##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2008
 
 VECTOR GROUP LTD.
  Delaware
    
    1-5759
    
    65-0949535(State or other jurisdiction 
incorporation or organization)
    
    Commission File Number
    
    (I.R.S. Employer Identification No.)
 100 S.E. Second Street
Miami, Florida 33131
305/579-8000
 
 x o
  x Large accelerated filer
    
    o Accelerated filero Non-accelerated filer
    
    o Smaller reporting company
 o x




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##### 



VECTOR GROUP LTD.
 FORM 10-Q
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and September 30, 2007
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and September 30, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    42Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    62Item 4. Controls and Procedures
    
    
    62PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    63Item 1A. Risk Factors
    
    
    63Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    63Item 6. Exhibits
    
    
    64SIGNATURE
    
    
    65EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 ITEM 1. VECTOR GROUP LTD. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
 
 VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 September 30,
    
    
    
    December 31,2008
    
    
    
    2007ASSETS:Current assets:Cash and cash equivalents
    
    $
    206,509
    
    
    
    $
    238,117Investment securities available for sale
    
    
    46,151
    
    
    
    
    45,875Accounts receivable  trade
    
    
    7,398
    
    
    
    
    3,113Inventories
    
    
    92,044
    
    
    
    
    86,825Deferred income taxes
    
    
    13,439
    
    
    
    
    18,336Other current assets
    
    
    5,128
    
    
    
    
    3,360Total current assets
    
    
    370,669
    
    
    
    
    395,626Property, plant and equipment, net
    
    
    52,318
    
    
    
    
    54,432Mortgage receivable, net
    
    
    17,704
    
    
    
    
    Long-term investments accounted for at cost
    
    
    70,019
    
    
    
    
    72,971Long-term investment accounted for under the equity method
    
    
    
    
    
    
    
    10,495Investments in non-consolidated real estate businesses
    
    
    57,858
    
    
    
    
    35,731Restricted assets
    
    
    7,928
    
    
    
    
    8,766Deferred income taxes
    
    
    30,958
    
    
    
    
    26,637Intangible asset
    
    
    107,511
    
    
    
    
    107,511Prepaid pension costs
    
    
    45,148
    
    
    
    
    42,084Other assets
    
    
    29,582
    
    
    
    
    31,036Total assets
    
    $
    789,695
    
    
    
    $
    785,289LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    9,432
    
    
    
    $
    20,618Accounts payable
    
    
    4,459
    
    
    
    
    6,980Accrued promotional expenses
    
    
    10,629
    
    
    
    
    9,210Income taxes payable, net
    
    
    14,384
    
    
    
    
    2,363Accrued excise and payroll taxes payable, net
    
    
    276
    
    
    
    
    5,327Settlement accruals
    
    
    38,211
    
    
    
    
    10,041Deferred income taxes
    
    
    95,593
    
    
    
    
    24,019Accrued interest
    
    
    4,987
    
    
    
    
    9,475Other current liabilities
    
    
    19,106
    
    
    
    
    21,304Total current liabilities
    
    
    197,077
    
    
    
    
    109,337Notes payable, long-term debt and other obligations, less current portion
    
    
    281,434
    
    
    
    
    277,178Fair value of derivatives embedded within convertible debt
    
    
    93,745
    
    
    
    
    101,582Non-current employee benefits
    
    
    44,743
    
    
    
    
    40,933Deferred income taxes
    
    
    66,879
    
    
    
    
    141,904Other liabilities
    
    
    16,785
    
    
    
    
    13,503Total liabilities
    
    
    700,663
    
    
    
    
    684,437Commitments and contingencies
    
    
    
    
    
    
    
    Stockholders equity:Preferred stock, par value $1.00 per share, 10,000,000 shares authorized
    
    
    
    
    
    
    
    Common stock, par value $0.10 per share, 150,000,000 shares authorized,
69,107,320 and 63,307,020 shares issued and 66,014,070 and
and 60,361,068 shares outstanding
    
    
    6,601
    
    
    
    
    6,036Additional paid-in capital
    
    
    80,081
    
    
    
    
    89,494Retained earnings
    
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    
    15,207
    
    
    
    
    18,179Less: 3,093,250 and 2,945,952 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    
    (12,857
    )Total stockholders equity
    
    
    89,032
    
    
    
    
    100,852Total liabilities and stockholders equity
    
    $
    789,695
    
    
    
    $
    785,289
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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Revenues*
    
    $
    145,601
    
    
    $
    136,053
    
    
    
    $
    420,766
    
    
    $
    410,296Expenses:Cost of goods sold*
    
    
    84,999
    
    
    
    80,182
    
    
    
    
    251,036
    
    
    
    252,089Operating, selling, administrative and general expenses
    
    
    23,067
    
    
    
    22,164
    
    
    
    
    69,809
    
    
    
    69,597Operating income
    
    
    37,535
    
    
    
    33,707
    
    
    
    
    99,921
    
    
    
    88,610Other income (expenses):Interest and dividend income
    
    
    1,094
    
    
    
    2,445
    
    
    
    
    4,440
    
    
    
    5,862Interest expense
    
    
    (15,515
    )
    
    
    (12,113
    )
    
    
    
    (46,025
    )
    
    
    (30,767
    )Change in fair value of derivatives embedded within
convertible debt
    
    
    522
    
    
    
    (6,331
    )
    
    
    
    7,837
    
    
    
    (4,215
    )Provision for loss on investments
    
    
    (7,000
    )
    
    
    (58
    )
    
    
    
    (7,000
    )
    
    
    (1,216
    )Gain from exchange of LTS notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,121Equity income from non-consolidated real
estate businesses
    
    
    5,202
    
    
    
    6,589
    
    
    
    
    22,706
    
    
    
    15,926Income from lawsuit settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000Other, net
    
    
    (1
    )
    
    
    (6
    )
    
    
    
    (578
    )
    
    
    (42
    )Income before provision for income taxes
    
    
    21,837
    
    
    
    24,233
    
    
    
    
    81,301
    
    
    
    102,279Income tax expense
    
    
    7,010
    
    
    
    9,169
    
    
    
    
    33,042
    
    
    
    42,707Net income
    
    $
    14,827
    
    
    $
    15,064
    
    
    
    $
    48,259
    
    
    $
    59,572Per basic common share:Net income applicable to common shares
    
    $
    0.22
    
    
    $
    0.22
    
    
    
    $
    0.72
    
    
    $
    0.89Per diluted common share:Net income applicable to common shares
    
    $
    0.21
    
    
    $
    0.22
    
    
    
    $
    0.70
    
    
    $
    0.87Cash distributions and dividends declared per share
    
    $
    0.38
    
    
    $
    0.36
    
    
    
    $
    1.14
    
    
    $
    1.09
 
 *
    
    Revenues and Cost of goods sold include excise taxes of $43,327, $43,025, $127,050 and
$132,305, respectively. 
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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
( Dollars in Thousands, Except Share Amounts )  Unaudited
 AccumulatedCommon Stock
    
    
    
    Additional
    
    
    
    
    
    
    
    
    OtherPaid-In
    
    
    
    Retained
    
    
    
    Comprehensive
    
    
    
    TreasuryShares
    
    
    Amount
    
    
    
    Capital
    
    
    
    Earnings
    
    
    
    Income
    
    
    
    Stock
    
    
    
    TotalBalance, December 31, 2007
    
    
    
    60,361,068
    
    
    $
    6,036
    
    
    
    $
    89,494
    
    
    
    $
    
    
    
    
    $
    18,179
    
    
    
    $
    (12,857
    )
    
    
    $
    100,852Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,259
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,259Pension-related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    586
    
    
    
    
    
    
    
    
    
    586Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    26Unrealized loss on long-term investments accounted for
under the equity method, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    
    
    (399
    )Unrealized loss on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,185
    )
    
    
    
    
    
    
    
    
    (3,185
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,972
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,287Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    (30,148
    )
    
    
    
    (47,945
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,093
    )Effect of stock dividend
    
    
    
    3,142,760
    
    
    
    314
    
    
    
    
    
    
    
    
    
    (314
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options, net of 1,375,895 shares delivered to
pay exercise price
    
    
    
    2,510,242
    
    
    
    251
    
    
    
    
    (164
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87Excess tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    18,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,304Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    2,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,595Balance, September 30, 2008
    
    
    
    66,014,070
    
    
    $
    6,601
    
    
    
    $
    80,081
    
    
    
    $
    
    
    
    
    $
    15,207
    
    
    
    $
    (12,857
    )
    
    
    $
    89,032
 
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VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( Dollars in Thousands, Except Per Share Amounts )  Unaudited
 Nine Months
    
    
    
    Nine MonthsEnded
    
    
    
    EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    
    2007Net cash provided by operating activities
    
    $
    70,435
    
    
    
    $
    91,199Cash flows from investing activities:Purchase of investment securities
    
    
    (5,682
    )
    
    
    
    (6,048
    )Proceeds from sale or liquidation of long-term investments
    
    
    8,334
    
    
    
    
    50Purchase of long-term investments
    
    
    (51
    )
    
    
    
    (35,091
    )Purchase of mortgage receivable
    
    
    (21,704
    )
    
    
    
    Distributions from non-consolidated real estate businesses
    
    
    17,628
    
    
    
    
    1,000Investments in non-consolidated real estate businesses
    
    
    (22,000
    )
    
    
    
    (750
    )Increases in cash surrender value of life insurance policies
    
    
    (766
    )
    
    
    
    (690
    )Decrease (increase) in non-current restricted assets
    
    
    838
    
    
    
    
    (310
    )Proceeds from sale of fixed assets
    
    
    403
    
    
    
    
    789Capital expenditures
    
    
    (5,426
    )
    
    
    
    (4,211
    )Net cash used in investing activities
    
    
    (28,426
    )
    
    
    
    (45,261
    )Cash flows from financing activities:Proceeds from debt issuance
    
    
    2,830
    
    
    
    
    174,576Repayments of debt
    
    
    (4,666
    )
    
    
    
    (39,718
    )Deferred financing charges
    
    
    (137
    )
    
    
    
    (9,888
    )Borrowings under revolver
    
    
    386,499
    
    
    
    
    389,383Repayments on revolver
    
    
    (397,892
    )
    
    
    
    (401,231
    )Dividends and distributions on common stock
    
    
    (78,581
    )
    
    
    
    (75,258
    )Excess tax benefit of options exercised
    
    
    18,304
    
    
    
    
    1,928Proceeds from exercise of options
    
    
    26
    
    
    
    
    4,857Net cash (used in) provided by financing activities
    
    
    (73,617
    )
    
    
    
    44,649Net (decrease) increase in cash and cash equivalents
    
    
    (31,608
    )
    
    
    
    90,587Cash and cash equivalents, beginning of period
    
    
    238,117
    
    
    
    
    146,769Cash and cash equivalents, end of period
    
    $
    206,509
    
    
    
    $
    237,356
 
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a)     Basis of Presentation:The condensed consolidated financial statements of Vector Group Ltd. (the Company or
Vector) include the accounts of VGR Holding LLC (VGR Holding), Liggett Group LLC
(Liggett), Vector Tobacco Inc. (Vector Tobacco), Liggett Vector Brands Inc. (Liggett
Vector Brands), New Valley LLC (New Valley) and other less significant subsidiaries. All
significant intercompany balances and transactions have been eliminated.Liggett is engaged in the manufacture and sale of cigarettes in the United States.
Vector Tobacco is engaged in the development and marketing of low nicotine and nicotine-free
cigarette products and the development of reduced risk cigarette products. New Valley is
engaged in the real estate business and is seeking to acquire additional operating companies
and real estate properties.The interim condensed consolidated financial statements of the Company are unaudited and,
in the opinion of management, reflect all adjustments necessary (which are normal and
recurring) to state fairly the Companys consolidated financial position, results of
operations and cash flows. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and the notes thereto included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed with the
Securities and Exchange Commission. The consolidated results of operations for interim
periods should not be regarded as necessarily indicative of the results that may be expected
for the entire year.(b)      Distributions and Dividends on Common Stock:The Company records distributions on its common stock as dividends in its condensed
consolidated statement of stockholders equity to the extent of retained earnings. Any
amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital.(c)     Earnings Per Share (EPS):Information concerning the Companys common stock has been adjusted to give retroactive
effect to the 5% stock dividend paid to Company stockholders on September 29, 2008 and
September 28, 2007. The dividends were recorded at par value of $314 and $287 since the
Company did not have retained earnings at September 30, 2008 and 2007, respectively. In
connection with the 5% stock dividend, the Company
increased the number of outstanding stock options by 5% and reduced the exercise prices
accordingly. All per share amounts have been presented as if the stock dividends had occurred
on January 1, 2007.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The Company has stock option awards which provide for common stock dividends at the same
rate as paid on the common stock with respect to the shares underlying the unexercised portion
of the options. As a result, in its calculation of basic EPS for the three and nine months
ended September 30, 2008 and 2007, the Company has adjusted its net income for the effect of
its participating securities as follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Net income
    
    $
    14,827
    
    
    $
    15,064
    
    
    
    $
    48,259
    
    
    $
    59,572Income attributable to
participating securities
    
    
    (675
    )
    
    
    (979
    )
    
    
    
    (2,228
    )
    
    
    (3,895
    )Net income available to
common stockholders
    
    $
    14,152
    
    
    $
    14,085
    
    
    
    $
    46,031
    
    
    $
    55,677
 Basic EPS is computed by dividing net income available to common stockholders by the
weighted-average number of shares outstanding, which includes vested restricted stock.Diluted EPS includes the dilutive effect of stock options, unvested restricted stock grants
and convertible securities. Diluted EPS is computed by dividing net income available to
common stockholders by the diluted weighted-average number of shares outstanding, which
includes dilutive non-vested restricted stock grants, stock options and convertible
securities.Basic and diluted EPS were calculated using the following shares for the three and nine
months ended September 30, 2008 and 2007:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Weighted-average
shares for
basic EPS
    
    
    65,643,892
    
    
    
    62,631,805
    
    
    
    
    64,043,271
    
    
    
    62,472,190Plus incremental
shares
related to
dilutive stock
options
and non-vested
restricted
stock
    
    
    1,246,278
    
    
    
    1,923,574
    
    
    
    
    1,396,407
    
    
    
    1,619,616Weighted-average
shares for
fully diluted EPS
    
    
    66,890,170
    
    
    
    64,555,379
    
    
    
    
    65,439,678
    
    
    
    64,091,806
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The following stock options, non-vested restricted stock and shares issuable upon the
conversion of convertible debt were outstanding during the three and nine months ended
September 30, 2008 and 2007 but were not included in the computation of diluted EPS because
the exercise prices of the options and the per share expense associated with the restricted
stock were greater than the average market price of the common shares during the respective
periods, and the impact of common shares issuable under the convertible debt were
anti-dilutive to EPS.
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Number of stock options
    
    
    514,735
    
    
    
    171,247
    
    
    
    
    514,735
    
    
    
    228,954Weighted-average exercise price
    
    $
    19.22
    
    
    $
    26.41
    
    
    
    $
    19.22
    
    
    $
    24.26Weighted-average shares of
non-vested restricted stock
    
    
    81,080
    
    
    
    
    
    
    
    
    225,784
    
    
    
    Weighted-average expense per
share
    
    $
    17.62
    
    
    
    N /A
    
    
    
    $
    17.15
    
    
    
    N /AWeighted-average number of shares
issuable upon conversion of debt
    
    
    12,932,556
    
    
    
    12,932,556
    
    
    
    
    12,932,556
    
    
    
    12,932,556Weighted-average conversion price
    
    $
    17.16
    
    
    $
    17.16
    
    
    
    $
    17.16
    
    
    $
    17.16
 The $18,304 excess tax benefit of options exercised was derived primarily from stock options
exercised during the second quarter of 2008.(d)     Comprehensive Income:Other comprehensive income is a component of stockholders equity and includes such items as the
unrealized gains and losses on investment securities available for sale, forward foreign
contracts and minimum pension liability adjustments. The Companys comprehensive income for the three and nine months ended September 30, 2008 was
$19,843 and $45,287, respectively. The Companys comprehensive income for the three and nine
months ended September 30, 2007 was $13,119 and $70,510, respectively.(e)     Fair Value of Derivatives Embedded within Convertible Debt:The Company has estimated the fair market value of the embedded derivatives based principally on
the results of a valuation model. The estimated fair value of the derivatives embedded within
the
convertible debt is based principally on the present value of future dividend payments expected
to be received by the convertible debt holders over the term of the debt. The discount rate
applied to the future cash flows is estimated based on a spread in the yield of the Companys
debt when compared to risk-free securities with the same duration; thus, a readily determinable
fair market value of the embedded derivatives is not available. The valuation model assumes
future dividend payments by the Company and utilizes interest rates and credit spreads for
secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred
stock to determine the fair value of the derivatives embedded within the convertible debt. The
valuation also considers other items, including current and future dividends and the volatility
of Vectors stock price. The range of estimated fair market values of the Companys embedded
derivatives was between $93,200 and $94,900. The Company recorded the fair market value of its
embedded derivatives at the midpoint of the inputs at $93,745 as of September 30, 2008. The
estimated fair market value of the Companys embedded derivatives could change significantly
based on future market conditions. (See Note 6.)(f)     Capital and Credit Market CrisisAs the capital and credit market crisis has worsened, the Company has performed additional
assessments to determine the impact, if any, of recent market developments, on the Companys
consolidated condensed financial statements. The Companys additional assessments have included a
review of access to liquidity in the capital and credit markets, counterparty creditworthiness,
value of the Companys investments (including long-term investments, mortgage receivable and
employee benefit plans) and macroeconomic conditions. The recent unprecedented volatility in
capital and credit markets may create additional risks in the upcoming months and possibly years
and the Company will continue to perform additional assessments to determine the impact, if any,
on the Companys condensed consolidated financial statements. Thus, future impairment charges may
occur.On a quarterly basis, the Company evaluates its investments to determine whether an impairment has
occurred. If so, the Company also makes a determination of whether such impairment is considered
temporary or other-than-temporary. The Company believes that the assessment of temporary or
other-than-temporary impairment is facts and circumstances driven. However, among the matters that
are considered in making such a determination are the period of time the investment has remained
below its cost or carrying value, the likelihood of recovery given the reason for the decrease in
market value and the Companys original expected holding period of the investment.(g)     Contingencies:The Company records Liggetts product liability legal expenses and other litigation costs as
operating, selling, general and administrative expenses as those costs are incurred. As
discussed in Note 8, legal proceedings covering a wide range of matters are pending or
threatened in various jurisdictions against Liggett.Management is unable to make a reasonable estimate with respect to the amount or range of loss
that could result from an unfavorable outcome of pending tobacco-related litigation or the costs
of defending such cases, and the Company has not provided any amounts in its consolidated
financial statements for unfavorable outcomes, if any. Litigation is subject to many
uncertainties, and it is possible that the Companys consolidated financial position, results of
operations or cash flows could be materially adversely affected by an unfavorable outcome in any
such tobacco-related litigation.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 (h)     New Accounting Pronouncements:Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS No. 157) for financial assets and financial
liabilities. SFAS No. 157 does not require any new fair value measurements but provides
a definition of fair value, establishes a framework for measuring fair value and
expands disclosure about fair value measurements. The Company will adopt SFAS No. 157
for nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption
of SFAS No. 157 on financial assets and financial liabilities did not have a material
impact on our consolidated results of operations, financial position or cash flows. The
Company is currently assessing the impact of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities on its consolidated results of operations, financial position
or cash flows.In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities
to elect to measure many financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company has not elected to use the fair value option.In December 2007, the FASB issued SFAS No. 141(R), a revised version of SFAS No. 141, Business
Combinations. The revision is intended to simplify existing guidance and converge rulemaking
under U.S. Generally Accepted Accounting Principles (GAAP) with international accounting
rules. This statement applies prospectively to business combinations where the acquisition date
is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. An
entity may not apply it before that date. The new standard also converges financial reporting
under U.S. GAAP with international accounting rules. The Company is currently assessing the
impact, if any, of SFAS No. 141(R) on its consolidated financial statements, which will depend
on future transactions.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities-an amendment of FASB Statement No. 133. SFAS No. 161 seeks qualitative
disclosures about the objectives and strategies for using derivatives, quantitative data about
the fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in hedged positions. SFAS No. 161 also seeks enhanced
disclosure around derivative instruments in financial statements, accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and how hedges affect an
entitys financial position, financial performance and cash flows. SFAS No. 161 is effective for
the Company as of January 1, 2009 and the Company does not expect the adoption of SFAS No. 161
to have a material impact on its consolidated results of operations, financial position or cash
flows.On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP No. APB 14-1). The Company is currently assessing the impact of FSP No. APB
14-1 on its consolidated financial statements.On June 16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating Securities, which
states that unvested share-based payment awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share under the two-class method. The guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. The Company is currently assessing the impact of FSP No.
EITF 03-6-1 on its consolidated financial statements.In October 2008, the FASB issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active, which addresses the application of SFAS 157 for
illiquid financial instruments. FSP SFAS 157-3 clarifies that approaches to determining fair value
other than the market approach may be appropriate when the market for a financial asset is not
active.2.
    
    RESTRUCTURINGThe only remaining component of the 2006 Vector Research restructuring at September 30, 2008 and
December 31, 2007 was employee severance and benefits of $14 and $70, respectively.
Approximately $0 and $56 was utilized during the three and nine months ended September 30, 2008,
respectively.The only remaining component of the 2004 Liggett Vector Brands restructuring at September 30,
2008 and December 31, 2007 was contract termination and exit costs and the balance was $520 and
$598 at September 30, 2008 and December 31, 2007, respectively. Approximately $44 and $78 was
utilized during the three and nine months ended September 30, 2008, respectively.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 3.
    
    INVESTMENT SECURITIES AVAILABLE FOR SALEInvestment securities classified as available for sale are carried at fair value, with net
unrealized gains or losses included as a component of stockholders equity, net of income taxes.
The components of investment securities available for sale at September 30, 2008 are as
follows:
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    27,229
    
    
    $
    19,836
    
    
    $
    (914
    )
    
    $
    46,151
 Investment securities available for sale as of September 30, 2008 and December 31, 2007 include
the Companys 13,888,889 shares of Ladenburg Thalmann Financial Services Inc. (LTS) common
stock, which were carried at $25,000 and $29,444, respectively. Investment securities available
for sale as of September 30, 2008 and December 31, 2007 also include 5,057,110 and 2,257,110
shares, respectively, of Opko Health Inc. (Opko) common stock, which were carried at $8,850
and $6,433, respectively. In March 2008, the Company acquired 2,800,000 shares of Opko in a
private placement. These shares have not been registered for resale but are expected to be
freely tradable within one year. In 2008, the Company acquired 2,259,796 shares of Cardo
Medical, Inc. for $500. The shares were carried at $3,842 as of September 30, 2008. These shares have not been registered for resale but are expected to be freely tradable within one
year.4.
    
    INVENTORIESInventories consist of:
 September 30,
    
    
    
    December 31,2008
    
    
    
    2007Leaf tobacco
    
    $
    47,959
    
    
    
    $
    41,502Other raw materials
    
    
    4,615
    
    
    
    
    4,847Work-in-process
    
    
    268
    
    
    
    
    710Finished goods
    
    
    47,794
    
    
    
    
    45,331Inventories at current cost
    
    
    100,636
    
    
    
    
    92,390LIFO adjustments
    
    
    (8,592
    )
    
    
    
    (5,565
    )$
    92,044
    
    
    
    $
    86,825
 The Company has a leaf inventory management program whereby, among other things, it is committed
to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not
in excess of anticipated requirements and are at prices, including carrying costs, established
at the commitment date. At September 30, 2008, Liggett had leaf tobacco purchase commitments of
approximately $9,901. There were no leaf tobacco purchase commitments at Vector Tobacco at that
date. During 2007, the Company entered into a single source supply agreement for fire safe
cigarette paper through 2012.The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in
ending inventory. For the nine months ended September 30, 2008, the Companys MSA expense was
reduced by approximately $1,300 as a result of a change in estimate to the MSA assessment for
2007.LIFO inventories represent approximately 95% of total inventories at September 30, 2008 and
December 31, 2007.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 5.
    
    LONG-TERM INVESTMENTSLong-term investments consist of investments in the following:
 September 30, 2008
    
    
    December 31, 2007Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    70,019
    
    
    $
    72,489
    
    
    $
    72,971
    
    
    $
    89,007Investments accounted for
on the equity method
    
    $
    
    
    
    $
    
    
    
    $
    10,495
    
    
    $
    10,495
 The principal business of these investment partnerships is investing in investment securities
and real estate. The estimated fair value of the investment partnerships was provided by the
partnerships based on the indicated market values of the underlying assets or investment
portfolio. The investments in these investment partnerships are illiquid and the ultimate
realization of these investments is subject to the performance of the underlying partnership and
its management by the general partners.In April 2008, the Company elected to withdraw its investment in Jefferies Buckeye Fund, LLC
(Buckeye Fund), a privately managed investment partnership, of which Jefferies Asset
Management, LLC is the portfolio manager. The Company recorded a loss of $567 during the first
quarter of 2008 associated with the Buckeye Funds performance, which has been included as
Other expense on the Companys condensed consolidated statement of operations. The Company
received proceeds of $8,328 in May 2008 and anticipates receiving an additional $925 of proceeds
in the fourth quarter of 2008, which has been included in Other current assets on the
Companys condensed consolidated balance sheet.The Company recorded a loss of $3,000 during the third quarter of 2008 due to the performance of
two of its long-term investments. The Company determined that an other-than-temporary impairment had occurred during the third
quarter of 2008 as a result of its quarterly evaluation of long-term investments. If it is
determined that an other-than-temporary decline in fair value exists in long-term investments, the
Company records an impairment charge with respect to such investment in its consolidated statements
of operations. During the three and nine months ended September 30, 2008, one of the Companys
long-term investments was impaired due to a portion of its underlying assets being held in an
account with the European subsidiary of Lehman Brothers Holdings Inc. while another of the
Companys long-term investments was impaired as a result of the funds performance in 2008.The long-term investments are carried on the condensed consolidated balance sheet at cost. The
fair value determination disclosed above would be classified as Level 3 under the SFAS 157
hierarchy disclosed in Note 11 if such assets were recorded on the condensed consolidated
balance sheet at fair value. The fair values were determined based on unobservable inputs and
were based on company assumptions, and information obtained from the partnerships based on the
indicated market values of the underlying assets of the investment portfolio.The changes in the fair value of these investments as of September 30, 2008 were as follows:
 Investment
    
    
    InvestmentPartnerships
    
    
    PartnershipsAccounted for at
    
    
    Accounted for onCost
    
    
    the Equity MethodBalance as of January 1, 2008
    
    $
    89,007
    
    
    $
    10,495Unrealized loss on long-term
investments
    
    
    (2,034
    )
    
    
    (675
    )Realized loss on long-term investments
    
    
    
    
    
    
    (567
    )Balance as of March 31, 2008
    
    
    86,973
    
    
    
    9,253Contributions (distributions)
    
    
    47
    
    
    
    (8,328
    )Unrealized loss on long-term
investments
    
    
    (3,767
    )
    
    
    Realized gain on long-term
investments
    
    
    14
    
    
    
    Receivable classified as
Other currents assets
    
    
    
    
    
    
    (925
    )Balance as of June 30, 2008
    
    
    83,267
    
    
    
    Contributions (distributions)
    
    
    
    
    
    
    Unrealized loss on long-term
investments
    
    
    (7,778
    )
    
    
    Realized loss on long-term
investments
    
    
    (3,000
    )
    
    
    Balance as of September 30, 2008
    
    $
    72,489
    
    
    $
    
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Because the capital and credit market crisis has continued to worsen, the Company will continue to
perform additional assessments to determine the impact, if any, on the Companys condensed
consolidated financial statements. Thus, future impairment charges may occur.In the future, the Company may invest in other investments, including limited partnerships, real
estate investments, equity securities, debt securities, derivatives and certificates of deposit,
depending on risk factors and potential rates of return.6.
    
    NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONSNotes payable, long-term debt and other obligations consist of:
 September 30,
    
    
    
    December 31,2008
    
    
    
    2007Vector:11% Senior Secured Notes due 2015
    
    $
    165,000
    
    
    
    $
    165,0003.875% Variable Interest Senior Convertible Debentures due

2026, net of unamortized discount of $84,066 and $84,299*
    
    
    25,934
    
    
    
    
    25,7015% Variable Interest Senior Convertible Notes due 2011,

net of unamortized net discount of $41,961 and $48,027*
    
    
    69,903
    
    
    
    
    63,837Liggett:Revolving credit facility
    
    
    3,389
    
    
    
    
    14,782Term loan under credit facility
    
    
    7,422
    
    
    
    
    7,822Equipment loans
    
    
    9,416
    
    
    
    
    9,660V.T. Aviation:Note payable
    
    
    5,583
    
    
    
    
    6,470VGR Aviation:Note payable
    
    
    4,130
    
    
    
    
    4,370Other
    
    
    89
    
    
    
    
    154Total notes payable, long-term debt and other obligations
    
    
    290,866
    
    
    
    
    297,796Less:Current maturities
    
    
    (9,432
    )
    
    
    
    (20,618
    )Amount due after one year
    
    $
    281,434
    
    
    
    $
    277,178
 
 *
    
    The fair value of the derivatives embedded within the 3.875% Variable Interest
Senior Convertible Debentures ($64,986 at September 30, 2008 and $67,911 at December
31, 2007) and the 5% Variable Interest Senior Convertible Notes ($28,759 at
September 30, 2008 and $33,671 at December 31, 2007) is separately classified as a
derivative liability in the condensed consolidated balance sheets. -12-




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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 11% Senior Secured Notes due 2015  Vector:In August 2007, the Company sold $165,000 of its 11% Senior Secured
Notes due 2015 (the Senior Secured Notes) in a private offering to
qualified institutional investors in accordance with Rule 144A of the
Securities Act of 1933. On May 28, 2008, the Company completed an
offer to exchange the Senior Secured Notes for an equal amount of
newly issued 11% Senior Secured Notes due 2015. The new Senior Secured
Notes have substantially the same terms as the original notes, except
that the new Senior Secured Notes have been registered under the
Securities Act.Variable Interest Senior Convertible Debt  Vector:Vector has issued two series of variable interest senior convertible
debt. Both series of debt pay interest on a quarterly basis at a
stated rate plus an additional amount of interest on each payment
date. The additional amount is based on the amount of cash dividends
paid during the prior three-month period ending on the record date for
such interest payment multiplied by the total number of shares of its
common stock into which the debt would be convertible on such record
date.A summary of non-cash interest expense associated with the amortization of the debt discount
created by the embedded derivative liability associated with the Companys variable interest
senior convertible debt for the three and nine months ended September 30, 2008 and 2007 is as
follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    20073.875% convertible debentures
    
    $
    89
    
    
    $
    70
    
    
    
    $
    269
    
    
    $
    (98
    )5% convertible notes
    
    
    1,423
    
    
    
    1,033
    
    
    
    
    3,904
    
    
    
    2,681Interest expense associated with
embedded derivatives
    
    $
    1,512
    
    
    $
    1,103
    
    
    
    $
    4,173
    
    
    $
    2,583
 A summary of non-cash changes in fair value of derivatives embedded within convertible debt is
as follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    20073.875% convertible debentures
    
    $
    43
    
    
    $
    (5,313
    )
    
    
    $
    2,925
    
    
    $
    (5,419
    )5% convertible notes
    
    
    479
    
    
    
    (1,018
    )
    
    
    
    4,912
    
    
    
    1,204Loss (gain) on changes in
fair value of
derivatives embedded within
convertible debt
    
    $
    522
    
    
    $
    (6,331
    )
    
    
    $
    7,837
    
    
    $
    (4,215
    )
 The following table reconciles the fair value of derivatives embedded within convertible debt at
September 30, 2008.
 3.875%
    
    
    
    5%Convertible
    
    
    
    ConvertibleDebentures
    
    
    
    Notes
    
    
    
    TotalBalance at December 31, 2007
    
    $
    67,911
    
    
    
    $
    33,671
    
    
    
    $
    101,582Loss (gain) from changes in fair
value of embedded derivatives
    
    
    3,250
    
    
    
    
    (806
    )
    
    
    
    2,444Balance at March 31, 2008
    
    
    71,161
    
    
    
    
    32,865
    
    
    
    
    104,026Gain from changes in fair
value of embedded derivatives
    
    
    (6,132
    )
    
    
    
    (3,627
    )
    
    
    
    (9,759
    )Balance at June 30, 2008
    
    
    65,029
    
    
    
    
    29,238
    
    
    
    
    94,267Gain from changes in fair
value of embedded derivatives
    
    
    (43
    )
    
    
    
    (479
    )
    
    
    
    (522
    )Balance at September 30, 2008
    
    $
    64,986
    
    
    
    $
    28,759
    
    
    
    $
    93,745
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:A summary of non-cash interest expense associated with the amortization of the debt discount
created by the beneficial conversion feature on the Companys variable interest senior
convertible debt for the three and nine months ended September 30, 2008 and 2007 is as follows:
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Amortization of beneficial
conversion feature:3.875% convertible debentures
    
    $
    (17
    )
    
    $
    (17
    )
    
    
    $
    (36
    )
    
    $
    (197
    )5% convertible notes
    
    
    789
    
    
    
    572
    
    
    
    
    2,162
    
    
    
    1,465Interest expense associated
with
beneficial
conversion feature
    
    $
    772
    
    
    $
    555
    
    
    
    $
    2,126
    
    
    $
    1,268
 Unamortized Debt Discount:The following table reconciles unamortized debt discount at September 30, 2008:
 3.875%
    
    
    
    5%Convertible
    
    
    
    ConvertibleDebentures
    
    
    
    Notes
    
    
    
    TotalBalance at December 31, 2007
    
    $
    84,299
    
    
    
    $
    48,027
    
    
    
    $
    132,326Amortization of embedded derivatives
    
    
    (269
    )
    
    
    
    (3,904
    )
    
    
    
    (4,173
    )Amortization of beneficial
conversion feature
    
    
    36
    
    
    
    
    (2,162
    )
    
    
    
    (2,126
    )Balance at September 30, 2008
    
    $
    84,066
    
    
    
    $
    41,961
    
    
    
    $
    126,027
 Revolving Credit Facility  Liggett:Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $3,389 was
outstanding at September 30, 2008. Availability as determined under the facility was
approximately $23,112 based on eligible collateral at September 30, 2008.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 7.
    
    EMPLOYEE BENEFIT PLANSDefined Benefit and Postretirement Plans:Net periodic benefit cost for the Companys pension and other postretirement benefit plans for
the three and nine months ended September 30, 2008 and 2007 consists of the following:
 Pension BenefitsThree Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Service cost 
benefits earned
during the period
    
    $
    1,035
    
    
    $
    1,062
    
    
    
    $
    3,105
    
    
    $
    3,186Interest cost on
projected benefit
obligation
    
    
    2,381
    
    
    
    2,281
    
    
    
    
    7,143
    
    
    
    6,843Expected return on plan
assets
    
    
    (3,036
    )
    
    
    (3,183
    )
    
    
    
    (9,108
    )
    
    
    (9,549
    )Amortization of prior
service cost
    
    
    350
    
    
    
    351
    
    
    
    
    1,050
    
    
    
    1,053Amortization of net loss
    
    
    25
    
    
    
    176
    
    
    
    
    75
    
    
    
    528Net expense
    
    $
    755
    
    
    $
    687
    
    
    
    $
    2,265
    
    
    $
    2,061
 OtherPostretirement BenefitsThree Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    
    2008
    
    
    2007Service cost 
benefits earned
during the period
    
    $
    4
    
    
    $
    4
    
    
    
    $
    12
    
    
    $
    12Interest cost on
projected benefit
obligation
    
    
    148
    
    
    
    148
    
    
    
    
    444
    
    
    
    444Amortization of net loss
    
    
    (45
    )
    
    
    (26
    )
    
    
    
    (135
    )
    
    
    (78
    )Net expense
    
    $
    107
    
    
    $
    126
    
    
    
    $
    321
    
    
    $
    378
 The Company did not make contributions to its pension benefits plans for the three and nine
months ended September 30, 2008 and does not anticipate making any contributions to such plans
in 2008. The Company anticipates paying approximately $750 in other postretirement benefits in
2008.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 8.
    
    CONTINGENCIESTobacco-Related Litigation:OverviewSince 1954, Liggett and other United States cigarette manufacturers have been named as
defendants in numerous direct, third-party and purported class actions predicated on the theory
that cigarette manufacturers should be liable for damages alleged to have been caused by
cigarette smoking or by exposure to secondary smoke from cigarettes. New cases continue to be
commenced against Liggett and other cigarette manufacturers. The cases generally fall into the
following categories: (i) smoking and health cases alleging personal injury brought on behalf of
individual plaintiffs (Individual Actions); (ii) smoking and health cases primarily alleging
personal injury or seeking court-supervised programs for ongoing medical monitoring and
purporting to be brought on behalf of a class of individual plaintiffs (Class Actions); (iii)
health care cost recovery actions brought by various foreign and domestic governmental entities
(Governmental Actions); and (iv) health care cost recovery actions brought by third-party
payors including insurance companies, union health and welfare trust funds, asbestos
manufacturers and others (Third-Party Payor Actions). As new cases are commenced, the costs
associated with defending these cases and the risks relating to the inherent unpredictability of
litigation continue to increase. The future financial impact of the risks and expenses of
litigation and the effects of the tobacco litigation settlements discussed below are not
quantifiable at this time. Liggett incurred legal expenses and other litigation related costs
totaling approximately $1,737 and $1,648, for the three months ended September 30, 2008 and
2007, respectively, and $4,806 and $5,886 for the nine months ended September 30, 2008 and 2007,
respectively.Individual ActionsAs of September 30, 2008, there were 36 individual cases pending against Liggett and/or
the Company, where one or more individual plaintiffs allege injury resulting from cigarette
smoking, addiction to cigarette smoking or exposure to secondary smoke and seek
compensatory and, in some cases, punitive damages. In addition, there were approximately
2,240 Engleprogeny cases (defined below) pending, in state and federal courts in Florida,
and approximately 100 individual cases pending in West Virginia state court as part of a
consolidated action. The following table lists the number of individual cases by state
that are pending against Liggett (excluding Engleprogeny cases and the cases consolidated
in West Virginia) or its affiliates as of September 30, 2008:
 NumberState
    
    of CasesFlorida
    
    11New York
    
    11Louisiana
    
    5Mississippi
    
    2West Virginia
    
    2District of Columbia
    
    1Maryland
    
    1Missouri
    
    1Ohio
    
    1Pennsylvania
    
    1
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Liggett Only Cases.There are currently five cases pending where Liggett is the only tobacco
company defendant. In April 2004, in Davis v. Liggett Group,a Florida state court jury awarded
compensatory damages of $540 against Liggett. In addition, plaintiffs counsel was awarded
legal fees of $752. Liggett appealed both the verdict and the legal fee award. In October
2007, the compensatory award was affirmed by the Fourth District Court of Appeal, but the court
certified certain issues to the Florida Supreme Court. Oral argument was held on November 6,
2008. The parties await a decision. In March 2008, the Fourth District Court of Appeal
reversed and remanded the legal fee award for further proceedings in the trial court. No
amounts have been expensed for this matter. In Ferlanti v. Liggett Group, an Engleprogeny case,
a trial is scheduled for February 2009. This case was originally filed by plaintiff in 2003 as
an individual case. Trial commenced in 2008 and, after three days, the court declared a
mistrial. Since that time, plaintiff amended her complaint to assert her status as a decertified
Engleclass member. The Engleprogeny cases are discussed below. The other three individual
actions, where Liggett is the only tobacco company defendant, are
dormant.The plaintiffs allegations of liability in those cases in which individuals seek recovery for
injuries allegedly caused by cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty, strict liability, fraud,
concealment, misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law
public nuisance, property damage, invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade practice laws, the federal
Racketeer Influenced and Corrupt Organizations Act (RICO), state RICO statutes and antitrust
statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including treble/multiple damages, medical monitoring, disgorgement of
profits and punitive damages. Although alleged damages often are not determinable from a
complaint, and the law governing the pleading and calculation of damages varies from state to
state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically
pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and
even billions of dollars.Defenses raised by defendants in individual cases include lack of proximate cause, assumption of
the risk, comparative fault and/or contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as unclean hands and lack of benefit, failure to state a
claim and federal preemption.In addition to the award against Liggett in Davis(discussed above), jury awards have been
returned against other cigarette manufacturers in recent years. The awards in these individual
actions, often in excess of millions of dollars, are for both compensatory and punitive damages.
There are several significant jury awards against other cigarette manufacturers which are
currently on appeal.Engle Progeny Cases. In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co.rendered a
$145,000,000 punitive damages verdict in favor of a Florida Class against certain cigarette
manufacturers, including Liggett. Pursuant to the Florida Supreme Courts July 2006 ruling in
Engle, which decertified the class on a prospective basis, and affirmed the appellate courts
reversal of the punitive damages award, former class members had one year from January 11, 2007
in which to file individual lawsuits. In addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in Engle, are attempting to avail
themselves of the Engleruling. Lawsuits by individuals requesting the benefit of the Engle
ruling, whether filed before or after the January 11, 2007 mandate, are referred to as the Engleprogeny cases. Liggett and/or the Company have been named in
approximately 2,240 Engleprogeny cases in both state and federal courts in Florida. Other
cigarette manufacturers have also been named as defendants in most of these cases. These cases include
approximately 9,570 plaintiffs, although duplicate cases were filed in federal and state court
on behalf of approximately 660 plaintiffs. Although the total number of Engleplaintiffs will
not increase, the number of cases will likely increase as the court may require multi-plaintiff
cases to be severed into individual cases. For further information on the Englecase, see
Class Actions EngleCase, below.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Class ActionsAs of September 30, 2008, there were eight actions pending for which either a class has been
certified or plaintiffs are seeking class certification, where Liggett is a named defendant,
including two alleged price fixing cases. Other cigarette manufacturers are also named in these
actions. Many of these actions purport to constitute statewide class actions and were filed
after May 1996 when the Fifth Circuit Court of Appeals, in Castano v. American Tobacco Co.,
Inc., reversed a federal district courts certification of a purported nationwide class action
on behalf of persons who were allegedly addicted to tobacco products.Engle Case. In May 1994, Englewas filed against Liggett and others in Miami-Dade County,
Florida. The class consisted of all Florida residents who, by November 21, 1996, have suffered,
presently suffer or have died from diseases and medical conditions caused by their addiction to
cigarette smoking. In July 1999, after the conclusion of Phase I of the trial, the jury
returned a verdict against Liggett and other cigarette manufacturers on certain issues
determined by the trial court to be common to the causes of action of the plaintiff class.
The jury made several findings adverse to the defendants including that defendants conduct
rose to a level that would permit a potential award or entitlement to punitive damages. Phase
II of the trial was a causation and damages trial for three of the class plaintiffs and a
punitive damages trial on a class-wide basis, before the same jury that returned the verdict in
Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class
plaintiffs, to be reduced in proportion to the respective plaintiffs fault. In July 2000, the
jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett.In May 2003, Floridas Third District Court of Appeal reversed the trial courts final judgment
and remanded the case with instructions to decertify the class. The judgment in favor of one of
the three class plaintiffs, in the amount of $5,831, was overturned as time barred and the court
found that Liggett was not liable to the other two class plaintiffs.In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages
award and held that the class should be decertified prospectively, but preserved several of the
trial courts Phase I findings (including that: (i) smoking causes lung cancer, among other
diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the
market that were defective and unreasonably dangerous; (iv) the defendants concealed material
information; (v) all defendants sold or supplied cigarettes that were defective; and (vi) all
defendants were negligent) and allowed former class members to proceed to trial on individual
liability issues (using the above findings) and compensatory and punitive damage issues,
provided they commence their individual lawsuits within one year from January 11, 2007, the date
of the courts mandate. In December 2006, the Florida Supreme Court added the finding that
defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to
the representations made by defendants. As a result of the decision, approximately 9,570
former Engleclass members have commenced suit against Liggett and/or the Company as well as
other cigarette manufacturers.In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco
Co.,awarded $37,500 in compensatory damages in a case involving Liggett and two other cigarette
manufacturers, which amount was subsequently reduced by the court. The jury found Liggett 50%
responsible for the damages incurred by the plaintiff. The Lukacscase was the first case to be
tried as an individual Engleprogeny suit following entry of final judgment by the Engletrial
court. In August 2008, the court entered judgment in the amount of $24,835 (for which Liggett
is 50% responsible), plus interest from June 2002 which, as of September 30, 2008, was
approximately $13,200. Liggett intends to appeal the award and may be required to post a bond.
In addition, plaintiff filed a motion seeking an award of attorneys fees from Liggett based on
plaintiffs prior proposal for settlement. In October 2008, plaintiff withdrew her request for
punitive damages.Other Class Actions.Classes remain certified against Liggett in Kansas (Smith) and New
Mexico (Romero). Smith v. Philip Morrisand Romero v. Philip Morrisare actions in which
plaintiffs allege that cigarette manufacturers conspired to fix cigarette prices in
violation of antitrust laws. Class certification was granted in Smithin November 2001.
Discovery is ongoing. Class certification was granted in Romeroin April 2003 and was
affirmed by the New Mexico Supreme Court in February 2005. In June 2006, the trial court
granted defendants motion for summary judgment. Plaintiffs appealed to the New Mexico
Court of Appeals. The parties completed briefing in August 2007 and await a decision. In
West Virginia, a jury verdict in a purported medical monitoring class action was entered
in favor of all tobacco company defendants other than Liggett (Liggett was previously
severed from the trial). There has been no further activity in this case.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Class action suits have been filed in a number of states against cigarette manufacturers,
alleging, among other things, that the use of the terms light and ultra light constitutes
unfair and deceptive trade practices, among other things. One such suit, Schwab v. Philip
Morris,pending in federal court in New York since 2004, sought to create a nationwide class of
light cigarette smokers. In September 2006, the United States District Court for the Eastern
District of New York certified the class. In April 2008, the United States Court of Appeals for
the Second Circuit decertified the class. The case was returned to the trial court for further
proceedings. There has been no further activity.In November 1997, in Young v. American Tobacco Co.,a purported personal injury class action was
commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though
not themselves cigarette smokers, alleged to have been exposed to secondhand smoke from
cigarettes which were manufactured by the defendants, and who suffered injury as a result of
that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and
punitive damages. In October 2004, the trial court stayed this case pending the outcome of the
appeal in Scott v. American Tobacco Co.,(See description below).In June 1998, in Cleary v. Philip Morris,a putative class action was brought in Illinois state
court on behalf of persons who were allegedly injured by (i) the defendants purported
conspiracy pursuant to which defendants allegedly concealed material facts regarding the
addictive nature of nicotine; (ii) the defendants alleged acts of targeting their advertising
and marketing to minors; and (iii) the defendants claimed breach of the publics right to
defendants compliance with laws prohibiting the distribution of cigarettes to minors. The
plaintiffs request that the defendants be required to disgorge all profits unjustly received
through their sale of cigarettes to plaintiffs and the class, which in no event will be greater
than $75 per class member, inclusive of punitive damages, interest and costs. In July 2006, the
plaintiffs filed a motion for class certification. A class certification hearing occurred in
September 2007
and the parties are awaiting a decision. Merits discovery is stayed pending a ruling by the
court. A status conference is scheduled in October 2009.In April 2001, in Brown v. American Tobacco Co.,a California state court granted in part
plaintiffs motion for class certification and certified a class comprised of adult residents of
California who smoked at least one of defendants cigarettes during the applicable time period
and who were exposed to defendants marketing and advertising activities in California. In
March 2005, the court granted defendants motion to decertify the class based on a recent change
in California law. In October 2006, the plaintiffs filed a petition for review with the
California Supreme Court, which was granted in November 2006. Oral argument has not yet been
scheduled.Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases), a
West Virginia State court consolidated approximately 750 individual smoker actions that were
pending prior to 2001 for trial of certain common issues. In January 2002, the court severed
Liggett from the trial of the consolidated action. The consolidation was affirmed on appeal by
the West Virginia Supreme Court. In February 2008, the United States Supreme Court denied the
defendants petition for writ of certiorari asking the Court to review the trial plan. It is
estimated that Liggett could be a defendant in approximately 100 of the cases. In February
2008, the court granted defendants motion to stay all proceedings pending United States Supreme
Court review in Altria Group Inc. v. Good, where the Court will determine whether certain state
law claims are preempted by federal law.Oral argument was held in that case in October 2008
and the parties await a decision.Class certification motions are pending in a number of other cases and a number of orders
denying class certification are on appeal. In addition to the cases described above, numerous
class actions remain certified against other cigarette manufacturers, including Scott.In that
case, a Louisiana jury returned a $591,000 verdict (subsequently reduced by the court to
$263,500 plus interest from June 2004) against other cigarette manufacturers to fund medical
monitoring or smoking cessation programs for members of the class. The verdict is on appeal.Governmental ActionsAs of September 30, 2008, there were two Governmental Actions pending against Liggett, only one
of which is active. The claims asserted in health care cost recovery actions vary. In these
cases, the governmental entities typically assert equitable claims that the tobacco industry was
unjustly enriched by their payment of health care costs allegedly attributable to smoking and
seek reimbursement of those costs. Other claims made by some but not all plaintiffs include the
equitable claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, breach of special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud,
antitrust, deceptive trade practices and false advertising, and claims under RICO.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 In December 1998, in City of St. Louis v. American Tobacco Company, a case pending in Missouri
state court, the City of St. Louis and approximately 50 hospitals brought suit against Liggett
and other cigarette manufacturers seeking recovery of costs expended by the hospitals on behalf
of patients who suffer, or have suffered, from illnesses allegedly resulting from the use of
cigarettes. In June 2005, the court granted defendants motion for summary judgment as to
claims for damages which accrued prior to November 16, 1993. The claims for damages which
accrued after November 16, 1993 are pending. Discovery is ongoing. On September 3, 2008, the court heard argument on motions for summary
judgment filed by the parties. A decision is pending. Recently, several plaintiffs dismissed
their cases, with prejudice. Trial is scheduled to commence in January 2010.DOJ Case.In September 1999, the United States government commenced litigation against Liggett
and other cigarette manufacturers in the United States District Court for the District of
Columbia. The action sought to recover an unspecified amount of health care costs paid for and
furnished, and to be paid for and furnished, by the federal government for lung cancer, heart
disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and
tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in
alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to
disgorge the proceeds of their unlawful conduct. The action asserted claims under three federal
statutes, the Medical Care Recovery Act (MCRA), the Medicare Secondary Payer provisions of the
Social Security Act (MSP) and RICO. In September 2000, the court dismissed the governments
claims based on MCRA and MSP.In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the
cigarette manufacturing defendants, except Liggett. The Final Judgment, among other things,
ordered that the non-Liggett defendants are enjoined from: (i) committing any act of
racketeering concerning the manufacturing, marketing, promotion, health consequences or sale of
cigarettes in the United States; (ii) making any material false, misleading, or deceptive
statement or representation concerning cigarettes that persuades people to purchase cigarettes;
and (iii) utilizing lights, low tar, ultra lights, mild, or natural descriptors, or
conveying any other express or implied health messages in connection with the marketing or sale
of cigarettes, domestically and internationally.Although this case has been concluded as to Liggett, it is unclear what impact, if any, the
Final Judgment will have on the cigarette industry as a whole. All parties, other than Liggett,
appealed the decision and, on October 14, 2008, oral argument was heard by the United States
Court of Appeals for the District of Columbia. A decision is pending. To the extent that the
Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United States
or otherwise imposes regulations which adversely affect the industry, Liggetts sales volume,
operating income and cash flows could be materially adversely affected.Third-Party Payor ActionsAs of September 30, 2008, there were two Third-Party Payor Actions pending against
Liggett. Other cigarette manufacturers are also named. The Third-Party Payor Actions
typically have been commenced by insurance companies, union health and welfare trust
funds, asbestos manufacturers and others. In Third-Party Payor Actions, plaintiffs
seek damages for: funding of corrective public education campaigns relating to issues
of smoking and health; funding for clinical smoking cessation programs; disgorgement of
profits from sales of cigarettes; restitution; treble damages; and attorneys fees.
Although no specific amounts are provided, it is understood that requested damages
against cigarette manufacturers in these cases might be in the billions of dollars.Several federal circuit courts of appeals and state appellate courts have ruled that
Third-Party Payors did not have standing to bring lawsuits against cigarette
manufacturers, relying primarily on grounds that plaintiffs claims were too remote.
The United States Supreme Court has refused to consider plaintiffs appeals from the
cases decided by five federal circuit courts of appeals.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action
commenced in 1998 by the largest private insurer in that country, General Health Services,
against the major United States cigarette manufacturers. The plaintiff seeks to recover the past
and future value of the total expenditures for health care services provided to residents of
Israel resulting from tobacco related diseases, court ordered interest for past expenditures
from the date of filing the statement of
claim, increased and/or punitive and/or exemplary damages and costs. The court ruled that,
although Liggett had not sold product in Israel since at least 1978, it might still have
liability for cigarettes sold prior to that time. Motions filed by the defendants are pending
before the Israel Supreme Court seeking appeal from a lower courts decision granting leave to
plaintiff for foreign service of process.In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris
USA,a case pending in the United States District Court for the Eastern District of New York,
plaintiffs commenced an action to recover twice the amount paid by Medicare for the health care
services provided to Medicare beneficiaries to treat diseases allegedly attributable to smoking
the defendants cigarettes from May 21, 2002 to the present, for which treatment the defendants
allegedly were required to make payment under MSP. Defendants motion to dismiss and
Plaintiffs motion for partial summary judgment were filed in July 2008. A decision is pending.Upcoming TrialsThere are currently 41 individual actions in Florida, that may be set for trial in 2009, where
Liggett and/or Vector, and other cigarette manufacturers are named as defendants. These cases
are all Engleprogeny cases. There is one Engleprogeny case scheduled for trial in February 2009 where Liggett is the only
defendant. In addition, a trial has been scheduled for January 19, 2009 in a
non-Engleindividual action in Florida and for October 19, 2009 in an individual action in
Missouri where Liggett and other cigarette manufacturers are named as defendants. Trial dates
are subject to change.MSA and Other State Settlement AgreementsIn March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with 45 states and territories. The settlements released Liggett from all
smoking-related claims within those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors.In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the Master Settlement Agreement (the MSA) with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern
Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted
health care cost recovery and certain other claims of those Settling States. The MSA received
final judicial approval in each Settling State.In the Settling States, the MSA released Liggett from:
 
    
    all claims of the Settling States and their respective political subdivisions and other
recipients of state health care funds, relating to: (i) past conduct arising out of the
use, sale, distribution, manufacture, development, advertising and marketing of tobacco
products; (ii) the health effects of, the exposure to, or research, statements or warnings
about, tobacco products; and
    
    all monetary claims of the Settling States and their respective subdivisions and other
recipients of state health care funds relating to future conduct arising out of the use of,
or exposure to, tobacco products that have been manufactured in the ordinary course of
business.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products;
bans the use of cartoon characters in all tobacco advertising and promotion; limits each
Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period;
bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco
product placement in various media; bans gift offers based on the purchase of tobacco products
without sufficient proof that the intended recipient is an adult; prohibits Participating
Manufacturers from licensing third parties to advertise tobacco brand names in any manner
prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or trade name or the names of
sports teams, entertainment groups or individual celebrities.
 The MSA also requires Participating Manufacturers to affirm corporate principles to comply with
the MSA and to reduce underage usage of tobacco products and imposes restrictions on lobbying
activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides
for the appointment of an independent auditor to calculate and determine the amount of payments
owed pursuant to the MSA.Liggett has no payment obligations under the MSA except to the extent its market share exceeds a
market share exemption of approximately 1.65% of total cigarettes sold in the United States.
Vector Tobacco has no payment obligations under the MSA, except to the extent its market share
exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United
States. According to data from Management Science Associates, Inc., domestic shipments by
Liggett and Vector Tobacco accounted for approximately 2.2%, 2.4% and 2.5% of the total
cigarettes shipped in the United States in 2005, 2006 and 2007, respectively. If Liggetts or
Vector Tobaccos market share exceeds their respective market share exemption in a given year,
then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, would
pay on each excess unit an amount equal (on a per-unit basis) to that due by the OPMs for that
year. In April 2006 and 2007, Liggett and Vector Tobacco paid $10,637 and $38,743 for their
2005 and 2006 MSA obligations, respectively and, in April 2008, paid $35,995 for their 2007 MSA
obligations, having prepaid $34,500 in 2007.Under the payment provisions of the MSA, the Participating Manufacturers are required to pay a
base annual amount of $9,000,000 in 2008 and each year thereafter (subject to applicable
adjustments, offsets and reductions). These annual payments are allocated based on unit volume
of domestic cigarette shipments. The payment obligations under the MSA are the several, and not
joint, obligations of each Participating Manufacturer and are not the responsibility of any
parent or affiliate of a Participating Manufacturer.Certain MSA DisputesIn 2005, the independent auditor under the MSA calculated that Liggett owed $28,668 for its
2004 sales. In April 2005, Liggett paid $11,678 and disputed the balance, as permitted by the
MSA. Liggett subsequently paid $9,304 of the disputed amount, although Liggett continues to
dispute that this amount is owed. This $9,304 relates to an adjustment to its 2003 payment
obligation claimed by Liggett for the market share loss to non-participating manufacturers,
which is known as the NPM Adjustment. At September 30, 2008, included in Other assets on
the Companys consolidated balance sheet, was
a noncurrent receivable of $6,513 relating to such amount. The remaining balance in dispute
of $7,686 is comprised of $5,318 claimed for a 2004 NPM Adjustment and $2,368 relating to the
independent auditors retroactive change from gross to net units in calculating MSA
payments, which Liggett contends is improper, as discussed below. From their April 2006
payment, Liggett and Vector Tobacco withheld approximately $1,600 claimed for the 2005 NPM
Adjustment and $2,612 relating to the retroactive change from gross to net units. Liggett
and Vector Tobacco withheld approximately $4,200 from their April 2007 payments related to the
2006 NPM Adjustment and approximately $3,000 relating to the retroactive change from gross to
net units. From its April 2008 payment, Liggett withheld approximately $4,000 for the 2007
NPM Adjustment and approximately $3,300 relating to the retroactive change from gross to net
units. Vector Tobacco paid approximately $200 into the disputed payments account for the 2007
NPM Adjustment.The following amounts have not been expensed in the accompanying condensed consolidated
financial statements as they relate to Liggetts and Vector Tobaccos claim for an NPM
adjustment: $6,513 for 2003, $3,789 for 2004 and $800 for 2005.NPM Adjustment.In March 2006, an economic consulting firm selected pursuant to the MSA
rendered its final and non-appealable decision that the MSA was a significant factor
contributing to the loss of market share of Participating Manufacturers for 2003. The economic
consulting firm rendered the same decision with respect to 2004 and 2005. As a result, the
manufacturers are entitled to potential NPM Adjustments to their 2003, 2004 and 2005 MSA
payments. A Settling State that has diligently enforced its qualifying escrow statute in the
year in question may be able to avoid application of the NPM Adjustment to the payments made by
the manufacturers for the benefit of that state or territory.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation has
been commenced in 49 Settling States over the issue of whether the application of the NPM
Adjustment for 2003 is to be determined through litigation or arbitration. These actions relate
to the potential NPM Adjustment for 2003, which the independent auditor under the MSA previously
determined to be as much as $1,200,000 for all Participating Manufacturers. To date, all 48
courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is arbitrable
and 42 of those decisions are final. It is not possible to estimate a date by which arbitration
of the dispute will commence or how many states will ultimately participate. There can be no
assurance that Liggett or Vector Tobacco will receive any adjustment as a result of these
proceedings.Gross v. Net Calculations.In October 2004, the independent auditor notified Liggett and all
other Participating Manufacturers that their payment obligations under the MSA, dating from the
agreements execution in late 1998, had been recalculated using net unit amounts, rather than
gross unit amounts (which had been used since 1999). The change in the method of calculation
could, among other things, require additional MSA payments by Liggett of approximately $18,300
for 2001 through 2007, require an additional payment of approximately $3,300 for 2008 and
require additional amounts in future periods because the proposed change from gross to net
units would serve to lower Liggetts market share exemption under the MSA.Liggett has objected to this retroactive change and has disputed the change in methodology.
Liggett contends that the retroactive change from using gross unit amounts to net unit
amounts is impermissible for several reasons, including:
 
    
    use of net unit amounts is not required by the MSA (as reflected by, among
other things, the use of gross unit amounts through 2005);
    
    such a change is not authorized without the consent of affected parties to the
MSA;
    
    the MSA provides for four-year time limitation periods for revisiting
calculations and determinations, which precludes recalculating Liggetts 1997
Market Share (and thus, Liggetts market share exemption); and
    
    Liggett and others have relied upon the calculations based on gross unit
amounts since 1998.
 No amounts have been expensed or accrued in the accompanying condensed consolidated financial
statements for any potential liability relating to the gross versus net dispute.QUEST 3. Vector Tobacco does not make MSA payments on sales of its QUEST 3 product as Vector
Tobacco believes that QUEST 3 does not fall within the definition of a cigarette under the MSA.
There can be no assurance that Vector Tobaccos assessment is correct and that additional
payments under the MSA for QUEST 3 will not be owed.Litigation Challenging the MSA.In litigation pending in federal court in New York, certain
importers of cigarettes allege that the MSA and certain related New York statutes violate
federal antitrust and constitutional law. The district court granted defendants motion to
dismiss the complaint for failure to state a claim. On appeal, the United States Court of
Appeals for the Second Circuit held that if all of the allegations of the complaint were assumed
to be true, plaintiffs had stated a claim for relief on antitrust grounds. On remand to the
district court, in September 2004, the court denied plaintiffs motion to preliminarily enjoin
the MSA and certain related New York statutes, but the court issued a preliminary injunction
against an amendment to the allocable share provision of the New York escrow statute. The
parties cross-motions for summary judgment are pending. Additionally, in another proceeding
pending in New York federal court, plaintiffs seek to enjoin the statutes enacted by New York
and other states in connection with the MSA on the grounds that the statutes violate the
Commerce Clause of the United States Constitution and federal antitrust laws. In September
2005, the United States Court of Appeals for the Second Circuit held that if all of the
allegations of the complaint were assumed to be true, plaintiffs had stated a claim for relief
and that the New York federal court had jurisdiction over the other defendant states. In October
2006, the United States Supreme Court denied the petition of the attorneys general for writ of
certiorari. Similar challenges to the MSA and MSA-related state statutes are pending in
Kentucky, Arkansas, Kansas, Louisiana, Tennessee and Oklahoma. Liggett and the other cigarette
manufacturers are not defendants in these cases.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 On October 28, 2008, Vibo Corporation, Inc., d/b/a General Tobacco commenced litigation in the
United States District Court for the Western District of Kentucky against each of the Settling
States and certain Participating Manufacturers. The plaintiff alleges, among other things, that
the market share exemptions (i.e.: Grandfathered Share) provided to certain SPMs under the MSA,
including Liggett and Vector Tobacco, violate federal antitrust and constitutional law. The
plaintiff seeks, among other things, treble damages against each Participating Manufacturer.Litigation challenging the validity of the MSA, including claims that the MSA violates antitrust
laws, to date, has not been successful.Other State Settlements.The MSA replaces Liggetts prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of these four
states, prior to the effective date of the MSA, negotiated and executed settlement
agreements with each of the other major tobacco companies, separate from those settlements
reached previously with Liggett. Liggetts agreements with these states remain in full
force and effect, and Liggett made various payments to these states during 1996, 1997 and
1998 under the agreements. These states settlement agreements with Liggett contained most
favored nation provisions which could reduce Liggetts payment obligations based on
subsequent settlements or resolutions by those states with certain other tobacco companies.
Beginning in 1999, Liggett determined that, based on each of these four states
settlements with United States Tobacco Company, Liggetts payment obligations to those
states had been eliminated. With respect to all non-economic obligations under the previous
settlements, Liggett believes it is entitled to the most favorable provisions as between
the MSA and each states respective settlement with the other major tobacco companies.
Therefore, Liggetts non-economic obligations to all states and territories are now defined
by the MSA. In 2003, in order to resolve any potential issues with Minnesota as to
Liggetts ongoing economic settlement obligations, Liggett negotiated a $100 a year payment
to Minnesota, to be paid any year cigarettes manufactured by Liggett are sold in that
state.In 2004, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they
believed that Liggett had failed to make all required payments under the respective settlement
agreements with these states for the period 1998 through 2003 and that additional payments may
be due for 2004 and subsequent years. In 2004, Florida and Mississippi proposed settlements to
Liggett in the total amount of approximately $20,000 for the period 1998 though 2003.
Subsequent discussions did not result in a resolution of the issues. Liggett believes the
states allegations are without merit, based, among other things, on the language of the most
favored nation provisions of the settlement agreements.Except for $2,500 accrued at September 30, 2008, in connection with the foregoing matters,
no other amounts have been accrued in the accompanying condensed consolidated financial
statements for any additional amounts that may be payable by Liggett under the settlement
agreements with Florida, Mississippi and Texas. There can be no assurance that Liggett will
resolve these matters or that Liggett will not be required to make additional material payments,
which payments could adversely affect the Companys consolidated financial position, results of
operations or cash flows.Management is not able to predict the outcome of the litigation pending or threatened against
Liggett. Litigation is subject to many uncertainties. For example, in June 2002, the jury in
the Lukacscase, an individual case brought under the third phase of the Englecase, awarded
$37,500 (subsequently reduced by the court to $24,835) of compensatory damages against Liggett
and two other defendants and found Liggett 50% responsible for the damages. In August 2008, the
court entered judgment in favor of the plaintiff, including interest from June 2002 which, as of
September 30, 2008, was approximately $13,200. In April 2004, a jury in an individual action in
a Florida state court awarded compensatory damages of $540 against Liggett and legal fees of
$752. The legal fee award was reversed on appeal and remanded to the trial court for further
proceedings. It is possible that additional cases could be decided unfavorably against Liggett.
As a result of the Engledecision, approximately 9,570 former Engleclass members commenced suit
against Liggett and/or the Company and other cigarette manufacturers. Liggett may enter into
discussions in an attempt to settle particular cases if it believes it is appropriate to do so.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Management cannot predict the cash requirements related to any future defense costs, settlements
or judgments, including cash required to bond any appeals, and there is a risk that those
requirements will not be able to be met. An unfavorable outcome of a pending smoking and health
case could encourage
the commencement of additional similar litigation, or could lead to multiple adverse decisions
in the Engleprogeny cases. Management is unable to make a reasonable estimate with respect to
the amount or range of loss that could result from an unfavorable outcome of the cases pending
against Liggett or the costs of defending such cases and as a result has not provided any
amounts in its condensed consolidated financial statements for unfavorable outcomes. The
complaints filed in these cases rarely detail alleged damages. Typically, the claims set forth
in an individuals complaint against the tobacco industry seek money damages in an amount to be
determined by a jury, plus punitive damages and costs.The tobacco industry is subject to a wide range of laws and regulations regarding the marketing,
sale, taxation and use of tobacco products imposed by local, state and federal governments.
There have been a number of restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning cigarette smoking and the tobacco
industry. These developments may negatively affect the perception of potential triers of fact
with respect to the tobacco industry, possibly to the detriment of certain pending litigation,
and may prompt the commencement of additional similar litigation or legislation.It is possible that the Companys consolidated financial position, results of operations or cash
flows could be materially adversely affected by an unfavorable outcome in any of the
smoking-related litigation.Liggetts and Vector Tobaccos management are unaware of any material environmental conditions
affecting their existing facilities. Liggetts and Vector Tobaccos management believe that
current operations are conducted in material compliance with all environmental laws and
regulations and other laws and regulations governing cigarette manufacturers. Compliance with
federal, state and local provisions regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had a material effect on the
capital expenditures, results of operations or competitive position of Liggett or Vector
Tobacco.Other Matters:In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five
year agreement with a subsidiary of the American Wholesale Marketers Association to support a
program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds
required by state and local governments for the distribution of cigarettes. This agreement was
recently extended through 2014. Under the agreement, Liggett Vector Brands has agreed to pay a
portion of losses, if any, incurred by the surety under the bond program, with a maximum loss
exposure of $500 for Liggett Vector Brands. To secure its potential obligations under the
agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100
letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has
incurred no losses to date under this agreement, and the Company believes the fair value of
Liggett Vector Brands obligation under the agreement was immaterial at September 30, 2008.There may be several other proceedings, lawsuits and claims pending against the Company and
certain of its consolidated subsidiaries unrelated to tobacco or tobacco product liability.
Management is of the
opinion that the liabilities, if any, ultimately resulting from such other proceedings, lawsuits
and claims should not materially affect the Companys financial position, results of operations
or cash flows.9.
    
    INCOME TAXESVectors income tax rates for the three and nine months ended September 30, 2008 and 2007 do not
bear a customary relationship to statutory income tax rates as a result of the impact of
nondeductible expenses, state income taxes and interest and penalties accrued on unrecognized
tax benefits offset by the impact of the domestic production activities deduction.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 The Companys provision for income taxes in interim periods is based on an estimated annual
effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary
operations in accordance with FIN 18, Accounting for Income Taxes in Interim Periodsan
interpretation of APB Opinion No. 28. In 2008, the Company did not include the gain on the
income of the Companys investment in the St. Regis Hotel, a $2,600 reversal of previously
unrecognized tax benefits due to the expiration of the Statute of
Limitations, and the provision for losses on long-term investments and mortgage
receivable in the computation of the effective annual income tax rate from estimated pre-tax
results from ordinary operations. In 2007, the Company did not include the benefit from the
settlement of a state income tax assessment, the income from the lawsuit settlement with the
United States government, the gain from the exchange of the LTS notes and the $2,200 reversal of
previously unrecognized deferred tax benefits in the computation of the effective annual income
tax rate for 2007 from estimated pre-tax results from ordinary operations. These items reduced
the Companys income tax provision by approximately $2,700 and $3,800 for the nine months ended
September 30, 2008 and 2007, respectively, and the Companys provision for income taxes by
approximately $2,750 and $2,200 for the three months ended September 30, 2008 and 2007, respectively due to
differences in the Companys marginal tax rate of approximately 41% and its anticipated
effective annual income tax rate from ordinary operations of approximately 44%.The Companys current deferred income tax liabilities increased by approximately $75,500 in 2008
as a result of the reclassification of a deferred tax liability from non-current to current
liabilities. This reclassification resulted from the Companys settlement with the Internal
Revenue Service in July 2006, which required the Company to recognize taxable income of
approximately $192,000 from the Philip Morris brand transaction by March 1, 2009.10.
    
    NEW VALLEYInvestments in non-consolidated real estate businesses.The components of Investments in
non-consolidated real estate businesses were as follows as of September 30, 2008 and December
31, 2007:
 September 30,
    
    
    
    December 31,2008
    
    
    
    2007Douglas Elliman Realty LLC
    
    $
    35,383
    
    
    
    $
    31,89316th and K Holdings LLC
    
    
    
    
    
    
    
    3,838Koa Investors LLC
    
    
    
    
    
    
    
    Aberdeen Townhomes LLC
    
    
    10,475
    
    
    
    
    New Valley Oaktree Chelsea Eleven LLC
    
    
    12,000
    
    
    
    
    Investments in non-consolidated real
estate businesses
    
    $
    57,858
    
    
    
    $
    35,731
 Residential Brokerage Business.New Valley recorded income of $4,727 and $6,621 for the three
months ended September 30, 2008 and 2007, respectively, and income of $10,249 and $17,763 for
the nine months ended September 30, 2008 and 2007, respectively, associated with Douglas Elliman
Realty. New Valleys income includes 50% of Douglas Ellimans net income, as well as interest
income earned by New Valley on a subordinated loan to Douglas Elliman Realty, increases to
income resulting from amortization of negative goodwill which resulted from purchase accounting,
and management fees. New Valley received cash distributions from Douglas Elliman Realty LLC of
$3,200 and $322 for the three months ended September 30, 2008 and 2007, respectively, and $5,757
and $5,170 for the nine months ended September 30, 2008 and 2007, respectively.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Summarized financial information for Douglas Elliman Realty for the three and nine months ended
September 30, 2008 and 2007 and as of September 30, 2008 and December 31, 2007 is presented
below.
 September 30,
    
    
    
    December 31,2008
    
    
    
    2007Cash
    
    $
    24,954
    
    
    
    $
    26,916Other current assets
    
    
    9,124
    
    
    
    
    9,462Property, plant and equipment, net
    
    
    16,734
    
    
    
    
    18,394Trademarks
    
    
    21,663
    
    
    
    
    21,663Goodwill
    
    
    38,321
    
    
    
    
    38,294Other intangible assets, net
    
    
    1,387
    
    
    
    
    1,928Other non-current assets
    
    
    922
    
    
    
    
    850Notes payable  current
    
    
    592
    
    
    
    
    581Current portion of notes payable to
member 
Prudential Real Estate Financial
Services
Of America, Inc.
    
    
    4,729
    
    
    
    
    4,373Current portion of notes payable
to member  New Valley
    
    
    4,729
    
    
    
    
    625Other current liabilities
    
    
    24,518
    
    
    
    
    26,579Notes payable  long term
    
    
    803
    
    
    
    
    2,402Notes payable to member 
Prudential Real
Estate Financial Services of
America, Inc.
    
    
    3,043
    
    
    
    
    15,115Notes payable to member  New Valley
    
    
    3,043
    
    
    
    
    8,583Other long-term liabilities
    
    
    7,479
    
    
    
    
    6,599Members equity
    
    
    64,169
    
    
    
    
    52,650
 Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,2008
    
    
    
    2007
    
    
    
    2008
    
    
    2007Revenues
    
    $
    99,259
    
    
    
    $
    110,139
    
    
    
    $
    281,515
    
    
    $
    313,434Costs and expenses
    
    
    88,564
    
    
    
    
    95,249
    
    
    
    
    256,803
    
    
    
    272,314Depreciation expense
    
    
    1,373
    
    
    
    
    1,476
    
    
    
    
    4,080
    
    
    
    4,528Amortization expense
    
    
    74
    
    
    
    
    111
    
    
    
    
    223
    
    
    
    285Interest expense, net
    
    
    800
    
    
    
    
    966
    
    
    
    
    2,465
    
    
    
    3,424Income tax expense
    
    
    76
    
    
    
    
    57
    
    
    
    
    422
    
    
    
    247Net income
    
    $
    8,372
    
    
    
    $
    12,280
    
    
    
    $
    17,522
    
    
    $
    32,636
 16th and K Holdings LLC.In 2007, 16th and K Holdings LLC entered into certain agreements to
sell 90% of the St. Regis Hotel. The sale closed in March 2008. In addition to retaining a 3%
interest, net of incentives, in the St. Regis Hotel, New Valley received $15,822 in March 2008
and received an additional $584 associated with the sale of the hotel in October 2008. The
Company anticipates receiving an additional $3,400 in various installments between 2009 and
2012. The Company recorded the $15,822 as an investing activity in the condensed consolidated
statement of cash flows. New Valley recorded equity losses of $0 and $32 for the three months
ended September 30, 2008 and 2007, respectively, and $3,796 and $134 for the nine months ended
September 30, 2008 and 2007, respectively, associated with 16th and K Holdings LLC. For the
nine months ended September 30, 2008, New Valley also recorded equity income of $15,779 in
connection with the gain from the sale of the St. Regis because the amount received from 16th
and K Holdings exceeded the Companys basis in the investment and the Company has no legal
obligation to make additional investments to 16th and K Holdings.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Hawaiian Hotel.KOA Investors LLC owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona,
Hawaii. New Valley and certain members in KOA Investors have chosen not to fund discretionary
capital calls in 2008 and KOA Investors was not able to meet its financial obligations in the
third quarter of 2008. KOA has been informed by its Lender that it is
in default on its $82,000 loan. The Company has carried its investment in
KOA at $0 throughout 2008.Aberdeen Townhomes LLC.In June 2008, a subsidiary of New Valley purchased a preferred equity
interest in Aberdeen Townhomes LLC (Aberdeen) for $10,000. Aberdeen acquired five town home
residences located in Manhattan, New York which it is in the process of rehabilitating and
selling. In the event that Aberdeen makes distributions of cash, New Valley is entitled to a
priority preferred return of 15% per annum until it has recovered its invested capital. New
Valley is entitled to 25% of subsequent cash distributions of profits until it has achieved an
annual 18% internal rate of return (IRR). New Valley is then entitled to 20% of subsequent
cash distributions of profits until it has achieved an annual 23% IRR. After New Valley has
achieved an annual 23% IRR, it is then entitled to 10% of any remaining cash distributions of
profits. Aberdeen is a variable interest entity; however, the Company is not the primary
beneficiary. The Companys maximum exposure to loss as a result of its investment in Aberdeen
is $10,000. This investment is being accounted for under the cost method. New Valley recorded
income of $475 related to the priority return of 15% per annum for the three and nine months
ended September 30, 2008New Valley Oaktree Chelsea Eleven, LLC.In September 2008, a subsidiary of New Valley LLC
purchased a 40% interest in New Valley Oaktree Chelsea Eleven, LLC (New Valley Oaktree). New
Valley Oaktree lent $29,000 and contributed $1,000 in capital to Chelsea Eleven LLC (Chelsea),
which is developing a condominium project in Manhattan, New York. The development consists of
72 luxury residential units and one commercial unit. Approximately 75% of the units have been
pre-sold and approximately $35,000 in deposits held in escrow. The loan from New Valley Oaktree
loan is subordinate to a $110,000 construction loan and a $24,000 mezzanine loan plus accrued
interest. The loan from New Valley Oaktree to Chelsea bears interest at 60.25% per annum,
compounded monthly, with $3,750 being held in an interest reserve.New Valley Chelsea is a variable interest entity; however, the Company is not the primary
beneficiary. The Companys maximum exposure to loss as a result of its investment in Chelsea is
$12,000. This investment is being accounted for under the equity method.Mortgage receivable.In March 2008, a subsidiary of New Valley purchased a loan secured by a
substantial portion of a 450-acre approved master planned community in Palm Springs, California
known as Escena. The loan, which is currently in foreclosure, was purchased for its $20,000
face value plus accrued interest and other costs of $1,445. The loan is being accounted for
under the cost recovery method and the cost includes the purchase price and additional
capitalized acquisition costs of $259.The borrowers are Escena-PSC, LLC and Palm Springs Classic, LLC, a joint venture of Lennar Homes
of California, Inc. and Empire Land, LLC. Empire Land recently filed a Chapter 11 bankruptcy
petition. Lennar Homes is an affiliate of Lennar Corporation. The loan collateral consists of
867 residential lots with site and public infrastructure, an 18-hole Nicklaus Design golf
course, a substantially completed clubhouse, and a seven-acre site approved for a 450-room
hotel.
 In October 2007, the as is value of the land was appraised in excess of the outstanding value
of the loan. The Company recently obtained an updated appraisal that valued the property at
substantially less than the outstanding loan balance. The reduction in value was attributed to
the overall real estate market conditions in California. Among other things, Lennar Corporation
has a payment guaranty of up to 50% of the outstanding loan and accrued interest as well as a
guaranty to complete the development of the property. In order to calculate the fair market
value of the investment, the Company utilized the most recent as is appraised value of the
collateral and estimated the value of Lennar Corporations completion and payment guaranties,
less estimated costs to enforce the guaranties and dispose of the property. The Company applied a discount rate of 25% and a default rate of approximately 5.4% to the Guarantors
debt in valuing the guaranties. The Company believes that both rates approximated market
conditions at September 30, 2008. Based on these
estimates, the Company has determined that the fair market value was less than the carrying
amount of the mortgage receivable at September 30, 2008 by approximately $4,000. This determination was made because real estate values in Palm Springs declined significantly in
the third quarter. Accordingly,
a reserve was established for the decline in value and a charge of $4,000 was recorded for the
three and nine months ended September 30, 2008 as a component of
Provision for loss on investments in the Companys
Condensed Consolidated Statement of Operations. The Company carried the loan on its condensed
consolidated balance sheet at its net basis of $17,704 as of
September 30, 2008. Litigation is ongoing to enforce the
Companys rights under the loan documents.
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VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Real Estate Market Conditions.Because the real estate, capital and credit markets have
continued to worsen, the Company will continue to perform additional assessments to determine the
impact of the markets, if any, on the Companys condensed consolidated financial statements. Thus,
future impairment charges may occur.NASA Settlement.In 1994, New Valley commenced an action against the United States government
seeking damages for breach of a launch services agreement covering the launch of one of the
Westar satellites owned by New Valleys former Western Union satellite business. In March 2007,
the parties entered into a Stipulation for Entry of Judgment to settle New Valleys claims and,
pursuant to the settlement, $20,000 was paid in May 2007. In the first quarter of 2007, the
Company recognized a pre-tax gain of $19,590, which consisted of other non-operating income of
$20,000 and $410 of selling, general and administrative expenses, in connection with the
settlement.11.
    
    INVESTMENTS AND FAIR VALUE MEASUREMENTSOn January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for
financial assets and financial liabilities. SFAS No. 157 does not require any new fair value
measurements but rather introduces a framework for measuring fair value and expands required
disclosure about fair value measurements of assets and liabilities.SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and the cost
approach (cost to replace the service capacity of an asset or replacement cost). The statement clarifies that
fair value is an exit price, representing amounts that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants.SFAS No. 157 utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The following is a brief
description of those three levels:
 Level 1
    
    Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.Level 2
    
    Inputs other than quoted prices that are observable for the assets
or liability, either directory or indirectly. These include
quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities
in markets that are not active.Level 3
    
    Unobservable inputs in which there is little market data, which
requires the reporting entity to develop their own assumptions
 This hierarchy requires the use of observable market data, when available, and to minimize the
use of unobservable inputs when determining fair value.The Companys population of recurring financial assets and liabilities subject to fair value
measurements and the necessary disclosures are as follows:
 Fair Value Measurements as of September 30, 2008Quoted Prices inActive Markets for
    
    
    Significant other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsDescription
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Money market funds
    
    $
    197,629
    
    
    $
    197,629
    
    
    $
    
    
    
    $
    Investment securities
available for sale
    
    
    46,151
    
    
    
    37,331
    
    
    
    8,820
    
    
    
    Total
    
    $
    243,780
    
    
    $
    234,960
    
    
    $
    8,820
    
    
    $
    Liabilities:Fair value of
derivatives
embedded
within
convertible debt
    
    $
    93,745
    
    
    $
    
    
    
    $
    
    
    
    $
    93,745
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Unaudited
 The fair value of investment securities available for sale included in Level 1 are based on
quoted market prices from various stock exchanges. The $8,820 of investment securities
available for sale in Level 2 are not registered and therefore do not have direct market quotes.The fair value of derivatives embedded within convertible debt were derived using a valuation
model and have been classified as Level 3. The valuation model assumes future dividend payments
by the Company and utilizes interest rates and credit spreads for secured to unsecured debt,
unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair
value of the derivatives embedded within the convertible debt. The changes in fair value of
derivatives embedded within convertible debt as of September 30, 2008 are disclosed. (See Note
6.)12.
    
    SEGMENT INFORMATIONThe Companys significant business segments for the three months ended
September 30, 2008 and 2007 were Liggett, Vector Tobacco and New
Valley. The Liggett segment consists of the manufacture and sale of
conventional cigarettes and, for segment reporting purposes, includes
the operations of Medallion (which operations are held for legal
purposes as part of Vector Tobacco). The Vector Tobacco segment
includes the development and marketing of the low nicotine and
nicotine-free cigarette products as well as the development of reduced
risk cigarette products and, for segment reporting purposes, excludes
the operations of Medallion. The accounting policies of the segments
are the same as those described in the summary of significant
accounting policies. The New Valley segment includes the Companys
equity income and investments in non-consolidated real estate
businesses and mortgage receivable.Financial information for the Companys operations before taxes
for the three and nine months ended September 30, 2008 and 2007
follows:
 Vector
    
    
    New
    
    
    CorporateLiggett
    
    
    Tobacco
    
    
    Valley
    
    
    and Other
    
    
    TotalThree months ended
September 30, 2008Revenues
    
    $
    144,841
    
    
    $
    760
    
    
    
    
    
    
    
    
    
    
    $
    145,601Operating income (loss)
    
    
    45,924
    
    
    
    (2,439
    )
    
    
    
    
    
    
    (5,950
    )
    
    
    37,535Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    5,202
    
    
    
    
    
    
    
    5,202Depreciation and amortization
    
    
    1,910
    
    
    
    30
    
    
    
    
    
    
    
    588
    
    
    
    2,528Three months ended
September 30, 2007Revenues
    
    $
    135,186
    
    
    $
    867
    
    
    
    
    
    
    
    
    
    
    $
    136,053Operating income (loss)
    
    
    40,448
    
    
    
    (2,841
    )
    
    
    
    
    
    
    (3,900
    )
    
    
    33,707Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    6,589
    
    
    
    
    
    
    
    6,589Depreciation
and amortization
    
    
    1,856
    
    
    
    26
    
    
    
    
    
    
    
    587
    
    
    
    2,469Nine months ended
September 30, 2008Revenues
    
    $
    418,816
    
    
    $
    1,950
    
    
    
    
    
    
    
    
    
    
    $
    420,766Operating income (loss)
    
    
    126,960
    
    
    
    (6,775
    )
    
    
    
    
    
    
    (20,264
    )
    
    
    99,921Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    22,706
    
    
    
    
    
    
    
    22,706Identifiable assets
    
    
    312,188
    
    
    
    2,317
    
    
    
    57,383
    
    
    
    417,807
    
    
    
    789,695Depreciation and amortization
    
    
    5,682
    
    
    
    89
    
    
    
    
    
    
    
    1,757
    
    
    
    7,528Capital expenditures
    
    
    5,341
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    5,426Nine months ended
September 30, 2007Revenues
    
    $
    407,304
    
    
    $
    2,992
    
    
    $
    
    
    
    $
    
    
    
    $
    410,296Operating income (loss)
    
    
    113,371
    
    
    
    (7,247
    )
    
    
    
    
    
    
    (17,514
    )
    
    
    88,610Equity income from non-consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    15,926
    
    
    
    
    
    
    
    15,926Identifiable assets
    
    
    283,797
    
    
    
    10,568
    
    
    
    39,122
    
    
    
    429,704
    
    
    
    763,191Depreciation and amortization
    
    
    5,711
    
    
    
    84
    
    
    
    
    
    
    
    1,759
    
    
    
    7,554Capital expenditures
    
    
    4,104
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    4,211
 -30-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 13.
    
    CONDENSED CONSOLIDATING FINANCIAL INFORMATIONThe accompanying condensed consolidating financial information has been prepared and presented
pursuant to Securities and Exchange Commission Regulation S-X, Rule 3-10, Financial Statements of
Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Each of the
subsidiary guarantors are 100% owned, directly or indirectly, by the Company, and all guaranties
are full and unconditional and joint and several. The Companys investments in its consolidated
subsidiaries are presented under the equity method of accounting.The 11% Senior Secured Notes due 2015, issued on August 16, 2007 by Vector, are fully and
unconditionally guarantied on a joint and several basis by all of the 100%-owned domestic
subsidiaries of the Company that are engaged in the conduct of its cigarette businesses. (See
Note 6.) The notes are not guarantied by any of the Companys subsidiaries engaged in the real
estate businesses conducted through its subsidiary New Valley. Presented herein are unaudited
condensed consolidating balance sheets as of September 30, 2008 and December 31, 2007, the related
unaudited condensed consolidating statements of operations for the three and nine months ended
September 30, 2008 and 2007 and the unaudited condensed consolidated statements of cash flows for
the nine months ended September 30, 2008 and 2007 of the Company (Parent/Issuer), the guarantor
subsidiaries (Subsidiary Guarantors) and the subsidiaries that are not guarantors (Subsidiary
Non-Guarantors).The indenture contains covenants that restrict the payment of dividends by the Company if the
Companys consolidated earnings before interest, taxes, depreciation and amortization
(Consolidated EBITDA), as defined in the indenture, for the most recently ended four full
quarters is less than $50,000. The indenture also restricts the incurrence of debt if the
Companys Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed 3.0
and 1.5, respectively. The Companys Leverage Ratio is defined in the
indenture as the ratio of the Companys and the guarantying subsidiaries total debt less the fair
market value of the Companys and the guarantying subsidiaries cash and cash equivalents,
investments in securities and long-term investments to Consolidated EBITDA, as defined in the
indenture. The Companys Secured Leverage Ratio is defined in the indenture in the same manner as
the Leverage Ratio, except that secured indebtedness is substituted for indebtedness.
 -31-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    199,028
    
    
    $
    7,481
    
    
    $
    
    
    
    $
    
    
    
    $
    206,509Investment securities
available for sale
    
    
    46,073
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    46,151Accounts receivable 
trade
    
    
    
    
    
    
    7,398
    
    
    
    
    
    
    
    
    
    
    
    7,398Intercompany receivables
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    (87
    )
    
    
    Inventories
    
    
    
    
    
    
    92,044
    
    
    
    
    
    
    
    
    
    
    
    92,044Deferred income taxes
    
    
    13,074
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    13,439Income taxes receivable
    
    
    27,106
    
    
    
    262
    
    
    
    
    
    
    
    (27,368
    )
    
    
    Other current assets
    
    
    1,100
    
    
    
    4,028
    
    
    
    
    
    
    
    
    
    
    
    5,128Total current assets
    
    
    286,468
    
    
    
    111,578
    
    
    
    78
    
    
    
    (27,455
    )
    
    
    370,669Property, plant and equipment, net
    
    
    767
    
    
    
    51,551
    
    
    
    
    
    
    
    
    
    
    
    52,318Mortgage receivable
    
    
    
    
    
    
    
    
    
    
    17,704
    
    
    
    
    
    
    
    17,704Long-term investments accounted
for at cost
    
    
    69,234
    
    
    
    
    
    
    
    785
    
    
    
    
    
    
    
    70,019Long-term investments accounted
under the equity method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    57,858
    
    
    
    
    
    
    
    57,858Investments in consolidated
subsidiaries
    
    
    213,029
    
    
    
    
    
    
    
    
    
    
    
    (213,029
    )
    
    
    Restricted assets
    
    
    3,705
    
    
    
    4,223
    
    
    
    
    
    
    
    
    
    
    
    7,928Deferred income taxes
    
    
    24,170
    
    
    
    915
    
    
    
    5,873
    
    
    
    
    
    
    
    30,958Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    45,148
    
    
    
    
    
    
    
    
    
    
    
    45,148Other assets
    
    
    16,074
    
    
    
    13,508
    
    
    
    
    
    
    
    
    
    
    
    29,582Total assets
    
    $
    613,447
    
    
    $
    334,434
    
    
    $
    82,298
    
    
    $
    (240,484
    )
    
    $
    789,695LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable
and long-term debt
    
    $
    
    
    
    $
    9,432
    
    
    $
    
    
    
    $
    
    
    
    $
    9,432Accounts payable
    
    
    398
    
    
    
    4,059
    
    
    
    2
    
    
    
    
    
    
    
    4,459Intercompany payables
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    (87
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    10,629
    
    
    
    
    
    
    
    
    
    
    
    10,629Income taxes payable, net
    
    
    
    
    
    
    16,024
    
    
    
    25,728
    
    
    
    (27,368
    )
    
    
    14,384Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    276
    
    
    
    
    
    
    
    
    
    
    
    276Settlement accruals
    
    
    
    
    
    
    38,211
    
    
    
    
    
    
    
    
    
    
    
    38,211Deferred income taxes
    
    
    84,089
    
    
    
    11,504
    
    
    
    
    
    
    
    
    
    
    
    95,593Accrued interest
    
    
    4,987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,987Other current liabilities
    
    
    5,217
    
    
    
    13,139
    
    
    
    750
    
    
    
    
    
    
    
    19,106Total current liabilities
    
    
    94,691
    
    
    
    103,361
    
    
    
    26,480
    
    
    
    (27,455
    )
    
    
    197,077Notes payable, long-term debt and
other obligations, less current
portion
    
    
    260,837
    
    
    
    20,597
    
    
    
    
    
    
    
    
    
    
    
    281,434Fair value of derivatives embedded
within convertible debt
    
    
    93,745
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,745Non-current employee
benefits
    
    
    29,569
    
    
    
    15,174
    
    
    
    
    
    
    
    
    
    
    
    44,743Deferred income
taxes
    
    
    45,120
    
    
    
    21,649
    
    
    
    110
    
    
    
    
    
    
    
    66,879Other liabilities
    
    
    453
    
    
    
    15,222
    
    
    
    1,110
    
    
    
    
    
    
    
    16,785Total liabilities
    
    
    524,415
    
    
    
    176,003
    
    
    
    27,700
    
    
    
    (27,455
    )
    
    
    700,663Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    89,032
    
    
    
    158,431
    
    
    
    54,598
    
    
    
    (213,029
    )
    
    
    89,032Total liabilities and

stockholders equity
    
    $
    613,447
    
    
    $
    334,434
    
    
    $
    82,298
    
    
    $
    (240,484)       $
    
    
    
    789,695
 -32-




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##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING BALANCE SHEETS
 December 31, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.ASSETS:Current assets:Cash and cash equivalents
    
    $
    228,901
    
    
    $
    9,216
    
    
    $
    
    
    
    $
    
    
    
    $
    238,117Investment securities
available for sale
    
    
    45,841
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    45,875Accounts receivable 
trade
    
    
    
    
    
    
    3,113
    
    
    
    
    
    
    
    
    
    
    
    3,113Intercompany receivables
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    Inventories
    
    
    
    
    
    
    86,825
    
    
    
    
    
    
    
    
    
    
    
    86,825Deferred income taxes
    
    
    18,003
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    18,336Income taxes receivable
    
    
    27,364
    
    
    
    
    
    
    
    
    
    
    
    (27,364
    )
    
    
    Other current assets
    
    
    103
    
    
    
    3,257
    
    
    
    
    
    
    
    
    
    
    
    3,360Total current assets
    
    
    320,231
    
    
    
    102,744
    
    
    
    34
    
    
    
    (27,383
    )
    
    
    395,626Property, plant and equipment, net
    
    
    867
    
    
    
    53,565
    
    
    
    
    
    
    
    
    
    
    
    54,432Long-term investments accounted for
at cost
    
    
    72,233
    
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    72,971Long-term investments accounted

under the equity method
    
    
    10,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,495Investments in non- consolidated
real estate businesses
    
    
    
    
    
    
    
    
    
    
    35,731
    
    
    
    
    
    
    
    35,731Investments in consolidated
subsidiaries
    
    
    190,354
    
    
    
    
    
    
    
    
    
    
    
    (190,354
    )
    
    
    Restricted assets
    
    
    3,859
    
    
    
    4,907
    
    
    
    
    
    
    
    
    
    
    
    8,766Deferred income taxes
    
    
    21,288
    
    
    
    883
    
    
    
    4,466
    
    
    
    
    
    
    
    26,637Intangible asset
    
    
    
    
    
    
    107,511
    
    
    
    
    
    
    
    
    
    
    
    107,511Prepaid pension costs
    
    
    
    
    
    
    42,084
    
    
    
    
    
    
    
    
    
    
    
    42,084Other assets
    
    
    18,066
    
    
    
    12,970
    
    
    
    
    
    
    
    
    
    
    
    31,036Total assets
    
    $
    637,393
    
    
    $
    324,664
    
    
    $
    40,969
    
    
    $
    (217,737
    )
    
    $
    785,289LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes
payable
and long-term debt
    
    $
    
    
    
    $
    20,618
    
    
    $
    
    
    
    $
    
    
    
    $
    20,618Accounts payable
    
    
    2,194
    
    
    
    4,786
    
    
    
    
    
    
    
    
    
    
    
    6,980Intercompany payables
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    (19
    )
    
    
    Accrued promotional
expenses
    
    
    
    
    
    
    9,210
    
    
    
    
    
    
    
    
    
    
    
    9,210Income taxes payable, net
    
    
    
    
    
    
    13,245
    
    
    
    16,482
    
    
    
    (27,364
    )
    
    
    2,363Accrued excise and payroll
taxes payable, net
    
    
    
    
    
    
    5,327
    
    
    
    
    
    
    
    
    
    
    
    5,327Settlement accruals
    
    
    
    
    
    
    10,041
    
    
    
    
    
    
    
    
    
    
    
    10,041Deferred income taxes
    
    
    20,218
    
    
    
    3,801
    
    
    
    
    
    
    
    
    
    
    
    24,019Accrued interest
    
    
    9,475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,475Other current liabilities
    
    
    6,486
    
    
    
    14,118
    
    
    
    700
    
    
    
    
    
    
    
    21,304Total current liabilities
    
    
    38,373
    
    
    
    81,165
    
    
    
    17,182
    
    
    
    (27,383
    )
    
    
    109,337Notes payable, long-term debt and
other obligations, less current
portion
    
    
    254,538
    
    
    
    22,640
    
    
    
    
    
    
    
    
    
    
    
    277,178Fair value of derivatives embedded
within convertible debt
    
    
    101,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,582Non-current employee benefits
    
    
    25,983
    
    
    
    14,950
    
    
    
    
    
    
    
    
    
    
    
    40,933Deferred income taxes
    
    
    115,571
    
    
    
    26,223
    
    
    
    110
    
    
    
    
    
    
    
    141,904Other liabilities
    
    
    494
    
    
    
    10,571
    
    
    
    2,438
    
    
    
    
    
    
    
    13,503Total liabilities
    
    
    536,541
    
    
    
    155,549
    
    
    
    19,730
    
    
    
    (27,383
    )
    
    
    684,437Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    100,852
    
    
    
    169,115
    
    
    
    21,239
    
    
    
    (190,354
    )
    
    
    100,852Total liabilities and
stockholders equity
    
    $
    637,393
    
    
    $
    324,664
    
    
    $
    40,969
    
    
    $
    (217,737
    )
    
    $
    785,289
 -33-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    145,601
    
    
    $
    
    
    
    $
    
    
    
    $
    145,601Expenses:Cost of goods sold
    
    
    
    
    
    
    84,999
    
    
    
    
    
    
    
    
    
    
    
    84,999Operating, selling,
administrative
and
general expenses
    
    
    7,554
    
    
    
    16,738
    
    
    
    (1,225
    )
    
    
    
    
    
    
    23,067Management fee
expense
    
    
    
    
    
    
    1,984
    
    
    
    
    
    
    
    (1,984
    )
    
    
    Operating (loss)
income
    
    
    (7,554
    )
    
    
    41,880
    
    
    
    1,225
    
    
    
    1,984
    
    
    
    37,535Other income (expenses):Interest and dividend
income
    
    
    977
    
    
    
    117
    
    
    
    
    
    
    
    
    
    
    
    1,094Interest expense
    
    
    (15,149
    )
    
    
    (366
    )
    
    
    
    
    
    
    
    
    
    
    (15,515
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522Provision for loss
on investments
    
    
    (3,000
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (7,000
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    5,202
    
    
    
    
    
    
    
    5,202Equity income in
consolidated
subsidiaries
    
    
    26,819
    
    
    
    
    
    
    
    
    
    
    
    (26,819
    )
    
    
    Management fee income
    
    
    1,984
    
    
    
    
    
    
    
    
    
    
    
    (1,984
    )
    
    
    Other, net
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Income before
provision for income
taxes
    
    
    4,598
    
    
    
    41,631
    
    
    
    2,427
    
    
    
    (26,819
    )
    
    
    21,837Income tax
benefit (expense)
    
    
    10,229
    
    
    
    (16,224
    )
    
    
    (1,015
    )
    
    
    
    
    
    
    (7,010
    )Net income
    
    $
    14,827
    
    
    $
    25,407
    
    
    $
    1,412
    
    
    $
    (26,819
    )
    
    $
    14,827
 -34-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Three Months Ended September 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    136,053
    
    
    $
    
    
    
    $
    
    
    
    $
    136,053Expenses:Cost of goods sold
    
    
    
    
    
    
    80,182
    
    
    
    
    
    
    
    
    
    
    
    80,182Operating, selling,
administrative
and
general expenses
    
    
    4,033
    
    
    
    17,895
    
    
    
    236
    
    
    
    
    
    
    
    22,164Management fee expense
    
    
    
    
    
    
    1,917
    
    
    
    
    
    
    
    (1,917
    )
    
    
    Operating (loss)
income
    
    
    (4,033
    )
    
    
    36,059
    
    
    
    (236
    )
    
    
    1,917
    
    
    
    33,707Other income
(expenses):Interest and dividend
income
    
    
    2,223
    
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    2,445Interest expense
    
    
    (11,633
    )
    
    
    (480
    )
    
    
    
    
    
    
    
    
    
    
    (12,113
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (6,331
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,331
    )Provision for loss on
investment
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    6,589
    
    
    
    
    
    
    
    6,589Equity income in
consolidated
subsidiaries
    
    
    29,984
    
    
    
    
    
    
    
    
    
    
    
    (29,984
    )
    
    
    Management fee income
    
    
    1,917
    
    
    
    
    
    
    
    
    
    
    
    (1,917
    )
    
    
    Other, net
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Income before
provision for income
taxes
    
    
    12,121
    
    
    
    35,801
    
    
    
    6,295
    
    
    
    (29,984
    )
    
    
    24,233Income tax
benefit (expense)
    
    
    2,943
    
    
    
    (9,537
    )
    
    
    (2,575
    )
    
    
    
    
    
    
    (9,169
    )Net income
    
    $
    15,064
    
    
    $
    26,264
    
    
    $
    3,720
    
    
    $
    (29,984
    )
    
    $
    15,064
 -35-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Nine Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    420,766
    
    
    $
    
    
    
    $
    
    
    
    $
    420,766Expenses:Cost of goods sold
    
    
    
    
    
    
    251,036
    
    
    
    
    
    
    
    
    
    
    
    251,036Operating, selling,
administrative
and
general expenses
    
    
    22,725
    
    
    
    47,610
    
    
    
    (526
    )
    
    
    
    
    
    
    69,809Management fee
expense
    
    
    
    
    
    
    5,954
    
    
    
    
    
    
    
    (5,954
    )
    
    
    Operating income
(loss)
    
    
    (22,725
    )
    
    
    116,166
    
    
    
    526
    
    
    
    5,954
    
    
    
    99,921Other income (expenses):Interest and dividend
income
    
    
    4,017
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    4,440Interest expense
    
    
    (44,699
    )
    
    
    (1,326
    )
    
    
    
    
    
    
    
    
    
    
    (46,025
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    7,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,837Provision for loss
on investments
    
    
    (3,000
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (7,000
    )Equity income from
non-consolidated
real estate
businesses
    
    
    
    
    
    
    
    
    
    
    22,706
    
    
    
    
    
    
    
    22,706Equity income in
consolidated
subsidiaries
    
    
    82,036
    
    
    
    
    
    
    
    
    
    
    
    (82,036
    )
    
    
    Management fee income
    
    
    5,954
    
    
    
    
    
    
    
    
    
    
    
    (5,954
    )
    
    
    Other, net
    
    
    (574
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (578
    )Income before
provision for income
taxes
    
    
    28,846
    
    
    
    115,263
    
    
    
    19,228
    
    
    
    (82,036
    )
    
    
    81,301Income tax
benefit (expense)
    
    
    19,413
    
    
    
    (44,568
    )
    
    
    (7,887
    )
    
    
    
    
    
    
    (33,042
    )Net income
    
    $
    48,259
    
    
    $
    70,695
    
    
    $
    11,341
    
    
    $
    (82,036
    )
    
    $
    48,259
 -36-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 Nine Months Ended September 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Revenues
    
    $
    
    
    
    $
    410,296
    
    
    $
    
    
    
    $
    
    
    
    $
    410,296Expenses:Cost of goods sold
    
    
    
    
    
    
    252,089
    
    
    
    
    
    
    
    
    
    
    
    252,089Operating, selling,
administrative
and
general expenses
    
    
    18,660
    
    
    
    49,913
    
    
    
    1,024
    
    
    
    
    
    
    
    69,597Management fee expense
    
    
    
    
    
    
    5,752
    
    
    
    
    
    
    
    (5,752
    )
    
    
    Operating
income (loss)
    
    
    (18,660
    )
    
    
    102,542
    
    
    
    (1,024
    )
    
    
    5,752
    
    
    
    88,610Other income
(expenses):Interest and dividend
income
    
    
    10,467
    
    
    
    522
    
    
    
    
    
    
    
    (5,127
    )
    
    
    5,862Interest expense
    
    
    (28,732
    )
    
    
    (7,162
    )
    
    
    
    
    
    
    5,127
    
    
    
    (30,767
    )Changes in fair value
of derivatives
embedded within
convertible debt
    
    
    (4,215
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,215
    )Provision for loss on
Investments,
net
    
    
    2
    
    
    
    
    
    
    
    (1,218
    )
    
    
    
    
    
    
    (1,216
    )Gain from conversion
of LTS notes
    
    
    
    
    
    
    
    
    
    
    8,121
    
    
    
    
    
    
    
    8,121Equity income from
non-consolidated

real estate
businesses
    
    
    
    
    
    
    
    
    
    
    15,926
    
    
    
    
    
    
    
    15,926Income from lawsuit
settlement
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000Equity income in
consolidated
subsidiaries
    
    
    86,019
    
    
    
    
    
    
    
    
    
    
    
    (86,019
    )
    
    
    Management fee income
    
    
    5,752
    
    
    
    
    
    
    
    
    
    
    
    (5,752
    )
    
    
    Other, net
    
    
    (67
    )
    
    
    1
    
    
    
    24
    
    
    
    
    
    
    
    (42
    )Income before
provision for income
taxes
    
    
    50,566
    
    
    
    95,903
    
    
    
    41,829
    
    
    
    (86,019
    )
    
    
    102,279Income tax
benefit (expense)
    
    
    9,006
    
    
    
    (35,073
    )
    
    
    (16,640
    )
    
    
    
    
    
    
    (42,707
    )Net income
    
    $
    59,572
    
    
    $
    60,830
    
    
    $
    25,189
    
    
    $
    (86,019
    )
    
    $
    59,572
 -37-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by operating activities
    
    $
    54,155
    
    
    $
    97,863
    
    
    $
    4,167
    
    
    $
    (85,750
    )
    
    $
    70,435Cash flows from investing
activities:Purchase of investment
securities
    
    
    (5,682
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,682
    )Proceeds from sale or
liquidation of
long-term
investments
    
    
    8,334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,334Purchase of long-term
investments
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Purchase of mortgage
receivable
    
    
    
    
    
    
    
    
    
    
    (21,704
    )
    
    
    
    
    
    
    (21,704
    )Distributions from
non-consolidated real
estate
businesses
    
    
    
    
    
    
    
    
    
    
    17,628
    
    
    
    
    
    
    
    17,628Investment in non-
consolidated real
estate businesses
    
    
    
    
    
    
    
    
    
    
    (22,000
    )
    
    
    
    
    
    
    (22,000
    )Increase in cash
surrender
value of life insurance
policies
    
    
    (386
    )
    
    
    (380
    )
    
    
    
    
    
    
    
    
    
    
    (766
    )Decrease in non-current
restricted assets
    
    
    154
    
    
    
    684
    
    
    
    
    
    
    
    
    
    
    
    838Investments in
subsidiaries
    
    
    (26,060
    )
    
    
    
    
    
    
    
    
    
    
    26,060
    
    
    
    Proceeds from the sale
of fixed assets
    
    
    
    
    
    
    403
    
    
    
    
    
    
    
    
    
    
    
    403Capital expenditures
    
    
    
    
    
    
    (5,426
    )
    
    
    
    
    
    
    
    
    
    
    (5,426
    )Net cash used in
investing activities
    
    
    (23,640
    )
    
    
    (4,719
    )
    
    
    (26,127
    )
    
    
    26,060
    
    
    
    (28,426
    )
 -38-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Nine Months Ended September 30, 2008Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Cash flows from
financing activities:Proceeds from debt
    
    
    
    
    
    
    2,830
    
    
    
    
    
    
    
    
    
    
    
    2,830Repayments of debt
    
    
    
    
    
    
    (4,666
    )
    
    
    
    
    
    
    
    
    
    
    (4,666
    )Deferred financing charges
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Borrowings under revolver
    
    
    
    
    
    
    386,499
    
    
    
    
    
    
    
    
    
    
    
    386,499Repayments on revolver
    
    
    
    
    
    
    (397,892
    )
    
    
    
    
    
    
    
    
    
    
    (397,892
    )Capital contributions
received
    
    
    
    
    
    
    4,100
    
    
    
    21,960
    
    
    
    (26,060
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (85,750
    )
    
    
    
    
    
    
    85,750
    
    
    
    Dividends and
distributions
on common
stock
    
    
    (78,581
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,581
    )Proceeds from exercise of
Vector
options and
warrants
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Excess tax benefit of
options
exercised
    
    
    18,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,304Net cash (used in) provided
by
financing activities
    
    
    (60,388
    )
    
    
    (94,879
    )
    
    
    21,960
    
    
    
    59,690
    
    
    
    (73,617
    )Net decrease in cash and cash
equivalents
    
    
    (29,873
    )
    
    
    (1,735
    )
    
    
    
    
    
    
    
    
    
    
    (31,608
    )Cash and cash equivalents,
beginning of period
    
    
    228,901
    
    
    
    9,216
    
    
    
    
    
    
    
    
    
    
    
    238,117Cash and cash equivalents,
end of
period
    
    $
    199,028
    
    
    $
    7,481
    
    
    $
    
    
    
    $
    
    
    
    $
    206,509
 -39-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Net cash provided by operating
activities
    
    $
    77,894
    
    
    $
    66,868
    
    
    $
    25,929
    
    
    $
    (79,492
    )
    
    $
    91,199Cash flows from investing
activities:Purchase of investment
securities
    
    
    (6,048
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,048
    )Proceeds from sale or
liquidation of
long-term
investments
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Purchase of long-term
investments
    
    
    (35,000
    )
    
    
    
    
    
    
    (91
    )
    
    
    
    
    
    
    (35,091
    )Distributions from
non-consolidatedreal
estate
businesses
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Investment in non-
consolidatedreal
estate businesses
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    
    
    
    
    (750
    )Increase in cash
surrender
value of life insurance
policies
    
    
    (353
    )
    
    
    (337
    )
    
    
    
    
    
    
    
    
    
    
    (690
    )Receipt of repayment
of notes receivable
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    (4,000
    )
    
    
    (Increase) decrease
in non-currentrestricted
assets
    
    
    (369
    )
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    (310
    )Investments in
subsidiaries
    
    
    (38,500
    )
    
    
    
    
    
    
    
    
    
    
    38,500
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (4,211
    )
    
    
    
    
    
    
    
    
    
    
    (4,211
    )Investments in
subsidiaries
    
    
    
    
    
    
    789
    
    
    
    
    
    
    
    
    
    
    
    789Net cash (used in) provided by
investing activities
    
    
    (76,270
    )
    
    
    (3,700
    )
    
    
    209
    
    
    
    34,500
    
    
    
    (45,261
    )
 -40-




---



##### Table of Contents



VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Dollars in Thousands, Except Per Share Amounts)  Unaudited
 Nine Months Ended September 30, 2007Subsidiary
    
    
    
    
    
    
    ConsolidatedParent/
    
    
    Subsidiary
    
    
    Non-
    
    
    Consolidating
    
    
    Vector GroupIssuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    Ltd.Cash flows from
financing activities:Proceeds from debt
issuance
    
    
    165,000
    
    
    
    9,576
    
    
    
    
    
    
    
    
    
    
    
    174,576Repayments of debt
    
    
    
    
    
    
    (43,718
    )
    
    
    
    
    
    
    4,000
    
    
    
    (39,718
    )Deferred financing
charges
    
    
    (9,863
    )
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (9,888
    )Borrowings under revolver
    
    
    
    
    
    
    389,383
    
    
    
    
    
    
    
    
    
    
    
    389,383Repayments on revolver
    
    
    
    
    
    
    (401,231
    )
    
    
    
    
    
    
    
    
    
    
    (401,231
    )Capital contributions
received
    
    
    
    
    
    
    38,500
    
    
    
    
    
    
    
    (38,500
    )
    
    
    Intercompany dividends paid
    
    
    
    
    
    
    (53,350
    )
    
    
    (26,142
    )
    
    
    79,492
    
    
    
    Dividends and
distributions
on common stock
    
    
    (75,258
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,258
    )Tax benefit of options
exercised
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,928Proceeds from exercise of
Vector
options and
warrants
    
    
    4,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,857Net cash (used in) provided
by financing activities
    
    
    86,664
    
    
    
    (60,865
    )
    
    
    (26,142
    )
    
    
    44,992
    
    
    
    44,649Net (decrease) increase in
cash and
cash equivalents
    
    
    88,288
    
    
    
    2,303
    
    
    
    (4
    )
    
    
    
    
    
    
    90,587Cash and cash equivalents,
beginning of period
    
    
    132,942
    
    
    
    13,797
    
    
    
    30
    
    
    
    
    
    
    
    146,769Cash and cash equivalents,
end of
period
    
    $
    221,230
    
    
    $
    16,100
    
    
    $
    26
    
    
    $
    
    
    
    $
    237,356
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Dollars in Thousands, Except Per Share Amounts
 Overview
  
    
    the manufacture and sale of cigarettes in the United States through our subsidiary
Liggett Group LLC,
    
    the development and marketing of the low nicotine and nicotine-free QUEST cigarette
products and the development of reduced risk cigarette products through our subsidiary
Vector Tobacco Inc., and
    
    the real estate business through our subsidiary, New Valley LLC, which is seeking
to acquire additional operating companies and real estate properties. New Valley owns
50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
   
    
    LIGGETT SELECT  the third largest brand in the deep discount category,
    
    GRAND PRIX  a growing brand in the deep discount segment,
    
    EVE  a leading brand of 120 millimeter cigarettes in the branded discount
category,
    
    PYRAMID  the industrys first deep discount product with a brand identity, and
    
    USA and various Partner Brands and private label brands.
   -42-




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Recent Developments
 SNUS
 NASA Settlement.
 Issuance of 11% Senior Secured Notes
 Proposed and enacted excise tax increases.
 Tobacco Settlement Agreements.
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Long-term Investments. .
  Sale of St. Regis Hotel.
 Escena
  -45-




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Aberdeen Townhomes LLC.
 New
Valley Oaktree Chelsea Eleven, LLC.
  Recent Developments in Tobacco-Related Litigation
  Engle v. R.J. Reynolds Tobacco Co. Engle Engle Engle Engle Engle Engle Engle
 -46-




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Lukacs v. R.J. Reynolds
Tobacco Company Lukacs Engle Engle Engle
   Critical Accounting Policies
  Recently Adopted Accounting Pronouncements.
 -47-




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Results of Operations
   Three Months Ended
    
    
    
    Nine Months EndedSeptember 30,
    
    
    
    September 30,
    
    
    
    September 30,
    
    
    
    September 30,2008
    
    
    
    2007
    
    
    
    2008
    
    
    
    2007Revenues:Liggett
    
    $
    144,841
    
    
    
    $
    135,186
    
    
    
    $
    418,816
    
    
    
    $
    407,304Vector Tobacco
    
    
    760
    
    
    
    
    867
    
    
    
    
    1,950
    
    
    
    
    2,992Total revenues
    
    $
    145,601
    
    
    
    $
    136,053
    
    
    
    $
    420,766
    
    
    
    $
    410,296Operating income (loss):Liggett
    
    $
    45,924
    
    
    
    $
    40,448
    
    
    
    $
    126,960
    
    
    
    $
    113,371Vector Tobacco
    
    
    (2,439
    )
    
    
    
    (2,841
    )
    
    
    
    (6,775
    )
    
    
    
    (7,247
    )Total tobacco
    
    
    43,485
    
    
    
    
    37,607
    
    
    
    
    120,185
    
    
    
    
    106,124Corporate and other
    
    
    (5,950
    )
    
    
    
    (3,900
    )
    
    
    
    (20,264
    )
    
    
    
    (17,514
    )Total operating income
    
    $
    37,535
    
    
    
    $
    33,707
    
    
    
    $
    99,921
    
    
    
    $
    88,610
 Three Months Ended September 30, 2008 Compared to Three Months ended September 30, 2007
 Revenues.
 Tobacco Revenues.
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Tobacco Gross Profit.
   Expenses.
  -49-




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Other expenses.
  Income before income taxes.
 Income tax provision.
  Nine Months Ended September 30, 2008 Compared to Nine Months ended September 30, 2007
 Revenues.
 Tobacco Revenues.
 -50-




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Tobacco Gross Profit.
   Expenses.
  -51-




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Other
income (expenses). th th
  Income before income taxes.
 Income tax provision.
 -52-




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Liquidity and Capital Resources
     Liggett
 -53-




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Engle Engle
  Vector
   -54-




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Market Risk
       -55-




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New Accounting Pronouncements
       -56-




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Legislation and Regulation
    -57-




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-58-




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QUEST QUEST QUEST
   -59-




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    economic outlook,
    
    capital expenditures,
    
    cost reduction,
    
    new legislation,
    
    cash flows,
    
    operating performance,
    
    litigation,
    
    impairment charges and cost savings associated with restructurings of our tobacco
operations, and
    
    related industry developments (including trends affecting our business, financial
condition and results of operations).
   
    
    general economic and market conditions and any changes therein, due to acts of war
and terrorism or otherwise,
    
    governmental regulations and policies,
    
    effects of industry competition,
    
    impact of business combinations, including acquisitions and divestitures, both
internally for us and externally in the tobacco industry,
    
    impact of restructurings on our tobacco business and our ability to achieve any
increases in profitability estimated to occur as a result of these restructurings,
    
    impact of new legislation on our competitors payment obligations, results of
operations and product costs, i.e. the impact of recent federal legislation
eliminating the federal tobacco quota system,
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
    
    uncertainty related to litigation and potential additional payment obligations for
us under the Master Settlement Agreement and other settlement agreements with the
states, and
    
    risks inherent in our new product development initiatives.
   -61-




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   -62-




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PART II
 OTHER INFORMATION
 
 Item 1.
    
    Legal ProceedingsReference is made to Note 8, incorporated herein by reference, to our condensed
consolidated financial statements included elsewhere in this report which contains a
general description of certain legal proceedings to which our company, VGR Holding,
Liggett, Vector Tobacco, New Valley or their subsidiaries are a party and certain
related matters. Reference is also made to Exhibit 99.1 for additional information
regarding the pending smoking-related material legal proceedings to
which Liggett or us is a
party. A copy of Exhibit 99.1 will be furnished without charge upon written request to
us at our principal executive offices, 100 S.E. Second St., Miami, Florida 33131, Attn.
Investor Relations.
 
 Item 1A.
    
    Risk FactorsExcept as set forth below, there are no material changes from the risk factors set forth
in Item 1A, Risk Factors, of our Annual Report on 10-K for the year ended December 31,
2007. Please refer to that section for disclosures regarding the risks and
uncertainties related to our business. The risk factors in the Annual Report on Form
10-K entitled Litigation will continue to harm the tobacco industry, Individual
tobacco-related cases have increased as a result of the Florida Supreme Courts ruling
in Engle and Liggett may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with the states are revised to
reflect the updated information concerning the number and status of cases and other
matters discussed under Note 8 to our condensed consolidated financial statements and in
Managements Discussion and Analysis of Financial Condition  Recent Developments 
Tobacco Settlement Agreements,  Recent Developments in Legislation, Regulation and
Tobacco-Related Litigation, and  Legislation and Regulation.
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsNo securities of ours which were not registered under the Securities Act of 1933 have
been issued or sold by us during the three months ended September 30, 2008.No securities of ours were repurchased by us or our affiliated purchasers during the
three months ended September 30, 2008.
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Item 6.
    
    Exhibits
 4.1
    
    
    First Supplemental Indenture dated as of July 15, 2008
to the Indenture dated August 16, 2007 between Vector
Group Ltd., the subsidiary guarantors named therein and
U.S. Bank National Association, as Trustee (incorporated
by reference to Exhibit 4.1 of Vectors Form 8-K dated
July 15, 2008).31.1
    
    
    Certification of Chief Executive Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.99.1
    
    
    Material Legal Proceedings
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SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and Chief
Financial Officer  -65-