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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