##### Table of Contents





SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 10-K
      ANNUAL
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For The Fiscal Year Ended
    December 31, 2008
      VECTOR
    GROUP LTD.
 (Exact name of registrant as
    specified in its charter)
      Delaware

1-5759

65-0949535(State or other jurisdiction
    of
    incorporation or organization)

Commission File Number

(I.R.S. Employer Identification
    No.)   100 S.E. Second Street, Miami, Florida

33131(Address of principal executive
    offices)

(Zip Code)   (305) 579-8000
 (Registrants telephone number, including area code)
      Securities registered pursuant to Section 12(b) of the
    Act:
  Title of each class

Name of each exchange on which registeredCommon Stock, par value $.10 per share

New York Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 Large
    accelerated
    filer  þ
    Accelerated
    filer  o
    Non-accelerated
    filer  o
    Smaller
    reporting
    company  o    Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE:




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##### 





VECTOR
    GROUP LTD.FORM 10-K
  TABLE
    OF CONTENTS
  PagePART IItem 1.

Business


1Item 1A.

Risk Factors


17Item 1B.

Unresolved Staff Comments


29Item 2.

Properties


30Item 3.

Legal Proceedings


30Item 4.

Submission of Matters to a Vote of Security
    Holders; Executive Officers of the Registrant


30PART IIItem 5.

Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


32Item 6.

Selected Financial Data


34Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


35Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


63Item 8.

Financial Statements and Supplementary Data


63Item 9.

Changes In and Disagreements with Accountants on
    Accounting and Financial Disclosure


63Item 9A.

Controls and Procedures


63Item 9B.

Other Information


64PART IIIItem 10.

Directors, Executive Officers and Corporate
    Governance


64Item 11.

Executive Compensation


64Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


64Item 13.

Certain Relationships and Related Transactions,
    and Director Independence


64Item 14.

Principal Accounting Fees and Services


64PART IVItem 15.

Exhibits and Financial Statement Schedules


64SIGNATURES


69EX-21EX-23.1EX-23.2EX-23.3EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1EX-99.2EX-99.3




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PART I  ITEM 1.
    BUSINESS  Overview
    
    the manufacture and sale of cigarettes in the United States
    through our subsidiary Liggett Group LLC,
    the development of reduced risk cigarette products through our
    subsidiary Vector Tobacco Inc., and
    the real estate business through our subsidiary, New Valley LLC,
    which is seeking to acquire additional operating companies and
    real estate properties. New Valley owns 50% of Douglas Elliman
    Realty, LLC, which operates the largest residential brokerage
    company in the New York metropolitan area.    Strategy
    Liggett
  
    Capitalize upon Liggetts cost advantage in the
    U.S. cigarette market due to the favorable treatment that
    it receives under the Master Settlement Agreement,
    Focus marketing and selling efforts on the discount segment,
    continue to build volume and margin in core discount brands
    (LIGGETT SELECT, GRAND PRIX and EVE) and utilize core brand
    equity to selectively build distribution,
    Continue product development to provide the best quality
    products relative to other discount products in the marketplace,
    Increase efficiency by developing and adopting an organizational
    structure to maximize profit potential,
    Selectively expand the portfolio of private and control label
    partner brands utilizing a pricing strategy that offers
    long-term list price stability for customers,
    Identify, develop and launch relevant new cigarette brands and
    other tobacco products to the market in the future, and
    Pursue strategic acquisitions of smaller tobacco manufacturers.  Vector
    Tobacco
  
    Take a measured approach to developing low nicotine and
    nicotine-free cigarettes, and
    Continue to conduct appropriate studies relating to the
    development of cigarettes that materially reduce risk to smokers. 1




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New
    Valley
  
    Continue to grow Douglas Elliman Realty operations by utilizing
    its strong brand name recognition and pursuing strategic and
    financial opportunities,
    Continue to leverage our expertise as direct investors by
    actively pursuing real estate investments in the United States
    and abroad which we believe will generate above-market returns,
    Acquire operating companies through mergers, asset purchases,
    stock acquisitions or other means, and
    Invest New Valleys excess funds opportunistically in
    situations that we believe can maximize stockholder value.  Liggett
    Group LLC
  General.
      
    LIGGETT SELECT  the third-largest brand in the deep
    discount category,
    GRAND PRIX  a growing brand in the deep discount
    segment,
    EVE  a leading brand of 120 millimeter cigarettes in
    the branded discount category,
    PYRAMID  the industrys first deep discount
    product with a brand identity, and
    USA and various Partner Brands and private label brands.   2




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Business Strategy.
  Sales, Marketing and
    Distribution.
   3




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Trademarks.
    Manufacturing.
        Competition.
     4




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The Medallion Company, Inc.
   5




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Philip Morris Brand Transaction.
        11-year
  90-day
    Vector
    Tobacco Inc.
    QUEST.
     6




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Manufacturing and Marketing.
  Competition.
  Intellectual Property.
    Risks.
  Legislation,
    Regulation and Litigation
     7




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The
    Master Settlement Agreement and Other State Settlement
    Agreements
        
    all claims of the Settling States and their respective political
    subdivisions and other recipients of state health care funds,
    relating to: (i) past conduct arising out of the use, sale,
    distribution, manufacture, development, advertising and
    marketing of tobacco products; (ii) the health effects of,
    the exposure to, or research, statements or warnings about,
    tobacco products; and
    all monetary claims of the Settling States and their respective
    subdivisions and other recipients of state health care funds,
    relating to future conduct arising out of the use of or exposure
    to, tobacco products that have been manufactured in the ordinary
    course of business.  12-month
     8




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##### Table of Contents



and/or per-unit
      New
    Valley LLC
      Business
    Strategy
    Douglas
    Elliman Realty, LLC
   9




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Real Estate Brokerage Business. Real Trends
     10




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Marketing.
  Competition.
   11




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Government Regulation.
    Truth-in-Lending
    Franchises and Trade Names.
   12




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Residential Property Management
    Business.
  New
    Valley Realty Division
  Hawaiian Hotel.
  20-acre
     13




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St. Regis Hotel, Washington, D.C.
      Escena. 450-acre seven-acre
   14




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Aberdeen Townhomes LLC.
        New Valley Oaktree Chelsea Eleven, LLC.
    Former
    Broker-Dealer Operations
     15




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16




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Other
    Investments
  Castle Brands.
  Long-Term Investments.
  Employees
    Available
    Information
  (http://vectorgroupltd.com/invest.asp) Form 10-K, Form 10-Q, Form 8-K Form 10-K.
  ITEM 1A.
    RISK
    FACTORS    We have
    significant liquidity commitments
    
    cash interest expense of approximately $48.5 million,
    dividends on our outstanding common shares (currently at an
    annual rate of approximately $115 million), 17




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
    a payment of a retirement benefit under our Supplemental
    Retirement Plan in July 2009 to our former Executive Chairman of
    approximately $20.75 million,
    the mandatory redemption by November 15, 2009 of
    approximately $14 million of the outstanding principal
    amount of our 5% Variable Interest Senior Convertible Notes, and
    the possible redemption of an additional approximately
    $98 million principal amount of Notes as a result of an
    option by the holders to require us to repurchase some or all of
    the remaining principal amount of Notes on November 15,
    2009, and
    other corporate expenses and taxes, including a tax payment of
    approximately $75.5 million in connection with the Philip
    Morris brands transaction.    We and
    our subsidiaries have a substantial amount of indebtedness,
    including indebtedness due in 2009.
    We are a
    holding company and depend on cash payments from our
    subsidiaries, which are subject to contractual and other
    restrictions, in order to service our debt and to pay dividends
    on our common stock.
      Our
    11% senior secured notes contain restrictive covenants that
    limit our operating flexibility.
    
    incur or guarantee additional indebtedness or issue preferred
    stock;
    pay dividends or distributions on, or redeem or repurchase,
    capital stock; 18




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
    create liens with respect to our assets;
    make investments, loans or advances;
    prepay subordinated indebtedness;
    enter into transactions with affiliates; and
    merge, consolidate, reorganize or sell our assets.      Liggett
    faces intense competition in the domestic tobacco
    industry.
      Liggetts
    business is highly dependent on the discount cigarette
    segment.
   19




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Liggetts
    market share is susceptible to decline.
    Liggett
    has significant sales to a single customer.
    Liggetts
    cigarettes are subject to substantial and increasing regulation
    and taxation, which has a negative effect on revenue and
    profitability.
          The
    proposed regulation of tobacco products by the Food and Drug
    Administration may adversely affect Liggetts sales and
    operating profit.
  326-102.
    
    Require larger and more severe health warnings on packs and
    cartons;
    Ban the use of descriptors on tobacco products, such as
    low-tar and light;
    Require the disclosure of ingredients and additives to consumers;
    Require pre-market approval by the FDA for claims made with
    respect to reduced risk or reduced exposure products; 20




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
    Allow the FDA to require the reduction of nicotine and the
    reduction or elimination of any other compound in tobacco
    products;
    Prohibit the use of foreign grown tobacco that has been grown or
    processed with pesticides not approved under federal law for use
    in domestic tobacco farming and processing;
    Allow the FDA to place more severe restrictions on the
    advertising, marketing and sale of cigarettes;
    Permit inconsistent state regulation of labeling and advertising
    and eliminate the existing federal preemption of such
    regulation; and
    Grant the FDA the regulatory authority to impose broad
    additional restrictions.        The
    domestic cigarette industry has experienced declining unit sales
    in recent periods.
    Litigation
    will continue to harm the tobacco industry.
  and/or
 21




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Altria
    Group Inc. v. Good
      Individual
    tobacco-related cases have increased as a result of the Florida
    Supreme Courts ruling in Engle.
  Engle R. J. Reynolds Tobacco
    Co
 22




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Lukacs v. R.J. Reynolds Tobacco Company Lukacs Engle Engle
  Engle Engle Engle Engle Engle Engle
  Engle
  Regulation
    and legislation may negatively impact sales of tobacco products
    and our financial condition.
      Liggett
    may be adversely affected by the 2004 legislation to eliminate
    the federal tobacco quota system.
   23




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Excise
    tax increases adversely affect cigarette sales.
    Liggett
    may have additional payment obligations under the Master
    Settlement Agreement and its other settlement agreements with
    the states.
       24




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Vector
    Tobacco is subject to risks inherent in new product development
    initiatives.
      Risks of market acceptance of new products.
    Potential extensive government
    regulation.
  Competition from other cigarette manufacturers with greater
    resources.
 25




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Intellectual property rights, including Vector Tobaccos
    patents involve complex legal and factual
    issues.
      Dependence on key scientific personnel.
  Ability to raise capital and manage growth of
    business.
  Potential delays in obtaining tobacco and other raw materials
    needed to produce products.
 26




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New
    Valley is subject to risks relating to the industries in which
    it operates.
  Risks of real estate ventures.
  The real estate, capital and credit markets have worsened in
    recent years.
  Risks of litigation on mortgage
    receivable. 450-acre
  New Valley may pursue a variety of real estate development
    projects.
  Risks relating to the residential brokerage
    business.
  
    coordinate with the franchiser on significant matters relating
    to their operations, including the opening and closing of
    offices;
    make substantial royalty payments to the franchiser and
    contribute significant amounts to national advertising funds
    maintained by the franchiser;
    indemnify the franchiser against losses arising out of the
    operations of their business under the franchise
    agreements; and
    maintain standards and comply with guidelines relating to their
    operations which are applicable to all franchisees of the
    franchisers real estate franchise system.     27




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Real estate ventures and mortgage receivable have been
    negatively impacted by the current downturn in the residential
    real estate market.
  and/or
  
    periods of economic slowdown or recession;
    rising interest rates;
    the general availability of mortgage financing, including:  
    the impact of the recent contraction in the subprime and
    mortgage markets generally; and
    the effect of more stringent lending standards for home
    mortgages;  
    adverse changes in economic and general business conditions in
    the New York metropolitan area;
    a decrease in the affordability of homes;
    declining demand for real estate;
    a negative perception of the market for residential real estate;
    commission pressure from brokers who discount their commissions;
    acts of God, such as hurricanes, earthquakes and other natural
    disasters, or acts or threats of war or terrorism; and/or
    an increase in the cost of homeowners insurance.  The three major real estate ventures current operations
    are located in the New York metropolitan
    area.
  Potential
    new investments we may make are unidentified and may not
    succeed.
    We depend
    on our key personnel.
   28




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We are
    exposed to risks from legislation requiring companies to
    evaluate their internal control over financial
    reporting.
    The price
    of our common stock may fluctuate significantly, and this may
    make it difficult for you to resell the shares of our common
    stock when you want or at prices you find attractive.
      
    actual or anticipated fluctuations in our operating results;
    changes in expectations as to our future financial performance,
    including financial estimates by securities analysts and
    investors;
    the operating and stock performance of our competitors;
    announcements by us or our competitors of new products or
    services or significant contract, acquisitions, strategic
    partnerships, joint ventures or capital commitments;
    the initiation or outcome of litigation;
    changes in interest rates;
    general economic, market and political conditions;
    additions or departures of key personnel; and
    future sales of our equity or convertible securities.      We have
    many potentially dilutive securities outstanding.
   29




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ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES        Approximate TotalType

Location


Owned or Leased


Square FootageStorage Facilities


Danville, VA



Owned



578,000Office and Manufacturing Complex


Mebane, NC



Owned



240,000Warehouse


Mebane, NC



Owned



60,000Warehouse


Mebane, NC



Leased



50,000Warehouse


Mebane, NC



Leased



30,000Warehouse


Mebane, NC



Leased



22,000       ITEM 3.
    LEGAL
    PROCEEDINGS      ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   30




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EXECUTIVE
    OFFICERS OF THE REGISTRANT
    Year IndividualBecame anName

Age


Position

Executive OfficerHoward M. Lorber


60


President and Chief Executive Officer


2001Richard J. Lampen


55


Executive Vice President


1996J. Bryant Kirkland III


43


Vice President, Chief Financial Officer and Treasurer


2006Marc N. Bell


48


Vice President, General Counsel and Secretary


1998Ronald J. Bernstein


55


President and Chief Executive Officer of Liggett


2000   Howard M. Lorber
  Richard J. Lampen
  J. Bryant Kirkland III
  Marc N. Bell
 31




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Ronald J. Bernstein
 PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES    Year

High


Low


Cash Dividends2008:Fourth Quarter

$
17.62


$
10.82


$
.40Third Quarter


19.45



15.24



.38Second Quarter


17.33



15.15



.38First Quarter


19.28



15.81



.382007:Fourth Quarter

$
21.90


$
18.90


$
.38Third Quarter


22.62



18.88



.36Second Quarter


20.78



15.74



.36First Quarter


17.35



15.40



.36            32




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Performance
    Graph
    
  12/03


12/04


12/05


12/06


12/07


12/08Vector Group Ltd.



100




118




148




168




216




168S&P 500



100




111




116




135




142




90S&P MidCap



100




116




131




145




156




100AMEX Tobacco



100




130




145




204




224




179   Unregistered
    Sales of Equity Securities and Use of Proceeds
    Issuer
    Purchases of Equity Securities
   33




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ITEM 6.
    SELECTED
    FINANCIAL DATA  Year Ended December 31,2008


2007


2006


2005


2004(dollars in thousands, except per share amounts)Statement of Operations Data:Revenues(1)

$
565,186


$
555,430


$
506,252


$
478,427


$
498,860Income from continuing operations


60,504



73,803



42,712



42,585



4,462Income from discontinued operations














3,034



2,689Extraordinary item














6,766



Net income


60,504



73,803



42,712



52,385



7,151Per basic common share(2):Net income applicable to common shares

$
0.90


$
1.10


$
0.66


$
1.02


$
0.14Per diluted common share(2):Net income applicable to common shares

$
0.80


$
1.07


$
0.65


$
0.96


$
0.14Cash distributions declared per common share(2)

$
1.54


$
1.47


$
1.40


$
1.33


$
1.27Balance Sheet Data:Current assets

$
355,283


$
395,626


$
303,156


$
319,099


$
242,124Total assets


717,712



785,289



637,462



603,552



535,927Current liabilities


296,159



109,337



168,786



128,100



119,835Notes payable, embedded derivatives, long-term debt and other
    obligations, less current portion


287,545



378,760



198,777



277,613



279,800Non-current employee benefits, deferred income taxes, minority
    interests and other long-term liabilities


100,403



196,340



174,922



168,773



225,509Stockholders equity (deficit)


33,605



100,852



94,977



29,066



(89,217
)     (1)
    
    Revenues include federal excise taxes of $168,170, $176,269,
    $174,339, $161,753 and $175,674, respectively.(2)
    
    Per share computations include the impact of 5% stock dividends
    on September 29, 2008, September 28, 2007,
    September 29, 2006, September 29, 2005 and
    September 29, 2004. 34




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  (Dollars
    in Thousands, Except Per Share Amounts)
  Overview
    
    the manufacture and sale of cigarettes in the United States
    through our subsidiary Liggett Group LLC,
    the development and marketing of reduced risk cigarette products
    through our subsidiary Vector Tobacco Inc., and
    the real estate business through our subsidiary, New Valley LLC,
    which is seeking to acquire additional operating companies and
    real estate properties. New Valley owns 50% of Douglas Elliman
    Realty, LLC, which operates the largest residential brokerage
    company in the New York metropolitan area.      
    LIGGETT SELECT  the third largest brand in the deep
    discount category,
    GRAND PRIX  a growing brand in the deep discount
    segment,
    EVE  a leading brand of 120 millimeter cigarettes in
    the branded discount category,
    PYRAMID  the industrys first deep discount
    product with a brand identity, and
    USA and various Partner Brands and private label brands.       35




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Recent
    Developments
  SNUS.
  Issuance of 11% Senior Secured Notes.
  LTS Debt Exchange Agreement.
      NASA Settlement.
  Proposed and enacted excise tax increases.
 36




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Tobacco Settlement Agreements.
           37




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Losses on Long-term Investments.
  Real Estate Activities.
  Sale of St. Regis Hotel.
  Escena. 450-acre
 38




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seven-acre
    Aberdeen Townhomes LLC.
      New Valley Oaktree Chelsea Eleven, LLC.
    Recent
    Developments in Tobacco-Related Litigation
   39




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Schwab v. Philip Morris Schwab
    Engle Engle Lukacs v. R. J.
    Reynolds Tobacco Company Engle Engle
 40




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Critical
    Accounting Policies
  General.
    No. 05-8,
  Revenue Recognition. No. 06-3,
  Marketing Costs.
  Restructuring and Asset Impairment Charges.
 41




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EITF 94-3,
  Contingencies. Engle
  Settlement Agreements.
  Derivatives; Beneficial Conversion Feature.
   42




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Inventories. last-in, first-in,
  Stock-Based Compensation. ,
  Employee Benefit Plans. 10-year
   43




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Long-Term Investments and Impairments.
  Income Taxes.
  Results
    of Operations
      44




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Year Ended December 31,2008


2007


2006(Dollars in thousands)Revenues:Liggett

$
562,660


$
551,687


$
499,468Vector Tobacco


2,527



3,743



6,784Total revenues

$
565,187


$
555,430


$
506,252Operating income (loss):Liggett

$
170,181


$
159,347


$
140,508
(1)Vector Tobacco


(8,331
)


(9,896
)


(13,971
)(1)Total tobacco


161,850



149,451



126,537Corporate and other


(26,546
)


(23,947
)


(25,508
)Total operating income

$
135,304


$
125,504


$
101,029
(1)     (1)
    
    Includes a gain on sale of assets at Liggett of $2,217 in 2006
    and a loss on sale of assets of $7 at Vector Tobacco,
    restructuring charges of $2,664 at Vector Tobacco and a reversal
    of restructuring charges of $116 at Liggett.  2008
    Compared to 2007
  Revenues.
  Tobacco Revenues.
      Tobacco Gross Profit.
 45




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Expenses.
    Other Income (Expenses).
     46




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Income Before Income Taxes.
  Income Tax Provision.
    2007
    Compared to 2006
  Revenues.
  Tobacco Revenues.
      Tobacco Gross Profit.
   47




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Expenses.
    Other Income (Expenses).
     48




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Income Before Income Taxes.
  Income Tax Provision.
    Liquidity
    and Capital Resources
           49




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Liggett. 30-day
   50




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Engle Engle
 51




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V.T. Aviation. 30-day
  VGR Aviation. 30-day
  Vector Tobacco.
  Vector.
  
    cash interest expense of approximately $48,500,
    dividends on our outstanding common shares (currently at an
    annual rate of approximately $115,000),
    a payment of a retirement benefit under our Supplemental
    Retirement Plan in July 2009 to our former Executive Chairman of
    approximately $20,750,
    the mandatory redemption by November 15, 2009 of
    approximately $14,000 of the outstanding principal amount of our
    5% Variable Interest Senior Convertible Notes, and the possible
    redemption of an additional approximately $98,000 principal
    amount of Notes as a result of an option by the holders to
    require us to repurchase some or all of the remaining principal
    amount of Notes on November 15, 2009, and
    other corporate expenses and taxes, including a tax payment of
    approximately $75,500 in connection with the Philip Morris
    brands transaction.     52




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and/or
         53




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Indenture


December 31,


December 31,Covenant

Requirement


2008


2007Consolidated EBITDA, as defined

$
50,000


$
154,053


$
137,820Leverage ratio, as defined


<3.0 to 1



0.1 to 1



NegativeSecured leverage ratio, as defined


<1.5 to 1



Negative



Negative       3 4
     54




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90-day 90-day 90-day
         55




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Long-Term
    Financial Obligations and Other Commercial Commitments
    Contractual Obligations

2009


2010


2011


2012


2013


Thereafter


TotalLong-term debt(1)

$
39,184


$
4,395


$
114,017
(8)

$
4,247


$
5,516


$
264,000
(9)

$
431,359Operating leases(2)


4,069



2,718



2,654



2,587



999







13,027Inventory purchase commitments(3)


8,658























8,658Capital expenditure purchase commitments(4)


1,072























1,072New Valley obligations under limited partnership agreements


112























112Interest payments(5)


50,816



51,355



49,161



33,474



34,037



306,910



525,753Total(6),(7)

$
103,911


$
58,468


$
165,832


$
40,308


$
40,552


$
570,910


$
979,981     (1)
    
    Long-term debt is shown before discount and assumes that only
    the mandatory redemption amounts will be retired on our 5%
    Variable Interest Senior Convertible Notes due 2011 (12.5% and
    87.5% of the principal balance in 2009 and 2011, respectively)
    and our 3.875% Variable Interest Senior Convertible Debentures
    due 2026 (10% and 90% of the principal balance in 2011 and 2026,
    respectively). For more information concerning our long-term
    debt, see Liquidity and Capital Resources above and
    Note 7 to our consolidated financial statements.(2)
    
    Operating lease obligations represent estimated lease payments
    for facilities and equipment. The amounts presented do not
    include amounts scheduled to be received under non-cancelable
    operating subleases of $1,028 in 2009, $946 in 2010, $965 in
    2011, $965 in 2012, $402 in 2013 and $0 thereafter. See
    Note 8 to our consolidated financial statements.(3)
    
    Inventory purchase commitments represent purchase commitments
    under our leaf inventory management program. See Note 4 to
    our consolidated financial statements.(4)
    
    Capital expenditure purchase commitments represent purchase
    commitments for machinery and equipment at Liggett and Vector
    Tobacco. See Note 5 to our consolidated financial
    statements.(5)
    
    Interest payments are based on current interest rates at
    December 31, 2008 and the assumption our current policy of
    a cash dividend of $0.40 per quarter and an annual 5% stock
    dividend will continue. In addition, interest payments have been
    computed assuming that only the mandatory amounts will be
    retired on our convertible debt as discussed in Note
    (1) above. For more information concerning our long-term
    debt, see Liquidity and Capital Resources above and
    Note 7 to our consolidated financial statements.(6)
    
    Not included in the above table is approximately $92,850 of net
    deferred tax liabilities and $7,503 of unrecognized income tax
    benefits.(7)
    
    Because their future cash outflows are uncertain, the above
    table excludes our pension and postretirement benefit plans,
    which includes a $20,760 payment under our Supplemental
    Retirement Plan in 2009, contractual guarantees, and net
    deferred tax liabilities of $92,850.(8)
    
    We may be required to redeem up to approximately $97,881 of this
    amount in 2009 in accordance with the terms of our 5% Variable
    Interest Senior Convertible Notes due 2011.(9)
    
    We may be required to redeem $99,000 of this amount in 2011 in
    accordance with the terms of our 3.875% Variable Interest Senior
    Convertible Debentures due 2026.   56




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##### Table of Contents



Off-Balance
    Sheet Arrangements
  and/or
        Market
    Risk
       57




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##### Table of Contents



New
    Accounting Pronouncements
     58




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##### Table of Contents



14-1, 14-1). 14-1
  No. EITF 03-6-1, No. EITF 03-6-1
  SFAS 157-3, SFAS 157-3
  Legislation
    and Regulation
     59




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##### Table of Contents



60




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##### Table of Contents



61




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##### Table of Contents



SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
    
    economic outlook,
    capital expenditures,
    cost reduction,
    new legislation,
    cash flows,
    operating performance,
    litigation,
    impairment charges and cost saving associated with
    restructurings of our tobacco operations, and
    related industry developments (including trends affecting our
    business, financial condition and results of operations).      
    general economic and market conditions and any changes therein,
    due to acts of war and terrorism or otherwise,
    impact of current crises in capital and credit markets,
    including any continued worsening,
    governmental regulations and policies,
    effects of industry competition,
    impact of business combinations, including acquisitions and
    divestitures, both internally for us and externally in the
    tobacco industry, 62




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##### Table of Contents




    impact of restructurings on our tobacco business and our ability
    to achieve any increases in profitability estimated to occur as
    a result of these restructurings,
    impact of new legislation on our competitors payment
    obligations, results of operations and product costs, i.e. the
    impact of recent federal legislation eliminating the federal
    tobacco quota system,
    impact of substantial increases in federal, state and local
    excise taxes,
    uncertainty related to litigation and potential additional
    payment obligations for us under the Master Settlement Agreement
    and other settlement agreements with the states, and
    risks inherent in our new product development initiatives.      ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  page F-1
  ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Conclusions
    Regarding the Effectiveness of Disclosure Controls and
    Procedures
    Managements
    Report on Internal Control Over Financial Reporting
  Rule 13a-15(f). Internal Control 
    Integrated Framework Internal
    Control  Integrated Framework
   63




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##### Table of Contents



Material
    Changes in Internal Control
    ITEM 9B.
    OTHER
    INFORMATION    PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES    PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    page F-1
    Schedule II  Valuation and Qualifying Accounts


Page F-75  64




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(a)(3) EXHIBITS
  Form 10-K:
  INDEX
    OF EXHIBITS
  ExhibitNo.

Description* 3
.1

Amended and Restated Certificate of Incorporation of Vector
    Group Ltd. (formerly known as Brooke Group Ltd.)
    (Vector) (incorporated by reference to
    Exhibit 3.1 in Vectors
    Form 10-Q
    for the quarter ended September 30, 1999).* 3
.2

Certificate of Amendment to the Amended and Restated Certificate
    of Incorporation of Vector (incorporated by reference to
    Exhibit 3.1 in Vectors
    Form 8-K
    dated May 24, 2000).* 3
.3

Certificate of Amendment to the Amended and Restated Certificate
    of Incorporation of Vector Group Ltd. (incorporated by reference
    to Exhibit 3.1 in Vectors
    Form 10-Q
    for the quarter ended June 30, 2007).* 3
.4

Amended and restated By-Laws of Vector Group Ltd. (incorporated
    by reference to Exhibit 3.4 in Vectors
    Form 8-K
    dated October 19, 2007).* 4
.1

Amended and Restated Loan and Security Agreement dated as of
    April 14, 2004, by and between Wachovia Bank, N.A., as
    lender, Liggett Group Inc., as borrower, 100 Maple LLC and Epic
    Holdings Inc. (the Wachovia Loan Agreement)
    (incorporated by reference to Exhibit 10.1 in Vectors
    Form 8-K
    dated April 14, 2004).* 4
.2

Amendment, dated as of December 13, 2005, to the Wachovia
    Loan Agreement (incorporated by reference to Exhibit 4.1 in
    Vectors
    Form 8-K
    dated December 13, 2005).* 4
.4

Amendment, dated as of January 31, 2007, to the Wachovia
    Loan Agreement (incorporated by reference to Exhibit 4.1 in
    Vectors
    Form 8-K
    dated February 2, 2007).* 4
.5

Amendment, dated as of August 10, 2007, to the Wachovia
    Loan Agreement (incorporated by reference to Exhibit 4.6 in
    Vectors
    Form 8-K
    dated August 16, 2007).* 4
.6

Amendment, dated as of August 16, 2007, to the Wachovia
    Loan Agreement (incorporated by reference to Exhibit 4.7 in
    Vectors
    Form 8-K
    dated August 16, 2007).* 4
.7

Intercreditor Agreement, dated as of August 16, 2007,
    between Wachovia Bank, N.A., as ABL Lender, U.S. Bank National
    Association, as Collateral Agent, Liggett Group LLC, as
    Borrower, and 100 Maple LLC, as Loan Party (incorporated by
    reference to Exhibit 99.1 in Vectors
    Form 8-K
    dated August 16, 2007).* 4
.8

Indenture, dated as of November 18, 2004, between Vector
    and Wells Fargo Bank, N.A., as Trustee, relating to the 5%
    Variable Interest Senior Convertible Notes due 2011, including
    the form of Note (incorporated by reference to Exhibit 10.1
    in Vectors
    Form 8-K
    dated November 18, 2004).* 4
.9

Indenture, dated as of April 13, 2005, by and between
    Vector and Wells Fargo Bank, N.A., relating to the 5% Variable
    Interest Senior Convertible Notes due 2011 including the form of
    Note (incorporated by reference to Exhibit 4.1 in
    Vectors
    Form 8-K
    dated April 14, 2005).* 4
.10

Indenture, dated as of July 12, 2006, by and between Vector
    and Wells Fargo Bank, N.A., relating to the
    37/8%
    Variable Interest Senior Convertible Debentures due 2026 (the
    37/8% Debentures),
    including the form of the
    37/8% Debenture
    (incorporated by reference to Exhibit 4.1 in Vectors
    Form 8-K
    dated July 11, 2006).* 4
.11

Indenture, dated as of August 16, 2007, between Vector
    Group Ltd., the subsidiary guarantors named therein and U.S.
    Bank National Association, as Trustee, relating to the
    11% Senior Secured Notes due 2015, including the form of
    Note (incorporated by reference to Exhibit 4.1 in
    Vectors
    Form 8-K
    dated August 16, 2007).* 4
.12

First Supplemental Indenture dated as of July 15, 2008 to
    the Indenture dated August 16, 2007 between Vector Group
    Ltd., the subsidiary guarantors named therein and U.S. Bank
    National Association, as Trustee (incorporated by reference to
    Exhibit 4.1 of Vectors
    Form 8-K
    dated July 15, 2008).* 4
.13

Pledge Agreement, dated as of August 16, 2007, between VGR
    Holding LLC, as Grantor, and U.S. Bank National Association, as
    Collateral Agent (incorporated by reference to Exhibit 4.2
    in Vectors
    Form 8-K
    dated August 16, 2007). 65




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##### Table of Contents



ExhibitNo.

Description* 4
.14

Security Agreement, dated as of August 16, 2007, between
    Vector Tobacco Inc., as Grantor, and U.S. Bank National
    Association, as Collateral Agent (incorporated by reference to
    Exhibit 4.3 in Vectors
    Form 8-K
    dated August 16, 2007).* 4
.15

Security Agreement, dated as of August 16, 2007, between
    Liggett Group LLC and 100 Maple LLC, as Grantors, and U.S. Bank
    National Association, as Collateral Agent (incorporated by
    reference to Exhibit 4.4 in Vectors
    Form 8-K
    dated August 16, 2007).* 4
.16

Registration Rights Agreement, dated as of August 16, 2007,
    between Vector Group Ltd., the subsidiary guarantors named
    therein and Jefferies & Company, Inc. (incorporated by
    reference to Exhibit 4.5 in Vectors
    Form 8-K
    dated August 16, 2007).* 10
.1

Corporate Services Agreement, dated as of June 29, 1990,
    between Vector and Liggett (incorporated by reference to
    Exhibit 10.10 in Liggetts Registration Statement on
    Form S-1,
    No. 33-47482).* 10
.2

Services Agreement, dated as of February 26, 1991, between
    Brooke Management Inc. (BMI) and Liggett (the
    Liggett Services Agreement) (incorporated by
    reference to Exhibit 10.5 in VGR Holdings
    Registration Statement on
    Form S-1,
    No. 33-93576).* 10
.3

First Amendment to Liggett Services Agreement, dated as of
    November 30, 1993, between Liggett and BMI (incorporated by
    reference to Exhibit 10.6 in VGR Holdings
    Registration Statement on
    Form S-1,
    No. 33-93576).* 10
.4

Second Amendment to Liggett Services Agreement, dated as of
    October 1, 1995, between BMI, Vector and Liggett
    (incorporated by reference to Exhibit 10(c) in
    Vectors
    Form 10-Q
    for the quarter ended September 30, 1995).* 10
.5

Third Amendment to Liggett Services Agreement, dated as of
    March 31, 2001, by and between Vector and Liggett
    (incorporated by reference to Exhibit 10.5 in Vectors
    Form 10-K
    for the year ended December 31, 2003).* 10
.6

Corporate Services Agreement, dated January 1, 1992,
    between VGR Holding and Liggett (incorporated by reference to
    Exhibit 10.13 in Liggetts Registration Statement on
    Form S-1,
    No. 33-47482).* 10
.7

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, Brooke Group Holding and Liggett (incorporated by
    reference to Exhibit 15 in the Schedule 13D filed by
    Vector on March 11, 1996, as amended, with respect to the
    common stock of RJR Nabisco Holdings Corp.).* 10
.8

Addendum to Initial States Settlement Agreement (incorporated by
    reference to Exhibit 10.43 in Vectors
    Form 10-Q
    for the quarter ended March 31, 1997).* 10
.9

Settlement Agreement, dated March 12, 1998, by and among
    the States listed in Appendix A thereto, Brooke Group
    Holding and Liggett (incorporated by reference to
    Exhibit 10.35 in Vectors
    Form 10-K
    for the year ended December 31, 1997).* 10
.10

Master Settlement Agreement made by the Settling States and
    Participating Manufacturers signatories thereto (incorporated by
    reference to Exhibit 10.1 in Philip Morris Companies
    Inc.s
    Form 8-K
    dated November 25, 1998, Commission File
    No. 1-8940).* 10
.11

General Liggett Replacement Agreement, dated as of
    November 23, 1998, entered into by each of the Settling
    States under the Master Settlement Agreement, and Brooke Group
    Holding and Liggett (incorporated by reference to
    Exhibit 10.34 in Vectors
    Form 10-K
    for the year ended December 31, 1998).* 10
.12

Stipulation and Agreed Order regarding Stay of Execution Pending
    Review and Related Matters, dated May 7, 2001, entered into
    by Philip Morris Incorporated, Lorillard Tobacco Co., Liggett
    Group Inc. and Brooke Group Holding Inc. and the class counsel
    in Engel, et. al., v. R.J. Reynolds Tobacco Co., et. al.
    (incorporated by reference to Exhibit 99.2 in Philip Morris
    Companies Inc.s
    Form 8-K
    dated May 7, 2001).* 10
.13

Amended and Restated Employment Agreement (LeBow
    Employment Agreement), dated as of September 27, 2005,
    between Vector and Bennett S. LeBow (incorporated by reference
    to Exhibit 10.1 in Vectors
    Form 8-K
    dated September 27, 2005).* 10
.14

Amendment dated January 27, 2006 to LeBow Employment
    Agreement (incorporated by reference to Exhibit 10.2 in
    Vectors
    Form 8-K
    dated January 27, 2006). 66




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##### Table of Contents



ExhibitNo.

Description* 10
.15

Amended and Restated Employment Agreement dated as of
    January 27, 2006, between Vector and Howard M. Lorber
    (incorporated by reference to Exhibit 10.1 in Vectors
    Form 8-K
    dated January 27, 2006).* 10
.16

Employment Agreement, dated as of January 27, 2006, between
    Vector and Richard J. Lampen (incorporated by reference to
    Exhibit 10.3 in Vectors
    Form 8-K
    dated January 27, 2006).* 10
.17

Amended and Restated Employment Agreement, dated as of
    January 27, 2006, between Vector and Marc N. Bell
    (incorporated by reference to Exhibit 10.4 in Vectors
    Form 8-K
    dated January 27, 2006).* 10
.18

Employment Agreement, dated as of November 11, 2005,
    between Liggett Group Inc. and Ronald J. Bernstein (incorporated
    by reference to Exhibit 10.1 in Vectors
    Form 8-K
    dated November 11, 2005).* 10
.19

Employment Agreement, dated as of January 27, 2006, between
    Vector and J. Bryant Kirkland III (incorporated by
    reference to Exhibit 10.5 in Vectors
    Form 8-K
    dated January 27, 2006).* 10
.20

Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive
    Plan (incorporated by reference to Appendix A in
    Vectors Proxy Statement dated April 21, 2004).* 10
.21

Stock Option Agreement, dated November 4, 1999, between
    Vector and Bennett S. LeBow (incorporated by reference to
    Exhibit 10.59 in Vectors
    Form 10-K
    for the year ended December 31, 1999).* 10
.22

Stock Option Agreement, dated November 4, 1999, between
    Vector and Richard J. Lampen (incorporated by reference to
    Exhibit 10.60 in Vectors
    Form 10-K
    for the year ended December 31, 1999).* 10
.23

Stock Option Agreement, dated November 4, 1999, between
    Vector and Marc N. Bell (incorporated by reference to
    Exhibit 10.61 in Vectors
    Form 10-K
    for the year ended December 31, 1999).* 10
.24

Stock Option Agreement, dated November 4, 1999, between
    Vector and Howard M. Lorber (incorporated by reference to
    Exhibit 10.63 in Vectors
    Form 10-K
    for the year ended December 31, 1999).* 10
.25

Stock Option Agreement, dated January 22, 2001, between
    Vector and Howard M. Lorber (incorporated by reference to
    Exhibit 10.2 in Vectors
    Form 10-Q
    for the quarter ended March 31, 2001).* 10
.26

Restricted Share Award Agreement, dated as of September 27,
    2005, between Vector and Howard M. Lorber (incorporated by
    reference to Exhibit 10.2 in Vectors
    Form 8-K
    dated September 27, 2005).* 10
.27

Restricted Share Award Agreement, dated as of November 11,
    2005, between Vector and Ronald J. Bernstein (incorporated by
    reference to Exhibit 10.2 in Vectors
    Form 8-K
    dated November 11, 2005).* 10
.28

Option Letter Agreement, dated as of November 11, 2005
    between Vector and Ronald J. Bernstein (incorporated by
    reference to Exhibit 10.3 in Vectors
    Form 8-K
    dated November 11, 2005)..* 10
.29

Restricted Share Award Agreement, dated as of November 16,
    2005, between Vector and Howard M. Lorber (incorporated by
    reference to Exhibit 10.1 in Vectors
    Form 8-K
    dated November 16, 2005).* 10
.30

Vector Senior Executive Annual Bonus Plan (incorporated by
    reference to Exhibit 10.7 in Vectors
    Form 8-K
    dated January 27, 2006).* 10
.31

Vector Supplemental Retirement Plan (as amended and restated
    April 24, 2008) (incorporated by reference to
    Exhibit 10.1 in Vectors
    Form 10-Q
    for the quarter ended June 30, 2008).* 10
.32

Closing Agreement on Final Determination Covering Specific
    Matters between Vector and the Commissioner of Internal Revenue
    of the United States of America dated July 20, 2006
    (incorporated by reference to Exhibit 10.3 in Vectors
    Form 10-Q
    for the quarter ended September 30, 2006).* 10
.33

Operating Agreement of Douglas Elliman Realty, LLC (formerly
    known as Montauk Battery Realty LLC) dated
    December 17, 2002 (incorporated by reference to
    Exhibit 10.1 in New Valleys
    Form 8-K
    dated December 13, 2002).* 10
.34

First Amendment to Operating Agreement of Douglas Elliman
    Realty, LLC (formerly known as Montauk Battery Realty LLC),
    dated as of March 14, 2003 (incorporated by reference to
    Exhibit 10.1 in New Valleys
    Form 10-Q
    for the quarter ended March 31, 2003).* 10
.35

Second Amendment to Operating Agreement of Douglas Elliman
    Realty, LLC, dated as of May 19, 2003 (incorporated by
    reference to Exhibit 10.1 in New Valleys
    Form 10-Q
    for the quarter ended June 30, 2003). 67




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##### Table of Contents



ExhibitNo.

Description* 10
.37

Note and Equity Purchase Agreement, dated as of March 14,
    2003 (the Note and Equity Purchase Agreement), by
    and between Douglas Elliman Realty, LLC (formerly known as
    Montauk Battery Realty LLC), New Valley Real Estate Corporation
    and The Prudential Real Estate Financial Services of America,
    Inc., including form of 12% Subordinated Note due
    March 14, 2013 (incorporated by reference to
    Exhibit 10.2 in New Valleys
    Form 10-Q
    for the quarter ended March 31, 2003).* 10
.38

Amendment to the Note and Equity Purchase Agreement, dated as of
    April 14, 2003 (incorporated by reference to
    Exhibit 10.3 in New Valleys
    Form 10-Q
    for the quarter ended March 31, 2003).* 10
.39

Stipulation for Entry of Judgment dated March 14, 2007
    between New Valley Corporation and the United States of America
    (incorporated by reference to Exhibit 10.2 in Vectors
    Form 10-Q
    for the quarter ended March 31, 2007).21


Subsidiaries of Vector.23
.1

Consent of PricewaterhouseCoopers LLP.23
.2

Consent of PricewaterhouseCoopers LLP.23
.3

Consent of PricewaterhouseCoopers LLP.31
.1

Certification of Chief Executive Officer, Pursuant to Exchange
    Act
    Rule 13a-14(a),
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.31
.2

Certification of Chief Financial Officer, Pursuant to Exchange
    Act
    Rule 13a-14(a),
    as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.32
.1

Certification of Chief Executive Officer, Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.32
.2

Certification of Chief Financial Officer, Pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.99
.1

Material Legal Proceedings.99
.2

Liggett Group LLCs Consolidated Financial Statements for
    the three years ended December 31, 2008.99
.3

Vector Tobacco Inc.s Consolidated Financial Statements for
    the three years ended December 31, 2008.     *
    
    Incorporated by reference   68




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##### Table of Contents



SIGNATURES    VECTOR GROUP LTD.
    (Registrant)
  By:
    /s/  J.
    Bryant Kirkland III        POWER OF
    ATTORNEY
  Form 10-K
    Signature

Title/s/  Howard
    M. LorberHoward
    M. Lorber

President and Chief Executive Officer
    (Principal Executive Officer)/s/  J.
    Bryant Kirkland IIIJ.
    Bryant Kirkland III

Vice President, Treasurer and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)/s/  Henry
    C. BeinsteinHenry
    C. Beinstein

Director/s/  Ronald
    J. BernsteinRonald
    J. Bernstein

Director/s/  Robert
    J. EideRobert
    J. Eide

Director/s/  Bennett
    S. LeBowBennett
    S. LeBow

Director/s/  Jeffrey
    S. PodellJeffrey
    S. Podell

Director/s/  Jean
    E. SharpeJean
    E. Sharpe

Director  69




---



##### 



VECTOR
    GROUP LTD.FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2008
    ITEMS 8, 15(a)(1) AND (2)
  INDEX TO
    FINANCIAL STATEMENTS
    AND FINANCIAL STATEMENT SCHEDULES
    PageFINANCIAL STATEMENTS:Vector Group Ltd. Consolidated Financial StatementsReport of Independent Registered Certified Public
    Accounting Firm


F-2Vector Group Ltd. Consolidated Balance Sheets as
    of December 31, 2008 and 2007


F-3Vector Group Ltd. Consolidated Statements of
    Operations for the years ended December 31, 2008, 2007 and
    2006


F-4Vector Group Ltd. Consolidated Statement of
    Stockholders Equity for the years ended December 31,
    2008, 2007 and 2006


F-5Vector Group Ltd. Consolidated Statements of Cash
    Flows for the years ended December 31, 2008, 2007 and
    2006


F-6Notes to Consolidated Financial Statements


F-8FINANCIAL STATEMENT SCHEDULE:Schedule II  Valuation and Qualifying
    Accounts


F-75      Liggett
    Group LLC
    Vector
    Tobacco Inc.
   F-1




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##### Table of Contents



Report of
    Independent Registered Certified Public Accounting
    Firm     Internal Control  Integrated
    Framework
      
     F-2




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##### Table of Contents



VECTOR
    GROUP LTD. AND SUBSIDIARIES



CONSOLIDATED
    BALANCE SHEETS  December 31,


December 31,2008


2007(Dollars in thousands, except per share amounts)ASSETS:Current assets:Cash and cash equivalents

$
211,105


$
238,117Investment securities available for sale


28,518



45,875Accounts receivable  trade


9,506



3,113Inventories


92,581



86,825Deferred income taxes


3,642



18,336Other current assets


9,931



3,360Total current assets


355,283



395,626Property, plant and equipment, net


50,691



54,432Mortgage receivable, net


17,704



Long-term investments accounted for at cost


51,118



72,971Long-term investments accounted under the equity method






10,495Investments in non-consolidated real estate businesses


50,775



35,731Restricted assets


6,555



8,766Deferred income taxes


45,222



26,637Intangible asset


107,511



107,511Prepaid pension costs


2,901



42,084Other assets


29,952



31,036Total assets

$
717,712


$
785,289LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt

$
97,498


$
20,618Current portion of employee benefits


21,840



1,298Accounts payable


6,104



6,980Accrued promotional expenses


10,131



9,210Income taxes payable, net


11,803



2,363Accrued excise and payroll taxes payable, net


7,004



5,327Settlement accruals


20,668



10,041Deferred income taxes


92,507



24,019Accrued interest


9,612



9,475Other current liabilities


18,992



20,006Total current liabilities


296,159



109,337Notes payable, long-term debt and other obligations, less
    current portion


210,301



277,178Fair value of derivatives embedded within convertible debt


77,245



101,582Non-current employee benefits


34,856



40,933Deferred income taxes


48,807



141,904Other liabilities


16,739



13,503Total liabilities


684,107



684,437Commitments and contingenciesStockholders equity:Preferred stock, par value $1.00 per share,
    10,000,000 shares authorized






Common stock, par value $0.10 per share, 150,000,000 shares
    authorized, 69,107,320 and 63,307,020 shares issued and
    66,014,070 and 60,361,068 shares outstanding


6,601



6,036Additional paid-in capital


65,103



89,494Retained earnings (accumulated deficit)






Accumulated other comprehensive income (loss)


(25,242
)


18,179Less: 3,093,250 and 2,945,952 shares of common stock in
    treasury, at cost


(12,857
)


(12,857
)Total stockholders equity


33,605



100,852Total liabilities and stockholders equity

$
717,712


$
785,289    F-3




---



##### Table of Contents



VECTOR
    GROUP LTD. AND SUBSIDIARIES



CONSOLIDATED
    STATEMENTS OF OPERATIONS  Year Ended December 31,2008


2007


2006(Dollars in thousands, except per share amounts)Revenues*

$
565,186


$
555,430


$
506,252Expenses:Cost of goods sold


335,299



337,079



315,163Operating, selling, administrative and general expenses


94,583



92,967



90,833Gain on sale of assets










(2,210
)Restructuring and impairment charges






(120
)


1,437Operating income


135,304



125,504



101,029Other income (expenses):Interest and dividend income


5,864



9,897



9,000Interest expense


(62,335
)


(45,762
)


(37,776
)Changes in fair value of derivatives embedded within convertible
    debt


24,337



(6,109
)


112Loss on extinguishment of debt










(16,166
)Gain on investments, net










3,019Provision for loss on investments


(32,400
)


(1,216
)


Gain from conversion of LTS notes






8,121



Equity income from non-consolidated real estate businesses


24,399



16,243



9,086Income from lawsuit settlement






20,000



Other, net


(597
)


(75
)


176Income before provision for income taxes


94,572



126,603



68,480Income tax expense


(34,068
)


(52,800
)


(25,768
)Net income

$
60,504


$
73,803


$
42,712Per basic common share:Net income applicable to common shares

$
0.90


$
1.10


$
0.66Per diluted common share:Net income applicable to common shares

$
0.80


$
1.07


$
0.65Cash distributions declared per share

$
1.54


$
1.47


$
1.40     *
    
    Revenues and cost of goods sold include federal excise taxes of
    $168,170, $176,269 and $174,339 for the years ended
    December 31, 2008, 2007 and 2006, respectively.   F-4




---



##### Table of Contents



VECTOR
    GROUP LTD. AND SUBSIDIARIES



CONSOLIDATED
    STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)  Additional








OtherCommon Stock


Paid-In


Unearned





Comprehensive


TreasuryShares


Amount


Capital


Compensation


Deficit


Income (Loss)


Stock


Total(Dollars in thousands)Balance, January 1, 2006


49,849,735



4,985



133,325



(11,681
)


(70,633
)


(10,610
)


(16,320
)


29,066Net income


















42,712











42,712Pension related minimum liability adjustments, net of taxes






















9,461







9,461Forward contract adjustments, net of taxes






















254







254Unrealized gain on long-term investments accounted for under the
    equity method, net of taxes






















173







173Unrealized gain on investment securities, net of taxes






















4,772







4,772Total other comprehensive income






























14,660Total comprehensive income






























57,372Adoption of SFAS No. 158






















(6,637
)






(6,637
)Reclassifications in accordance with SFAS No. 123(R)










(11,681
)


11,681















Distributions on common stock










(92,359
)


















(92,359
)Effect of stock dividend


2,708,295



271











(271
)










Exercise of options, net of 41,566 shares delivered to pay
    exercise price


273,239



27



3,241















(697
)


2,571Amortization of deferred compensation










3,926



















3,926Note conversion


4,200,000



420



79,522















4,263



84,205Beneficial conversion feature of convertible debt, net of taxes










16,833



















16,833Balance, December 31, 2006


57,031,269



5,703



132,807







(28,192
)


(2,587
)


(12,754
)


94,977Net income


















73,803











73,803Change in net loss and prior service cost, net of taxes






















11,545







11,545Forward contract adjustments, net of taxes






















28







28Unrealized gain on long-term investments accounted for under the
    equity method, net of taxes






















226







226Unrealized gain on investment securities, net of taxes






















8,967







8,967Total other comprehensive income






























20,766Total comprehensive income






























94,569Distributions and dividends on common stock










(54,054
)






(45,324
)










(99,378
)Effect of stock dividend


2,870,589



287











(287
)










Restricted stock grants


40,000



4



(4
)


















Tax benefit of options exercised










2,055



















2,055Exercise of options, net of 7,627 shares delivered to pay
    exercise price


419,210



42



5,161















(103
)


5,100Amortization of deferred compensation










3,529



















3,529Balance, December 31, 2007


60,361,068



6,036



89,494











18,179



(12,857
)


100,852Net income


















60,504











60,504Change in net loss and prior service cost, net of taxes






















(30,989
)






(30,989
)Forward contract adjustments, net of taxes






















35







35Unrealized gain on long-term investments accounted for under the
    equity method, net of taxes






















(399
)






(399
)Unrealized gain on investment securities, net of taxes






















(12,263
)






(12,263
)Total other comprehensive income






























(43,616
)Total comprehensive income






























16,888Adoption of SFAS No. 158 measurement date


















(509
)


195







(314
)Distributions and dividends on common stock










(46,081
)






(59,681
)










(105,762
)Effect of stock dividend


3,142,760



314











(314
)










Tax benefit of options exercised










18,304



















18,304Exercise of options, net of 1,375,895 shares delivered to
    pay exercise price


2,510,242



251



(164
)


















87Amortization of deferred compensation










3,550



















3,550Balance, December 31, 2008


66,014,070


$
6,601


$
65,103


$



$



$
(25,242
)

$
(12,857
)

$
33,605    F-5




---



##### Table of Contents



VECTOR
    GROUP LTD. AND SUBSIDIARIES



CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2008


2007


2006(Dollars in thousands, except per share amounts)Cash flows from operating activities:Net income

$
60,504


$
73,803


$
42,712Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


10,057



10,202



9,888Non-cash stock-based expense


3,550



3,529



3,926Non-cash portion of restructuring and impairment charges


53



(120
)


1,437Loss on extinguishment of debt










16,166Gain on sale of investment securities available for sale










(3,019
)Gain on sale of assets










(2,210
)Deferred income taxes


432



44,656



(10,379
)Gain from conversion of LTS notes






(6,388
)


Provision for loss on mortgage receivable


4,000







Provision for loss on non-consolidated real estate businesses


3,500







Provision for loss on long-term investments accounted for at cost


21,900







Loss on long-term investments accounted under the equity method


568







Provision for loss on marketable securities


3,000



1,216



Equity income in non-consolidated real estate businesses


(24,399
)


(16,243
)


(9,086
)Distributions from non-consolidated real estate businesses


8,462



8,878



7,311Non-cash interest (income) expense


(11,907
)


13,912



5,176Changes in assets and liabilities:Receivables


(6,393
)


12,367



(2,766
)Inventories


(5,756
)


4,474



(20,904
)Change in book overdraft.


198



(179
)


759Accounts payable and accrued liabilities


11,850



(46,960
)


(2,881
)Cash payments on restructuring liabilities


(154
)


(884
)


(1,284
)Other assets and liabilities, net


11,800



6,935



11,169Net cash provided by operating activities


91,265



109,198



46,015    F-6




---



##### Table of Contents



VECTOR
    GROUP LTD. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2008


2007


2006(Dollars in thousands, except per share amounts)Cash flows from investing activities:Proceeds from sale of businesses and assets


452



917



1,486Proceeds from sale or maturity of investment securities










30,407Purchase of investment securities


(6,411
)


(6,571
)


(19,706
)Proceeds from sale or liquidation of long-term investments


8,334



71



326Purchase of long-term investments


(51
)


(40,091
)


(35,345
)Purchase of mortgage receivable


(21,704
)






Purchase of Castle Brands and other minority equity interests


(4,250
)






Increase in restricted assets


(411
)


(492
)


(1,527
)Investments in non-consolidated real estate businesses


(22,000
)


(750
)


(9,850
)Distributions from non-consolidated real estate businesses


19,393



1,000



Capital expenditures


(6,309
)


(5,189
)


(9,558
)Increase in cash surrender value of life insurance policies


(938
)


(838
)


(898
)Net cash used in investing activities


(33,895
)


(51,943
)


(44,665
)Cash flows from financing activities:Proceeds from issuance of debt


2,831



174,576



118,146Repayments of debt


(6,329
)


(41,200
)


(72,925
)Deferred financing charges


(137
)


(9,985
)


(5,280
)Borrowings under revolver


531,251



537,746



514,739Repayments on revolver


(526,518
)


(534,950
)


(502,753
)Distributions on common stock


(103,870
)


(99,249
)


(90,138
)Proceeds from exercise of Vector options and warrants


86



5,100



2,571Tax benefit of options exercised


18,304



2,055



Net cash (used in) provided by financing activities


(84,382
)


34,093



(35,640
)Net (decrease) increase in cash and cash equivalents


(27,012
)


91,348



(34,290
)Cash and cash equivalents, beginning of year


238,117



146,769



181,059Cash and cash equivalents, end of year

$
211,105


$
238,117


$
146,769    F-7




---



##### Table of Contents



VECTOR
    GROUP LTD.



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts) 1.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  (a)  Basis
    of Presentation:
      (b)  Estimates
    and Assumptions:
    (c)  Cash
    and Cash Equivalents:
    (d)  Financial
    Instruments:
       F-8




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (e)  Investment
    Securities:
      (f)  Significant
    Concentrations of Credit Risk:
      (g)  Accounts
    Receivable:
      (h)  Inventories:
  last-in, first-in,
   F-9




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (i)  Restricted
    Assets:
    (j)  Property,
    Plant and Equipment:
      (k)  Investment
    in Non-Consolidated Real Estate Businesses:
        (l)  Intangible
    Assets:
    10-12 years
 F-10




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (m)  Impairment
    of Long-Lived Assets:
      (n)  Pension,
    Postretirement and Postemployment Benefits
    Plans:
    (o)  Stock
    Options:
    (p)  Income
    Taxes:
      (q)  Distributions
    and Dividends on Common Stock:
   F-11




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  paid-in-capital.
  (r)  Revenue
    Recognition:
  Sales: No. 01-9, No. 06-3,
  Shipping and Handling Fees and Costs:
  (s)  Advertising
    and Research and Development:
      (t)  Earnings
    Per Share:
    No. 03-6, No. 03-6.
 F-12




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  No. 03-6.
  2008


2007


2006Net income

$
60,504


$
73,803


$
42,712Income attributable to participating securities


(2,783
)


(4,817
)


(2,958
)Net income available to common stockholders

$
57,721


$
68,986


$
39,754         2008


2007


2006Weighted-average shares for basic EPS


64,484,281



62,594,700



59,817,129Plus incremental shares related to stock options and warrants


717,217



1,748,850



1,573,502Plus incremental shares related to convertible debt


5,923,533







Weighted-average shares for diluted EPS


71,125,031



64,343,550



61,390,631     F-13




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31,2008


2007


2006Number of stock options


514,735



174,650



548,905Weighted-average exercise price

$
19.22


$
26.23


$
19.11Weighted-average shares of non- vested restricted stock


66,610



N/A



676,144Weighted-average expense per share

$
17.63



N/A


$
16.99Weighted-average number of sharesissuable upon conversion of debt


7,009,023



12,932,556



13,559,513Weighted-average conversion price

$
15.96


$
17.16


$
17.21     Year Ended December 31,2008


2007


2006Net income

$
60,504


$
73,803


$
42,712Income attributable to 3.875% variable interest senior
    convertible debentures due 2026


(962
)






Income attributable to participating securities


(2,738
)


(4,817
)


(2,958
)Net income for diluted EPS

$
56,804


$
68,986


$
39,754  F-14




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (u) Comprehensive
    Income:
    Year Ended December 31,2008


2007


2006Net income

$
60,504


$
73,803


$
42,712Net unrealized gains on investment securities available for sale:Change in net unrealized (losses) gains, net of income taxes


(14,047
)


8,248



6,556Net unrealized losses reclassified into net income, net of
    income taxes


1,784



719



(1,784
)Net unrealized (losses) gains on investment securities available
    for sale, net of income taxes


(12,263
)


8,967



4,772Change in net unrealized (losses) gains, net of income taxes


(674
)


226



173Net unrealized losses (gains) reclassified into net income, net
    of income taxes


275







Net unrealized (losses) gains on long-term investments accounted
    for under the equity method


(399
)


226



173Net change in forward contracts


35



28



254Net change in pension  related amounts, net of income
    taxes


(30,989
)


11,545



9,461Comprehensive income

$
16,888


$
94,569


$
57,372     December 31,


December 31,2008


2007Net unrealized gains on investment securities available for
    sale, net of income taxes of $1,456 and $9,943, respectively

$
2,104


$
14,367Net unrealized gains on long-term investments accounted for
    under the equity method, net of income taxes of $0 and $276,
    respectively






399Forward contracts adjustment, net of income taxes of $195 and
    $219, respectively


(282
)


(317
)Pension  related amounts, net of income taxes of
    $17,408 and $2,452, respectively


(27,064
)


3,730Accumulated other comprehensive (loss) income

$
(25,242
)

$
18,179   (v)  Fair
    Value of Derivatives Embedded within Convertible
    Debt:
   F-15




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (w)  Capital
    and Credit Market Crisis:
      (x)  Contingencies:
      (y)  New
    Accounting Pronouncements:
     F-16




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      14-1, 14-1). 14-1
  No. EITF 03-6-1, No. EITF 03-6-1
  SFAS 157-3, SFAS 157-3
  2.  RESTRUCTURINGS
  Vector Research 2006 Restructuring.
   F-17




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employee


Non-Cash


ContractSeverance


Asset


Termination/and Benefits


Impairment


Exit Costs


TotalBalance, January 1, 2006

$



$



$



$
Restructuring charges


484



1,842



338



2,664Utilized






(1,842
)






(1,842
)Balance, December 31, 2006

$
484


$



$
338


$
822Change in estimate


(71
)






8



(63
)Utilized


(343
)






(346
)


(689
)Balance, December 31, 2007

$
70


$



$



$
70Change in estimate


(14
)










(14
)Utilized


(56
)










(56
)Balance, December 31, 2008

$



$



$



$
   Liggett Vector Brands Restructurings.
     F-18




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Employee


Non-Cash


ContractSeverance


Asset


Termination/and Benefits


Impairment


Exit Costs


TotalBalance, January 1, 2006

$
713


$



$
1,403


$
2,116Change in estimate


(103
)






(25
)


(128
)Utilized


(610
)






(528
)


(1,138
)Balance, December 31, 2006

$



$



$
850


$
850Change in estimate










(57
)


(57
)Utilized










(195
)


(195
)Balance, December 31, 2007

$



$



$
598


$
598Change in estimate










(39
)


(39
)Utilized










(98
)


(98
)Balance, December 31, 2008

$



$



$
461


$
461   3.
    INVESTMENT
    SECURITIES AVAILABLE FOR SALE      Gross


GrossUnrealized


Unrealized


FairCost


Gain


Loss


Value2008Marketable equity securities

$
24,958


$
5,024


$
(1,464
)

$
28,5182007Marketable equity securities

$
21,565


$
24,374


$
(64
)

$
45,875    F-19




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    INVENTORIES    December 31,


December 31,2008


2007Leaf tobacco

$
48,880


$
41,502Other raw materials


5,128



4,847Work-in-process


314



710Finished goods


46,202



45,331Inventories at current cost


100,524



92,390LIFO adjustments


(7,943
)


(5,565
)$
92,581


$
86,825           5.
    PROPERTY,
    PLANT AND EQUIPMENT    December 31,


December 31,2008


2007Land and improvements

$
1,418


$
1,418Buildings


13,575



13,575Machinery and equipment


105,645



103,416Leasehold improvements


2,269



2,209Construction-in-progress


730



1,151123,637



121,769Less accumulated depreciation


(72,946
)


(67,337
)$
50,691


$
54,432    F-20




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    15-year
  6.
    LONG-TERM
    INVESTMENTS    December 31,


December 31,2008


2007Carrying


Fair


Carrying


FairValue


Value


Value


ValueInvestment partnerships accounted for at cost

$
51,118


$
54,997


$
72,971


$
89,007Investments accounted for on the equity method

$



$



$
10,495


$
10,495       No. D-46,
  No. 03-16,
   F-21




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Investment


InvestmentPartnerships


PartnershipsAccounted for at


Accounted for onCost


the Equity MethodBalance as of January 1, 2008

$
89,007


$
10,495Contributions (distributions)


47



(8,328
)Receivable classified as Other currents assets






(925
)Unrealized loss on long-term investments


(12,157
)


(675
)Other than temporary impairment on long-term investments


(21,900
)


Realized loss on long-term investments






(567
)Balance as of December 31, 2008

$
54,997


$
      F-22




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    NOTES PAYABLE,
    LONG-TERM DEBT AND OTHER OBLIGATIONS    December 31,


December 31,2008


2007Vector:11% Senior Secured Notes due 2015

$
165,000


$
165,0003.875% Variable Interest Senior Convertible Debentures due 2026,
    net of unamortized discount of $83,993 and $84,299*


26,007



25,7015% Variable Interest Senior Convertible Notes due 2011, net of
    unamortized net discount of $39,565 and $48,027*


72,299



63,837Liggett:Revolving credit facility


19,515



14,782Term loan under credit facility


7,290



7,822Equipment loans


8,307



9,660V.T. Aviation:Note payable


5,266



6,470VGR Aviation:Note payable


4,053



4,370Other


62



154Total notes payable, long-term debt and other obligations


307,799



297,796Less:Current maturities


(97,498
)


(20,618
)Amount due after one year

$
210,301


$
277,178     *
    
    The fair value of the derivatives embedded within the 3.875%
    Variable Interest Senior Convertible Debentures ($51,829 and
    $67,911 at December 31, 2008 and December 31, 2007,
    respectively) and the 5% Variable Interest Senior Convertible
    Notes ($25,416 at December 31, 2008 and $33,671 at
    December 31, 2007, respectively) is separately classified
    as a derivative liability in the consolidated balance sheets.  11% Senior
    Secured Notes due 2015 
    Vector:
     F-23




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Indenture


December 31,


December 31,Covenant

Requirement


2008


2007Consolidated EBITDA, as defined

$
50,000


$
154,053


$
137,820Leverage ratio, as defined


<3.0 to 1



0.1 to 1



NegativeSecured leverage ratio, as defined


<1.5 to 1



Negative



Negative   Variable
    Interest Senior Convertible Debt 
    Vector:
    3.875%
    Variable Interest Senior Convertible Debentures due
    2026:
       F-24




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    5%
    Variable Interest Senior Convertible Notes Due November
    2011:
      Embedded
    Derivatives on the Variable Interest Senior Convertible
    Debt:
     F-25




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


20063.875% convertible debentures

$
360


$
(28
)

$
4145% convertible notes


5,445



3,796



3,056Interest expense associated with embedded derivatives

$
5,805


$
3,768


$
3,470     Year Ended December 31,2008


2007


20063.875% convertible debentures

$
16,082


$
(8,104
)

$
(3,593
)5% convertible notes


8,255



1,995



3,705Gain (loss) on changes in fair value of derivatives embedded
    within convertible debt

$
24,337


$
(6,109
)

$
112     3.875%


5%Convertible


ConvertibleDebentures


Notes


TotalBalance at January 1, 2006






39,371



39,371Issuance of 3.875% convertible debentures


56,214







56,214Loss (gain) from changes in fair value of embedded derivatives


3,593



(3,705
)


(112
)Balance at December 31, 2006


59,807



35,666



95,473Loss (gain) from changes in fair value of embedded derivatives


8,104



(1,995
)


6,109Balance at December 31, 2007


67,911



33,671



101,582Gain from changes in fair value of embedded derivatives


(16,082
)


(8,255
)


(24,337
)Balance at December 31, 2008

$
51,829


$
25,416


$
77,245   Beneficial
    Conversion Feature on Variable Interest Senior Convertible
    Debt:
  No. 98-5,
  No. 05-8,
  F-26




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31,2008


2007


2006Amortization of beneficial conversion feature:3.875% convertible debentures

$
(54
)

$
(215
)

$
1255% convertible notes


3,017



2,083



1,693Interest expense associated with beneficial conversion feature

$
2,963


$
1,868


$
1,818   Unamortized
    Debt Discount:
    3.875%


5%Convertible


ConvertibleDebentures


Notes


TotalBalance at January 1, 2006

$



$
58,655


$
58,655Issuance of 3.875% convertible debentures-embedded derivative


56,214







56,214Issuance of 3.875% convertible debentures-beneficial conversion
    feature


28,381







28,381Amortization of embedded derivative


(414
)


(3,056
)


(3,470
)Amortization of beneficial conversion feature


(125
)


(1,693
)


(1,818
)Balance at December 31, 2006


84,056



53,906



137,962Amortization of embedded derivative


28



(3,796
)


(3,768
)Amortization of beneficial conversion feature


215



(2,083
)


(1,868
)Balance at December 31, 2007


84,299



48,027



132,326Amortization of embedded derivative


(360
)


(5,445
)


(5,805
)Amortization of beneficial conversion feature


54



(3,017
)


(2,963
)Balance at December 31, 2008

$
83,993


$
39,565


$
123,558   Revolving
    Credit Facility 
    Liggett:
  30-day
   F-27




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Equipment
    Loans 
    Liggett:
              Note
    Payable  V.T.
    Aviation:
  30-day
 F-28




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note
    Payable  VGR
    Aviation:
  30-day
  Scheduled
    Maturities:
    UnamortizedPrincipal


Discount


NetYear Ending December 31:2009


137,063



39,565



97,4982010


4,397







4,3972011


115,136



83,993



31,1432012


4,247







4,2472013


5,514







5,514Thereafter


165,000







165,000Total

$
431,357


$
123,558


$
307,799          F-29




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Weighted-Average
    Interest Rate on Current Maturities of Long-Term
    Debt:
    8.
    COMMITMENTS    Lease


SubleaseCommitments


Rentals


NetYear Ending December
    31:2009


4,069



1,027



3,0422010


2,718



946



1,7722011


2,654



965



1,6892012


2,587



965



1,6222013


999



402



597Thereafter










Total

$
13,027


$
4,305


$
8,722       9.
    EMPLOYEE
    BENEFIT PLANS  Defined
    Benefit Plans and Postretirement Plans:
  Defined Benefit Plans.
 F-30




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Postretirement Medical and Life Plans.
  Computation of Defined Benefit and Postretirement Benefit
    Plan Liabilities.
 F-31




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Post AMLSFAS


and SFASNo. 158


No. 158Adjustment


AdjustmentsPrepaid pension costs

$
(10,705
)

$
20,933Intangible asset


(1,232
)


Current liabilities


1,142



1,142Pension liabilities


(349
)


26,548Postretirement liabilities


(1,450
)


9,502Accumulated other comprehensive loss


11,280



12,891     Defined


Post-Benefit


RetirementPension Plans


Plans


TotalPrior service cost

$
801


$



$
801Actuarial loss (gain)


2,136



(163
)


1,973  F-32




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    OtherPension Benefits


Postretirement Benefits2008


2007


2008


2007Change in benefit obligation:Benefit obligation at January 1

$
(159,776
)

$
(163,463
)

$
(9,836
)

$
(10,295
)Service cost


(3,789
)


(3,896
)


(14
)


(18
)Interest cost


(9,525
)


(9,122
)


(591
)


(591
)Gap period cash flow


3,192







194



Gap period service and interest cost


(3,328
)






(151
)


Benefits paid


12,583



12,990



642



770Plan amendment














Time contractual termination benefits






(632
)






Actuarial gain


4,325



4,347



1,013



298Benefit obligation at December 31

$
(156,318
)

$
(159,776
)

$
(8,743
)

$
(9,836
)Change in plan assets:Fair value of plan assets at January 1

$
169,465


$
157,499


$



$
Gap period cash flow


(3,278
)










Actual return on plan assets


(42,810
)


24,598







Contributions


472



358



643



770Benefits paid


(12,583
)


(12,990
)


(643
)


(770
)Fair value of plan assets at December 31

$
111,266


$
169,465


$



$
Funded status at December 31

$
(45,052
)

$
9,689


$
(8,743
)

$
(9,836
)Amounts recognized in the consolidated balance sheets:Prepaid pension costs

$
2,901


$
42,084


$



$
Other accrued liabilities


(21,139
)


(530
)


(701
)


(768
)Non-current employee benefit liabilities


(26,814
)


(31,865
)


(8,042
)


(9,068
)Net amounts recognized

$
(45,052
)

$
9,689


$
(8,743
)

$
(9,836
)   OtherPension Benefits


Postretirement Benefits2008


2007


2006


2008


2007


2006Actuarial assumptions:Discount rates  benefit obligation


6.75
%


6.25
%


5.85
%


6.75
%


6.25
%


5.85
%Discount rates  service cost


6.25
%


5.85
%


5.68
%


6.25
%


5.85
%


5.68
%Assumed rates of return on invested assets


7.50
%


8.50
%


8.50
%










Salary increase assumptions


N/A



N/A



N/A



3.00
%


3.00
%


3.00
%   F-33




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  OtherPension Benefits


Postretirement Benefits2008


2007


2006


2008


2007


2006Service cost  benefits earned during the period

$
4,139


$
4,246


$
4,897


$
15


$
18


$
20Interest cost on projected benefit obligation


9,525



9,122



9,012



591



591



598Expected return on assets


(12,145
)


(12,726
)


(12,590
)










Prior service cost


1,402



1,402



1,051











Time contractual termination benefits






632















Amortization of net loss (gain)


98



705



1,689



(180
)


(105
)


(12
)Net expense

$
3,019


$
3,381


$
4,059


$
426


$
504


$
606     Defined


Post-Benefit


RetirementPension Plans


Plans


TotalPrior year accumulated other comprehensive income

$
5,128


$
1,054


$
6,182Amortization of prior service costs


1,402







1,402Amortization of gain (loss)


99



(180
)


(81
)Net (loss) gain arising during the year


(53,316
)


1,013



(52,303
)Gap period adjustment


373



(45
)


328Current year accumulated other comprehensive income (loss)

$
(46,314
)

$
1,842


$
(44,472
)         Defined


Post-Benefit


RetirementPension Plans


Plans


TotalPrior year accumulated other comprehensive income (loss)

$
(13,548
)

$
657


$
(12,891
)Amortization of prior service costs


1,402







1,402Amortization of gain (loss)


705



(105
)


600Net gain arising during the year


16,569



502



17,071Current year accumulated other comprehensive income

$
5,128


$
1,054


$
6,182    F-34




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      year-by-year,
  10-year
       F-35




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Plan Assets atDecember 31,2008


2007Asset category:Equity securities


44
%


52
%Investment grade fixed income securities


26
%


18
%High yield fixed income securities


5
%


8
%Alternative investments


8
%


13
%Short-term investments


17
%


9
%Total


100
%


100
%       1% Increase


1% DecreaseEffect on total of service and interest cost components

$
12


$
(11
)Effect on benefit obligation

$
176


$
(163
)       PostretirementPension


Medical2009

$
33,488


$
7012010


24,792



6852011


12,137



6792012


13,469



6782013


11,401



6892014  2018


58,286



3410  F-36




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Profit
    Sharing and Other
    Plans:
    10.
    INCOME
    TAXES  80%-owned
  Year Ended December 31,2008


2007


2006Current:U.S. Federal

$
25,747


$
5,035


$
27,982State


7,889



3,109



8,165$
33,636


$
8,144


$
36,147Deferred:U.S. Federal

$
5,170


$
40,575


$
(10,591
)State


(4,738
)


4,081



212432



44,656



(10,379
)Total

$
34,068


$
52,800


$
25,768     December 31, 2008


December 31, 2007Deferred Tax


Deferred Tax


Deferred Tax


Deferred TaxAssets


Liabilities


Assets


LiabilitiesExcess of tax basis over book basis- non-consolidated entities

$
3,938


$



$
2,907


$
Deferral on Philip Morris brand transaction






75,466







75,466Employee benefit accruals


18,803







16,543



15,234Book/tax differences on fixed and Intangible assets






26,908







23,984Impact of embedded derivatives on convertible debt






18,890







12,613Impact of timing of settlement payments






7,854







16,293Restricted U.S. tax loss carryforwards










873



U.S. tax credit carryforwards  Vector










15,991



Various U.S. state tax loss carryforwards


15,211







15,962



Other


26,123



12,196



9,532



22,333Valuation allowance


(15,211
)






(16,835
)


$
48,864


$
141,314


$
44,973


$
165,923    F-37




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    80%-owned
       F-38




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


2006Income before income taxes

$
94,572


$
126,603


$
68,480Federal income tax expense at statutory rate


33,100



44,311



23,969Increases (decreases) resulting from:State income taxes, net of federal income tax benefits


2,048



4,674



5,445Non-deductible expenses


1,771



2,950



3,188Impact of domestic production deduction


(1,608
)






Non-deductible impact of conversion of debt










5,201Equity and other adjustments


381



115



(293
)Impact of tax audit settlements






(468
)


(11,500
)Change in other tax contingencies






2,114



1,984Changes in valuation allowance, net of equity and tax audit
    adjustments


(1,624
)


(896
)


(2,226
)Income tax expense

$
34,068


$
52,800


$
25,768       Balance at January 1, 2007

$
11,685Additions based on tax positions related to current year


Additions based on tax positions related to prior years


2,242Reductions based on tax positions related to prior years


(95
)Settlements


Expirations of the statute of limitations


(3,227
)Balance at December 31, 2007


10,605Additions based on tax positions related to current year


Additions based on tax positions related to prior years


747Reductions based on tax positions related to prior years


(317
)Settlements


Expirations of the statute of limitations


(3,532
)Balance at December 31, 2008

$
7,503    F-39




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      11.
    STOCK
    COMPENSATION    Stock Options.
       F-40




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2006Risk-free interest rate


4.9%  5.0%Expected volatility


38.17%  40.52%Dividend yield


9.96%  10.03%Expected holding period


6  6.75 yearsWeighted average fair value

$
2.14  $2.50     Weighted-AverageRemaining


AggregateNumber of


Weighted Average


Contractual Term


IntrinsicShares


Exercise Price


(Years)


Value(1)Outstanding on January 1, 2006


9,917,574


$
9.10



3.6


$
67,495Granted


312,559


$
15.20Exercised


(355,293
)

$
8.76Cancelled


(28,672
)

$
16.41Outstanding on December 31, 2006


9,846,168


$
9.27



2.8


$
69,246Granted






Exercised


(469,148
)

$
8.31Cancelled


(10,270
)

$
22.68Outstanding on December 31, 2007


9,366,750


$
9.24



1.8


$
95,238Granted






Exercised


(4,080,467
)

$
5.72Cancelled


(1,403
)

$
30.93Outstanding on December 31, 2008


5,284,880


$
11.59



1.7


$
13,708Options exercisable at:December 31, 2006


9,468,852December 31, 2007


9,159,824December 31, 2008


5,169,119     (1)
    
    The aggregate intrinsic value represents the amount by which the
    fair value of the underlying common stock ($13.62, $19.10 and
    $16.10 at December 31, 2008, 2007 and 2006, respectively)
    exceeds the option exercise price. F-41




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Options Outstanding


Options ExercisableWeighted-AverageOutstanding


Remaining





ExercisableRange of

as of


Contractual Life


Weighted-Average


as of


Weighted-AverageExercise Prices

12/31/2008


(Years)


Exercise Price


12/31/2008


Exercise Price$0.00  9.28



10,554



4.0


$
8.98



10,554


$
8.98$9.29  12.37



3,507,143



0.9


$
9.95



3,507,143


$
9.95$12.38  15.47



1,541,854



3.3


$
13.49



1,452,138


$
13.40$15.48  18.56



52,090



6.9


$
17.67



26,044


$
17.67$18.57  21.65



5,612



3.1


$
19.69



5,612


$
19.69$21.66  24.74



33,971



2.5


$
22.23



33,971


$
22.23$24.75  27.84



53,465



2.6


$
26.29



53,465


$
26.29$27.84  30.93



80,191



2.7


$
28.26



80,191


$
28.265,284,880



1.7


$
11.59



5,169,118


$
11.50           employee-by-employee grant-by-grant
       F-42




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Restricted Stock Awards.
             F-43




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  12.
    CONTINGENCIES  Tobacco-Related
    Litigation:
  Overview
  and/or
    Individual
    Actions
  and/or Engle and/or
 F-44




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Engle
  NumberState

of CasesFlorida


12New York


10Louisiana


5Maryland


2Mississippi


2West Virginia


2District of Columbia


1Missouri


1Ohio


1   Liggett Only Cases. Davis v. Liggett Group, Davis In Ferlanti v. Liggett
    Group Engle Engle Engle
    and/or
  Davis
  Engle Progeny Cases. Engle v. R.J. Reynolds Tobacco Co.
 F-45




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Engle Engle Engle Engle Engle and/or Engle Engle Engle
  Class Actions
  Castano v. American Tobacco
    Co. Inc.
  Engle Case. Engle class-wide
    Engle and/or
  Lukacs v. R.J. Reynolds Tobacco Co.,
 F-46




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Lukacs Engle
  Other Class Actions.  Smith v. Philip
    Morris Romero v. Philip Morris Smith Romero
  Schwab v. Philip Morris,
  Young v. American Tobacco Co., Scott v. American Tobacco Co.
  Cleary v. Philip Morris,
  Brown v. American Tobacco Co.,
 F-47




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  In Re: Tobacco
    Litigation (Personal Injury Cases) Altria Group
    Inc. v. Good Good Good
  Scott.
  Governmental
    Actions
    City of St. Louis v. American Tobacco Company
  DOJ Case.
   F-48




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Third-Party
    Payor Actions
      and/or and/or
  National Committee to Preserve Social
    Security and Medicare v. Philip Morris USA,
  Upcoming
    Trials
  and/or Engle Engle
 F-49




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  MSA and
    Other State Settlement Agreements
        
    all claims of the Settling States and their respective political
    subdivisions and other recipients of state health care funds,
    relating to: (i) past conduct arising out of the use, sale,
    distribution, manufacture, development, advertising and
    marketing of tobacco products; (ii) the health effects of,
    the exposure to, or research, statements or warnings about,
    tobacco products; and
    all monetary claims of the Settling States and their respective
    subdivisions and other recipients of state health care funds
    relating to future conduct arising out of the use of, or
    exposure to, tobacco products that have been manufactured in the
    ordinary course of business.  12-month
    and/or per-unit
 F-50




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Certain
    MSA Disputes
      NPM Adjustment.
   F-51




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Gross v. Net Calculations.
    
    use of net unit amounts is not required by the MSA
    (as reflected by, among other things, the use of
    gross unit amounts through 2005);
    such a change is not authorized without the consent of affected
    parties to the MSA;
    the MSA provides for four-year time limitation periods for
    revisiting calculations and determinations, which precludes
    recalculating Liggetts 1997 Market Share (and thus,
    Liggetts market share exemption); and
    Liggett and others have relied upon the calculations based on
    gross unit amounts since 1998.    QUEST 3.
  Litigation Challenging the MSA.
     F-52




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other State Settlements.
      Davis Lukacs Engle Engle Engle and/or
  Engle
 F-53




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Other
    Matters:
      13.
    SUPPLEMENTAL
    CASH FLOW INFORMATION  Year Ended December 31,2008


2007


2006I. Cash paid during the period for:Interest

$
48,794


$
30,491


$
35,553Income taxes


4,015



18,967



45,475II. Non-cash investing and financing activities:Issuance of stock dividend


314



287



271Conversion of debt










70,000  F-54




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14.
    RELATED
    PARTY TRANSACTIONS  30-month
         F-55




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      15.
    INVESTMENTS
    AND FAIR VALUE MEASUREMENTS        Level 1
    Observable inputs such as quoted prices (unadjusted) in active
    markets for identical assets or liabilities.Level 2
    Inputs other than quoted prices that are observable for the
    assets or liability, either directory or indirectly. These
    include quoted prices for similar assets or liabilities in
    active markets and quoted prices for identical or similar assets
    or liabilities in markets that are not active.Level 3
    Unobservable inputs in which there is little market data, which
    requires the reporting entity to develop their own assumptions      Fair Value Measurements as of December 31, 2008Quoted Pricesin Active


SignificantMarkets for


Other


SignificantIdentical


Observable


UnobservableAssets


Inputs


InputsDescription

Total


(Level 1)


(Level 2)


(Level 3)Assets:Money market funds

$
192,348


$
192,348


$



$
Investment securities available for sale


28,518



20,627



7,891



Total

$
220,866


$
212,975


$
7,891


$
Liabilities:Fair value of derivatives embedded within convertible debt

$
77,245


$



$



$
77,245  F-56




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      16.
    PHILIP
    MORRIS BRAND TRANSACTION  L&M, Chesterfield Lark
        11-year
  90-day
    17.
    NEW
    VALLEY CORPORATION  Investments in non-consolidated real estate
    businesses.
 F-57




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,


December 31,2008


2007Douglas Elliman Realty LLC

$
33,175


$
31,89316th and

    K Holdings LLC






3,838Koa Investors LLC






Aberdeen Townhomes LLC


6,500



New Valley Oaktree Chelsea Eleven LLC


11,100



Investments in non-consolidated real estate businesses

$
50,775


$
35,731   Residential Brokerage Business.
  December 31,


December 31,2008


2007Cash

$
22,125


$
26,916Other current assets


7,496



9,462Property, plant and equipment, net


15,868



18,394Trademarks


21,663



21,663Goodwill


38,325



38,294Other intangible assets, net


1,311



1,928Other non-current assets


904



850Notes payable  current


1,413



581Current portion of notes payable to member - Prudential Real
    Estate Financial Services of America, Inc.


4,729



4,373Current portion of notes payable to member  New Valley


4,729



625Other current liabilities


23,294



26,579Notes payable  long term


1,805



2,402Notes payable to member  Prudential Real Estate
    Financial Services of America, Inc.


2,030



15,115Notes payable to member  New Valley


2,030



8,583Other long-term liabilities


6,939



6,599Members equity


60,723



52,650   F-58




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31,2008


2007


2006Revenues

$
352,681


$
405,595


$
347,244Costs and expenses


324,645



359,334



315,347Depreciation expense


5,507



6,047



5,138Amortization expense


298



448



410Interest expense, net


3,228



4,308



5,705Income tax expense


253



748



1,140Net income

$
18,750


$
34,710


$
19,504       Hawaiian Hotel.
        St. Regis Hotel, Washington, D.C.
 F-59




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Aberdeen Townhomes LLC.
        New Valley Oaktree Chelsea Eleven, LLC.
 F-60




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Mortgage receivable. 450-acre seven-acre
    Real Estate Market Conditions.
  Ladenburg Thalmann Financial Services.
 F-61




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      NASA Settlement.
  18.
    SEGMENT
    INFORMATION      Vector


Real


CorporateLiggett


Tobacco


Estate


and Other


Total2008Revenues

$
562,660


$
2,526


$



$



$
565,186Operating income (loss)


170,181



(8,331
)






(26,546
)


135,304Equity income from non-consolidated real estate businesses










23,899







23,899Identifiable assets


277,532



13,730



70,979



355,471



717,712Depreciation and amortization


7,601



118







2,338



10,057Capital expenditures


6,220



89











6,3092007Revenues

$
551,687


$
3,743


$



$



$
555,430Operating income (loss)


159,347



(9,896
)






(23,947
)


125,504Equity income from non-consolidated real estate businesses










16,243







16,243Identifiable assets


314,242



2,459



35,731



432,857



785,289Depreciation and amortization


7,723



134







2,345



10,202Capital expenditures


4,997



192











5,189 F-62




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Vector


Real


CorporateLiggett


Tobacco


Estate


and Other


Total2006Revenues

$
499,468


$
6,784


$



$



$
506,252Operating income (loss)


140,508
(1)


(13,971
)(1)






(25,508
)


101,029
(1)Equity income from non-consolidated real estate businesses










9,086







9,086Identifiable assets


316,165



3,122



28,416



289,759



637,462Depreciation and amortization


7,344



317







2,227



9,888Capital expenditures


9,439



100







19



9,558     (1)
    
    Includes a gain on sale of assets at Liggett of $2,217 and a
    loss on sale of assets of $7 at Vector Tobacco, restructuring
    and inventory impairment charges of $2,664 at Vector Tobacco and
    a reversal of restructuring charges of $116 at Liggett.  19. QUARTERLY
    FINANCIAL RESULTS (UNAUDITED)
    December 31,


September 30,


June 30,


March 31,2008(1)


2008(2)


2008


2008(3)Revenues

$
144,420


$
145,601


$
142,960


$
132,205Operating income


35,383



37,535



34,345



28,041Net income applicable to common shares

$
12,245


$
14,827


$
19,125


$
14,307Per basic common share(4):Net income applicable to common shares

$
0.18


$
0.22


$
0.29


$
0.22Per diluted common share(4):Net income applicable to common shares

$
0.09


$
0.21


$
0.23


$
0.21     (1)
    
    Fourth quarter 2008 net income applicable to common shares
    includes pre-tax impairment charges of $24,400 on long-term
    investments, $3,000 on investments held for sale and $3,500 on
    investments in non-consolidated real estate businesses.(2)
    
    Third quarter 2008 net income applicable to common shares
    includes pre-tax impairment charges on a mortgage receivable of
    $4,000 and long-term investments of $3,000.(3)
    
    First quarter 2008 net income applicable to common shares
    includes $12,000 of pre-tax income from the Companys
    investment in the St. Regis hotel, which was sold in March 2008.(4)
    
    Per share computations include the impact of a 5% stock dividend
    paid on September 29, 2008. Quarterly basic and diluted net
    income per common share were computed independently for each
    quarter and do not necessarily total to the year to date basic
    and diluted net income per common share.  F-63




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31,


September 30,


June 30,


March 31,2007


2007


2007(1)


2007(2)Revenues

$
145,134


$
136,053


$
140,351


$
133,892Operating income


36,894



33,707



29,183



25,720Net income applicable to common shares

$
14,231


$
15,064


$
21,381


$
23,127Per basic common share(3):Net income applicable to common shares

$
0.21


$
0.22


$
0.32


$
0.35Per diluted common share(3):Net income applicable to common shares

$
0.21


$
0.22


$
0.31


$
0.34     (1)
    
    Second quarter 2007 net income applicable to common shares
    included an $8,121 pre-tax gain from the exchange of LTS notes.(2)
    
    First quarter of 2007 net income applicable to common
    shares included a $19,590 pre-tax gain from lawsuit settlement.(3)
    
    Per share computations include the impact of a 5% stock
    dividends paid on September 29, 2008 and September 28,
    2007. Quarterly basic and diluted net income per common share
    were computed independently for each quarter and do not
    necessarily total to the year to date basic and diluted net
    income per common share.  20.
    CONDENSED
    CONSOLIDATING FINANCIAL INFORMATION  Regulation S-X, Rule 3-10,
     F-64




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
  December 31, 2008Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.ASSETS:Current assets:Cash and cash equivalents

$
200,066


$
11,039


$



$



$
211,105Investment securities available for sale


28,440







78







28,518Accounts receivable  trade






9,506











9,506Intercompany receivables


1,938











(1,938
)


Inventories






92,581











92,581Deferred income taxes


3,304



338











3,642Income taxes receivable


25,125











(25,125
)


Other current assets


3,962



5,969











9,931Total current assets


263,835



119,433



78



(27,063
)


355,283Property, plant and equipment, net


735



49,956











50,691Mortgage receivable










17,704







17,704Long-term investments accounted for at cost


50,332







786







51,118Long-term investments accounted under the equity method


















Investments in non- consolidated real estate businesses










50,775







50,775Investments in consolidated subsidiaries


164,917











(164,917
)


Restricted assets


3,845



2,710











6,555Deferred income taxes


37,177



870



7,175







45,222Intangible asset






107,511











107,511Prepaid pension costs






2,901











2,901Other assets


16,295



13,657











29,952Total assets

$
536,136


$
297,038


$
76,518


$
(191,980
)

$
717,712  F-65




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31, 2008Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt

$
72,299


$
25,199


$



$



$
97,498Current portion of employee Benefits


28,420















28,420Accounts payable


2,168



3,936











6,104Intercompany payables






3







(3
)


Accrued promotional expenses






10,131











10,131Income taxes payable, net






10,754



26,174



(25,125
)


11,803Accrued excise and payroll taxes payable, net






7,004











7,004Settlement accruals






20,668











20,668Deferred income taxes


81,961



10,546











92,507Accrued interest


9,612















9,612Other current liabilities






20,017



910



(1,935
)


18,992Total current liabilities


194,460



108,258



27,084



(27,063
)


302,739Notes payable, long-term debt and other obligations, less
    current portion


191,007



19,294











210,301Fair value of derivatives embedded within convertible debt


77,245















77,245Non-current employee benefits


10,808



17,468











28,276Deferred income taxes


28,573



20,125



109







48,807Other liabilities


438



15,219



1,082







16,739Total liabilities


502,531



180,876



28,275



(27,575
)


684,107Commitments and contingencies


















Stockholders equity


33,605



116,674



48,243



(164,917
)


33,605Total liabilities and stockholders equity

$
536,136


$
297,038


$
77,118


$
(192,580
)

$
717,712  F-66




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING BALANCE SHEETS
  December 31, 2007Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.ASSETS:Current assets:Cash and cash equivalents

$
228,901


$
9,216


$



$



$
238,117Investment securities available for sale


45,841







34







45,875Accounts receivable  trade






3,113











3,113Intercompany receivables


19











(19
)


Inventories






86,825











86,825Deferred income taxes


18,003



333











18,336Income taxes receivable


27,364











(27,364
)


Other current assets


103



3,257











3,360Total current assets


320,231



102,744



34



(27,383
)


395,626Property, plant and equipment, net


867



53,565











54,432Long-term investments accounted for at cost


72,233







738







72,971Long-term investments accounted under the equity method


10,495















10,495Investments in non- consolidated real estate businesses










35,731







35,731Investments in consolidated subsidiaries


190,354











(190,354
)


Restricted assets


3,859



4,907











8,766Deferred income taxes


21,288



883



4,466







26,637Intangible asset






107,511











107,511Prepaid pension costs






42,084











42,084Other assets


18,066



12,970











31,036Total assets

$
637,393


$
324,664


$
40,969


$
(217,737
)

$
785,289  F-67




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31, 2007Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt

$



$
20,618


$



$



$
20,618Accounts payable


2,194



4,786











6,980Intercompany payables






19







(19
)


Accrued promotional expenses






9,210











9,210Income taxes payable, net






13,245



16,482



(27,364
)


2,363Accrued excise and payroll taxes payable, net






5,327











5,327Settlement accruals






10,041











10,041Deferred income taxes


20,218



3,801











24,019Accrued interest


9,475















9,475Other current liabilities


6,486



14,118



700







21,304Total current liabilities


38,373



81,165



17,182



(27,383
)


109,337Notes payable, long-term debt and other obligations, less
    current portion


254,538



22,640











277,178Fair value of derivatives embedded within convertible debt


101,582















101,582Non-current employee benefits


25,983



14,950











40,933Deferred income taxes


115,571



26,223



110







141,904Other liabilities


494



10,571



2,438







13,503Total liabilities


536,541



155,549



19,730



(27,383
)


684,437Commitments and contingencies


















Stockholders equity


100,852



169,115



21,239



(190,354
)


100,852Total liabilities and stockholders equity

$
637,393


$
324,664


$
40,969


$
(217,737
)

$
785,289  F-68




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Year Ended December 31, 2008Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.Revenues

$



$
565,186


$



$



$
565,186Expenses:Cost of goods sold






335,299











335,299Operating, selling, administrative and general expenses


29,577



65,135



(129
)






94,583Management fee expense






7,940







(7,940
)


Operating income (loss)


(29,577
)


156,812



129



7,940



135,304Other income (expenses):Interest and dividend income


4,911



953











5,864Interest expense


(60,172
)


(2,163
)










(62,335
)Changes in fair value of derivatives embedded within convertible
    debt


24,337















24,337Provision for loss on investments


(24,900
)






(7,500
)






(32,400
)Equity income from non-consolidated real estate businesses










24,399







24,399Equity income in consolidated subsidiaries


108,539











(108,539
)


Management fee income


7,940











(7,940
)


Other, net


(593
)






(4
)






(597
)Income before provision for income taxes


30,485



155,602



17,024



(108,539
)


94,572Income tax benefit (expense)


30,019



(57,056
)


(7,031
)






(34,068
)Net income

$
60,504


$
98,546


$
9,993


$
(108,539
)

$
60,504  F-69




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF OPERATIONS
  Year Ended December 31, 2007Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.Revenues

$



$
555,430


$



$



$
555,430Expenses:Cost of goods sold






337,079











337,079Operating, selling, administrative and general expenses


25,974



65,835



1,158







92,967Management fee expense






7,669







(7,669
)


Restructuring and impairment charges






(120
)










(120
)Operating income (loss)


(25,974
)


144,967



(1,158
)


7,669



125,504Other income (expenses):Interest and dividend income


13,618



1,406







(5,127
)


9,897Interest expense


(43,217
)


(7,672
)






5,127



(45,762
)Changes in fair value of derivatives embedded within convertible
    debt


(6,109
)














(6,109
)Provision for loss on investments, net










(1,216
)






(1,216
)Gain from conversion of LTS notes










8,121







8,121Equity income from non-consolidated real estate businesses










16,243







16,243Income from lawsuit settlement










20,000







20,000Equity income in consolidated subsidiaries


111,400











(111,400
)


Management fee income


7,669











(7,669
)


Other, net


(107
)






32







(75
)Income before provision for income taxes


57,280



138,701



42,022



(111,400
)


126,603Income tax benefit (expense)


16,523



(52,604
)


(16,719
)






(52,800
)Net income

$
73,803


$
86,097


$
25,303


$
(111,400
)

$
73,803  F-70




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31, 2006Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.Revenues

$



$
506,252


$



$



$
506,252Expenses:Cost of goods sold






315,163











315,163Operating, selling, administrative and general expenses


27,901



62,064



868







90,833Management fee expense






7,338







(7,338
)


Gain on sale of assets






(2,210
)










(2,210
)Restructuring and impairment charges






1,437











1,437Operating income (loss)


(27,901
)


122,460



(868
)


7,338



101,029Other income (expenses):Interest and dividend income


18,132



965







(10,097
)


9,000Interest expense


(33,206
)


(14,667
)






10,097



(37,776
)Changes in fair value of derivatives embedded within convertible
    debt


112















112Loss on extinguishment of Debt


(16,166
)














(16,166
)Gain on investments, Net


2,869







150







3,019Equity income from non-consolidated real estate businesses










9,086







9,086Equity income in consolidated subsidiaries


74,278











(74,278
)


Management fee income


7,338











(7,338
)


Other, net


131







45







176Income (loss) before provision for income taxes


25,587



108,758



8,413



(74,278
)


68,480Income tax benefit (expense)


17,125



(39,452
)


(3,441
)






(25,768
)Net income

$
42,712


$
69,306


$
4,972


$
(74,278
)

$
42,712  F-71




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
  Year Ended December 31, 2008Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.Net cash provided by operating activities

$
82,821


$
125,279


$
7,415


$
(124,250
)

$
91,265Cash flows from investing activities:Proceeds from sale of businesses and assets






452











452Purchase of investment securities


(6,411
)














(6,411
)Proceeds from sale or liquidation of long-term investments


8,334















8,334Purchase of long-term investments










(51
)






(51
)Purchase of mortgage receivable










(21,704
)






(21,704
)Purchase of Castle Brands equity


(4,250
)














(4,250
)Investment in non-consolidated real estate businesses










(22,000
)






(22,000
)Distributions from non-consolidated real estate businesses










19,393







19,393Increase in cash surrender value of life insurance policies


(500
)


(438
)










(938
)Decrease in non-current restricted assets


(1,465
)


1,054











(411
)Investments in subsidiaries


(21,747
)










21,747



Capital expenditures






(6,309
)










(6,309
)Net cash used in investing activities


(26,039
)


(5,241
)


(24,362
)


21,747



(33,895
)Cash flows from financing activities:Proceeds from debt






2,831











2,831Repayments of debt






(6,329
)










(6,329
)Deferred financing charges


(137
)














(137
)Borrowings under revolver






531,251











531,251Repayments on revolver






(526,518
)










(526,518
)Capital contributions received






4,800



16,947



(21,747
)


Intercompany dividends paid






(124,250
)






124,250



Dividends and distributions on common stock


(103,870
)














(103,870
)Proceeds from exercise of Vector options and warrants


86















86Excess tax benefit of options exercised


18,304















18,304Net cash (used in) provided by financing activities


(85,617
)


(118,215
)


16,947



102,503



(84,382
)Net decrease in cash and cash equivalents


(28,835
)


1,823











(27,012
)Cash and cash equivalents, beginning of period


228,901



9,216











238,117Cash and cash equivalents, end of period

$
200,066


$
11,039


$



$



$
211,105  F-72




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
  Year Ended December 31, 2007Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.Net cash provided by (used in) operating activities

$
115,616


$
80,376


$
30,549


$
(117,343
)

$
109,198Cash flows from investing activities:Proceeds from sale of businesses and assets






917











917Purchase of investment securities


(6,571
)














(6,571
)Proceeds from sale or liquidation of long-term investments










71







71Purchase of long-term investments


(40,000
)






(91
)






(40,091
)(Increase) decrease in restricted assets


(521
)


29











(492
)Investments in non-consolidated real estate businesses










(750
)






(750
)Investments in subsidiaries


(39,150
)










39,150



Distributions from non-consolidated real estate businesses










1,000







1,000Receipt of repayment of notes receivable


4,000











(4,000
)


Capital expenditures






(5,189
)










(5,189
)Increase in cash surrender value of life insurance policies


(460
)


(378
)










(838
)Net cash (used in) provided by investing activities


(82,702
)


(4,621
)


230



35,150



(51,943
)Cash flows from financing activities:Proceeds from issuance of debt


165,000



9,576











174,576Repayments of debt






(45,200
)






4,000



(41,200
)Deferred financing charges


(9,863
)


(122
)










(9,985
)Borrowings under revolver






537,746











537,746Repayments on revolver






(534,950
)










(534,950
)Capital contributions received






39,150







(39,150
)


Intercompany dividends paid






(86,536
)


(30,807
)


117,343



Dividends and distributions on common stock


(99,249
)














(99,249
)Proceeds from exercise of Vector options and warrants


5,100















5,100Tax benefit of options exercised


2,055















2,055Net cash provided by (used in) financing activities


63,043



(80,336
)


(30,807
)


82,193



34,093Net increase (decrease) in cash and cash equivalents


95,957



(4,581
)


(28
)






91,348Cash and cash equivalents, beginning of year


132,944



13,797



28







146,769Cash and cash equivalents, end of year

$
228,901


$
9,216


$



$



$
238,117  F-73




---



##### Table of Contents



VECTOR
    GROUP LTD.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  CONDENSED
    CONSOLIDATING STATEMENTS OF CASH FLOWS
  Year Ended December 31, 2006Subsidiary





ConsolidatedParent/


Subsidiary


Non-


Consolidating


Vector GroupIssuer


Guarantors


Guarantors


Adjustments


Ltd.Net cash provided by (used in) operating activities

$
137,372


$
76,515


$
6,415


$
(174,287
)

$
46,015Cash flows from investing activities:Proceeds from sale of businesses and assets






1,486











1,486Proceeds from sale or maturity of investment securities


29,725







682







30,407Purchase of investment securities


(19,706
)














(19,706
)Proceeds from sale or liquidation of long-term investments










326







326Purchase of long-term investments


(35,000
)






(345
)






(35,345
)(Increase) decrease in restricted assets


94



(1,621
)










(1,527
)Investments in non-consolidated real estate businesses










(9,850
)






(9,850
)Receipt of repayment of notes receivable


5,825











(5,825
)


Investments in subsidiaries


(7,435
)










7,435



Capital expenditures


(19
)


(9,539
)










(9,558
)Increase in cash surrender value of life insurance policies


(520
)


(378
)










(898
)Net cash (used in) provided by investing activities


(27,036
)


(10,052
)


(9,187
)


1,610



(44,665
)Cash flows from financing activities:Proceeds from issuance of debt


110,000



8,146











118,146Repayments of debt


(63,143
)


(15,607
)






5,825



(72,925
)Deferred financing charges


(5,180
)


(100
)










(5,280
)Borrowings under revolver






514,739











514,739Repayments on revolver






(502,753
)










(502,753
)Distributions on common stock


(90,138
)


(79,533
)


(94,754
)


174,287



(90,138
)Capital contributions received






4,662



2,773



(7,435
)


Proceeds from exercise of options and warrants


2,571















2,571Net cash provided by (used in) financing activities


(45,890
)


(70,446
)


(91,981
)


172,677



(35,640
)Net (decrease) increase in cash and cash equivalents


64,446



(3,983
)


(94,753
)






(34,290
)Cash and cash equivalents, beginning of year


68,498



17,780



94,781







181,059Cash and cash equivalents, end of year

$
132,944


$
13,797


$
28


$



$
146,769  F-74




---



##### Table of Contents



VECTOR
    GROUP LTD.SCHEDULE II  VALUATION AND
    QUALIFYING ACCOUNTS(Dollars in Thousands)
  AdditionsBalance at


Charged to





BalanceBeginning


Costs and





at EndDescription

of Period


Expenses


Deductions


of PeriodYear Ended December 31, 2008Allowances for:Doubtful accounts

$
51


$



$



$
51Cash discounts


69



14,797



14,662



204Deferred tax valuation allowance


16,835







896



15,939Sales returns


3,700



2,364



2,064



4,000Total

$
20,655


$
17,161


$
17,622


$
20,194Year Ended December 31, 2007Allowances for:Doubtful accounts

$
55


$



$
4


$
51Cash discounts


556



18,470



18,957



69Deferred tax valuation allowance


17,731







896



16,835Sales returns


3,651



1,806



1,757



3,700Total

$
21,993


$
20,276


$
21,614


$
20,655Year Ended December 31, 2006Allowances for:Doubtful accounts

$
105


$



$
50


$
55Cash discounts


369



22,093



21,906



556Deferred tax valuation allowance


19,957







2,226



17,731Sales returns


5,194



398



1,941



3,651Total

$
25,625


$
22,491


$
26,123


$
21,993  F-75