<PAGE>   1

                                                                    EXHIBIT 99.2





                               LIGGETT GROUP INC.

                        CONSOLIDATED FINANCIAL STATEMENTS


                                 MARCH 31, 2000












<PAGE>   2


                               LIGGETT GROUP INC.

                                    Index to
                              Financial Statements



<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                        <C>

Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 ..............      2

Consolidated Statements of Operations for the three months ended March 31, 2000
     and 1999 .......................................................................      4

Consolidated Statement of Stockholder's Equity for the three months
     ended March 31, 2000 ...........................................................      5

Consolidated Statements of Cash Flows for the three months ended March 31, 2000
     and 1999 .......................................................................      6

Notes to Consolidated Financial Statements ..........................................      7


</TABLE>







<PAGE>   3



                               LIGGETT GROUP INC.

                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                              March 31,    December 31,
                                                                                2000          1999
                                                                              --------     ------------
<S>                                                                           <C>           <C>
                                     ASSETS

Current assets:
     Cash and cash equivalents .........................................      $    906      $  2,959

     Accounts receivable:
         Trade, less allowances of $1,100 and $1,002, respectively .....         8,959         7,228
         Other .........................................................         4,029         1,568

     Inventories .......................................................        37,818        27,119

     Other current assets ..............................................        39,905        42,656
                                                                              --------      --------

              Total current assets .....................................        91,617        81,530

Property, plant and equipment, at cost, less accumulated
    depreciation of $34,814 and $33,924, respectively ..................        33,205        29,668

Other assets ...........................................................         1,673         1,702
                                                                              --------      --------

              Total assets .............................................      $126,495      $112,900
                                                                              ========      ========




</TABLE>














                   The accompanying notes are an integral part
                         of these financial statements.





                                       2
<PAGE>   4


                               LIGGETT GROUP INC.

                     CONSOLIDATED BALANCE SHEETS (Continued)
                             (Dollars in thousands)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                         March 31,     December 31,
                                                                                           2000            1999
                                                                                        ---------      ------------
<S>                                                                                     <C>             <C>
                      LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
     Current maturities of long-term debt ........................................      $   1,246       $   1,074
     Accounts payable, principally trade .........................................          7,150           2,575
     Accrued expenses:
        Promotional ..............................................................         23,247          22,473
        Other taxes, principally excise taxes ....................................          6,168             225
        Estimated allowance for sales returns ....................................          4,190           4,190
        Settlement accruals ......................................................          2,042           2,005
        Other ....................................................................         15,792          16,675
                                                                                        ---------       ---------
             Total current liabilities ...........................................         59,835          49,217

Long-term debt, less current maturities ..........................................         31,896           8,198

Non-current employee benefits ....................................................         11,960          11,966

Other long-term liabilities ......................................................          9,812           9,738

Commitments and contingencies (Note 8)

Stockholder's equity:
     Redeemable preferred stock (par value $1.00 per share; authorized 1,000
       shares; no shares issued and outstanding)
     Common stock (par value $0.10 per share; authorized 2,000 shares; issued
       and outstanding 1,000 shares)
       and contributed capital ...................................................         60,106          60,002
     Accumulated deficit .........................................................        (47,114)        (26,221)
                                                                                        ---------       ---------

             Total stockholder's equity ..........................................         12,992          33,781
                                                                                        ---------       ---------

             Total liabilities and stockholder's equity ..........................      $ 126,495       $ 112,900
                                                                                        =========       =========


</TABLE>



                   The accompanying notes are an integral part
                         of these financial statements.


                                       3
<PAGE>   5



                               LIGGETT GROUP INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             (Dollars in thousands)
                                   (Unaudited)




<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                       March 31,
                                                                               -------------------------
                                                                                 2000              1999
                                                                               ---------       ---------
<S>                                                                            <C>             <C>
Net sales*  .............................................................      $ 106,902       $  86,047

Cost of sales* ..........................................................         33,643          23,165
                                                                               ---------       ---------

          Gross profit ..................................................         73,259          62,882

Selling, general and administrative expenses excluding
   non-cash stock-based expense .........................................         64,133          42,210
Settlement charges ......................................................             37             115
Non-cash stock-based expense ............................................                            488
                                                                               ---------       ---------
          Operating income ..............................................          9,089          20,069

Other income (expense):
     Interest expense ...................................................           (606)           (707)
     Other, net .........................................................            (42)            (47)
                                                                               ---------       ---------

          Income before income taxes ....................................          8,441          19,315

Income tax provision ....................................................          3,334           7,632
                                                                               ---------       ---------

          Net income ....................................................      $   5,107       $  11,683
                                                                               =========       =========

</TABLE>



*Net sales and cost of sales include federal excise taxes of $20,042 and
 $12,553, respectively.








                   The accompanying notes are an integral part
                         of these financial statements.




                                       4
<PAGE>   6



                               LIGGETT GROUP INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
                             (Dollars in thousands)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                              Common
                                                             Stock and                       Total
                                                            Contributed    Accumulated   Stockholder's
                                                              Capital        Deficit        Equity
                                                            -----------    -----------   -------------
<S>                                                           <C>           <C>            <C>
Balance at December 31, 1999 ...........................      $ 60,002      $(26,221)      $ 33,781

   Net income ..........................................                       5,107          5,107
   Amortization of deferred compensation ...............           104                          104
   Distributions and other payments ....................                     (26,000)       (26,000)
                                                              --------      --------       --------

Balance at March 31, 2000  .............................      $ 60,106      $(47,114)      $ 12,992
                                                              ========      ========       ========

</TABLE>












                   The accompanying notes are an integral part
                         of these financial statements.




                                       5
<PAGE>   7


                               LIGGETT GROUP INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                           March 31,
                                                                                    -------------------------
                                                                                       2000            1999
                                                                                    ---------       ---------
<S>                                                                                 <C>             <C>
Net cash provided by operating activities ....................................      $   4,590       $  14,346
                                                                                    ---------       ---------

Cash flows from investing activities:
    Capital expenditures .....................................................         (4,514)         (6,356)
                                                                                    ---------       ---------
            Net cash used in investing activities ............................         (4,514)         (6,356)
                                                                                    ---------       ---------

Cash flows from financing activities:
    Repayments of notes payable ..............................................           (295)            (25)
    Issuance of equipment loan payable .......................................          1,000           4,500
    Borrowings under revolving credit facility ...............................        103,442          75,574
    Repayments under revolving credit facility ...............................        (80,276)        (71,319)
    Distributions and other payments .........................................        (26,000)        (16,700)
    Decrease in cash overdraft ...............................................                            (20)
                                                                                    ---------       ---------
            Net cash used in financing activities ............................         (2,129)         (7,990)
                                                                                    ---------       ---------


Net increase in cash and cash equivalents ....................................         (2,053)
Cash and cash equivalents:
    Beginning of period ......................................................          2,959
                                                                                    ---------       ---------
    End of period ............................................................      $     906       $
                                                                                    =========       =========

</TABLE>





                   The accompanying notes are an integral part
                         of these financial statements.





                                       6
<PAGE>   8


                               LIGGETT GROUP INC.

                   Notes to Consolidated Financial Statements
                             (Dollars in thousands)
                                   (Unaudited)


1.       THE COMPANY

Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned subsidiary of
Brooke Group Holding Inc. ("Brooke Group Holding"). Brooke Group Holding is a
wholly-owned subsidiary of BGLS Inc. ("BGLS"), all of whose capital stock is
owned by Brooke Group Ltd. ("Brooke"). Liggett is engaged primarily in the
manufacture and sale of cigarettes, principally in the United States. Certain
management and administrative functions are performed by affiliates. (See Note
8.)

The interim consolidated financial statements included herein are unaudited and,
in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1999 balance
sheet has been derived from audited financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included as Exhibit 99.2 in Brooke'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 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.

All of the Company's common shares (1,000 shares, issued and outstanding for all
periods presented herein) are owned by Brooke Group Holding. Accordingly,
earnings and dividends per share data are not presented in these consolidated
financial statements.


2.       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, the 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 allowance for doubtful accounts, sales returns and allowances, actuarial
assumptions of pension plans and litigation and defense costs. Actual results
could differ from those estimates.


3.       PHILIP MORRIS BRAND TRANSACTION

In November 1998, Liggett and Brooke granted Philip Morris Incorporated options
to purchase interests in Trademarks LLC which holds three cigarette brands, L&M,
CHESTERFIELD and LARK, formerly held by Liggett's subsidiary, 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.




                                       7
<PAGE>   9

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.

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.

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 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.       PRO FORMA EFFECTS OF BRAND TRANSACTION

The following table presents unaudited pro forma results of operations as if the
Philip Morris brand transaction had occurred immediately prior to January 1,
1999. These pro forma results are presented 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.

                                                  For the three months ended
                                                         March 31, 1999
                                                  --------------------------
           Revenues                                        $73,355
                                                           =======
           Operating income                                $12,059
                                                           =======
           Income from continuing operations               $11,305
                                                           =======
           Net income                                      $ 6,833
                                                           =======



                                      8
<PAGE>   10

5.       INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                             March 31,      December 31,
                                                                                2000            1999
                                                                             ---------      ------------
<S>                                                                          <C>             <C>
           Leaf tobacco ...............................................      $   8,018       $   6,871
           Other raw materials ........................................          1,857           1,841
           Work-in-process ............................................          2,514           2,583
           Finished goods .............................................         28,186          17,461
           Replacement parts and supplies .............................          2,228           2,179
                                                                             ---------       ---------

           Inventories at current cost ................................         42,803          30,935

           LIFO adjustment ............................................         (4,985)         (3,816)
                                                                             ---------       ---------

           Inventories at LIFO cost ...................................      $  37,818       $  27,119
                                                                             =========       =========
</TABLE>

The Company has a leaf inventory management program whereby, among other things,
it is committed to purchase certain quantities of leaf tobacco. The purchase
commitments are for quantities not in excess of anticipated requirements and are
at prices, including carrying costs, established at the date of the commitment.
Liggett had leaf tobacco purchase commitments of approximately $2,162 at March
31, 2000.


6.       PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                             March 31,      December 31,
                                                                                2000            1999
                                                                             ---------      ------------
<S>                                                                          <C>             <C>
           Land and improvements ......................................      $     442       $     415
           Buildings ..................................................          5,852           5,852
           Construction-in-progress ...................................         14,391          10,342
           Machinery and equipment ....................................         47,334          46,983
                                                                             ---------       ---------

           Property, plant and equipment ..............................         68,019          63,592

           Less accumulated depreciation ..............................        (34,814)        (33,924)
                                                                             ---------       ---------

           Property, plant and equipment, net .........................      $  33,205       $  29,668
                                                                             =========       =========

</TABLE>

As of March 31, 2000, the company has capitalized into construction-in-progress
approximately $2,791 of the contracted $4,924 construction costs related to the
new manufacturing facility.



                                       9
<PAGE>   11



7.       LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                           March 31,     December 31,
                                                                             2000           1999
                                                                           --------      ------------
<S>                                                                        <C>            <C>
           Borrowings outstanding under revolving credit
              facility ..............................................      $ 23,166       $     --
           Other ....................................................         9,976          9,272
                                                                           --------       --------
                                                                             33,142          9,272

           Current portion ..........................................        (1,246)        (1,074)
                                                                           --------       --------

           Amount due after one year ................................      $ 31,896       $  8,198
                                                                           ========       ========
</TABLE>

REVOLVING CREDIT FACILITY:

Liggett has a $35,000 revolving credit facility under which $23,166 was
outstanding at March 31, 2000. The facility is collateralized by all inventories
and receivables of the Company. Availability under the facility was
approximately $6,974 based upon eligible collateral at March 31, 2000.
Borrowings under the facility bear interest equal to 1.0% above Philadelphia
National Bank's (the indirect parent of Congress Financial Corporation, the lead
lender) prime rate. At March 31, 2000, Liggett's interest rate was 9.75%. 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 March 31, 2000,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $17,977 and net working capital was $36,795 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 with a final payment of $1,500. Interest is charged at the
same rate as applicable to the facility. Liggett has guaranteed the loan, and a
first mortgage on the Mebane property collateralizes the Maple Lane loan and
Liggett's credit facility.

EQUIPMENT LOANS:

In January 1999, Liggett purchased equipment for $5,750 and borrowed $4,500 to
fund the purchase from a third party. The loan, which is collateralized by the
equipment and guaranteed by BGLS and Brooke, 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 through a capital lease
arrangement payable in 60 monthly installments of $21 with an effective annual
interest rate of 10.14%.




                                       10
<PAGE>   12



8.       COMMITMENTS AND 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 parent 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
three months ended March 31, 2000, Liggett incurred counsel fees and costs
totaling approximately $1,969, compared to $1,568 for the comparable prior year
period.

INDIVIDUAL ACTIONS. As of March 31, 2000, there were approximately 310 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, 39 in Massachusetts, 17 in Texas and 24 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.

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.




                                       11
<PAGE>   13

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 March 31, 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 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, courts in Louisiana (Liggett is not a defendant in this
proceeding) and Maryland have 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-






                                       12
<PAGE>   14

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. The punitive damages
portion Phase II is scheduled to begin May 15, 2000 and is expected to last
several weeks. 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. The
defendants' motion to order the trial court to assess punitive damages on an
individual basis was denied and the petition for review was also denied, without
prejudice to raise the same issue on subsequent appeals.

It is unclear how the trial court's order will be implemented. The order
provides that the punitive damage amount, if any, 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 would be required to pay the punitive damage award, if any,
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, $100 million plus
twice the statutory rate of interest, 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 its
application. 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) and Maryland
(RICHARDSON). A number of class certification denials are on appeal.

Approximately 30 purported state class action complaints have been filed on
behalf of various consumers of cigarette products against the tobacco
manufacturers. The complaints allege that cigarette manufacturers engaged in
illegal and unethical activities since the 1940's, many conspiratorial in
nature, designed to increase profits at the financial and physical expense of
customers. These alleged activities include knowingly increasing the
addictiveness of cigarettes through crop manipulation; downplaying the
detrimental health effects of cigarette smoking; conspiring to refrain from
researching and introducing "safer" cigarettes; creating false and misleading
scientific research design to combat the growing scientific consensus about the
lethal health effects associated with cigarettes; aggressively marketing
products to children and minors in an effort to addict them to cigarettes at a
young age; and systematically covering up activities to avoid regulation of
products by governmental agencies. The purported class actions are brought
pursuant to various state laws.

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.

GOVERNMENTAL ACTIONS. As of March 31, 2000, there were approximately 20
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.




                                       13
<PAGE>   15
THIRD-PARTY PAYOR ACTIONS. As of March 31, 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. The United States Supreme Court recently 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 healthcare 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. Oral argument on the motion is
currently scheduled for June 2000.

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, as of March 31, 2000, in 47 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.






                                       14
<PAGE>   16

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, 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





                                       15
<PAGE>   17

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 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 Brooke'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 in federal court in New York (September), asbestos companies in
Mississippi (September) and New York (July) and certain unions in New York
(November). Also, one Individual Action, ANDERSON, is currently being tried in
State Court in New York and two other Individual Actions are scheduled to be
tried later this year. Trial dates, however, are subject to change.

Management is not able to predict the outcome of the litigation pending against
Liggett. Litigation is subject to many uncertainties. An unfavorable verdict has
been returned in the first phase of the ENGLE smoking and health class action
trial pending in Florida and the jury will now consider the award of lump sum
punitive damages, if any, for the entire class. 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, if necessary, 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 of
loss that could result from an unfavorable outcome of many of the cases pending
against Liggett, because the complaints filed in these cases rarely detail
alleged damages. Typically, the claims set forth in an individual's complaint
against the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage claims are
typically stated as being for the minimum necessary to invoke the jurisdiction
of the court.

It is possible that Liggett'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.

Management is unaware of any material environmental conditions affecting its
existing facilities. 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





                                       16
<PAGE>   18

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 Liggett
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 Liggett'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 Liggett.

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




                                       17
<PAGE>   19

$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 includes 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 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.


8.       RELATED PARTY TRANSACTIONS

Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with Brooke and
certain other entities pursuant to which Liggett has paid taxes to Brooke as if
it were filing a separate company tax return except that the agreement
effectively limits the ability of Liggett to carry back losses for refunds.
Liggett is entitled to recoup overpayments in a given year out of future
payments due under the agreement.

Liggett is a party to an agreement dated February 26, 1991, as amended October
1, 1995, with Brooke to provide various management and administrative services
to the Company in consideration for an annual management fee of $900 paid in
monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments.

In addition, Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee paid in monthly installments. Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to $960
in the first three months of 2000 and $915 in the first three months of 1999.

The Company leases equipment from a subsidiary of BGLS for $50 per month.









                                       18