<PAGE>   1
================================================================================


                       Securities And Exchange Commission
                             Washington, D.C. 20549

                                    FORM 10-Q

          JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

                                VECTOR GROUP LTD.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                             <C>                             <C>
                                                  BROOKE GROUP LTD.
                               ------------------------------------------------------
                                      (Former name, if changed since last report)

               DELAWARE                                 1-5759                               65-0949535
    -------------------------------             ----------------------          ------------------------------------
    (State or other jurisdiction of             Commission File Number          (I.R.S. Employer Identification No.)
    incorporation or organization)

</TABLE>

                                   BGLS INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


<TABLE>
<CAPTION>
<S>                                             <C>                             <C>
               DELAWARE                                33-93576                              65-0949536
    -------------------------------             ----------------------          ------------------------------------
    (State or other jurisdiction of             Commission File Number          (I.R.S. Employer Identification No.)
    incorporation or organization)

</TABLE>

                             100 S.E. SECOND STREET
                              MIAMI, FLORIDA 33131
                                  305/579-8000
     -----------------------------------------------------------------------
     (Address, including zip code and telephone number, including area code,
                       of the principal executive offices)

         Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the preceding 12 months (or
for such shorter period that the Registrants were required to file such
reports), and (2) have been subject to such filing requirements for the past 90
days. [X] Yes [ ] No

         At August 11, 2000, Vector Group Ltd. had 21,989,782 shares of common
stock outstanding, and BGLS Inc. had 100 shares of common stock outstanding, all
of which are held by Vector Group Ltd.


================================================================================







<PAGE>   2




                                VECTOR GROUP LTD.
                                    BGLS INC.

                                    FORM 10-Q

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                          PAGE
                                                                                                          ----

<S>                                                                                                      <C>
PART I. FINANCIAL INFORMATION

Item 1. VECTOR GROUP LTD./BGLS INC. CONSOLIDATED FINANCIAL STATEMENTS:

   Vector Group Ltd. Consolidated Balance Sheets as of June 30, 2000 and
         December 31, 1999.............................................................................        2

   BGLS Inc. Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.....................        3

   Vector Group Ltd. Consolidated Statements of Operations for the three and six months
         ended June 30, 2000 and June 30, 1999.........................................................        4

   BGLS Inc. Consolidated Statements of Operations for the three and six months
         ended June 30, 2000 and June 30, 1999.........................................................        5

   Vector Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the six
         months ended June 30, 2000....................................................................        6

   BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the six months
         ended June 30, 2000...........................................................................        7

   Vector Group Ltd. Consolidated Statements of Cash Flows for the six months ended
         June 30, 2000 and June, 1999..................................................................        8

   BGLS Inc. Consolidated Statements of Cash Flows for the six months ended
         June 30, 2000 and June 30, 1999...............................................................        9

   Notes to Consolidated Financial Statements..........................................................       10

Item 2  MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................       36

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................       47


PART II.     OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS..............................................................................       48

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................       48

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................       48

Item 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................       49

SIGNATURES.............................................................................................       51

</TABLE>


                                      -1-

<PAGE>   3


                       VECTOR GROUP LTD. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                         June 30,        December 31,
                                                                                           2000              1999
                                                                                      ---------------- -----------------
<S>                                                                                     <C>              <C>
ASSETS:

Current assets:
  Cash and cash equivalents....................................................         $  33,046        $  20,123
  Receivables from clearing brokers............................................            13,594           10,903
  Investment securities available for sale.....................................            36,756           48,722
  Trading securities owned.....................................................            13,589           15,707
  Accounts receivable - trade..................................................            20,773           19,658
  Other receivables............................................................             1,993            1,290
  Inventories..................................................................            55,683           45,205
  Restricted assets............................................................               787            3,239
  Deferred income taxes........................................................            59,268           21,374
  Other current assets.........................................................             5,600            2,511
                                                                                        ---------        ---------
    Total current assets.......................................................           241,089          188,732

Property, plant and equipment, net.............................................           166,765          154,260
Investment in real estate, net.................................................            54,665           53,353
Long-term investments, net.....................................................             7,794            8,731
Investment in joint venture....................................................            41,316           38,378
Restricted assets..............................................................             4,101            5,195
Deferred income taxes..........................................................             9,216           45,631
Other assets...................................................................             5,984           10,168
                                                                                        ---------         --------
    Total assets...............................................................          $530,930         $504,448
                                                                                        =========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):

Current liabilities:
  Current portion of notes payable and long-term debt..........................          $161,347        $  41,547
  Margin loan payable..........................................................             5,397              983
  Accounts payable.............................................................            49,229           36,456
  Securities sold, not yet purchased...........................................               976            7,625
  Accrued promotional expenses.................................................            24,561           22,473
  Accrued taxes payable........................................................            50,172           42,408
  Deferred income taxes........................................................             2,364            2,274
  Accrued interest.............................................................             8,118            8,488
  Prepetition claims and restructuring accruals................................            11,951           12,279
  Other accrued liabilities....................................................            45,778           52,121
                                                                                         --------         --------
    Total current liabilities..................................................           359,893          226,654

Notes payable, long-term debt and other obligations, less current portion......            48,060          148,349

Noncurrent employee benefits...................................................            14,106           23,264
Deferred income taxes..........................................................           117,230          117,285
Other liabilities..............................................................            88,937           76,628
Minority interests.............................................................            41,745           45,366

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

Stockholders' equity (deficit):
  Preferred stock, par value $1.00 per share, authorized 10,000,000 shares.....
  Common stock, par value $0.10 per share, authorized 100,000,000
    shares, issued 27,822,779 shares, outstanding 21,989,782...................             2,199            2,199
  Additional paid-in capital...................................................           185,511          196,695
  Deficit......................................................................          (298,793)        (302,155)
  Accumulated other comprehensive income.......................................             3,258            1,379
  Other........................................................................            (3,743)          (3,743)
  Less:  5,832,997 shares of common stock in treasury, at cost.................           (27,473)         (27,473)
                                                                                         --------         --------
      Total stockholders' equity (deficit).....................................          (139,041)        (133,098)
                                                                                          -------          -------

      Total liabilities and stockholders' equity (deficit).....................          $530,930         $504,448
                                                                                         ========         ========
</TABLE>

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


                                      -2-
<PAGE>   4


                           BGLS INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                         June 30,         December 31,
                                                                                           2000               1999
                                                                                      ---------------- -------------------
<S>                                                                                     <C>               <C>
ASSETS:

Current assets:
  Cash and cash equivalents.....................................................        $  32,704         $  19,590
  Receivables from clearing brokers.............................................           13,594            10,903
  Investment securities available for sale......................................           36,756            48,722
  Trading securities owned......................................................           13,589            15,707
  Accounts receivable - trade...................................................           20,773            19,658
  Other receivables.............................................................            2,748             1,237
  Inventories...................................................................           55,683            45,205
  Restricted assets.............................................................              787             3,239
  Deferred income taxes.........................................................           59,268            21,374
  Other current assets..........................................................            5,195             2,350
                                                                                        ---------         ---------
      Total current assets......................................................          241,097           187,985

Property, plant and equipment, net..............................................          166,754           154,246
Investment in real estate, net..................................................           54,665            53,353
Long-term investments, net......................................................            7,794             8,731
Investment in joint venture.....................................................           39,630            38,378
Restricted assets...............................................................            4,101             5,195
Deferred income taxes...........................................................            9,216            45,631
Other assets....................................................................            8,025             9,002
                                                                                        ---------         ---------
      Total assets..............................................................         $531,282          $502,521
                                                                                          =======           =======

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):

Current liabilities:
  Current portion of notes payable and long-term debt...........................         $160,433         $  41,333
  Margin loan payable...........................................................            5,397               983
  Accounts payable..............................................................           49,129            36,236
  Securities sold, not yet purchased............................................              976             7,625
  Accrued promotional expenses..................................................           24,561            22,473
  Accrued taxes payable.........................................................           50,172            42,408
  Deferred income taxes.........................................................            2,364             2,274
  Accrued interest..............................................................            8,118             8,488
  Prepetition claims and restructuring accruals.................................           11,951            12,279
  Other accrued liabilities.....................................................           44,691            50,254
                                                                                         --------          --------
      Total current liabilities.................................................          357,792           224,353

Notes payable, long-term debt and other obligations, less current portion.......           48,060           148,349

Noncurrent employee benefits....................................................           14,106            23,264
Deferred income taxes...........................................................          117,230           117,285
Other liabilities...............................................................           88,868            76,360
Minority interests..............................................................           41,745            45,366

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

Stockholder's equity (deficit):
  Common stock, par value $0.01 per share; 100 shares authorized, issued and
    outstanding.................................................................
  Additional paid-in capital....................................................          161,770           161,800
  Deficit.......................................................................         (301,547)         (295,635)
  Accumulated other comprehensive income........................................            3,258             1,379
                                                                                        ---------         ---------
      Total stockholder's equity (deficit)......................................         (136,519)         (132,456)
                                                                                        ---------           -------
      Total liabilities and stockholder's equity (deficit)......................        $ 531,282          $502,521
                                                                                        =========           =======
</TABLE>

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



                                      -3-
<PAGE>   5


                       VECTOR GROUP LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                          Three Months Ended              Six Months Ended
                                                                     ---------------------------    ---------------------------
                                                                       June 30,      June 30,         June 30,      June 30,
                                                                         2000          1999             2000          1999
                                                                     ------------- -------------    ------------- -------------

<S>                                                                  <C>             <C>             <C>             <C>
         Revenues:
           Tobacco* ..............................................   $    187,644    $    109,265    $    334,792    $    217,662
           Broker-dealer transactions ............................         18,300           5,876          48,596           5,876
           Real estate leasing ...................................            820             754           1,591             754
                                                                     ------------    ------------    ------------    ------------
             Total revenues ......................................        206,764         115,895         384,979         224,292

         Expenses:
           Cost of goods sold* ...................................         85,567          40,098         154,142          81,525
           Operating, selling, administrative and general expenses        111,067          62,210         210,812         106,932
           Settlement charges ....................................             65             (11)            102             104
                                                                     ------------    ------------    ------------    ------------
             Operating income ....................................         10,065          13,598          19,923          35,731

         Other income (expenses):
           Interest and dividend income ..........................          1,652             672           3,182             732
           Interest expense ......................................        (11,814)        (12,073)        (23,570)        (27,061)
           Equity in loss of affiliate ...........................         (1,362)         (1,569)         (2,913)         (9,198)
           Recognition of deferred gain on sale of assets ........                                                          7,050
           Foreign currency gain .................................            312             341           1,535           2,611
           Gain (loss) in joint venture ..........................            379            (790)            153            (790)
           Gain on sale of investments, net ......................          1,438             327           6,191             327
           Sale of assets ........................................            150           3,984             150           4,125
           Gain on brand transaction .............................                        294,287                         294,287
           Other, net ............................................            883              64           1,111             310
                                                                     ------------    ------------    ------------    ------------

         Income from continuing operations before provision for
             income taxes and minority interests .................          1,703         298,841           5,762         308,124
           Provision for income taxes ............................            640          81,645           2,314          83,374
           Minority interests ....................................         (1,883)          1,382            (144)          1,382
                                                                     ------------    ------------    ------------    ------------
         Income from continuing operations .......................          2,946         215,814           3,592         223,368

         Gain on disposal of discontinued operations .............                                                          1,249

         Loss on extraordinary items .............................                         (1,056)           (230)         (1,056)
                                                                     ------------    ------------    ------------    ------------
         Net income ..............................................   $      2,946    $    214,758    $      3,362    $    223,561
                                                                     ============    ============    ============    ============

         Per basic common share:
           Income from continuing operations .....................   $       0.13    $       9.81    $       0.16    $      10.16
                                                                     ============    ============    ============    ============
           Gain from discontinued operations .....................                                                   $       0.06
                                                                                                                     ============
           Loss from extraordinary items .........................                   $      (0.05)   $      (0.01)   $      (0.05)
                                                                                     ============    ============    ============
           Net income applicable to common shares ................   $       0.13    $       9.76    $       0.15    $      10.17
                                                                     ============    ============    ============    ============

         Basic weighted average common shares outstanding ........     21,989,782      21,989,782      21,989,782      21,989,782
                                                                     ============    ============    ============    ============

         Per diluted common share:
           Income from continuing operations .....................   $       0.11    $       8.00    $       0.14    $       8.30
                                                                     ============    ============    ============    ============
           Gain from discontinued operations .....................                                                   $       0.05
                                                                                                                     ============
           Loss from extraordinary items .........................                   $      (0.04)   $      (0.01)   $      (0.04)
                                                                                     ============    ============    ============
           Net income applicable to common shares ................   $       0.11    $       7.96    $       0.13    $       8.31
                                                                     ============    ============    ============    ============

         Diluted weighted average common shares outstanding ......     26,331,250      26,961,596      26,281,801      26,906,485
                                                                     ============    ============    ============    ============

</TABLE>


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

*    Tobacco revenues and Cost of goods sold include excise taxes of $32,459,
     $14,718, $57,161 and $28,756, respectively.


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


                                      -4-
<PAGE>   6


                           BGLS INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                        Three Months Ended              Six Months Ended
                                                                  ------------------------------- ------------------------------
                                                                     June 30,        June 30,       June 30,        June 30,
                                                                       2000            1999           2000            1999
                                                                  --------------- --------------- -------------- ---------------
<S>                                                                   <C>           <C>           <C>           <C>
         Revenues:
           Tobacco* ..............................................    $ 187,644     $ 109,265     $ 334,792     $ 217,662
           Broker dealer transactions ............................       18,300         5,876        48,596         5,876
           Real estate leasing ...................................          820           754         1,591           754
                                                                      ---------     ---------     ---------     ---------
             Total revenues ......................................      206,764       115,895       384,979       224,292

         Expenses:
           Cost of goods sold* ...................................       85,567        40,098       154,142        81,525
           Operating, selling, administrative and general expenses      110,068        62,061       208,479       106,381
           Settlement charges ....................................           65           (11)          102           104
                                                                      ---------     ---------     ---------     ---------
             Operating income ....................................       11,064        13,747        22,256        36,282

         Other income (expenses):
           Interest and dividend income ..........................        1,644           670         3,174           730
           Interest expense ......................................      (11,803)      (13,406)      (23,535)      (29,650)
           Equity in loss of affiliate ...........................       (1,362)       (1,569)       (2,913)       (9,198)
           Recognition of deferred gain on sale of assets ........                                                  8,264
           Foreign currency gain .................................          312           341         1,535         2,611
           Gain (loss) in joint venture ..........................          379          (790)          153          (790)
           Gain on sale of investments, net ......................        1,438           327         6,191           327
           Sale of assets ........................................          150         3,984           150         4,125
           Gain on brand transaction .............................                    294,287                     294,287
           Other, net ............................................        1,046            64         1,029           280
                                                                      ---------     ---------     ---------     ---------

         Income from continuing operations before provision
             for income taxes and minority interests .............        2,868       297,655         8,040       307,268
           Provision for income taxes ............................          640        81,645         2,314        83,374
           Minority interests ....................................       (1,883)        1,382          (144)        1,382
                                                                      ---------     ---------     ---------     ---------

         Income from continuing operations .......................        4,111       214,628         5,870       222,512

         Gain on disposal of discontinued operations .............                                                  1,249

         Loss on extraordinary items .............................                     (1,056)         (230)       (1,056)
                                                                      ---------     ---------     ---------     ---------

         Net income ..............................................    $   4,111     $ 213,572     $   5,640     $ 222,705
                                                                      =========     =========     =========     =========

</TABLE>



-----------

*    Tobacco revenues and Cost of goods sold include excise taxes of $32,459,
     $14,718, $57,161 and $28,756, respectively.


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



                                      -5-
<PAGE>   7
                       VECTOR GROUP LTD. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                         Common Stock    Additional                                          Other
                                     -----------------    Paid-in                  Treasury              Comprehensive
                                     Shares     Amount    Capital    Deficit         Stock     Other        Income      Total
                                     ------     ------    -------    -------         -----     -----        ------      -----
<S>                                 <C>           <C>      <C>       <C>            <C>          <C>       <C>           <C>
Balance, December 31, 1999.......   21,989,782    $2,199   $196,695  $(302,155)   $(27,473)    $(3,743)  $  1,379      $(133,098)

Net income.......................                                        3,362                                             3,362
  Effect of New Valley capital
    transactions.................                               (30)                                        1,879          1,849
                                                                                                                           -----
      Total other comprehensive
        income...................                                                                                          1,849
                                                                                                                           -----
Total comprehensive income.......                                                                                          5,211

Distributions on common
  stock..........................                           (10,869)                                                     (10,869)
Amortization of
  deferred compensation..........                              (285)                                                        (285)
                                    ----------    ------   --------  ---------    --------     -------   --------      ---------
Balance, June 30, 2000...........   21,989,782    $2,199   $185,511  $(298,793)   $(27,473)    $(3,743)  $  3,258      $(139,041)
                                    ==========     =====    =======  =========    ========     =======   ========      =========
</TABLE>





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



                                      -6-
<PAGE>   8


                           BGLS INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                                                                     Accumulated
                                                           Common Stock     Additional                  Other
                                                     --------------------     Paid-in               Comprehensive
                                                     Shares        Amount     Capital    Deficit        Income      Total
                                                     ------        ------     -------    -------        ------      -----
<S>                                                    <C>     <C>                        <C>          <C>        <C>
Balance, December 31, 1999.......................      100     $              $161,800    $(295,635)   $  1,379   $(132,456)

Net income.......................................                                             5,640                   5,640
  Other New Valley capital transactions..........                                  (30)                   1,879       1,849
                                                                                                                      -----
      Total other comprehensive income...........                                                                     1,849
                                                                                                                      -----
Total comprehensive income.......................                                                                     7,489

Distributions to parent..........................                                           (11,552)                (11,552)
                                                    ------      ---------      --------   --------- -----------   ---------

Balance, June 30, 2000...........................      100     $              $161,770    $(301,547)   $  3,258   $(136,519)
                                                       ===      =========      =======      =======     =======     =======

</TABLE>




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


                                      -7-
<PAGE>   9


                       VECTOR GROUP LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                          Six Months Ended
                                                                                  ----------------------------------
                                                                                     June 30,          June 30,
                                                                                       2000              1999
                                                                                  ---------------- -----------------

<S>                                                                                 <C>               <C>
Net cash (used in) provided by operating activities.........................        $   (3,556)       $  12,116
                                                                                     ---------         --------

Cash flows from investing activities:
  Proceeds from sale of businesses and assets, net..........................               162            5,214
  Proceeds from brand transaction...........................................                            145,000
  Sale or maturity of investment securities.................................            29,126              491
  Purchase of investment securities.........................................            (5,732)          (2,529)
  Purchase of long-term investments.........................................            (1,875)
  Sale or liquidation of long-term investments..............................                                217
  Decrease in restricted assets.............................................             3,394
  Payment of prepetition claims.............................................              (327)             (23)
  Investment in joint venture...............................................            (1,266)
  Repurchase by New Valley of common shares.................................              (407)
  Capital expenditures......................................................           (21,429)         (38,202)
                                                                                      --------         --------
Net cash provided by investing activities...................................             1,646          110,168
                                                                                     ---------          -------

Cash flows from financing activities:
  Proceeds from debt........................................................             3,134            4,976
  Repayments of debt........................................................            (6,718)        (142,906)
  Borrowings under revolvers................................................           225,241          163,978
  Repayments on revolvers...................................................          (200,929)        (152,599)
  Effect of New Valley recapitalization.....................................                              9,055
  Increase (decrease) in margin loan payable................................             4,414           (1,147)
  Increase in cash overdraft................................................               693            1,173
  Distributions on common stock.............................................           (10,869)          (3,210)
                                                                                      --------        ---------
Net cash provided by (used in) financing activities.........................            14,966         (120,680)
                                                                                      --------          -------

Effect of exchange rate changes on cash and cash equivalents................              (133)            (632)
Net increase in cash and cash equivalents...................................            12,923              972
Cash and cash equivalents, beginning of period..............................            20,123            7,396
                                                                                      --------        ---------

Cash and cash equivalents, end of period....................................         $  33,046       $    8,368
                                                                                      ========        =========

</TABLE>


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



                                      -8-
<PAGE>   10


                           BGLS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                      Six Months Ended
                                                                              ---------------- -----------------
                                                                                 June 30,          June 30,
                                                                                   2000              1999
                                                                              ---------------- -----------------
<S>                                                                              <C>                   <C>
         Net cash (used in) provided by operating activities ........            $  (2,025)            $   9,327
                                                                                 ---------             ---------

         Cash flows from investing activities:
           Proceeds from sale of businesses and assets, net .........                  162                 5,214
           Proceeds from brand transaction ..........................                                    145,000
           Sale or maturity of investment securities ................               29,126                   491
           Purchase of investment securities ........................               (5,732)               (2,529)
           Sale or liquidation of long-term investments .............                                        217
           Purchase of long-term investments ........................               (1,875)
           Decrease in restricted assets ............................                3,394
           Payment of prepetition claims ............................                 (327)                  (23)
           Investment in joint venture ..............................               (1,266)
           Repurchase by New Valley of common shares ................                 (407)
           Capital expenditures .....................................              (21,429)              (38,202)
                                                                                 ---------             ---------
         Net cash provided by investing activities ..................                1,646               110,168
                                                                                 ---------             ---------

         Cash flows from financing activities:
           Proceeds from debt .......................................                2,434                 4,500
           Repayments of debt .......................................               (6,675)             (142,858)
           Borrowings under revolvers ...............................              225,241               163,978
           Repayments on revolvers ..................................             (200,929)             (152,599)
           Effect of New Valley recapitalization ....................                                      9,055
           Increase in margin loan payable ..........................                4,414                (1,147)
           Increase in cash overdraft ...............................                  693                 1,180
           Distributions paid to parent .............................              (11,552)
                                                                                 ---------             ---------
         Net cash provided by (used in) financing activities ........               13,626              (117,891)
                                                                                 ---------             ---------

         Effect of exchange rate changes on cash and cash equivalents                 (133)                 (632)
         Net increase in cash and cash equivalents ..................               13,114                   972
         Cash and cash equivalents, beginning of period .............               19,590                 7,396
                                                                                 ---------             ---------
         Cash and cash equivalents, end of period ...................            $  32,704             $   8,368
                                                                                 =========             =========

</TABLE>



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




                                      -9-
<PAGE>   11
                                VECTOR GROUP LTD.
                                    BGLS INC.

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



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      (a)  BASIS OF PRESENTATION:

           The consolidated financial statements of Vector Group Ltd. (the
           "Company" or "Vector") include the consolidated financial statements
           of its wholly-owned subsidiary, BGLS Inc. ("BGLS"). The consolidated
           financial statements of BGLS include the accounts of Liggett Group
           Inc. ("Liggett"), Brooke (Overseas) Ltd. ("Brooke (Overseas)"),
           Liggett-Ducat Ltd. ("Liggett-Ducat") and other less significant
           subsidiaries. As of June 1, 1999, New Valley Corporation ("New
           Valley") became a consolidated subsidiary of the Company as a result
           of New Valley's recapitalization in which the Company's interest in
           New Valley's common shares increased to 55.1%. (Refer to Note 4.) All
           significant intercompany balances and transactions have been
           eliminated.

           Liggett is engaged primarily in the manufacture and sale of
           cigarettes, principally in the United States. Prior to its sale in
           August 2000, Liggett-Ducat was engaged in the manufacture and sale of
           cigarettes in Russia. (Refer to Note 2.) New Valley is engaged
           primarily in the investment banking and brokerage business through
           its ownership of Ladenburg Thalmann & Co. Inc., in the real estate
           development business in Russia and in investment in Internet-related
           businesses.

           Effective October 1, 1999, the Company was reorganized into a holding
           company form of organizational structure. The new corporate structure
           was implemented by the merger of a wholly-owned indirect subsidiary
           of the former Brooke Group Ltd., the predecessor of the current
           Company, with the predecessor, which was the surviving corporation.
           As a result of this merger, each share of the common stock of the
           predecessor issued and outstanding or held in its treasury was
           converted into one share of common stock of the current Company
           (formerly known as BGL Successor Inc.). The current Company became
           the holding company for the business and operations previously
           conducted by the predecessor and its subsidiaries, and the
           predecessor became an indirect wholly-owned subsidiary of the
           Company. On the effective date of the merger, the name of the current
           Company was changed to Brooke Group Ltd. and the name of the
           predecessor was changed to Brooke Group Holding Inc. ("Brooke Group
           Holding"). The holding company reorganization had no impact on these
           consolidated financial statements.

           At the Company's annual meeting held on May 24, 2000, stockholders
           approved a corporate name change to Vector Group Ltd. The New York
           Stock Exchange symbol for the Company's common stock was changed from
           "BGL" to "VGR".

           The interim consolidated financial statements of the Company and BGLS
           are unaudited and, in the opinion of management, reflect all
           adjustments necessary (which are normal and recurring) to present
           fairly the Company's and BGLS' consolidated financial position,
           results of operations and cash flows. These consolidated financial
           statements should be read in conjunction with the consolidated
           financial statements and the notes thereto included in the Company's
           and BGLS' Annual Report on Form 10-K for the year ended December 31,
           1999, as filed with the Securities and Exchange Commission. The



                                      -10-
<PAGE>   12
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


           consolidated results of operations for interim periods should not be
           regarded as necessarily indicative of the results that may be
           expected for the entire year.

      (b) RISKS AND UNCERTAINTIES:

           The Russian Federation continues to experience economic difficulties
           following the financial crisis of August 1998. Consequently, the
           country's currency continues to devalue, there is continued
           volatility in the debt and equity market, hyperinflation persists,
           confidence in the banking sector has yet to be restored and there
           continues to be a general lack of liquidity in the economy. In
           addition, laws and regulations affecting businesses operating within
           the Russian Federation continue to evolve.

           The Russian Federation's return to economic stability is dependent to
           a large extent on the effectiveness of the measures taken by the
           government, decisions of international lending organizations, and
           other actions, including regulatory and political developments, which
           are beyond the Company's control.

           The Company's assets and operations could be at risk if there are any
           further significant adverse changes in the political and business
           environment. Management is unable to predict what effect those
           uncertainties might have on the future financial position of the
           Company. No adjustments related to these uncertainties have been
           included in these consolidated financial statements.

      (c) ESTIMATES AND ASSUMPTIONS:

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

      (d)  RECLASSIFICATIONS:

           Certain amounts in the 1999 consolidated financial statements have
           been reclassified to conform to the 2000 presentation.

      (e)  PROVISION FOR INCOME TAXES:

           The effective tax rate does not bear a customary relationship to
           pre-tax accounting income principally as a consequence of foreign
           taxes and the change in the valuation allowance on deferred tax
           assets.


                                      -11-
<PAGE>   13
                                VECTOR GROUP LTD.
                                    BGLS INC.

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

      (f)  EARNINGS PER SHARE:

           Information concerning the Company's common stock has been adjusted
           to give effect to the 5% stock dividend paid to Company stockholders
           on September 30, 1999. In connection with the 5% dividend, the
           Company increased the number of warrants and stock options by 5% and
           reduced the exercise prices accordingly. All share amounts have been
           presented as if the stock dividend had occurred on January 1, 1999.

      (g)  OTHER COMPREHENSIVE INCOME (LOSS):

           Other comprehensive income is a component of stockholders' equity and
           includes such items as the Company's proportionate interest in New
           Valley's capital transactions, unrealized gains and losses on
           investment securities and minimum pension liability adjustments.
           Total other comprehensive income was $1,849 for the six months ended
           June 30, 2000 and $198,775 for the six months ended June 30, 1999.

2.    SALE OF WESTERN TOBACCO INVESTMENTS

      On August 4, 2000, Brooke (Overseas) completed the sale of all of the
      membership interests of Western Tobacco Investments LLC ("Western Tobacco
      Investments") to Gallaher Overseas (Holdings) Ltd. ("Gallaher Overseas").
      Brooke (Overseas) held its 99.9% equity interest in Liggett-Ducat, one of
      Russia's leading cigarette producers, through Western Tobacco Investments.

      The purchase price for the sale consisted of $334,100 in cash
      and $64,400 in assumed debt and capital commitments. The proceeds
      generated from the sale were divided among Brooke (Overseas) and Western
      Realty Development LLC ("Western Realty Development"), a joint venture of
      New Valley and Apollo Real Estate Investment Fund III, L.P. ("Apollo"),
      in accordance with the terms of the participating loan. (Refer to Note
      5.) Of the cash proceeds from the transaction after estimated closing
      expenses, Brooke (Overseas) received approximately $200,000. New Valley
      received $57,208 in cash proceeds from the sale and Apollo received
      $68,378 in cash proceeds from the sale. These amounts are subject to
      adjustment based on final closing expenses. The Company anticipates
      recording a gain of approximately $159,000(including the Company's share
      of New Valley's gain), net of income taxes, in connection with the sale
      in the third quarter of 2000.

      On August 4, 2000, with the proceeds of the sale, BGLS repurchased $24,850
      principal amount of its 15.75% Senior Secured Notes (the "Notes"),
      together with accrued interest of $11,531, for $36,381. On that date, BGLS
      called the remaining Notes for redemption on September 5, 2000. On the
      redemption date, all of these Notes will be redeemed for 100% of the
      principal amount thereof plus accrued interest. BGLS will use
      approximately $105,000 of the proceeds of the sale to retire the Notes.


                                      -12-
<PAGE>   14
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      Gallaher Overseas has also agreed to purchase for $1,500 additional land
      adjacent to the Liggett-Ducat manufacturing facility outside Moscow,
      Russia. The seller is a subsidiary of Western Realty Repin LLC ("Western
      Realty Repin").

3.    PHILIP MORRIS BRAND TRANSACTION

      In November 1998, the Company and Liggett granted Philip Morris
      Incorporated options to purchase interests in Trademarks LLC which holds
      three domestic cigarette brands, L&M, CHESTERFIELD and LARK, formerly held
      by Liggett's subsidiary, Eve Holdings Inc. ("Eve").

      Under the terms of the Philip Morris agreements, Eve contributed the three
      brands to Trademarks, a newly-formed limited liability company, in
      exchange for 100% of two classes of Trademarks' interests, the Class A
      Voting Interest and the Class B Redeemable Nonvoting Interest. Philip
      Morris acquired two options to purchase the interests from Eve. In
      December 1998, Philip Morris paid Eve a total of $150,000 for the options,
      $5,000 for the option for the Class A interest and $145,000 for the option
      for the Class B interest.

      The Class A option entitled Philip Morris to purchase the Class A interest
      for $10,100. On March 19, 1999, Philip Morris exercised the Class A
      option, and the closing occurred on May 24, 1999.

      The Class B option entitles Philip Morris to purchase the Class B interest
      for $139,900. The Class B option will be exercisable during the 90-day
      period beginning on December 2, 2008, with Philip Morris being entitled to
      extend the 90-day period for up to an additional six months under certain
      circumstances. The Class B interest will also be redeemable by Trademarks
      for $139,900 during the same period the Class B option may be exercised.

      On May 24, 1999, Trademarks borrowed $134,900 from a lending institution.
      The loan is guaranteed by Eve and collateralized by a pledge by Trademarks
      of the three brands and Trademarks' interest in the trademark license
      agreement (discussed below) and by a pledge by Eve of its Class B
      interest. In connection with the closing of the Class A option, Trademarks
      distributed the loan proceeds to Eve as the holder of the Class B
      interest. The cash exercise price of the Class B option and Trademarks'
      redemption price were reduced by the amount distributed to Eve. Upon
      Philip Morris' exercise of the Class B option or Trademarks' exercise of
      its redemption right, Philip Morris or Trademarks, as relevant, will be
      required to obtain Eve's release from its guaranty. The Class B interest
      will be entitled to a guaranteed payment of $500 each year with the Class
      A interest allocated all remaining income or loss of Trademarks. The
      proceeds of the loan and the exercise of the Class A option were used to
      retire a portion of the BGLS Notes. (Refer to Note 11.)

      Trademarks has granted Philip Morris an exclusive license of the three
      brands for an 11-year term expiring May 24, 2010 at an annual royalty
      based on sales of cigarettes under the brands, subject to a minimum annual
      royalty payment equal to the annual debt service obligation on the loan
      plus $1,000.


                                      -13-
<PAGE>   15
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      If Philip Morris fails to exercise the Class B option, Eve will have an
      option to put its Class B interest to Philip Morris, or Philip Morris'
      designees, at a put price that is $5,000 less than the exercise price of
      the Class B option (and includes Philip Morris' obtaining Eve's release
      from its loan guarantee). The Eve put option is exercisable at any time
      during the 90-day period beginning March 2, 2010.

      If the Class B option, Trademarks' redemption right and the Eve put option
      expire unexercised, the holder of the Class B interest will be entitled to
      convert the Class B interest, at its election, into a Class A interest
      with the same rights to share in future profits and losses, the same
      voting power and the same claim to capital as the entire existing
      outstanding Class A interest, i.e., a 50% interest in Trademarks.

      Upon the closing of the exercise of the Class A option and the
      distribution of the loan proceeds on May 24, 1999, Philip Morris obtained
      control of Trademarks, and the Company recognized a pre-tax gain of
      $294,078 in its consolidated financial statements to the extent of the
      total cash proceeds received from the payment of the option fees, the
      exercise of the Class A option and the distribution of the loan proceeds.

4.    NEW VALLEY CORPORATION

      Until May 31, 1999, the Company was an equity investor in New Valley. The
      Class A Senior Preferred Shares and the Class B Preferred Shares of New
      Valley that the Company owned were accounted for as debt and equity
      securities, respectively, pursuant to the requirements of SFAS No. 115,
      "Accounting for Certain Investments in Debt and Equity Securities", and
      were classified as available for sale. The Common Shares were accounted
      for pursuant to APB No. 18, "The Equity Method of Accounting for
      Investments in Common Stock".

      RECAPITALIZATION. In connection with New Valley's recapitalization on June
      4, 1999, New Valley's preferred shares were reclassified and changed into
      Common Shares and Warrants to purchase Common Shares. The Company's
      ownership of the Common Shares of New Valley increased from 42.3% to
      55.1%, and its total voting power increased from 42.3% to 55.1%. As a
      result of the increase in ownership, New Valley became a consolidated
      subsidiary of the Company as of June 1, 1999.

      On October 5, 1999, New Valley's Board of Directors authorized the
      repurchase of up to 2,000,000 Common Shares from time to time on the open
      market or in privately negotiated transactions depending on market
      conditions. As of August 11, 2000, New Valley had repurchased 261,400
      shares for approximately $981. At June 30, 2000, the Company owned 55.7%
      of New Valley's Common Shares.

      BROOKEMIL LTD. In connection with the sale by Brooke (Overseas) of the
      common shares of BrookeMil Ltd. ("BrookeMil") to New Valley in 1997, a
      portion of the gain was deferred in recognition of the fact that the
      Company retained an interest in BrookeMil through its 42% equity ownership
      of New Valley prior to recapitalization and that a portion of the property



                                      -14-
<PAGE>   16
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      sold (the site of the third phase of the Ducat Place real estate project
      being developed by BrookeMil, which was used by Liggett-Ducat for its
      cigarette factory operation) was subject to a put option held by New
      Valley. The option expired when Liggett-Ducat ceased factory operations at
      the site in March 1999. The Company recognized that portion of the
      deferred gain, $7,050, in March 1999.

5.    INVESTMENT IN WESTERN REALTY

      WESTERN REALTY DEVELOPMENT LLC. In February 1998, New Valley and Apollo
      organized Western Realty Development to make real estate and other
      investments in Russia. New Valley agreed to contribute the real estate
      assets of BrookeMil, including Ducat Place II and the site for Ducat Place
      III, to Western Realty Development and Apollo agreed to contribute up to
      $72,021, including the investment in Western Realty Repin discussed below.

      The ownership and voting interests in Western Realty Development are held
      equally by Apollo and New Valley. Apollo is entitled to a preference on
      distributions of cash from Western Realty Development to the extent of its
      investment commitment of $43,750, of which $41,266 had been funded through
      June 30, 2000, together with a 15% annual rate of return. New Valley is
      then entitled to a return of its investment commitment of $23,750, of
      which $21,266 had been funded through June 30, 2000, together with a 15%
      annual rate of return. Subsequent distributions are made 70% to New Valley
      and 30% to Apollo. Western Realty Development is managed by a board of
      managers consisting of an equal number of representatives chosen by Apollo
      and New Valley. Material corporate transactions by Western Realty
      Development generally require the unanimous consent of the board of
      managers. Accordingly, New Valley accounts for its non-controlling
      interest in Western Realty Development using the equity method of
      accounting. New Valley recognizes losses incurred by Western Realty
      Development to the extent that cumulative earnings of Western Realty
      Development are not sufficient to satisfy Apollo's preferred return.

      Summarized financial information as of June 30, 2000 and December 31, 1999
      and for the six-month periods ended June 30, 2000 and June 30, 1999 for
      Western Realty Development follows:

<TABLE>
<CAPTION>

                                               JUNE 30, 2000            DECEMBER 31, 1999
                                               -------------            -----------------
<S>                                              <C>                        <C>
Current assets.......................            $    3,336                 $  3,557
Participating loan receivable........                40,725                   37,849
Real estate, net.....................                77,174                   77,988
Furniture and fixtures, net..........                   224                      249
Other noncurrent assets..............                   226                      320
Goodwill, net........................                   549                      722
Notes payable - current..............                 6,968                    6,445
Other current liabilities............                 4,939                    7,067
Notes payable - long-term............                 4,591                    8,211
Other long-term liabilities..........                   799                      752
Members' equity......................               104,937                   98,210
</TABLE>


                                      -15-
<PAGE>   17
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


<TABLE>
<CAPTION>

                              Three Months      Three Months       Six Months       Six Months
                                  Ended            Ended             Ended             Ended
                              June 30, 2000    June 30, 1999     June 30, 2000     June 30, 1999
                              -------------    -------------     -------------     -------------
<S>                                <C>              <C>               <C>               <C>
Revenues...............            $2,994           $2,430            $5,384            $5,878
Costs and expenses.....             2,288            2,811             4,458             7,236
Other income...........             1,464             (741)            2,876               261
Income tax provision...                                (16)
Net income (loss)......             2,186           (1,106)            3,802             1,097
</TABLE>


      Western Realty Development made a $30,000 participating loan to Western
      Tobacco Investments, which holds the interests of Brooke (Overseas) in
      Liggett-Ducat and its new factory. As a result of the sale of Western
      Tobacco Investments, Western Realty Development was entitled to receive
      the return of all amounts advanced on the loan, together with a 15% annual
      rate of return, and 30% of subsequent distributions. Brooke (Overseas)
      recognized net interest expense of $1,464 and $2,876 for the three and six
      months ended June 30, 2000, which represented a 15% cumulative adjustment
      to realizable value on the loan and 30% of any net expense applicable to
      common interests in Western Tobacco Investments. The loan was classified
      in other long-term liabilities on the consolidated balance sheet at June
      30, 2000. The loan was repaid and terminated in connection with the sale
      of Western Tobacco Investments in August 2000. (Refer to Note 2.)

      WESTERN REALTY REPIN LLC. In June 1998, New Valley and Apollo organized
      Western Realty Repin to make a loan to BrookeMil, a wholly-owned
      subsidiary of New Valley. The proceeds of the loan have been used by
      BrookeMil for the acquisition and preliminary development of the Kremlin
      sites, two adjoining sites totaling 10.25 acres located in Moscow across
      the Moscow River from the Kremlin. BrookeMil is planning the development
      of a hotel, office, retail and residential complex on the Kremlin sites.
      BrookeMil owned 96.8% of one site and 100% of the other site at June 30,
      2000. Western Realty Repin has three classes of equity: Class A interests,
      of which $18,750 were outstanding at June 30, 2000 and are owned by
      Apollo; Class B interests, of which $6,250 were outstanding at June 30,
      2000 and are owned by New Valley; and Class C interests, of which Apollo
      had subscribed for $9,521 ($7,437 funded) and New Valley had subscribed
      for $5,712 ($4,463 funded) at June 30, 2000. Apollo and New Valley are
      entitled to receive on a pro-rata basis an amount equal to each party's
      investment in Class C interests, together with a 20% annual return. After
      the distributions to the Class C interests have been made, Apollo will be
      entitled to a preference on distributions of cash from Western Realty
      Repin to the extent of its investment of $18,750 in Class A interests,
      together with a 20% annual rate of return. New Valley will then be
      entitled to a return of its investment of $6,250 in Class B interests,
      together with a 20% annual rate of return. Subsequent distributions will
      be made 50% to New Valley and 50% to Apollo. Western Realty Repin is
      managed by a board of managers consisting of an equal number of
      representatives chosen by Apollo and New Valley. Material corporate
      transactions by Western Realty Repin generally require the unanimous
      consent of the board of managers.


                                      -16-
<PAGE>   18
                                VECTOR GROUP LTD.
                                    BGLS INC.

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



      Through June 30, 2000, Western Realty Repin has advanced $36,900 to
      BrookeMil, of which $26,188 was funded by Apollo under the loan and was
      classified in other long-term liabilities on the consolidated balance
      sheet at June 30, 2000. The loan bears no fixed interest and is payable
      only out of distributions by the entities owning the Kremlin sites to
      BrookeMil. Such distributions will be applied first to pay the principal
      of the loan and then as contingent participating interest on the loan. Any
      rights of payment on the loan are subordinate to the rights of all other
      creditors of BrookeMil. BrookeMil used a portion of the proceeds of the
      loan to repay New Valley for certain expenditures on the Kremlin sites
      previously incurred. The loan is due and payable upon the dissolution of
      BrookeMil and is collateralized by a pledge of New Valley's shares of
      BrookeMil.

      As of June 30, 2000, BrookeMil had invested $33,846 in the Kremlin sites
      and held $1,430 in cash and receivables from an affiliate, which were
      restricted for future investment in the Kremlin sites. In connection with
      the acquisition of a 34.8% interest in one of the Kremlin sites, BrookeMil
      agreed with the City of Moscow to invest an additional $22,000 by May 2000
      in the development of the property. In April 2000, Western Realty Repin
      arranged short-term financing to fund the investment. Under the terms of
      the investment, BrookeMil is required to make additional construction
      expenditures of $22,000 on the site by June 2002. Failure to make the
      expenditures could result in forfeiture of the 34.8% interest in the site.
      Based on the distribution terms contained in the Western Realty Repin
      agreement, the 20% annual rate of return preference to be received by
      Apollo on funds advanced to Western Realty Repin is treated as interest
      cost in the consolidated statement of operations to the extent of New
      Valley's net investment in the Kremlin sites. Because BrookeMil's
      investment of $35,276 in the Kremlin sites was less than Apollo's
      preference of $35,688 in Western Realty Repin at June 30, 2000, the
      Company will recognize future interest costs associated with the
      participating loan concurrently with future investments by BrookeMil in
      the Kremlin sites.

      The development of Ducat Place III and the Kremlin sites will require
      significant amounts of debt and other financing. New Valley is considering
      potential financing alternatives on behalf of Western Realty Development
      and BrookeMil. However, in light of the recent economic turmoil in Russia,
      there is a risk that financing will not be available on acceptable terms.
      Failure to obtain sufficient capital for the projects would force Western
      Realty Development and BrookeMil to curtail or delay the planned
      development of Ducat Place III and the Kremlin sites.

6.    PRO FORMA RESULTS

      The following table presents unaudited pro forma results of operations as
      if the Philip Morris brand transaction, New Valley's recapitalization and
      the sale of five of New Valley's shopping centers and the Thinking
      Machines assets had occurred immediately prior to January 1, 1999. These
      pro forma results have been prepared for comparative purposes only and do
      not purport to be indicative of what would have occurred had these
      transactions been consummated as of such date.



                                      -17-
<PAGE>   19
                                VECTOR GROUP LTD.
                                    BGLS INC.

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




                                                   Six Months
                                                     Ended
                                                 June 30, 1999
                                                 -------------

Revenues..................................         $  241,743
                                                   ==========

Operating income..........................         $   15,367
                                                   ==========

Income from continuing operations.........         $    5,734
                                                   ==========

Net income................................         $    6,246
                                                   ==========

Net income per common share:

    Basic.................................              $0.28
                                                         ====
    Diluted...............................              $0.23
                                                         ====


7.    INVESTMENT SECURITIES AVAILABLE FOR SALE

      Investment securities classified as available for sale are carried at fair
      value, with net unrealized gains included as a component of stockholders'
      equity, net of minority interest. The Company had realized gains on sales
      of investment securities available for sale of $1,438 and $6,191 for the
      three and six months ended June 30, 2000.

      The components of investment securities available for sale at June 30,
      2000 are as follows:

<TABLE>
<CAPTION>

                                                          Gross         Gross
                                                       Unrealized     Unrealized       Fair
                                             Cost         Gain           Loss          Value
                                             ----      -----------    ----------       -----
<S>                                          <C>          <C>            <C>           <C>
Marketable equity securities.........        $29,074      $6,000         $2,149        $32,925
Marketable warrants..................                      3,831                         3,831
                                          -----------      -----      ---------        -------
Investment securities................        $29,074      $9,831         $2,149        $36,756
                                              ======       =====          =====         ======
</TABLE>



                                      -18-
<PAGE>   20
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


8.    INVENTORIES

      Inventories consist of:

                                                     June 30,      December 31,
                                                       2000            1999
                                                   ------------- ---------------

Leaf tobacco.................................      $16,156            $13,599
Other raw materials..........................        9,048              6,423
Work-in-process..............................        3,016              3,542
Finished goods...............................       26,385             20,662
Replacement parts and supplies...............        6,124              4,795
                                                   -------            -------
Inventories at current cost..................       60,729             49,021
LIFO adjustments.............................       (5,046)            (3,816)
                                                   -------            -------
                                                   $55,683            $45,205
                                                   =======            =======

      At June 30, 2000, the Company had leaf tobacco purchase commitments of
approximately $51,134.

9.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of:

                                                June 30,       December 31,
                                                  2000             1999
                                             --------------- --------------

Land and improvements..................         $    443         $    415
Buildings..............................           53,395           51,773
Machinery and equipment................          138,590          129,693
Construction-in-progress...............           23,455           14,605
                                                --------         --------
                                                 215,883          196,486
Less accumulated depreciation..........          (49,118)         (42,226)
                                                --------         --------
                                                $166,765         $154,260
                                                ========         ========


10.   LONG-TERM INVESTMENTS

      At June 30, 2000, long-term investments were $7,794 and consisted
      primarily of investments in limited partnerships. The Company believes the
      fair value of the limited partnerships exceeds their carrying amount by
      approximately $5,448 based on the indicated market values of the
      underlying investment portfolio provided by the partnerships. The
      Company's estimates of the fair value of its long-term investments are
      subject to judgment and are not necessarily indicative of the amounts that
      could be realized in the current market. The Company's investments in
      limited partnerships are illiquid, and the ultimate realization of these
      investments is subject to the performance of the underlying partnership
      and its management by the general partners.



                                      -19-
<PAGE>   21
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      Also included in long-term investments are various Internet-related
      businesses which are carried at $3,659 at June 30, 2000. These investments
      include a 33.4% interest in AtomicPop LLC, an online music company, and
      smaller interests in other Internet companies. The Company accounts for
      its investment in AtomicPop and its investment in one other internet
      company under the equity method.

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

      Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>

                                                                          June 30,       December 31,
                                                                            2000             1999
                                                                      ----------------- ----------------

<S>                                                                     <C>             <C>
         BGLS:
         15.75% Series B Senior Secured Notes due 2001,
               net of unamortized discount of $2,777 and $5,468 ..      $  79,793       $  82,602

         Deferred interest on 15.75% Series B Senior Secured
               Notes due 2001 ....................................         22,708          25,435

         New Valley:
         Notes payable ...........................................         19,674          19,813

         Liggett:
         Revolving credit facility ...............................         17,453
         Term loan under credit facility .........................          4,680           5,040
         Notes payable ...........................................          6,070           4,232

         Brooke (Overseas):
         Foreign credit facilities ...............................         37,200          29,470
         Notes payable ...........................................         20,915          23,090

         Other ...................................................            914             214
                                                                        ---------       ---------

         Total notes payable, long-term debt and other obligations        209,407         189,896
         Less:
               Current maturities ................................       (161,347)        (41,547)
                                                                        ---------       ---------
         Amount due after one year ...............................      $  48,060       $ 148,349
                                                                        =========       =========
</TABLE>


      15.75% SERIES B SENIOR SECURED NOTES DUE 2001 - BGLS:

      During 1999, BGLS repurchased $144,794 principal amount of its Notes,
      together with accrued interest thereon. The purchases were funded
      primarily with proceeds from the Philip Morris brand transaction which
      closed on May 24, 1999. In January 2000, BGLS repurchased an additional
      $5,500 principal amount of the Notes, together with accrued interest
      thereon. At June 30, 2000, the principal amount of Notes outstanding was
      $82,570, and $50,100 principal amount of the Notes were held by the
      holders who had agreed to defer payment of interest as discussed below.

      On March 2, 1998, the Company entered into an agreement with AIF II, L.P.
      and an affiliated investment manager on behalf of a managed account
      (together the "Apollo Holders"), who held approximately 41.8% of the
      $232,864 principal amount of the Notes then outstanding. The Apollo
      Holders (and any transferees) agreed to defer the payment of interest on






                                      -20-
<PAGE>   22
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      the Notes held by them, commencing with the interest payment that was due
      July 31, 1997, which they had previously agreed to defer, through the
      interest payment due July 31, 2000. The deferred interest payments were
      payable at final maturity of the Notes on January 31, 2001 or upon an
      event of default under the Indenture for the Notes. Interest on all of the
      Notes for the six-month period ended January 31, 2000 was paid in cash.

      In connection with the sale of Western Tobacco Investments on August 4,
      2000, BGLS repurchased a portion of the Notes and called the remaining
      Notes for redemption on September 5, 2000. (Refer to Note 2.)

      REVOLVING CREDIT FACILITY - LIGGETT:

      Liggett has a $35,000 credit facility, under which $17,453 was outstanding
      at June 30, 2000. Availability under the credit facility was approximately
      $10,861 based on eligible collateral at June 30, 2000. The facility is
      collateralized by all inventories and receivables of Liggett. Borrowings
      under the facility, whose interest is calculated at a rate equal to 1.0%
      above First Union's (the indirect parent of Congress Financial
      Corporation, the lead lender) prime rate. The facility's interest rate was
      10.5% at June 30, 2000. The facility requires Liggett's compliance with
      certain financial and other covenants including a restriction on the
      payment of cash dividends unless Liggett's borrowing availability under
      the facility for the 30-day period prior to the payment of the dividend,
      and after giving effect to the dividend, is at least $5,000. In addition,
      the facility, as amended, imposes requirements with respect to Liggett's
      adjusted net worth (not to fall below $8,000 as computed in accordance
      with the agreement) and working capital (not to fall below a deficit of
      $17,000 as computed in accordance with the agreement). At June 30, 2000,
      Liggett was in compliance with all covenants under the credit facility;
      Liggett's adjusted net worth was $18,112 and net working capital was
      $28,263, as computed in accordance with the agreement. The facility
      expires on March 8, 2003 subject to automatic renewal for an additional
      year unless a notice of termination is given by the lender at least 60
      days prior to the anniversary date.

      In November 1999, 100 Maple Lane LLC, a new company formed by Liggett to
      purchase an industrial facility in Mebane, North Carolina, borrowed $5,040
      from the lender under Liggett's credit facility. The loan is payable in 59
      monthly installments of $60 including annual interest at 1% above the
      prime rate with a final payment of $1,500. Liggett has guaranteed the
      loan, and a first mortgage on the Mebane property collateralizes the Maple
      Lane loan and Liggett's credit facility. Liggett plans to complete the
      relocation of its manufacturing operations to this facility by October
      2000.

      EQUIPMENT LOANS - LIGGETT:

      In January 1999, Liggett purchased equipment for $5,750 and borrowed
      $4,500 to fund the purchase. The loan, which is collateralized by the
      equipment and guaranteed by BGLS and the Company, is payable in 60 monthly
      installments of $56 including annual interest of 7.67% with a final
      payment of $2,550. In March 2000, Liggett purchased equipment for $1,000




                                      -21-
<PAGE>   23
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      under a capital lease which is payable in 60 monthly installments of $21
      with an effective annual interest rate of 10.14%. In April 2000, Liggett
      purchased equipment for $1,071 under two capital leases which are payable
      in 60 monthly installments of $22 with an effective interest rate of
      10.20%.

      NOTES PAYABLE - NEW VALLEY:

      During the third quarter 1999, New Valley refinanced its notes payable on
      its two remaining shopping centers in Florida and West Virginia for
      $19,674 in the aggregate. Interest rates range from 7.5% to 9.03% per
      annum. The four notes are due between 2002 and 2024.

      FOREIGN CREDIT FACILITIES - LIGGETT-DUCAT:

      At June 30, 2000, Liggett-Ducat had various credit facilities with Russian
      banks under which $37,200 was outstanding. The facilities are denominated
      in dollars, bear interest at rates of 13% to 20% per annum and expire
      within the next twelve months. The facilities are collateralized by the
      new factory building, factory equipment and tobacco inventory.

      NOTES PAYABLE - WESTERN TOBACCO INVESTMENTS:

      Western Tobacco Investments has entered into several contracts for the
      purchase of cigarette manufacturing equipment. Approximately 85% of the
      amount of the contracts were financed with promissory notes generally
      payable over a period of five years. The outstanding balance on these
      notes, which are denominated in various European currencies, was
      $15,892 at June 30, 2000. Other short-term notes for purchases of
      equipment were approximately $5,023. The terms of these notes ranged from
      four to twelve months and carried interest rates of up to 16%. A
      promissory note issued by Brooke (Overseas) for approximately $1,290
      covering deposits for equipment purchased for the new factory was paid in
      full on March 31, 2000.

      In connection with the sale of Western Tobacco Investments on August 4,
      2000, all of the credit facilities, notes payable and other obligations of
      Western Tobacco Investments and Liggett-Ducat were assumed by the
      purchaser.

12.   1999 LONG-TERM INCENTIVE PLAN

      On November 4, 1999, the Company adopted its 1999 Long-Term Incentive Plan
      (the "1999 Plan") which was approved by the stockholders of the Company at
      the 2000 annual meeting. The 1999 Plan authorizes the granting of up to
      5,000,000 shares of common stock through awards of stock options (which
      may include incentive stock options and/or nonqualified stock options),
      stock appreciation rights and shares of restricted Company common stock.
      All officers, employees and consultants of the Company and its
      subsidiaries are eligible to receive awards under the 1999 Plan.



                                      -22-
<PAGE>   24
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      On November 4, 1999, the Company granted non-qualified stock options to
      six executive officers of the Company or its subsidiaries pursuant to the
      1999 Plan. Under the options, the option holders have the right to
      purchase an aggregate of 2,100,000 shares of common stock at an exercise
      price of $15 7/16 per share (the fair market value of a share of common
      stock on the date of grant). Common stock dividend equivalents will be
      paid currently with respect to each share underlying the unexercised
      portion of the options. The options have a ten-year term and become
      exercisable on the fourth anniversary of the date of grant. However, the
      options will earlier vest and become immediately exercisable upon (i) the
      occurrence of a "Change in Control" or (ii) the termination of the option
      holder's employment with the Company due to death or disability.

13.   CONTINGENCIES

      SMOKING-RELATED LITIGATION:

      OVERVIEW. Since 1954, Liggett and other United States cigarette
      manufacturers have been named as defendants in numerous direct and
      third-party actions predicated on the theory that cigarette manufacturers
      should be liable for damages alleged to have been caused by cigarette
      smoking or by exposure to secondary smoke from cigarettes. These cases are
      reported here as though having been commenced against Liggett (without
      regard to whether such cases were actually commenced against Brooke Group
      Holding, the Company's predecessor and a wholly-owned subsidiary of BGLS,
      or Liggett). There has been a noteworthy increase in the number of cases
      commenced against Liggett and the other cigarette manufacturers in recent
      years. The cases generally fall into the following categories: (i) smoking
      and health cases alleging injury brought on behalf of individual
      plaintiffs ("Individual Actions"); (ii) smoking and health cases alleging
      injury and purporting to be brought on behalf of a class of individual
      plaintiffs ("Class Actions"); (iii) health care cost recovery actions
      brought by various governmental entities ("Governmental Actions"); and
      (iv) health care cost recovery actions brought by third-party payors
      including insurance companies, union health and welfare trust funds,
      asbestos manufacturers and others ("Third-Party Payor Actions"). As new
      cases are commenced, defense costs and the risks attendant to the inherent
      unpredictability of litigation continue to increase. The future financial
      impact of the risks and expenses of litigation and the effects of the
      tobacco litigation settlements discussed below is not quantifiable at this
      time. For the six months ended June 30, 2000, Liggett incurred counsel
      fees and costs totaling approximately $4,133 compared to $3,001 for the
      comparable prior year period.

      INDIVIDUAL ACTIONS. As of June 30, 2000, there were approximately 330
      cases pending against Liggett, and in most cases the other tobacco
      companies, where individual plaintiffs allege injury resulting from
      cigarette smoking, addiction to cigarette smoking or exposure to secondary
      smoke and seek compensatory and, in some cases, punitive damages. Of
      these, 85 were pending in Florida, 94 in New York, 40 in Massachusetts, 17
      in Texas and 32 in California. The balance of the individual cases were
      pending in 29 states. There are five individual cases pending where
      Liggett is the only named defendant.



                                      -23-
<PAGE>   25
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


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

      In February 1999, a California jury awarded $51,500 in damages to a woman
      who claimed lung cancer from smoking Marlboro cigarettes made by Philip
      Morris. The award includes $1,500 in compensatory damages and $50,000 in
      punitive damages. The court subsequently reduced the punitive damages
      award to $25,000. In March 1999, an Oregon jury awarded $80,311 in damages
      to the family of a deceased smoker who smoked Marlboro cigarettes made by
      Philip Morris. The award includes $79,500 in punitive damages. The court
      subsequently reduced the punitive damages award to $32,000. Philip Morris
      has appealed both the verdict and damage awards in both cases.

      In March 2000, a California jury awarded $1,700 in compensatory damages
      and $20,000 in punitive damages to a former smoker and her husband. The
      jury found Philip Morris and R.J. Reynolds Tobacco misrepresented the
      health dangers of cigarettes and that they acted with malice. The
      defendants have stated that they intend to appeal both the verdict and
      damage awards.

      CLASS ACTIONS. As of June 30, 2000, there were approximately 60 actions
      pending, for which either a class has been certified or plaintiffs are
      seeking class certification, where Liggett, among others, was a named
      defendant. Many of these actions purport to constitute statewide class
      actions and were filed after May 1996 when the Fifth Circuit Court of
      Appeals, in the CASTANO case (discussed below), reversed a Federal
      district court's certification of a purported nationwide class action on
      behalf of persons who were allegedly "addicted" to tobacco products.

      In March 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN TOBACCO
      COMPANY INC., ET AL., United States District Court, Eastern District of
      Louisiana, was filed against Liggett and others. The class action
      complaint sought relief for a nationwide class of smokers based on their
      alleged addiction to nicotine. In February 1995, the District Court
      granted plaintiffs' motion for class certification. In May 1996, the Court
      of Appeals for the Fifth Circuit reversed the class certification order
      and instructed the District Court to dismiss the class complaint. The




                                      -24-
<PAGE>   26
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


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

      The extent of the impact of the CASTANO decision on smoking-related class
      action litigation is still uncertain. The CASTANO decision has had a
      limited effect with respect to courts' decisions regarding narrower
      smoking-related classes or class actions brought in state rather than
      federal court. For example, since the Fifth Circuit's ruling, a court in
      Louisiana (Liggett is not a defendant in this proceeding) has certified
      "addiction-as-injury" class actions that covered only citizens in those
      states. Two other class actions, BROIN and ENGLE, were certified in state
      court in Florida prior to the Fifth Circuit's decision.

      In May 1994, an action entitled ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO
      COMPANY, ET AL., Circuit Court, Eleventh Judicial Circuit, Dade County,
      Florida, was filed against Liggett and others. The class consists of all
      Florida residents and citizens, and their survivors, who have suffered,
      presently suffer or have died from diseases and medical conditions caused
      by their addiction to cigarettes that contain nicotine. Phase I of the
      trial commenced in July 1998 and in July 1999, the jury returned the Phase
      I verdict. The Phase I verdict concerned certain issues determined by the
      trial court to be "common" to the causes of action of the plaintiff class.
      Among other things, the jury found that: smoking cigarettes causes 20
      diseases or medical conditions, cigarettes are addictive or dependence
      producing, defective and unreasonably dangerous, defendants made
      materially false statements with the intention of misleading smokers,
      defendants concealed or omitted material information concerning the health
      effects and/or the addictive nature of smoking cigarettes and agreed to
      misrepresent and conceal the health effects and/or the addictive nature of
      smoking cigarettes, and defendants were negligent and engaged in extreme
      and outrageous conduct or acted with reckless disregard with the intent to
      inflict emotional distress. The jury also found that defendants' conduct
      "rose to a level that would permit a potential award or entitlement to
      punitive damages." The court decided that Phase II of the trial, which
      commenced November 1999, would be a causation and damages trial for three
      of the class representatives and a punitive damages trial on a class-wide
      basis, before the same jury that returned the verdict in Phase I. On April
      7, 2000, the jury awarded compensatory damages of $12,704 to the three
      plaintiffs, to be reduced in proportion to the respective plaintiff's
      fault. The jury also decided that the claim of one of the plaintiffs, who
      was awarded compensatory damages of $5,831, was not timely filed. On July
      14, 2000, the jury awarded approximately $145,000,000 in the punitive


                                      -25-
<PAGE>   27
                                VECTOR GROUP LTD.
                                    BGLS INC.

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



      damages portion of Phase II against all defendants including $790,000
      against Liggett. Liggett intends to pursue all available post-trial and
      appellate remedies. If this verdict is not eventually reversed on appeal,
      or substantially reduced by the court, it could have a material adverse
      effect on the Company. Phase III of the trial will be conducted before
      separate juries to address absent class members' claims, including issues
      of specific causation and other individual issues regarding entitlement to
      compensatory damages.

      On July 14, 2000, the Southeastern Iron Workers Union filed a motion to
      intervene in the ENGLE case, seeking to protect its members' subrogation
      rights under the federal Employment Retirement Income and Security Act.
      Based on the federal question raised in that motion, defendants removed
      the case to federal court in Miami on July 24, 2000. The removal stays all
      state court proceedings unless and until the federal court decides to
      return the case to the state court.

      Now that the jury has awarded punitive damages, it is unclear how the
      state court's order in ENGLE will be implemented. The order provides that
      the punitive damage amount should be standard as to each class member and
      acknowledges that the actual size of the class will not be known until the
      last case has withstood appeal. The order does not address whether
      defendants will be required to pay the punitive damage award prior to a
      determination of claims of all class members, a process that could take
      years to conclude. Recently, legislation has been enacted in Florida that
      limits the size of any bond required, pending appeal, to stay execution of
      a punitive damages verdict to the lesser of the punitive award plus twice
      the statutory rate of interest, $100,000 or 10% of the net worth of the
      defendant, but the limitation on the bond does not affect the amount of
      the underlying verdict. Although the legislation is intended to apply to
      the ENGLE case, management cannot predict the outcome of any possible
      challenges to the application or constitutionality of this legislation.
      Similar legislation has been enacted in Georgia, Kentucky, North Carolina
      and Virginia.

      Class certification motions are pending in a number of putative class
      actions. Classes remain certified against Liggett in Florida (ENGLE). A
      number of class certification denials are on appeal.

      Approximately 38 purported state and federal class action complaints have
      been filed against the cigarette manufacturers for alleged antitrust
      violations. The actions allege that the cigarette manufacturers have
      engaged in a nationwide and international conspiracy to fix the price of
      cigarettes in violation of state and federal antitrust laws. Plaintiffs
      allege that defendants' price-fixing conspiracy raised the price of
      cigarettes above a competitive level. Plaintiffs in the 31 state actions
      purport to represent classes of indirect purchasers of cigarettes in each
      of the states; plaintiffs in the seven federal actions purport to
      represent a nationwide class of wholesalers who purchased cigarettes
      directly from the defendants. The federal actions have been consolidated
      and, on July 28, 2000, plaintiffs in the federal consolidated action filed
      a single consolidated complaint that did not name Liggett or Brooke Group
      Holding as defendants.

      In February 2000, Liggett and plaintiffs sent correspondence to the court,
      in SIMON V. PHILIP MORRIS ET AL., a putative nationwide smokers class
      action, indicating that Liggett and the plaintiffs are engaged in
      preliminary settlement discussions. There are no assurances that any
      settlement will be reached or that the class will ultimately be certified.



                                      -26-
<PAGE>   28
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      GOVERNMENTAL ACTIONS. As of June 30, 2000, there were approximately 25
      Governmental Actions pending against Liggett. In these proceedings, both
      foreign and domestic governmental entities seek reimbursement for Medicaid
      and other health care expenditures. The claims asserted in these health
      care cost recovery actions vary. In most of these cases, plaintiffs assert
      the equitable claim that the tobacco industry was "unjustly enriched" by
      plaintiffs' payment of health care costs allegedly attributable to smoking
      and seek reimbursement of those costs. Other claims made by some but not
      all plaintiffs include the equitable claim of indemnity, common law claims
      of negligence, strict liability, breach of express and implied warranty,
      breach of special duty, fraud, negligent misrepresentation, conspiracy,
      public nuisance, claims under state and federal statutes governing
      consumer fraud, antitrust, deceptive trade practices and false
      advertising, and claims under RICO.

      THIRD-PARTY PAYOR ACTIONS. As of June 30, 2000, there were approximately
      70 Third-Party Payor Actions pending against Liggett. The claims in these
      cases are similar to those in the Governmental Actions but have been
      commenced by insurance companies, union health and welfare trust funds,
      asbestos manufacturers and others. Five United States Circuit Courts of
      Appeal have ruled that Third-Party Payors did not have standing to bring
      lawsuits against the tobacco companies. In January 2000, the United States
      Supreme Court denied petitions for certiorari filed by several of the
      union health and welfare trust funds. However, a number of Third-Party
      Payor Actions, including an action brought by 24 Blue Cross/Blue Shield
      Plans, remain pending.

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

      FEDERAL GOVERNMENT ACTION. In September 1999, the United States government
      commenced litigation against Liggett and the other tobacco companies in
      the United States District Court for the District of Columbia. The action
      seeks to recover an unspecified amount of health care costs paid for and
      furnished, and to be paid for and furnished, by the Federal Government for
      lung cancer, heart disease, emphysema and other smoking-related illnesses
      allegedly caused by the fraudulent and tortious conduct of defendants, and
      to restrain defendants and co-conspirators from engaging in fraud and
      other unlawful conduct in the future, and to compel defendants to disgorge
      the proceeds of their unlawful conduct. The complaint alleges that such
      costs total more than $20,000,000 annually. The action asserts claims
      under three federal statutes, the Medical Care Recovery Act, the Medicare
      Secondary Payer provisions of the Social Security Act and RICO. In
      December 1999, Liggett filed a motion to dismiss the lawsuit on numerous
      grounds, including that the statutes invoked by the government do not
      provide the basis for the relief sought. The trial court has heard oral
      argument on the motion but has not issued a ruling to date.



                                      -27-
<PAGE>   29
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      SETTLEMENTS. In March 1996, Brooke Group Holding and Liggett entered into
      an agreement, subject to court approval, to settle the CASTANO class
      action tobacco litigation. The CASTANO class was subsequently decertified
      by the court.

      In March 1996, March 1997 and March 1998, Brooke Group Holding and Liggett
      entered into settlements of smoking-related litigation with the Attorneys
      General of 45 states and territories. The settlements released both Brooke
      Group Holding and Liggett from all smoking-related claims, including
      claims for health care cost reimbursement and claims concerning sales of
      cigarettes to minors.

      In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
      R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (collectively,
      the "Original Participating Manufacturers" or "OPMs") and Liggett
      (together with the OPMs and any other tobacco product manufacturer that
      becomes a signatory, the "Participating Manufacturers") entered into the
      Master Settlement Agreement (the "MSA") with 46 states, the District of
      Columbia, Puerto Rico, Guam, the United States Virgin Islands, American
      Samoa and the Northern Marianas (collectively, the "Settling States") to
      settle the asserted and unasserted health care cost recovery and certain
      other claims of those Settling States.

      The MSA has been initially approved by trial courts in all Settling
      States. The MSA is subject to final judicial approval in each of the
      Settling States, which approval has been obtained in 50 jurisdictions. If
      final judicial approval is not obtained in a jurisdiction by December 31,
      2001, then, unless the settling defendants and the relevant jurisdiction
      agree otherwise, the MSA will be terminated with respect to such
      jurisdiction.

      The MSA restricts tobacco product advertising and marketing within the
      Settling States and otherwise restricts the activities of Participating
      Manufacturers. Among other things, the MSA prohibits the targeting of
      youth in the advertising, promotion or marketing of tobacco products; bans
      the use of cartoon characters in all tobacco advertising and promotion;
      limits each Participating Manufacturer to one tobacco brand name
      sponsorship during any 12-month period; bans all outdoor advertising, with
      the exception of signs 14 square feet or less in dimension at retail
      establishments that sell tobacco products; prohibits payments for tobacco
      product placement in various media; bans gift offers based on the purchase
      of tobacco products without sufficient proof that the intended recipient
      is an adult; prohibits Participating Manufacturers from licensing third
      parties to advertise tobacco brand names in any manner prohibited under
      the MSA; prohibits Participating Manufacturers from using as a tobacco
      product brand name any nationally recognized non-tobacco brand or trade
      name or the names of sports teams, entertainment groups or individual
      celebrities; and prohibits Participating Manufacturers from selling packs
      containing fewer than twenty cigarettes.

      The MSA also requires Participating Manufacturers to affirm corporate
      principles to comply with the MSA and to reduce underage usage of tobacco
      products and imposes requirements applicable to lobbying activities
      conducted on behalf of Participating Manufacturers.

      Liggett has no payment obligations under the MSA unless its market share
      exceeds a base share of 125% of its 1997 market share, or approximately
      1.65% of total cigarettes sold in the United States. Liggett believes,




                                      -28-
<PAGE>   30
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      based on published industry sources, that its domestic shipments accounted
      for 1.2% of the total cigarettes shipped in the United States during 1999.
      In the year following any year in which Liggett's market share does exceed
      the base share, Liggett will pay on each excess unit an amount equal (on a
      per-unit basis) to that paid during such following year by the OPMs under
      the annual and strategic contribution payment provisions of the MSA,
      subject to applicable adjustments, offsets and reductions. Under the
      annual and strategic contribution payment provisions of the MSA, the OPMs
      (and Liggett to the extent its market share exceeds the base share) will
      pay the following annual amounts (subject to certain adjustments):

           YEAR                     AMOUNT
           ----                     ------

      2000                          $4,500,000
      2001                          $5,000,000
      2002 - 2003                   $6,500,000
      2004 - 2007                   $8,000,000
      2008 - 2017                   $8,139,000
      2018 and each                 $9,000,000
        year thereafter

      These annual payments will be allocated based on relative unit volume of
      domestic cigarette shipments. The payment obligations under the MSA are
      the several, and not joint, obligations of each Participating Manufacturer
      and are not the responsibility of any parent or affiliate of a
      Participating Manufacturer.

      The MSA replaces Liggett's prior settlements with all states and
      territories except for Florida, Mississippi, Texas and Minnesota. In the
      event the MSA does not receive final judicial approval in any state or
      territory, Liggett's prior settlement with that state or territory, if
      any, will be revived.

      The states of Florida, Mississippi, Texas and Minnesota, prior to the
      effective date of the MSA, negotiated and executed settlement agreements
      with each of the other major tobacco companies separate from those
      settlements reached previously with Liggett. Because these states'
      settlement agreements with Liggett provided for "most favored nation"
      protection for both Brooke Group Holding and Liggett, the payments due
      these states by Liggett (with certain possible exceptions) have been
      eliminated. With respect to all non-economic obligations under the
      previous settlements, both Brooke Group Holding and Liggett are entitled
      to the most favorable provisions as between the MSA and each state's
      respective settlement with the other major tobacco companies. Therefore,
      Liggett's non-economic obligations to all states and territories are now
      defined by the MSA.

      In April 1999, a putative class action was filed on behalf of all firms
      that directly buy cigarettes in the United States from defendant tobacco
      manufacturers. The complaint alleges violation of antitrust law, based in
      part on the MSA. Plaintiffs seek treble damages computed as three times
      the difference between current prices and the price plaintiffs would have




                                      -29-
<PAGE>   31
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      paid for cigarettes in the absence of an alleged conspiracy to restrain
      and monopolize trade in the domestic cigarette market, together with
      attorneys' fees. Plaintiffs also seek injunctive relief against certain
      aspects of the MSA.

      In March 1997, Liggett, Brooke Group Holding and a nationwide class of
      individuals that allege smoking-related claims filed a mandatory class
      settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
      GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
      court granted preliminary approval and preliminary certification of the
      class. In July 1998, Liggett, Brooke Group Holding and plaintiffs filed an
      amended class action settlement agreement in FLETCHER which agreement was
      preliminarily approved by the court in December 1998. In July 1999, the
      court denied approval of the FLETCHER class action settlement. The
      parties' motion for reconsideration is still pending.

      The Company accrued $16,902 for the present value of the fixed payments
      under the March 1998 Attorneys General settlements. As a result of the
      Company's treatment under the MSA, $14,928 of net charges accrued for the
      prior settlements were reversed in 1998 and $1,051 were reversed in 1999.

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

      TRIALS. In addition to the ENGLE case, cases currently scheduled for trial
      in 2000 include Third-Party Payor Actions brought by several Blue
      Cross/Blue Shield plans and an asbestos company trust in federal court in
      New York (October). One action with five individuals, GLUSSI, is scheduled
      to be tried in state court in New York in September and an action with two
      individuals is scheduled for trial in West Virginia in October. A motion
      to certify the West Virginia case as a class action remains pending. Trial
      dates, however, are subject to change.

      Management is not able to predict the outcome of the litigation pending
      against Brooke Group Holding or Liggett. Litigation is subject to many
      uncertainties. An unfavorable verdict was returned in the first phase of
      the ENGLE smoking and health class action trial pending in Florida.
      Recently, the jury awarded $790,000 in punitive damages against Liggett in
      the second phase of the trial. Liggett intends to pursue all available
      post-trial and appellate remedies. If this verdict is not eventually
      reversed on appeal, or substantially reduced by the court, it could have a
      material adverse effect on the Company. It is possible that additional
      cases could be decided unfavorably and that there could be further adverse
      developments in the ENGLE case. Management cannot predict the cash
      requirements related to any future settlements and judgments, including
      cash required to bond any appeals, and there is a risk that those
      requirements will not be able to be met. An unfavorable outcome of a
      pending smoking and health case could encourage the commencement of
      additional similar litigation. Management is unable to make a meaningful
      estimate with respect to the amount or range of loss that could result
      from an unfavorable outcome of the cases pending against Brooke Group
      Holding or Liggett or the costs of defending such cases. The complaints
      filed in these cases rarely detail alleged damages. Typically, the claims
      set forth in an individual's complaint against the tobacco industry pray
      for money damages in an amount to be determined by a jury, plus punitive
      damages and costs. These damage claims are typically stated as being for
      the minimum necessary to invoke the jurisdiction of the court.



                                      -30-
<PAGE>   32
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      It is possible that the Company's consolidated financial position, results
      of operations or cash flows could be materially adversely affected by an
      unfavorable outcome in any such smoking-related litigation.

      Liggett's management is unaware of any material environmental conditions
      affecting its existing facilities. Liggett's management believes that
      current operations are conducted in material compliance with all
      environmental laws and regulations and other laws and regulations
      governing cigarette manufacturers. Compliance with federal, state and
      local provisions regulating the discharge of materials into the
      environment, or otherwise relating to the protection of the environment,
      has not had a material effect on the capital expenditures, earnings or
      competitive position of Liggett.

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

      LEGISLATION AND REGULATION:

      In 1993, the Environmental Protection Agency ("EPA") released a report on
      the respiratory effect of secondary smoke which concludes that secondary
      smoke is a known human lung carcinogen in adults and in children, causes
      increased respiratory tract disease and middle ear disorders and increases
      the severity and frequency of asthma. In June 1993, the two largest of the
      major domestic cigarette manufacturers, together with other segments of
      the tobacco and distribution industries, commenced a lawsuit against the
      EPA seeking a determination that the EPA did not have the statutory
      authority to regulate secondary smoke, and that given the current body of
      scientific evidence and the EPA's failure to follow its own guidelines in
      making the determination, the EPA's classification of secondary smoke was
      arbitrary and capricious. Whatever the outcome of this litigation,
      issuance of the report may encourage efforts to limit smoking in public
      areas. In July 1998, a federal district court vacated those sections of
      the report relating to lung cancer, finding that the EPA may have reached
      different conclusions had it complied with relevant statutory
      requirements. The federal government has appealed the court's ruling.

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



                                      -31-
<PAGE>   33
                                VECTOR GROUP LTD.
                                    BGLS INC.

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



      In August 1996, the Food and Drug Administration (the "FDA") filed in the
      Federal Register a Final Rule classifying tobacco as a "drug" or "medical
      device", asserting jurisdiction over the manufacture and marketing of
      tobacco products and imposing restrictions on the sale, advertising and
      promotion of tobacco products. Litigation was commenced challenging the
      legal authority of the FDA to assert such jurisdiction, as well as
      challenging the constitutionality of the rules. On March 21, 2000, the
      United States Supreme Court ruled that the FDA does not have the power to
      regulate tobacco. Liggett supported the FDA Rule and began to phase in
      compliance with certain of the proposed FDA regulations.

      In August 1996, Massachusetts enacted legislation requiring tobacco
      companies to publish information regarding the ingredients in cigarettes
      and other tobacco products sold in that state. In December 1997, the
      United States District Court for the District of Massachusetts enjoined
      this legislation from going into effect on the grounds that it is
      preempted by federal law. In November 1999, the First Circuit affirmed
      this ruling. Notwithstanding the foregoing, in December 1997, Liggett
      began complying with this legislation by providing ingredient information
      to the Massachusetts Department of Public Health. Several other states
      have enacted, or are considering, legislation similar to that enacted in
      Massachusetts.

      As part of the 1997 budget agreement approved by Congress, federal excise
      taxes on a pack of cigarettes, which are currently 34 cents, were
      increased at the beginning of 2000 and will rise 5 cents more in the year
      2002. In general, excise taxes and other taxes on cigarettes have been
      increasing. These taxes vary considerably and, when combined with sales
      taxes and the current federal excise tax, may be as high as $1.66 per pack
      in a given locality in the United States. Congress has been considering
      significant increases in the federal excise tax or other payments from
      tobacco manufacturers, and the Clinton Administration's fiscal year 2001
      budget proposal included an additional increase of $.25 per pack in the
      federal excise tax, as well as a contingent special assessment related to
      youth smoking rates. Increases in other cigarette-related taxes have been
      proposed at the state and local level.

      In June 2000, the New York state legislature passed legislation charging
      the state's Office of Fire Prevention and Control with developing
      standards for "fire safe" or self-extinguishing cigarettes. The OFPC has
      until July 1, 2002 to issue final regulations. Six months from the
      issuance of the standards, but no later than January 1, 2003, all
      cigarettes offered for sale in New York state will be required to be
      manufactured to those standards.

      In addition to the foregoing, there have been a number of other
      restrictive regulatory actions, adverse legislative and political
      decisions and other unfavorable developments concerning cigarette smoking
      and the tobacco industry, the effects of which, at this time, management
      is not able to evaluate. These developments may negatively affect the
      perception of potential triers of fact with respect to the tobacco
      industry, possibly to the detriment of certain pending litigation, and may
      prompt the commencement of additional similar litigation.



                                      -32-
<PAGE>   34

                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      OTHER MATTERS:

      In March 1997, a stockholder derivative suit was filed in Delaware
      Chancery Court against New Valley, as a nominal defendant, its directors
      and Brooke Group Holding by a stockholder of New Valley. The suit alleges
      that New Valley's purchase of the BrookeMil shares from Brooke (Overseas)
      in January 1997 constituted a self-dealing transaction which involved the
      payment of excessive consideration by New Valley. The plaintiff seeks (i)
      a declaration that New Valley's directors breached their fiduciary duties,
      Brooke Group Holding aided and abetted such breaches and such parties are
      therefore liable to New Valley, and (ii) unspecified damages to be awarded
      to New Valley. In December 1999, another stockholder of New Valley
      commenced an action in Delaware Chancery Court substantially similar to
      the March 1997 action. This stockholder alleges, among other things, that
      the consideration paid by New Valley for the BrookeMil shares was
      excessive, unfair and wasteful, that the special committee of New Valley's
      board lacked independence, and that the appraisal by the independent
      appraisal firm and the fairness opinion by the independent investment bank
      were flawed. Brooke Group Holding and New Valley believe that the
      allegations in both cases are without merit. By order of the court, both
      actions were consolidated. Brooke Group Holding and New Valley recently
      filed a motion to dismiss the consolidated action. Although there can be
      no assurances, Brooke Group Holding and New Valley believe, after
      consultation with counsel, that the ultimate resolution of this matter
      will not have a material adverse effect on the Company's or New Valley's
      consolidated financial position, results of operations or cash flows.

      In July 1999, a purported class action was commenced on behalf of New
      Valley's former Class B preferred shareholders against New Valley, Brooke
      Group Holding and certain directors and officers of New Valley in Delaware
      Chancery Court. The complaint alleges that the recapitalization, approved
      by a majority of each class of New Valley's stockholders in May 1999, was
      fundamentally unfair to the Class B preferred shareholders, the proxy
      statement relating to the recapitalization was materially deficient and
      the defendants breached their fiduciary duties to the Class B preferred
      shareholders in approving the transaction. The plaintiffs seek class
      certification of the action and an award of unspecified compensatory
      damages as well as all costs and fees. Brooke Group Holding and New Valley
      believe that the allegations are without merit. Brooke Group Holding and
      New Valley recently filed a motion to dismiss the action. Although there
      can be no assurances, Brooke Group Holding and New Valley believe, after
      consultation with counsel, that the ultimate resolution of this matter
      will not have a material adverse effect on the Company's or New Valley's
      consolidated financial position, results of operations or cash flows.

      On October 18, 1999, an action was commenced against a subsidiary of
      Brooke Group Holding in the Supreme Court of the State of New York, County
      of New York. The complaint alleges that under the terms of a 1993 Put
      Agreement, Brooke Group Holding's subsidiary was obligated to purchase
      certain shares of plaintiff's stock for $7,500. In addition, the complaint
      seeks prejudgment interest in the amount of approximately $4,000. Brooke
      Group Holding believes, and has been so advised by counsel, that it has a
      number of valid defenses to this matter. Both parties recently moved for
      summary judgment.



                                      -33-
<PAGE>   35
                                VECTOR GROUP LTD.
                                    BGLS INC.

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


      As of June 30, 2000, New Valley had $11,951 of prepetition
      bankruptcy-related claims and restructuring accruals. The remaining
      prepetition claims may be subject to future adjustments depending on
      pending discussions with the various parties and the decisions of the
      bankruptcy court.

      New Valley is a defendant in various lawsuits and may be subject to
      unasserted claims primarily concerning its activities as a securities
      broker-dealer and its participation in public underwritings. These
      lawsuits involve claims for substantial or indeterminate amounts and are
      in varying stages of legal proceedings. In the opinion of management,
      after consultation with counsel, the ultimate resolution of these matters
      will not have a material adverse effect on the Company's or New Valley's
      consolidated financial position, results of operations or cash flows.



                                      -34-
<PAGE>   36
                                VECTOR GROUP LTD.
                                    BGLS INC.

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



14.   SEGMENT INFORMATION

      Financial information for the Company's continuing operations before taxes
      and minority interest for the three and six months ended June 30, 2000 and
      1999 follows:
<TABLE>
<CAPTION>

                                              United
                                              States     Russian     Broker-        Real      Corporate
                                             Tobacco     Tobacco      Dealer       Estate     and Other      Total
                                             -------     -------     -------     ---------    ---------      -----
<S>                                            <C>          <C>           <C>       <C>          <C>         <C>
         THREE MONTHS ENDED JUNE 30, 2000:

         Revenues ........................   $138,560   $  49,084    $ 18,300    $     820    $       0    $206,764
         Operating income ................     15,636       1,287         163       (2,113)      (4,908)     10,065
         Depreciation and amortization ...      1,008       2,619         217          383            8       4,235

         THREE MONTHS ENDED JUNE 30, 1999:

         Revenues ........................   $ 93,926   $  15,339    $  5,876    $     754    $       0    $115,895
         Operating income (loss) .........     16,146        (807)       (107)        (371)      (1,263)     13,598
         Depreciation and amortization ...        965         429          80          168          103       1,745


         SIX MONTHS ENDED JUNE 30, 2000:

         Revenues ........................   $245,462   $  89,330    $ 48,596    $   1,591    $       0    $384,979
         Operating income (loss) .........     24,690       1,643       5,046       (4,096)      (7,360)     19,923
         Identifiable assets .............    119,699     170,060      44,573       58,493      138,105     530,930
         Depreciation and amortization ...      2,006       4,641         437          532           17       7,633
         Capital expenditures ............      8,790      10,505         289        1,845                   21,429

         SIX MONTHS ENDED JUNE 30, 1999:

         Revenues ........................   $179,973   $  37,689    $  5,876    $     754    $       0    $224,292
         Operating income (loss) .........     36,215         568        (107)        (371)        (574)     35,731
         Identifiable assets .............    102,650     133,130      44,390      100,360      170,002     550,532
         Depreciation and amortization ...      1,820       1,182          80          168          151       3,401
         Capital expenditures ............      6,972      30,565                      338          327      38,202
</TABLE>


-----------

*    Broker-Dealer, Real Estate and New Valley's portion of Corporate and Other
     are included for the month ended June 30, 1999 when New Valley became a
     consolidated subsidiary of the Company.




                                      -35-
<PAGE>   37

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INTRODUCTION

         The following discussion provides an assessment of the consolidated
results of operations, capital resources and liquidity of Vector Group Ltd. (the
"Company") and its subsidiaries and should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company and BGLS Inc.
("BGLS") included elsewhere in this document. BGLS is a wholly-owned subsidiary
of the Company. The consolidated financial statements include the accounts of
BGLS, Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), Liggett-Ducat Ltd. ("Liggett-Ducat") and other less significant
subsidiaries. As of June 1, 1999, New Valley Corporation ("New Valley") became a
consolidated subsidiary of the Company as a result of New Valley's
recapitalization in which the Company's interest in New Valley's common shares
increased to 55.1%. New Valley's stock repurchase program, which began in late
1999, increased the Company's interest to 55.7% at June 30, 2000.

         The Company is a holding company for a number of businesses which it
holds through its wholly-owned subsidiary BGLS. Accordingly, a separate
Management's Discussion and Analysis of Financial Condition and Results of
Operations for BGLS is not presented herein as it would not differ materially
from the discussion of the Company's consolidated results of operations, capital
resources and liquidity. The Company is principally engaged in the manufacture
and sale of cigarettes in the United States through its subsidiary Liggett and
in the investment banking and brokerage business in the United States, real
estate operations in Russia and investment in Internet-related businesses
through its majority-owned subsidiary New Valley. Prior to the sale of Western
Tobacco Investments on August 4, 2000, the Company was engaged in the
manufacture and sale of cigarettes in Russia through Liggett-Ducat.

         At the Company's annual meeting held on May 24, 2000, stockholders
approved a corporate name change to Vector Group Ltd. The New York Stock
Exchange symbol for the Company's common stock was changed from "BGL" to "VGR".

RECENT DEVELOPMENTS

        SALE OF WESTERN TOBACCO INVESTMENTS. On June 14, 2000, Brooke
(Overseas) entered into a definitive agreement to sell all of the membership
interests of Western Tobacco Investments to a subsidiary of Gallaher Group Plc
for $400,000 in cash and the assumption of debt and capital commitments. Brooke
(Overseas) completed the sale on August 4, 2000. Brooke (Overseas) held its
99.9% equity interest in Liggett-Ducat, one of Russia's leading cigarette
producers, through Western Tobacco Investments. Of the cash proceeds from the
transaction after estimated closing expenses, Brooke (Overseas) received
approximately $200,000 and New Valley received $57,208, in accordance with the
terms of the participating loan. These amounts are subject to adjustment based
on final closing expenses. The Company anticipates recording a gain of
approximately $159,000(including the Company's share of New Valley's gain), net
of income taxes, in connection with the transaction in the third quarter of
2000.

         On August 4, 2000, with the proceeds of the sale, BGLS repurchased a
portion of its Notes and called the remaining Notes for redemption on September
5, 2000. BGLS will use approximately $105,000 of the proceeds of the sale to
retire the Notes.



                                      -36-
<PAGE>   38


RECENT DEVELOPMENTS IN LEGISLATION, REGULATION AND LITIGATION

         The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of June 30, 2000, there were approximately 330 individual
suits, 60 purported class actions and 95 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. Additionally, approximately 38 purported class
action complaints have been filed against the cigarette manufacturers for
alleged antitrust violations. As new cases are commenced, the costs associated
with defending such cases and the risks attendant to the inherent
unpredictability of litigation continue to increase. An unfavorable verdict was
returned in the first phase of the ENGLE smoking and health class action trial
pending in Florida. Recently, the jury awarded $790,000 in punitive damages
against Liggett in the second phase of the trial. Liggett intends to pursue all
available post-trial and appellate remedies. If this verdict is not eventually
reversed on appeal, or substantially reduced by the court, it could have a
material adverse effect on the Company. It is possible that additional cases
could be decided unfavorably and that there could be further adverse
developments in the ENGLE case. Management cannot predict the cash requirements
related to any future settlements and judgments, including cash required to bond
any appeals, and there is a risk that those requirements will not be able to be
met. In recent years, there have been a number of restrictive regulatory actions
from various Federal administrative bodies, including the United States
Environmental Protection Agency and the Food and Drug Administration. There have
also been adverse political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of
third-party payor actions. These developments generally receive widespread media
attention. The Company is not able to evaluate the effect of these developing
matters on pending litigation or the possible commencement of additional
litigation, but the Company's consolidated financial position, results of
operations or cash flows could be materially adversely affected by an
unfavorable outcome in any of such smoking-related litigation. See Part II, Item
1, "Legal Proceedings" and Note 13 to the Company's Consolidated Financial
Statements for a description of legislation, regulation and litigation.

         In March 1996, March 1997 and March 1998, the Company and Liggett
entered into settlements of tobacco-related litigation with the Attorneys
General of 45 states and territories. The settlements released the Company and
Liggett from all tobacco claims including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors. See the
discussions of the tobacco litigation settlements appearing in Note 13 to the
Company's Consolidated Financial Statements.



                                      -37-
<PAGE>   39


RESULTS OF OPERATIONS
<TABLE>
<CAPTION>

                                          Three Months Ended             Six Months Ended
                                               June 30,                      June 30,
                                          -------------------          -------------------
                                          2000           1999          2000           1999
                                          ----           ----          ----           ----
<S>                                      <C>           <C>            <C>            <C>
REVENUES:
   Liggett......................         $138,560      $  93,926      $245,462       $179,973
   Liggett-Ducat................           49,084         15,339        89,330         37,689
                                         --------       --------      --------       --------
      Total tobacco.............          187,644        109,265       334,792        217,662

*Broker-dealer..................           18,300          5,876        48,596          5,876
*Real estate....................              820            754         1,591            754
                                       ----------     ----------     ---------     ----------
      Total revenues............          206,764        115,895       384,979        224,292

OPERATING INCOME:
   Liggett......................           15,636         16,146        24,690         36,215
   Liggett-Ducat................            1,287           (807)        1,643            568
                                        ---------     ----------     ---------     ----------
      Total tobacco.............           16,923         15,339        26,333         36,783

*Broker-dealer..................              163           (107)        5,046           (107)
*Real estate....................           (2,113)          (371)       (4,096)          (371)
  Corporate and other...........           (4,908)        (1,263)       (7,360)          (574)
                                        ---------      ---------     ---------     ----------
      Total operating income....        $  10,065      $  13,598     $  19,923      $  35,731
                                         ========       ========      ========       ========
</TABLE>


--------
*    New Valley became a consolidated subsidiary on June 1, 1999. Accordingly,
     results of operations for New Valley are included for the one month ended
     June 30, 1999.

THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999

         REVENUES. Total revenues were $206,764 for the three months ended June
30, 2000 compared to $115,895 for the three months ended June 30, 1999. This
78.4% increase in revenues was due to a $44,634 or 47.5% increase in revenues at
Liggett, an increase of $33,745 or 220.0% in revenues at Liggett-Ducat and the
addition of three months' revenues from New Valley of $19,120 compared to one
month's revenue of $6,630 in the prior year.

         TOBACCO REVENUES. In August 1999, the major cigarette manufacturers,
including Liggett, announced a list price increase of $1.50 per carton. In
January 2000, an additional list price increase of $1.30 per carton was
announced. Effective July 31, 2000, a further increase of $0.60 per carton was
announced.

         Total tobacco revenues were $187,644 for the three months ended June
30, 2000 compared to $109,265 for the three months ended June 30, 1999. This
71.7% increase in revenues was due to an increase in tobacco revenues at Liggett
and at Liggett-Ducat discussed above. Revenues at Liggett increased for both the
premium and discount segments due to price increases of $24,140 and a 37.5%
increase in unit sales volume (approximately 436.0 million units), accounting
for $35,236 in volume variance, partially offset by an unfavorable sales mix of
$14,742.

         Premium sales at Liggett for the second quarter of 2000 amounted to
$14,839 and represented 10.7% of Liggett's total sales, compared to $23,297 and
24.8% of total sales in the second quarter of 1999. In the premium segment,
revenues declined by 36.3% ($8,458) for the three months ended June 30, 2000,
compared to the prior year period, due to the contribution of three of Liggett's
premium brands, LARK, CHESTERFIELD and L & M, in the Philip Morris brand
transaction which closed on May 24, 1999. The contribution of the brands
accounted for an unfavorable volume variance in the second quarter of 2000 of



                                      -38-
<PAGE>   40



$10,114, reflecting a 43.4% decline in unit sales volume (approximately 105.1
million units). This was partially offset by price increases of $1,656. As
adjusted for the contribution of the three brands in the Philip Morris brand
transaction, Liggett's premium segment declined from the prior year period by
6.4% (approximately 9.4 million units).

         Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the three months ended June 30, 2000 amounted to $123,721 and
represented 89.3% of Liggett's total sales, compared to $70,629 and 75.2% of
total sales for the three months ended June 30, 1999. In the discount segment,
revenues grew by 75.2% ($53,092) for the three months ended June 30, 2000
compared to the prior year period, due to price increases of $22,484, along with
a 58.8% increase in unit sales volume (approximately 541.1 million units),
accounting for $41,536 in volume variance, partially offset by an unfavorable
product mix among the discount brand categories of $10,928.

         For the three months ended June 30, 2000, fixed manufacturing costs at
Liggett on a basis comparable to 1999 were $141 higher than in the same period
in 1999, although costs per thousand units of $1.63 per thousand declined 21.6%
($0.45) from $2.08 in the prior period, due to the 35.3% increase in production
volume.

         Net tobacco revenues at Liggett-Ducat for the three months ended June
30, 2000 increased 220% over the same period in 1999 due to a 215% increase in
unit sales volume of $33,034 (approximately 8,302 million units) and a favorable
product mix of $5,469 (36%) offset by an approximate 30% decrease in prices of
$4,758.

         TOBACCO GROSS PROFIT. Tobacco consolidated gross profit was $101,927
for the three months ended June 30, 2000 compared to $69,167 for the three
months ended June 30, 1999, an increase of $32,760 or 47.4% when compared to the
same period last year, reflecting an increase in gross profit at Liggett of
$28,308 and at Liggett-Ducat of $4,452 for the three months ended June 30, 2000
compared to the same period in the prior year. For the three months ended June
30, 2000, Liggett's premium brands contributed 10.5% and discount brands
contributed 82.5% to the Company's gross tobacco profit. Liggett-Ducat
contributed 7.0%. Over the same period in 1999, Liggett's premium brands
contributed 24.8%, Liggett's discount brands contributed 71.5% and Liggett-Ducat
contributed 3.7% to the Company's gross profit.

         Gross profit at Liggett of $94,770 for the three months ended June 30,
2000 increased $28,308 from gross profit of $66,462 for the second quarter of
1999, due primarily to the price increases discussed above. As a percent of
revenues (excluding federal excise taxes), gross profit at Liggett increased to
84.6% for the three months ended June 30, 2000 compared to 82.7% for the same
period in 1999, with gross profit for the premium segment at 85.8% in the 2000
period compared to 84.0% in the 1999 period. Gross profit for the discount
segment was 84.4% for the three months ended June 30, 2000 and 82.3% for the
three months ended June 30, 1999. This increase is primarily the result of the
August 1999 and January 2000 list price increases.

         As a percent of revenues (excluding Russian excise taxes), gross profit
at Liggett-Ducat decreased 1.3% to 16.6% for the three months ended June 30,
2000 compared to 17.9% in the same period in 1999, primarily due to lower prices
offset in part by higher sales volumes.

         BROKER-DEALER AND REAL ESTATE REVENUES. For the three months ended June
30, 2000, Ladenburg's revenues were $18,300 and real estate revenues were $820
compared to revenues of $5,826 at Ladenburg and $754 in real estate for one
month in the prior year period.



                                      -39-
<PAGE>   41


         EXPENSES. Operating, selling, general and administrative expenses were
$111,067 for the three months ended June 30, 2000 compared to $62,210 for the
same period last year, an increase of $48,857 primarily due to increased
expenses at Liggett of $30,330, increased expenses at Liggett-Ducat of $2,402
and an increase of $17,262 caused by consolidation of New Valley for the full
three-month period compared to one month in the period ended June 30, 1999. The
increase was partially offset by lower corporate expense due to a reduction in
the Company's obligation under non-current employee benefits. The increase in
operating expenses at Liggett was due primarily to higher spending for
promotional and marketing programs, factory relocation costs and increased
administrative expenses. At Liggett-Ducat, depreciation expense increased over
the prior year period due to the opening of the new factory in June 1999, and
marketing and advertising expense increased due primarily to the introduction of
western-style cigarettes.

         OTHER INCOME (EXPENSES). For the three months ended June 30, 2000,
other expense was $8,362 compared to income of $285,243 for the period ended
June 30, 1999 in which Liggett recognized a gain of $294,287 in connection with
the closing of the Philip Morris brand transaction.

         Interest expense was $11,814 for the three months ended June 30, 2000
compared to $12,073 for the same period last year. This decrease of $259 was due
to a savings at corporate because of the purchase by BGLS of $150,294 principal
amount of its Notes beginning in May 1999. This was offset by the addition of
$1,984 in interest expense of New Valley and higher interest expense at Western
Tobacco Investments primarily due to non-cash interest expense under the
participating loan agreement.

         New Valley contributed gains on sale of investment securities of $1,438
and interest and dividend income of $1,620 offset by a loss in equity of its
affiliate of $1,362.

         For the three months ended June 30, 1999, equity in earnings of
affiliate was a loss of $1,569 and related to New Valley's net loss applicable
to common shares. This loss in the 1999 period was offset by the gain on the
Philip Morris brand transaction.

         INCOME FROM CONTINUING OPERATIONS. The income from continuing
operations for the three months ended June 30, 2000 was $2,946 compared to
income of $215,814 for the three months ended June 30, 1999. Income tax expense
for the second quarter of 2000 was $640 compared to $81,645 for the for the
second quarter of 1999.

SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999

         REVENUES. Total revenues were $384,979 for the six months ended June
30, 2000 compared to $224,292 for the six months ended June 30, 1999. This 71.6%
increase in revenues was due to a $65,489 or 36.4% increase in revenues at
Liggett, a $51,641 increase at Liggett-Ducat and an increase of $43,557 in
revenues from New Valley.

         TOBACCO REVENUES. Tobacco revenues at Liggett increased for both the
premium and discount segments due to price increases of $42,594 discussed above
and a 26.2% ($47,123) gain in unit sales volume (approximately 585.1 million
units) offset by $24,228 in unfavorable sales mix. The increase in tobacco
revenues of $51,641 or 137% at Liggett-Ducat was attributable to increased
volume (151%) at the new factory of $57,081 and a favorable product mix of
$7,571 (20%) offset by a 34% price decline ($13,011) compared to the prior year
period. Liggett-Ducat's sales volume during the 1999 period was adversely
affected by the move to the new factory and price declines in Russia, following
the continued decline in the value of the ruble.



                                      -40-
<PAGE>   42


         Premium sales at Liggett for the six months ended June 30, 2000
amounted to $30,531 and represented 12.4% of total Liggett sales, compared to
$48,663 and 27.0% of total sales for the same period in 1999. In the premium
segment, revenues declined by 37.3% ($18,132) over the six months ended June 30,
2000, compared to the same period in 1999, due to an unfavorable volume variance
of $21,824, reflecting a 44.8% decline in unit sales volume (approximately 0.9
million units), which was partially offset by price increases of $3,692.

         Liggett's discount sales over the six-month period in 2000 amounted to
$214,931 and represented 87.6% of total Liggett sales, compared to $131,310 and
73.0% of total Liggett sales for the same period in 1999. In the discount
segment, revenues grew by 63.7% ($83,621) over the six months ended June 30,
2000 compared to the same period in 1999, due to price increases of $38,902, and
a 47.3% gain in unit sales volume (approximately 814.5 million units) accounting
for $62,069 in volume variance, partially offset by an unfavorable product mix
of $17,350. For the six months ended June 30, 2000, fixed manufacturing costs on
a basis comparable to the same period in 1999 were $93 higher, although costs
per thousand units of $1.47 declined by $0.32 (17.9%) from the previous period's
$1.79, concurrent with a 24.0% increase in production volume due to the impact
of higher volumes on fixed costs.

         TOBACCO GROSS PROFIT. Gross profit was $180,350 for the six months
ended June 30, 2000 compared to $135,837 for the six months ended June 30, 1999,
an increase of $44,513 or 32.8% when compared to the same period last year, due
primarily to price increases at Liggett offset by the price declines at
Liggett-Ducat discussed above. Liggett's premium brands contributed 12.2% to the
Company's gross profit, the discount segment contributed 81.0% and Liggett-Ducat
contributed 6.8% for the six months ended June 30, 2000. Over the same period in
1999, Liggett's premium brands contributed 26.8%, the discount segment
contributed 68.4% and Liggett-Ducat contributed 4.8%.

         Liggett's gross profit of $168,029 for the six months ended June 30,
2000 increased $38,685 from gross profit of $129,344 for the same period in
1999, due primarily to the price increases discussed above. In the first six
months of 2000, Liggett's premium brands contributed 13.1% and Liggett's
discount brands contributed 86.9% to Liggett's overall gross profit. Over the
same period in 1999, Liggett's premium brands contributed 28.1% and Liggett's
discount brands contributed 71.9% to Liggett's gross profit. As a percent of
revenues (excluding federal excise taxes), gross profit at Liggett increased to
84.5% for the six months ended June 30, 2000 compared to 84.1% for the same
period in 1999, with gross profit for the premium segment at 85.8% and 85.3% in
the six months ended June 30 of 2000 and 1999, respectively, and gross profit
for the discount segment at 84.3% and 83.6% in 2000 and 1999, respectively. This
increase is primarily the result of the August 1999 and January 2000 list price
increases.

         As a percentage of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased to 15.7% for the six months ended June 30,
2000 compared to 18.5% in the same period in 1999, due to decreased selling
prices.

         BROKER-DEALER AND REAL ESTATE REVENUES. New Valley's broker-dealer
revenues were $48,596 and real estate revenues were $1,591 for the month ended
June 30, 2000. This compares to one month of revenues in the 1999 period of
$5,876 at Ladenburg and $754 at the real estate division.

         EXPENSES. Operating, selling, general and administrative expenses were
$210,812 for the six months ended June 30, 2000 compared to $106,932 for the
prior year period. The increase of $103,880 is due primarily to a $52,288
increase at Liggett, a $4,562 increase at Liggett-Ducat and additional expenses
of $47,864 as a result of the consolidation of New Valley. The increase was
partially offset by lower corporate expense due to a reduction in the Company's





                                      -41-
<PAGE>   43


obligation under non-current employee benefits. The increase in operating
expenses at Liggett was due primarily to higher spending for promotional and
marketing programs, factory relocation costs and increased administrative
expenses.

        OTHER INCOME (EXPENSES). Other expense was $14,161 for the six months
ended June 30, 2000 compared to other income of $272,393 for the six months
ended June 30, 1999. For the six months ended June 30, 1999, Liggett recognized
a gain of $294,287 in connection with the closing of the Philip Morris brand
transaction. In addition, New Valley recognized a gain of $3,801 on the sale of
substantially all of Thinking Machines' assets. During the first six months of
1999, the Company also recognized a deferred gain of $7,050 relating to a put
obligation on the site of the old cigarette factory in connection with the sale
of the BrookeMil Ltd. common shares in 1997.

        Interest expense was $23,570 for the six months ended June 30, 2000
compared to $27,061 for the same period in the prior year. The decrease of
$3,491 is largely due to the repurchase of a portion of the BGLS Notes. This was
offset by additional interest expense at Liggett-Ducat of $4,571 and additional
interest at New Valley of $3,366.

         Equity in earnings of affiliate was a loss of $2,913 for the six months
ended June 30, 2000 at New Valley compared to a loss of $9,198 for the six
months ended June 30, 1999 which relates to New Valley's net loss applicable to
common shares.

         Income tax expense for the six months ended June 30, 2000 was $2,314
compared to $83,374 for the six months ended June 30, 1999.


CAPITAL RESOURCES AND LIQUIDITY

         Net cash and cash equivalents increased $12,923 for the six months
ended June 30, 2000 and increased $972 for the six months ended June 30, 1999.
Net cash used in operations for the six months ended June 30, 2000 was $3,556
compared to net cash provided by operations of $12,116 for the comparable period
of 1999. The decrease in net cash from operating activities of $15,672 was
primarily due to a decrease in operating income at Liggett over the prior year,
an increase in inventories at Liggett and Liggett-Ducat and a gain on the sale
of securities at New Valley offset by a reduction in debt service, resulting
primarily from the Company's repurchase of $150,294 of the BGLS Notes.

         Cash provided by investing activities of $1,646 compares to cash
provided of $110,168 for the periods ended June 30, 2000 and 1999, respectively.
For the six months ended June 30, 2000, the majority of the proceeds were
attributable to the sale or maturity of long-term investments of $29,126. This
was offset primarily by capital expenditures at Liggett and Liggett-Ducat and
the purchase of investment securities. For the six months ended June 30, 1999,
the majority of the proceeds were from the closing of the Philip Morris brand
transaction in May 1999. In the 1999 period, these proceeds were partially
offset by capital expenditures for machinery and equipment at Liggett of $6,972
and equipment and construction costs for the new factory of $30,565 at
Liggett-Ducat. Other payments made principally pertained to broker-dealer
transactions and real estate at New Valley.

         Cash provided by financing activities was $14,966 for the six months
ended June 30, 2000 as compared with cash used of $120,680 for the six months
ended June 30, 1999. Cash was provided primarily by net borrowings under the
revolving credit facilities of $24,312 and an increase in the margin loan
payable of $4,414. Cash provided was offset by net repayments of debt of $3,584
and distributions on common stock of $10,869. Cash was used in the 1999 period
to retire a portion of the BGLS Notes for $142,584. Cash was also used in 1999
to decrease the margin loan at New Valley and for distributions on the Company's




                                      -42-
<PAGE>   44


common stock. Net borrowings under the revolving credit facilities were $11,379,
of which $420 is attributable to Liggett and $10,959 is attributable to
Liggett-Ducat. Proceeds included $4,976 of equipment financing and the effect of
the New Valley recapitalization.

         LIGGETT. Liggett has a $35,000 credit facility under which $17,453 was
outstanding at June 30, 2000. Availability under the credit facility was
approximately $10,861 based on eligible collateral at June 30, 2000. The
facility is collateralized by all inventories and receivables of Liggett.
Borrowings under the facility, whose interest is calculated at a rate equal to
1.0% above First Union's (the indirect parent of Congress Financial Corporation,
the lead lender) prime rate. The facility's interest rate was 10.5% at June 30,
2000. The facility requires Liggett's compliance with certain financial and
other covenants including a restriction on the payment of cash dividends unless
Liggett's borrowing availability under the facility for the 30-day period prior
to the payment of the dividend, and after giving effect to the dividend, is at
least $5,000. In addition, the facility, as amended, imposes requirements with
respect to Liggett's adjusted net worth (not to fall below $8,000 as computed in
accordance with the agreement) and working capital (not to fall below a deficit
of $17,000 as computed in accordance with the agreement). At June 30, 2000,
Liggett was in compliance with all covenants under the facility; Liggett's
adjusted net worth was $18,112 and net working capital was $28,263, as computed
in accordance with the agreement. The facility expires on March 8, 2003 subject
to automatic renewal for an additional year unless a notice of termination is
given by the lender at least 60 days prior to the anniversary date.

         In November 1999, 100 Maple Lane LLC, a new company formed by Liggett
to purchase an industrial facility in Mebane, North Carolina, borrowed $5,040
from the lender under Liggett's credit facility. The loan is payable in 59
monthly installments of $60 including annual interest at 1% above the prime rate
with a final payment of $1,500. Liggett has guaranteed the loan, and a first
mortgage on the Mebane property collateralizes the Maple Lane loan and Liggett's
credit facility. Liggett plans to complete the relocation of its manufacturing
operations to this facility by October 2000.

         In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase. The loan, which is collateralized by the equipment
and guaranteed by BGLS and the Company, is payable in 60 monthly installments of
$56 including annual interest of 7.67% with a final payment of $2,550. In March
2000, Liggett purchased equipment for $1,000 under a capital lease which is
payable in 60 monthly installments of $21 with an effective annual interest rate
of 10.14%. In April 2000, Liggett purchased equipment for $1,071 under two
capital leases which are payable in 60 monthly installments of $22 with an
effective interest rate of 10.20%.

         Liggett (and, in certain cases, Brooke Group Holding, the Company's
predecessor and a wholly-owned subsidiary of BGLS) and other United States
cigarette manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke from cigarettes. The Company believes, and has been so advised
by counsel handling the respective cases, that Brooke Group Holding and Liggett
have a number of valid defenses to claims asserted against them. Litigation is
subject to many uncertainties. An unfavorable verdict was returned in the first
phase of the ENGLE smoking and health class action trial pending in Florida.
Recently, the jury awarded $790,000 in punitive damages against Liggett in the
second phase of the trial. Liggett intends to pursue all available post-trial
and appellate remedies. If this verdict is not eventually reversed on appeal, or






                                      -43-
<PAGE>   45


substantially reduced by the court, it could have a material adverse effect on
the Company. It is possible that additional cases could be decided unfavorably
and that there could be further adverse developments in the ENGLE case. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Management cannot predict the
cash requirements related to any future settlements and judgments, including
cash required to bond any appeals, and there is a risk that those requirements
will not be able to be met. In recent years, there have been a number of adverse
regulatory, political and other developments concerning cigarette smoking and
the tobacco industry. These developments generally receive widespread media
attention. Neither the Company nor Liggett is able to evaluate the effect of
these developing matters on pending litigation or the possible commencement of
additional litigation or regulation. (See Note 13 to the Company's Consolidated
Financial Statements.)

         Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against Brooke Group Holding or Liggett or the costs of defending such cases. It
is possible that the Company's consolidated financial position, results of
operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such smoking-related litigation.

         Liggett-Ducat completed construction of a new cigarette factory on the
outskirts of Moscow which became operational in June 1999. The new factory,
which utilizes Western cigarette making technology and has a capacity in excess
of 40 billion units per year, produces American and international blend
cigarettes, as well as traditional Russian cigarettes. Western Realty
Development made a $30,000 participating loan to, and payable out of a 30%
profits interest in, Western Tobacco Investments, which held the 99.9% equity
interest of Brooke (Overseas) in Liggett-Ducat and the new factory. In addition,
Western Tobacco Investments entered into note agreements for equipment purchases
which have a liability of approximately $20,915 at June 30, 2000. The remaining
costs for construction and equipment for the new factory and working capital
requirements were financed by loans and credit facilities from Russian banks.

         On August 4, 2000, Brooke (Overseas) completed the sale of Western
Tobacco Investments to a subsidiary of Gallaher Group Plc. (See Recent
Developments.) In connection with the sale, all of the credit facilities, notes
payable and other obligations of Western Tobacco Investments and Liggett-Ducat
were assumed by the purchaser.

         BGLS. At June 30, 2000, BGLS had outstanding $82,570 principal amount
of the BGLS Notes which mature on January 31, 2001. Of this amount, $50,100 of
the Notes carry deferred interest. On March 2, 1998, BGLS entered into a
standstill agreement with the holders of $97,239 principal amount of its notes,
who were affiliated with Apollo, under which the Apollo holders (and any
transferees) agreed to the deferral of interest payments, commencing with the
interest payment due July 31, 1997 through the interest payment due July 31,
2000. BGLS had a total of $22,708 of deferred interest outstanding as of June
30, 2000. Interest on all of the Notes for the six month period ended July 31,
2000 was paid in cash.

         On August 4, 2000, with the proceeds of the Western Tobacco Investments
sale, BGLS repurchased $24,850 principal amount of its Notes, together with
accrued interest of $11,531, for $36,381. On that date, BGLS called the
remaining Notes for redemption on September 5, 2000. On the redemption date, all
of these Notes will be redeemed for 100% of the principal amount thereof plus
accrued interest. BGLS will use approximately $105,000 of the proceeds of the
sale to retire the Notes.



                                      -44-
<PAGE>   46


         THE COMPANY. After giving effect to the retirement of the BGLS Notes
and the assumption of the Western Tobacco Investments and Liggett-Ducat debt,
the Company has aggregate required principal payments of approximately $10,800
due within the next twelve months. The Company believes that it will continue to
meet its liquidity requirements through 2000. Corporate expenditures (exclusive
of Liggett and New Valley) over the next twelve months for current operations
include dividends on the Company's shares (currently at an annual rate of
approximately $6,300) and corporate expenses. The Company anticipates funding
its expenditures for current operations with the proceeds from the Western
Tobacco Investments sale, public and/or private debt and equity financing,
management fees from subsidiaries and tax sharing and other payments from
Liggett or New Valley. New Valley may acquire or seek to acquire additional
operating businesses through merger, purchase of assets, stock acquisition or
other means, or to make other investments, which may limit its ability to make
such distributions.

MARKET RISK

         Vector is exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity prices. The Company
seeks to minimize these risks through its regular operating and financing
activities and its long-term investment strategy.

         FOREIGN MARKET RISK

         EUROPE. Vector has foreign currency exchange risk relating to its
outstanding obligations under foreign currency denominated construction and
equipment contracts with various European companies where costs are affected by
fluctuations in the United States dollar as compared to certain European
currencies. Management believes that currencies in which it presently has such
exposure are relatively stable.

         RUSSIA. BrookeMil's and Western Realty Development's operations are
conducted in Russia. The Russian Federation continues to experience economic
difficulties following the financial crisis of August 1998. Consequently, the
country's currency continues to devalue, there is continued volatility in the
debt and equity markets, hyperinflation persists, confidence in the banking
sector has yet to be restored and there continues to be a general lack of
liquidity in the economy. In addition, laws and regulations affecting businesses
operating within the Russian Federation continue to evolve.

         The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond Vector's control.
Vector's Russian operations may be significantly affected by these factors for
the foreseeable future.

         DOMESTIC MARKET RISK

         New Valley's market risk management procedures cover all market risk
sensitive financial instruments.



                                      -45-
<PAGE>   47



         Current and proposed underwriting, corporate finance, merchant banking
and other commitments at Ladenburg are subject to due diligence reviews by
Ladenburg's senior management, as well as professionals in the appropriate
business and support units involved. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and maintaining
collateral. Ladenburg monitors its exposure to counterparty risk through the use
of credit exposure information, the monitoring of collateral values and the
establishment of credit limits.

         EQUITY PRICE RISK. Ladenburg maintained inventories of trading
securities at June 30, 2000 with fair values of $13,589 in long positions and
$976 in short positions. Ladenburg performed an entity-wide analysis of its
financial instruments and assessed the related risk and materiality. Based on
this analysis, in the opinion of management, the market risk associated with the
Ladenburg's financial instruments at June 30, 2000 will not have a material
adverse effect on the consolidated financial position or results of operations
of Vector.

         New Valley held investment securities available for sale totaling
$36,756 at June 30, 2000. Approximately 32% of these securities represent an
investment in Nabisco Group Holdings Corp., which is a defendant in numerous
tobacco products-related litigation, claims and proceedings. An adverse outcome
in any of these proceedings could have a significant effect on the value of New
Valley's investment.

         New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Originally,
the statement had been effective for all quarters of fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities", which postponed the adoption of
SFAS No. 133 until fiscal years beginning after June 15, 2000. Vector has not
yet determined the impact that the adoption of SFAS 133 will have on its
earnings or statement of financial position.

         In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 is applicable beginning with
the Company's fourth quarter of 2000. Based on the Company's current analysis,
SAB 101 will not have an impact on the financial results of the Company.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, including any statements that may be contained in
the foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this report and in other filings with
the SEC and in its reports to stockholders, which reflect management's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties and,
in connection with the "safe-harbor" provisions of the Private Securities Reform
Act, the Company has identified under "Risk Factors" in Item 1 of the Company's
Form 10-K for the year ended December 31, 1999 filed with the SEC important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of the Company.




                                      -46-
<PAGE>   48


         Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. The Company does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.




                                      -47-
<PAGE>   49



                                     PART II

                                OTHER INFORMATION

Item 1.       LEGAL PROCEEDINGS

              Reference is made to Note 13, incorporated herein by reference, to
              the Consolidated Financial Statements of Vector Group Ltd. and
              BGLS Inc. included elsewhere in this Report on Form 10-Q which
              contains a general description of certain legal proceedings to
              which Brooke Group Holdings, BGLS, New Valley or their
              subsidiaries are a party and certain related matters. Reference is
              also made to Exhibit 99.1 for additional information regarding the
              pending smoking-related material legal proceedings to which Brooke
              Group Holding, BGLS and/or Liggett are party. A copy of Exhibit
              99.1 will be furnished to security holders of the Company and its
              subsidiaries without charge upon written request to the Company at
              its principal executive offices, 100 S.E. Second St., Miami,
              Florida 33131, Attn. Investor Relations.

Item 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS

              No securities of the Company which were not registered under the
              Securities Act of 1933, as amended, have been issued or sold by
              the Company during the three months ended June 30, 2000.

Item 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

              During the second quarter of 2000, the Company submitted the
              following matters to a vote of stockholders at its Annual Meeting
              of Stockholders held on May 24, 2000. Proxies for the Annual
              Meeting were solicited pursuant to Regulation 14A under the
              Securities Exchange Act of 1934, as amended.

              The matters voted upon at the Annual Meeting were (i) the election
              of four directors, (ii) approval of the Brooke Group Ltd. 1999
              Long-Term Incentive Plan and (iii) approval of an amendment to the
              certificate of incorporation to change the corporate name to
              Vector Group Ltd., and the following is a tabulation of the
              results:

              Total shares of common stock outstanding as of April 17, 2000 (the
              record date) - 21,989,782

              Total shares of common stock voted in person or by proxy -
              20,537,713

                             Election of Directors:
<TABLE>
<CAPTION>

                                                               FOR                    WITHHOLD
                                                               ---                    --------

<S>                                                        <C>                        <C>
                    Robert J. Eide                         20,266,990                 270,723
                    Bennett S. LeBow                       20,266,733                 270,980
                    Jeffrey S. Podell                      20,266,990                 270,723
                    Jean E. Sharpe                         20,266,990                 270,723


</TABLE>


                                      -48-
<PAGE>   50


                           Approval of Incentive Plan:
<TABLE>
<CAPTION>

                                                                                                BROKER
                             FOR                 AGAINST               ABSTAIN                NON-VOTES
                             ---                 -------               -------                ---------
<S>                      <C>                    <C>                     <C>                   <C>
                         13,396,328             1,569,155               64,867                5,507,363

</TABLE>

                            Approval of Name Change:
<TABLE>
<CAPTION>

                                 FOR                         AGAINST                  ABSTAIN
                                 ---                         -------                  -------
<S>                           <C>                            <C>                       <C>
                              20,426,663                     55,760                    55,289
</TABLE>



Item 6.       EXHIBITS AND REPORTS ON FORM 8-K

                    (a)    EXHIBITS

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

               3.2      By-Laws of the Company.

              *10.1     Purchase and Sale Agreement, dated as of June 14,
                        2000, between Gallaher Overseas (Holdings) Ltd. and
                        Brooke (Overseas) Ltd. (incorporated by reference to
                        Exhibit 10.1 in the Company's Form 8-K dated June 14,
                        2000).

              *10.2     Guaranty, dated as of June 14, 2000, by Vector Group
                        Ltd. in favor of Gallaher Overseas (Holdings) Ltd.
                        (incorporated by reference to Exhibit 10.2 in the
                        Company's Form 8-K dated June 14, 2000).

               27.1     Vector Group Ltd.'s Financial Data Schedule (for SEC use
                        only).

               27.2     BGLS Inc.'s Financial Data Schedule (for SEC use only).

               99.1     Material Legal Proceedings.

               99.2     Liggett Group Inc.'s Interim Consolidated Financial
                        Statements for the quarterly periods ended June 30, 2000
                        and 1999.

              *99.3     New Valley Corporation's Interim Consolidated Financial
                        Statements for the quarterly periods ended June 30, 2000
                        and 1999 (incorporated by reference to New Valley's
                        Quarterly Report on Form 10-Q for the quarterly period
                        ended June 30, 2000, Commission File No. 1-2493).

               99.4     Brooke (Overseas) Ltd.'s Interim Consolidated Financial
                        Statements for the quarterly periods ended June 30, 2000
                        and 1999.


----------
*   Incorporated by reference



                                      -49-
<PAGE>   51


         (b) REPORTS ON FORM 8-K

         The Company filed the following Reports on Form 8-K during the second
         quarter of 2000:

                                                                  FINANCIAL
               DATE                      ITEMS                    STATEMENTS
               ----                      -----                    ----------

           April 3, 2000                   7                         None

           May 24, 2000                   5, 7                       None

           June 14, 2000                  5, 7                       None






                                      -50-
<PAGE>   52





                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                         VECTOR GROUP LTD.

                                         (REGISTRANT)

                                         By: /s/ Joselynn D. Van Siclen
                                            -------------------------------
                                         Joselynn D. Van Siclen
                                         Vice President and Chief

                                             Financial Officer

Date:  August 14, 2000

                                         BGLS INC.

                                         (REGISTRANT)

                                         By: /s/ Joselynn D. Van Siclen
                                            -------------------------------
                                         Joselynn D. Van Siclen
                                         Vice President and Chief

                                             Financial Officer

Date:  August 14, 2000





                                      -51-