<PAGE>   1

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

                       Securities And Exchange Commission
                             Washington, D.C. 20549

                                    FORM 10-Q

             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                For The Quarterly Period Ended September 30, 2000


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


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

                             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 Registrant (1) has 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 Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

         Yes [X] No [ ]

         At November 13, 2000, Vector Group Ltd. had 25,667,082 shares of common
stock outstanding.

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

<PAGE>   2

                                VECTOR GROUP LTD.

                                    FORM 10-Q

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>     <C>                             <C>                                                                   <C>
PART I. FINANCIAL INFORMATION

Item 1. VECTOR GROUP LTD. CONSOLIDATED FINANCIAL STATEMENTS:

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

   Vector Group Ltd. Consolidated Statements of Operations for the three and nine months
         ended September 30, 2000 and September 30, 1999...............................................        3

   Vector Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the nine
         months ended September 30, 2000...............................................................        4

   Vector Group Ltd. Consolidated Statements of Cash Flows for the nine months ended
         September 30, 2000 and September 30, 1999.....................................................        5

   Notes to Consolidated Financial Statements..........................................................        6

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................       31

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................       42

PART II.  OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS..............................................................................       43

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................       43

Item 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................       43

SIGNATURES.............................................................................................       45
</TABLE>

                                      -1-
<PAGE>   3
                       VECTOR GROUP LTD. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   September 30,     December 31,
                                                                                       2000              1999
                                                                                   -------------     ------------
<S>                                                                                 <C>               <C>
ASSETS:

Current assets:
  Cash and cash equivalents ................................................        $ 153,294         $  20,123
  Receivables from clearing brokers ........................................           20,185            10,903
  Investment securities available for sale .................................           45,465            48,722
  Trading securities owned .................................................           12,599            15,707
  Accounts receivable - trade ..............................................            9,049            19,658
  Other receivables ........................................................            2,562             1,290
  Inventories ..............................................................           30,841            45,205
  Restricted assets ........................................................              988             3,239
  Deferred income taxes ....................................................            3,536            21,374
  Other current assets .....................................................            3,618             2,511
                                                                                    ---------         ---------
    Total current assets ...................................................          282,137           188,732

Property, plant and equipment, net .........................................           47,562           154,260
Investment in real estate, net .............................................           55,342            53,353
Long-term investments, net .................................................            6,506             8,731
Investment in joint venture ................................................           35,625            38,378
Restricted assets ..........................................................            4,017             5,195
Deferred income taxes ......................................................            6,933            45,631
Other assets ...............................................................            5,301            10,168
                                                                                    ---------         ---------
    Total assets ...........................................................        $ 443,900         $ 504,448
                                                                                    =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):

Current liabilities:
  Current portion of notes payable and long-term debt ......................        $  10,469         $  41,547
  Margin loan payable ......................................................            6,195               983
  Accounts payable .........................................................            8,063            36,456
  Securities sold, not yet purchased .......................................            4,913             7,625
  Accrued promotional expenses .............................................           23,314            22,473
  Income and accrued taxes payable .........................................           40,627            42,408
  Deferred income taxes ....................................................            2,603             2,274
  Prepetition claims and restructuring accruals ............................           11,915            12,279
  Other accrued liabilities ................................................           41,783            60,609
                                                                                    ---------         ---------
    Total current liabilities ..............................................          149,882           226,654

Notes payable, long-term debt and other obligations,
  less current portion .....................................................           38,982           148,349

Noncurrent employee benefits ...............................................           12,667            23,264
Deferred income taxes ......................................................          125,964           117,285
Other liabilities ..........................................................           47,133            76,628
Minority interests .........................................................           60,474            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 31,791,728 and 29,213,917 shares, outstanding 25,667,082 and
    23,089,271 shares ......................................................            2,567             2,199
  Additional paid-in capital ...............................................          198,381           196,695
  Deficit ..................................................................         (163,378)         (302,155)
  Accumulated other comprehensive income ...................................            2,444             1,379
  Other ....................................................................           (3,743)           (3,743)
  Less:  6,124,646 shares of common stock in treasury, at cost .............          (27,473)          (27,473)
                                                                                    ---------         ---------
      Total stockholders' equity (deficit) .................................            8,798          (133,098)
                                                                                    ---------         ---------

      Total liabilities and stockholders' equity (deficit) .................        $ 443,900         $ 504,448
                                                                                    =========         =========
</TABLE>

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

                                      -2-
<PAGE>   4

                       VECTOR GROUP LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                    Three Months Ended                  Nine Months Ended
                                                              ------------------------------      ------------------------------
                                                                Sept. 30,         Sept. 30,         Sept. 30,        Sept. 30,
                                                                  2000              1999              2000              1999
                                                              ------------      ------------      ------------      ------------
<S>                                                           <C>               <C>               <C>               <C>
Revenues:
  Tobacco* ..............................................     $    167,123      $    135,932      $    501,915      $    353,594
  Broker-dealer transactions ............................           13,009            12,711            61,605            18,587
  Real estate leasing ...................................              778             1,576             2,369             2,330
                                                              ------------      ------------      ------------      ------------
    Total revenues ......................................          180,910           150,219           565,889           374,511

Expenses:
  Cost of goods sold* ...................................           58,862            47,473           213,004           128,998
  Operating, selling, administrative and
    general expenses ....................................          114,696            83,384           325,610           190,395
                                                              ------------      ------------      ------------      ------------
    Operating income ....................................            7,352            19,362            27,275            55,118

Other income (expenses):
  Interest and dividend income ..........................            3,833               507             7,015             1,239
  Interest expense ......................................           (6,073)          (16,114)          (29,643)          (43,200)
  Equity in loss of affiliate ...........................           (1,969)             (908)           (4,882)          (10,106)
  Recognition of deferred gain on sale of assets ........               --                --                --             7,050
  Foreign currency gain .................................              550                --             2,085                --
  Income from joint venture .............................           52,427             1,740            52,580               950
  Gain on sale of investments, net ......................              108               151             6,299               478
  Gain on sale of assets ................................          193,779             3,844           193,929             7,969
  Gain on brand transaction .............................               --              (189)               --           294,098
  Other, net ............................................            4,644              (427)            5,755             2,494
                                                              ------------      ------------      ------------      ------------

Income from continuing operations before provision
    for income taxes and minority interests .............          254,651             7,966           260,413           316,090
  Provision for income taxes ............................           76,539             2,782            78,853            86,156
  Minority interests ....................................          (19,423)            1,046           (19,279)             (336)
                                                              ------------      ------------      ------------      ------------

Income from continuing operations .......................          158,689             6,230           162,281           229,598

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

Loss on extraordinary items .............................           (2,422)             (354)           (2,652)           (1,410)
                                                              ------------      ------------      ------------      ------------

Net income ..............................................     $    156,267      $      5,876      $    159,629      $    229,437
                                                              ============      ============      ============      ============

Per basic common share:

  Income from continuing operations .....................     $       6.63      $       0.27      $       6.94      $       9.94
                                                              ============      ============      ============      ============
  Gain from discontinued operations .....................               --                --                --      $       0.05
                                                                                                                    ============
  Loss from extraordinary items .........................     $      (0.10)     $      (0.02)     $      (0.11)     $      (0.06)
                                                              ============      ============      ============      ============
  Net income applicable to common shares ................     $       6.53      $       0.25      $       6.83      $       9.93
                                                              ============      ============      ============      ============

Basic weighted average common shares outstanding ........       23,939,989        23,090,462        23,372,844        23,090,462
                                                              ============      ============      ============      ============

Per diluted common share:

  Income from continuing operations .....................     $       5.58      $       0.22      $       5.82      $       7.81
                                                              ============      ============      ============      ============
  Gain from discontinued operations .....................               --                --                --      $       0.04
                                                                                                                    ============
  Loss from extraordinary items .........................     $      (0.09)     $      (0.01)     $      (0.09)     $      (0.05)
                                                              ============      ============      ============      ============
  Net income applicable to common shares ................     $       5.49      $       0.21      $       5.73      $       7.80
                                                              ============      ============      ============      ============

Diluted weighted average common shares outstanding ......       28,445,916        27,971,803        27,879,233        29,395,148
                                                              ============      ============      ============      ============
</TABLE>

------------------
*    Tobacco revenues and Cost of goods sold include excise taxes of
     $30,923, $17,374, $88,084 and $46,129, respectively.

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

                                      -3-
<PAGE>   5

                       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 .........................         --          --          --     159,629           --        --          --      159,629
Total other comprehensive income
  related to unrealized gains
  on investment securities .........         --          --          --          --           --        --       1,065        1,065
                                                                                                                          ---------
Total comprehensive income .........         --          --          --          --           --        --          --      160,694
                                                                                                                          ---------

Exercise of options and
  warrants .........................  2,455,206         246          --          --           --        --          --          246
Effect of stock
  dividend .........................  1,222,094         122      20,730     (20,852)          --        --          --           --
Distributions on
  common stock .....................         --          --     (20,249)         --           --        --          --      (20,249)
Amortization of deferred
  compensation .....................         --          --       1,205          --           --        --          --        1,205
                                     ----------  ----------  ----------  ----------   ----------  --------     -------    ---------

Balance, September 30, 2000 ........ 25,667,082  $    2,567  $  198,381  $ (163,378)  $  (27,473) $ (3,743)    $ 2,444    $   8,798
                                     ==========  ==========  ==========  ==========   ==========  ========     =======    =========
</TABLE>

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

                                      -4-
<PAGE>   6

                       VECTOR GROUP LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                 ---------------------------
                                                                 Sept. 30,         Sept. 30,
                                                                    2000              1999
                                                                 ---------         ---------
<S>                                                              <C>               <C>
Net cash (used in) provided by operating activities ........     $ (11,042)        $  30,750
                                                                 ---------         ---------
Cash flows from investing activities:
  Proceeds from sale of businesses and assets, net .........       327,087               932
  Proceeds from brand transaction ..........................            --           145,000
  Sale or maturity of investment securities ................        35,561             3,234
  Purchase of investment securities ........................       (24,059)           (6,737)
  Purchase of long-term investments ........................        (2,358)           (2,902)
  Proceeds from sale or purchase of real estate, net .......        (2,668)           47,550
  Decrease in restricted assets ............................         3,477                --
  Payment of prepetition claims ............................          (363)              (67)
  Investment in joint venture ..............................        (1,916)               --
  Repurchase by New Valley of common shares ................          (954)               --
  Capital expenditures .....................................       (26,636)          (44,372)
                                                                 ---------         ---------
Net cash provided by investing activities ..................       307,171           142,638
                                                                 ---------         ---------
Cash flows from financing activities:
  Proceeds from debt .......................................        29,133             4,976
  Repayments of debt .......................................      (127,315)         (187,582)
  Borrowings under revolvers ...............................       305,775           262,084
  Repayments on revolvers ..................................      (287,066)         (247,196)
  Purchase of preferred stock in subsidiary ................            --            (1,509)
  Effect of New Valley recapitalization ....................            --             9,055
  Increase (decrease) in margin loan payable ...............         5,212            (5,046)
  Increase in cash overdraft ...............................            --                95
  Repayment of participating loan and related amounts ......       (68,338)               --
  Distributions on common stock ............................       (20,249)           (8,446)
                                                                 ---------         ---------
Net cash used in financing activities ......................      (162,848)         (173,569)
                                                                 ---------         ---------
Effect of exchange rate changes on cash and
  cash equivalents .........................................          (110)             (901)
Net increase (decrease) in cash and cash equivalents .......       133,171            (1,082)
Cash and cash equivalents, beginning of period .............        20,123             7,396
                                                                 ---------         ---------
Cash and cash equivalents, end of period ...................     $ 153,294         $   6,314
                                                                 =========         =========
Supplemental non-cash investing and financing activities:

Issuance of stock dividends ................................        20,852            25,646
</TABLE>

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

                                      -5-
<PAGE>   7

                                VECTOR GROUP LTD.
                   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 accounts of BGLS Inc. ("BGLS"),
           Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("Brooke
           (Overseas)"), through July 31, 2000 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. and in the real estate
           development business in Russia.

           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 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. These consolidated financial statements should be read in
           conjunction with the consolidated financial statements and the notes
           thereto included in the Company's 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.

                                      -6-
<PAGE>   8

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      (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 result of the difference
           in the book and tax bases of the Company's investment in
           Liggett-Ducat.

      (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 and September 28, 2000. In connection with each
           of the stock dividends, the Company

                                      -7-
<PAGE>   9

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

           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 dividends had occurred on January 1, 1999.

      (g)  Comprehensive Income:
           --------------------

           Comprehensive income is a component of stockholders' equity and
           includes the Company's net income and other comprehensive income
           which 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 comprehensive income was $160,694 for the nine months ended
           September 30, 2000 and $201,384 for the nine months ended
           September 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 $197,098. New Valley received $57,208 in cash proceeds
      from the sale and Apollo received $68,338 in cash proceeds from the sale.
      These amounts are subject to  revision based on final closing expenses and
      adjustments. The Company recorded a gain of $161,000 (including the
      Company's share of New Valley's gain), net of income taxes and minority
      interests, 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 September 5,
      2000, BGLS redeemed the remaining Notes for 100% of the principal amount
      thereof plus accrued interest. BGLS used a total amount of $106,821 of the
      proceeds of the sale to retire the Notes.

      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 BrookeMil Ltd. ("BrookeMil"), a
      wholly-owned subsidiary of New Valley.

                                      -8-
<PAGE>   10

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


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.

      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.

                                      -9-
<PAGE>   11

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

      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 November 13, 2000, New Valley had repurchased 344,400
      shares for approximately $1,354. At September 30, 2000, the Company owned
      56.1% of New Valley's Common Shares.

      BROOKEMIL LTD. In connection with the sale by Brooke (Overseas) of the
      common shares of 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 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.

                                      -10-
<PAGE>   12

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

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 $41,916 had been funded,
      $41,266 was returned in connection with the sale of Western Tobacco
      Investments and $650 was outstanding as of September 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 $21,916 had been funded,
      $21,266 was returned in connection with the sale of Western Tobacco
      Investments and $650 was outstanding as of September 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 September 30, 2000 and December 31,
      1999 and for the three and nine month periods ended September 30, 2000 and
      September 30, 1999 for Western Realty Development follows:

<TABLE>
<CAPTION>
                                             September 30, 2000         December 31, 1999
                                             ------------------         -----------------
      <S>                                          <C>                      <C>
      Current assets.......................        $  3,873                 $  3,557
      Participating loan receivable........               -                   37,849
      Real estate, net.....................          76,763                   77,988
      Furniture and fixtures, net..........             181                      249
      Other noncurrent assets..............             186                      320
      Goodwill, net........................             462                      722
      Notes payable - current..............           7,233                    6,445
      Other current liabilities............           5,121                    7,067
      Notes payable - long-term............           2,682                    8,211
      Other long-term liabilities..........             799                      752
      Members' equity......................          65,630                   98,210
</TABLE>


                                      -11-
<PAGE>   13

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                              Three Months      Three Months      Nine Months         Feb. 20, 1998
                                  Ended            Ended             Ended         (date of inception)
                             Sept. 30, 2000    Sept. 30, 1999    Sept. 30, 2000     to Sept. 30, 1999
                             --------------    --------------    --------------     -----------------
<S>                              <C>              <C>               <C>                  <C>
Revenues...............          $  2,174         $  2,194          $  7,558             $  8,072
Costs and expenses.....             2,197            3,551             6,655               10,787
Other income...........            85,001            4,218            87,877                4,479
Net income ............            84,978            2,861            88,780                1,764
</TABLE>

      Western Realty Development made a $30,000 participating loan to Western
      Tobacco Investments, which held 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 $3,460 through August 4, 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, together with the 15% annual rate of return
      thereon, 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 LLC ("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 September 30, 2000. Western Realty Repin has three
      classes of equity: Class A interests, of which $18,750 were outstanding at
      September 30, 2000 and are owned by Apollo; Class B interests, of which
      $6,250 were outstanding at September 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
      September 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.

      Through September 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 September 30, 2000. The loan bears no fixed

                                      -12-
<PAGE>   14

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

      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 September 30, 2000, BrookeMil had invested $34,669 in the Kremlin
      sites and held $1,304 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 LLC 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 $35,973 in the Kremlin sites was less than Apollo's
      preference of $37,482 in Western Realty Repin at September 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, the sale of Western Tobacco
      Investments, 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.

                                      -13-
<PAGE>   15

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                 Nine Months             Nine Months
                                                    Ended                    Ended
                                              September 30, 2000      September 30, 1999
                                              ------------------      ------------------
<S>                                             <C>                      <C>
Revenues..................................      $     458,626            $     324,242
                                                =============            =============

Operating income..........................      $      25,278            $      34,529
                                                =============            =============

Income from continuing operations before
  taxes and minority interest.............      $      33,045            $      37,691
                                                =============            =============

Income from continuing operations.........      $      18,213            $      13,853
                                                =============            =============

Income from continuing operations
  per common share:
    Basic.................................      $        0.78            $        0.60
                                                =============            =============
    Diluted...............................      $        0.65            $        0.47
                                                =============            =============
</TABLE>

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 interests. The Company had realized gains on sales
      of investment securities available for sale of $108 and $6,299 for the
      three and nine months ended September 30, 2000.

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

<TABLE>
<CAPTION>
                                                  Gross         Gross
                                               Unrealized     Unrealized       Fair
                                     Cost         Gain           Loss         Value
                                   -------     ----------     ----------     -------
<S>                                <C>           <C>           <C>           <C>
Marketable equity
  securities ...............       $34,973       $ 4,301       $ 3,897       $35,377
Marketable debt securities..         6,100           250            --         6,350
Marketable warrants ........            --         3,738            --         3,738
                                   -------       -------       -------       -------
Investment securities ......       $41,073       $ 8,289       $ 3,897       $45,465
                                   =======       =======       =======       =======
</TABLE>

                                      -14-
<PAGE>   16

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)

8.    INVENTORIES

      Inventories consist of:

                                                 September 30,    December 31,
                                                     2000             1999
                                                 -------------    ------------

      Leaf tobacco ............................    $  7,778         $ 13,599
      Other raw materials .....................       1,947            6,423
      Work-in-process .........................       3,721            3,542
      Finished goods ..........................      20,829           20,662
      Replacement parts and supplies ..........       1,958            4,795
                                                   --------         --------
      Inventories at current cost .............      36,233           49,021
      LIFO adjustments ........................      (5,392)          (3,816)
                                                   --------         --------
                                                   $ 30,841         $ 45,205
                                                   ========         ========

      At September 30, 2000, the Company had leaf tobacco purchase commitments
      of approximately $1,062.

9.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of:

                                                  September 30,     December 31,
                                                      2000               1999
                                                  -------------     ------------

      Land and improvements ..................     $   1,646          $     415
      Buildings ..............................        14,649             51,773
      Machinery and equipment ................        70,175            129,693
      Construction-in-progress ...............         1,576             14,605
                                                   ---------          ---------
                                                      88,046            196,486
      Less accumulated depreciation ..........       (40,484)           (42,226)
                                                   ---------          ---------
                                                   $  47,562          $ 154,260
                                                   =========          =========

10.   LONG-TERM INVESTMENTS

      At September 30, 2000, long-term investments consisted primarily of
      investments in limited partnerships of $4,133. The Company believes the
      fair value of the limited partnerships exceeds their carrying amount by
      approximately $5,736 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.

                                      -15-
<PAGE>   17

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      Also included in long-term investments are investments in various
      Internet-related businesses which are carried at $2,373 at September 30,
      2000. The Company accounts for its investment in one of the internet
      companies 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>
                                                                September 30,    December 31,
                                                                    2000            1999
                                                                -------------    ------------
      <S>                                                        <C>              <C>
      BGLS:
      15.75% Series B Senior Secured Notes due 2001,
            net of unamortized discount of $5,468 ..............        --        $  82,602
      Deferred interest on 15.75% Series B Senior Secured
            Notes due 2001 .....................................        --           25,435

      New Valley:
      Notes payable ............................................    19,603           19,813

      Liggett:
      Revolving credit facility ................................    18,709               --
      Term loan under credit facility ..........................     4,500            5,040
      Equipment Loans ..........................................     5,936            4,232

      Brooke (Overseas):
      Foreign credit facilities ................................        --           29,470
      Notes payable ............................................        --           23,090

      Other ....................................................       703              214
                                                                 ---------        ---------

      Total notes payable, long-term debt
        and other obligations ..................................    49,451          189,896
      Less:
            Current maturities .................................   (10,469)         (41,547)
                                                                 ---------        ---------
      Amount due after one year ................................ $  38,982        $ 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. In connection with the sale of Western Tobacco Investments on
      August 4, 2000, BGLS repurchased a portion of the Notes and redeemed the
      remaining Notes on September 5, 2000. (Refer to Note 2.)

      Revolving Credit Facility - Liggett:
      -----------------------------------

      Liggett has a $35,000 credit facility, under which $18,709 was outstanding
      at September 30, 2000. Availability under the credit facility was
      approximately $8,262 based on eligible collateral at September 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%

                                      -16-
<PAGE>   18

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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 September 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 September 30,
      2000, Liggett was in compliance with all covenants under the credit
      facility; Liggett's adjusted net worth was $14,323 and net working capital
      was $23,630, 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 completed the relocation
      of its manufacturing operations to this facility in 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
      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.

      Notes Payable and Foreign Credit Facilities - Western Tobacco Investments
      -------------------------------------------------------------------------
      and Liggett-Ducat:
      -----------------

      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.   EQUITY

      During September 2000, three new employees were awarded a total of 157,500
      options to purchase shares of common stock at prices ranging from $18.51
      to $18.63, the fair market value on the dates of grant, under the
      Company's 1998 Long-Term Incentive Plan.

                                      -17-
<PAGE>   19

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      During August and September 2000, 2,362,947 warrants, exercisable at $.10
      per share and 215,019 options exercisable at $5.44 per share were
      exercised for cash and the surrender of 107,409 warrants and options.

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 nine months ended September 30, 2000, Liggett incurred
      counsel fees and costs totaling approximately $4,342 compared to $4,210
      for the comparable prior year period.

      INDIVIDUAL ACTIONS. As of September 30, 2000, there were approximately 285
      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, 66 were pending in Florida, 91 in New York, 13 in Massachusetts, 13
      in Texas and 19 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. In addition to these cases, during
      the third quarter of 2000, an action against cigarette manufacturers
      involving hundreds of named individual plaintiffs has been consolidated
      before a single West Virginia state court. Liggett is a defendant in most
      of the cases pending in West Virginia.

      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.

                                      -18-
<PAGE>   20


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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.

      Jury awards in three states have been entered against other companies in
      the tobacco industry. The awards in these individual actions are for both
      compensatory and punitive damages and represent a material amount of
      damages. In each case, both the verdict and damage awards are being
      appealed by the defendants.

      CLASS ACTIONS. As of September 30, 2000, there were approximately 41
      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, 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.

                                      -19-
<PAGE>   21


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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
      damages portion of Phase II against all defendants including $790,000
      against Liggett. The court entered a final order of judgment against the
      defendants on November 6, 2000. The court's final judgment also denied
      various of defendants' post-trial motions, which included a motion for new
      trial and a motion seeking reduction of the punitive damages award.
      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 Security Act. Based
      on the federal question raised in that motion, defendants removed the case
      to federal court in Miami on July 24, 2000. On November 3, 2000, the
      federal court returned the case to the state court on procedural grounds.

      Now that the ENGLE jury has awarded punitive damages and final judgment
      has been entered, it is unclear how the state court's order regarding the
      determination of punitive damages 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. Liggett has filed the $3,450

                                      -20-
<PAGE>   22


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      bond required by the Florida law in order to stay execution of the ENGLE
      judgment. 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. Fourteen California actions have been consolidated
      and the consolidated complaint did not name Liggett or Brooke Group
      Holding as defendants. In Nevada, an amended complaint was filed that did
      not name Liggett or Brooke Group Holding as defendants.

      Liggett and plaintiffs have advised the court, in SIMON V. PHILIP MORRIS
      ET AL., a putative nationwide smokers class action, that Liggett and the
      plaintiffs have 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 September 30, 2000, there were approximately
      26 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 September 30, 2000, there were
      approximately 56 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. Seven 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

                                      -21-
<PAGE>   23


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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 ("MCRA"), the
      Medicare Secondary Payer provisions of the Social Security Act ("MSP") 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. In a September 2000 ruling,
      the court dismissed the government's claims based on MCRA and MSP, on the
      ground, among others, that these statutes do not provide a basis for the
      relief sought. The government filed a motion seeking the court's
      reconsideration of this ruling, which remains pending. In the September
      2000 ruling, the court also determined not to dismiss the government's
      claims based on RICO, under which the government continues to seek court
      relief to restrain the defendant tobacco companies from allegedly engaging
      in fraud and other unlawful conduct and to compel disgorgement. This
      action is now moving into the discovery phase.

      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

                                      -22-
<PAGE>   24


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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 all jurisdictions
      except for Missouri and Arkansas. 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,
      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):


                                      -23-
<PAGE>   25


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


           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
      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.

                                      -24-
<PAGE>   26


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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. Cases currently scheduled for trial in 2000 include an action
      brought by an asbestos company trust in federal court in New York
      (November). An individual action, APOSTOLOU, is scheduled to be tried in
      state court in New York in November. A class action seeking medical
      monitoring relief for asymptomatic smokers in West Virginia is scheduled
      for trial in state court in December. 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, and the court has entered an order of final
      judgment. 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. Liggett has filed the $3,450 bond required under
      recent Florida legislation which limits the size of any bond required,
      pending appeal, to stay execution of a punitive damages 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. 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.

      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

                                      -25-
<PAGE>   27


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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.

      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.

                                      -26-
<PAGE>   28

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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. Similar legislation is being considered
      by other state legislatures.

      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.

      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

                                      -27-
<PAGE>   29


                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      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. Oral argument is scheduled for November 30, 2000. 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. The Court, on the
      defendants' motion, recently dismissed six of plaintiff's nine claims
      alleging inadequate disclosure in the proxy statement. The surviving
      claims are plaintiff's allegations that (i) the fact that the fairness
      opinion did not cover the relative fairness to each class of shares should
      have been expressly disclosed; (ii) failure to disclose the identity of
      shareholders who suggested the recapitalization and their respective
      holdings, broken down by share class, was a material omission; and (iii)
      the disclosure in the proxy statement was inadequate because it did not
      reveal the value of the Company's lines of business or its assets. The
      Court speculated that facts might exist under which one or more of the
      foregoing alleged non-disclosures might be material and, therefore, the
      motion to dismiss as to these three allegations was denied. An answer has
      been filed as to the surviving claims. 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 October 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 alleged 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 sought
      prejudgment interest in the amount of approximately $4,000. In September
      2000, the litigation was settled for $6,100 and the Company recorded a
      gain of $1,400 based on the prior reserves for the matter.

                                      -28-
<PAGE>   30

                                VECTOR GROUP LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
                                   (UNAUDITED)


      As of September 30, 2000, New Valley had $11,915 of prepetition
      bankruptcy-related claims and restructuring accruals including claims for
      lease rejection damages and for unclaimed monies that certain states are
      seeking on behalf of money transfer customers. The remaining claims may be
      subject to future adjustments based on potential settlements or decisions
      of the 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.

                                      -29-
<PAGE>   31

                                VECTOR GROUP LTD.
                   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 nine months ended September 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 SEPT. 30, 2000:
---------------------------------

Revenues .........................     $ 149,190       $  17,933       $  13,009        $     778        $      --        $ 180,910
Operating income .................        24,878              55              80           (1,114)         (16,547)           7,352
Depreciation and amortization ....         1,156           1,254             210              147                8            2,775

THREE MONTHS ENDED SEPT. 30, 1999:
---------------------------------

Revenues .........................       108,676          27,256          12,711            1,576               --          150,219
Operating income (loss) ..........        19,689           4,262          (2,424)           1,683           (3,848)          19,362
Depreciation and amortization ....           747           1,649             244              450               12            3,102


NINE MONTHS ENDED SEPT. 30, 2000:
--------------------------------

Revenues .........................       394,652         107,263          61,605            2,369               --          565,889
Operating income (loss) ..........        49,568           1,998           5,126           (5,210)         (24,207)          27,275
Identifiable assets ..............       108,979              --          49,051           59,195          226,675          443,900
Depreciation and amortization ....         3,162           5,895             647              679               25           10,408
Capital expenditures .............        11,902          14,394             340            2,668               --           29,304

NINE MONTHS ENDED SEPT. 30, 1999:
--------------------------------

Revenues .........................       288,649          64,945          18,587            2,330               --          374,511
Operating income (loss) ..........        55,904           4,830          (2,531)           1,312           (4,397)          55,118
Identifiable assets ..............       107,785         135,268          39,841           59,872          166,548          509,314
Depreciation and amortization ....         2,567           2,921             144              863                8            6,503
Capital expenditures .............         8,084          35,915              --               --              373           44,372
</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. Russian tobacco is
       included through July 31, 2000. Western Tobacco Investments was sold on
       August 4, 2000. (Refer to Note 2.)

                                      -30-
<PAGE>   32


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 included
elsewhere in this document. The consolidated financial statements include the
accounts of BGLS Inc. ("BGLS"), Liggett Group Inc. ("Liggett"), Brooke
(Overseas) Ltd. ("Brooke (Overseas)"), through July 31, 2000 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 56.1% at September 30, 2000.

         The Company is a holding company for a number of businesses. It is
engaged principally 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 and real estate operations in Russia
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 August 4, 2000, Brooke
(Overseas) completed the sale of all of the membership interests of Western
Tobacco Investments to a subsidiary of Gallaher Group Plc. 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. Of the cash proceeds from the
transaction after estimated closing expenses, Brooke (Overseas) received
$197,098 and New Valley received $57,208 in accordance with the terms of the
participating loan. These amounts are subject to revision based on final closing
expenses and adjustments. The Company recorded a gain of $161,000 (including the
Company's share of New Valley's gain), net of income taxes and minority
interests, in connection with the transaction in the third quarter of 2000.

         BGLS repurchased a portion of its Notes on August 4, 2000 with the
proceeds of the sale, and redeemed the remaining Notes on September 5, 2000.
BGLS used approximately $106,821 of the proceeds of the sale to retire the
Notes.

                                      -31-
<PAGE>   33

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 September 30, 2000, there were approximately 285 individual
suits, 41 purported class actions and 82 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. In addition to these cases, during the third
quarter of 2000, an action against cigarette manufacturers involving hundreds of
named individual plaintiffs has been consolidated before a single West Virginia
state court. Liggett is a defendant in most of the cases pending in West
Virginia. Approximately 38 other 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, and the court entered an order of final judgment. 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. Liggett has filed the $3,450 bond
required under recent Florida legislation which limits the size of any bond
required, pending appeal, to stay execution of a punitive damages 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. 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.

                                      -32-
<PAGE>   34

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                       Three Months Ended                Nine Months Ended
                                          September 30,                    September 30,
                                   --------------------------        --------------------------
                                     2000             1999             2000             1999
                                   ---------        ---------        ---------        ---------
<S>                                <C>              <C>              <C>              <C>
REVENUES:
---------
   Liggett .................       $ 149,190        $ 108,676        $ 394,652        $ 288,649
   Liggett-Ducat(1) ........          17,933           27,256          107,263           64,945
                                   ---------        ---------        ---------        ---------
      Total tobacco ........         167,123          135,932          501,915          353,594

   Broker-dealer(2) ........          13,009           12,711           61,605           18,587
   Real estate(2) ..........             778            1,576            2,369            2,330
                                   ---------        ---------        ---------        ---------
      Total revenues .......       $ 180,910        $ 150,219        $ 565,889        $ 374,511
                                   =========        =========        =========        =========

OPERATING INCOME:
-----------------
   Liggett .................       $  24,878        $  19,689        $  49,568        $  55,904
   Liggett-Ducat(1) ........              55            4,262            1,998            4,830
                                   ---------        ---------        ---------        ---------
      Total tobacco ........          24,933           23,951           51,566           60,734

   Broker-dealer(2) ........              80           (2,424)           5,126           (2,531)
   Real estate(2) ..........          (1,114)           1,683           (5,210)           1,312
   Corporate and other .....         (16,547)          (3,848)         (24,207)          (4,397)
                                   ---------        ---------        ---------        ---------
      Total operating
        income .............       $   7,352        $  19,362        $  27,275        $  55,118
                                   =========        =========        =========        =========
</TABLE>

--------------
(1)   Due to the sale of Western Tobacco Investments by Brooke (Overseas) on
      August 4, 2000, results for Liggett-Ducat are shown through July 31, 2000.
(2)   New Valley became a consolidated subsidiary on June 1, 1999. Accordingly,
      results of operations include the four months ended September 30, 1999.


Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
--------------------------------------------------------------------

         REVENUES. Total revenues were $180,910 for the three months ended
September 30, 2000 compared to $150,219 for the three months ended September 30,
1999. This $30,691 or 20.4% increase in revenues was due to a $40,514 or 37.3%
increase in revenues at Liggett, an increase of $298 in broker-dealer revenues
offset by a decrease in Liggett-Ducat's revenues of $9,323 or 34.2% due to the
sale of Western Tobacco Investments on August 4, 2000 and a decrease in real
estate revenues of $798 due to the sale of the shopping centers in August 1999.

         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 $167,123 for the three months ended
September 30, 2000 compared to $135,932 for the three months ended September 30,
1999. This $31,191 or 22.9% increase in revenues was due to an increase in
tobacco revenues at Liggett offset by a decrease at Liggett-Ducat due to the
sale on August 4, 2000. Revenues at Liggett increased for both the premium and
discount segments due to price increases of $23,592 and a 29.5% increase in unit
sales volume (approximately 392.0 million units), accounting for $32,093 in
volume variance, partially offset by an unfavorable sales mix of $15,171.

                                      -33-
<PAGE>   35

         Premium sales at Liggett for the third quarter of 2000 amounted to
$14,380 and represented 9.6% of Liggett's total sales, compared to $15,114 and
13.9% of total sales in the third quarter of 1999. In the premium segment,
revenues declined by 4.9% ($734) for the three months ended September 30, 2000,
compared to the prior year period, due to an unfavorable volume variance in the
third quarter of 2000 of $2,652, reflecting a 17.5% decline in unit sales volume
(approximately 28.0 million units). This was partially offset by price increases
of $1,918.

         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 September 30, 2000 amounted to
$134,810 and represented 90.4% of Liggett's total sales, compared to $93,562 and
86.1% of total sales for the three months ended September 30, 1999. In the
discount segment, revenues grew by 44.1% ($41,248) for the three months ended
September 30, 2000 compared to the prior year period, due to price increases of
$21,674, along with a 36.0% increase in unit sales volume (approximately 420.0
million units), accounting for $33,650 in volume variance, partially offset by
an unfavorable product mix among the discount brand categories of $14,076.

         For the three months ended September 30, 2000, fixed manufacturing
costs at Liggett on a basis comparable to the same period in 1999 were $1,667
higher with costs of $2.73 per thousand units in the 2000 period, which were
higher by $0.54 (24.7%) compared to costs of $2.19 in the prior year period. The
increase in costs is related to increased payroll expense and factory relocation
charges in the current year. Production volume increased by 19.5% over the prior
year quarter.

         TOBACCO GROSS PROFIT. Tobacco consolidated gross profit was $108,261
for the three months ended September 30, 2000 compared to $88,459 for the three
months ended September 30, 1999, an increase of $19,802 or 22.4% when compared
to the same period last year, reflecting an increase in gross profit at Liggett
of $25,340 offset by a decrease of $5,539 at Liggett-Ducat due to the sale of
Western Tobacco Investments. For the three months ended September 30, 2000,
Liggett's premium brands contributed 9.8% and discount brands contributed 87.6%
to the Company's gross tobacco profit. Liggett-Ducat contributed 2.5%. Over the
same period in 1999, Liggett's premium brands contributed 13.0%, Liggett's
discount brands contributed 77.8% and Liggett-Ducat contributed 9.2% to the
Company's gross profit.

         Gross profit at Liggett of $105,503 for the three months ended
September 30, 2000 increased $25,340 from gross profit of $80,163 for the third
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 87.5% for the three months ended September 30, 2000 compared to
85.8% for the same period in 1999, with gross profit for the premium segment at
88.0% in the 2000 period compared to 86.7% in the 1999 period. Gross profit for
the discount segment was 87.5% for the three months ended September 30, 2000 and
85.6% for the three months ended September 30, 1999. This increase is primarily
the result of the January 2000 and July 2000 list price increases.

         As a percent of revenues (excluding Russian excise taxes), gross profit
at Liggett-Ducat decreased 15.7% to 16.7% for the month ended July 31, 2000
compared to 32.4% in the third quarter of 1999, due to lower prices offset in
part by higher sales volumes.

         BROKER-DEALER AND REAL ESTATE REVENUES. For the three months ended
September 30, 2000, Ladenburg's revenues were $13,009 and real estate revenues
were $778 compared to revenues of $12,711 at Ladenburg and $1,576 from real
estate activities for the three months ended September 30, 1999. Ladenburg's
revenues increased primarily as a result of an increase in principal
transactions and corporate finance fees partially offset by a decrease in
commissions. Revenues from real estate declined due to the sale of the shopping
centers in August 1999.



                                      -34-
<PAGE>   36


         EXPENSES. Operating, selling, general and administrative expenses were
$114,696 for the three months ended September 30, 2000 compared to $83,384 for
the same period last year, an increase of $31,312 primarily due to increased
expenses at Liggett of $20,051, increased expenses at Brooke (Overseas) of
$5,669 and an increase of $3,254 at New Valley. The increase in operating
expenses at Liggett was due primarily to higher spending for promotional and
marketing programs, factory relocation costs and increased administrative
expense. The increased expenses at Brooke (Overseas) were principally a result
of closing costs, including commissions, paid in connection with the sale of
Western Tobacco Investments. These increases were partially offset by lower
corporate expense due to a reduction in the Company's obligation under
non-current employee benefits.

         OTHER INCOME (EXPENSES). For the three months ended September 30, 2000,
other income was $247,299 compared to expense of $11,396 for the period ended
September 30, 1999. Income in the 2000 period consisted primarily of the gain of
$193,077 recognized by the Company on the sale of Western Tobacco Investments
and the income of $52,580 recognized on the sale by New Valley through its joint
venture, Western Realty Development.

         Interest expense was $6,073 for the three months ended September 30,
2000 compared to $16,114 for the same period last year. This decrease of $10,041
was due primarily to a savings at corporate because of the repurchase by BGLS of
all of its outstanding Notes beginning in May 1999 and concluding with the
redemption of the remaining Notes in September 2000.

         Interest and dividend income was $3,833 during the three months ended
September 30, 2000 offset by a loss at New Valley in equity in loss of affiliate
of $1,969. This compared to interest and dividend income of $507 in the 1999
period offset by equity in loss of affiliate of $908.

         INCOME FROM CONTINUING OPERATIONS. The income from continuing
operations for the three months ended September 30, 2000 was $158,689 compared
to income of $6,230 for the three months ended September 30, 1999 and includes
income tax expense of $76,539 and minority interests in income of subsidiaries
of $19,423 for the third quarter of 2000 compared to taxes of $2,782 and
minority interests in losses of subsidiaries of $1,046 for the for the third
quarter of 1999.

Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
-------------------------------------------------------------------

         REVENUES. Total revenues were $565,889 for the nine months ended
September 30, 2000 compared to $374,511 for the nine months ended September 30,
1999. This 51.1% increase in revenues was due to a $106,003 or 36.7% increase in
revenues at Liggett, a $42,318 increase at Liggett-Ducat and an increase of
$43,057 in revenues from New Valley, due to its inclusion in the consolidated
statements for the full nine months of 2000 compared to four months' inclusion
in the 1999 statements.

         TOBACCO REVENUES. Tobacco revenues at Liggett increased for both the
premium and discount segments due to price increases of $65,240 discussed above
and a 27.4% ($79,170) gain in unit sales volume (approximately 977.0 million
units) offset by $38,407 in unfavorable sales mix. The increase in tobacco
revenues of $42,318 or 65.2% at Liggett-Ducat was attributable to increased
volume at the new factory and a favorable product mix offset by continuing
decline in prices 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.


                                      -35-
<PAGE>   37

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.

         Premium sales at Liggett for the nine months ended September 30, 2000
amounted to $44,910 and represented 11.4% of total Liggett sales, compared to
$63,777 and 22.1% of total sales for the same period in 1999. In the premium
segment, revenues declined by 29.6% ($18,867) over the nine months ended
September 30, 2000, compared to the same period in 1999, due to an unfavorable
volume variance of $24,471, reflecting a 38.4% decline in unit sales volume
(approximately 257.5 million units), primarily due to the transfer of Liggett's
premium brands, LARK, CHESTERFIELD and L&M, in connection with the Philip Morris
brand transaction on May 24, 1999. This decline was partially offset by price
increases of $5,604.

         Liggett's discount sales over the nine-month period in 2000 amounted to
$349,742 and represented 88.6% of total Liggett sales, compared to $224,872 and
77.9% of total Liggett sales for the same period in 1999. In the discount
segment, revenues grew by 55.5% ($124,870) over the nine months ended September
30, 2000 compared to the same period in 1999, due to price increases of $59,636,
and a 42.7% gain in unit sales volume (approximately 1,234.5 million units)
accounting for $96,024 in volume variance, partially offset by an unfavorable
product mix of $30,790. For the nine months ended September 30, 2000, fixed
manufacturing costs on a basis comparable to the same period in 1999 were $753
higher, although costs per thousand units of $2.62 declined by $0.40 (13.2%)
from the previous period's $3.02, concurrent with a 22.3% increase in production
volume due to the impact of higher volumes on fixed costs.

         TOBACCO GROSS PROFIT. Gross profit was $288,911 for the nine months
ended September 30, 2000 compared to $224,596 for the nine months ended
September 30, 1999, an increase of $64,315 or 28.6% 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 11.4% to the Company's gross profit, the discount segment
contributed 83.3% and Liggett-Ducat contributed 5.3% for the nine months ended
September 30, 2000. Over the same period in 1999, Liggett's premium brands
contributed 21.2%, the discount segment contributed 72.2% and Liggett-Ducat
contributed 6.6%.

         Liggett's gross profit of $273,532 for the nine months ended September
30, 2000 increased $64,025 from gross profit of $209,507 for the same period in
1999, due primarily to the price increases discussed above. In the first nine
months of 2000, Liggett's premium brands contributed 12.0% and Liggett's
discount brands contributed 88.0% to Liggett's overall gross profit. Over the
same period in 1999, Liggett's premium brands contributed 22.7% and Liggett's
discount brands contributed 77.3% to Liggett's gross profit. As a percent of
revenues (excluding federal excise taxes), gross profit at Liggett increased to
85.6% for the nine months ended September 30, 2000 compared to 84.7% for the
same period in 1999, with gross profit for the premium segment at 86.7% and
85.4% in the nine months ended September 30 of 2000 and 1999, respectively, and
gross profit for the discount segment at 85.5% and 84.5% in 2000 and 1999,
respectively. This increase is primarily the result of the August 1999, January
2000 and July 2000 list price increases.

         As a percentage of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased to 15.8% for the seven months ended July 31,
2000 compared to 49.5% in the nine months ended September 30, 1999, due to
decreased selling prices.

                                      -36-
<PAGE>   38

         BROKER-DEALER AND REAL ESTATE REVENUES. New Valley's broker-dealer
revenues were $61,605 and real estate revenues were $2,369 for the nine months
ended September 30, 2000. This compares to four months of revenues in the 1999
period of $18,587 at Ladenburg and $2,330 from real estate activities.

         EXPENSES. Operating, selling, general and administrative expenses were
$325,610 for the nine months ended September 30, 2000 compared to $190,395 for
the prior year period. The increase of $135,215 was due primarily to a $71,123
increase at Liggett, a $10,231 increase at Brooke (Overseas) and additional
expenses of $51,143 as a result of the consolidation of New Valley. The increase
in operating expenses at Liggett was due primarily to higher spending for
promotional and marketing programs, factory relocation costs and increased
administrative expense. The increased expenses at Brooke (Overseas) were
principally a result of closing costs, including commission, paid in connection
with the sale of Western Tobacco Investments. These increases were partially
offset by lower corporate expense due to a reduction in the Company's obligation
under non-current employee benefits.

         OTHER INCOME (EXPENSES). Other income was $233,138 for the nine months
ended September 30, 2000 compared to other income of $260,972 for the nine
months ended September 30, 1999. For the nine months ended September 30, 2000,
the Company recognized a gain of $193,077 on the sale of Western Tobacco
Investments and New Valley recognized $52,512 on the sale through its interest
in the joint venture, Western Realty Development. For the nine months ended
September 30, 1999, the Company recognized a gain of $294,098 in connection with
the closing of the Philip Morris brand transaction. In addition, New Valley
recognized a gain during the 1999 period of $3,801 on the sale of substantially
all of Thinking Machines' assets. During the first nine 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 $29,643 for the nine months ended September 30,
2000 compared to $43,200 for the same period in the prior year. The overall
decrease of $13,557 was largely due to the repurchase of all of the BGLS Notes,
which resulted in an interest savings of $16,153. This was offset, in part, by
additional interest expense at Liggett of $700 and at New Valley of $2,255.

         Equity in earnings of affiliate was a loss of $4,882 for the nine
months ended September 30, 2000 at New Valley compared to a loss of $10,106 for
the nine months ended September 30, 1999.

         INCOME FROM CONTINUING OPERATIONS. The income from continuing
operations for the nine months ended September 30, 2000 was $162,281 compared to
income of $229,598 for the nine months ended September 30, 2000. Income tax
expense was $78,853 and minority interests in income of subsidiaries were
$19,279 for the nine months ended September 30, 2000. This compared to tax
expense of $86,156 and minority interests in income of subsidiaries of $336 for
the nine months ended September 30, 1999.

CAPITAL RESOURCES AND LIQUIDITY

         Net cash and cash equivalents increased $133,171 for the nine months
ended September 30, 2000 and decreased $1,082 for the nine months ended
September 30, 1999. Net cash used in operations for the nine months ended
September 30, 2000 was $11,042 compared to net cash provided by operations of
$30,750 for the comparable period of 1999. The decrease from operating
activities of $41,792 reflects an overall decline of $27,843 in operating income
when compared to the nine months ended September 30, 1999 due to the inclusion
of nine months' operating expenses from New Valley when compared with four
months in the prior year period, closing costs associated with the sale of
Western Tobacco Investments and lower operating income at Liggett. Further,
there was the non-cash impact of the gain on the sale of Western Tobacco
Investments at Brooke (Overseas) and New Valley. In addition to the higher
operating income in 1999, there was a reduction in debt service resulting from
Liggett's redemption of debt in December 1998 and, to a lesser degree, BGLS'
repurchase of Notes in May 1999.

                                      -37-
<PAGE>   39


         Cash provided by investing activities of $307,171 compares to cash
provided of $142,638 for the periods ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000, the majority of the
proceeds, $366,125, were attributable to the sale of Western Tobacco Investments
and the sale or maturity of investment securities. This was offset primarily by
capital expenditures at Liggett of $11,902, Liggett-Ducat of $14,394 and New
Valley of $3,008 and the purchase of investment securities. For the nine months
ended September 30, 1999, the majority of the proceeds were from the closing of
the Philip Morris brand transaction in May 1999 and the sale of the shopping
centers at New Valley. In the 1999 period, these proceeds were partially offset
by capital expenditures for machinery and equipment at Liggett of $8,015 and
equipment and construction costs for the new factory of $35,915 at
Liggett-Ducat. Other payments made principally pertained to broker-dealer
transactions and real estate at New Valley.

         Cash used in financing activities was $162,848 for the nine months
ended September 30, 2000 as compared with cash used of $173,569 for the nine
months ended September 30, 1999. Cash in the 2000 period was used primarily to
redeem all outstanding BGLS Notes and to repay the participating loan and
amounts related to the sale of Western Tobacco Investments to Western Realty
Development. In addition, distributions on common stock were $20,249. In the
comparable prior year period, BGLS repurchased $149,735 of its outstanding Notes
and New Valley repaid debt associated with the shopping centers it sold in
August 1999. Distributions on common stock in the 1999 period were $8,446.

         LIGGETT. Liggett has a $35,000 credit facility under which $18,709 was
outstanding at September 30, 2000. Availability under the credit facility was
approximately $8,262 based on eligible collateral at September 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 September
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 September 30, 2000,
Liggett was in compliance with all covenants under the facility; Liggett's
adjusted net worth was $14,323 and net working capital was $23,630, 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

                                      -38-
<PAGE>   40

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, and the court entered an order of final judgment.
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. Liggett has
filed the $3,450 bond required under recent Florida legislation which limits the
size of any bond required, pending appeal, to stay execution of a punitive
damages 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. 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. 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.

         BROOKE (OVERSEAS). 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.

                                      -39-
<PAGE>   41

         BGLS. 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 September 5, 2000,
BGLS redeemed the remaining Notes for 100% of the principal amount thereof plus
accrued interest. BGLS used $106,821 of the proceeds of the sale to retire the
Notes.

         THE COMPANY. 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 2001. 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 $41,000) 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

         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.

         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

                                      -40-
<PAGE>   42

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 September 30, 2000 with fair values of $12,599 in long positions
and $4,913 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 September 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
$45,465 at September 30, 2000. Approximately 29% 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

                                      -41-
<PAGE>   43

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.

         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.

                                      -42-
<PAGE>   44

                                     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. included
         elsewhere in this Report on Form 10-Q which contains a general
         description of certain legal proceedings to which Brooke Group Holding,
         BGLS, Liggett, 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 September 30, 2000,
         except for the grant of stock options to employees of the Company
         and/or its subsidiaries as described in Note 12, incorporated
         herein by reference, to the Consolidated Financial Statements of
         Vector Group Ltd. The foregoing transactions were effected in
         reliance on the exemption from registration afforded by Section
         4(2) of the Securities Act of 1933 or did not involve a "sale"
         under the Securities Act of 1933.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits
                  --------

                * 10       Amendment to Purchase and Sale Agreement, dated as of
                           August 4, 2000, between Gallaher Overseas (Holdings)
                           Ltd. and Brooke (Overseas) Ltd. (incorporated by
                           reference to Exhibit 10.3 in the Company's Report on
                           Form 8-K dated August 4, 2000, Commission File No.
                           1-5759).

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

                  99.1     Material Legal Proceedings.

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

*  Incorporated by reference

                                      -43-
<PAGE>   45


         (b)      REPORTS ON FORM 8-K

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

                                                           Financial
                      Date                 Items           Statements
                      ----                 -----           ----------

                  July 14, 2000              5                None

                  August 4, 2000            2,7               None


                                      -44-
<PAGE>   46

                                   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:  November 14, 2000


                                      -45-