##### 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, 2007
 
 VECTOR GROUP LTD.
  Delaware
(State or other jurisdiction of incorporation 
incorporation or organization)
    
    1-5759
Commission File Number
    
    65-0949535
(I.R.S. Employer Identification No.)
 100 S.E. Second Street
Miami, Florida 33131
305/579-8000
 
 þ o
  þ o o
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VECTOR GROUP LTD.
 FORM 10-Q
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Vector Group Ltd. Consolidated Financial Statements (Unaudited):Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and September 30, 2006
    
    
    3Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2007
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and September 30, 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 . Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    50Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    82Item 4. Controls and Procedures
    
    
    82PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    83Item 1A. Risk Factors
    
    
    83Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    83Item 6. Exhibits
    
    
    84SIGNATURE
    
    
    86EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFOEX-99.1 Material Legal Proceedings
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##### Table of Contents



VECTOR GROUP LTD. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ( Dollars in Thousands, Except Per Share Amounts )
 Unaudited
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETS:Current assets:Cash and cash equivalents
    
    $
    237,356
    
    
    $
    146,769Investment securities available for sale
    
    
    46,734
    
    
    
    18,960Accounts receivable  trade
    
    
    3,855
    
    
    
    15,480Inventories
    
    
    80,739
    
    
    
    91,299Deferred income taxes
    
    
    16,853
    
    
    
    27,580Other current assets
    
    
    5,717
    
    
    
    3,068Total current assets
    
    
    391,254
    
    
    
    303,156Property, plant and equipment, net
    
    
    56,095
    
    
    
    59,921Long-term investments accounted for at cost
    
    
    68,012
    
    
    
    32,971Long-term investments accounted under the equity method
    
    
    10,537
    
    
    
    10,230Investments in non-consolidated real estate businesses
    
    
    39,122
    
    
    
    28,416Restricted assets
    
    
    8,584
    
    
    
    8,274Deferred income taxes
    
    
    25,937
    
    
    
    43,973Intangible asset
    
    
    107,511
    
    
    
    107,511Prepaid pension costs
    
    
    24,427
    
    
    
    20,933Other assets
    
    
    31,712
    
    
    
    22,077Total assets
    
    $
    763,191
    
    
    $
    637,462LIABILITIES AND STOCKHOLDERS EQUITY:Current liabilities:Current portion of notes payable and long-term debt
    
    $
    5,882
    
    
    $
    52,686Accounts payable
    
    
    4,607
    
    
    
    7,203Accrued promotional expenses
    
    
    8,887
    
    
    
    12,527Income taxes payable, net
    
    
    10,422
    
    
    
    12,970Accrued excise and payroll taxes payable, net
    
    
    382
    
    
    
    9,934Settlement accruals
    
    
    34,144
    
    
    
    47,408Deferred income taxes
    
    
    5,023
    
    
    
    5,020Accrued interest
    
    
    4,804
    
    
    
    2,586Other current liabilities
    
    
    21,124
    
    
    
    18,452Total current liabilities
    
    
    95,275
    
    
    
    168,786Notes payable, long-term debt and other obligations, less current portion
    
    
    276,970
    
    
    
    103,304Fair value of derivatives embedded within convertible debt
    
    
    99,688
    
    
    
    95,473Non-current employee benefits
    
    
    39,799
    
    
    
    36,050Deferred income taxes
    
    
    136,589
    
    
    
    130,533Other liabilities
    
    
    13,506
    
    
    
    8,339Total liabilities
    
    
    661,827
    
    
    
    542,485Commitments and contingenciesStockholders 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 and 100,000,000
shares authorized, 63,281,955 and 59,843,379 shares issued
and 60,336,003 and 57,031,269 shares outstanding
    
    
    6,034
    
    
    
    5,703Additional paid-in capital
    
    
    99,836
    
    
    
    132,807Retained earnings (accumulated deficit)
    
    
    
    
    
    
    (28,192
    )Accumulated other comprehensive income (loss)
    
    
    8,351
    
    
    
    (2,587
    )Less: 2,945,952 and 2,812,110 shares of common stock in treasury, at cost
    
    
    (12,857
    )
    
    
    (12,754
    )Total stockholders equity
    
    
    101,364
    
    
    
    94,977Total liabilities and stockholders equity
    
    $
    763,191
    
    
    $
    637,462
 
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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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues*
    
    $
    136,053
    
    
    $
    137,665
    
    
    $
    410,296
    
    
    $
    368,724Expenses:Cost of goods sold*
    
    
    80,182
    
    
    
    88,329
    
    
    
    252,089
    
    
    
    230,974Operating, selling, administrative and general expenses
    
    
    22,164
    
    
    
    23,635
    
    
    
    69,597
    
    
    
    69,362Operating income
    
    
    33,707
    
    
    
    25,701
    
    
    
    88,610
    
    
    
    68,388Other income (expenses):Interest and dividend income
    
    
    2,445
    
    
    
    2,281
    
    
    
    5,862
    
    
    
    6,383Interest expense
    
    
    (12,113
    )
    
    
    (10,779
    )
    
    
    (30,767
    )
    
    
    (27,795
    )Changes in fair value of derivatives embedded within
convertible debt
    
    
    (6,331
    )
    
    
    (3,464
    )
    
    
    (4,215
    )
    
    
    (1,225
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (1,306
    )
    
    
    
    
    
    
    (16,166
    )Gain on sale of investments, net
    
    
    
    
    
    
    1,433
    
    
    
    
    
    
    
    1,386Provision for loss on investments
    
    
    (58
    )
    
    
    
    
    
    
    (1,216
    )
    
    
    Gain from exchange of LTS notes
    
    
    
    
    
    
    
    
    
    
    8,121
    
    
    
    Equity income from non-consolidated real
estate businesses
    
    
    6,589
    
    
    
    2,121
    
    
    
    15,926
    
    
    
    9,726Income from lawsuit settlement
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    Other, net
    
    
    (6
    )
    
    
    81
    
    
    
    (42
    )
    
    
    158Income before provision for income taxes
    
    
    24,233
    
    
    
    16,068
    
    
    
    102,279
    
    
    
    40,855Income tax expense (benefit)
    
    
    9,169
    
    
    
    (3,550
    )
    
    
    42,707
    
    
    
    13,934Net income
    
    $
    15,064
    
    
    $
    19,618
    
    
    $
    59,572
    
    
    $
    26,921Per basic common share:Net income applicable to common shares
    
    $
    0.24
    
    
    $
    0.31
    
    
    $
    0.94
    
    
    $
    0.45Per diluted common share:Net income applicable to common shares
    
    $
    0.23
    
    
    $
    0.30
    
    
    $
    0.91
    
    
    $
    0.43Cash distributions and dividends declared per share
    
    $
    0.38
    
    
    $
    0.36
    
    
    $
    1.14
    
    
    $
    1.09
 
 *
    
    Revenues and cost of goods sold include excise taxes of $43,025, $48,153, $132,305
and $127,956, respectively. 
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VECTOR GROUP LTD. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 ( Dollars in Thousands, Except Per Share Amounts )
 Unaudited
 Retained
    
    
    AccumulatedAdditional
    
    
    Earnings
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance, December 31, 2006
    
    
    57,031,269
    
    
    $
    5,703
    
    
    $
    132,807
    
    
    $
    (28,192
    )
    
    $
    (2,587
    )
    
    $
    (12,754
    )
    
    $
    94,977Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,572
    
    
    
    
    
    
    
    
    
    
    
    59,572Pension related minimum liability adjustments,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    896
    
    
    
    
    
    
    
    896Forward contract adjustments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    19Unrealized gain on long-term investments
accounted for under the equity method,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    
    
    
    
    238Unrealized gain on investment securities,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,785
    
    
    
    
    
    
    
    9,785Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,938Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,510Distributions and dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (42,446
    )
    
    
    (31,093
    )
    
    
    
    
    
    
    
    
    
    
    (73,539
    )Effect of stock dividend
    
    
    2,872,364
    
    
    
    287
    
    
    
    
    
    
    
    (287
    )
    
    
    
    
    
    
    
    
    
    
    Restricted stock grants
    
    
    40,000
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    1,928
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,928Exercise of options, net of 7,627 shares
delivered to pay exercise price
    
    
    392,370
    
    
    
    40
    
    
    
    4,920
    
    
    
    
    
    
    
    
    
    
    
    (103
    )
    
    
    4,857Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    2,631
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,631Balance, September 30, 2007
    
    
    60,336,003
    
    
    $
    6,034
    
    
    $
    99,836
    
    
    $
    
    
    
    $
    8,351
    
    
    $
    (12,857
    )
    
    $
    101,364
 
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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
    
    
    September30, 2007
    
    
    30, 2006Net cash provided by operating activities
    
    $
    91,199
    
    
    $
    15,591Cash flows from investing activities:Proceeds from sale or maturity of investment securities
    
    
    
    
    
    
    13,467Purchase of investment securities
    
    
    (6,048
    )
    
    
    (12,339
    )Proceeds from sale or liquidation of long-term investments
    
    
    50
    
    
    
    205Purchase of long-term investments
    
    
    (35,091
    )
    
    
    (25,266
    )Return of contributions from non-consolidated real estate businesses
    
    
    1,000
    
    
    
    Investments in non-consolidated real estate businesses
    
    
    (750
    )
    
    
    (7,350
    )Increase in cash surrender value of life insurance policies
    
    
    (690
    )
    
    
    (606
    )Increase in non-current restricted assets
    
    
    (310
    )
    
    
    (1,777
    )Capital expenditures
    
    
    (4,211
    )
    
    
    (8,948
    )Proceeds from the sale of capital equipment
    
    
    789
    
    
    
    159Net cash used in investing activities
    
    
    (45,261
    )
    
    
    (42,455
    )Cash flows from financing activities:Proceeds from debt
    
    
    174,576
    
    
    
    118,146Repayments of debt
    
    
    (39,718
    )
    
    
    (67,993
    )Deferred financing charges
    
    
    (9,888
    )
    
    
    (5,280
    )Borrowings under revolver
    
    
    389,383
    
    
    
    390,610Repayments on revolver
    
    
    (401,231
    )
    
    
    (380,052
    )Dividends and distributions on common stock
    
    
    (75,258
    )
    
    
    (67,438
    )Tax benefit of options exercised
    
    
    1,928
    
    
    
    Proceeds from exercise of options
    
    
    4,857
    
    
    
    1,229Net cash provided by (used in) financing activities
    
    
    44,649
    
    
    
    (10,778
    )Net increase (decrease) in cash and cash equivalents
    
    
    90,587
    
    
    
    (37,642
    )Cash and cash equivalents, beginning of period
    
    
    146,769
    
    
    
    181,059Cash and cash equivalents, end of period
    
    $
    237,356
    
    
    $
    143,417
 
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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 present 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, 2006,
as amended, 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.Certain amounts in the Companys consolidated balance sheet as of December 31, 2006 have
been reclassified to conform to the current years presentation. This reclassification
includes bifurcating Accrued taxes payable, net as of December 31, 2006 into Income
taxes payable, net and Accrued excise and payroll taxes payable, net.(b)
    
    Estimates and Assumptions:The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of revenues and expenses.
Significant estimates subject to material changes in the near term include restructuring
and impairment charges, inventory valuation, deferred tax assets, allowance for doubtful
accounts, promotional accruals, sales returns and allowances, actuarial assumptions of
pension plans, the estimated fair value of embedded derivative liabilities, settlement
accruals and litigation and defense costs. Actual results could differ from those
estimates.(c)
    
    Investment in Non-Consolidated Real Estate Businesses:In accounting for its investment in non-consolidated real estate businesses, the Company
applies the Financial Accounting Standards Boards (FASB) Interpretation No. 46(R) (FIN
46(R)), Consolidation of Variable Interest Entities, which clarified the application of
Accounting Research Bulletin No. 51 (ARB No. 51), Consolidated Financial Statements.
FIN 46(R) requires the Company to identify its participation in Variable Interest Entities
(VIE),
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 which are defined as entities with a level of invested equity insufficient to fund future
activities to operate on a stand-alone basis, or whose equity holders lack certain
characteristics typical to holders of equity interests, such as voting rights. For
entities identified as VIEs, FIN 46(R) sets forth a model to evaluate potential
consolidation based on an assessment of which party, if any, bears a majority of the
exposure to the expected losses, or stands to gain from a majority of the expected
returns. FIN 46(R) also sets forth certain disclosures regarding interests in VIEs that
are deemed significant, even if consolidation is not required.New Valley accounts for its 50% interests in Douglas Elliman Realty LLC, Koa Investors LLC
and 16th & K Holdings LLC, as well as its approximate 21% interest in Ceebraid
Acquisition Corporation (Ceebraid) on the equity method because the entities neither
meet the definition of a VIE nor is New Valley each respective entitys primary
beneficiary, as defined in FIN 46(R).In addition, FIN 46(R) includes a scope exception for certain entities that are deemed to
be businesses and meet certain other criteria. Entities that meet this scope exception
are not subject to the accounting and disclosure rules of FIN 46(R), but are subject to
the pre-existing consolidation rules under Accounting Research Bulletin No. 51 (ARB No.
51), Consolidated Financial Statements, which are based on an analysis of voting
rights. This scope exception applies to New Valleys investment in Douglas Elliman Realty
LLC and, as a result, under the applicable ARB No. 51 rules, the Company is not required
to consolidate this business.(d)
    
    Distributions and dividends on common stockThe 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.(e)
    
    Earnings per shareInformation concerning the Companys common stock has been adjusted to give retroactive
effect to the 5% stock dividends paid to Company stockholders on September 28, 2007 and
September 29, 2006. The dividend was recorded at par value of $287 in 2007 since the
Company did not have retained earnings at September 30, 2007. In connection with the 5%
stock dividends, 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, 2006.In March 2004, the FASBs Emerging Issue Task Force (EITF) reached a final consensus on
Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement
128, which established standards regarding the computation of earnings per share (EPS)
by companies that have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the company. For purposes
of calculating basic EPS, earnings available to common stockholders for the period are
reduced by the contingent interest and the non-cash interest expense associated with the
discounts created by the beneficial conversion features and embedded derivatives related
to the Companys convertible notes issued in 2004, 2005 and 2006. The convertible debt
issued by the Company in 2004, 2005 and 2006, which are participating securities due to
the contingent interest feature, had no impact on EPS for the three and nine months ended
September 30, 2007 and 2006, as
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 the dividends on the common stock reduced earnings available to common stockholders so
there were no unallocated earnings under EITF Issue No. 03-6.As discussed in Note 10, the Company has stock option awards which provide for common
stock dividend equivalents at the same rate as paid on the common stock with respect to
the shares underlying the unexercised portion of the options. These outstanding options
represent participating securities under EITF Issue No. 03-6. Effective with the adoption
of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment
using the modified prospective method with guidance provided by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure on January 1, 2006,
the Company recognizes payments of the dividend equivalent rights ($1,590 and $1,578 for
the three months ended September 30, 2007 and 2006, respectively, and $4,800 and $4,734
for the nine months ended September 30, 2007 and 2006, respectively) on these options as
Distributions and dividends on common stock on the Companys condensed consolidated
statement of changes in stockholders equity. In its calculation of basic and diluted EPS
for the three months ended September 30, 2007 and 2006 and the nine months ended September
30, 2007 and 2006, the Company has adjusted its net income for the effect of these
participating securities as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    15,064
    
    
    $
    19,618
    
    
    $
    59,572
    
    
    $
    26,921Income attributable to
participating securities
    
    
    (979
    )
    
    
    (1,330
    )
    
    
    (3,895
    )
    
    
    (1,871
    )Net income available to
common stockholders
    
    $
    14,085
    
    
    $
    18,288
    
    
    $
    55,677
    
    
    $
    25,050
 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. Because the impact of the conversion of the Companys
debt is anti-dilutive, diluted EPS is computed by dividing net income available to common
stockholders by the weighted-average number of shares outstanding, which includes vested
restricted stock, unvested 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, 2007 and 2006:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted-average shares for
basic EPS
    
    
    59,649,338
    
    
    
    59,017,939
    
    
    
    59,497,324
    
    
    
    56,210,077Plus incremental shares
related to stock options
and warrants
    
    
    1,831,975
    
    
    
    1,460,383
    
    
    
    1,542,491
    
    
    
    1,521,629Weighted-average shares for
diluted EPS
    
    
    61,481,313
    
    
    
    60,478,322
    
    
    
    61,039,815
    
    
    
    57,731,706
 8




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 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, 2007 and 2006 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Number of stock options
    
    
    163,092
    
    
    
    633,285
    
    
    
    218,051
    
    
    
    534,794Weighted-average exercise price
    
    $
    27.73
    
    
    $
    19.31
    
    
    $
    25.47
    
    
    $
    20.06Weighted-average shares of non-
vested restricted stock
    
    
    
    
    
    
    666,998
    
    
    
    
    
    
    
    684,333Weighted-average expense per share
    
    
    N/A
    
    
    $
    17.84
    
    
    
    N/A
    
    
    $
    17.83Weighted-average number of shares
issuable upon conversion of debt
    
    
    12,315,488
    
    
    
    13,188,945
    
    
    
    12,315,488
    
    
    
    13,116,319Weighted-average conversion price
    
    $
    18.02
    
    
    $
    18.05
    
    
    $
    18.02
    
    
    $
    18.09
 (f)
    
    Share-Based PaymentsEffective January 1, 2006, the Company adopted SFAS No. 123(R). Under the modified
prospective method, the share-based compensation cost recognized beginning January 1, 2006
includes compensation cost for (i) all share-based payments granted prior to, but not
vested as of January 1, 2006, based on the grant date fair value originally estimated in
accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123) and (ii) all share-based payments granted subsequent to December 31,
2005, based on the grant date fair value estimated in accordance with the provisions of
SFAS No. 123(R). Compensation cost under SFAS No. 123(R) is recognized ratably using the
straight-line attribution method over the expected vesting period. In addition, pursuant
to SFAS No. 123(R), the Company is required to estimate the amount of expected forfeitures
when calculating the compensation costs, instead of accounting for forfeitures as
incurred, which was the Companys previous method. As of January 1, 2006, the cumulative
effect of adopting the estimated forfeiture method was not significant. Prior periods
were not restated under this transition method.
 9




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 (g)
    
    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. Total comprehensive income
applicable to common shares for the three and nine months ended September 30, 2007 and
2006 is as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    15,064
    
    
    $
    19,618
    
    
    $
    59,572
    
    
    $
    26,921Forward contract adjustments,
net of income taxes
    
    
    26
    
    
    
    (50
    )
    
    
    19
    
    
    
    227Pension related minimum liability
adjustments, net of income taxes
    
    
    299
    
    
    
    
    
    
    
    896
    
    
    
    Net unrealized gains (losses) on
long-term investments accounted
under the equity method
    
    
    (2
    )
    
    
    
    
    
    
    238
    
    
    
    Net unrealized gains (losses) on
investment securities
available for sale:Change in net unrealized gains
    
    
    (2,303
    )
    
    
    553
    
    
    
    9,066
    
    
    
    4,293Net unrealized gains (losses)
reclassified into net income,
net of income taxes
    
    
    35
    
    
    
    (878
    )
    
    
    719
    
    
    
    (850
    )Change in unrealized gains
    
    
    (2,268
    )
    
    
    (325
    )
    
    
    9,785
    
    
    
    3,443Total comprehensive income
    
    $
    13,119
    
    
    $
    19,243
    
    
    $
    70,510
    
    
    $
    30,591
 10




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 The components of accumulated other comprehensive income (loss), net of income taxes, were as
follows as of September 30, 2007 and December 31, 2006:
 September 30,
    
    
    December 31,2007
    
    
    2006Net unrealized gains on investment securities
available for sale, net of income taxes of
$10,509 and $3,737, respectively
    
    $
    15,185
    
    
    $
    5,400Net unrealized gains on long term
investments accounted for under the equity
method, net of income taxes of
$284 and $120, respectively
    
    
    411
    
    
    
    173Forward contracts adjustment, net of income
taxes of $225 and $226, respectively
    
    
    (326
    )
    
    
    (345
    )Additional pension liability, net of income taxes
of $4,470 and $5,076, respectively
    
    
    (6,919
    )
    
    
    (7,815
    )Accumulated other comprehensive
Income (loss)
    
    $
    8,351
    
    
    $
    (2,587
    )
 (h)
    
    Financial Instruments:The carrying values of cash and cash equivalents, investment securities available for sale
and restricted assets approximate their fair value.As required by SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133, derivatives
embedded within the Companys convertible debt are recognized on the Companys balance
sheet and are stated at estimated fair value as determined by a third party at each
reporting period. Changes in the fair value of the embedded derivatives are reflected
quarterly as Change in fair value of derivatives embedded within convertible debt.The estimated fair values for financial instruments presented herein are not necessarily
indicative of the amounts the Company could realize in a current market exchange. The use
of different market assumptions and/or estimation methodologies may have a material effect
on the estimated fair values.The Company uses forward foreign exchange contracts to mitigate its exposure to changes in
exchange rates relating to purchases of equipment from third parties. The primary
currency to which the Company is exposed is the Euro. A substantial portion of the
Companys foreign exchange contracts is effective as hedges. The fair value of forward
foreign exchange contracts designated as hedges is reported in other current assets or
current liabilities and is recorded in other comprehensive income. Although the Company
may enter into additional forward foreign exchange contracts, all forward foreign exchange
contracts had been settled at September 30, 2007.
 11




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 (i)
    
    Revenue Recognition:Revenues from sales are recognized upon the shipment of finished goods when title
and risk of loss have passed to the customer, there is persuasive evidence of an arrangement,
the sale price is determinable and collectibility is reasonably assured. The Company provides an
allowance for expected sales returns, net of any related inventory cost recoveries. Certain sales incentives,
including buydowns, are classified as reductions of net sales in accordance with EITF Issue No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products). In accordance with EITF
Issue No.
06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement
(That Is, Gross versus Net Presentation), the Companys accounting policy is to include federal excise taxes in
revenues and cost of goods sold.
Such revenues totaled $43,025 and $132,305 for the three and nine months ended September 30, 2007 and $48,153 and $127,956
for the
three and nine months ended September 30, 2006, respectively. Since the Companys primary line of business is tobacco, the
Companys financial position and its results of operations and cash flows have been and could continue to be materially
adversely
affected by significant unit sales volume declines, litigation and defense costs, increased excise taxes,
increased tobacco costs or reductions in the selling price of cigarettes in the near term.Shipping and
handling fees
related to sales
transactions are
neither billed to
customers nor
recorded as
revenue. Shipping
and handling costs
are recorded as
operating, selling,
administrative and
general expenses.(j)
    
    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.The Company records provisions in the condensed consolidated financial statements for
pending litigation when it determines that an unfavorable outcome is probable and the
amount of the loss can be reasonably estimated. Except as discussed in Note 8, (i)
management has not concluded that it is probable that a loss has been incurred in any of
the pending smoking-related litigation; (ii) management is unable to make a meaningful
estimate of the amount or range of loss that could result from an unfavorable outcome of
pending smoking-related litigation; and (iii) accordingly, management has not provided any
amounts in the condensed 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 smoking-related litigation.(k)
    
    New Accounting Pronouncements:In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Instruments (SFAS No. 155). SFAS No. 155 amends SFAS Nos. 133, Accounting for
Derivative Instruments and Hedging Activities, and 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB
Statement No. 125,
 12




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 and relates to the financial reporting of certain hybrid financial instruments. SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted for as a
single instrument (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning of fiscal
years commencing after September 15, 2006. The Company did not elect to retroactively
apply SFAS No. 155 and, as a result, it did not have an impact on the Companys condensed
consolidated financial statements.In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109), which is effective for fiscal years beginning
after December 15, 2006 with earlier adoption encouraged. This interpretation was issued
to clarify the accounting for uncertainty in income taxes recognized in the financial
statements by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The adoption of FIN 48 is discussed in Note 11.In September 2006, the FASB issued SFAS No. 157, Fair ValueMeasurements, which defines
fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 clarifies that fair value should be based on
assumptions that market participants would use when pricing an asset or liability and
establishes a fair value hierarchy of three levels that prioritizes the information used
to develop those assumptions. The fair value hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157
requires fair value measurements to be separately disclosed by level within the fair value
hierarchy. The provisions of SFAS No. 157 will become effective for the Company beginning
January 1, 2008. Generally, the provisions of this statement are to be applied
prospectively. Certain situations, however, require retrospective application as of the
beginning of the year of adoption through the recognition of a cumulative effect of
accounting change. Such retrospective application is required for financial instruments,
including derivatives and certain hybrid instruments with limitations on initial gains or
losses under EITF Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management
Activities.The Company has not completed its assessment of the impact of this standard
on its consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits entities to choose 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, with early adoption permitted provided the entity also
elects to apply the provisions of SFAS No. 157. The Company is currently evaluating the
impact of adopting SFAS No. 159 on its consolidated financial statements.
 13




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 
 2.
    
    RESTRUCTURINGThe components of the combined pre-tax restructuring charges relating to the 2006 Vector
Research restructuring for the nine months ended September 30, 2007 are as follows:
 Employee
    
    
    ContractSeverance
    
    
    Termination/and Benefits
    
    
    Exit Costs
    
    
    TotalBalance, December 31, 2006
    
    $
    484
    
    
    $
    338
    
    
    $
    822Utilized
    
    
    (297
    )
    
    
    (324
    )
    
    
    (621
    )Balance, September 30, 2007
    
    $
    187
    
    
    $
    14
    
    
    $
    201
 The only remaining component of the 2004 Liggett Vector Brands restructuring at December 31,
2006 and September 30, 2007 was contract termination and exit costs of $850 and $729,
respectively. Approximately $121 was utilized for the nine months ended September 30, 2007.3.
    
    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. For the three and nine months ended September 30, 2007 and 2006, net realized gains
were $0, $1,433, $0 and $1,386 respectively. In addition, the Company recorded a loss related
to other-than-temporary declines in the fair value of its marketable equity securities totaling
$58 and $1,216 for the three and nine months ended September 30, 2007, respectively.The components of investment securities available for sale at September 30, 2007 are as
follows:
 Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueMarketable equity securities
    
    $
    21,039
    
    
    $
    25,695
    
    
    $
    0
    
    
    $
    46,734
 Investment securities available for sale as of September 30, 2007 and December 31, 2006 include
New Valley LLCs 13,888,889 and 11,111,111 shares, respectively, of Ladenburg Thalmann
Financial Services Inc. (LTS) common stock, which were carried at $27,222 and $13,556,
respectively (see Note 12). Investment securities available for sale as of September 30, 2007
also include 2,257,110 shares of Opko Health Inc. (Opko) common stock, which were carried at
$9,119. The Opko shares were acquired in a private placement and have not been registered for
resale.
 14




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 4.
    
    INVENTORIESInventories consist of:
 September 30,
    
    
    December 31,2007
    
    
    2006Leaf tobacco
    
    $
    34,958
    
    
    $
    33,363Other raw materials
    
    
    3,830
    
    
    
    2,725Work-in-process
    
    
    166
    
    
    
    1,348Finished goods
    
    
    47,296
    
    
    
    57,485Inventories at current cost
    
    
    86,250
    
    
    
    94,921LIFO adjustments
    
    
    (5,511
    )
    
    
    (3,622
    )$
    80,739
    
    
    $
    91,299
 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, 2007, Liggett had leaf tobacco
purchase commitments of approximately $15,476. There were no leaf tobacco purchase commitments
at Vector Tobacco at that date.The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in
ending inventory (see Note 8).LIFO inventories represent approximately 94.2% of total inventories at September 30, 2007 and
91% of total inventories at December 31, 2006.5.
    
    PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment consist of:
 September 30,
    
    
    December 31,2007
    
    
    2006Land and improvements
    
    $
    1,418
    
    
    $
    1,418Buildings
    
    
    13,544
    
    
    
    13,366Machinery and equipment
    
    
    102,140
    
    
    
    103,241Leasehold improvements
    
    
    1,887
    
    
    
    2,017Construction-in-progress
    
    
    2,040
    
    
    
    525121,029
    
    
    
    120,567Less accumulated depreciation
    
    
    (64,934
    )
    
    
    (60,646
    )$
    56,095
    
    
    $
    59,921
 Depreciation and amortization expense on property, plant and equipment for the three and nine
months ended September 30, 2007 was $2,469 and $7,554, respectively. Depreciation and
amortization expense on property, plant and equipment for the three and nine months ended
 15




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 September 30, 2006 was $2,486 and $7,477, respectively. Future machinery and equipment
purchase commitments at Liggett were $3,596 at September 30, 2007.During the second quarter of 2006, Liggett recognized an impairment charge of $324 associated
with its decision to dispose of an asset to an unrelated third party and was recorded as part
of operating, selling, general and administrative expenses on the Companys condensed
consolidated statement of operations.6.
    
    LONG-TERM INVESTMENTSLong-term investments consist of investments in the following:
 September 30, 2007
    
    December 31, 2006Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueInvestment partnerships
accounted for at cost
    
    $
    68,012
    
    
    $
    85,040
    
    
    $
    32,971
    
    
    $
    47,560Investments accounted for
under the equity method
    
    $
    10,537
    
    
    $
    10,537
    
    
    $
    10,230
    
    
    $
    10,230
 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. New Valley is an investor in real estate partnerships where it has committed to make
additional investments of up to an aggregate of $172 at September 30, 2007. 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 August 2006, the Company invested $25,000 in Icahn Partners, LP, a privately managed
investment partnership, of which Carl Icahn is the portfolio manager and the controlling person
of the general partner, and manager of the partnership. In September 2007, the Company
invested an additional $25,000 in Icahn Partners, LP. Based on information available in public
filings, the Company believes affiliates of Mr. Icahn are the beneficial owners of
approximately 20.2% of Vectors common stock at September 30, 2007.The Companys investments constituted less than 3% of the invested funds in each of the other
partnerships at September 30, 2007 and, in accordance with EITF Topic No. D-46, Accounting for
Limited Partnership Investments, the Company has accounted for such investments using the cost
method of accounting.On November 1, 2006, the Company invested $10,000 in Jefferies Buckeye Fund, LLC (Buckeye
Fund), a privately managed investment partnership, of which Jefferies Asset Management, LLC is
the portfolio manager. The Company believes affiliates of Jefferies Asset Management, LLC
beneficially owned approximately 7.8% of Vectors common stock as of June 30, 2007, which was
the date of the most recently available data. The Companys investment in the Buckeye Fund
represented approximately 13.5% of the amounts invested in the Buckeye Fund at September 30,
2007. In accordance with EITF Issue No. 03-16, Accounting for Investments in Limited
Liability
 16




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Companies, the Company has accounted for its investment in Buckeye Fund using the equity
method of accounting and carried its investment in the Buckeye Fund at $10,537 as of September
30, 2007, which includes $695 ($411 net of income taxes) of unrealized gains on investment
securities. The Company recorded losses of $7 and $96 associated with the Buckeye Fund for the
three and nine months ended September 30, 2007, respectively.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.7.
    
    NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONSNotes payable, long-term debt and other obligations consist of:
 September 30,
    
    
    December 31,2007
    
    
    2006Vector:11% Senior Secured Notes due 2015
    
    $
    165,000
    
    
    $
    3.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $84,351 and $84,056*
    
    
    25,649
    
    
    
    25,9445% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $49,758 and $53,904*
    
    
    62,106
    
    
    
    57,960Liggett:Revolving credit facility
    
    
    138
    
    
    
    11,986Term loan under credit facility
    
    
    7,956
    
    
    
    Equipment loans
    
    
    10,632
    
    
    
    12,660Vector Tobacco:Notes payable  Medallion acquisition due 2007
    
    
    
    
    
    
    35,000V.T. Aviation:Note payable
    
    
    6,725
    
    
    
    7,448VGR Aviation:Note payable
    
    
    4,445
    
    
    
    4,655Other
    
    
    201
    
    
    
    337Total notes payable, long-term debt and other obligations
    
    
    282,852
    
    
    
    155,990Less:Current maturities
    
    
    (5,882
    )
    
    
    (52,686
    )Amount due after one year
    
    $
    276,970
    
    
    $
    103,304
 
 *
    
    The fair value of the derivatives embedded within the 3.875% Variable Interest
Senior Convertible Debentures ($65,226 and $59,807 at September 30, 2007 and
December 31, 2006, respectively) and the 5% Variable Interest Senior Convertible
Notes ($34,462 at September 30, 2007 and $35,666 at December 31, 2006,
respectively) is separately classified as a derivative liability in the condensed
consolidated balance sheets. 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. The Company intends to use the net proceeds of the
issuance for
 17




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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 general corporate purposes which may include working capital requirements, the financing of
capital expenditures, future acquisitions, the repayment or refinancing of outstanding
indebtedness, payment of dividends and distributions and the repurchase of all or any part of
its outstanding convertible notes.The Senior Secured Notes pay interest on a semi-annual basis at a rate of 11% per year and
mature on August 15, 2015. The Company may redeem some or all of the Senior Secured Notes at
any time prior to August 15, 2011 at a make-whole redemption price. On or after August 15,
2011 the Company may redeem some or all of the Senior Secured Notes at a premium that will
decrease over time, plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date. At any time prior to August 15, 2010, the Company may on any one or more
occasions redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with
the net proceeds of certain equity offerings at 111% of the aggregate principal amount thereof,
plus accrued and unpaid interest and liquidated damages, if any, to the redemption date. In the
event of a change of control, as defined in the indenture governing the Senior Secured Notes,
each holder of the Senior Secured Notes may require the Company to repurchase some or all of
its Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal
amount plus accrued and unpaid interest and liquidated damages, if any to the date of purchase.The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis
by all of the domestic subsidiaries of the Company that are engaged in the conduct
of the Companys cigarette businesses. In addition, some of the guarantees are collateralized
by second priority or first priority security interests in certain collateral of some of the
subsidiary guarantors pursuant to security and pledge agreements.In connection with the issuance of the Senior Secured Notes, the Company entered into a
Registration Rights Agreement. The Company agreed to consummate a registered exchange offer for
the Senior Secured Notes within 360 days after the date of the initial issuance of the Senior
Secured Notes. The Company will be required to pay additional interest on the Senior Secured
Notes if it fails to timely comply with its obligations under the Registration Rights Agreement
until such time as it complies.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 guaranteeing subsidiaries total debt less the fair market value
of the Companys cash, investments in marketable 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. At September 30, 2007, management believed that
the Company was in compliance with all covenants under the indenture.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
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 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 will be convertible on such record
date (the Additional Interest).3.875% Variable Interest Senior Convertible Debentures due 2026:In July 2006, the Company sold $110,000 of its 3.875% variable interest senior convertible
debentures due 2026 in a private offering to qualified institutional buyers in accordance with
Rule 144A under the Securities Act of 1933. The Company used the net proceeds of the offering
to redeem its remaining 6.25% convertible subordinated notes due 2008 and for general corporate
purposes.The debentures pay interest on a quarterly basis at a rate of 3.875% per annum plus Additional
Interest (the Debenture Total Interest). Notwithstanding the foregoing, however, the
interest payable on each interest payment date shall be the higher of (i) the Debenture Total
Interest and (ii) 5.75% per annum. The debentures are convertible into the Companys common
stock at the holders option. The conversion price, which was $19.50 per share at September
30, 2007, is subject to adjustment for various events, including the issuance of stock
dividends.The debentures will mature on June 15, 2026. The Company must redeem 10% of the total
aggregate principal amount of the debentures outstanding on June 15, 2011. In addition to such
redemption amount, the Company will also redeem on June 15, 2011 and at the end of each
interest accrual period thereafter an additional amount, if any, of the debentures necessary to
prevent the debentures from being treated as an Applicable High Yield Discount Obligation
under the Internal Revenue Code. The holders of the debentures will have the option on June
15, 2012, June 15, 2016 and June 15, 2021 to require the Company to repurchase some or all of
their remaining debentures. The redemption price for such redemptions will equal 100% of the
principal amount of the debentures plus accrued interest. If a fundamental change (as defined
in the indenture governing the debentures) occurs, the Company will be required to offer to
repurchase the debentures at 100% of their principal amount, plus accrued interest and, under
certain circumstances, a make-whole premium.5% Variable Interest Senior Convertible Notes Due November 2011:In November 2004, the Company sold $65,500 of its 5% variable interest senior convertible notes
due November 15, 2011 in a private offering to qualified institutional investors in accordance
with Rule 144A under the Securities Act of 1933. The buyers of the notes had the right, for a
120-day period ending March 18, 2005, to purchase up to an additional $16,375 of the notes. At
December 31, 2004, buyers had exercised their rights to purchase an additional $1,405 of the
notes, and the remaining $14,959 principal amount of notes was purchased during the first
quarter of 2005. In April 2005, Vector issued an additional $30,000 principal amount of 5%
variable interest senior convertible notes due November 15, 2011 in a separate private offering
to qualified institutional investors in accordance with Rule 144A. These notes, which were
issued under a new indenture at a net price of 103.5%, were on the same terms as the $81,864
principal amount of notes previously issued in connection with the November 2004 placement.The notes pay interest on a quarterly basis at a rate of 5% per annum plus Additional Interest
(the Notes Total Interest). The notes are convertible into the Companys common stock at the
holders option. The conversion price, which was $16.76 at September 30, 2007, is subject to
adjustment for various events, including the issuance of stock dividends.
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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 The notes will mature on November 15, 2011. The Company must redeem 12.5% of the total
aggregate principal amount of the notes outstanding on November 15, 2009. In addition to such
redemption amount, the Company will also redeem on November 15, 2009 and at the end of each
interest accrual period thereafter an additional amount, if any, of the notes necessary to
prevent the notes from being treated as an Applicable High Yield Discount Obligation under
the Internal Revenue Code. The holders of the notes will have the option on November 15, 2009
to require the Company to repurchase some or all of their remaining notes. The redemption price
for such redemptions will equal 100% of the principal amount of the notes plus accrued
interest. If a fundamental change (as defined in the indenture governing the notes) occurs, the
Company will be required to offer to repurchase the notes at 100% of their principal amount,
plus accrued interest and, under certain circumstances, a make-whole premium.Embedded Derivatives on the Variable Interest Senior Convertible Debt:The portion of the Debenture Total Interest and the Notes Total Interest which is computed by
reference to the cash dividends paid on the Companys common stock is considered an embedded
derivative within the convertible debt, which the Company is required to separately value.
Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, the Company has bifurcated these embedded derivatives and, based on a valuation by
a third party, estimated the fair value of the embedded derivative liability. The resulting
discount created by allocating a portion of the issuance proceeds to the embedded derivative is
then amortized to interest expense over the term of the debt using the effective interest
method. Changes to the fair value of these embedded derivatives are reflected quarterly in the
Companys consolidated statements of operations as Change in fair value of derivatives
embedded within convertible debt. The value of the embedded derivative is contingent on
changes in interest rates of debt instruments maturing over the duration of the convertible
debt as well as projections of future cash and stock dividends over the term of the debt.The estimated initial fair values of the embedded derivates associated with the 3.875%
convertible debentures and the 5% convertible notes were $56,214 and $42,041, respectively, at
the dates of issuance.A summary of non-cash interest expense associated with the amortization of the discount created
by the embedded derivative liability for the three and nine months ended September 30, 2007 and
2006 is as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    20063.875% convertible debentures
    
    $
    70
    
    
    $
    515
    
    
    $
    (98
    )
    
    $
    5155% convertible notes
    
    
    1,033
    
    
    
    763
    
    
    
    2,681
    
    
    
    2,173$
    1,103
    
    
    $
    1,278
    
    
    $
    2,583
    
    
    $
    2,688
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 A summary of non-cash changes in the estimated fair value of derivatives embedded within
convertible debt is as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    20063.875% convertible debentures
    
    $
    (5,313
    )
    
    $
    (2,099
    )
    
    $
    (5,419
    )
    
    $
    (2,099
    )5% convertible notes
    
    
    (1,018
    )
    
    
    (1,365
    )
    
    
    1,204
    
    
    
    874$
    (6,331
    )
    
    $
    (3,464
    )
    
    $
    (4,215
    )
    
    $
    (1,225
    )
 The following table reconciles the estimated fair value of derivatives embedded within
convertible debt at September 30, 2007.
 3.875%
    
    
    5%Convertible
    
    
    ConvertibleDebentures
    
    
    Notes
    
    
    TotalBalance at December 31, 2006
    
    $
    59,807
    
    
    $
    35,666
    
    
    $
    95,473(Loss) gain from changes in fair
value of embedded derivatives
    
    
    (5,419
    )
    
    
    1,204
    
    
    
    (4,215
    )Balance at September 30, 2007
    
    $
    65,226
    
    
    $
    34,462
    
    
    $
    99,688
 Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:After giving effect to the recording of the embedded derivative liability as a discount to the
convertible debt, the Companys common stock had a fair value at the issuance date of the debt
in excess of the effective conversion price, resulting in a beneficial conversion feature. EITF
Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Convertible Ratios, requires that the intrinsic value of the
beneficial conversion feature be recorded to additional paid-in capital and as a discount on
the debt. The discount is amortized to interest expense over the term of the debt using the
effective interest method.The initial intrinsic value of the beneficial conversion feature associated with the 3.875%
convertible debentures and the 5% convertible notes was $28,381 and $22,138, respectively. In
accordance with EITF Issue No. 05-8, Tax Effects of Beneficial Conversion Features, the
beneficial conversion feature has been recorded, net of income taxes, as an increase to
stockholders equity.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amortization of discount created
by beneficial conversion feature:3.875% convertible debentures
    
    $
    (17
    )
    
    $
    218
    
    
    $
    (197
    )
    
    $
    2185% convertible notes
    
    
    572
    
    
    
    439
    
    
    
    1,465
    
    
    
    1,220Interest expense associated with
Discount created by the
beneficial conversion feature
    
    $
    555
    
    
    $
    657
    
    
    $
    1,268
    
    
    $
    1,438
 Unamortized Debt Discount:The following table reconciles the unamortized debt discount at September 30, 2007.
 3.875%
    
    
    5%Convertible
    
    
    ConvertibleDebentures
    
    
    Notes
    
    
    TotalBalance at December 31, 2006
    
    $
    84,056
    
    
    $
    53,904
    
    
    $
    137,960Amortization of debt discount created by:Embedded derivative
    
    
    98
    
    
    
    (2,681
    )
    
    
    (2,583
    )Beneficial conversion feature
    
    
    197
    
    
    
    (1,465
    )
    
    
    (1,268
    )Balance at September 30, 2007
    
    $
    84,351
    
    
    $
    49,758
    
    
    $
    134,109
 6.25% Convertible Subordinated Notes Due July 15, 2008  Vector:In July 2001, Vector completed the sale of $172,500 (net proceeds of approximately $166,400) of
its 6.25% convertible subordinated notes due July 15, 2008 through a private offering to
qualified institutional investors in accordance with Rule 144A under the Securities Act of
1933. The notes paid interest at 6.25% per annum and were convertible into Vectors common
stock, at the option of the holder. The conversion price was subject to adjustment for various
events, and any cash distribution on Vectors common stock resulted in a corresponding decrease
in the conversion price. In December 2001, $40,000 of the notes were converted into Vectors
common stock, in October 2004, $8 of the notes were converted and, in June 2006, $70,000 of the
notes were converted. The Company recorded a loss of $14,860 for the nine months ended
September 30, 2006 on the conversion of the $70,000 of notes principally as a result of the
issuance of 1,010,658 shares of common stock as an inducement for conversion. In August
2006, Vector redeemed the remaining outstanding notes at a redemption price of 101.042% of the
principal amount plus accrued interest. The Company recorded a loss of $1,306 in the third
quarter of 2006 on the retirement of the notes.Revolving Credit Facility  Liggett:Liggett has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which $138
was outstanding at September 30, 2007. Availability as determined under the facility was
approximately $30,000 based on eligible collateral at September 30, 2007. The facility is
collateralized by all
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 inventories and receivables of Liggett and a mortgage on Liggetts manufacturing facility. The
facility requires Liggetts compliance with certain financial and other covenants including a
restriction on Liggetts ability to pay cash dividends unless Liggetts borrowing availability,
as defined, under the facility for the 30-day period prior to the payment of the dividend, and
after giving effect to the dividend, is at least $5,000 and no event of default has occurred
under the agreement, including Liggetts compliance with the covenants in the credit facility.Liggett and Wachovia have entered into a series of amendments to the Wachovia credit facility.
In February 2007, Liggett entered into an amendment (the Amendment) to the Wachovia credit
facility that extended the term of the facility from March 8, 2008 to March 8, 2010, subject to
automatic renewal for additional one-year periods unless a notice of termination is given by
Wachovia or Liggett at least 60 days prior to such date or the anniversary of such date. The
Amendment also reduced the interest rates payable on borrowings under the facility and revised
certain financial covenants. Prime rate loans under the facility now bear interest at a rate
equal to the prime rate of Wachovia, as compared to the previous interest rate of 1.0% above
the prime rate. Further, Eurodollar rate loans will now bear interest at a rate of 2.0% above
Wachovias adjusted Eurodollar rate, as compared to the previous interest rate of 3.5% above
the adjusted Eurodollar rate. The Amendment also eliminated the minimum adjusted working
capital and net working capital requirements previously imposed by the facility and replaced
those requirements with new covenants based on Liggetts earnings before interest, taxes,
depreciation and amortization (EBITDA), as defined in the Amendment, and Liggetts capital
expenditures, as defined in the Amendment. The revised covenants provide that Liggetts
EBITDA, on a trailing twelve month basis, shall not be less than $100,000 if Liggetts excess
availability, as defined, under the facility, is less than $20,000. The revised covenants also
require that annual capital expenditures (before a maximum carryover amount of $2,500) shall
not exceed $10,000 during any fiscal year. At September 30, 2007, management believed that
Liggett was in compliance with all covenants under the credit facility.On August 13, 2007, Liggett entered into an amendment (the Fifth Amendment) to the facility
that provided an $8,000 term loan to 100 Maple LLC (Maple), a subsidiary of Liggett, within
the commitment under the existing credit facility. The $8,000 term loan is collateralized by
the existing collateral securing the credit facility, and is also collateralized by a lien on
certain real property (the Mebane Property) owned by Maple. The Mebane Property also secures
the other obligations of Liggett under the credit facility. The $8,000 term loan did not
increase the $50,000 borrowing amount of the credit facility, but did increase the outstanding
amounts under the credit facility by the $8,000 term loan amount and proportionately reduces
the maximum borrowing availability under the facility. The Fifth Amendment also extended the
term of the facility from March 8, 2010 to March 8, 2012, subject to automatic renewal for
additional one-year periods unless notice of termination is given by Wachovia or Liggett at
least 60 days prior to such date or the anniversary of such date.On August 16, 2007, Liggett entered into an amendment (the Sixth Amendment) to the credit
facility which permitted the guaranty of the Senior Secured Notes by each of Liggett and Maple
and the pledging of certain assets of Liggett and Maple on a subordinated basis to secure their
guarantees. The Sixth Amendment also amended the credit facility to grant to Wachovia a blanket
lien on all the assets of Liggett and Maple, excluding any equipment pledged to current or
future purchase money or other financiers of such equipment and excluding any real property,
other than the Mebane Property and other real property to the extent its value is in excess of
$5,000. In connection with the Sixth Amendment, Wachovia, Liggett, Maple and the collateral
agent for the holders of the Companys Senior Secured Notes entered into an intercreditor
agreement, pursuant to which the liens of the collateral agent on the Liggett and Maple assets
will be subordinated to the liens of Wachovia on the Liggett and Maple assets.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Equipment Loans  Liggett:In March 2002, Liggett purchased equipment for $3,023 through the issuance of a note, payable
in 30 monthly installments of $62 and then 30 monthly installments of $51. Interest was
calculated at LIBOR plus 2.8%. The notes were paid in full in the first quarter of 2007.In May 2002, Liggett purchased equipment for $2,871 through the issuance of a note, payable in
30 monthly installments of $59 and then 30 monthly installments of $48. Interest is calculated
at LIBOR plus 2.8%. The notes were paid in full in the second quarter of 2007.In September 2002, Liggett purchased equipment for $1,573 through the issuance of a note
guaranteed by the Company, payable in 60 monthly installments of $26 plus interest calculated
at LIBOR plus 4.31%. The notes were paid in full in the third quarter of 2007.In October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable
in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%
per annum. Liggett was required to provide a security deposit equal to 25% of the funded
amount ($1,110).In December 2005, Liggett purchased equipment for $2,273 through a financing agreement payable
in 24 installments of $58 and then 24 installments of $46. Interest is calculated at 5.03% per
annum. Liggett was required to provide a security deposit equal to 25% of the funded amount
($568).In August 2006, Liggett purchased equipment for $7,922 through a financing agreement payable in
30 installments of $191 and then 30 installments of $103. Interest is calculated at 5.15% per
annum. Liggett was required to provide a security deposit equal to 20% of the funded amount
($1,584).In May 2007, Liggett purchased equipment for $1,576 through a financing agreement payable in 60
installments of $32. Interest is calculated at 7.99% per annum.Each of these equipment loans is collateralized by the purchased equipment.Notes for Medallion Acquisition  Vector Tobacco:The purchase price for the 2002 acquisition of The Medallion Company, Inc. (Medallion)
included $60,000 in notes of Vector Tobacco, guaranteed by the Company and Liggett. Of the
notes, $25,000 have been repaid with the final quarterly principal payment of $3,125 made on
March 31, 2004. The remaining $35,000 of notes bore interest at 6.5% per year, payable
semiannually, and was paid in full on April 2, 2007.Note Payable  V.T. Aviation:In February 2001, V.T. Aviation LLC, a subsidiary of Vector Research Ltd., purchased an
airplane for $15,500 and borrowed $13,175 to fund the purchase. The loan, which is
collateralized by the airplane and a letter of credit from the Company for $775, is guaranteed
by Vector Research, VGR Holding and the Company. The loan is payable in 119 monthly
installments of $125, including annual interest of 2.31% above the 30-day commercial paper
rate, with a final payment of $2,865 in 2011 based on current interest rates.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Note Payable  VGR Aviation:In February 2002, V.T. Aviation LLC purchased an airplane for $6,575 and borrowed $5,800 to
fund the purchase. The loan is guaranteed by the Company. The loan is payable in 119 monthly
installments of $40, including annual interest of 2.75% above the 30-day average commercial
paper rate, with a final payment of $3,776 in 2012 based on current interest rates. During the
fourth quarter of 2003, this airplane was transferred to the Companys direct subsidiary, VGR
Aviation LLC, which assumed the debt.
 8.
    
    CONTINGENCIESSmoking-Related Litigation:Overview. Since 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
costs totaling approximately $1,648 and $989 for the three months ended September 30, 2007 and
2006, respectively, and $5,886 and $3,452 for the nine months ended September 30, 2007 and
2006, respectively.Individual Actions. As of September 30, 2007, there were approximately 250 cases pending
against Liggett (excluding approximately 950 individual cases pending in West Virginia state
court as a consolidated action), and in most cases other tobacco companies, 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. Of these, 168 were pending in Florida (many of which name the Company as a defendant),
32 in Mississippi, 15 in Missouri, 11 in New York and 11 in Maryland. The balance of the
individual cases was pending in seven states and territories.There are currently three individual cases pending where Liggett is the only tobacco company
defendant. In April 2004, in Davis v. Liggett Group Inc.,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 award of legal fees. In October
2007, the Fourth District Court of Appeal affirmed the compensatory award. Liggett filed a
motion for rehearing and/or certification which is currently pending before the appellate
court. In March 2005, in Ferlanti v.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Liggett Group Inc.,a Florida state court granted Liggetts motion for summary judgment. The
plaintiff appealed and in June 2006, the appellate court reversed and remanded back to the
trial court. The court granted leave to plaintiff to add a claim for punitive damages.
Discovery is ongoing. The case is set for trial in January 2008. There is no activity in the
other case where Liggett is the sole tobacco company defendant.The plaintiffs allegations of liability in those cases in which individuals seek recovery for
injuries allegedly caused by cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty, strict liability, fraud,
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 these cases include
lack of proximate cause, assumption of the risk, comparative fault and/or contributory
negligence, lack of design defect, statute of limitations, equitable defenses such as unclean
hands and lack of benefit, failure to state a claim and federal preemption.Jury awards representing material amounts of damages have been returned against other cigarette
manufacturers in recent years. The awards in these individual actions are for both
compensatory and punitive damages. Over the last several years, after conclusion of all
appeals, damage awards have been paid to several individual plaintiffs by other cigarette
manufacturers including an award of $5,500 in compensatory damages and $50,000 in punitive
damages, plus $27,000 in interest, paid in 2006 by Philip Morris in Boeken v. Philip Morris.
Liggett was not a party to those actions. There are several significant jury awards against
other cigarette manufacturers which are on appeal.Class Actions.As of September 30, 2007, there were 11 actions pending for which either a
class has been certified or plaintiffs are seeking class certification, where Liggett is a
named defendant. Other cigarette manufacturers are also named. 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., reversed a federal district courts
certification of a purported nationwide class action on behalf of persons who were allegedly
addicted to tobacco products.Since the Fifth Circuits Castanoruling, in Scott v. American Tobacco Co., Inc.,(Liggett is
not a defendant in this proceeding) a Louisiana court certified an addiction-as-injury class
action that covered only citizens in that state. In May 2004, the Scottjury returned a
verdict in the amount of $591,000, plus prejudgment interest, on the class claim for a smoking
cessation program. In February 2007, the appellate court upheld $279,000 of the $591,000
verdict, finding that certain smokers were entitled to damages. The trial courts award of
prejudgment interest was overturned by the appellate court and the case was remanded to the
trial court. In February 2007, the defendants filed a motion for rehearing. Two other class
actions, Broin v. Philip Morris Companies
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Inc.,(Liggett was dismissed from this case) and Engle v. R.J. Reynolds Tobacco Co.,were
certified in state court in Florida prior to the Castanodecision.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 tobacco companies 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 against all defendants, including $790,000
against Liggett.In November 2000, Liggett filed a $3,450 bond in order to stay execution of the Englejudgment
pending appeal. In May 2001, Liggett, along with Philip Morris and Lorillard Tobacco Company,
reached an agreement with the Engleclass, which provided assurance of the ability to appeal
the jurys July 2000 punitive damage verdict. As required by the agreement, Liggett released
the existing $3,450 bond and paid $6,273 into an escrow account to be distributed to the class,
upon completion of the appellate process, regardless of the outcome of the appeal. Entitlement
to the escrowed monies will ultimately have to be determined by the court.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 in part and reversed in part the May 2003
Third District Court of Appeals decision.  Among other things, 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 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) the defendants agreed to
misrepresent information relating to the health effects of cigarettes with the intention that
the public would rely on this information to its detriment; (vi) all defendants sold or
supplied cigarettes that were defective; and (vii) all defendants were negligent) and allowed
former class members to proceed to trial on individual liability issues (utilizing the above
findings) and compensatory and punitive damage issues, provided they commence their individual
lawsuits within one year from January 11, 2007. In December 2006, the Florida Supreme Court
refused to revise its July 2006 ruling, except that it vacated finding (v) listed above and
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.  The Florida Supreme Court
issued its mandate on that decision on January 11, 2007, at which time the case was remanded to
the Third District Court of Appeal for further proceedings consistent with the Florida Supreme
Courts opinion. The Third District Court of Appeal remanded the case to the trial court.
Class counsel filed motions for attorneys fees and costs. In May 2007, the defendants,
including Liggett, filed a petition for writ of certiorari with the United States Supreme
Court. The petition was denied in September 2007. In October 2007, defendants filed a
petition for rehearing before the United States Supreme Court.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 The Company anticipates that the Florida Supreme Courts decision will result in the filing of
a large number of individual personal injury cases in Florida. Since the Florida Supreme
Courts decision, there have been approximately 120 Engleprogeny cases filed and served where
either Liggett or the Company, or both, have been named as defendants.In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco
Company,awarded $37,500 in compensatory damages in a case involving Liggett and two other
tobacco manufacturers. In March 2003, the court reduced the amount of the compensatory damages
to $24,860. 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 Engleclass member suit
following entry of final judgment by the Engletrial court. After the verdict was returned, the
case was abated pending completion of the Engleappeal. After the issuance of the Florida
Supreme Courts opinion discussed above, the plaintiff filed a motion requesting that the trial
court enter partial final judgment, tax costs and attorneys fees and schedule trial on the
punitive damages claims. Oral argument was held in March 2007 and the parties are awaiting a
decision. Liggett may ultimately be required to bond the amount of the judgment against it to
perfect its appeal.Classes also remain certified against Liggett in West Virginia (Blankenship),Kansas (Smith),
New Mexico (Romero) and New York (Schwab). Blankenshipis dormant. Smithand Romeroare two
class actions pending against Liggett, and other cigarette manufacturers, in which plaintiffs
allege that cigarette manufacturers conspired to fix cigarette prices in violation of antitrust
laws. Class certification was granted in Smith v. Philip Morris,in November 2001. Discovery
is ongoing in that matter. Class certification was granted in Romero v. Philip Morrisin April
2003 and was affirmed by the New Mexico Supreme Court in February 2005. In June 2006, the
trial court in Romerogranted defendants motions for summary judgment. Plaintiffs appealed
the decision.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, seeks to create a nationwide class of
light cigarette smokers. The action asserts claims under RICO. The proposed class is
seeking as much as $200,000,000 in damages, which could be trebled under RICO. In November
2005, the court ruled that if the class is certified, the plaintiffs would be permitted to
calculate damages on an aggregate basis and use fluid recovery theories to allocate them
among class members. Fluid recovery would permit potential damages to be paid out in ways
other than merely giving cash directly to plaintiffs, such as establishing a pool of money that
could be used for public purposes. In September 2006, the court granted plaintiffs motion for
class certification. In November 2006, the United States Court of Appeals for the Second
Circuit granted the defendants motions to stay the district court proceedings and for review
of the class certification ruling. Oral argument was held in July 2007 and the parties are
awaiting a decision. Liggett is a defendant in the case.In June 1998, in Cleary v. Philip Morris, Inc., a putative class action was brought in Illinois
state court on behalf of persons who have allegedly been 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, which in no event will be greater than
$75,000 each, inclusive of punitive damages, interest and costs. In July
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 2006, the plaintiffs filed a motion for class certification. A class certification hearing
occurred on September 6, 2007 and the parties are awaiting a decision. Merits discovery is
stayed pending a ruling by the court on class certification. Liggett is a defendant in the
case.In April 2001, in Brown v. The American Tobacco Co., Inc.,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.
Briefing is complete. Liggett is a defendant in the case.Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases),
a West Virginia State court consolidated approximately 950 individual smoker actions that were
pending prior to 2001 for trial of certain common issues. The consolidation was affirmed on
appeal by the West Virginia Supreme Court. The first phase of the trial is scheduled for March
2008 on certain liability and punitive damages claims allegedly common to the consolidated
claims. In January 2002, the court severed Liggett from the trial of the consolidated action.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, a number
of class actions remain certified against other cigarette manufacturers.Governmental Actions. As of September 30, 2007, there were three Governmental Actions pending
against Liggett. The claims asserted in these health care cost recovery actions vary. In most
of these cases, the governmental entities 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.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. Trial of the case concluded in June 2005.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 the following relief against the non-Liggett defendants: (i) the defendants are
enjoined from committing any act of racketeering concerning the manufacturing, marketing,
promotion, health
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 consequences or sale of cigarettes in the United States; (ii) the defendants are enjoined from
making any material false, misleading, or deceptive statement or representation concerning
cigarettes that persuades people to purchase cigarettes; (iii) the defendants are enjoined from
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, as of January 1, 2007; (iv) the defendants must
make certain corrective statements on their websites, and in television and print media
advertisements; (v) the defendants must maintain internet document websites until 2016 with
access to smoking and health related documents; (vi) the defendants must disclose all
disaggregated marketing data to the government on a confidential basis; (vii) the defendants
are not permitted to sell or otherwise transfer any of their cigarette brands, product formulas
or businesses to any person or entity for domestic use without a court order, and unless the
acquiring person or entity agrees to be bound by the terms of the Final Judgment; and (viii)
the defendants must pay the appropriate costs incurred by the government in prosecuting the
action, in an amount to be determined by the trial court.No monetary damages were awarded other than the governments costs. In October 2006, the
United States Court of Appeals for the District of Columbia stayed the Final Judgment pending
appeal. The defendants filed amended notices of appeal in March 2007. In May 2007, the court
of appeals issued a briefing schedule that extends into the second quarter of 2008. It is
unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole.
While Liggett was excluded from the Final Judgment, 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.A case is pending in Missouri state court brought by the City of St. Louis and approximately 50
hospitals against Liggett and other cigarette manufacturers. Plaintiffs seek 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.Third-Party Payor Actions. As of September 30, 2007, there were two Third-Party Payor Actions
pending where Liggett is a defendant. 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 the tobacco
company defendants 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.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
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 the major United States tobacco 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 plaintiffs for foreign service of process.In August 2005, the United Seniors Association, Inc. filed a lawsuit in federal court in
Massachusetts pursuant to the private cause of action provisions of the MSP seeking to recover
for the Medicare program all expenditures on smoking-related diseases since August 1999. In
August 2006, the court granted the defendants motion to dismiss the complaint which was
affirmed by the appellate court in August 2007.State Settlements.In 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 the settling jurisdictions, 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.
 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 jurisdiction.The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco
products; bans the use of cartoon characters in all tobacco advertising and promotion; limits
each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month
period; bans all outdoor advertising, with the exception of signs 14 square feet or less, at
retail establishments that sell tobacco products; prohibits payments for tobacco product
placement in various media; bans gift offers based on the purchase of tobacco products without
sufficient proof that the intended recipient
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 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.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 2.3% of the total cigarettes shipped in
the United States during 2004, 2.2% during 2005 and 2.4% during 2006. 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,
subject to applicable adjustments, offsets and reductions. In April 2004, Liggett and Vector
Tobacco paid $50,322 for their 2003 MSA obligations. In April 2005, Liggett and Vector Tobacco
paid $20,982 for their 2004 MSA obligations. In April 2006, Liggett and Vector Tobacco paid
$10,637 for their 2005 MSA obligations. In April 2007, Liggett and Vector Tobacco paid $38,743
for their 2006 MSA obligations. Liggett and Vector Tobacco expensed $10,144 and $35,929 for
the three and nine months ended September 30, 2007, respectively, and $12,395 and $24,101 for
the three and nine months ended September 30, 2006, as part of cost of goods sold.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.In 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, 2007, included in Other assets on
the Companys condensed consolidated balance sheet, was a 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 its 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.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 The following amounts have not been expensed in the accompanying 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.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. In February 2007, the economic
consulting firm rendered the same decision with respect to 2004. As a result, the manufacturers
are entitled to potential NPM Adjustments to their 2003 and 2004 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.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, 46 of 47 courts that have decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable and 30 of those decisions are final. In Louisiana, Participating
Manufacturers have moved for reconsideration of the courts decision that the dispute was not
arbitrable. There can be no assurance that Liggett or Vector Tobacco will receive any
adjustment as a result of these proceedings.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, have been recalculated utilizing net unit amounts, rather than
gross unit amounts (which had been utilized since 1999). The change in the method of
calculation could, among other things, require additional MSA payments by Liggett of
approximately $14,200, plus interest, for 2001 through 2006, require an additional payment of
approximately $3,400 for 2007 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 utilizing 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 consolidated financial statements
for any potential liability relating to the gross versus net dispute.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 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 or resolutions 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 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
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. Liggett believes these allegations are without merit, based, among other things, on the
language of the most favored nation provisions of the settlement agreements. In December 2004,
Florida offered to settle all amounts allegedly owed by Liggett for the period through 2003 for
the sum of $13,500. In March 2005, Florida reaffirmed its December 2004 offer to settle and
provided Liggett with a 60 day notice to cure the alleged defaults. Liggett offered Florida
$2,500 in a lump sum to settle all alleged obligations through December 31, 2006 and $100 per
year thereafter in any year in which cigarettes manufactured by Liggett are sold in Florida, to
resolve all alleged future obligations under the settlement agreement. In November 2004,
Mississippi offered to settle all amounts allegedly owed by Liggett for the period through 2003
for the sum of $6,500. In April 2005, Mississippi reaffirmed its November 2004 offer to settle
and provided Liggett with a 60 day notice to cure the alleged defaults. No specific monetary
demand has been made by Texas. Liggett has met with representatives of Mississippi and Texas
to discuss the issues relating to the alleged defaults, although no resolution has been
reached.Except for $2,500 accrued at September 30, 2007, 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.In August 2004, the Company announced that Liggett and Vector Tobacco had notified the
Attorneys General of 46 states that they intended to initiate proceedings against one or more
of the Settling States for violating the terms of the MSA. The Companys subsidiaries alleged
that the Settling States violated their rights and the MSA by extending unauthorized favorable
financial terms to Miami-based Vibo Corporation d/b/a General Tobacco when, in August 2004, the
Settling States
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 entered into an agreement with General Tobacco purporting to allow it to become an SPM under
the MSA. General Tobacco imports discount cigarettes manufactured in Colombia, South America.In the notice sent to the Attorneys General, the Companys subsidiaries indicated that they
sought to enforce the terms of the MSA, void the General Tobacco agreement and enjoin the
Settling States and National Association of Attorneys General from listing General Tobacco as a
Participating Manufacturer on their websites. Several SPMs, including Liggett and Vector
Tobacco, filed a motion in state court in Kentucky seeking to enforce the terms of the MSA with
respect to General Tobacco or, alternatively, to receive the same treatment as General Tobacco
under the MSAs most favored nation clause. In January 2006, the court entered an order
denying the motion and finding that the terms of the General Tobacco settlement agreement were
not in violation of the MSA. The judge also found that the SPMs, under these circumstances,
were not entitled to most favored nation treatment. These SPMs appealed to the Kentucky court
of appeals, which affirmed the decision.There is a suit pending against New York state officials, in federal court in New York, in
which importers of cigarettes allege that the MSA and certain New York statutes enacted in
connection with the MSA violate federal antitrust and constitutional law. The United States
Court of Appeals for the Second Circuit has held that plaintiffs have stated a claim for relief
on antitrust grounds. 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 repealing the allocable share provision of the New York
escrow statute. The parties 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
plaintiffs stated a claim for relief and that the New York federal court had jurisdiction of
the other defendant state attorneys general. In October 2006, the United States Supreme Court
denied the attorneys generals petition for writ of certiorari. Similar lawsuits are pending in
Kentucky, Arkansas, Kansas, Louisiana, Tennessee and Oklahoma. Liggett and the other tobacco
companies are not defendants in these cases.Upcoming Trials.There are five individual actions in New York state court, where Liggett is
a defendant, along with other tobacco companies, that may be set for trial in 2007 or 2008.
One individual action in Florida is set for trial in January 2008. Liggett is the sole tobacco
company defendant in this case. Three other individual actions in Florida, where Liggett and
other cigarette manufacturers are defendants, may be set for trial in 2008.Management is not able to predict the outcome of the litigation pending or threatened against
Liggett. Litigation is subject to many uncertainties. In July 2006, the Florida Supreme Court
affirmed in part and reversed in part the May 2003 intermediate appellate court decision in the
Englecase. Although the Florida Supreme Court affirmed the decision to decertify the class
on a prospective basis and the order vacating the punitive damages award, the court upheld
certain of the trial courts Phase I determinations. In June 2002, the jury in the Lukacs
case, an individual case brought under the third phase of the Englecase, awarded $37,500
(subsequently reduced by the court to $24,860) of compensatory damages against Liggett and two
other defendants and found Liggett 50% responsible for the damages. The plaintiff filed a
motion for the trial court to enter partial final judgment, tax costs and attorneys fees, and
schedule trial on the punitive damages claim. Oral argument on the motion occurred in March
2007 and the parties are awaiting a decision. Liggett may ultimately be required to bond the
amount of the judgment entered against it to perfect its appeal. In April 2004, a jury in a
Florida state court action awarded compensatory damages of
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##### Table of Contents



VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 approximately $540 against Liggett in an individual action. In addition, plaintiffs counsel
was awarded legal fees of $752. Liggett appealed both the verdict and the award of legal fees.
In October 2007, the Fourth District Court of Appeal affirmed the compensatory award. Liggett
filed a motion for rehearing and/or certification. It is possible that additional cases could
be decided unfavorably and that there could be further adverse developments as a result of the
decision in the Englecase, including the filing of a large number of individual personal
injury cases in Florida. Liggett may enter into discussions in an attempt to settle particular
cases if it believes it is appropriate to do so. In August 2006, the trial court in the
Department of Justice case entered a Final Judgment and Remedial Order against certain
cigarette manufacturers, other than Liggett. It is unclear what impact, if any, the Final
Judgment will have on the cigarette industry as a whole.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. Management is
unable to make a meaningful estimate with respect to the amount or range of loss that could
result from an unfavorable outcome of the cases pending against Liggett or the costs of
defending such cases. The complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in an individuals complaint against the tobacco industry 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 such
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 Litigation: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. In May 2007,
New Valley received a $20,000 payment from the government in connection with the settlement.
The Company recognized a pre-tax gain in 2007 of $19,590, net of operating, selling,
administrative and general expenses of $410, in connection with the settlement.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Beginning in 2002, Liggett was served in three class actions filed on behalf of purported
descendants of slaves, seeking reparations from defendants, including Liggett, for alleged
profits arising from the use of slave labor. In October 2002, these three actions were
consolidated by the court. In July 2005, the district court granted defendants motions to
dismiss these actions. Thereafter, plaintiffs appealed. Oral argument was held in September
2006 and on December 13, 2006, the appellate court affirmed in part and reversed in part the
district courts decision. The court affirmed the district courts dismissal without prejudice,
for lack of standing, of all claims except those brought by putative legal representatives.
The dismissal of claims brought by the putative legal representatives was affirmed on the
merits, and therefore, those claims were dismissed with prejudice. The dismissal of the
consumer protection claims was reversed and the case was remanded to the district court for
further proceedings on those claims. Certain plaintiffs have filed amended complaints, although
these amended complaints do not name Liggett as a defendant.In October 2005, Lorillard Tobacco Company advised Liggett that it believed that certain styles
of Liggetts Grand Prix brand cigarettes created a likelihood of confusion among consumers with
Lorillards Newport cigarette brand because of similarities in packaging. In December 2006,
Lorillard commenced an action in the United States District Court for the Middle District of
North Carolina seeking, among other things: an injunction against Liggetts sale of certain
brand styles of Grand Prix; an order directing the recall of the relevant brand styles; an
accounting of profits for the relevant brand styles; treble damages; and interest, attorneys
fees and costs. Discovery is ongoing. Counsel has advised Liggett that it has meritorious
defenses to the action.Other Matters:In May 1999, in connection with the Philip Morris brand transaction, Eve Holdings Inc., a
subsidiary of Liggett, guaranteed a $134,900 bank loan to Trademarks LLC. The loan is secured
by Trademarks three premium cigarette brands and Trademarks interest in the exclusive license
of the three brands by Philip Morris. The license provides for a minimum annual royalty payment
equal to the annual debt service on the loan plus $1,000. Trademarks future royalties have
been guaranteed by Altria Group Inc., the parent of Philip Morris. As a result of Altria
Groups investment-grade debt rating, the Company believes that no premium would be required by
Eve to issue the same guarantee in a stand alone arms length transaction. Thus, the Company
believes the fair value of Eves guarantee was negligible at September 30, 2007.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. 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, 2007.There are 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
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 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.
    
    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, 2007 and 2006 consists of the following:
 Pension Benefits
    
    
    Pension BenefitsThree Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September30, 2007
    
    
    30, 2006
    
    
    30, 2007
    
    
    30, 2006Service cost  benefits earned
during the period
    
    $
    1,062
    
    
    $
    1,225
    
    
    $
    3,186
    
    
    $
    3,675Interest cost on projected benefit
Obligation
    
    
    2,281
    
    
    
    2,250
    
    
    
    6,843
    
    
    
    6,750Expected return on plan assets
    
    
    (3,183
    )
    
    
    (3,145
    )
    
    
    (9,549
    )
    
    
    (9,435
    )Amortization of prior service cost
    
    
    351
    
    
    
    262
    
    
    
    1,053
    
    
    
    786Amortization of net loss
    
    
    176
    
    
    
    435
    
    
    
    528
    
    
    
    1,305Net expense
    
    $
    687
    
    
    $
    1,027
    
    
    $
    2,061
    
    
    $
    3,081
 Other
    
    
    OtherPostretirement Benefits
    
    
    Postretirement BenefitsThree Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September30, 2007
    
    
    30, 2006
    
    
    30, 2007
    
    
    30, 2006Service cost  benefits earned
during the period
    
    $
    4
    
    
    $
    5
    
    
    $
    12
    
    
    $
    15Interest cost on projected benefit
Obligation
    
    
    148
    
    
    
    150
    
    
    
    444
    
    
    
    450Amortization of net (gain) loss
    
    
    (26
    )
    
    
    3
    
    
    
    (78
    )
    
    
    9Net expense
    
    $
    126
    
    
    $
    158
    
    
    $
    378
    
    
    $
    474
 The Company did not make contributions to its pension benefits plans for the three and nine
months ended September 30, 2007 and does not anticipate making any contributions to such plans
in 2007. The Company anticipates paying approximately $775 in other postretirement benefits in
2007.10.
    
    STOCK-BASED COMPENSATIONStock Options.On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
which requires the Company to value unvested stock options granted prior to the adoption of
SFAS No. 123(R) under the fair value method of accounting and expense this amount in the
statement of operations over the stock options remaining vesting period. Upon adoption, there
was no cumulative adjustment for the impact of the change in accounting principle because the
assumed forfeiture rate
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 did not differ significantly from prior periods. The Company recognized stock-based
compensation expense of $45 and $123 related to stock options for the three months ended
September 30, 2007 and 2006, respectively and $142 and $438 related to stock options for the
nine months ended September 30, 2007 and 2006, respectively.The terms of certain stock options awarded under the Companys Amended and Restated 1999
Long-Term Incentive Plan (the 1999 Plan) in January 2001 and November 1999 provide for common
stock dividend equivalents (at the same rate as paid on the common stock) with respect to the
shares underlying the unexercised portion of the options. Effective January 1, 2006, in
accordance with SFAS No. 123(R), the Company recognizes payments of the dividend equivalent
rights on these options as Distributions and dividends on common stock on the Companys
condensed consolidated statement of changes in stockholders equity ($1,590 and $1,578 for the
three months ended September 30, 2007 and 2006, respectively, and $4,800 and $4,734 for the
nine months ended September 30, 2007 and 2006, respectively).The total intrinsic value of options exercised during the three months ended September 30, 2007
and 2006 was $2,065 and $209, respectively, and $3,515 and $1,104 for the nine months ended
September 30, 2007 and 2006, respectively.Restricted Stock Awards. In September 2005, the President of the Company was awarded a
restricted stock grant of 551,250 shares of the Companys common stock and, on November 16,
2005, he was awarded an additional restricted stock grant of 86,622 shares of the Companys
common stock, in each case, pursuant to the 1999 Plan. Pursuant to the restricted share
agreements, one-fourth of the shares vested on September 15, 2006, with an additional
one-fourth vesting on each of the three succeeding one-year anniversaries of the first vesting
date through September 15, 2009. In the event his employment with the Company is terminated
for any reason other than his death, his disability or a change of control (as defined in his
restricted share agreements) of the Company, any remaining balance of the shares not previously
vested will be forfeited by him. These restricted stock awards by the Company replaced the
unvested portion of a New Valley restricted stock grant relinquished by the President of the
Company. The number of restricted shares of the Companys common stock awarded to him (637,872
shares) was the equivalent of the number of shares of the Companys common stock that would
have been issued to him had he retained his unvested New Valley restricted shares and those
shares were exchanged for the Companys common stock in the exchange offer and subsequent
merger whereby the Company acquired the remaining minority interest in New Valley in December
2005. The Company recorded deferred compensation of $11,340 representing the fair market value
of the total restricted shares on the dates of grant. The deferred compensation will be
amortized over the vesting period as a charge to compensation expense. The Company recorded an
expense of $715 and $749 associated with the grants for the three months ended September 30,
2007 and 2006, respectively, and $2,121 and $2,273 associated with the grants for the nine
months ended September 30, 2007 and 2006, respectively.In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted
stock grant of 55,125 shares of the Companys common stock pursuant to the 1999 Amended Plan.
Pursuant to his restricted share agreement, one-fourth of the shares vest on November 1, 2006,
with an additional one-fourth vesting on each of the three succeeding one-year anniversaries of
the first vesting date through November 1, 2009. In the event his employment with the Company
is terminated for any reason other than his death, his disability or a change of control (as
defined in his restricted share agreement) of the Company, any remaining balance of the shares
not previously vested will be forfeited by him. The Company recorded deferred compensation of
$1,018 representing the fair market value of the restricted shares on the date of grant. The
Company
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 recorded an expense of $64 and $191 for the three and nine months ended September 30, 2007,
respectively. The Company recorded an expense of $63 and $191 for the three and nine months
ended September 30, 2006, respectively.On June 1, 2004, the Company granted 12,154 restricted shares of the Companys common stock
pursuant to the 1999 Amended Plan to each of its four outside directors. The shares vested
over three years and the Company recognized $644 of expense over the vesting period. On June
4, 2007, the Company granted 10,500 restricted shares of the Companys common stock pursuant to
the 1999 Amended Plan to each of its four outside directors. The shares will vest over three
years and the Company will recognize $792 of expense over the vesting period.The Company recognized $66 and $177 of expense for the three and nine months ended September
30, 2007, respectively, and $55 and $161 of expense for the three and nine months ended
September 30, 2006, respectively, in connection with the 2004 and 2007 restricted stock awards
to its outside directors.The Companys accounting policy is to treat dividends paid on restricted stock as a reduction
to additional paid-in capital on the Companys consolidated balance sheet.11.
    
    INCOME TAXESVectors income tax rates for the three and nine months ended September 30, 2007 and 2006 do
not bear a customary relationship to statutory income tax rates as a result of the impact of
nondeductible expenses and state income taxes offset by the impact the items applied using the
discrete method discussed below and, in 2007, the domestic production activities deduction.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 Accounting Principles Board Opinion
No. 28. The Companys anticipated
effective annual income tax rate from ordinary operations is approximately 46%.For the three months ended September 30, 2007, the Company did not include a $2,200 benefit
from the recognition of previously unrecognized tax benefits in the computation of the
effective annual income tax rate for 2007 on the estimated pre-tax results from ordinary
operations, which reduced the Companys income tax provision by $2,200.For the nine months ended September 30, 2007, the Company did not include the $2,200 benefit
discussed above, a $450 benefit from the settlement of a state income tax assessment, the
income from the lawsuit settlement with the United States government (see Note 8) or the gain
from the exchange of the LTS notes (see Note 12) in the computation of the effective annual
income tax rate for 2007 on estimated pre-tax results from ordinary operations. These items
reduced the Companys income tax provision by approximately $3,800 for the nine months ended
September 30, 2007. Accordingly, the provision for income taxes for the three and nine months
ended September 30, 2007 has been computed by applying the discrete method in accordance with
FIN 18 to account for these items.The Company also anticipates that its income tax expense for the fourth quarter of 2007 will be
reduced by approximately $900 due to the reversal of previously established valuation
allowances at Vector Tobacco. These valuation allowances had been established against deferred
tax assets from
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 net operating losses which have previously been limited. This will be applied using the
discrete method.For the three months ended September 30, 2006, the Company did not include a $11,500 reduction
in previously established reserves in the computation of the effective annual income tax rate
for 2006 on the estimated pre-tax results from ordinary operations.On July 20, 2006, the Company entered into a settlement with the Internal Revenue Service with
respect to the Philip Morris brand transaction where a subsidiary of Liggett contributed three
of its premium cigarette brands to Trademarks LLC, a newly-formed limited liability company. In
such transaction, Philip Morris acquired an option to purchase the remaining interest in
Trademarks for a 90-day period commencing in December 2008, and the Company has an option to
require Philip Morris to purchase the remaining interest for a 90-day period commencing in
March 2010. The Company deferred for income tax purposes, a portion of the gain on the
transaction until such time as the options were exercised. In connection with an examination
of the Companys 1998 and 1999 federal income tax returns, the Internal Revenue Service issued
to the Company in September 2003 a notice of proposed adjustment. The notice asserted that, for
tax purposes, the entire gain should have been recognized in 1998 and in 1999 in the additional
amounts of $150,000 and $129,900, respectively, rather than upon the exercise of the options
during the 90-day periods commencing in December 2008 or in March 2010. As part of the
settlement, the Company agreed that $87,000 of the gain on the transaction would be recognized
by the Company as income for tax purposes in 1999 and that the balance of the remaining gain,
net of previously capitalized expenses of $900, ($192,000) will be recognized by the Company as
income in 2008 or 2009, upon exercise of the options. The Company paid approximately $41,400
during the third and fourth quarters of 2006, including interest, with respect to the gain
recognized in 1999. As a result of the settlement, the Company reduced, during the third
quarter of 2006, the excess portion ($11,500) of a previously established reserve in its
consolidated financial statements, which resulted in a decrease in such amount in reported
income tax expense in the consolidated statements of operations.Vectors income tax rate for the nine months ended September 30, 2006 does not bear a customary
relationship to statutory income tax rates as a result of the impact of the nondeductible
expense associated with the conversion of its 6.25% convertible notes due 2008, other
nondeductible expenses and state income taxes, offset by the $11,500 reduction in previously
established reserves. This reduced income tax expense for the nine months ended September 30,
2006 by approximately $5,450.The Company or its subsidiaries file U.S. federal income tax returns and tax returns in various
state and local jurisdictions. With few exceptions, the Company is no longer subject to state
and local income tax examinations by tax authorities for years ending before 2003. In July
2006, the Company and the Internal Revenue Service entered into a settlement for taxable years
ending on and before December 31, 1999. The Internal Revenue Service has not audited the
Companys U.S. income tax returns for years after December 31, 1999. The Company could
potentially recognize net reductions to its total unrecognized tax benefits within the next
12 months of approximately $900.As discussed in Note 1(k), the Company adopted FIN 48 as of January 1, 2007. The Company did
not recognize any adjustment in the liability for unrecognized tax benefits, as a result of the
adoption of FIN 48, that impacted the January 1, 2007 accumulated deficit. The total amount of
unrecognized tax benefits was $11,685 at January 1, 2007 and
increased $1,777 and $3,027 during
the three and
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 nine months ended September 30, 2007, respectively. The total amount of tax benefits that, if
recognized, would impact the effective tax rate was $11,685 and
$14,712 at December 31, 2006
and September 30, 2007, respectively. These amounts have been included in Income taxes
payable on the Companys condensed consolidated balance sheet at September 30, 2007 and
December 31, 2006.The Company continues to classify all income tax related interest and penalties as income tax
expense. As of the beginning of fiscal 2007, the liability for tax-related interest and
penalties amounted to approximately $2,100.12.
    
    LTS DEBT EXCHANGE AGREEMENTIn February 2007, LTS entered into a Debt Exchange Agreement (the Exchange Agreement) with
New Valley, the holder of $5,000 principal amount of its promissory notes due March 31, 2007.
Pursuant to the Exchange Agreement, New Valley agreed to exchange the principal amount of its
notes for LTS common stock at an exchange price of $1.80 per share, representing the average
closing price of the LTS common stock for the 30 prior trading days ending on the date of the
Exchange Agreement.The debt exchange was consummated on June 29, 2007 following approval by the LTS shareholders
of the transaction at its annual meeting of shareholders. At the closing, the $5,000 principal
amount of notes was exchanged for 2,777,778 shares of LTSs common stock, and accrued interest
on the notes of approximately $1,730 was paid in cash. As a result of the debt exchange, New
Valleys ownership of LTS common stock increased to 13,888,889 shares or approximately 8.7% of
the outstanding LTS shares.New Valley provided a full reserve against the LTS notes in 2002 and carried the notes on its
consolidated balance sheet at $0 prior to the exchange. In connection with the debt exchange,
the Company recorded a gain of $8,121, which consisted of the fair value of the 2,777,778
shares of LTS common stock at June 29, 2007 (the transaction date) and interest received in
connection with the exchange, in the second quarter of 2007.
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 13.
    
    INVESTMENTS IN NON-CONSOLIDATED REAL ESTATE BUSINESSESNew Valley accounts for its 50% interests in Douglas Elliman Realty LLC, Koa Investors LLC and
16th & K Holdings LLC, as well as its 21% interest in Ceebraid on the equity method.
See Note 1(c). Douglas Elliman Realty operates a residential real estate brokerage company in
the New York metropolitan area. Koa Investors owns the Sheraton Keauhou Bay Resort & Spa in
Kailua-Kona, Hawaii. Following a major renovation, the property reopened in the fourth quarter
2004 as a four star resort with 521 rooms. 16th and K Holdings acquired the St.
Regis Hotel, a 193 room luxury hotel in Washington, D.C. in August 2005. The St. Regis Hotel
was temporarily closed for an extensive renovation on August 31, 2006. Ceebraid owns the
Holiday Isle Resort in Islamorada, Florida.The components of Investments in non-consolidated real estate businesses were as follows as
of September 30, 2007 and December 31, 2006:
 September 30,2007
    
    
    December 31, 2006Douglas Elliman Realty LLC
    
    $
    33,073
    
    
    $
    20,48116th and K Holdings LLC
    
    
    6,049
    
    
    
    7,182Ceebraid Acquisition Corporation
    
    
    
    
    
    
    753Koa Investors LLC
    
    
    
    
    
    
    Investments in non-consolidated real
estate businesses
    
    $
    39,122
    
    
    $
    28,416
 Residential Brokerage Business.New Valley recorded income of $6,621 and $3,605 for the three
months ended September 30, 2007 and 2006, respectively, and income of $17,763 and $10,645 for
the nine months ended September 30, 2007 and 2006, respectively, associated with its interest
in 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 $322 and $2,385 for the three months ended September 30, 2007 and 2006,
respectively, and $5,170 and $3,426 for the nine months ended September 30, 2007 and 2006,
respectively.Summarized financial information for Douglas Elliman Realty for the three and nine months ended
September 30, 2007 and 2006 and as of September 30, 2007 and December 31, 2006 is presented
below.
 September 30,2007
    
    December 31, 2006Cash
    
    $
    33,685
    
    
    $
    19,307Other current assets
    
    
    7,693
    
    
    
    6,218Property, plant and equipment, net
    
    
    18,703
    
    
    
    19,538Trademarks
    
    
    21,663
    
    
    
    21,663Goodwill
    
    
    38,193
    
    
    
    38,087
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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 September 30,2007
    
    December 31, 2006Other intangible assets, net
    
    
    1,748
    
    
    
    1,966Other non-current assets
    
    
    850
    
    
    
    1,001Notes payable  current
    
    
    2,281
    
    
    
    2,880Current
portion of notes payable to member -
Prudential Real Estate Financial Services
of America, Inc.
    
    
    9,562
    
    
    
    1,500Current portion of notes payable
to member  New Valley
    
    
    1,152Other current liabilities
    
    
    22,584
    
    
    
    21,506Notes payable  long term
    
    
    4,038
    
    
    
    3,175Notes
payable to member  Prudential Real
Estate Financial Services of America, Inc.
    
    
    13,612
    
    
    
    32,557Notes
payable to member  New Valley
    
    
    7,966
    
    
    
    8,875Other long-term liabilities
    
    
    3,996
    
    
    
    5,204Members equity
    
    
    57,344
    
    
    
    32,083
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    110,139
    
    
    $
    86,082
    
    
    $
    313,434
    
    
    $
    264,157Costs and expenses
    
    
    95,249
    
    
    
    76,450
    
    
    
    272,314
    
    
    
    236,882Depreciation expense
    
    
    1,476
    
    
    
    1,272
    
    
    
    4,528
    
    
    
    3,735Amortization expense
    
    
    111
    
    
    
    102
    
    
    
    285
    
    
    
    307Interest expense, net
    
    
    966
    
    
    
    1,412
    
    
    
    3,424
    
    
    
    4,346Income tax expense
    
    
    57
    
    
    
    427
    
    
    
    247
    
    
    
    764Net income
    
    $
    12,280
    
    
    $
    6,419
    
    
    $
    32,636
    
    
    $
    18,123
 Hawaiian Hotel.New Valley did not record any income for the three months ended September 30,
2007 and recorded a loss of $325 for the three months ended September 30, 2006, associated
with Koa Investors. New Valley recorded a loss of $750 and income of $829 for the nine
months ended September 30, 2007 and 2006, respectively, associated with Koa Investors.
The income in the 2006 period related to the receipt of a tax credit of $1,154 from the
State of Hawaii, which was received in the first quarter of 2006, offset by equity in the
loss of Koa Investors of $325 during the third quarter of 2006.In the event that Koa Investors makes distributions of cash, New Valley is entitled to 50% of
the cash distributions until it has recovered its invested capital and achieved an annual 12%
internal rate of return (IRR), compounded on a quarterly basis. New Valley is then entitled
to 35% of subsequent cash distributions until it has achieved an annual 25% IRR. New Valley is
then entitled to 30% of subsequent cash distributions until it has achieved an annual 35% IRR.
After New Valley has achieved an annual 35% IRR, it is then entitled to 25% of subsequent cash
distributions.
 44




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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Summarized financial information for the three and nine months ended September 30, 2007 and
2006 and as of September 30, 2007 and December 31, 2006 for Koa Investors is presented below.
 September 30,2007
    
    December 31, 2006Cash
    
    $
    647
    
    
    $
    1,264Restricted assets
    
    
    3,784
    
    
    
    3,279Other current assets
    
    
    2,141
    
    
    
    2,030Property, plant and equipment, net
    
    
    64,116
    
    
    
    67,889Deferred financing costs, net
    
    
    773
    
    
    
    1,297Accounts payable and other current liabilities
    
    
    10,813
    
    
    
    5,930Notes payable
    
    
    84,260
    
    
    
    87,661Members deficit
    
    
    (23,612
    )
    
    
    (17,832
    )
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    7,110
    
    
    $
    7,718
    
    
    $
    23,454
    
    
    $
    22,936Costs and operating expenses
    
    
    6,550
    
    
    
    7,077
    
    
    
    20,765
    
    
    
    20,661Management fees
    
    
    30
    
    
    
    40
    
    
    
    90
    
    
    
    100Depreciation and amortization
expense
    
    
    1,559
    
    
    
    1,527
    
    
    
    4,657
    
    
    
    4,452Interest expense, net
    
    
    1,728
    
    
    
    1,688
    
    
    
    5,013
    
    
    
    4,900Net loss
    
    $
    (2,757
    )
    
    $
    (2,614
    )
    
    $
    (7,071
    )
    
    $
    (7,177
    )
 In August 2005, a wholly-owned subsidiary of Koa Investors borrowed $82,000 at an interest rate
of LIBOR plus 2.45%. Koa Investors used the proceeds of the loan to repay its $57,000
construction loan and distributed a portion of the proceeds to its members, including $5,500 to
New Valley. As a result of the refinancing, New Valley suspended its recognition of equity
losses in Koa Investors to the extent such losses exceed its basis plus any commitment to make
additional investments, which totaled $600 at the refinancing. New Valley recorded a $600
liability for its future obligation to Koa Investors which was carried under Other
liabilities on the Companys consolidated balance sheet at December 31, 2005. In August 2006,
New Valley contributed $925 to Koa in the form of $600 of the required contributions and $325
of discretionary contributions. Accordingly, the Company recognized a $325 loss from its
equity investment in Koa Investors for the year ended December 31, 2006. Although New Valley
was not obligated to fund any additional amounts to Koa Investors at December 31, 2006, New
Valley made a $750 capital contribution in February 2007, which was recognized as an equity
loss from non-consolidated real estate businesses for the nine months ended September 30, 2007.
The Company anticipates recognizing losses from any future contributions made to Koa
Investors.St. Regis Hotel, Washington, D.C.In June 2005, affiliates of New Valley and Brickman
Associates formed 16th & K Holdings LLC (Hotel LLC), which acquired the St. Regis
Hotel in Washington, D.C. for $47,000 in August 2005. The Company, which holds a 50% interest
in Hotel LLC, had invested $12,125 in the project at December 31, 2006. In connection with the
purchase of the hotel, a subsidiary of Hotel LLC entered into agreements to borrow up to
$50,000 of senior and subordinated debt. In April 2006, Hotel LLC purchased for approximately
$3,000 a building adjacent to the hotel to house various administrative and sales functions.
 45




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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 New Valley accounts for its interest in Hotel LLC under the equity method and recorded a loss
of $32 and $588 for the three months ended September 30, 2007 and 2006, respectively, and $134
and $887 for the nine months ended September 30, 2007 and 2006, respectively. The St. Regis
Hotel was temporarily closed on August 31, 2006 for an extensive renovation. Hotel LLC is
capitalizing all costs other than management fees related to the renovation of the property
during the renovation phase.In the event that Hotel LLC makes distributions of cash, New Valley is entitled to 50% of the
cash distributions until it has recovered its invested capital and achieved an annual 11% IRR,
compounded quarterly. New Valley is then entitled to 35% of subsequent cash distributions
until it has achieved an annual 22% IRR. New Valley is then entitled to 30% of subsequent cash
distributions until it has achieved an annual 32% IRR. After New Valley has achieved an annual
32% IRR, it is then entitled to 25% of subsequent cash distributions.In 2007, Hotel LLC entered into certain agreements to sell 90% of the St. Regis Hotel. In addition to
retaining a 2.5% interest, net of incentives, in the St. Regis Hotel, New Valley anticipates
receiving approximately $20,000 associated with the sale of the hotel in 2007 and approximately
an additional $4,000 in various installments between 2008 and 2012.Summarized financial information as of September 30, 2007 and December 31, 2006 for the three
and nine months ended September 30, 2007 and 2006 for Hotel LLC is presented below.
 September 30,2007
    
    December 31, 2006Cash
    
    $
    
    
    
    $
    1,041Restricted assets
    
    
    5,208
    
    
    
    771Other current assets
    
    
    290
    
    
    
    524Property, plant and equipment, net
    
    
    98,239
    
    
    
    56,311Deferred financing costs, net
    
    
    3,280
    
    
    
    462Other assets
    
    
    
    
    
    
    82Current portion of mortgages payable
    
    
    500
    
    
    
    500Cash overdraft
    
    
    2,035
    
    
    
    Accounts payable and other current liabilities
    
    
    1,432
    
    
    
    4,691Notes payable
    
    
    86,150
    
    
    
    34,500Other liabilities
    
    
    
    
    
    
    393Members equity
    
    
    16,900
    
    
    
    19,107
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    
    
    
    $
    2,200
    
    
    $
    
    
    
    $
    14,024Costs and operating expenses
    
    
    
    
    
    
    2,368
    
    
    
    
    
    
    
    12,088Management fees
    
    
    64
    
    
    
    279
    
    
    
    268
    
    
    
    404Depreciation and amortization
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    1,152Interest expense, net
    
    
    
    
    
    
    438
    
    
    
    
    
    
    
    2,154Net loss
    
    $
    (64
    )
    
    $
    (1,176
    )
    
    $
    (268
    )
    
    $
    (1,774
    )
 46




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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Holiday Isle.During the fourth quarter of 2005, New Valley advanced a total of $2,750 to
Ceebraid, an entity which entered into an agreement to acquire the Holiday Isle Resort in
Islamorada, Florida. In February 2006, Ceebraid filed for Chapter 11 bankruptcy after it was
unable to consummate financing arrangements for the acquisition. Although Ceebraid continued
to seek to obtain financing for the transaction and to close the acquisition pursuant to the
purchase agreement, the Company determined that a reserve for uncollectibility should be
established against these advances at December 31, 2005. Accordingly, a charge of $2,750 was
recorded for the year ended December 31, 2005. In April 2006, an affiliate of Ceebraid
completed the acquisition of the property for $98,000, and New Valley increased its investment
in the project to a total of $5,800 and indirectly holds an approximate 21% equity interest in
Ceebraid. New Valley had committed to make additional investments of up to $200 in Ceebraid at
September 30, 2007 and has recorded a $200 liability for its future obligation to Holiday Isle.
In connection with the closing of the purchase, an affiliate of Ceebraid borrowed $98,000 of
mezzanine and senior debt to finance a portion of the purchase price and anticipated
development costs. The maturity of approximately $77,000 of the debt, which was due on May 1,
2007, has been extended until November 1, 2007. Ceebraid is in current negotiations to
extend and restructure the debt. In April 2006, the Company agreed, under certain circumstances, to
guarantee up to $2,000 of the debt. The Company believes the fair value of its guarantee was
negligible at September 30, 2007. New Valley accounts for its interest in Holiday Isle under
the equity method and recorded losses of $0 and $953 for the three and nine months ended
September 30, 2007 in connection with its investment and a loss of $571 and $861 for the three
and nine months ended September 30, 2006. New Valley has suspended its recognition of equity
losses in Ceebraid to the extent such losses exceed its basis plus any commitment to make
additional investments, which totaled $200 at September 30, 2007. As a result, the Company has
recorded a $200 liability, which has been included in Other current liabilities in its
condensed consolidated balance sheet as of September 30, 2007. The Company anticipates
recognizing losses from any future contributions exceeding $200 made to Holiday Isle. Holiday
Isle will capitalize all costs related to the renovation of the property during the renovation
phase.Summarized financial information as of September 30, 2007 and December 31, 2006 and for the
three and nine months ended September 30, 2007 and for the three months ended September 30,
2006 and the period from April 21, 2006 to September 30, 2006 for Ceebraid is presented below.
 September 30,2007
    
    December 31, 2006Cash
    
    $
    
    
    
    $
    307Restricted assets
    
    
    7,421
    
    
    
    9,484Other current assets
    
    
    1,615
    
    
    
    1,090Property, plant and equipment, net
    
    
    98,687
    
    
    
    99,855Other assets
    
    
    292
    
    
    
    2,515Deferred financing costs, net
    
    
    
    
    
    
    1,511Current portion of notes payable
    
    
    98,000
    
    
    
    98,000Accounts payable and other current liabilities
    
    
    3,927
    
    
    
    496Members equity
    
    
    6,099
    
    
    
    16,266
 47




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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    3,276
    
    
    $
    3,716
    
    
    $
    10,527
    
    
    $
    7,936Costs and operating expenses
    
    
    4,089
    
    
    
    3,578
    
    
    
    13,273
    
    
    
    6,996Interest expense, net
    
    
    2,788
    
    
    
    2,708
    
    
    
    9,090
    
    
    
    4,815Net loss
    
    $
    (3,601
    )
    
    $
    (2,570
    )
    
    $
    (11,836
    )
    
    $
    (3,875
    )
 14.
    
    SEGMENT INFORMATIONThe Companys significant business segments for the three and nine months ended September 30,
2007 and 2006 were Liggett, Vector Tobacco and real estate. The Liggett segment consists of
the manufacture and sale of conventional cigarettes and, for segment reporting purposes,
includes the operations of Medallion acquired on April 1, 2002 (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 real estate segment includes
the Companys investments in non-consolidated real estate businesses.
 48




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VECTOR GROUP LTD.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dollars in Thousands, Except Per Share Amounts)  (Continued)
 Unaudited
 Financial information for the Companys continuing operations before taxes for the three and
nine months ended September 30, 2007 and 2006 follows:
 Vector
    
    Real
    
    CorporateLiggett
    
    Tobacco
    
    Estate
    
    and Other
    
    TotalThree Months Ended Sept. 30, 2007:Revenues
    
    $
    135,186
    
    
    $
    867
    
    
    $
    
    
    
    $
    
    
    
    $
    136,053Operating income (loss)
    
    
    40,448
    
    
    
    (2,841
    )
    
    
    
    
    
    
    (3,900
    )
    
    
    33,707Depreciation and amortization
    
    
    1,856
    
    
    
    26
    
    
    
    
    
    
    
    587
    
    
    
    2,469Three Months Ended Sept. 30, 2006:Revenues
    
    $
    135,941
    
    
    $
    1,724
    
    
    $
    
    
    
    $
    
    
    
    $
    137,665Operating income (loss)
    
    
    34,648
    
    
    
    (2,637
    )
    
    
    
    
    
    
    (6,310
    )
    
    
    25,701Depreciation and amortization
    
    
    1,839
    
    
    
    83
    
    
    
    
    
    
    
    564
    
    
    
    2,486Nine Months Ended Sept. 30, 2007:Revenues
    
    $
    407,304
    
    
    $
    2,992
    
    
    $
    
    
    
    $
    
    
    
    $
    410,296Operating income (loss)
    
    
    113,371
    
    
    
    (7,247
    )
    
    
    
    
    
    
    (17,514
    )
    
    
    88,610Identifiable assets
    
    
    283,797
    
    
    
    10,568
    
    
    
    39,122
    
    
    
    429,704
    
    
    
    763,191Depreciation and amortization
    
    
    5,711
    
    
    
    84
    
    
    
    
    
    
    
    1,759
    
    
    
    7,554Capital expenditures
    
    
    4,104
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    4,211Nine Months Ended Sept. 30, 2006:Revenues
    
    $
    363,308
    
    
    $
    5,416
    
    
    $
    
    
    
    $
    
    
    
    $
    368,724Operating income (loss)
    
    
    95,919
    
    
    
    (8,927
    )
    
    
    
    
    
    
    (18,604
    )
    
    
    68,388Identifiable assets
    
    
    301,385
    
    
    
    6,243
    
    
    
    29,287
    
    
    
    262,071
    
    
    
    598,986Depreciation and amortization
    
    
    5,501
    
    
    
    225
    
    
    
    
    
    
    
    1,751
    
    
    
    7,477Capital expenditures
    
    
    8,861
    
    
    
    65
    
    
    
    
    
    
    
    22
    
    
    
    8,948
 49




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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.
       - 50 -




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
    
    LIGGETT SELECT  the third largest brand in the deep discount category,
    
    GRAND PRIX  a rapidly 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.
     - 51 -




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Recent Developments
 Issuance of 11% Senior Secured Notes
 LTS Debt Exchange Agreement.
 - 52 -




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Medallion Notes.
 NASA Settlement.
 Proposed and enacted excise tax increases.
 Tobacco Settlement Agreements.
  - 53 -




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- 54 -




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Real Estate Activities th th th
 Sale of St. Regis Hotel.
 Recent Developments in Tobacco-Related Litigation
   - 55 -




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Schwab v. Philip Morris
  Engle Engle
 - 56 -




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Lukacs v. R.J. Reynolds
Tobacco Company Lukacs Engle Engle Engle
 - 57 -




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Critical Accounting Policies
 General
  Revenue Recognition
 Marketing Costs
 Restructuring and Asset Impairment Charges
 - 58 -




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Impairment of Long-Lived Assets
 Contingencies Engle
 Settlement Agreements
 Derivatives; Beneficial Conversion Feature
 - 59 -




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Inventories
 Stock-Based Compensation. ,
 - 60 -




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Employee Benefit Plans.
   - 61 -




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Income Taxes.
 Results of Operations
   Three Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September30, 2007
    
    
    30, 2006
    
    
    30, 2007
    
    
    30, 2006Revenues:Liggett
    
    $
    135,186
    
    
    $
    135,941
    
    
    $
    407,304
    
    
    $
    363,308Vector Tobacco
    
    
    867
    
    
    
    1,724
    
    
    
    2,992
    
    
    
    5,416Total revenues
    
    $
    136,053
    
    
    $
    137,665
    
    
    $
    410,296
    
    
    $
    368,724Operating income (loss):Liggett
    
    $
    40,448
    
    
    $
    34,648
    
    
    $
    113,371
    
    
    $
    95,919Vector Tobacco
    
    
    (2,841
    )
    
    
    (2,637
    )
    
    
    (7,247
    )
    
    
    (8,927
    )Total tobacco
    
    
    37,607
    
    
    
    32,011
    
    
    
    106,124
    
    
    
    86,992Corporate and other
    
    
    (3,900
    )
    
    
    (6,310
    )
    
    
    (17,514
    )
    
    
    (18,604
    )Total operating income
    
    $
    33,707
    
    
    $
    25,701
    
    
    $
    88,610
    
    
    $
    68,388
 - 62 -




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Three Months Ended September 30, 2007 Compared to Three Months ended September 30, 2006
 Revenues.
 Tobacco Revenues.
   Tobacco Gross Profit.
   Expenses.
 - 63 -




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Other Income (Expenses).
  th
  Income before income taxes.
 - 64 -




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Income tax provision (benefit)
    Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Revenues.
 Tobacco Revenues.
   Tobacco Gross Profit.
 - 65 -




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Expenses.
  Other Income (Expenses).
 - 66 -




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th
  Income before income taxes.
 Income tax provision.
    - 67 -




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Liquidity and Capital Resources
      - 68 -




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Liggett
  - 69 -




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- 70 -




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Engle Engle
  V.T. Aviation
 VGR Aviation.
 Vector Tobacco.
 Vector
 - 71 -




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- 72 -




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- 73 -




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Off-Balance Sheet Arrangements
  - 74 -




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Market Risk
  - 75 -




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New Accounting Pronouncements
   - 76 -




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.
  Legislation and Regulation
   - 77 -




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- 78 -




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QUEST QUEST QUEST
 - 79 -




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    economic outlook,
    
    capital expenditures,
    
    cost reduction,
    
    new legislation,
    
    cash flows,
    
    operating performance,
    
    litigation,
    
    taxation,
    
    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).
   - 80 -




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
    
    general economic and market conditions and any changes therein, due to acts of war
and terrorism or otherwise,
    
    governmental regulations and policies, including proposed FDA regulation, proposed
increases in federal and state excise taxes and legislation creating smoke-free
environments,
    
    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; e.g.; the impact of recent federal legislation
eliminating the federal tobacco quota system,
    
    uncertainty related to litigation and potential additional payment obligations for
us under the Master Settlement Agreement and other settlement agreements with the
states,
    
    uncertainty related to product liability litigation, and
    
    risks inherent in our new product development initiatives.
   - 81 -




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   - 82 -




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PART II
 OTHER INFORMATION
 
 Item 1.
    
    
    Legal Proceedings
 Reference 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, 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 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 Factors
 Except 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,
2006. 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, as amended, entitled Litigation will continue to harm the tobacco industry,
Individual tobacco-related cases may increase 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 Tobacco-Related
Litigation, and - Legislation and Regulation.
 
 Item 2.
    
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 No 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, 2007 except for
approximately 2,872,364 shares of our common stock issued as a stock dividend on
September 28, 2007.No securities of ours were repurchased by us or our affiliated purchasers during the
three months ended September 30, 2007.
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Exhibits
 *3.1
    
    Amended and Restated By-Laws of Vector Group Ltd.
(incorporated by reference to Exhibit 3.4 in Vectors
Form 8-K dated October 19, 2007).*4.1
    
    Indenture, dated as of August 16, 2007, between Vector
Group Ltd., the subsidiary guarantors named therein and
U.S. Bank National Association, as Trustee, relating to
the 11% Senior Secured Notes due 2015, including the form
of Notes (incorporated by reference to Exhibit 4.1 in
Vectors Form 8-K dated August 16, 2007).*4.2
    
    Pledge Agreement, dated as of August 16, 2007, between
VGR Holding LLC, as Grantor, and U.S. Bank National
Association, as Collateral Agent (incorporated by
reference to Exhibit 4.2 in Vectors Form 8-K dated
August 16, 2007).*4.3
    
    Security Agreement, dated as of August 16, 2007, between
Vector Tobacco Inc., as Grantor, and U.S. Bank National
Association, as Collateral Agent (incorporated by
reference to Exhibit 4.3 in Vectors Form 8-K dated
August 16, 2007).*4.4
    
    Security Agreement, dated as of August 16, 2007, between
Liggett Group LLC and 100 Maple LLC, as Grantors, and
U.S. Bank National Association, as Collateral Agent
(incorporated by reference to Exhibit 4.4 in Vectors
Form 8-K dated August 16, 2007).*4.5
    
    Registration Rights Agreement, dated as of August 16,
2007, between Vector Group Ltd., the subsidiary
guarantors named therein and Jefferies & Company, Inc.
(incorporated by reference to Exhibit 4.5 in Vectors
Form 8-K dated August 16, 2007).*4.6
    
    Fifth Amendment, as of August 10, 2007, to Amended and
Restated Loan and Security Agreement, dated as of
April 14, 2004, by and between Wachovia Bank, N.A., as
Lender, Liggett Group LLC., as Borrower, 100 Maple LLC
and Epic Holdings Inc. (incorporated by reference to
Exhibit 4.6 in Vectors Form 8-K dated August 16, 2007).*4.7
    
    Sixth Amendment, dated as of August 16, 2007, to Amended
and Restated Loan and Security Agreement, dated as of
April 14, 2004, by and between Wachovia Bank, N.A., as
Lender, Liggett Group LLC., as Borrower, 100 Maple LLC
and Epic Holdings Inc. (incorporated by reference to
Exhibit 4.7 in Vectors Form 8-K dated August 16, 2007).*4.8
    
    Intercreditor Agreement, dated as of August 16, 2007,
between Wachovia Bank, N.A., as ABL Lender, U.S. Bank
National Association, as Collateral Agent, Liggett Group
LLC, as Borrower, and 100 Maple LLC, as Loan Party
(incorporated by reference to Exhibit 99.1 in Vectors
Form 8-K dated August 16, 2007).*10.1
    
    Purchase Agreement, dated as of August 8, 2007, between
Vector Group Ltd., the subsidiary guarantors named
therein and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 1.1 in Vectors Form 8-K dated
August 8, 2007).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.
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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
 
 *
    
    Incorporated by reference. - 85 -




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SIGNATURE
  VECTOR GROUP LTD.
(Registrant)By:
    
    /s/ J. Bryant Kirkland IIIJ. Bryant Kirkland IIIVice President, Treasurer and ChiefFinancial Officer
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