31, 1994 Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets $77,521 $77.521 $77,521 $81,472 $83.471 $83,622 78.239 (718) 7,232 78,475 5,147 11,143 (229) 803 6,514 16,864 (2.061) ~2.060) $ 4.453 $14,804 Assumptions used in the determination of net benefit obligations were as follows: pension expense and the actuarial present value of 1995 1994 Discount rates ...................................................... Accrued rates of return on invested assets .......... Salary increase assumptions ............................... 6.25 - 8.50% 5.75 - 8.50% 9.0% 9.0% N/A 3.0% per annum per annum Plan assets consist of commingled funds, marketable equity securities and corporate and government debt securities. Postretirement Medical and Life Insuran¢~ Plans: BGLS and Liggett Substantially all of the Company's United States employees were eligible for certain postretirement benefits if they reach retirement age while working for the Company; however, there were several modifications made to the Company's Plans in 1993. Prior to 1994, the Plans had reimbursed 80 percent of retirees' medical claims. However, the Company announced on November 11, 1993 that retirees would be required to fund 60 percent of participant medical premiums in 1994 and 100 percent of premiums on a going-forward basis, effective January 1, 1995. As a result of the above modifications, the Plan's Accumulated Postretirement Benefit Obligation was decreased from $39,029 at January 1, 1993 to $15,137 at December 31, 1993. C-29

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) The components of net periodic postretirement (benefit) cost for the years ended December 31, 1995, 1994 and 1993 are as follows: 1995 1_.9_9_4 1993 Service cost, benefits attributed to employee service during the year ..................................................... $ 68 $ 63 $ 587 Interest cost on accumulated postretirement benefit obligation .............................................................. 970 1,037 3,133 Curtailment credits related to restructuring expense ........................................................................... (623) Immediate recognition of transition obligation .......................... 16,853 Curtailment credits related to modification of Medical Plans ................................................................... Charge for special termination benefits ................................... Amortization of net (gain) loss ................................................. 489 (26) 33 (26,172) Net periodic postretirement cost (benefit) ................................ $1,501 $1,133 $ (6,222) The following sets forth the actuarial present value of the Accumulated Postretirement Benefit Obligation ("APBO") at December 31, 1995 and 1994 applicable to each employee group: 1995 1994 Retired employees ................................................................... $ 8,673 Active employees - fully eligible ............................................... 1,707 Active employees - not fully eligible ......................................... 1,078 APBO ............................................................................... $11,458 Unrecognized net gain ............................................................. 1,339 Purchase accounting valuation adjustments related to income taxes .................................................................... Postretirement liability .............................................................. $ 9,292 1,170 1,143 $11,605 1,277 (1,181) (1.291) $11.616 $11.591 The APBO at December 31, 1995 was determined using a discount rate of 7.5% and a health-care cost trend rate ranging from 10% in the near term, declining to 4% in the third and subsequent years. A 1% increase in the trend rate for health care costs would have increased the APBO and postretirement benefit costs by $420 and $50 for the year ended December 31, 1995. The Company does not hold any assets reserved for use in the plan. 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. Liggett contributed $900, $420 and $1,787 to the 401(k) plans for the years ended December 31, 1995, 1994 and 1993, respectively. C-30

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (.Continued) 11. INCOME TAXES The Company files a consolidated federal income tax return that includes its more than 80% owned United States subsidiaries. The amounts provided for income taxes are as follows: Year Ended December 31, 1995 I 1994 I 1993 Current: U.S. Federal .......................................................... State ...................................................................... $ 342 Deferred: U.S. Federal .......................................................... State ...................................................................... Total provision (benefit) for continuing operations ...... $~342 $(24,714) $I ,000 227 $(24,487..) 2,141 2.052 $5.193 The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows: December 31. 1995 December 31. 1994 Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities Sales and product allowances ......... $ 2,337 Inventory .......................................... 831 Coupon accruals .............................. 3,198 Property, plant and equipment ......... Employee benefit accruals ............... 13,249 Debt restructuring charges .............. 5,702 Excess of tax basis over book basis- non-consolidated entities ........... 4,327 Excess of book basis over tax basis- non-consolidated entities ........... Other ................................................ Legal settlements ............................. 3,556 Net operating loss carryforwards ..... 54,860 Valuation allowance ......................... (73,955) Reclassifications .............................. (13,044) $ 1,061 $ 2,721 $1,280 550 $ 2,397 4,645 6,200 6,554 12,502 3,403 17,508 5,564 21,306 1,289 48,501 (60,862) $13.044) (30.257) (30.2~57) . $ $ Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rate are summarized as follows: (Loss) from continuing operations before income taxes ................................................... Federal income tax (benefit) at statutory rate ............... Year Ended December 31, 1995 I 1994 I 1993 $(45.002) $(42.478) $(64.035) (15,751 ) (14,867) (22,412) Increases (decreases) resulting from: State income taxes, net of federal income tax benefits ................................................................... 342 Changes in valuation allowance ................................ 11,810 Other .......................................................................... 3,941 Reduction of reserves ................................................ Provision (benefit) forincome tax .............................. $. 342 148 1,333 14,432 26,272 (24.200) $(24.487) $ 5.193 The Company favorably settled an audit with the Internal Revenue Service in the third quarter of 1994 and has adjusted its reserves accordingly. C-31

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (.Continued) At December 31, 1995, the Company and its consolidated group had net operating loss carryforwards for tax purposes of approximately $135,000 which may be subject to certain restrictions and limitations and which will expire in the years 2006 to 2009. 2. 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: Yearending December31: 1996 ........................................ $ 4,014 1997 ........................................ 2,989 1998 ........................................ 2,344 1999 ........................................ 1,252 2000 ........................................ 900 2001 and thereaffer ................ 24.950 $36.449 Lease commitments for 2001 and thereafter relate primarily to the remaining 45 years of a land lease and 23 years of an equipment lease in Russia. The total of minimum rentals to be received in the future by certain of the Company's subsidiaries under noncancelable subleases are as follows: Yearending December31: 1996 ........................................ 1997 ........................................ $ 642 126 $ 768 The Company's rental expense for the years ended December 31, 1995, 1994 and 1993 was $4,449, $4,808 and $7,286 respectively. 13. CONTINGENT VALUE RIGHTR The CVR entitled the holder (3,117,400 CVRs outstanding at December31, 1992) to receive on November 15, 1993 a cash payment equal to the amount, if any, by which the then current market value of the Company's common stock for a period of 20 trading days ending five days before such date was less than $19.45 per share, reduced as provided in the CVR agreement for dividends and distributions, if any, paid on shares of common stock up to the time of maturity. The Company was permitted to redeem the CVRs in whole or in part, at any time after May 15, 1991, for a price equal to $13.75 per share increased from November 1990 at a 15% compound annual rate as adjusted for dividends paid (the "Target Price") minus the then market price of the common stock as of a date 60 days before the redemption date. The CVR obligation, initially recorded at fair market value which was de minimis, was adjusted to the calculated redemption value through October 15, 1993, with the change reflected directly in stockholder's equity C-32

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) The CVR's were senior collateralized obligations of the Company and were freely transferable separately from the common stock. They were collateralized by assets ($12,000 in cash and certain securities of the Company) deposited with a trustee. The Company satisfied the major portion of its liability with respect to the CVR obligation on October 6, 1993 through the distribution of SkyBox common stock which removed $44,813 of the obligation. The remaining portion of the obligation was satisfied pursuant to a Notice of Redemption given on October 15, 1993 whereby the Company redeemed each CVR for $0.36 (a total of $1,122) on December 9, 1993 or thereafter when such CVR was surrendered to the Trustee. Accordingly, all collateral (except for the $1,122, above) which included cash and certain securities of the Company and BGLS was released. (See also Note 16, "Contingencies", regarding a complaint filed by a group of CVR holders). 14. EQUITY Preferred StoCk Series E. F and G: On September 14, 1993, certain officers and an employee of the Company exchanged 11,124,172 common shares for 8,929.338 shares of Series E and 2,194.834 of Series F redeemable preferred stock. Each share of Series E Preferred Stock is convertible beginning 30 days after initial issuance into 1,000 shares of the Company's common stock. At October 31, 1993, all Series E Preferred Stock had been converted into the Company's common stock. The terms of the Series F Preferred Stock are identical to those of the Series E Preferred Stock, except that the Series F Preferred Stock are entitled to receive, in addition to dividends payable on the Series E Preferred Stock, a special dividend per share in an amount equal to the appraised value per share of the SkyBox common stock ($14.375) dividended in the Distribution times the number of shares into which it is convertible, payable one year from the date of the Distribution, in cash, or at the option of the Company, in the Company's common stock valued at its average closing price over the 20 trading days prior to payment. Following payment of this dividend, each share of Series F Preferred Stock will convert automatically into Company common stock. On December 30, 1993, certain present and a former officer of the Company were offered an exchange for all shares remaining (a total of 2,184.834) of Series F redeemable preferred stock for 2,184.834 shares of Series G redeemable preferred stock. The terms of the Series G Preferred Stock are identical to those of the Series F Stock, except that the special dividend on Series G stock was accelerated and paid in two parts. To the extent that dividends were utilized to facilitate the repayment or defrayal of certain debt obligations to the Company, cash dividends were disbursed or dividends were waived to satisfy such obligations. The remaining portion of the special dividend was payable in four installments on January 1, April 1, July 1 and October 1, 1994 payable in cash or shares of common stock at the option of the Company using the prime rate announced by Citibank, N.A. discounted by the number of days between the installment payment date and October 6, 1994, the date the Special dividend on the Series F preferred stock was to have been paid out. (Refer to Note 16 "Contingencies" and Note 17 "Related Party Transactions"). At December 31, 1994, all Series G Preferred Stock had been converted into Company common stock. C-33

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (.Continued) Treasury_ Stock: For information concerning the exercise of a warrant for 607,889 shares of the Company's common stock, for the year ended December 31, 1994, refer to Note 17. For the year ended December 31, 1993, the Company purchased at market prices 1,224,200 shares of common stock in the open market for a total amount of $3,323. In 1995 and 1994, pursuant to a Stock Grant Agreement, the Company purchased 33,748 and 41,641 shares of common stock, respectively, from two former employees at market price. Through December 31, 1993, 225,000 unvested shares were surrendered by a former officer and two employees. In addition, 127,939 vested shares were transferred to the Company by two former officers and an employee in satisfaction of certain liabilities. 15. STOCK PLANS The Company's Stock Option Plan (the "Plan") provides that options and stock appreciation rights ("SAR's") for up to 400,000 shares of common stock may be granted to officers and other key employees of the Company. All options must be granted on or before the tenth anniversary of the effective date of the Plan (September 1, 1997) and at prices not less than the fair market value of the stock on the date of grant. The exercise price may be paid in cash or in shares of the Company's common stock having a fair market value equal to the cash amount for which it was substituted. Shares received upon exercise of a portion of an option may be applied automatically at their fair market value to purchase additional portions of the option. Shares relating to options that expire or are canceled are added back to shares authorized for future grants. At December 31, 1995, 1994 and 1993, no options were outstanding; however, there were 212,400 shares available to be granted under this Plan. On August 7, 1991, the Company's Board of Dire, tors adopted the 1991 Stock Incentive Plan (the "1991 Incentive Plan") for officers and other key employees of the Company and its subsidiaries and authorized the grant of up to 1,213,343 shares of common stock under the 1991 Incentive Plan. The 1991 Incentive Plan was approved by stockholders on September 12, 1991, and all shares were granted during 1991. Of the awards made under the 1991 Incentive Plan, 110,000 shares were unrestricted shares and the remainder were shares whose transferability were restricted for a specified period of time and vest over a four-year period (the "Restricted Shares"). Restricted Shares had full voting rights and, subject to certain escrow arrangements, were entitled to all dividends. Holders of unrestricted shares had all rights of a stockholder. In connection with the Company's 1991 Incentive Plan described above, the Company issued an additional 998,043 shares of common stock. During the first quarter of 1993, the Company granted an additional 375,000 shares of common stock to an officer and an employee, under terms substantially similar to the Restricted Shares described above. During the fourth quarter of 1993, the officer surrendered the equivalent of 150,000 unvested shares received earlier in the year. Pursuant to an agreement dated as of January 1, 1994, the Company granted 500,000 shares of restricted common stock to a consultant who also serves as the Chairman of SkyBox and a member of the Board of Directors and President of New Valley. 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 will vest in 1997. In addition, on January 25, 1995 the Company entered C-34

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thou ands Exce tPerSh~areAmount - C~) into a nonqualified 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. Unexercised options do not provide any rights of a stockholder; however, the grant does provide for dividend equivalent rights on the unexercised shares. During 1995, 1994 and 1993, the Company recorded charges to income of $557, $781 and $790 for compensation equal to the excess of the fair market value for the shares granted over the price paid for them and, in 1995, recorded charges to income of $150 for the dividend equivalent rights. In 1993, 75,000 restricted shares were cancelled and all other shares were deemed unrestricted as a result of certain officers' termination of employment. 16. CONTINGENCIES Liggett: 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 actually were commenced against Brooke Group Ltd. in its former name or in its present name or against Liggett), since all involve the tobacco manufacturing and marketing activities currently performed by Liggett. New cases continue to be commenced against Liggett and other cigarette manufacturers. As new cases are commenced, the costs associated with defending such cases and the risks attendant to the inherent unpredictability of litigation continue to increase. Liggett has been receiving certain financial assistance from others in the industry in defraying the costs incurred in the defense of smoking and health litigation and related proceedings. The future financial benefit to the Company is not quantifiable at this time since the arrangements for assistance can be terminated on limited notice, or under certain circumstances, without notice, and the amount of assistance received is a function of the level of costs incurred. Certain joint defense arrangements, and the financial benefits incident thereto, have ended. No assurances can be made that other arrangements will continue. To date a number of such actions, including several against Liggett, have been disposed of favorably to the defendants and no plaintiff has ultimately prevailed in trial for recovery of damages in any such action. In the action entitled Cipollone v, Liggett GrouP Inc.. et al., the United States Supreme Court on June 24, 1992, issued an opinion regarding federal preemption of state law damage actions. The Supreme Court in (,3ipoIIone concluded that The Federal Cigarette Labeling and Advertising Act (the "1965 Act") did not preempt any state common law damage claims. Relying on The Public Health Cigarette Smoking Act of 1969 (the "1969 Act"), however, the Supreme Court concluded that the 1969 Act preempted certain, but not all, common law damage claims. Accordingly, the decision bars plaintiff from asserting claims that, after the effective date of the 1969 Act, the tobacco companies either failed to warn adequately of the claimed health risks of cigarette smoking or sought to neutralize those claimed risks in their advertising or promotion of cigarettes. It does permit, however, claims for fraudulent misrepresentation (other than a claim of fraudulently neutralizing the warning), concealment (other than in advertising and promotion of cigarettes), conspiracy and breach of express warranty after 1969. The Court expressed no opinion on whether any of these claims are viable under state law, but assumed ~rguendo that they are viable.

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) In addition, bills have been introduced in Congress on occasion to eliminate the federal preemption defense. Enactment of any federal legislation with such an effect could result in a significant increase in claims, liabilities and litigation costs. On September 10, 1993, an action entitled Sackman V. Liggett Group Inc., United States District Court, Eastern District of New York, was filed against Liggett alone alleging as injury lung cancer. Fact discovery closed on August 31, 1995 and expert discovery is scheduled to close on July 3, 1996. It is possible that the case will be scheduled for trial during 1996. On March 19, 1996, the Magistrate Judge assigned to the case ordered Liggett to produce certain of its documents with respect to which Liggett has asserted various claims of privilege. Liggett intends to appeal the decision and order. Upon Liggett's motion, the Court has enlarged the time to and including May 1, 1996 for Liggett to file its appeal. The other major cigarette manufacturers and The Council for Tobacco Research U.S.A., Inc. have moved to intervene. On May 11, 1993, in the case entitled V~lks v. The American Tobacco.Company,, No. 91-12,355, Circuit Court of Washington County, State of Mississippi (a case in which Liggett was not a defendant), the tdal court granted plaintiffs' motion to impose absolute liability on defendants for the manufacture and sale of cigarettes and struck defendants' affirmative defenses of assumption of risk and comparative fault/contributory negligence. The trial court ruled that the only issues to be tried in the case were causation and damages. No other court has ever imposed absolute liability on a manufacturer of cigarettes. After tdal, the jury returned a verdict for defendants, finding no liability. The Company is or has been a defendant in other cases in Mississippi and it cannot be stated that other courts will not apply the W~lks ruling as to absolute liability. On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et al., Superior Court of the State of California, City of San Diego, was filed against Liggett and others. In her complaint, plaintiff, purportedly on behalf of the general public, alleges that defendants have been engaged in unlawful, unfair and fraudulent business practices by allegedly misrepresenting and concealing from the public scientific studies pertaining to smoking and health funded by, and misrepresenting the independence of, the Council for Tobacco Research and its predecessor. The complaint seeks equitable relief against the defendants, including the imposition of a corrective advertising campaign, restitution of funds, disgorgement of revenues and profits and the imposition of a constructive trust. The case is presently in the discovery phase. On October 31, 1991, an action entitled Broin et al v, Philip Morris Companies. Inc.. et al., Circuit Court of the 11th Judicial District in and for Dade County, Florida, was filed against Liggett and others. This case was the first class action commenced against the industry, and has been brought by plaintiffs on behalf of all flight attendants that have worked or are presently working for airlines based in the United States and who have never regularly smoked cigarettes but allege that they have been damaged by involuntary exposure to ETS. On December 12, 1994, plaintiffs' motion to certify the action as a class action was granted. Defendants have appealed this ruling and on January 3, 1996, the Third District of the Florida Court of Appeals affirmed the ruling of the trial court. On January 18, 1996, defendants filed a petition for rehearing, for rehearing ¢_~ banc and for certification to the Florida Supreme Court. Defendants' petition has not been ruled upon as yet. On March 25, 1994, an action entitled Castano, et al v. The American Tobacco Company. et al., United States District Court, Eastern District of Louisiana, was filed against Liggett and others. The class action complaint was brought on behalf of plaintiffs and residents of the United States who claim to be addicted to tobacco products and survivors who claim their decedents were also so addicted. The complaint is based upon the claim that defendants manipulated the nicotine levels in their tobacco products with the intent to addict plaintiffs and the class members and, inter alia, fraud, C-36

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) deceit, negligent misrepresentation, breach of express and implied warranty, strict liability and violation of consumer protection statutes. Plaintiffs seek compensatory and punitive damages, equitable relief including disgorgement of profits from the sale of cigarettes and creation of a fund to monitor the health of class members and to pay for medical expenses allegedly caused by defendants, attorneys' fees and costs. On February 17, 1995, the court issued an Order that granted in part Plaintiffs' motion for class certification for certain claims, together with punitive damages to the end of establishing a multiplier to compute punitive damage awards. Defendants' application for discretionary appeal to the Court of Appeals for the Fifth Circuit was granted. Oral argument was held on April 2, 1996. On May 5, 1994, an action entitled Engle. et al v. R. J. Reynolds Tobacco Company. et al.. Circuit Court of the 11th Judicial District in and for Dade County, Florida, was filed against Liggett and others. The class action complaint was brought on behalf of plaintiffs and all persons in the United States who allegedly have become addicted to cigarette products and allegedly have suffered personal injury as a result thereof. Plaintiffs seek compensatory and punitive damages together with equitable relief including but not limited to a medical fund for future health care costs, attorneys' fees and costs. On October 31, 1994, plaintiffs' motion to certify the action as a class action was granted. Defendants have appealed this ruling. On January 31, 1996, the Third District of the Florida Court of Appeals affirmed the ruling of the trial court certifying the action as a class action, but modified the trial court ruling to limit the class to Florida citizens and residents. It is anticipated that defendants will file a petition for rehearing, for rehearing en banc and for certification to the Florida Supreme Court. On March 12, 1996, the Company and Liggett entered into an agreement to settle the Castano class action tobacco litigation. The settlement undertakes to release the Company and Liggett from all current and future addiction-based claims, including claims by a nationwide class of smokers in the Castano class action pending in Louisiana federal court as well as claims by a narrower statewide class in the Engle class action pending in Florida state court. The settlement is subject to and conditioned upon the approval of United States District Court for the Eastern District of Louisiana. The Company is unable to determine at this time when the Court will review the settlement, and no assurance can be given that the settlement will be approved by the Court. Certain items of the settlement are summarized below. Under the settlement, the Castano class would 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, together with reasonable fees and expenses of the Castano Plaintiffs Legal Committee. Settlement funds received by the class would be used to pay half the cost of smoking-cessation programs for eligible class members. While neither consenting to FDA jurisdiction nor waiving their objections thereto, the Company and Liggett also have agreed to phase in compliance with certain of the proposed interim 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 Company and Liggett have the right to terminate the .Castano settlement if the remaining defendants succeed on the merits or in the event of a full and final denial of class action certification. The terms of the settlement would still apply if the Castano plaintiffs or their lawyers were to institute a substantially similar new class action against the tobacco industry. The Company and Liggett may also terminate the settlement if they conclude that too many class members have chosen to opt out of the settlement. In the event of any such termination by the Company and Liggett, the named plaintiffs would be at liberty to renew their prosecution of such civil action against the Company and Liggett. C-37

r BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) On March 14, 1996, the Company and 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 of the Castano settlement or, if earlier, the completion of a combination by the Company or Liggett with certain defendants, or an affiliate thereof, in Castano, the Castano Plaintiffs agree not to enter into any settlement agreement with any Castano defendant which would reduce the terms of the Castano settlement agreement. If the .Castano Plaintiffs 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 enters into any such transaction, then the Castan0 Plaintiffs will be entitled to receive $250,000 within thirty days from the transacting party. An action entitled Yvonne Roger8 v. Liggett Group Inc. et al.. Superior Court, Marion County, Indiana, was filed by the plaintiff on March 27, 1987 against Liggett and others. The plaintiff seeks compensatory and punitive damages for cancer alleged to have been caused by cigarette smoking. .Trial commenced on January 31, 1995. The trial ended on February 22, 1995 when the trial court declared a mistrial due to the jury's inability to reach a verdict. The Court directed a verdict in favor of the defendants as to the issue of punitive damages during the trial of this action. A second trial has been scheduled to commence August 5, 1996. On May 23, 1994, an action entitled Mike Moore, Attorney General, ex rel State of Mississippi vs. The American Tobacco Company. et al., Chancery Court for the County of Jackson, State of Mississippi, was filed against Liggett and others. The State of Mississippi seeks restitution and indemnity for medical payments and expenses made or incurred by it on behalf of welfare patients for tobacco related illnesses. Similar actions (although not identical) have been filed recently by the State of Minnesota (together with Minnesota Blue Cross-Blue Shield), by the State of West Virginia and more recently by the Commonwealth of Massachusetts. In West Virginia, the trial Court, in a ruling issued on May 3, 1995, dismissed eight of the ten counts of the complaint filed therein, leaving only two counts of an alleged conspiracy to control the market and the market price of tobacco products and an alleged consumer protection claim. In a subsequent ruling, the trial court adjudged the contingent fee agreement entered into by the State of West Virginia and its counsel to be unconstitutional under the Constitution of the State of West Virginia. In Mississippi, the Governor has recently commenced an action in the Mississippi Supreme Court against the Attorney General of the state, seeking a writ of prohibition to bar further prosecution and dismissal of the suit brought by the Attorney General of the state seeking such restitution and indemnity, alleging that the commencement and prosecution of such a civil action by the Attorney General of the state was and is outside the authority of the Attorney General. On November 28, 1995, each of the major manufacturers in the industry, including Liggett, filed suit in both the Commonwealth of Massachusetts and in the State of Texas seeking declaratory relief to the effect that the commencement of any such litigation (as had been filed by Florida, Mississippi, West Virginia and Minnesota and now by Massachusetts) seeking to recover Medicaid expenses against the manufacturers by either the Commonwealth of Massachusetts or the State of Texas would be unlawful. On January 22, 1996, a suit seeking substantially similar declaratory relief was filed in the State of Maryland. C-38

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) The State of Florida enacted legislation, effective July 1, 1994, allowing certain state authorities or entities to commence litigation seeking recovery of Medicaid payments made on behalf of Medicaid recipients as a result of diseases (including but not limited to diseases allegedly caused by cigarette smoking) allegedly caused by liable third parties (including but not limited to the tobacco industry). This statute purportedly abrogates certain defenses typically available to defendants. This legislation would impose on the tobacco industry, if ultimate liability of the industry is established in litigation, liability based upon market share for such payments made as a result of such smoking related diseases. Although a suit has been commenced to challenge the constitutionality of the Florida legislation, no assurance can be given that it will be successful. On May 6, 1995, the Florida legislature voted in favor of a bill to repeal this legislation, but the Governor of Florida vetoed this repealer bill. On March 13, 1996, the Florida legislature considered taking certain action to override the veto of the repealer bill if the requisite vote could be attained, but decided not to take formal action when it was determined that it could not attain the requisite vote. On February 22, 1995, suit was commenced pursuant to the above-referenced enabling statute by the State of Florida, acting through the Agency For Health Care Administration against Liggett and others, seeking restitution of monies expended in the past and which may be expended in the future by the State of Florida to provide health care to Medicaid recipients for injuries and ailments allegedly caused by the use of cigarettes and other tobacco products. Plaintiffs also seek a variety of other forms of relief including a disgorgement of all profits from the sales of cigarettes in Florida. The Commonwealth of Massachusetts has enacted legislation authorizing lawsuits similar to the suits filed by the States of Mississippi, Minnesota, West Virginia, Louisiana and Texas. Aside from the Florida and Massachusetts statutes, legislation authorizing the state to sue a company or individual to recover costs incurred by the state to provide health care to persons injured by the company or individual also has been introduced in at least nine other states. These bills contain some or all of the following provisions: eliminating certain affirmative defenses, permitting the use of statistical evidence to prove causation and damages, adopting market share liability and allowing class action suits without notification to class members. On March 15, 1996, the Company and Liggett entered into a settlement of tobacco litigation with the Attorneys General of the states of Florida, Louisiana, Massachusetts, Mississippi and West Virginia. The settlement with the Attorneys General releases the Company and Liggett from all tobacco- related claims by these states including claims for Medicaid reimbursement and concerning sales of cigarettes to minors. The settlement provides that additional states which commence similar Attorney General actions may agree to be bound by the settlement prior to six months from the date thereof (subject to extension of such period by the settling defendants). Certain of the terms of the settlement are summarized below. Under the settlement, the states would share an initial $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 sixty days after either a default by Liggett in its payment obligations under the settlement or a merger or other transaction by 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 would range from 2-1/2% to 7-1/2% of Liggett's pretax income depending on the number of additional states joining the settlement. 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 transaction with another defendant in the lawsuits within three years of the date of the settlement.

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands. Except Per Share Amounts! - !Continued) Settlement funds received by the Attorneys General will be used to reimburse the states' smoking- related healthcare costs. VVhile neither consenting to FDA jurisdiction nor waiving their objections thereto, the Company and Liggett also have agreed to phase in compliance with certain of the proposed interim FDA regulations on the same bases as provided in the Castano settlement. The Company and Liggett have the right to terminate the settlement with respect to any state participating in the settlement if any of the remaining defendants in the litigation succeed on the merits in that state's Attorney General action. The Company and Liggett may also terminate the settlement if they conclude that too many states have filed Attorney General actions and have not resolved such cases as to the settling defendants by joining in the settlement. In the event of any such termination by the Company and Liggett, the named plaintiffs would be at liberty to renew the prosecution of such civil action against the Company and Liggett. Currently, in addition to Cordova, approximately 90 product liability lawsuits, which have been filed in various jurisdictions, are pending and active in which Liggett is a defendant. Of these, 68 are pending in the State of Florida. In most of these lawsuits, plaintiffs seek punitive as well as compensatory damages. In the product liability lawsuits presently pending in Florida against Liggett and others, three are scheduled for trial during 1996. A grand jury investigation presently is being conducted by the office of the United States Attorney for the Eastern District of New York regarding possible violations of criminal law relating to the activities of The Council for Tobacco Research - USA, Inc. The Company was a sponsor of The Council for Tobacco Research - USA, Inc. at one time. The Company is unable at this time to predict the outcome of the investigation. Liggett has been responding to a civil investigative demand from the Antitrust Division of the United States Department of Justice which requests certain information from Liggett. The request appears to focus on United States tobacco industry activities in connection with product development efforts respecting, in particular, "fire-safe" or self-extinguishing cigarettes. It also requests certain general information addressing Liggett's involvement with and relationship to its competitors. The Company is unable to predict at this time the outcome of this investigation. In March and April 1994, the Health and the Environmental Subcommittee of the Energy and Commerce Committee of the House of Representatives held hearings regarding nicotine in cigarettes. On March 25, 1994, Commissioner David A. Kessler of the Food and Drug Administration ("FDA") gave testimony as to the potential regulation of nicotine under the Food, Drug and Cosmetic Act, and the potential for jurisdiction over the regulation of cigarettes to be accorded to the FDA. In response to commissioner Kessler's allegations about manipulation of nicotine by cigarette manufacturers, the chief executive of each of the major cigarette manufacturers, including Liggett, testified before the subcommittee on April 14, 1994, denying Commissioner Kessler's claims. An FDA advisory panel has stated that it believes nicotine is addictive. On August 10, 1995, the FDA filed in the Federal Register a Notice of Proposed Rule-Making (the "Proposed Rule-Making") which would classify tobacco as a drug, assert jurisdiction by the FDA over the manufacture and marketing of tobacco products and impose restrictions on the sale, advertising and promotion of tobacco products. The FDA's stated objective and focus for its initiative is to limit access to cigarettes by minors by measures beyond the restrictions either mandated by existing federal, state and local laws or voluntarily implemented by major manufacturers in the industry. Liggett and other major manufacturers in the industry responded by filing a civil action in the United States District court for the Middle District of North Carolina on that day challenging the legal authority of the FDA to assert such jurisdiction. In addition thereto, Liggett and the other four major cigarette manufacturers, as well as others, have filed comments in opposition to the Proposed Rule-Making. Management is unable C--40

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands. Except Per Share Amounts) - (Continued) to predict whether such a classification will be made. Management is also unable to predict the effects of such a classification, were it to occur, or of such regulations, if implemented, on Liggett's operations, but such actions could have an unfavorable impact thereon. On March 12, 1996, Liggett, together with the Company, entered into an agreement to settle the Castano class action tobacco litigation, and on March 15, 1996, Liggett, together with the Company, entered into an agreement with the Attorneys General of the State of West Virginia, State of Florida, State of Mississippi, Commonwealth of Massachusetts and the State of Louisiana to settle certain actions brought against Liggett by such states. In these two 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 Rule-Making and to phase in compliance with certain of the proposed interim FDA regulations. See discussions of the Castano Settlement Agreement and the Attorneys General Settlement Agreement appearing hereinabove and hereinafter. The Omnibus Budget Reconciliation Act of 1993 (°OBRA") required United States cigarette manufacturers to use at least 75% domestic tobacco in the aggregate of the cigarettes manufactured in the United States, effective January 1, 1994, on an annualized basis or pay a "marketing assessment" based upon price differentials between foreign and domestic tobacco and under certain circumstances make purchases of domestic tobacco from the stabilization cooperatives organized by the United States government. OBRA was repealed retroactively (as of December 31, 1994) coincident in time with the recent issuance of a Presidential proclamation, effective September 13, 1995, imposing tariffs on imported tobacco in excess of certain quotas. On February 14, 1995, Liggett filed with the United States Department of Agriculture (the "USDA") its certification as to usage of domestic and imported tobaccos during 1994 and an audit was commenced by the USDA during August 1995 to verify this certification. Liggett received the results of the audit from the USDA, which states that Liggett did not satisfy the 75% domestic tobacco usage requirement for 1994. The marketing assessment presently is estimated to approximate $5,500, which amount is disputed by the Company. It is the understanding of the Company that the levels of domestic tobacco inventories currently on hand at the tobacco stabilization organizations are below reserve stock levels, and for such reason, the Company is of the opinion that it will not be obligated to make such purchases of domestic tobacco from the tobacco stabilization cooperatives. The Company is currently engaged in negotiations with the USDA in an effort to resolve this matter on satisfactory terms. At December 31, 1995, the Company has accrued $4,900, representing its best estimate for the USDA marketing assessment. The charge is included as a component of cost of sales in 1995. On September 13, 1995, the President of the United States, after negotiations with the affected countries, declared a tariff rate quota ("TRQ") on certain imported tobacco, imposing prohibitive tariffs on imports of flue-cured and burley tobaccos in excess of certain levels which vary from country to country. Oriental (Turkish) tobacco is exempt from the quota as well as all tobacco originating from Canada, Mexico or Israel. Management believes that the TRQ levels are sufficiently high to allow Liggett to operate without material disruption to its business. On February 20, 1996, the United States Trade Representative issued an "advance notice of rule making" concerning how tobaccos imported under the 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 C-41

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) approach, if adopted, could have a materially adverse effect on the Company. The Company believes it is unlikely that an end-user licensing system will be adopted because it would likely lead to another GATT proceeding. The end-user licensing system has not been authorized by legislation and it could create significant problems for U.S. exports in other product markets. However, no assurances can be made that an end-user licensing system will not be adopted. On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Inc. was filed in the United States District Court for the Southern District of New York, Case No. 96-CIV-1921, wherein plaintiff, who was formerly employed as Liggett's President and Chief Executive officer, seeks recovery of certain monies allegedly owing to him by Liggett to plaintiff for long-term incentive compensation. The action presently is in the pleading stage and discovery has not as yet commenced. As a consequence of certain tobacco litigation settlements and marketing assessment contingencies discussed above, Liggett charged approximately $8,846 to operations in the fourth quarter of 1995. Possible future payments under the litigation settlements which are based on a percentage of Liggett's pretax income, if any, will be charged to operations in the period that Liggett's operating results are known. 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 Liggett. It is possible that the Company's financial position, results of operations or cash flows could be materially affected by an ultimate unfavorable outcome in any of such pending litigation. As to each of the cases referred to above which is pending against Liggett, Liggett believes, and has been so advised by counsel handling the respective cases, that Liggett has a number of valid defenses to the claim or claims asserted against Liggett. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome of a pending smoking and health case could encourage the commencement of additional similar litigation. Recently, there have been a number of restrictive regulatory actions, adverse political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, including the commencement of the purported class actions referred to above. These developments generally receive widespread media attention. Liggett is not able to evaluate the effect of these developing matters on pending litigation or the possible commencement of additional litigation. The Company: On September 20, 1993, a group of CVR holders and the CVR trustee filed an action in the Delaware Court of Chancery, New Castle County, against the Company and certain of its present and former directors, challenging and seeking to enjoin or rescind the Distribution. Pursuant to notice given on October 15, 1993, the Company redeemed its CVRs on December 9, 1993 for a payment of $.36 per CVRo On June 2, 1994, the Company and the director defendants entered into a Stipulation and Agreement of Compromise and Settlement (the "Stipulation") pursuant to which a class of CVR holders, which includes the plaintiff CVR holders and all other persons who held CVRs at any time between September 20, 1993 and June 2, 1994, were to receive a total of $4,000 plus an award of attorneys' and experts' fees and expenses, as approved by the Court of Chancery, not to exceed $900. The $4,000 settlement fund has been deposited into an escrow account for eventual disbursement to all eligible CVR holders. By order dated June 10, 1994, the Court of Chancery scheduled a settlement hearing to be held on August 16, 1994 to determine, inter alia, whether the Stipulation is fair, reasonable and adequate. C-42

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Con~;inued) That settlement hearing was adjourned at the named plaintiff CVR holders' request because of issues arising from the Company's filing of a motion for leave to amend the Company's complaint in a separate lawsuit pending against the CVR trustee. The named plaintiff CVR holders subsequently asked the court to rescind the Stipulation, stating, in substance, that they had mistakenly entered into it in the erroneous belief that the Company would be unable to assert claims against the trustee which those CVR holders might have to indemnify. On December 28, 1994, the court rescinded the Stipulation, finding that such a mistake had been made; however, the named plaintiff CVR holders and the defendants continued settlement discussions, seeking to address the named plaintiff CVR holders' concerns over their obligation to indemnify the trustee. On March 3, 1995, these parties advised the court that they had reached an agreement in principle to settle the case on a class basis, subject to the final resolution of certain remaining issues. The issues have recently been resolved and on March 21, 1996 a revised settlement agreement was filed with the court. A hearing on approval of the settlement is scheduled for June 4, 1996. The CVR trustee withdrew from the action coincident with the initial presentation of the settlement to the court in June 1994. Notwithstanding this, all claims, the assertions of which the CVR trustee initially joined, would be compromised and dismissed under the proposed settlement. The proposed settlement would leave both the Company and the plaintiff CVR holders free to pursue claims, in certain circumstances, against the CVR trustee. On November 20, 1995, R JR Nabisco filed an action against the Company and Messrs. LeBow and Icahn in the United States District Court for the Middle District of North Carolina alleging violations of the federal securities laws. Specifically, R JR Nabisco alleges that the Company and Messrs. LeBow and Icahn violated sections 14(a) and 10(b) of the Securities Exchange Act of 1934, as amended, and Rules 14a-9 and 10b-5 promulgated thereunder, by purportedly making materially false or incomplete statements concerning the purpose and background of the consent solicitation. R JR Nabisco seeks temporary and permanent injunctions barring the Company and Messrs. LeBow and Icahn from proceeding with the consent solicitation until such time as they remedy the alleged disclosure obligation violations. R JR Nabisco also alleges that the Company and Messrs. LeBow and Icahn secretly formed a group of investors to purchase a controlling interest in R JR Nabisco and the Company. According to the complaint, the purpose for such a combination is to eliminate certain alleged issues under the Investment Company Act allegedly applicable to the Company, BGLS and/or New Valley. The Company and Messrs. LeBow and Icahn believe the allegations are without merit and are defending the action vigorously. In addition, the Company and LeBow asserted counterclaims against R JR Nabisco, alleging that R JR Nabisco had made false statements and material omissions in its opposition to the Company's consent solicitation. On March 5, 1996, R JR Nabisco voluntarily dismissed, without prejudice, its claims asserted against Icahn. At December 31, 1995, there were several other proceedings, lawsuits and claims pending against subsidiaries of the Company. The Company is of the opinion that the liabilities, if any, ultimately resulting from the CVR action, the R JR Nabisco action and such other proceedings, lawsuits and claims should not materially affect its consolidated financial position, results of operations or cash flows. 17. RELATED PARTY TRANSACTIONS Effective June 1993, $14,692 of principal indebtedness (the "Consolidated Indebtedness") of the Chairman and certain of his affiliates to the Company were consolidated and the terms of such C-43

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) indebtedness were amended. On January 5, 1994, the Chairman repaid his principal indebtedness of $14,692 and that of certain of his affiliates in the total amount of $15,695 with the use of dividends paid on December 31, 1993 on Series G stock. (Refer to Footnote 13 "Equity"). On March 21, 1994, the Chairman repaid all interest due on the various debts in the amount of $1,163 and accordingly, the stock collateralizing the loans was released. Certain of the various debts under the Consolidated Indebtedness that were satisfied are discussed below: In September 1992, the Chairman became indebted to the Company for a shortfall of $1,640 under a note assigned to the Company in prior years. In March 1993, a shortfall in the amount of $3,573 arose with respect to a second note and as a result he became obligated to pay such shortfall amount (plus interest at prime plus 1%) to the Company. These shortfalls were a portion of the Consolidated Indebtedness which was repaid in January 1994. A corporation owned by the Chairman, and subsequently a subsidiary of BGLS, had an outstanding payable for approximately $994 at December 5, 1993. This payable had been assigned to BGLS, in September 1992, in exchange for the cancellation by BGLS of a like amount of debt owed to it by the subsidiary. Prior to the assignment to BGLS, no interest had been charged in respect of this receivable. The Chairman had agreed to guarantee payment of this receivable to BGLS, plus interest at prime rate plus one percent. This loan was repaid as part of the Consolidated Indebtedness and was repaid in January 1994. In December 1991, the Company acquired an option to purchase rights in an aircraft from a company controlled by the Chairman. The appraised value of the plane exceeded the purchase price at that time. The option expired unexercised on January 15, 1993, after which time the aircraft was sold to a third party. The Chairman's company was obligated to repay the option price ($2,895) as well as an amount of approximately $300 related to unreimbursed medical payments from another company owned by the Chairman. Both of the above repayments were a portion of the Consolidated Indebtedness which was repaid in January 1994. As of January 1, 1993, the Chairman had approximately $1,650 of other personal unsecured indebtedness to the Company. In addition, the Chair:man was indebted to the Company in 1993 for approximately $2,049 collateralized by 6,234,837 shares of common stock and 1,754.657 shares of Series G Preferred to the Company owned directly or indirectly by the Chairman. On January 11, 1993, the Company approved a $1,475 line of credit for the Chairman on the same terms as the unsecured loans described above, of which $1,475 was outstanding. These loans bore interest at the prime rate plus 1% and were due on June 30, 1993. All of these amounts were repaid in January 1994 as part of the Consolidated Indebtedness. Other related party transactions follow: Effective July 1, 1990, a former executive transferred all of his equity in the Company to the Chairman and resigned from substantially all of his positions with the Company and its affiliates. In consideration for this transfer, a partnership (the "Partnership") controlled by the Chairman agreed, among other things, to make certain payments to the Company on account of the former executive's outstanding indebtedness of $8,677 (deducted from equity). In connection with this transaction, the Partnership had pledged 1,681,713 of the shares it held of the Company's common stock to secure its obligation. In May 1994, the Partnership paid $3,200 in partial satisfaction of the obligation. In consideration thereof, the Company released 1,281,713 of the pledged shares. C-44

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - (Continued) The Company and companies in which it has an interest also paid aircraft-related charges of approximately $376 to affiliated companies during the years ended December 31, 1993. Prior to 1990, The Company advanced funds to the former Vice Chairman ($5,126 outstanding as of December 31, 1991, plus accrued interest, and deducted from equity at December 31, 1991). The loans bore interest at either the prime rate or federal short-term interest rate and were payable semiannually or annually. The loans were scheduled to mature in 1995 and 1997, were collateralized by 607,889 shares of the former Vice Chairman's common stock in the Company and, with the exception of loans in the principal amount of $1,500, were nonrecourse to him. Effective December 30, 1992, the former Vice Chairman transferred the 607,889 shares of common stock in the Company which were the collateral for the nonrecourse loan (approximately $4,600 including accrued interest) in connection with the termination of such loans. The Company recorded a $2,654 charge to income as a result of this transfer. In conjunction with the transfer of shares, the former Vice Chairman was granted a warrant (the =Warrant") to purchase 607,889 shares of the Company's common stock for an exercise price of $7.60 per share. This price was subsequently reduced to $0.10 per share as a result of the SkyBox Distribution. The Warrant was exercised in November 1994. The remaining loans in principal amount of $1,500 were to mature in 1995, bore interest at the federal short-term rate, are payable semiannually and are recourse to the former Vice Chairman. On December 31, 1993, the former Vice Chairman repaid $900 of the loan out of certain dividend proceeds. Effective January 1, 1994, the former Vice Chairman resigned waiving all rights in respect of a lump sum severance payment of $1,500 which was part of an employment agreement in effect since January 1, 1991. The Company waived all rights to the remaining $600 balance on the loan. The agreement provides that the former Vice Chairman remains as a consultant to the Company. The former Vice Chairman has served on the Board of Directors of New Valley since 1990. During the fourth quarter of 1994, he was elected President and Chief Executive Officer of MAI. In February 1991, the Company made a loan to a former executive vice president of the Company in the amount of $250, bearing interest at the prime rate plus one percent and due March 1, 1994. On July 26, 1993, the former officer transferred 50,000 shares of the Company's common stock with a fair market value of $275 to the Company in satisfaction of the loan and interest thereon. Pursuant to an agreement dated as of January 1, 1994, as amended, the Company granted 500,000 shares of restricted common stock (with dividend equivalent rights) to a consultant who also served as the Chairman of SkyBox and is currently President and a Board member of New Valley. Of the total number of shares granted, 250,000 were immediately vested and issued during the third quarter of1994. The remaining 250,000 shares have been issued and will vest in 1997. In addition, on January 25, 1995, the Company entered into a nonqualified stock option agreement. 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. Unexercised options do not provide any rights of a stockholder; however, the grant does provide for dividend equivalent rights on the unexercised shares. During 1995 and 1994, the Company recorded charges to income of $479 and $586, respectively, for compensation equal to the excess of the fair market value for the shares granted over the price paid for them. 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, 1993. The broker-dealer received commissions of approximately $121, and commissions and other income of approximately $584 from the Company and/or its affiliates during 1994 and 1995, respectively. 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. C-45

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands. Except Per Share Amounts) - (Continued) During 1995, the Company and New Valley entered into an expense sharing agreement whereby New Valley agreed to reimburse the Company for its portion of certain operating expenses, rent and utilization of personnel. Expense reimbursements amounted to $571 for the year ended December 31, 1995. In connection with their agreement to serve as the Company's nominees at R JR Nabisco's Annual Meeting, two directors of New Valley were each paid $30 by the Company during the fourth quarter of 1995. In addition, the Company also entered into an agreement with each of the Company nominees whereby it has agreed to indemnify such nominees from and against any losses incurred by such nominees resulting from, relating to, or arising out of any claim in connection with the solicitation of proxies in support of the nominees' election at the Annual Meeting, including the right to be advanced by the Company for any expenses incurred in connection with any such claim. 18. SEGMENT INFORMATION The Company's major operations are in tobacco products, principally cigarettes, and real estate development. The tobacco segment operates primarily in the United States with a much smaller manufacturing facility in Russia; real estate activities are conducted in Russia. Total assets of the foreign real estate and tobacco operations included in the consolidated balance sheet at December 31, 1995 were approximately $45,400. (Refer to Note 4.) Real Corporate 1995 Tobacco Estate and Others Consolidated Net sales ......................... Operating income ........... Identifiable assets ........... Capital expenditures ....... Depreciation and amortization ................. $455,666 $ 5,793 $461,459 16,725 $(1,990) (6,675) 8,060 123,144 31,149 71,327 225,620 1,104 7,229 472 8,805 7,972 1,104 9,076 C-46

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands, Except Per Share Amounts) - !Continued) 19. SUPPLEMENTAL CASH FLOW INFORMATION In accordance with the requirements of SFAS No. 95, "Statement of Cash Flows," supplemental cash flow information is disclosed below: II. Cash paid during the period for: Interest ................................................................ Income taxes, net of refunds ............................... Noncash investing and financing activities: Contingent Value Rights liability .......................... Dividends payable ............................................... Issuance and exchange of long-term debt .......... Distribution of MAI to stockholders ...................... Common stock received in connection with • debt repayment ................................................ Financing of equipment purchases ..................... Series G dividend ................................................ Shareholder settlement ....................................... Transfer of pension liability to SkyBox ................ Year Ended December 31, 199 I 199 I 1993 $60,158 $39,429 $56,217 1,735 605 2.110 $61.893 $40,034 $58.327 $27,085 $ 131 114,888 3,200 6,250 4,305 $43,821 15,136 275 3,500 20. SUPPLEMENTAL INFORMATION Supplemental balance sheetinformation at December31is as follows: 1995 1994 Other assets: Deferred financing costs, net of amortization ............ $10,502 Other ......................................................................... 797 Total other assets .................................................. $11,299 $ 9,933 1.934 $11.867 Other accrued liabilities: Compensation and related items .............................. $1,201 Debt guarantee .........................................................7,500 Restructuring ............................................................. 515 Estimated allowance for future sales returns ............ 5,000 Legal and professional fees ...................................... 1,469 Unearned revenue .................................................... 2,955 Other ......................................................................... 2,812 Total other accrued liabilities ................................. $21,452 $3,913 7,500 1,306 5,80O 1,510 2,056 4.492 $26,577

BROOKE GROUP LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands. Except Per Share Amounts) - (Continued) 21. QUARTERLY FINANCIAL. RESULTS (UNAUDITED) Quarterly data for the years ended December 31, 1995 and 1994 (reclassified) are as follows(Al: December 31, I September 30, I June 30, March 31, 1995 I 1995 I 1995 1995 Revenues $119,741 $124,100 Gross profit 62,320 69,474 (Loss) from continuing operations (17,671) (1,124) Income of discontinued operations 5,231 98 Extraordinary items (9,810) Net (loss) income applicable to common shares 1,772 $122,328 $95,290 64,566 48,912 (13,639) (12,910) 1,114 14,786 (22,269) (1,571) 4,945 Per share data: Loss (income) from continuing operations Income of discontinued operations Extraordinary items Net (loss) income applicable to common shares $(0.97) $ 0.09 $(0.15) $(0.53) $ 0.29 $ 0.01 $ 0.06 $ 0.80 $(o,~4) $__ $ $ ~.. $(1.22) $ 0.10 $(0.09.) $ 0,27 Share .~rices: High 9 7/8 11 3/8 5 1/2 4 1/4 Low 6 5/8 4 3/8 3 1/8 3 15/64 December 31, I September 30, I June 30, March 31, 1994 [ 1994 [ 1994 1994 Revenues $121,715 $124,446 $119,077 $114,105 Gross profit 64,999 66,599 61,129 56,809 (Loss) income from continuing operations (14,007) 9,113 (6,377) (6,720) Income of discontinued operations 154,604 9,805 4,960 5,314 Extraordinary items (45,479) (1,118) Net income 95,118 18,918 (1,417) (2,524) Per share data: (Loss) income from continuing operations $(0,7.9) $ 0,52 $(0.37) $ (.0._,~) Income of discontinued operations $ 8.75 $ 0.55 $ 0.29 $ 0.30 Extraordinary items $(2.60) $ __ $ -- $(0.06) Net income $ 5.27 $1.07 $(~) $(0,14) Share orices: High 4 1/2 5 3/8 2 2 1/4 Low 2 5/8 1 3/8 1 1/4 1 1/2 (A) Results of operations have been reclassified for discontinued operations in 1994 (Note 5). C.-48

BROOKE GROUP LTD. SCHEDULE II -o VALUATION AND QUALIFYING ACCOUNTS (In Thousands) Description Year ended December 31, 1995 Allowances for: Doubtful accounts ........................... Cash discounts ............................... Sales returns ................................... Total .......................................... Provision for inventory obsolescence ...... Year ended December 31, 1994 Allowances for: Doubtful accounts ........................... Cash discounts ............................... Sales returns ................................... Total .......................................... Provision for inventory obsolescence ...... IBalance at Beginning of Period $ $ . $ 249 720 5,800 6,769 1.369 Additions Charged to Costs and Expenses Charged to Other Accounts 235 745 6,300 7,280 $ 260 14,579 1.030 $15.869 $1,072 $ 69:~ (800)(") $ (108) $ 630(b) 1.418 Year ended December 31, 1993 Allowances for: Doubtful accounts ........................... $ 300 Cash discounts ............................... 1,191 Sales returns ................................... 10,700 Price increase credits ..................... 919 Total .......................................... $ 13,110 Provision for inventory obsolescence ...... $ 1.090 $ 21 12,337 $12,358 $ 520 $ 2.800(a) $ 2.800 $ 240 13,018 $13.258 $ 35O 3,800(") 3.800 I Deductions $ 28O 14,684 1,030 $15.994 $ 430 $ 7 12,362 3.300 $15.669 $ 569 $ 3O5 13,464 8,200 919 $22.888 Balance at End of Period $ 921 615 5.000 $ 6,536 $ 2,641 $ 249 720 5.800 $ 6,769 $ 1.369 $ 235 745 6,300 $ 7.280 $ 22 $ 1,418 (a) Charged to net sales. (b) Amounts include impact of consolidating LDL.

i Coopers &Lybrand Coopers & Lybrand L.L.R a professional services firm REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Shareholders of New Valley Corporation We have audited the accompanying consolidated balance sheet of New Valley Corporation and subsidiaries as of December 31, 1995, and the related statements of operations, changes in non-redeemable preferred shares, common shares and other capital (deficit), and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Valley Corporation and subsidiaries at December31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Miami, Florida April 10, 1996 C-50 Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand Internatior~al, a limited liability association incorporated in Switzerland.

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Shareholders of New Valley Corporation In our opinion, the consolidated financial statements as of December 31, 1994, appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of New Valley Corporation and its subsidiaries (the "Company") at December 31, 1994, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluation the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Morristown, New Jersey March 24, 1995 C-51

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Exce.~t Per Share Amounts) December 31, J 1995 J 1994 ASSETS Current assets: Cash and cash equivalents Investment securities Contract receivable Restricted assets Receivable from clearing brokers Other current assets Total current assets $ 51,742 $ 376,170 241,526 300,000 22,919 354,639 13,752 3.546 8.400 333.485 1.039.209 Investment securities Assets of discontinued operations held for sale Restricted assets Long-term investments, net Other assets Total assets 517 5,400 15,086 25,000 29,512 7.222 282 $385.822 $1.069.891 LIABILITIES AND CAPITAL (DEFICIT) Current liabilities: Margin loan payable Accounts payable and accrued liabilities Prepetition claims and restructuring accruals Dividend payable Income taxes Securities sold, not yet purchased Current portion of long-term obligations Total current liabilities Deferred income taxes payable Long-term obligations Redeemable preferred shares Commitments and contingencies Non-redeemable preferred shares, Common Shares and other capital (deficit): Cumulative preferred shares; liquidation preference of $69,769, dividends in arrears: 1995 - $95,118; 1994 - $76,700 Common Shares, $.01 par value; 850,000,000 shares authorized; 191,551,586 and 188,725,550 shares outstanding Additional paid-in capital Accumulated deficit Unrealized appreciation on investment securities, net of taxes of $294 Total non-redeemable preferred shares, Common Shares and other capital (deficit) Total liabilities and capital (deficit) $ 75,119 27,712 33,392 20,283 13,047 8.367 177.920 11,967 226,396 279 1,916 679,058 (714,364) 2.650 (30,461) $385,822 10,931 619,833 75,070 31,907 16.619 754.360 19,572 16,605 317,798 279 1,887 692,001 (732,611) (38,444) $1,069,891 See accompanying Notes to Consolidated Financial Statements C-52

I I NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) Revenues: Principal transactions, net Commissions Interest and dividends Other income Total revenues Costs and expenses: Employee compensation and benefits Interest Provision for (recovery of) restructuring charges Write-down of long-term investments (Note 6) Other expenses Total costs and expenses Income (loss) from continuing operations before income taxes and extraordinary items Income tax provision (benefit) Income (loss) from continuing operations before extraordinary items Discontinued operations (Note 3): Income from discontinued operations, net of income taxes of $480, $5,500, and $1,325, respectively Gain on disposal of discontinued operations, net of income taxes of $1,400 and $52,000 Income from discontinued operations Income before extraordinary items Extraordinary items: Loss on extinguishment of debt, net of income taxes of $3,475 (Note 15) Gain on extinguishment of lease obligation (Note 8) Net income Dividends on preferred shares - undeclared Excess of carrying value of redeemable preferred shares over cost of shares purchased Net income (loss) applicable to Common Shares Year Ended December31, I December31,I December31, 1995 1994 1993 $18,237 9,888 21,047 $ 7,104 $ 3,369 18.558 3,277 475 67.730 10,381 3,844 30,994 219 2,102 643 2,752 (2,044) 22,734 9,035 11,790 23,222 2.550 3,247 66.064 26.146 15.034 1,666 (15,765) (11,190) 292 (500) (225) 1,374 (15.285) (10.965) 4,315 79,625 38,368 12,558 1.056.081 16,873 1.135.706 38.368 18,247 1,120,441 27,403 (110,500) 18,247 1,009,941 (72,303) (80,037) 40.342 $(13,714) $ 929,904 8.417 35,820 (68,706) $(32.886) See accompanying Notes to Consolidated Financial Statements C-53

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Amounts) Income (loss) per common share: Continuing operations before extraordinary items Discontinued operations Before extraordinary items Extraordinary items Net income (loss) Number of shares used in computation Income (loss) per common share assuming full dilution: Continuing operations before extraordinary items Discontinued operations Before extraordinary items Extraordinary items Net income (loss) Number of shares used in computation Supplemental information: Additional interest expense, absent the Chapter 11 filing Year Ended December 31'11995 December 31'I 1994 December 31, 1993 $(.16) $ (.50) $ (.42) .09 6.03 .20 (.07) 5.53 (.22) -- (.59) ,04 $(.07) $ 4,94 $ (,18) 191.086.000 188.298.000 187,723,000 $(.16) $ (.37) $ (.42) .09 5.36 .20 (.07) 4.99 (.22) -- (.52) .04 $(.07) $. 4.47 $ (.16) 191,086,000 211.558.000 187.723.000 $ 2,314 $ 46,927 $ 46,927 See accompanying Notes to Consolidated Financial Statements C-54

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NON-REDEEMABLE PREFERRED SHARES, COMMON SHARES AND OTHER CAPITAL (DEFICIT) (Dollars in Thousands, Except Per Share Amounts) $3.00 Class B Preferred Shares Shares Amount Common Sh~r¢~ Shares Amount Additional Paid In Capital Accumulated Deficit Unrealized Appreciation Balance December 31, 1992 Net income Undeclared dividends and accretion on redeemable preferred shares Conversion of preferred shares Accrued compensation associated with stock options granted Balance December 31, 1993 Net income Undeclared dividends and accretion on redeemable preferred shares Conversion of preferred shares Exercise of stock options Balance, December 31, 1994 Net income Undeclared dividends and accretion on redeemable preferred shares Purchase of redeemable preferred shares Exercise of stock options Unrealized appreciation on investment securities, net of taxes Balance, December 31, 1995 3,025 $ 303 186,163 $1,862 $809,215 (54,149) (234) (24) 1,951 19 5 __ 450 2,791 279 188,114 1,881 755,521 2,791 279 3 609 188,726 1,887 2,825 29 (63,635) 115 692,001 (53,821) 40,342 536 2.791 $ 279 191,551 $1,916 $679.058 $(1,778,372) 35,820 (1,742,552) 1,009,941 (732,611) 18,247 $(714,364) $2,650 $2.650 See accompanying Notes to Consolidated Financial Statements

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands, Except Per Share Amount-~) Year Ended December 31, 1995 I 1994 I 1993 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash used for operating activities: Gain on disposal of business (12,558) Income from discontinued operations (4,315) Provision for loss on long-term investments 11,790 Reversal of restructuring accruals (2,044) Extraordinary loss (gain) Financial restructuring costs Changes in assets and liabilities, net of effects from acquisition: Decrease (increase) in receivables and other assets 12,292 Decrease in income taxes payable and deferred taxes (32,517) Decrease in securities sold not yet purchased (9,359) Increase (decrease) in accounts payable and accrued liabilities 5.223 Net cash used for operating activities Cash flows from investing activities: Net proceeds from disposal of business Payment of prepetition claims and restructuring accruals Collection of contract receivable Decrease (increase) in restricted assets Sale or maturity of investment securities Purchase of investment securities Purchase of long-term investments Sale or liquidation of long-term investments Payment for purchase of Ladenburg, net of cash acquired Net cash provided from (used for) investing activities Cash flows from financing activities: Payment of preferred dividends Purchase of Class A preferred stock Increase in margin loan payable Payment of long-term obligations Exercise of stock options Net cash used for financing activities Expenses of financial restructuring Net cash provided from discontinued operations Net (decrease) Increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $18,247 $1,009,941 $ 35,820 _d_3_2,_~) (1,056,081) (79,625) (38,368) (318) (2,117) 110,500 (8,417) 23,052 11,152 (7,571) 160 (16.896) (12.635) (16.998) (14.405) 17,540 (584,397) 300,000 341,634 250,129 (458,017) (77,411) 36,109 (25.750) (200.163) 467,822 (367,378) 100.444 (132,162) (47,761) 75,119 (12,890) 565 (117,129) (23,052) (11,152) 6.105 139.410 71,417 (324,428) 199,804 45,860 376,170 176,366 130.506 $ 51,742 $ 376.170 $176.366 See accompanying Notes to Consolidated Financial Statements C-56

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in Thousands, Except Per Share Amounts) Supplemental cash flow information: Cash paid during the year for: Interest (including capital leases and excluding interest on prepetition claims) Income taxes Non-cash investing and financing activities: Contract receivable Pension liability discharge Capital leases Year Ended December 31, $ 2,105 $ 476 $ 2,915 33,662 882 834 300,000 245,000 4,982 Detail of Ladenburg acquisition: Fair value of assets acquired Liabilities assumed Cash paid Less cash acquired Net cash paid for acquisition $59,066 32.316 26,750 1.000 $25.750 See accompanying Notes to Consolidated Financial Statements C-57

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands.'Exce_~t Per Share Amounts) 1. BASIS OF PRESENTATION Principles of Consolidation The consolidated financial statements include the accounts of New Valley Corporation (the "Company") and its majority owned subsidiaries (collectively, "New Valley"). All significant intercompany transactions are eliminated in consolidation. Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform to the 1995 presentation. 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. C-58

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) 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, 1995, the Company had accrued $33,392 for unsettled prepetition claims and restructuring accruals (see Note 15). 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 $1,4O0. 2. ACQUISITION 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 the straight-line basis over 15 years. Unaudited pro-forma data giving effect to the acquisition of Ladenburg as if it had been consummated as of January 1, 1994 are shown below. The unaudited pro-forma data does not purport to be indicative of what would have occurred had the acquisition been consummated as of such date. Year Ended December 31, 199~ 1994 Revenues Income (loss) from continuing operations before extraordinary item Income before extraordinary item Net income Net income (loss) applicable to common shares Net income (loss) per common share $ 93,072 $ 69,251 1,633 (13,699) 18,506 1,122,007 18,506 1,011,507 (13,455) 931,470 (.07) 4.95 3. DISCONTINUED OPERATIONS As noted above, the Company sold FSI during the fourth quarter of 1994 and 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 which principally consisted of the investment banking and brokerage business of Ladenburg and income derived from its other investments at December 31, 1995. Operating results of the discontinued operations, as shown below, include the operations of the Messaging Services Business for the nine months ended September 30, 1995 and the operations of FSI and Messaging Services Business for the years ended December 31, 1994 and 1993. C-59

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) Revenues Operating Income Income before income taxes Provision for income taxes Net income Year Ended December 31, ]995 1994 1993 $37,771 $489,916 $477,349 $ 4.795 $ 85,125 $ 39,693 $ 4,795 $ 85,125 $ 39,693 480 ~ 1,325 $ 4,315 $ 79,625 $. 38,366 4. 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. 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. Investment Securities. The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities" which requires certain investments in debt and marketable equity securities be classified 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 stockholders' 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. At December 31, 1995, the current and noncurrent portions of restricted assets consisted primarily of $28,200 held in escrow pursuant to the sale of FSI to FFMC, which have been classified based on the terms of the Purchase Agreement and the anticipated release of the escrow. Restricted assets consists of investments in U.S. government bonds. At December 31, 1994, restricted assets consisted of $334,600 held in escrow for certain debenture holders, which monies were released on January 18, 1995, in addition to $45,000 held in escrow pursuant to the Purchase Agreement. In addition, pursuant to certain provisions contained in the Joint Plan, the Company's cash and cash equivalents held at December31, 1994 were restricted to short-term high grade marketable securities until January 18, 1995. C-60

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) Depreciation. Property 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. As property and equipment is retired, its cost and the related accumulated depreciation are eliminated. Depreciation expense was $600, $9,000 and $12,400 in 1995, 1994 and 1993, respectively. Depreciation expense for 1994 and 1993 is included in discontinued operations. Income Taxes. At December 31, 1995, the Company had $84,678 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. 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, 1995, 1994 and 1993, does not bear a customary relationship with pre-tax accounting income from continuing operations principally as a consequence of the reduction in the valuation allowance relating to deferred tax assets. Securities Sold, Not Yet Purchased. Securities sold, but not yet purchased, represent obligations of the Company to deliver a specified security at a contracted price and thereby creates 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, but not yet purchased, may exceed the amount recognized in the consolidated statement of financial condition. At December 31, 1995, securities sold, but not yet purchased, consisted of $10,293 .of equity and index options and $2,754 of common stock. Income (Loss) Per Common Share. 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 dividends 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. 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 if such conversion was dilutive. New Accounting Pronouncements. In March 1995, the Financial Accounting Standards Board issued SFAS Noo 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 establishes accounting standardsfor the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and that Iong-iived assets and certain identifiable intangibles to be disposed of generally be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS No. 121 to have a material effect on its financial position or results of operations. 5. INVESTMENT SECURITIES Investment securities classified as available for sale are carried at fair value, with net unrealized gains of $2,944 ($3,252 of unrealized gains and $308 of unrealized losses) included as a separate component of stockholders' equity (deficit). The Company had net realized gains on sales of C-61

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts! - (Continued) investment securities available for sale of $6,736 ($9,223 of realized gains and $2,487 of realized losses) for the year ended December 31, 1995. In August 1995, the Company received approval from the Federal Trade Commission to purchase up to 15% of the voting securities of R JR Nabisco Holdings Corp. ("R JR Nabisco"). As of December 31, 1995, the Company, through a wholly-owned subsidiary, held approximately 4.9 million shares of R JR Nabisco common stock, par value $.01 per share (the "R JR Nabisco Common Stock"), with a market value of $150,446 (cost of $149,005). The Company's investment in R JR Nabisco collateralizes margin loan financing of $75,119 at December31, 1995. This margin loan bears interest at .25% below the broker's call rate (6.5% at December 31, 1995). At December 31, 1995, investment securities consisted of the following: Securities available for sale Trading securities $210,832 31,211 Total $242,043 The details of the investment categories by type of security at December 31, 1995 are as follows: Fair Cost Value Available for Sale: Marketable equity securities: R JR Nabisco common stock $149,005 Other marketable securities 9,147 Total marketable equity securities 158,152 U.S. government securities 49,219 Marketable debt securities (long-term) 517 Total securities available for sale 207,888 Trading Securities (Ladenburg): Marketable equity securities 21,431 Equity and index options 6,253 Other securities 2.585 Total trading securities 30.269 Total Investment securities 238,157 Less long-term portion of investment securities 517 Investment securities - current portion $237.640 $150,446 10,506 160,952 49,363 517 210,832 21,828 6,134 3,249 31.211 242,043 517 $241,526 The $517 long-term portion of investment securities at cost consists of marketable debt securities which mature in three years. On October 17, 1995, the Company entered into an agreement, as amended (the "Agreement"), with High River Limited Partnership ("High River"), an entity owned by Carl C. Icahn. Pursuant to the Agreement, the Company sold approximately 1.6 million shares of R JR Nabisco Common Stock to High River for an aggregate purchase price of $51,000 and the parties agreed that the Company and High River would each invest up to approximately $250,000 in shares of R JR Nabisco Common Stock, subject to certain conditions and limitations. Any party to the Agreement may terminate it at any time, although under certain circumstances, the terminating party will be required to pay a fee of $50,000 to the nonterminating party. The Agreement also provides for the parties to pay certain other C-62

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts! - (.Continued) fees to each other under certain circumstances, including a fee to High River equal to 20% of the Company's profit on its R JR Nabisco Common Stock, after certain expenses as defined in the Agreement. On December 27, 1995, the Company entered into an agreement with Brooke Group Ltd. ("Brooke"), an affiliate of the Company, pursuant to which it agreed to pay directly or reimburse Brooke and its subsidiaries for reasonable out-of-pocket expenses incurred in connection with Brooke's solicitation of consents and proxies from the shareholders of R JR Nabisco. The Company has also agreed to pay to a wholly-owned subsidiary of Brooke a fee of 20% of the net profit received by the Company or its subsidiaries from the sale of shares of R JR Nabisco Common Stock after the Company and its subsidiaries have achieved a rate of return of 20% and after deduction of certain expenses incurred by the Company and its subsidiaries, including the cost of the consent and proxy solicitations and of acquiring the shares of common stock. The Company has also agreed to indemnify Brooke and its affiliates against certain liabilities arising out of the solicitations. On December 28, 1995, the Company, Brooke and Liggett, a wholly-owned subsidiary of Brooke, engaged Jefferies & Company, Inc. ("Jefferies") to act as a financial advisor in connection with the Company's investment in R JR Nabisco and Brooke's solicitation of consents and proxies (as amended on February 28, 1996 and April 9, 1996, the "Jefferies Agreement"). The Company has (i) paid to Jefferies an initial fee of $1,500 and (ii) agreed to pay to Jefferies for the period commencing January 1, 1996 and ending March 31, 1996 monthly fees of $250 (which increased to $500 on February 20, 1996 and was pro rated for February) and, in addition, until March 31, 1996, an additional monthly fee of $100, and during the month of April 1996, a $160 fee. The companies also have agreed to pay Jefferies 10% of the net profit (up to a maximum of $15,000) with respect to R JR Nabisco Common Stock (including the distributions made by R JR Nabisco) held or sold by these companies and their affiliates after deduction of certain expenses, including the costs of the solicitations and the costs of acquiring the R JR Nabisco Common Stock. The Company has also agreed to indemnify Jefferies against certain liabilities arising out of the solicitations. During 1995, the Company expensed $3,879 relating to the R JR Nabisco investment. Included in this amount is $1,419 in out-of-pocket expenses owed to Brooke at December 31, 1995 pursuant to the Brooke agreement. In February 1996, the Company acquired 269,200 additional shares in R JR Nabisco for an aggregate consideration of $9,220. The Company's investment in R JR Nabisco decreased from a $1,440 unrealized gain at December31, 1995 to a $2,082 unrealized loss at March 29, 1996. Since January 1, 1996, the Company expensed approximately $6,000 relating to its R JR Nabisco investment. 6. LONG-TERM INVESTMENTS At December 31, 1995, long-term investments consisted of investments in the following: Carrying Fair Value Value Limited partnerships $18,715 $23,200 Foreign corporations 6,000 6,000 Joint venture 3,796 3,796 U.S. corporation 1,001 1,001 Total $29,512 $33,997 C-63

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) 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. At December 31, 1995, the Company had committed to fund one of the limited partnerships up to an additional $20,000. The investment in foreign corporations is currently comprised of an indirect ownership of a 1.9% interest in a Brazilian airplane manufacturer (the "Brazilian Investment") acquired for $12,698, and a 10% equity interest in a company that owns a 33.3% interest in a Russian commercial bank (the "Russian Investment") acquired for $2,000. The joint venture represents an investment of $6,888 in bonds of a foreign republic with a face amount of $12,654 at December 31, 1995. The joint venture partner is in the process of litigation to collect the amounts owed under these bonds. During the fourth quarter of 1995, the Company determined that an other than temporary impairment in the value of its Brazilian Investment and its investment in the joint venture had occurred. Accordingly, $11,790 was provided for the Brazilian Investment and for the investment in the joint venture as an impairment charge in 1995. The investment in a U.S. corporation represents a minority equity interest in a computer software company. 7. PENSIONS AND RETIREE BENEFITS New Valley has a Profit Sharing Plan (the "Plan") for substantially all employees of Ladenburg. The Plan includes three features: a 401(k) option, profit sharing, and a deferred compensation vehicle. The 401(k) is funded solely by employee contributions. 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 year ended December 31, 1995, employer contributions to the Plan were approximately $200, excluding those made under the deferred compensation feature described above. During 1994 and 1993, New Valley maintained a suspended defined benefit plan and two defined contribution plans which covered virtually all full-time employees. Total pension costs accrued under all plans was $18,900 and $25,100 in 1994 and 1993, respectively. All pension costs for 1994 and 1993 are included in the results of the discontinued operations. Contributions were made to the pension plans in amounts necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). As discussed in Note 1, the liabilities related to these pension plans were assumed by FFMC on November 15, 1994. These liabilities aggregated approximately $245,000 at the date of sale. Net pension cost accrued under defined benefit plans for 1994 and 1993 was: Year Ended December 31, 1994 1993 Service cost $ 1,250 $ 1,500 Interest cost 35,490 43,928 Return on assets(21,448) (55,046) Net amortization and deferral -- 30.406 Net pension cost $15,292 $20,788 C-64

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar~ in Thousands, Except Per Share Amounts) - (Continued) Actuarial assumptions underlying the above data for financial statement purposes were as follows: 1994 1993 Discounted rates Assumed rates of return on invested assets 7.5-8.5% 7.5% 10.0% 10.0% The change in discount rates from 7.5% to 8.5% as of March 31, 1994 resulted in a $29,200 decrease in the minimum pension liability. New Valley made contributions to its suspended defined benefit pension plans in amounts necessary to meet minimum funding requirements under ERISA. Cash contributions to such suspended plans were $20,300 and $24,700 in 1994 and 1993, respectively. Pension expense for defined contribution plans was $3,100 and $3,500 in 1994 and 1993, respectively. Effective November 15, !994, sponsorship of these defined contribution plans were assumed by FFMC. 8. COMMITMENT AND CONTINGENCIES Leases New Valley is currently obligated under two noncancelable lease agreements for office space, expiring in December 1996 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, 1995: 1996 $ 2,O58 1997 3,327 1998 3,324 1999 3,047 2000 3,047 2001 and the~a~er 56.020 $70,823 During 1994 and 1993, New Valley leased certain real properties for use as customer service centers, corporate headquarters and sales offices. It also leased certain data communications terminals, electronic data processing equipment and automobiles. Effective November 15, 1994, virtually all of these leases were assumed by FFMC as part of the sale of FSI. Rental expense for operating leases for the years ended 1995, 1994 and 1993 was $1,677, $3,600, and $1,200, respectively. Virtually all of the rental expense for the years ended 1994 and 1993 are included in the results of the discontinued operations. In December 1993, an $8,400 extraordinary gain was recorded as a result of the extinguishment of a capital lease obligation associated with the Company's former corporate headquarters. Lawsuits 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 C-65

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (_Continued) 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 or results of operations. Investment Company Act The Investment Company Act of 1940, as amended (the "Investment Company Act") and the rule's and regulations thereunder require the registration of, and impose various substantive restrictions on, companies that engage primarily in the business of investing, reinvesting or trading in securities or engage in the business of investing, reinvesting, owning, holding or trading in securities and own or propose to acquire "investment securities" having a "value" in excess of 40% of a company's "total assets" (exclusive of Government securities and cash items) on an unconsolidated basis. Following dispositions of its then operating businesses pursuant to the Joint Plan, the Company was above this threshold and relied on the one-year exemption from registration under the Investment Company Act provided by Rule 3a-2 thereunder, which exemption expired on January 18, 1996. Prior to such date, through the Company's acquisition of the investment banking and brokerage business of Ladenburg and its acquisition of the Office Buildings and Shopping Centers (see Note 21), the Company was engaged primarily in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities, and the value of its investment securities was below the 40% threshold. Under the Investment Company Act, the Company is required to determine the value of its total assets for purposes of the 40% threshold based on "market" or "fair" values, depending on the nature of the asset, at the end of the last preceding fiscal quarter and based on cost for assets acquired since that date. If the Company were required to register under the Investment Company Act, it would be subject to a number of material restrictions on its operations, capital structure and management, including without limitation its ability to enter into transactions with affiliates. 9. FEDERAL INCOME TAX In January 1993, New Valley prospectively adopted SFAS No. 109 "Accounting for Income Taxes" which changes the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. New Valley files a consolidated Federal income tax return. Since 1993, Federal income tax provisions were based on Alternative Minimum Tax rates. 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: Provision (credit) under statutory U.S. tax rates Increase (decrease) in taxes resulting from: Nondeductible items State taxes, net of Federal benefit (Decrease) increase in valuation reserve Income tax provision (benefit) 1995 1994 1993 $ 583 $(5,518) $(3,916) 543 2,100 (2,664) 180 (122) -- (1.014) 3.040 6.355 $ 292 $ (,500) $ (225) As described in Note 3, the Company sold FSI and the Messaging Services Business to FFMC and has therefore reflected these operations as discontinued. In addition, the Company recognized an extraordinary loss on the extinguishment of debt in 1994. 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. C-66

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) Deferred tax amounts are comprised of the following at December 31: Deferred Tax Assets: Net operating loss carryforward: Restricted net operating loss Unrestricted net operating loss Other 1995 1994 $ 21,786 $ 21,666 51,156 120,336 14,592 8.750 Total deferred tax assets 87.534 150.752 Deferred tax liabilities: Deferred gain on sale -- (105,000) Other (2.856) (13.512) Total deferred tax liabilities (2.856) (118,512) Net deferred tax assets Valuation allowance 84,678 32,240 (84,678) (51.812) Deferred tax liability $ -- $ (19,572) As of December 31, 1994, virtually all of the Company's current and deferred income taxes payable of $31,900 and $19,600, respectively, resulted from income taxes on discontinued operations. In 1995, the Company identified additional potential tax benefits, principally relating to the amount of net operating losses and changes in tax rates. Since the Company deems it more likely than not that future taxable income will not be sufficient to realize the deferred tax assets, the valuation allowance was increased accordingly. In December 1987, New Valley consummated certain restructuring transactions that included certain changes in the ownership of New Valley'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. New Valley'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, 1995, New Valley had consolidated net operating loss carryforwards of approximately $180,000 for tax purposes, which expire at various dates through 2007. Approximately $54,000 of net operating loss carryforwards constitute pre-change losses and $126,000 of net operating losses were unrestricted. New Valley's Federal income tax returns have been examined and settled through 1980. In addition, the Federal income tax returns for 1981 through 1991 have been preliminarily surveyed by the IRS and no changes have been proposed. In addition, all years through 1991 are closed for audit by virtue of the statute of limitations except to the extent of net operating loss carryforwards. C-67

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) 10. LONG-TERM OBLIGATIONS 9% note payable due 7/14/92~a~ Amount payable to FFMC pursuant to the purchase contract Retiree and disability obligations Total long-term obligations December 31, 1995 ~ 1994 (b) Long-term Current Long-term portion portion portion $ 3,500 $6,567 10,967 8,467 1,800 5.638 $11,967 $8.367 $16.605 Current portion $ 5,4O0 10,167 1,052 $16,619 The 9% Note that was due 7/14/92 was paid in February 1995. See Note 15 for details of Prepetition Claims. The maturity ofthe long-term portion at December 31, 1995 is as ~llows: 1997 - $5,300, 1998 - $1,500, 1999 - $1,000, 2000 - $1,000, and $3,167 the~a~er. 11. REDEEMABLE PREFERRED SHARES At December31, 1995, the Company had authorized and ou.tstanding 2,000,000 and 1,107,566, respectively, of its Class A Senior Preferred Shares. At December 31, 1994, there were 1,501,411 Class A Senior Preferred Shares outstanding. At December 31, 1995 and 1994, respectively, the carrying value of such shares amounted to $226,396 and $317,798, including undeclared dividends of $121,893 and $176,761, or $110.06 and $117.73 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, 1995, the unamortized discount on the Class A Senior Preferred Shares was $6,254. 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 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 made an $80 per share cash tender offer for a maximum of 150,000 Class A Senior Preferred Shares. This tender offer expired February 17, 1995 and resulted in a payment of $4,355 for 54,445 shares tendered and increased the Company's additional paid-in capital by $7,358. C-68

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) 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 $12.50 per share in July 1995 and $37.50 per share in September 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. The repurchase of the Class A Senior Preferred Shares increased the Company's additional paid-in capital by $26,266 for the 200,000 shares acquired and $6,718 for the 139,400 shares acquired based on the difference between the purchase price and the carrying values of the shares. For information on Class A Senior Preferred Shares owned by Brooke, see Note 17. 12. 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, 1995 and 1994, 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 8.3333 Common Shares based on a $25 liquidation value and a conversion price of $3.00 per Common Share. 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 two directors were designated pursuant to the Joint Plan in November 1994. During 1994 and 1993, 3,094 and 1,951,155 Common Shares, respectively, were issued upon conversion of 372 and 234,141 Class B Preferred Shares, respectively. C-69

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands. Except Per Share Amounts) - (Continued) 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 $95,100 and $76,700 at December 31, 1995 and 1994, respectively. These undeclared dividends represent $34.08 and $27.46 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. 13. COMMON SHARES Stock Warrants. In 1995, 1994 and 1993, no warrants were exercised. Stock warrants outstanding at December 31, 1995 are as follows: Date Issued Common Shares Subject to Exercise Warrants Price Expiration Date September 30, 1987 220,000 $2.50 October 30, 1987 220,000 $2.50 440 000 November 13, 1997 November 13, 1997 Stock Option Plans. Under the 1987 Stock Option Plan (the "1987 Plan"), options to purchase up to 30,000,000 Common Shares may be offered to key employees, including officers, and non-employee directors. Options may be issued at an exercise price of not less than 35% of the fair market value of the Common Shares at date of grant. A summary of transactions during 1995 and 1994 with respect to options is as follows: Number of Shares Optioned Price Range Outstanding at January 1, 1994 Exercised Canceled, expired or terminated Outstanding at December 31, 1994(a) Exercised Canceled, expired or terminated Outstanding at December 31, 1995 19,270,000 (608,750) (1.675.300) 16,985,950 (2,825,000) (14,160.950) $.20 - $.48 $.20 $.2O $.20 -- $.48 $.2O $.20 - $.48 (a) 14,401,230 shares exercisable. C-70

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The composition of accounts payable and accrued liabilities is as follows: Accounts payable and accrued liabilities: Accrued compensation Taxes (property and miscellaneous) Excise tax payable lal Accrued expenses and other liabilities Due to affiliates December 31, 1995 1994 $ 6,981 $ 95 2,637 2,758 6,000 6,000 10,675 2,078 1,419 -- Total $27,712 $10,931 (a) The Excise tax payable relates to an excise tax imposed on annual contributions to retirement plans that exceed a certain percentage of annual payroll. The Company intends to vigorously contest this tax liability. 15. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS Those liabilities that are expected to be resolved as part of the Joint Plan are classified in the Consolidated Balance Sheets as prepetition claims. On January 18, 1995, approximately $550,000 of prepetition claims were paid pursuant to the Joint Plan. Another $36,000 of prepetition claims and restructuring accruals have been settled and paid 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, December 31, 1995 1994 Debentures and notes(a) Accrued interest- prepetition(a) Accrued interest- postpetition(b) Restructuring accruals(c) Payable to connecting carriers Money transfer payable(d) Other, miscellaneous $304,172 44,512 $ 3,634 178,000 18,759 74,166 3,405 7,648 7,444 8,645 150 2.690 Total $33.392 $619.833 (a) (b) The Company's debentures and notes, and accrued interest thereon, listed above were paid in full on January 18, 1995. Prior to the Joint Plan being confirmed on November 1, 1994, no interest expense was accrued on prepetition claims since December 31, 1992. The terms of the Joint Plan provided for the payment of postpetition interest in the amount of $178,000. An extraordinary loss of $110,500 was recorded for the extinguishment of this debt. C-71

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) (c) (d) Restructuring accruals at December 31, 1995 consisted of $15,600 of disputed claims, primarily related to leases and $3,200 of other restructuring accruals. 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. 16. RESTRUCTURING CHARGES In 1995, 1994 and 1993, New Valley reversed $2,044, $300 and $2,100, respectively, of prior year restructuring accruals as a result of settlements on certain of its prepetition claims and vacated real estate lease obligations. In 1994 and 1993, New Valley incurred financial restructuring costs of $23,100 and $11,200, respectively, which consisted of professional fees related to its financial restructuring. 17. RELATED PARTY TRANSACTIONS At December 31, 1995, Brooke, a company under the control of Bennett S. LeBow, Chairman of the Company's Board of Directors, held 79,794,229 Common Shares (approximately 41.7% of such class), 618,326 Class A Senior Preferred Shares (approximately 55.8% of such class), and 250,885 Class B Preferred Shares (approximately 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 to share certain lease, legal and administrative expenses. The Company expensed approximately $600 under this expense sharing agreement in 1995. The Joint Plan imposes a number of restrictions on transactions between the Company and certain affiliates of the Company, including Brooke, and establishes certain restrictions on proposed investments. A director of the Company received a commission of $800 on the purchase of Ladenburg, of which $400 was paid by the Company and $400 was paid by the selling shareholders. Two directors of the Company are affiliated with law firms that rendered legal services to the Company. The Company paid these firms $1,083 during 1995 for legal services. An executive officer and director of the Company is a shareholder in a brokerage firm to which the Company paid $584 in brokerage commissions and other fees during 1995. In connection with their agreement to serve as Brooke nominees at R JR Nabisco's Annual Meeting, two directors of the Company were each paid $30 by Brooke during the fourth quarter of 1995. In addition, Brooke also entered into an agreement with each of the Brooke nominees whereby it has agreed to indemnify such nominees from and against any losses incurred by such nominees resulting from, relating to, or arising out of any claim in connection with the solicitation of proxies in support of the nominees' election at the Annual Meeting, including the right to be advanced by Brooke for any expenses incurred in connection with any such claim. In connection with the acquisition of the Office Buildings by the Company on January 10, 1996, a director of Brooke received a commission of $220 from the seller. C-72

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) - (Continued) 18. 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, 1995, substantially all of the securities owned and the amounts due from brokers reflected in the consolidated statement of financial condition 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. Financial Instruments - In the normal course of its business, the Company 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 December31, 1995, the Company had commitments to purchase and sell financial instruments under futures contracts of $2,560 and $4,270, 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. The Company 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, the Company receives a premium in exchange for bearing the risk of unfavorable changes in the price of the securities underlying the option. At December 31, 1995, the Company had wdtten options to sell units of various stock market indices with a contract amount of $338,650. 19. 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. C-73

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amourlts) - (Continued) December 31, 1995 Carrying Fair Amount Value Financial assets: Cash and cash equivalents Investments (Note 5) Restricted assets Receivable from clearing broker Long-term investments (Note 6) Financial liabilities: Short-term loan Redeemable preferred shares $ 51,742 $ 51,742 242,043 242,043 38,005 38,005 13,752 13,752 29,512 33,997 75,119 75,119 226,396 161,704 For cash and cash equivalents, restricted assets, receivable from clearing broker, and short-term loan, the carrying value of these amounts is a reasonable estimate of their fair value. The fair value of the Company's redeemable preferred shares is based on their last reported sales price. 20. BUSINESS SEGMENT INFORMATION Prior to the acquisition of Ladenburg on May 1, 1995, virtually all of the Company's operating businesses were reported as discontinued operations. The following table presents certain financial information of the Company's broker-dealer operations of Ladenburg and the Company's corporate operations as of and for the year ended December 31, 1995. Broker- Corporate Dealer and Other Total Revenues $40,418 $ 27,312 $ 67,730 Operating income 300 1,074 1,374 Identifiable assets 61,175 324,647 385,822 Depreciation and amortization 608 -- 608 Capital expenditures 372 - 372 21. SUBSEQUENT EVENTS Purchase of Assets - 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. The Company paid $11,400 in cash and executed four promissory notes aggregating $100,000 for the Office Buildings. The Office Building notes bear interest at 7.5% and have terms of ten to fifteen years. These Office Buildings consist of two adjacent commercial office buildings in Troy, Michigan and two adjacent commercial office buildings in Bernards Township, New Jersey. 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. Each Shopping Center note has a term of five years, and bears interest 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. 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. C-74

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts} - (Continued) The following pro forma condensed balance sheet gives effect to the purchase of real estate as if it had occurred on December 31, 1995. As Reported Pro Forma Assets: Current assets $333,485 $309,585 Real estate, net -- 183,900 Other non-current assets .52,337 52.337 $385.822 $545,822 Liabilities: Current liabilities Long-term debt Other long-term liabilities Redeemable preferred shares Shareholders' deficit $177,920 $181,920 -- 156,000 11,967 11,967 226,396 226,396 (30.461) (30.461) $385,822 $545.822 Acauisition - On January 11, 1996, New Valley, through a partnership controlled by New Valley, provided a $10,600 convertible bridge loan to finance Thinking Machines Corporation ("TMC"), a developer and marketer of parallel software of high-end and networked computer systems. In February 1996, the bridge loan was converted into a controlling interest in a partnership which holds 3.3 million common shares of TMC which represent 61.4% of the outstanding shares. Pro Forma Information - The following table presents unaudited pro forma results of continuing operations as if the acquisitions of Ladenburg, TMC and the Office Buildings and Shopping Centers, had occurred on January 1, 1995. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been consummated as of such date. Year Ended December 31, 1995 Revenues Net income Net loss applicable to common shares Net loss per common share $143,680 641 (30,920) (.16) Class A Senior Preferred Shares - In January and February, 1996, the Company repurchased 72,104 Class A Senior Preferred Shares for $10,530. This repurchase of Class A Senior Preferred Shares increased the Company's additional paid-in capital by $4,279 based on the difference between the purchase price and the carrying value of the shares. The Company declared and paid a cash dividend of $10 per share on the Class A Senior Preferred Shares in March 1996. R JR Nabisco Equity Swap - On February 29, 1996, New Valley entered into a total return equity swap transaction (the Equity Swap Agreement") with an unaffiliated company (the "Counterparty") relating to 1,000,000 shares of R JR Nabisco Common Stock. The transaction is for a period of up to six months, subject to earlier termination at the election of New Valley, and provides 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 R JR Nabisco Common Stock during a specified C-75

NEW VALLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) o (Continued) period prior to such date (the "Final Price") exceeds $34.42, the price of the R JR Nabisco Common Stock during a specified period following the commencement of the swap (the "Initial Price"), the Counterparty will pay New Valley an amount in cash equal to the amount of such appreciation with respect to 1,000,000 shares of R JR Nabisco Common Stock plus the value of any dividends with a record date occurring during the swap period. If the Final Price is less than the Initial Price, then New Valley will pay the Counterparty at the termination of the transaction an amount in cash equal to the amount of such decline with respect to 1,000,000 shares of R JR Nabisco Common Stock, offset by the value of any dividends, provided that, with respect to approximately 225,000 shares of R JR Nabisco Common Stock, New Valley will not be 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 are being guaranteed by the Counterparty's parent, a large foreign bank, and New Valley has pledged certain collateral in respect of its potential obligations under the swap and has agreed to pledge additional collateral under certain conditions. At March 29, 1996, the Company had an unrealized loss on this swap transaction of approximately $4,200 and had pledged collateral of $11,806. Redomestication and Reverse Stock Split - The Company's Board of Directors has unanimously approved a proposal to change the Company's jurisdiction of incorporation from the State of New York to the State of Delaware (the "Redomestication") pursuant to a merger between the Company and a newly formed wholly-owned subsidiary of the Company, which would also provide for a "reverse stock split" of the Company's Common Shares, that would reduce the number of such shares outstanding on a one-for-twenty-basis (the "Reverse Stock Split"). The Redomestication (and attendant Reverse Stock Split) is subject to the approval of the Company's shareholders at the Company's Annual Meeting of Shareholders in June 1996 in accordance with the New York Business Corporation Law. C-76

NEW VALLEY CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars inThousands, Except Per Share Amounts) Quarters 1st 2nd 3rd 1995: Revenues $ 7,669 $10,032 Expenses(b) 1.038 7,748 Income (loss) from continuing operations 6,631 2,284 Discontinued operations(d) 1,398 2,682 Net income $ 8,029 $ 4.966 Income (loss) per Common Share: Income (loss) from continuing operations Discontinued operations Net income (loss)(c) 1994(a): Revenues Expenses(b) Income (loss) from continuing operations before extraordinary item Discontinued operations(d) Income before extraordinary item Extraordinary item(e) Net income Income (loss) per Common Share: Loss from continuing operations before extraordinary item Discontinued operations Extraordinary item Net income (loss)(c) $21,514 18,730 2,784 235 $ 3.019 $28,5' (10,3: $(.04) $.06 $(.04) $(.1 .01 .Ol - ._93 $.(.03) $.0__~_7 $(.04) $.L~ $ 345 $ 467 $ 918 $ 8,65 5,528 13,420 7,497 (79! (5,183) (12,953) (6,579) 17,587 29,226 26,071 12,404 16,273 19,492 $12,404 $16,273 $19,492 9,451 1.062.82: 1,072,27: (110.50( $ 961.77~ $(.12) $(.18) $(.15) $(.0C .09 .16 .14 5.641 $(.03) $(.02) $(.01) $4,9~. (a) The quarterly financial data has been restated to reflect the discontinued operations of FSI and DSI. (b) Includes provision for Federal and state income taxes, and reorganization items. Includes write-down of $11,790 in the 4th quarter of 1995. (c) Income (loss) per common share is determined after giving effect to dividends on preferred shares and the repurchase of such shares. The sum of quarterly income (loss) per share may not equal income (loss) per share for the year, because the per share data for each quarter and for the year is independently computed. Fully diluted earnings per share is anti- dilutive for all periods of 1995 and 1994, except for the 4th quarter of 1994. See Note 4. (d) Includes gain on sale of FSI in the 4th quarter of 1994 of $1.,056,081 and gain on sale of the Messaging Services Business in the 4th quarter of 1995 of $12,558. See Note 1. (e) Represents extraordinary loss on extinguishment of debt. See Note 15. C-77

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY (Dollars in Thousands, Except per Share Amounts) Operating Results:(a) Total revenues Total costs and expenses(b) income (loss) from continuing operations before provision for income taxes and extraordinary items Provision (benefit) for income taxes Income (loss) from continuing operations before extraordinary items income (loss) from discontinued operations Income (loss) before extraordinary items Extraordinary items(c) Net income (loss) ~)ividends on preferred shares(d) Excess of carrying value of redeemable preferred shares over cost of shares purchased ~let income (loss) applicable to Common Shares Year Ended December 31, $67,730 $ 10,381 $ 3,844 $ 10,908 $ 11,400 66.064 26.146 15.034 65,006 43.047 1,666 (15,765) (11,190) (54,098) (31,647) 292 (500) (225) .... 1,374 (15,265) (10,965) (54,098) (31,647) 16,673 1.135.706 38.368 34.173 (445) 18,247 1,120,441 27,403 (19,925) (32,092) -- (110,500) 8,417 .... 18,247 1,009,941 35,820 (19,925) (32,092) (72,303) (80,037) (68,706) (60,086) (52,148) 40,342 $(13.714) $ 929.904 $(,32.886) $(80.011) $(84.240) =er Common and equivalent share: =rimary: Income (loss) from continuing operations before extraordinary items Discontinued operations Extraordinary items Net income (loss) :u~ly diluted: Income (loss) from continuing operations before extraordinary items Discontinued operations Extraordinary items Net income (loss) :)ividends declared(d) $ (.16) $ (.50) $ (.42) $ (.61) $(.46) .09 6.03 .20 .18 -- - (.59) .04 .... (.07) 4.94 (.18) (.43) (.46) (.16) (.37) (.42) (.61) (.46) .09 5.36 .20 o 18 -- -- (.52) .04 .... , (.07) 4.47 (.18) (.43) (.46) C-78

NEW VALLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED FIVE-YEAR FINANCIAL SUMMARY - (Continued) (Dollars in Thousands, Except Per Share Amounts) Balance Sheet Data:(a) Total assets Long-term debt classified as current(e) Long-term obligations Prepetition claims(f) Redeemable preferred shares{g) Non-redeemable preferred shares Deficit Working capital (deficit) Year Ended December 31, $385,822 $1,069,891 $269,483 $242,802 $236,391 .... 98,167 11,967 36,177 19,318 7,230 358,998 33,392 619,833 791,893 809,185 -- 226,396 317,798 329,233 275,085 229,002 279 279 279 303 317 (30,740) (38,723) (1,020,935) (986,616) (929,234) 155,565 284,849 64,695 45,967 (395,875) (a) (b) (c) (d) (e) (f) (g) The operating results for the years 1993 through 1991 were reclassified to reflect the discontinued operations of FSI and DSI. See Note 3 to the Consolidated Financial Statements. Includes reorganization expense (benefit) of $(2,044), $22,734, $9,035, $(6,756), and $(12,272) in 1995, 1994, 1993, 1992 and 1991, respectively. Represents extraordinary loss on the extinguishment of debt in 1994 and the extraordinary gain on the early termination of a capital lease in 1993. No dividends on preferred shares were declared for 1993, 1992, and 1991. In both 1995 and 1994, dividends of $50 per share on the Class A Redeemable Preferred stock were declared. The 1995, 1994, 1993, 1992, and 1991 dividend amounts include $521, $4,847, $3,999, $3,260, and $2,657, respectively, accrued on redeemable preferred shares to reflect the effective dividend yield over the life of such securities. All preferred dividends, whether or not declared, are reflected as a deduction in arriving at income (loss) applicable to Common Shares. At December 31, 1991, New Valley was in default under various loan agreements and indentures, and, as a result, the portion of the long-term debt so affected was classified as current in the balance sheet. In subsequent years such debt is included in prepetition claims. See note (f) below. Comprised of prepetition claims against the Corporation in its bankruptcy case, including long-term notes, debentures, pension liabilities and certain other obligations. For details, see Note 15 to the Consolidated Financial Statements. Includes undeclared cumulative preferred dividends on redeemable preferred shares of $121,893, $176,761, $193,042, $142,893, and $100,000 at December 31, 1995, 1994, 1993, 1992, and 1991, respectively. See Note 11 to the Consolidated Financial Statements. C-79

NEW VALLEY CORPORATION VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 1995 (Thousands) SCHEDULE II Description Losses Additions Charged to Balance at Charged to Reserve, Net Other Balance at January. 1. Expenses of Collection~; r.~ December 31~ Year 1994 Allowance for uncollectible receivables $8,820 $4,614 $(4,946) $(8,488) $ Year 1993 Allowance for uncollectible receivables 9,145 5,130 (5,455) -- 8,820 (a) The receivable and related allowance for uncollectible receivables were sold to FFMC on November, 1994. c-80

[.ndependen~, Auditors' Report The Board of Directors and Shareholders MAI Systems Corporation: We have audited the accompanying consolidated balance sheets of MAI Systems Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' deficiency and cash flows for the years ended December 31, 1994 and 1993, the three-month period ended December 31, 1992 and the year ended September 30, 1992. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 f'mancial position of MAI Systems Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for the years ended December 31, 1994 and 1993, the three-month period ended December 31, 1992 and the year ended September 30, 1992. in conformity with generally accepted accounting principles. KPm KPMG Peat Marwick LLP Orange County, California March 9, 1995 C-81

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 29, 1996 BROOKE GROUP LTD. (Registrant) By:/s/Gerald E. Sauter Gerald E. Sauter Vice President and Chief Financial Officer

Independent Accountants: Coopers & Lybrand, L.L.P. 200 S. Biscayne Blvd. Suite 1900 Miami, FL 33131 Corporate Headquarters: Brooke Group Ltd. 100 S.E. Second Street Miami, FL 33131 Additional Information: Requests for general information should be directed to corporate headquarters. Attention: Investor Relations (305) 579-8000 Requests for exhibits not attached to the Annual Report must be in writing, and should be sent to corporate headquarters. Attention: Investor Relations. Please specify the exhibits requested. Company Stock: Brooke Group Ltd. common stock is listed on the New York Stock Exchange (ticker symbol BGL) Transfer Agent and Registrar: American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Telephone: (718) 921-8200 Board of Directors: Bennett S. LeBow Chairman of the Board, President and Chief Executive Officer Robert J. Eide Secretary and Treasurer, Aegis Capital Corp. Jeffrey S. Podell Chairman of the Board and President, Newsote, Inc. Corporate Officers: Bennett S. LeBow Chairman of the Board, President and Chief Executive Officer Joselynn D. Van Siclen Vice President, Treasurer and Chief Financial Officer Marc N. Bell Secretary and General Counsel