<PAGE>   1


                                                                    Exhibit 10.1
                           CLASS SETTLEMENT AGREEMENT
                           --------------------------

         This CLASS SETTLEMENT AGREEMENT is entered into this 15th day of May
1997 by and between the named and representative plaintiff ("Plaintiff") in EARL
WILLIAM WALKER, ET AL. V. LIGGETT GROUP INC., ET AL., Civil Action No.
2:97-0102, United States District Court, Southern District of West Virginia (the
"WALKER Action"), for himself and on behalf of the plaintiff settlement class as
hereinafter defined ("Settlement Class"), and Brooke Group Ltd., a Delaware
corporation ("Brooke Group"), Liggett & Myers Inc., a Delaware corporation
("Myers"), and Liggett Group Inc., a Delaware corporation (which, with Myers, is
hereinafter referred to as "Liggett").

                                    RECITALS
                                    --------
WHEREAS,

         1     On February 7, 1997, Plaintiff filed a complaint to commence the
WALKER Action against Liggett, asserting claims on behalf of a putative
nationwide class of all persons who have incurred or are alleged to have
incurred costs or other damages arising from cigarette smoking and seeking,
among other things, equitable/injunctive relief, a declaratory judgment, and
compensatory and/or punitive damages, according to proof, as set forth in the
complaint.

         2     On March 19, 1997, a complaint was filed to commence the action 
CAROL FLETCHER, ET AL. V. BROOKE GROUP, LTD., ET AL., Civil No. 97-13, in the
Circuit Court of Mobile, Alabama ("FLETCHER") against Liggett and Brooke Group
asserting claims on behalf of a putative nationwide class of all persons and
entities which have incurred or are alleged to have incurred costs or other
damages arising from cigarette smoking and seeking, among other things,




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equitable/injunctive relief, a declaratory judgment, and compensatory and/or
punitive damages, according to proof, as set forth in the complaint.

         3     On March 20, 1997, the plaintiffs in FLETCHER and Liggett and 
Brooke Group entered into a settlement (the "FLETCHER Settlement") of the
nationwide class action brought by the plaintiffs in FLETCHER, pursuant to which
Liggett agreed to, among other things, make certain payments into a settlement
fund to be equitably distributed to the settlement class, comply with certain
proposed regulations restricting the marketing and sale of cigarettes to minors,
and offer cooperation in connection with the prosecution of lawsuits against
other tobacco companies; all in accordance with the terms of the FLETCHER
Settlement, a copy of which is annexed hereto as Appendix A.

         4     Subsequent to the execution of the FLETCHER Settlement, the 
parties to the WALKER Action engaged in settlement discussions and succeeded in
renegotiating that settlement for the purpose of resolving the WALKER Action.

         5     The primary purpose of this Class Settlement Agreement (and the
FLETCHER Settlement) is to provide certain compensatory, equitable and
injunctive relief sought by Plaintiff and other settlement class members,
including, among other things, payments by Liggett to a settlement fund, the
cooperation of Liggett and Brooke Group with respect to class members' claims
against other tobacco manufacturers, the preclusion of certain advertisement and
marketing practices, and the addition of a further warning to Liggett
cigarettes. The mechanism for accomplishing the compensatory relief set forth in
this Agreement is the creation of a settlement fund board, to which the claims
of all settlement class members against Liggett and 


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Brooke Group shall be directed. The compensatory, equitable and injunctive
relief are components of an integrated settlement set forth in this Class
Settlement Agreement.

         6     Apart from this action and the FLETCHER action, scores of 
individual and putative class actions, as well as several actions brought on
behalf of states and other governmental bodies and other entities, have been
filed against Liggett and Brooke Group and other tobacco defendants seeking,
among other things, equitable relief and damages allegedly arising from
cigarette smoking. Moreover, actions are still being filed and many more are
expected to be filed in the future. Smoking-related litigation has resulted in
extensive discovery concerning the potential liability of Liggett and Brooke
Group as well as extensive consideration of the legal and factual bases of
smoking-related litigation.

         7     The plaintiffs and the defendant tobacco companies have spent, 
and continue to spend, enormous resources litigating these smoking-related
claims. Such litigation is depleting and will continue to deplete the defendant
tobacco companies' resources otherwise available to compensate claimants. Absent
an alternative method of resolution, Liggett, a financially troubled company,
would not be able to satisfy the smoking-related claims pending against it, let
alone the claims which may be asserted in the future.

         8     Counsel for the Plaintiff have substantial experience in the
litigation of smoking-related cases and class actions, including the litigation
of individual smokers' cases.

         9     Liggett and Brooke Group have denied, and continue to deny any
wrongdoing or any legal liability of any kind in all smoking-related litigation.


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         10    In light of the uncertainties associated with the pending 
litigation and Liggett's financial condition, there are substantial risks that
adjudications with respect to smoking-related claims by certain settlement class
members will, as a practical matter, be dispositive of the claims and interests
of certain other settlement class members not yet adjudicated or will
substantially impair or impede the ability of such other settlement class
members to protect their interests.

         11    Liggett and Brooke Group recognize and acknowledge that defending
the continued prosecution of the WALKER Action (and other similar putative class
actions and individual suits) against them, through trial and appeals, would
require considerable resources and expense, would entail uncertainty and risk,
and constitutes circumstances under which the available assets of Liggett may be
properly characterized as a "limited fund" in comparison to the aggregate
potential claims of all settlement class members. Liggett and Brooke Group have
determined that the settlement, in accordance with this Class Settlement
Agreement, of the claims asserted in the WALKER Action against them will be
beneficial by enabling Liggett to continue the legal business of selling
cigarettes, under terms of candor and full disclosure to the public, while
avoiding bankruptcy or other insolvency that could otherwise result from the
transaction costs and potential exposure of ongoing litigation.

         12    Plaintiffs allege that Liggett and Brooke Group have acted or
refused to act on grounds generally applicable to the settlement class, thereby
making final injunctive relief appropriate with respect to the class as a whole
in accordance with Rule 23(b)(2) of the Federal Rules of Civil Procedure in the
context of this settlement.



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         13    Liggett has made available relevant information, and Plaintiff,
through counsel, have investigated such information and other relevant
information, as to the nature, extent and availability of Liggett's financial
resources, and have concluded preliminarily that the criteria of Federal Rule of
Civil Procedure 23(b)(1)(B) apply to Liggett and its affiliates in the context
of this settlement.


         14    Plaintiff and Liggett and Brooke Group recognize and support the
public interest in preventing smoking by, or the promotion of smoking to,
children and adolescents and further recognize that it is of extreme importance
to halt any marketing efforts directed to children and adolescents and to
provide for full disclosure of material facts relating to tobacco products.

         15    Plaintiff recognizes and acknowledges that the continued 
prosecution of the WALKER Action and other smoking-related litigation against
Liggett and Brooke Group through trial and appeals would require considerable
time and expense and would entail uncertainty, risk and delay, including the
risk of bankruptcy or other insolvency of Liggett. Plaintiffs have determined
that the settlement, in accordance with this Class Settlement Agreement, of the
claims asserted in the WALKER Action will be beneficial to the settlement class
by providing the class with compensatory relief, as well as substantial and
critical non-monetary equitable and injunctive relief.

                  NOW, THEREFORE, in consideration of the foregoing and of the
promises and covenants set forth in this Class Settlement Agreement, Plaintiff,
on his own behalf and on behalf of the Settlement Class (as defined below), and
Liggett and Brooke Group hereby stipulate and agree that, conditional upon the
approval of the Court as required by Rule 23 of the Federal 



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Rules of Civil Procedure and as provided herein, the WALKER Action shall be
settled as against Liggett and Brooke Group and that all claims asserted by or
on behalf of the Walker putative class members against the Settling Defendants
shall be dismissed with prejudice, all on the terms and conditions contained
herein, as follows:

1    DEFINITIONS.
     ------------

         As used in and solely for the purposes of this Agreement, the following
terms shall have the following respective meanings:
 
         "Actively Assist" means to engage in all reasonable efforts to provide
full and timely cooperation and assistance.

         "Affiliate" means a Present Affiliate or a Future Affiliate.

         "Agreement" means this Settlement Agreement.

         "Arbitrator" means the person or persons agreed to by the Settling
States and the Settlement Class (and/or the FLETCHER Settlement Class), and/or
their counsel, or appointed by the Court, the FLETCHER Court or the
Multidistrict Litigation Panel, as the case may be, to make decisions regarding
allocations of the Settlement Fund between the Settling States and the
Settlement Class (and/or the FLETCHER Settlement Class), and to resolve disputes
of the Oversight Committee.

         "Attorneys General" means those State Attorneys General or other
parties who have brought Attorney General Actions.




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         "Attorney General Actions" means actions by or on behalf of States
seeking injunctive relief and/or damages in connection with smoking and/or
Medicaid or other expenses allegedly resulting therefrom.

         "Attorneys General Settlement Agreement" means that agreement entered
into on or about March 20, 1997 between Brooke Group and Liggett and the
Attorneys General of certain states, a copy of which is annexed hereto as
Exhibit B.

         "Brooke Group" means Brooke Group Ltd. and its Present Affiliates other
than Liggett.

         "Cigarette" means any product including components, accessories, or
parts which is intended to be burned under ordinary conditions of use and
consists of: (1) any roll of tobacco wrapped in paper or in any substance not
containing tobacco; or (2) any roll of tobacco wrapped in any substances
containing tobacco which, because of its appearance, the type of tobacco used in
the filler, or its packaging and labeling, is likely to be offered to, or
purchased by, consumers as a cigarette described in subparagraph (1).

         "Cigarette Pack" means a unit of twenty Cigarettes or one ounce of
Tobacco Snuff.

         "Cost Per Cigarette Pack" means, with respect to a Tobacco Company, the
aggregate costs incurred by such Tobacco Company under a Global Settlement
during a specified year, divided by the number of Cigarette Packs manufactured
by such Tobacco Company during such year, as determined by The Maxwell Consumer
Report published by Wheat First Butcher Singer or a similar or successor report.



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         "Court" means the United States District Court for the Southern
District of West Virginia.


         "Domestic Tobacco Operations" means the manufacture and/or sale of
Cigarettes and any other tobacco products in the United States, its territories,
its possessions and the Commonwealth of Puerto Rico.

         "FDA Rule" means the regulations promulgated by the FDA concerning the
sale and distribution of cigarettes and other products on August 28, 1996 at 60
Fed. Reg. 44396, to be codified at 21 C.F.R. Parts 801, 803, 804, 807, 820 and
897.

         "FLETCHER Class Counsel" means the settlement class counsel listed in
Section 25.8 of the FLETCHER Settlement Agreement.

         "FLETCHER Court" means the Circuit Court of Mobile County, Alabama.

         "FLETCHER Settlement Agreement" means the mandatory class action
settlement entered into by plaintiffs and Liggett and Brooke Group in CAROL
FLETCHER, ET AL. V. BROOKE GROUP, LTD., ET AL., Civil No. 97-13, in the Circuit
Court of Mobile, Alabama on March 20, 1997, a copy of which is annexed hereto as
Appendix A.

         "FLETCHER Settlement Class" means the settlement class as defined in
the FLETCHER Settlement Agreement.

         "Future Affiliate" means any one entity, other than an entity with a
Market Share greater than 30% as of the date of this Agreement, which is a
Non-settling Tobacco Company (including any successor to or assignee of its
assets) if such entity or an Affiliate of such entity with the prior written
approval of Brooke Group, subsequent to the date, and during the term, of 



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this Agreement but prior to the fourth anniversary of the date of execution of
this Settlement Agreement: (i) directly or indirectly acquires or is acquired by
Liggett or Brooke Group; (ii) directly or indirectly acquires all or
substantially all of the stock or assets of Liggett or Brooke Group; (iii) all
or substantially all of whose stock or assets are directly or indirectly
acquired by Liggett or Brooke Group; or (iv) directly or indirectly merges with
Liggett or Brooke Group or otherwise combines on any basis with Liggett or
Brooke Group.

         "Future Affiliate Transaction" means a transaction, or series of
transactions, by which an entity becomes a Future Affiliate.

         "Global Settlement" means any National disposition, settlement,
agreement or other arrangement, such as "Tobacco Claims Legislation", by way of
legislation, executive order, regulation, taxation, levy, fine, class action
settlement, court order or otherwise, of smoking-related litigation, in direct
or indirect connection with which one or more Tobacco Companies receives the
benefit of a limitation of, or total or partial immunity from, liability to the
members of the Settlement Class for the types of claims released under this
Agreement.

         "Initial Notice" means the written notice document to be provided by
Liggett and its Present Affiliates to Settlement Class members as defined in
Section 8.1 of this Agreement.

         "Initial Notice Date" means the first date upon which Initial Notice is
given by Liggett and its Present Affiliates to the Settlement Class pursuant to
Section 8.1 of this Agreement.

         "Injury" means any physical, mental or emotional injury, including, by
way of example and not limitation, cancer, heart disease, emphysema, addiction
and phobia.




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         "Liggett" means Liggett Group Inc. and Liggett & Myers, Inc.

         "Mandatory Class Fairness Hearing" means the hearing to be conducted by
the Court in connection with the determination of the fairness, adequacy and
reasonableness of this Agreement under Rule 23 of the Federal Rules of Civil
Procedure, insofar as the Agreement applies to Liggett and its Present
Affiliates.

         "Mandatory Class Final Order and Judgment" or "Mandatory Class Final
Approval" means the order to be entered by the Court, with respect to Liggett
and its Present Affiliates, approving this Agreement without material
alterations, as fair, adequate and reasonable under Rule 23 of the Federal Rules
of Civil Procedure, confirming the Settlement Class certification under Rule 23
thereof, and making such other findings and determinations as the Court deems
necessary and appropriate to effectuate the terms of this Agreement and to
exercise its continuing and exclusive jurisdiction over the enforcement and
administration of all terms of this Settlement Agreement.

         "Mandatory Class Settlement Date" or "Settlement Date" means the date
on which all of the following shall have occurred: (a) the entry of the
Mandatory Class Final Order and Judgment without material modification, and (b)
the achievement of finality for the Mandatory Class Final Order and Judgment by
virtue of that order having become final and non-appealable through (i) the
expiration of all appropriate appeal periods without an appeal having been
filed; (ii) final affirmance of the Mandatory Class Final Order and Judgment on
appeal or final dismissal or denial of all such appeals, including petitions for
review, rehearing or certiorari; or 


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(iii) final disposition of any proceedings, including any appeals, resulting
from any appeal from the entry of the Mandatory Class Final Order and Judgment.

         "Market Share" means, with respect to a specified Tobacco Company and a
specified year, the Domestic Tobacco Operations market share in that year of all
of such company's cigarettes and other tobacco products (as the case may be), as
determined by The Maxwell Consumer Report published by Wheat First Butcher
Singer or a similar or successor report.

                  "National" means actually covering or potentially covering
(whether by block grants to states, localities or other governmental entities or
otherwise) the United States or the United States and one or more of its
territories, possessions and the Commonwealth of Puerto Rico.
             
         "Non-Settling Tobacco Companies" means each of The American Tobacco
Co., Lorillard Tobacco Co., Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown
& Williamson Tobacco Corp., and United States Tobacco Co., unless and until it
becomes a Future Affiliate, as herein defined.

         "Other Settlement" means a settlement of a Tobacco Action which is not
a Global Settlement.

         "Oversight Committee" means a committee, made up of no less than nine
(9) individuals, to oversee the cooperation provided by Settling Defendants
under Sections 5.3.1 and 5.3.2 hereof. The committee shall have not less than
75% of its composition from representation of the Attorneys General.


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         "Parent", with respect to Liggett means Brooke Group, and with respect
to any other specified corporation or entity, means another corporation,
partnership or other entity which directly or indirectly controls such specified
corporation or entity.

         "Parties" means the Plaintiffs and Brooke Group and Liggett.

         "Population" means, with respect to a geographic area, the population
of that area as reported in the most recent census conducted by the United
States Bureau of the Census.

         "Population Quotient" means, with respect to an Other Settlement or
judgment, a quotient whose numerator is the Population of the United States and
whose denominator is the total Population of the state(s), jurisdictions, or
other grouping of persons covered by such Other Settlement or judgment.

         "Preliminary Approval" means the Court's provisional certification of
the Settlement Class, preliminary approval of this Agreement, approval of the
form of Initial Notice to the Settlement Class pursuant to Rule 23 of the
Federal Rules of Civil Procedure, or the setting of a date for the approval or
submission for approval of the form of such notice.

         "Present Affiliate" means with respect to a specified corporation,
another corporation, partnership or other entity which as of the date of this
Agreement, directly or indirectly, controls, is controlled by, or is under
common control with, such specified corporation or entity including any and all
Parents, subsidiaries, and/or sister corporations or entities of such specified
corporation or entity.

         "Present Value" means, with respect to a specified amount or amounts,
the present value of such amount or amounts as calculated using a discount rate
equal to the yield on 10-year 


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Treasury Notes as reported in the WALL STREET JOURNAL at the time of such
calculation; provided that where such amount or amounts are not otherwise
determinable, the amount or amounts to be present-valued shall be deemed to be
the average for the most recent three years. "Pretax Income", with respect to
Liggett, means for a specified year, the "Income before Income Taxes" as
determined in accordance with generally accepted accounting principles ("GAAP")
of Liggett for its most recent fiscal year, as report in filings to the United
States Securities and Exchange Commission or, if there is no such filing, as
reported by Liggett's independent outside auditors. If GAAP changes in any
material respect during the term of this Agreement so that the benefits
anticipated by the parties (in light of GAAP applicable on the date of this
Agreement), an appropriate adjustment shall be made to the formulas and
calculations hereunder to achieve the parties' expectations as of the date
hereof.

                  "Protective Order" or "Stipulation Regarding Liggett
Documents" means, with respect to privileged documents produced by a Settling
Defendant pursuant to Paragraph 5.3.2 an order of the Court: (a) protecting the
confidentiality of such documents; (b) providing that such documents may be used
only in actions against Non-Settling Tobacco Companies and, to the extent
permitted by law, only under seal; (c) providing that, to the extent such
documents are or may be subject to the attorney/client privilege or attorney
work product doctrine, such production or use of the documents does not
constitute a waiver of such privilege, doctrine or protection with respect to
any party other than the parties to whom the documents are produced subject to
the order. The provisions of the Protective Order shall not apply to documents
claimed to be privileged but which are determined by the Court or by any other
court not to be privileged for reasons other than waiver due to production
pursuant to this Agreement.


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         "Settlement Class" means a settlement class composed of:

         (a)   all Smokers who reside in the United States, its territories,
possessions and the Commonwealth of Puerto Rico; and

         (b)   the estates, representatives, and administrators of these 
Smokers; and

         (c)   the spouses, children, relatives and "significant others" of 
these Smokers as their heirs or survivors; and

         (d)   all persons who reside in the United States, its territories,
possessions and the Commonwealth of Puerto Rico who, prior to or during the term
of this Agreement, have been exposed to or claim to have been exposed to
(including, through market share theory) environmental or second-hand tobacco
smoke from tobacco products manufactured by Liggett or its predecessors and have
suffered or claim to have suffered Injury as a consequence thereof; and

         (e)   all persons or entities (including, without limitation, any
territory, city, county, state, parish, possession or any other political
subdivision thereof, or any agency or instrumentality of any of the foregoing,
or any insurance company) in the United States, its territories, possessions,
and the Commonwealth of Puerto Rico, which, prior to or during the term of this
Agreement, have incurred or claim to have incurred losses as a result of, based
on, or by reason of paying for or providing treatment for diseases, illnesses,
or medical conditions allegedly caused by Cigarettes (or exposure thereto,
including by way of environmental or second hand smoke) to the persons defined
in subparagraphs (a) through (d) above; and


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         (f)   all persons who reside in the United States, its territories,
possessions and the Commonwealth of Puerto Rico, who, prior to or during the
term of this Agreement, have either smoked Cigarettes or used tobacco products
(or been exposed thereto, including by way of environmental or second hand
smoke) and claim (i) to have suffered Injury as a consequence thereof, and (ii)
in connection with such claim, allege that Liggett and/or Brooke Group or their
predecessors engaged in a fraud, conspiracy or any concerted activity with one
or more other tobacco product manufacturers in the manufacturing, sale or
marketing of tobacco products;

         provided that excluded from such settlement class are (i) officers and
directors of any of the Settling Defendants, (ii) any person or entity which has
entered into any prior or contemporaneous settlement with Liggett of a Tobacco
Action, and (iii) any State that opts out of this Settlement pursuant to Section
9 of this Agreement.


         "Settlement Class Counsel" means the firms listed in Section 24.8 of
this Agreement.

         "Settlement Class Representatives" means the Plaintiff or Plaintiffs
approved by the Court to serve as Settlement Class representatives.

         "Settlement Fund" means the fund established in accordance with the
terms of Section 7 of this Agreement, which shall be established in a reputable
bank or other financial institution subject to the jurisdiction of the Court, to
provide a secure and interest-bearing fund, which shall be jointly controlled by
the Settling States and the Settlement Class (and/or the FLETCHER Settlement
Class).


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         "Settlement Fund Board" or "Board" means the board which shall be
established pursuant to this Agreement (and/or the FLETCHER Settlement
Agreement) to administer that portion of the Settlement Fund allocated to the
Settlement Class and/or the FLETCHER Settlement Class pursuant to such
Agreements. Board representatives shall be appointed by the Court pursuant to
procedures for selection of the representatives established by the Court. At
least one-third of the Board shall be comprised of representatives of the public
health community who shall be designated by majority vote of the other members
of the Board.

         "Settling Defendants" means Brooke Group and/or Liggett.

         "Settling Defendants' Counsel" means the law firm of Kasowitz, Benson,
Torres & Friedman L.L.P.

         "Settling States" means those States that entered into the Attorneys
General Settlement Agreement.

         "Smokers" means all persons who, prior to or during the term of this
Agreement, have smoked Cigarettes or have used other tobacco products
manufactured by Liggett or its predecessors and have suffered or claim to have
suffered Injury as a consequence thereof.

         "Subsequent Notice" means the written notice to be provided by Liggett
and its Present Affiliates to Settlement Class members as defined and provided
by Section 8.4 of this Agreement.

         "Subsequent Notice Dates" means the dates defined in Section 8.4
hereof.


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<PAGE>   17

         "Tobacco Action" means any individual lawsuit or putative or certified
class action lawsuit brought against one or more Tobacco Companies in connection
with smoking-related claims such as (without limitation) those asserted in the
WALKER Action.

         "Tobacco Companies" means The American Tobacco Co., Lorillard Tobacco
Co., Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco
Corp., Liggett and United States Tobacco Co. and/or their respective Affiliates.

         "Tobacco Snuff" means any cut, ground, powdered, or leaf tobacco that
is intended to be placed in the oral cavity.

2.       SETTLEMENT PURPOSES ONLY.
         -------------------------

         This Agreement is for settlement purposes only, and neither the fact
of, nor any provision contained in, this Agreement nor any action taken
hereunder shall constitute, be construed as, or be admissible in evidence
against the Settling Defendants as, any admission of the validity of any claim,
any argument or any fact alleged or which could have been alleged by Plaintiffs
in the Action or alleged or which could have been alleged in any other action or
proceeding of any kind or of any wrongdoing, fault, violation of law, or
liability of any kind on the part of the Settling Defendants or any admission by
them of any claim or allegation made or which could have been made in the Action
or in any other action or proceeding of any kind, or as an admission by any of
the Plaintiffs or members of the Settlement Class of the validity of any fact or
defense asserted or which could have been asserted against them in the Action or
in any other action or proceeding of any kind.


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<PAGE>   18


3.       SUBMISSION FOR PRELIMINARY APPROVAL.
         ------------------------------------

         Promptly after execution of this Agreement, the Parties shall, through
their respective attorneys, jointly submit this Agreement to the Court and move
the Court for Preliminary Approval.

4.       PARTIES.
         --------

         4.1. This Agreement shall be binding, in accordance with the terms
hereof, upon Plaintiffs, the Settlement Class, Brooke Group and Liggett;
provided that, notwithstanding anything else contained in this Agreement, the
payment obligations of this Agreement shall be binding only upon Liggett and its
successors.

         4.2. No Settling Defendant shall sell, dispose or transfer
substantially all of its cigarette brands or businesses without first causing
the acquiror, on behalf of itself and its successors, to be bound by all of the
obligations of a Settling Defendant pursuant to Sections 5.2 and 5.4 through 5.8
hereunder as to such transferred brands or businesses; provided that this
Section 4.2 shall not apply to the extent such sale, disposition or transfer is
required by the Federal Trade Commission, Department of Justice, State Attorney
General or court order.

         4.3. The Parties acknowledge and agree that the willingness of Brooke
Group and Liggett to enter into this Agreement, and in particular their
willingness to agree to the equitable and other relief relating to cigarette
marketing and to cooperation provided for in Section 5 hereof, are important to
the interests of the Settlement Class.


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<PAGE>   19

5.       CONSENT DECREES; WARNINGS; COOPERATION.
         ---------------------------------------

         5.1. Upon execution of this Settlement Agreement, Liggett shall, by and
through its Director, Bennett S. LeBow, issue a public statement substantially
in the following form and substance:

         The tobacco industry has for many years acted in concert to seek to
deny, refute or dilute warnings concerning smoking issued by the United States
Surgeon General, the Environmental Protection Agency and other respected health
authorities. We at Liggett have determined, in entering into agreements settling
smoking-related litigation, that we will not be a party to this industry
activity. Our settlement agreements with a national settlement class, including
our agreement submitted today in federal court in West Virginia for preliminary
approval, have reaffirmed our commitment to aid the settlement class members and
their counsel in revealing the true nature and extent of this industry conduct.

         5.2. As promptly as reasonably practicable, but no later than six
months after execution of the Attorneys General Settlement Agreement, Settling
Defendants shall cause to be printed boldly, on all of their Cigarette packages
and in all of their Cigarette advertising, in addition to the warnings mandated
under the Federal Cigarette Labeling and Advertising Act, as amended, 15 U.S.C.
Section 1331 ET SEQ., the statement that cigarette smoking is addictive. To the
extent any Settling Defendant manufactures and sells other tobacco products, a
similar warning shall be placed on such product.

         5.3.1. Upon execution of this Agreement, each Settling Defendant shall:

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<PAGE>   20

              (1) cooperate with the Settlement Class, its members and counsel,
         in that such Settling Defendant will take no steps to impede or
         frustrate their investigations into, or prosecutions of, any of the
         non-settling defendants in Tobacco Actions, so as to secure the just,
         speedy and inexpensive determination of all such smoking-related claims
         against said non-settling persons and entities;

              (2) cooperate in and facilitate reasonable non-party discovery
         from Settling Defendants in connection with Tobacco Actions;

              (3) actively assist the Settlement Class, its members and counsel
         in identifying and locating any and all persons known to such Settling
         Defendant to have documents or information that is discoverable in such
         proceedings, and to actively assist in interviewing and obtaining
         documents and information from all such persons, and to encourage such
         person to cooperate with the Settlement Class; and shall actively
         assist in interpreting documents relating to litigation against
         Non-settling Tobacco Companies; and

              (4) actively assist the Settlement Class, its members and counsel,
         by requesting, and if necessary, moving the Court to compel, the
         Non-settling Tobacco Companies to produce to Liggett all documents (1)
         that are relevant to the subject matter of Tobacco Actions or which are
         likely to lead to admissible evidence in connection with the claims
         asserted in a Tobacco Action, and (2) that the Non-settling Tobacco
         Companies claim are subject to a joint defense or common interest
         privilege. Settling Defendants will review such documents, and 



                                      -20-
<PAGE>   21

         shall deposit those documents with respect to which Settling Defendants
         have concerns regarding whether such documents should be protected from
         discovery under seal for IN CAMERA inspection by the Court, together
         with a statement to the Court of Settling Defendants' concerns
         regarding whether they should be protected from discovery. The Parties
         agree to request that the Court shall retain jurisdiction to resolve
         that issue; and

              (5) insofar as such Settling Defendant has or obtains any material
         information concerning any fraudulent or illegal conduct on the part of
         any parties, including Non-settling Tobacco Companies, their agents,
         attorneys, or their co-defendants designed to frustrate or defeat the
         claims of the plaintiffs against such parties, companies, agents,
         attorneys, or co-defendants, or which have the effect of unlawfully
         suppressing evidence relevant to smoking claims, disclose such
         information to the appropriate judicial and regulatory agencies, and to
         Settlement Class Counsel.

         5.3.2. With respect to each Settlement Class member and her counsel,
         subject to, and promptly after (i) the entry of a Protective Order by
         the Court, and (ii) an agreement by such Settlement Class member and
         her counsel to abide by, and not object to this Settlement Agreement,
         each Settling Defendant shall:

              (1) promptly provide all documents and information that are
         relevant to the subject matter of the Actions or which are likely to
         lead to admissible 

                                      -21-
<PAGE>   22

         evidence in connection with the claims asserted in a Tobacco Action,
         subject to the provisions of Section 5.3.2(2) hereof;

              (2) waive any and all applicable attorney-client privileges and
         work product protections with respect to such documents and
         information. Such waiver shall not extend to (a) documents and
         information not relevant to the subject matter of Tobacco Actions or
         not reasonably likely to lead to admissible evidence in connection with
         claims asserted in any Tobacco Action (b) documents subject to a joint
         defense or other privilege or protection which Settling Defendants
         cannot legally waive unilaterally, except that the waiver by the
         Settling Defendant shall apply, to the extent permitted by law, to its
         own joint defenses or other privileges. To the extent that a Settling
         Defendant has a good faith belief, or one or more Non-settling Tobacco
         Companies claims, that documents to be provided pursuant to Section
         5.3.2(1) hereof may be subject to a joint defense or other privilege
         (or a claim of such privilege) of one or more of the Non-settling
         Tobacco Companies, such documents shall be deposited under seal for in
         camera inspection by the Court, or a court in which a Tobacco Action is
         pending, together with a statement to the Court that such Settling
         Defendant has concerns as to whether some or all of such documents
         should be protected from discovery, and the Parties agree to request
         that the Court shall retain jurisdiction to resolve that issue. Liggett
         will participate in proceedings, including by way of court 


                                      -22-
<PAGE>   23

         appearances or declarations, concerning issues of whether such
         documents are discoverable;

              (3) offer their employees, and any and all other individuals over
         whom they have control, to provide witness interviews of such employees
         and to testify, in depositions and at trial; it being understood and
         agreed that Liggett will waive and hereby does waive any and all
         applicable confidentiality agreements to the extent such
         confidentiality agreements would restrict testimony under this
         Agreement, if any, to which such witnesses may be subject;

              (4) demand from its past or current national legal counsel all
         documents and information obtained in the course of representation of
         any Settling Defendant which in any way relates to the cooperation
         required in paragraphs 5.3.1(1) - 5.3.2(3) above, which shall be
         provided to the Settlement Class, its members and counsel as provided
         under this paragraph.

              5.3.3. With respect to the cooperation set forth in paragraphs
         5.3.1 and 5.3.2 above, the Attorneys General and Settlement Class
         Counsel (and/or FLETCHER Class Counsel) shall appoint, on a yearly
         basis, an Oversight Committee, to oversee such cooperation so that it
         fairly assists them and minimizes the burden on a Settling Defendant.
         All requests for cooperation will be first made to the Oversight
         Committee. The Oversight Committee shall coordinate such requests
         giving due regard to the legitimate needs of the litigants requesting
         cooperation and the burden on the Settling Defendant. Nothing in this
         Agreement shall waive or alter the rights of Settlement Class

                                      -23-
<PAGE>   24

         members to obtain discovery of Liggett as required by a court order or
         case management order in any Tobacco Action, provided that no order is
         sought that is inconsistent with this Agreement.

              5.3.4. In the event the Oversight Committee cannot agree on the
         sharing of cooperation by litigants, any member of the Committee may
         seek resolution by an Arbitrator. In the event that the Oversight
         Committee cannot agree on the selection of an Arbitrator, the Oversight
         Committee will petition the Multidistrict Litigation Panel for
         appointment of an Arbitrator. In the event any Settling Defendant,
         absent good cause, does not provide requested cooperation as promptly
         as reasonably practicable, after receiving written notice from the
         Committee of such request, (1) the Committee may seek relief from an
         Arbitrator, and (2) the Committee, upon notice to the Settling
         Defendant, may petition an Arbitrator for specific performance of such
         requested cooperation.

              5.4. Each Settling Defendant, promptly after becoming bound by
         this Agreement, shall consent to jurisdiction by the FDA, for the sole
         purpose of promulgating the FDA Rule with respect to all Tobacco
         Companies. Further, each Settling Defendant, promptly after execution
         of this Agreement, shall endorse, support and assist in attempts by the
         FDA to have the FDA Rule become enforceable. Such efforts shall
         include, if and as reasonably requested by the Attorneys General,
         filing appropriate amicus briefs and other court papers in litigation
         relating to the FDA Rule.

              5.5. Each Settling Defendant shall follow and abide by the
         provisions of the FDA Rule, insofar as they pertain solely to such
         Settling Defendant's Domestic Tobacco 


                                      -24-
<PAGE>   25

         Operations, as set forth in, and modified by, paragraphs 5.5.1 - 5.5.4
         hereof until a final determination is reached respecting the FDA Rule
         at which time the Settling Defendants will be bound by the FDA Rule
         only insofar as, and to the extent that, the FDA Rule becomes an
         enforceable obligation binding upon all of the Tobacco Companies:

         1        FDA Rule Section 897.16(b), as proposed.

         2        FDA Rule Section 897.16(d), as proposed. 

         3        FDA Rule Section 897.30(a), as proposed.

         4        FDA Rule Section 897.30(b), but only to the extent that such
                  section applies to billboards within 1,000 feet of a clearly
                  marked public or private elementary or secondary school or a
                  clearly marked, outdoor, municipal or other
                  government-operated public playground for children.

              5.6. Notwithstanding anything to the contrary in the Proposed Rule
         or in this Agreement, Liggett will commence compliance with Section 5.5
         of this Agreement as soon as reasonably practicable, according priority
         as to compliance to the States listed in Appendix A to the Attorneys
         General Settlement Agreement and then to Subsequent Settling States;
         provided that Liggett may limit its compliance to the extent, if any,
         necessary to ensure that the net annual out-of-pocket cost to Liggett
         of such compliance not exceed $1 million; and provided further that
         Liggett shall not be obligated pursuant hereto to breach pre-existing
         legal obligations, if any, it may have with respect to the matters
         covered by Section 5.5 (and shall use its reasonable best efforts to
         minimize the degree to which any such obligations would impede its full
         compliance therewith). For purposes of this paragraph, the phrase "net
         annual out-of-pocket costs" means 



                                      -25-
<PAGE>   26

         the excess of (a) the additional out-of-pocket expenditures incurred
         during a particular year by Liggett in complying with the matters
         specified in Section 5.5, over (b) savings, if any, in out-of-pocket
         expenditures realized during such year by Liggett directly from the
         implementation of the matters covered by Section 5.5.

              5.7. If, when and to the extent that the FDA Rule, in whole or in
         part, becomes an enforceable legal obligation binding upon all of the
         Defendants, each Settling Defendant will comply therewith, without
         consideration of any limits or exceptions herein. If the FDA Rule does
         not so become such a legal obligation, Liggett shall, during the
         duration of this Agreement, continue to comply with Section 5.5.

              5.8. Each Settling Defendant shall not use cartoon characters,
         such as "Joe Camel" in any of its advertising and promotional materials
         and activities with respect to tobacco products. No Settling Defendant
         shall enter into any new contract for advertising and promotion with
         respect to tobacco products using any such cartoon characters after the
         date the Settling Defendants become bound by this Agreement.

6.       GLOBAL SETTLEMENT.
         ------------------

         2    Effective upon the execution hereof, Settlement Class 
Counsel each agree (a) to exercise best efforts to ensure that the financial
terms, financial obligations or financial conditions of any Global Settlement
are no more onerous on, or less favorable to, Brooke Group and Liggett than the
financial terms, financial obligations or financial conditions of this
Settlement Agreement, and (b) to issue a public statement substantially in the
following form and substance:

                                      -26-
<PAGE>   27

                   The historic settlements entered into by Liggett, whereby
         Liggett has agreed, among other things, to provide full cooperation to
         twenty-two Attorneys General and a nationwide settlement class and to
         consent to FDA regulation of tobacco marketing, are a major advance in
         our efforts to prevent smoking by children and adolescents and to
         ensure that the tobacco industry markets its products lawfully.
         Accordingly, the undersigned counsel will use their best efforts in
         Congress and elsewhere to ensure that any such industry-wide resolution
         provide for financial terms for Liggett that reflect appropriate
         recognition of Liggett's cooperative efforts, and which are no more
         onerous on, or less favorable to Liggett than those provided for in our
         Settlement Agreement.

         3     In the event there is a Global Settlement at any time which 
contains financial terms, financial obligations or financial conditions as to
Brooke Group and Liggett which are more onerous on, or less favorable to, Brooke
Group and Liggett than those of this Settlement Agreement, then, in addition to
and not in derogation of any other rights or remedies Brooke Group and Liggett
may have, Brooke Group and Liggett shall have the right, at their option, to
withdraw from future performance of this Agreement.

7.       SETTLEMENT FUND.
         ----------------

         7.1. Except as may otherwise be provided herein, all amounts due and
owing by each Settling Defendant under this Agreement shall be paid when due
into the Settlement Fund to be allocated and distributed to Settlement Class
members (and/or FLETCHER Settlement Class members) and Settling States in
accordance with this Agreement (and/or the FLETCHER 

                                      -27-
<PAGE>   28

Settlement Agreement) and the Attorneys General Settlement Agreement. In the
event that the Settling States and Settlement Class Counsel (and/or FLETCHER
Class Counsel) cannot agree to an equitable allocation of the Settlement Fund
between the Settling States and the Settlement Class (and/or the FLETCHER
Settlement Class), the Settling States and Settlement Class Counsel (and/or
FLETCHER Class Counsel) shall seek to agree on the selection of an Arbitrator to
determine such allocation. In the event that the Settling States and Settlement
Class Counsel (and/or FLETCHER Class Counsel) cannot agree on the selection of
an Arbitrator, the Settling States and Settlement Class Counsel (and/or FLETCHER
Class Counsel) will petition the Court to determine such allocation; it being
understood that some portion of the Settlement Fund will be allocated to
counter-market advertising.

         7.2. Settling Defendants shall have no interest in or responsibility
for allocations or distributions from the Settlement Fund and do not guarantee
any earnings or insure against any losses from any portion of the Settlement
Fund assets that may be maintained or administered as provided in Section 7.1
above.

         7.3. Subject to the terms of this Agreement, Liggett shall make the
following payments:

         7.3.1. An initial payment of $25 million due 120 days from the date of
a Future Affiliate Transaction; and

         7.3.2. Subject to the provisions of Sections 7.7 - 7.9, payments, each
equivalent to 25% of Liggett's Pretax Income, due 120 days after the end of each
fiscal year of 

                                      -28-
<PAGE>   29

Liggett. The first payment shall be made with respect to the first full fiscal
year commencing after the date of this Settlement Agreement.

         7.4. Liggett shall pay the reasonable and necessary expenses of the
administration, allocation, and distribution of the Settlement Fund; provided
that Liggett shall not be obligated to pay more than $1 million in any year for
such expenses or the costs of Initial and each Subsequent Notice.

         7.5. The amounts payable hereunder to the Settlement Fund shall
represent the maximum amounts payable to the Settlement Fund under this
Agreement (and/or the FLETCHER Settlement Agreement) and the Attorneys General
Settlement Agreements. Subject to the approval of the Court (and/or the FLETCHER
Court) the Settlement Fund Board shall institute a process for the allocation of
the Settlement Fund to the Settlement Class, as set forth in this Agreement.

         7.6. The Court shall retain exclusive and continuing jurisdiction over
the Settlement Fund, and any and all claims thereto. All allocations of, and
distributions from, the Settlement Fund to the Settlement Class shall be subject
to Court approval.

         7.7. In the event of a Global Settlement, the Settling Defendants shall
have the right to reduce the aggregate payments due from Liggett in each year
pursuant to this Agreement so that such aggregate payments shall be no more than
the lesser of (A) on a Cost Per Cigarette Pack basis, one-third of the lowest
Cost Per Cigarette Pack due in such year from the Non-Settling Tobacco Companies
under such Global Settlement and (B) on a percentage of Pretax Income basis,
one-third of the lowest percentage of Pretax Income due in such year from the


                                      -29-
<PAGE>   30

Non-Settling Tobacco Companies under such Global Settlement (such percentage to
be computed as if the payments due from such companies were included in revenues
and earnings).

         7.8. Liggett shall receive as a credit against any and all amounts due
hereunder, any and all amounts it is required to pay under a Global Settlement.

         7.9. In the event that one or more States elect to opt out of the
Settlement Class (and/or the FLETCHER Settlement Class) and action(s) are
brought against any Settling Defendant on behalf of such State(s), the annual
payment amount due under Sections 7.3.2 of this Agreement from a Settling
Defendant shall be reduced by an amount equal to the product of (i) the ratio
that the Medicaid Population of the States that elect to opt out of the FLETCHER
Settlement Class then bears to the total Medicaid Population and (ii) 20% of
Liggett's Pretax Income.

         7.10. The Settlement Fund shall constitute the sole source of recovery
on any and all claims against Liggett and its Present Affiliates which have
been, will be, or could be asserted, directly or indirectly, by, on behalf, or
for the benefit of any and all Settlement Class members, such that, subject to
the Court's final determination that this Settlement Agreement is fair pursuant
to Mandatory Class Final Approval, Liggett and its Present Affiliates shall
enjoy a universal release from all claims associated with or resulting from the
smoking of their cigarettes in consideration of their agreeing to the entry of
the Consent Decree and of Liggett's payments into the Settlement Fund and of the
reasonable expenses of the administration, allocation, and distribution of the
Settlement Fund, for the benefit of Settlement Class members, in accordance with
this Agreement.



                                      -30-
<PAGE>   31

         7.11. The Board shall institute a process for the equitable
adjudication of smoking-related claims against Liggett for compensatory damages
by Settlement Class members in view of, among other things, the history of the
outcome of such claims; it being understood that all claims for punitive,
exemplary or other such damages are hereby waived. The Board shall also consider
any and all comments, recommendations, requests and suggestions from Settlement
Class members and their counsel, as to the appropriate and equitable allocation
and distribution of the Settlement Fund, for evaluation and recommendation by
the Board to the Court for its approval. The Court shall not be requested by the
Parties or the Board to make any specific orders regarding the ultimate
allocation and distribution of the Settlement Fund at the time of Preliminary or
Mandatory Class Final Approval. The notice forms to be submitted to the Court
for its approval shall inform Settlement Class members that issues of allocation
and distribution are reserved for future rulings, conditioned upon and
subsequent to Mandatory Class Final Approval, and that any and all Settlement
Class members who wish to do so may submit their comments, recommendations,
requests and suggestions for the allocation and distribution of the Settlement
Fund, under a procedure to be established by the Court. The Court will be
requested to grant Preliminary and Mandatory Class Final Approval without regard
to the ultimate equitable allocation and distribution of the Settlement Fund, in
order to provide Settlement Class members with a full opportunity to participate
in the allocation decision-making process after the Settlement Fund is in place;
and to avoid distracting the parties and the Court, during the settlement
approval process, with comments or objections more properly directed at the
specifics of allocation and distribution with respect to particular claimants
rather than the 



                                      -31-
<PAGE>   32

common class interest in the overall fairness, adequacy, and reasonableness of
the Settlement itself, in the context of the "limited fund" available from
Liggett to pay claims, the provision of valuable equitable relief, and the
compromise of disputed and risky claims.

         7.12. Settling Defendants agree not to take any action the primary
purpose of which is to reduce Liggett's payment obligations under this
Agreement.

         7.13. Settling Defendants represent that prior to entering into this
Settlement Agreement, Settling Defendants took no action the primary purpose of
which was to reduce Liggett's anticipated payment obligations under this
Agreement.

8.   NOTICE TO THE SETTLEMENT CLASS.
     -------------------------------

         8.1. Upon Preliminary Approval, and as the Court may direct, each
Settling Defendant shall cause notice of the settlement embodied herein (the
"Initial Notice") to be given to the members of the Settlement Class.


         8.2. The Initial Notice to Settlement Class members shall inform them
as follows:

              The allocation of the Settlement Fund to specific uses or among
         particular claimants has not been determined. Future allocation and
         distribution of the Settlement Fund will be administered by the
         Settlement Fund Board. The Board shall be comprised of representatives
         appointed by the Attorneys General of certain settling states and by
         Settlement Class Counsel with the approval of the Court, and it shall
         include representatives of the public health community. The Board shall
         be responsible for recommending and implementing guidelines and
         procedures for the administration of 



                                      -32-
<PAGE>   33

         claims. The Settlement Agreement does not specify any particular
         allocation of Settlement proceeds. Settlement Class members will be
         given notice and an opportunity to be heard and make suggestions
         regarding allocation before any final allocation or distribution
         decisions are made.

         8.3. The Initial Notice, in a form to be approved by the Court, shall
be disseminated as provided in this Section 8 over the course of a period not to
exceed ninety (90) days from the Initial Notice Date, subject to approval by the
Court.

         8.4. At the end of each successive three-year interval during the term
of this Agreement ("Subsequent Notice Dates"), each Settling Defendant shall
cause notice of the settlement embodied herein (the "Subsequent Notice") to be
given to the members of the Settlement Class.

         8.5. Each Subsequent Notice, in a form to be approved by the Court,
shall be disseminated over the course of four periods each not to exceed sixty
(60) days from each applicable Subsequent Notice Date.

9.       MANDATORY CLASS CERTIFICATION AS TO LIGGETT.
         --------------------------------------------

         The mandatory certification of the Settlement Class under Rule
23(b)(1)(B) and/or 23(b)(2) of the Federal Rules of Civil Procedure is essential
to the ability of the Parties to perform the terms and conditions set forth in
this Settlement Agreement. It is the intent and understanding of the Parties
that the undertakings of Liggett and Brooke Group as described in Section 5 of
this Settlement Agreement, with respect to Liggett's promotional, advertising,
marketing and sales practices in order to inform the Settlement Class and the
American public of



                                      -33-
<PAGE>   34

the dangers of smoking and the addictive nature of nicotine, to prevent sales of
cigarettes to children and adolescents, and to provide active and meaningful
cooperation in the prosecution of smokers' claims against Non-Settling Tobacco
Companies constitute injunctive, equitable, and declaratory relief of real,
immediate, and ongoing benefit to the Settlement Class and the public,
sufficient to satisfy the criteria of mandatory class certification under Rule
23. The Parties shall cooperate in establishing, to the satisfaction of the
Court, the evidentiary predicates for the Court's determination of a "limited
fund" under Rule 23. In the event the Settlement Class is not certified under
one or more of these mandatory provisions, or is later decertified by the Court
or on appeal, Liggett and Brooke Group shall have the right and option to
withdraw from this Settlement Agreement.

10.       FUTURE AFFILIATE.
          -----------------

         10.1. The terms of this Agreement shall not be binding upon or
applicable to a Future Affiliate of the Settling Defendants, except as provided
for in this Section 10.

         10.2. (a) In the event of a Future Affiliate Transaction, the
Settlement Class shall not seek to enjoin or otherwise challenge a spinoff or
like disposition of the stock or assets of any Affiliate of the Future Affiliate
which is not engaged in Domestic Tobacco Operations. The Settlement Class
reserves the right to seek to enjoin such a spinoff in the event that such
spinoff or like disposition is sought by someone other than Brooke Group or a
Future Affiliate or an Affiliate of a Future Affiliate.

               (b) In the event of and after a Future Affiliate Transaction: 
(i) the Settlement Class members each release (pursuant to, MUTATIS MUTANDIS,
Section 11.1 hereof) and 


                                      -34-
<PAGE>   35

covenant not to bring suit for any claim so released against any Affiliate of
the Future Affiliate, other than the Affiliate engaged in Domestic Tobacco
Operations; and (ii) if prior to the Future Affiliate Transaction, a Settlement
Class member shall have obtained a verdict or judgment in an action, against an
Affiliate (including the Parent) of the Future Affiliate, other than against the
Affiliate engaged in Domestic Tobacco Operations, such Settlement Class member
shall not seek to enforce such verdict or judgment against any such Affiliate
other than the Affiliate engaged in Domestic Tobacco Operations.

         10.3. In the event a Settlement Class member obtains a verdict or
judgment against a Non-settling Tobacco Company in a Tobacco Action, and a
Settling Defendant commences a proxy contest or similar action seeking control
of such Non-settling Tobacco Company or an Affiliate thereof, then such
Non-settling Tobacco Company or an Affiliate thereof will not be required to
post a bond in order to stay enforcement of such verdict or judgment, and such
Settlement Class member will not seek to enforce such verdict or judgment
against such Non-settling Tobacco Company or such Affiliate, for a period of the
earlier of (i) one year from the commencement of such proxy contest or action,
and (ii) completion or resolution of the proxy or merger vote.

         10.4. In the event that subsequent to a Future Affiliate Transaction,
and in conformity with Section 10.2(b) hereof, a Settlement Class member 
obtains a verdict or judgment against a Future Affiliate in an action, such 
Future Affiliate will not be required to post a bond in order to stay 
enforcement of such verdict or judgment, and such Settlement Class member will 


                                      -35-
<PAGE>   36

not seek to enforce such judgment against such Future Affiliate or an Affiliate
of such Future Affiliate until the verdict or judgment becomes final and
non-appealable.

         10.5. Prior to a Future Affiliate Transaction, Settling Defendants
shall not enter into any agreement with any prospective Future Affiliate which
diminishes or impairs the prospective Future Affiliate's assets, other than in
the established and/or ordinary course of business of such prospective Future
Affiliate, and shall use best efforts to prevent such prospective Future
Affiliate from diminishing or impairing such assets. In the event of a Future
Affiliate Transaction, the Settlement Class reserves all of their rights to
prevent the Future Affiliate from diminishing or impairing the Future
Affiliate's assets, other than in the established and/or ordinary course of
business of such Future Affiliate.

         10.6. With respect to subsections 10.1 - 10.5 above, nothing in these
provisions, or elsewhere in this Agreement, limits the authority of the
Settlement Class to challenge any transaction which they reasonably believe is
in violation of federal or state antitrust law.

         10.7. In the event of a Future Affiliate Transaction, after which
Liggett remains as a separate entity such that Liggett's Pretax Income is
readily calculable, Section 7.3.2 hereof shall remain in effect with respect to
Pretax Income solely attributable to such separate entity. In the event of a
Future Affiliate Transaction, Settling Defendants and the Attorneys General and
their respective counsel, each agree to exercise best efforts to negotiate in
good faith a payment schedule to replace that set forth in Section 7.3.2.
Nothing in this Section 10.7 affects in any way Liggett's payment obligations
under Section 7.3.1 hereof.


                                      -36-
<PAGE>   37

         10.8. Promptly after a Future Affiliate Transaction, a Future Affiliate
shall abide by Sections 5.4 - 5.7 hereof.

         10.9. Promptly after a Future Affiliate Transaction, Settling
Defendants and the Settlement Class Counsel, each agree to exercise best efforts
to negotiate in good faith a settlement of all claims against a Future
Affiliate.

         10.10. As promptly as reasonably practicable after a Future Affiliate
Transaction, a Future Affiliate shall agree to eliminate cartoon characters such
as "Joe Camel," from all of its advertising and promotional materials and
activities with respect to tobacco products.

11.       RELEASE.
          --------

         11.1. Upon the Mandatory Class Settlement Date, with respect to each
Settling Defendant, for good and sufficient consideration as described herein,
all members of the Settlement Class, collectively and individually, on behalf of
themselves, the persons they represent, their heirs, executors, administrators,
trustees, beneficiaries, agents, attorneys, successors, assigns, affiliates,
officers, directors, employees and shareholders shall be deemed to and do hereby
release, dismiss and discharge each and every claim, right, and cause of action
(including, without limitation, all claims for damages, medical expenses,
restitution, medical monitoring, or any similar legal or equitable relief, under
federal, state or common law), known or unknown, asserted or unasserted, direct
or indirect, which they had, now have, or may hereafter have against each
Settling Defendant (including its past, present and future parents,
subsidiaries, affiliates and their past, present and future agents, servants,
attorneys, employees, officers, directors, shareholders, and beneficial owners)
(and downstream distribution entities of 


                                      -37-
<PAGE>   38

Liggett, but only to the extent that such downstream distribution entities would
have cross-claims against Liggett) which is based on any and all harm, injury or
damages claimed by members of the Settlement Class to be caused by smoking,
addiction to, or dependence upon, cigarettes or which is asserted in the Action
in connection with, or arising out of the conduct, acts, facts, transactions,
occurrences, representations or omissions set forth, alleged, referred to or
otherwise embraced in the Action complaint or any and all other Tobacco Actions.

         Provided, however, as follows:

         1) If this Agreement expires upon completion of its full term, this
release shall continue and apply in full force and effect with respect to all
released claims which accrued or shall accrue prior to, through and including
the date of such expiration, such that such claims shall be forever released,
but only as to such claims through and including such date; if this Agreement
terminates for any reason prior to its full term, this release shall be of no
further force and effect and Settling Defendants shall be entitled to a credit
to the extent otherwise provided in this Agreement against all claims covered by
the release for the full amount paid by such Settling Defendants hereunder.

         2) Except as specifically provided herein, this release does not
pertain or apply to any other existing or potential defendant in any present or
future action.

         3) This release does not release Settling Defendants from claims which
may be asserted by the Settlement Class against a Settling Defendant involving
conduct unrelated to the manufacture and/or sale of tobacco products.


                                      -38-
<PAGE>   39

         11.2. Except as specifically provided herein, nothing in this Agreement
shall prejudice or in any way interfere with the rights of the Plaintiffs,
Settlement Class members, and the Settling Defendants to pursue all of their
rights and remedies against Non-settling Tobacco Companies or other defendants.

12.      EXCLUSIVE REMEDY; DISMISSAL OF ACTION; JURISDICTION OF COURT.
         -------------------------------------------------------------

         12.1. Except as otherwise provided in this Agreement, this Agreement
shall be the sole and exclusive remedy for any and all released claims of
Settlement Class members against the Settling Defendants, and upon the entry of
the Mandatory Class Final Order and Judgment by the Court, each Settlement Class
member shall be barred from initiating, asserting, or prosecuting any released
claims against Brooke Group or Liggett.

         12.2. On the Mandatory Class Settlement Date, the Action shall be
dismissed as against each Settling Defendant, subject to the continuing and
exclusive jurisdiction of the Court over the enforcement and administration of
the Settlement Agreement, and the allocation and distribution of the Settlement
Fund. Settlement Class members may not commence or prosecute actions against
Brooke Group or Liggett on claims released pursuant to this Agreement once the
Mandatory Class Final Order and Judgment is entered. The Settlement Class
Counsel agree to provide reasonable cooperation to stay or dismiss, as
appropriate, any action of any Settlement Class member for such released claims
pending in state or federal court against the Settling Defendants.

         12.3. The Court shall retain exclusive and continuing jurisdiction over
the Action, all Parties, all Settlement Class members and the Settlement Fund to
interpret and enforce the terms, conditions, and obligations of this Agreement.
Nothing in this Agreement shall be construed to divest or limit the jurisdiction
of the Court with respect to claims which may be alleged by the Settlement Class
against Non-settling Tobacco Companies or other defendants.



                                      -39-
<PAGE>   40

13.      TERM.
         -----

         13.1. Unless earlier terminated in accordance with the provisions of
this Agreement, the duration of this Agreement shall be twenty-five (25) years
from the Liggett Settlement Date; provided that in the event of a Global
Settlement, the duration of this Agreement shall be equal to the duration of the
Global Settlement.

         13.2. The performance of this Agreement by Liggett and Brooke Group is
expressly contingent upon the Court's issuance of the Mandatory Class Final
Order and Judgment. If the Court fails to hold the Mandatory Class Fairness
Hearing within six (6) months of the date hereof or to issue a Mandatory Class
Final Order and Judgment within sixty (60) days following conclusion of the
Mandatory Class Fairness Hearing, Liggett and Brooke Group may elect to
terminate this Agreement by written notice to the Court and the Settlement Class
Counsel within twenty (20) business days following the end of either such
period.

         13.3. Except as may be otherwise specifically provided in this
Agreement, a termination by a Settling Defendant hereunder shall have the effect
of rendering this Agreement as having no force or effect whatsoever, null and
void AB INITIO, and not admissible as evidence for any purpose in any pending or
future litigation in any jurisdiction. However, a termination 


                                      -40-
<PAGE>   41

shall not affect any prior cooperation or require the return of any documents
produced to a Settlement Class member pursuant to this Agreement.

14.      CONTINUING ENFORCEABILITY.
         --------------------------

         14.1. The parties acknowledge and agree that the purpose of this
Agreement and the mandatory certification of the Settlement Class with respect
to Liggett and its Present Affiliates is to provide the Settlement Class with
certain equitable and other relief, and a secure and ongoing source of recovery,
subject to equitable allocation and distribution, while ensuring that Liggett
may make its payments hereunder without risking bankruptcy or other insolvency;
this Agreement is intended to be a mutually beneficial and equitable alternative
to the prospect of bankruptcy.

         14.2. Unless earlier terminated, as to the Settlement Class, this
Agreement and each provision of or obligation arising from this Agreement shall
continue and remain fully executory and enforceable if a Settling Defendant
institutes or is subject to the institution against it of any proceeding or
voluntary case under title 11 of the UnIted States Code, or other proceeding
seeking to adjudicate it insolvent or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition of it
or its debts under any law relating to bankruptcy, insolvency or reorganization
or relief or protection of debtors or other proceeding seeking the entry of an
order for relief or the appointment of a receiver, trustee, custodian or other
similar official for it or for any part of its property (each, a "Bankruptcy
Proceeding"). Brooke Group has the right but not the obligation to cure and to
perform any and all obligations of Liggett under this Agreement notwithstanding
the occurrence and continuation 



                                      -41-
<PAGE>   42

of any Bankruptcy Proceeding with respect to Liggett; provided, however, that
until such time as Liggett decides whether to reject or assume this Agreement,
Brooke Group shall have the obligation to pay the annual installments as
provided by Section 7 hereof and any and all rights the Settlement Class may
have not to accept such cure or performance in any Bankruptcy Proceeding are
waived.


15.      ENTRY OF GOOD FAITH BAR ORDER ON CONTRIBUTION AND
         INDEMNITY CLAIMS; INDEMNIFICATION.
         -------------------------------------------------

         15.1. The Parties shall request that the Court enter an order barring
and prohibiting the commencement and prosecution of any claim or action by any
Non-settling Tobacco Company in any smoking-related litigation against Settling
Defendants, including but not limited to any contribution, indemnity and/or
subrogation claim seeking reimbursement for payments made or to be made to any
Settlement Class member for claims settled under this Agreement. Settling
Defendants shall be entitled to dismissal with prejudice of any such
Non-settling Tobacco Company's claims against them which violate or are
inconsistent with this bar.

         15.2. Any Settlement Class member making a claim against a non-settling
person for what would be a claim settled under this Agreement if asserted
against a Settling Defendant shall indemnify and hold harmless each Settling
Defendant from any claim ever asserted against such Settling Defendant arising
from such claim.

         15.3. Claims by or on behalf of any Settlement Class members against
any non-settling parties are not released and shall not be barred, precluded,
limited, or reduced as a 

                                      -42-
<PAGE>   43

consequence of this Agreement or the subsequent award and distribution of funds
to such Settlement Class members from the Settlement Fund, except if and to the
extent required under federal or state law applicable under choice-of-law
doctrines in the forum in which any such claims may be instituted or pursued.

16.      EXPENSES AND FEES.
         ------------------

         16.1. Subject to Section 7.4 hereof, all reasonable and necessary
expenses incurred by the Board in administering, allocating and distributing the
Settlement Fund, and the costs of Initial and Subsequent Notices, shall be paid
by the Settling Defendants in addition to, and without reducing, their payments
into the Settlement Fund.

         16.2. In addition to the above described expenses of administration and
notice, the reasonable fees and expenses of the Settlement Class Counsel, if and
as approved by the Court, shall be paid by the Settling Defendants after the
Settlement Date separate and apart from, and in addition to, their initial
payments into the Settlement Fund.

         16.3. In the event of a failure by the Court to issue the Final Order
and Judgment or a decision by any Settling Defendant to exercise its right to
withdraw pursuant to Section 13 of this Agreement, the Settling Defendants will
bear, in accordance with the terms of this Agreement, the costs of the Initial
Notice incurred to such point (in the case of Brooke Group and Liggett not to
exceed a total of $1 million; provided that Brooke Group, Liggett and Plaintiffs
shall each have the right to terminate this Agreement in the event that the
Court orders Initial Notice costing in excess of $1 million, unless Brooke Group
and/or Liggett and/or Plaintiffs and/or Settlement Class Counsel agree to pay
such excess.)


                                      -43-
<PAGE>   44

17.      TAX STATUS OF SETTLEMENT FUND.
         ------------------------------

         17.1. The Settlement Fund created under this Agreement will be
established and maintained as a Qualified Settlement Fund ("QSF") in accordance
with Section 468B of the Internal Revenue Code of 1986, as amended (the "IRC"),
and the regulations promulgated thereunder. Any Settling Defendant shall be
permitted, in its discretion, and at its own cost, to seek a private letter
ruling from the Internal Revenue Service ("IRS") regarding the tax status of the
Settlement Fund. The parties agree to negotiate in good faith, subject to Court
approval, any changes to the Agreement which may be necessary to obtain IRS
approval of the Settlement Fund as a QSF.

         17.2. Representatives of the Settling States and the Settlement Class
will be appointed to act as administrator of the Settlement Fund. As
administrator, such representatives will undertake the following actions in
accordance with the regulations under IRC section 468B: (a) apply for the tax
identification number required for the Settlement Fund; (b) file, or cause to be
filed, all tax returns the Settlement Fund is required to file under federal or
state laws; (c) pay from the Settlement Fund all taxes that are imposed upon the
Settlement Fund by federal or state laws; and (d) file, or cause to be filed,
tax elections available to the Settlement Fund, including a request for a prompt
assessment under IRC sec. 6501(d), if and when the administrator deems it
appropriate to do so.

         17.3. The Settling Defendants, as transferors of the Settlement Fund,
shall prepare and file the information statements concerning their settlement
payments to 


                                      -44-
<PAGE>   45

the Settlement Fund as required to be provided to the IRS pursuant to the
regulations under IRC Section 468B.

18.      COURT'S SETTLEMENT APPROVAL ORDER.
         ----------------------------------

         Except as specifically provided herein, this Agreement is subject to
and conditioned upon the issuance by the Court, following the fairness hearing,
of a Mandatory Class Final Order and Judgment.

19.      EFFECT OF DEFAULT OF ANY SETTLING DEFENDANT.
         --------------------------------------------

         In the event any Settling Defendant fails to make a payment due and
owing under the terms of this Agreement, or is in default of this Agreement in
any other respect, the Settlement Class Counsel shall so notify the Court. The
defaulting Settling Defendant shall then be given up to sixty (60) calendar days
to "cure" the default. If the defaulting Settling Defendant does not "cure" the
default in the time provided in this Section 19, the Settlement Class Counsel
may apply to the Court for relief, including withdrawal from the agreement.

20.      REPRESENTATIONS AND WARRANTIES; COVENANTS.
         ------------------------------------------

         20.1. Each Settling Defendant represents and warrants that (i) it has
all requisite corporate power and authority to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby; (ii) the
execution, delivery and performance by such Settling Defendant of this Agreement
and the consummation by it of the actions contemplated herein have been duly
authorized by all necessary corporate action on the part of such Settling
Defendant; and (iii) this Agreement has been duly and validly executed and
delivered by such Settling Defendant and constitutes its legal, valid and
binding obligation.


                                      -45-
<PAGE>   46

         20.2. Each Settling Defendant covenants and agrees for the benefit of
the Settlement Class that it will not enter into any transaction involving the
borrowing of funds in excess of $100 million unless such transaction is fair
from a financial perspective to the Settling Defendant and represents the
reasonable exercise of such Settling Defendant's business judgment.

21.      ARBITRATION.
         ------------

         21.1. In the event that the Parties are unable to agree, after good
faith efforts, as to the determination or calculation of Pretax Income or Market
Share for any year hereunder, such determination or calculation shall be
submitted to binding arbitration under the supervision of the Court.

         21.2. The Settlement Class Counsel shall during the term of this
Agreement have the right, at its sole cost, to have an independent auditor
review the Settling Defendants' compliance with their payment obligations under
this Agreement; provided that any such review will not be binding upon such
Settling Defendants.

22.      MOST FAVORED NATION.
         --------------------

         22.1. In the event of any Other Settlement with any Non-Settling
Tobacco Company, the payments due from each Settling Defendant in each year
under this Agreement shall be reduced to the extent, if any, necessary to ensure
that such payments are the lesser of (a) on a percentage of Pretax Income basis,
payments such that the percentage in each year of such Settling Defendant's
Pretax Income represented by such payments is no more than one-third of the
percentage in such year of such Non-Settling Tobacco Company's Pretax Income


                                      -46-
<PAGE>   47

represented by the product of (i) the average annual payments due from such
Non-Settling Tobacco Company under such Other Settlement and (ii) the Population
Quotient with respect to such Other Settlement and (b) on a Cost Per Cigarette
Pack basis, no more than the product of (i) one-third of the lowest Cost Per
Cigarette Pack due in such year from the Non-Settling Tobacco Companies under
such Other Settlement and (ii) the Population Quotient with respect to such
Other Settlement. The Benchmark Figure set forth in this Section 22.1 does not
reflect in any fashion the Settlement Class's or Settlement Class Counsels'
views as to an appropriate settlement or resolution with any Non-Settling
Tobacco Company.

         22.2. In the event of the entry of any final monetary judgment (other
than by way of settlement) in a Tobacco Action, against any one or more of the
Non-Settling Tobacco Companies, then each Settling Defendant shall have the
right to reduce the payments it is obligated to make pursuant to this Agreement
to the extent, if any, necessary to make the sum of all amounts theretofore paid
and the then Present Value of all amounts thereafter payable pursuant to this
Agreement (assuming for purposes of such Present Value calculation that the
annual amounts due hereunder remain unchanged from the then most recent fiscal
year) by any Settling Defendant per percentage point of the then Market Share of
such Settling Defendant no more than the lesser of (a) fifty (50%) of (i) the
dollar amount of the product of (A) such judgment and (B) the Population
Quotient with respect to such judgment per (ii) percentage point of the then
Market Share of each such Non-Settling Tobacco Company and (b) on a Cost Per
Cigarette Pack basis, no more than the product of (i) one-third of the lowest
Cost Per Cigarette Pack due in each year from such Non-Settling Tobacco Company
under such judgment and 


                                      -47-
<PAGE>   48

(ii) the Population Quotient with respect to such judgment; provided that such
Settling Defendant shall give written notice of such reduction and the method of
calculating such reduction to the Court and Settlement Class Counsel as soon as
practicable after the entry of such judgment.

         22.3. In each year beginning with the second year a Settling Defendant
becomes bound by this Agreement, the annual payment amount due under Section 7.3
of this Agreement from such Settling Defendant shall be decreased in proportion
to any decrease, and (only if there shall have been a prior such decrease)
increased in proportion to any increase, in such Settling Defendant's Market
Share from the prior year; provided, however, that (a) such annual payment
amount shall not be so decreased to the extent, if any, that such annual payment
amount in such year is decreased as a result of a decrease in such Settling
Defendant's Pretax Income and (b) such annual payment amount shall never be
increased such that the aggregate amount of any such increases exceeds the
aggregate amount of any such decreases. Such Settling Defendant, as soon as
practicable after the end of such year, shall give written notice of any such
decrease or increase and the method of calculating it to the Court and
Settlement Class Counsel.

         22.4. The Plaintiffs, on behalf of themselves (upon the execution
hereof) and the Settlement Class (upon Preliminary Approval), Settlement Class
Counsel, and any attorneys or representatives of any of the foregoing, agree
that for the next fifteen (15) years neither the Plaintiffs, the Settlement
Class, nor any attorneys or representatives of the foregoing will, without the
express written consent of Brooke Group (which may be withheld for any reason or
for no reason) discuss, negotiate, support, approve or enter into any agreement
or understanding 


                                      -48-
<PAGE>   49

with any creditor, claimant, trustee, receiver or other party-in-interest, of
Liggett, Brooke Group or any of their affiliates, other than Brooke Group itself
(collectively, "Prohibited Parties"), with respect to any restructuring,
liquidation or reorganization of Liggett, Brooke Group or any of their
affiliates, including with respect to any plan under Chapter 11 or Chapter 7 of
title 11, United States Code (the "Bankruptcy Code").

         22.5. The rights and remedies of each Settling Defendant under this
Section 22 are cumulative and not exclusive of each other and shall survive the
termination of this Agreement.

23.      FURTHER ACTIONS.
         ----------------

         Each of the Parties and their respective counsel shall take such
actions and execute such additional documents as may be reasonably necessary or
appropriate to consummate or implement the settlement contemplated by this
Agreement.

24.       MISCELLANEOUS.
          --------------


         24.1. This Agreement, including all Exhibits attached hereto, shall
constitute the entire agreement among the Parties with regard to the subject
matter of this Agreement and shall supersede any previous agreements and
understandings between the Parties with respect to the subject matter of this
Agreement. This Agreement may not be changed, modified, or amended except in
writing signed by all parties, subject to Court approval.

         24.2. This Agreement shall be construed under and governed by the laws
of the State of West Virginia.


                                      -49-
<PAGE>   50

         24.3. This Agreement may be executed by the Parties in one or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument.

         24.4. This Agreement shall be binding upon and inure to the benefit of
the Settlement Class, the Settling Defendants, and their representatives, heirs,
successors, and assigns.

         24.5. Nothing in this Agreement shall be construed to subject any
Settling Defendant's parent or affiliated company to the obligations or
liabilities of that Settling Defendant.

         24.6. There shall be no third party beneficiaries of this Agreement
other than non-party releases hereunder. No person other than the Parties
hereto, the Settlement Class members and the releasees hereunder shall have any
right or claim under or in respect of this Agreement.

         24.7. The headings of the Sections of this Agreement are included for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect its construction.



                                      -50-
<PAGE>   51

         24.8. Any notice, request, instruction, application for Court approval
or application for Court orders sought in connection with this Agreement or
other document to be given by any Party to any other Party shall be in writing
and delivered personally or sent by registered or certified mail, postage
prepaid, if to the Settling Defendants to the attention of each Settling
Defendant's respective representative and to the Settlement Class Counsel on
behalf of Settlement Class members, or to other recipients as the Court may
specify. As of the date of this Agreement, the respective representatives are as
follows:

                  Settlement Class Counsel
                  ------------------------

                  Kenneth B. McClain
                  Gregory Leyh
                  HUMPHREY, FARRINGTON & McCLAIN, P.C.
                  221 West Lexington
                  Suite 400
                  Independence, Missouri  64051

                  James F. Humphreys
                  JAMES F. HUMPHREYS & ASSOCIATES, L.C.
                  Bank One Center
                  Suite 1113
                  707 Virginia Street, East
                  Charleston, West Virginia  25301






                                      -51-
<PAGE>   52



                  Brooke Group and Liggett
                  ------------------------

                  Mr. Bennett S. LeBow
                  BROOKE GROUP LTD.
                  100 S.E. Second Street
                  Miami, Florida  33131

                  Mr. Marc E. Kasowitz
                  Mr. Daniel R. Benson
                  KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 
                  1301 Avenue of the Americas 
                  New York, New York 10019

                  Mr. Michael L. Hirschfeld
                  MILBANK, TWEED, HADLEY & MCCLOY  
                  1 Chase Manhattan Plaza 
                  New York, New York 10005-1413

         The above designated representatives may be changed from time to time
by any Party upon giving notice to all other Parties in conformance with this
Section 24.8.

         24.9. References to or use of a singular noun or pronoun in this
Agreement shall include the plural, unless the context implies otherwise.





                                      -52-
<PAGE>   53



         IN WITNESS WHEREOF the Parties have executed this Agreement as of the
day and date first written above.

                                    SETTLEMENT CLASS COUNSEL

                                    By: /s/ Kenneth B. McClain
                                       -------------------------------

                                    Date:  May 15, 1997



                                    BROOKE GROUP LTD.

                                    By: /s/ Bennett S. Lebow
                                       -------------------------------

                                    Date:  May 15, 1997



                                    LIGGETT GROUP INC.


                                    By:   /s/ Bennett S. LeBow
                                       -------------------------------

                                    Date:  May 15, 1997


                                      -53-