<PAGE>   1
                                                                    EXHIBIT 99.2


                               LIGGETT GROUP INC.
                                        
                       CONSOLIDATED FINANCIAL STATEMENTS
                                        
                               DECEMBER 31, 1998


<PAGE>   2

                               LIGGETT GROUP INC.

                                    INDEX TO

              FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>

                                                                                                      PAGE
                                                                                                      ----
FINANCIAL STATEMENTS
<S>                                                                                                   <C>
    Report of Independent Accountants                                                                 2

    Consolidated Balance Sheets as of December 31, 1998 and 1997                                      3

    Consolidated Statements of Operations for the years ended December 31,
        1998, 1997 and 1996                                                                           5

    Consolidated Statements of Stockholder's Equity (Deficit) for the years
        ended December 31, 1998, 1997 and 1996                                                        6

    Consolidated Statements of Cash Flows for the years ended December 31,
        1998, 1997 and 1996                                                                           7

    Notes to Consolidated Financial Statements                                                        8


</TABLE>
<PAGE>   3
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and the
Stockholder of Liggett Group Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholder's equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Liggett Group Inc. (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.


/s/ PricewaterhouseCoopers LLP

Miami, Florida
March 30, 1999










                                       2
<PAGE>   4



                               LIGGETT GROUP INC.

                           CONSOLIDATED BALANCE SHEETS

                (Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                           -----------------------------
                                                                            1998                 1997
                                                                           -------              -------
<S>                                                                        <C>                  <C>    
                                                      ASSETS
Current assets:
     Accounts receivable:
         Trade, less allowances of $1,686 and $1,062, respectively.....    $14,510              $ 9,572
         Other ........................................................        821                  743
     Inventories ......................................................     25,974               35,057
     Other current assets .............................................     10,561                  738
                                                                           -------              -------
             Total current assets .....................................     51,866               46,110
Property, plant and equipment, at cost, less accumulated
    depreciation of $30,893 and $29,452, respectively..................     16,195               17,756

Intangible assets, at cost, less accumulated amortization
    of $20,550 and $19,111, respectively ..............................        171                1,609

Other assets and deferred charges, at cost, less accumulated
    amortization of $15,343 and $9,000, respectively ..................      6,491                3,000
                                                                           -------              -------
              Total assets ............................................    $74,723              $68,475
                                                                           =======              =======
</TABLE>





                                   (continued)




                                       3
<PAGE>   5


                               LIGGETT GROUP INC.

                     CONSOLIDATED BALANCE SHEETS (Continued)

                (Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                    -------------------------
                                                                                      1998            1997
                                                                                    -------        ----------
<S>                                                                                <C>             <C>      
                                  LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Current liabilities:
     Current maturities of long-term debt ...................................      $      --       $      28
     Cash overdraft .........................................................             63             891
     Accounts payable, principally trade ....................................          3,206           6,413
     Accrued expenses:
        Promotional .........................................................         23,760          26,993
        Income taxes ........................................................            115              --
        Other taxes, principally excise taxes ...............................          3,397           3,643
        Estimated allowance for sales returns ...............................          7,100           4,750
        Interest ............................................................             12           8,070
        Settlement accruals .................................................          1,120           4,030
        Proceeds received for options .......................................        150,000              --
        Other ...............................................................         10,697           8,834
                                                                                   ---------       ---------
            Total current liabilities .......................................        199,470          63,652

Long-term debt, less current maturities .....................................          2,538         168,112

Non-current employee benefits ...............................................         10,902          11,168

Other long-term liabilities .................................................          6,999          18,400

Commitments and contingencies (Notes 6 and 13)

Stockholder's equity (deficit):
     Redeemable preferred stock (par value $1.00 per share; authorized 1,000
       shares; no shares issued and outstanding)
     Common stock (par value $0.10 per share; authorized 2,000 shares; issued
       and outstanding 1,000 shares) and contributed capital ................         57,380          50,218
     Accumulated deficit ....................................................       (202,566)       (243,075)
                                                                                   ---------       ---------
             Total stockholder's deficit ....................................       (145,186)       (192,857)
                                                                                   ---------       ---------
             Total liabilities and stockholder's equity (deficit) ...........      $  74,723       $  68,475
                                                                                   =========       =========
</TABLE>


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



                                       4
<PAGE>   6
                               LIGGETT GROUP INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                 YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------
                                                           1998            1997            1996
                                                         ---------       ---------       ---------
<S>                                                      <C>             <C>             <C>      
Net sales* ........................................      $ 347,129       $ 312,268       $ 401,062
Cost of sales* ....................................        129,287         139,310         187,799
                                                         ---------       ---------       ---------

          Gross profit ............................        217,842         172,958         213,263

Selling, general and administrative expenses ......        178,348         151,186         203,214
Legal settlements .................................        (14,928)         16,527              --
Restructuring .....................................             --           1,557           3,296
                                                         ---------       ---------       ---------
          Operating income ........................         54,422           3,688           6,753

Other income (expense):

    Interest income ...............................            449              60              23
    Interest expense ..............................        (26,342)        (23,755)        (23,901)
    Equity in income (loss) of affiliates .........             --             498          (1,116)
    Sale of assets ................................            764           1,017           3,669
    Miscellaneous, net ............................              3           1,735              --
                                                         ---------       ---------       ---------
          Income (loss) before income taxes .......         29,296         (16,757)        (14,572)

Income tax (benefit) provision ....................        (11,213)             --           3,800
                                                         ---------       ---------       ---------
          Net income (loss)  ......................      $  40,509       $ (16,757)      $ (18,372)
                                                         =========       =========       =========

</TABLE>
------------------------------

* Net sales and cost of sales include federal excise taxes of $69,200, $75,316
  and $104,518 respectively.


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


                                       5
<PAGE>   7
\


                               LIGGETT GROUP INC.

                  STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                           Common                         Total
                                                          Stock and                    Stockholder's
                                                         Contributed                      Equity
                                                           Capital        Deficit         Deficit
                                                         -----------     ---------       ---------
<S>                                                      <C>             <C>             <C>
Balance at December 31, 1995  .....................      $  53,240       $(207,946)      $(154,706)
   Net loss .......................................             --         (18,372)        (18,372)
   Consideration for option to acquire affiliate
       stock in excess of its net assets (Note 14)          (3,400)             --          (3,400)
                                                         ---------       ---------       ---------

Balance at December 31, 1996 ......................         49,840        (226,318)       (176,478)
   Net loss .......................................             --         (16,757)        (16,757)
   Sale of equipment to affiliate .................          2,578              --           2,578
   Excess of investment over cost basis of
       net assets acquired from indirect parent ...         (2,200)             --          (2,200)
                                                         ---------       ---------       ---------

Balance at December 31, 1997  .....................         50,218        (243,075)       (192,857)
   Net income .....................................             --          40,509          40,509
   Capital contribution received ..................          4,224              --           4,224
   Effectiveness fee on debt ......................          4,105              --           4,105
   Transfer of ownership interest in an affiliate .         (1,167)             --          (1,167)
                                                         ---------       ---------       ---------
Balance at December 31, 1998 ......................      $  57,380       $(202,566)      $(145,186)
                                                         =========       =========       =========

</TABLE>









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




                                       6
<PAGE>   8

                               LIGGETT GROUP INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                                               YEAR ENDED DECEMBER 31,
                                                                                      -----------------------------------------
                                                                                         1998            1997           1996
                                                                                      ---------       ---------       ---------
<S>                                                                                   <C>             <C>             <C>       
Cash flows from operating activities:
    Net income (loss)  .........................................................      $  40,509       $ (16,757)      $ (18,372)
    Adjustments to reconcile net income (loss) to net cash provided by operating
        activities:
      Depreciation and amortization ............................................          6,678           7,025           7,969
      Deferred income taxes ....................................................        (11,587)             --           3,800
      Gain on sale of property, plant and equipment ............................           (757)         (1,017)         (3,669)
      Gain on retirement of notes ..............................................             --          (2,963)             --
      Effectiveness fee on debt ................................................          3,648              --              --
      Non-cash stock-based expense .............................................          4,192              --              --
      Deferred finance charges and  debt discount
         written off ...........................................................            558             130              --
      Equity in (income) loss of affiliate .....................................             --            (498)          1,116
    Changes in assets and liabilities:
         Accounts receivable ...................................................         (5,016)          9,745           4,691
         Inventories ...........................................................          9,083          15,065           4,220
         Accounts payable ......................................................         (5,335)        (12,092)           (330)
         Accrued expenses ......................................................         (9,213)         (5,442)          8,479
         Non-current employee benefits .........................................           (508)           (172)           (276)
         Other, net ............................................................        (14,477)         12,027          (1,461)
                                                                                      ---------       ---------       ---------
             Net cash provided by operating activities .........................         17,775           5,051           6,167

Cash flows from investing activities:
    Proceeds received for options ..............................................        150,000              --              --
    Proceeds from sale of property, plant and equipment ........................          1,159           1,494           4,424
    Proceeds from sale of equipment to an affiliate ............................             --           3,000              --
    Capital expenditures .......................................................         (1,859)         (2,462)         (4,319)
    Investment in affiliates ...................................................             --          (2,200)         (5,500)
                                                                                      ---------       ---------       ---------
            Net cash provided by (used in) investing activities.................        149,300            (168)         (5,395)

Cash flows from financing activities:
    Repayments of long-term debt ...............................................       (144,919)         (4,775)           (254)
    Borrowings under revolving credit facility .................................        266,404         278,442         351,428
    Repayments under revolving credit facility .................................       (287,293)       (279,286)       (348,173)
    Deferred finance charges ...................................................           (439)           (149)            (18)
    Increase (decrease) in cash overdraft ......................................           (828)            885          (3,755)
                                                                                      ---------       ---------       ---------
            Net cash used in financing activities ..............................       (167,075)         (4,883)           (772)

Net change in cash and cash equivalents ........................................             --              --              --
Cash and cash equivalents:
    Beginning of period ........................................................             --              --              --
                                                                                      ---------       ---------       ---------
    End of period ..............................................................      $      --       $      --       $      --
                                                                                      =========       =========       =========
Supplemental cash flow information:
  Cash payments during the period for:
      Interest .................................................................      $  29,528       $  23,491       $  23,228
      Income taxes .............................................................      $     163       $     162       $     189


</TABLE>



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




                                       7
<PAGE>   9


                               LIGGETT GROUP INC.

                   Notes to Consolidated Financial Statements

                (Dollars in thousands, except per share amounts)

1.       BASIS OF PRESENTATION

         Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group Ltd.
("BGL"). Liggett is engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. Certain management and administrative
functions are performed by affiliates (see Note 14).

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.       Liquidity:

         On December 28, 1998, Liggett redeemed all of its 11.50% Series B and
19.75% Series C Senior Secured Notes due 1999 (the "Series B Notes" and the
"Series C Notes", collectively, the "Liggett Notes"), together with accrued
interest, using $150,000 in proceeds received from the sale of options in an
entity that will hold certain Liggett trademarks. (See Note 3.) Liggett has a
$40,000 revolving credit facility expiring March 8, 2000 (the "Facility"), under
which $2,538 was outstanding at December 31, 1998 and $18,607 was available to
the Company. As of December 31, 1998, Liggett had net worth and working capital
deficiencies of $145,186 and $147,604, respectively.

b.       Principles of Consolidation

         The consolidated financial statements include the accounts of Liggett
and its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve"), Cigarette
Exporting Company of America Ltd. ("CECOA") and Carolina Tobacco Express
Company ("CTEC"). Intercompany accounts and transactions have been eliminated.

c.       Estimates and Assumptions

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1998 and 1997
and the reported amounts of revenues and expenses during the three year period
ended December 31, 1998. Significant estimates subject to material changes in
the near term include deferred tax assets, allowance for doubtful accounts,
promotional accruals, sales returns and allowances, actuarial assumptions of
pension plans and litigation and defense costs. Actual results could differ from
those estimates.

d.       Per Share Data

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

e.       Inventories

         Inventories are valued at the lower of cost (LIFO) or market. Although
portions of leaf tobacco inventories may not be used or sold within one year
because of the time required for aging, they are included in current assets,
which is common practice in the industry. It is not practicable to determine the
amount that will not be used or sold within one year.




                                       8
<PAGE>   10

f.       Property, Plant and Equipment

         Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets which are twenty
years for buildings and four to ten years for machinery and equipment.

         Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. The cost
and related accumulated depreciation of property, plant and equipment are
removed from the accounts upon retirement or other disposition and any resulting
gain or loss is reflected in operations.

         The Company is required to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Accordingly, when indicators of impairment are
present, the Company evaluates the carrying value of property, plant and
equipment and intangibles in relation to the operating performance and estimates
of future discounted cash flows of the underlying business.

g.       Trademarks

         Trademarks are amortized using the straight-line method over twelve
years. Amortization expense for the years ended December 31, 1998, 1997 and 1996
amounted to $1,419, $1,723 and $1,726, respectively. Management periodically
reviews the carrying value of trademarks to determine whether asset values are
impaired.

h.       Sales and Sales Returns

         Revenue from sales is recognized upon the shipment of finished goods to
customers. The Company provides for expected sales returns, net of related
inventory cost recoveries. As Liggett does not have any other lines of business,
the Company's financial position and its results of operations could be
materially adversely affected by significant unit sales volume declines,
litigation and defense costs, increased tobacco costs or reductions in the
selling price of cigarettes.

i.       Advertising and Promotional Costs

         Advertising and promotional costs are expensed as incurred. Advertising
expenses were $44,540, $40,534 and $74,238 for the years ended December 31,
1998, 1997 and 1996, respectively.

j.       Employee Benefits

         The Company sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such benefits
involves an estimate of unpaid claims as of December 31, 1998 and 1997 which are
subject to significant fluctuations in the near term.

         BGLS maintains defined benefit retirement plans for substantially all
of the Company's employees. The Company records as an expense the portion of
BGLS' annual funding requirements applicable to the Company.

         The Company sponsors a postretirement benefit plan and records an
actuarially determined liability and charges operations for the estimated cost
of postretirement benefits for current employees and retirees.




                                       9
<PAGE>   11


k.       Income Taxes

         Deferred taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for tax purposes as well as tax credit carryforwards
and loss carryforwards. These deferred taxes are measured by applying currently
enacted tax rates. A valuation allowance reduces deferred tax assets when it is
deemed more likely than not that future taxable income will be insufficient to
realize some portion or all of the deferred tax assets.

l.       Legal Costs

         The Company's accounting policy is to accrue legal and other costs
related to contingencies as services are performed.

m.       Fair Value of Financial Instruments

         The estimated fair values of the Liggett Notes at December 31, 1997 was
based upon market quotations (see Note 11). The carrying amount of borrowings
outstanding under the revolving credit facility and other long-term debt is a
reasonable estimate of fair value, based upon estimated current borrowing rates
for loans with similar terms and maturities. The estimates 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.

n.       New Accounting Pronouncements.

         The Company adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"), for the year ended December 31, 1998. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information and changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
useful. The Company has not yet determined the impact of this pronouncement.

3.       PHILIP MORRIS BRAND TRANSACTIONS

         On November 20, 1998, Liggett and BGL entered into a definitive
agreement with Philip Morris Incorporated ("PM") which provided for PM to
purchase options in an entity which will hold three cigarette brands, L&M,
CHESTERFIELD AND LARK (the "Marks"), held by Liggett's subsidiary Eve. As
contemplated by the agreement, Liggett and PM entered into additional agreements
(collectively, the "PM Agreements") on January 12, 1999 to effectuate the
transactions.

         Under the terms of the PM Agreements, Eve will contribute the Marks to
Brands LLC ("LLC"), a newly-formed limited liability company, in exchange for
100% of two classes of LLC interests, the Class A Voting Interest (the "Class A
Interest") and the Class B Redeemable Nonvoting Interest (the "Class B
Interest"). PM acquired two options to purchase such interests (the "Class A
Option" and the "Class B Option"). On December 2, 1998, PM paid Eve a total of
$150,000 for such options, $5,000 for the Class A Option and $145,000 for the
Class B Option. The payments were used to fund the redemption of the Liggett
Notes on December 28, 1998. (Refer to Note 11).

         The Class A Option entitles PM to purchase the Class A Interest for
$10,100. The statutory waiting period under the Hart-Scott-Rodino Act regarding
the exercise by PM of the Class A Option expired on February 12, 1999. On March
19, 1999, PM exercised the Class A Option with the closing scheduled for June
10, 1999, subject to customary closing conditions.





                                       10
<PAGE>   12

         The Class B Option will entitle PM to purchase the Class B Interest for
$139,900. The Class B Option will be exercisable during the 90-day period
beginning on December 2, 2008, with PM being entitled to extend the 90-day
period for up to an additional six months under certain circumstances. The Class
B Interest will also be redeemable by the LLC for $139,900 during the same
period the Class B Option may be exercised.

         The LLC will seek to borrow $134,900 (the "Loan") from a lending
institution. The Loan will be guaranteed by Eve and collateralized by a pledge
by the LLC of the Marks and of the LLC's interest in the trademark license
agreement (discussed below) and by a pledge by Eve of its Class B Interest. In
connection with the closing of the Class A Option, the LLC will distribute the
Loan proceeds to Eve with respect to its Class B Interest. The cash exercise
price of the Class B Option and the LLC's redemption price will be reduced by
the amount distributed to Eve. Upon PM's exercise of the Class B Option or the
LLC's exercise of its redemption right, PM or the LLC, as relevant, will be
required to procure Eve's release from its guaranty. The Class B Interest will
be entitled to a guaranteed payment of $500 each year, with the Class A Interest
allocated all remaining LLC income or loss.

         The LLC will grant PM an exclusive license of the Marks for an 11-year
term at an annual royalty based on sales of cigarettes under the Marks, subject
to a minimum annual royalty payment equal to the annual debt service obligation
on the Loan plus $1,000.

         If PM fails to exercise the Class B Option, Eve will have an option to
put its Class B Interest to PM, or PM's designees (the "Eve Put Option"), at a
put price that is $5,000 less than the exercise price of the Class B Option (and
includes PM's procuring Eve's release from its Loan guarantee). The Eve Put
Option is exercisable at any time during the 90-day period beginning March 2,
2010.

         If the Class B Option, the LLC's redemption right and the Eve Put
Option expire unexercised, the holder of the Class B Interest will be entitled
to convert the Class B Interest, at its election, into a Class A Interest with
the same rights to share in future profits and losses, the same voting power and
the same claim to capital as the entire existing outstanding Class A Interest,
i.e., a 50% LLC interest.

         The $150,000 in proceeds received from the sale of the Class A and B
Options is presented as a liability on the consolidated balance sheet until the
closing of the exercise of the Class A Option and the distribution of the Loan
proceeds which is scheduled to occur during the second quarter of 1999. Upon
such closing, PM will obtain control of the LLC, and the Company anticipates,
based on the expected structure of the transactions, to recognize a gain in its
consolidated financial statements to the extent of the total cash proceeds
received from the payment of the option fees, the exercise of the Class A Option
and the distribution of the Loan proceeds.

4.       CHANGES IN ACCOUNTING ESTIMATES

         Liggett increased its valuation allowance for deferred tax assets by
$3,800 in the third quarter of 1996. In December 1996, Liggett increased its
estimate of coupon promotions which resulted in a decrease in the Company's
operating income of $1,800 for the year ended December 31, 1996.

         As a consequence of certain litigation settlements (see Note 13),
Liggett charged approximately $16,421 to operations in the fourth quarter of
1997. As a result of Liggett's participation in the Master Settlement Agreement
(see Note 13), net charges accrued for the prior settlements were reversed in
1998.




                                       11
<PAGE>   13


5.       CONCENTRATIONS OF CREDIT RISK

         Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.

         Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett's largest
single customer accounted for approximately 26.9% in 1998, approximately 19.4%
in 1997 and approximately 13.9% of net sales in 1996. Sales to this customer
were primarily in the private label discount market segment. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the remainder of the Company's customer base.
Ongoing credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's estimates.

6.       INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>

                                                         December 31,     December 31,
                                                             1998            1997     
                                                         ------------     ------------
<S>                                                        <C>            <C>     
Leaf tobacco ........................................      $ 10,796       $ 19,088
Other raw materials .................................         1,741          2,123
Work-in-process .....................................         1,828          1,926
Finished goods ......................................        12,231         13,273
Replacement parts and supplies ......................         3,150          3,545
                                                           --------       --------
Inventories at current cost .........................        29,746         39,955
LIFO adjustment .....................................        (3,772)        (4,898)
                                                           --------       --------
Inventories at LIFO cost ............................      $ 25,974       $ 35,057
                                                           ========       ========
</TABLE>


         The Company has a leaf inventory management program whereby, among
other things, it is committed to purchase certain quantities of leaf tobacco.
The purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at the
date of the commitment. Liggett had leaf tobacco purchase commitments of
approximately $6,721 at December 31, 1998.

7.       SALE OF ASSETS

         On November 20, 1998 Liggett and BGL sold options to PM to purchase
interests in the LLC. (See Note 3.)

         On May 14, 1996, Liggett sold to the County of Durham certain surplus
realty in Durham, North Carolina, for a sale price of $4,300 and recognized a
gain of approximately $3,600.

         On April 29, 1996, Liggett executed a definitive agreement (as amended)
with Blue Devil Ventures for the sale of certain surplus realty in Durham, North
Carolina, for a sale price of $2,200. The transaction closed on March 11, 1997.
A gain of $1,147 was recognized, net of costs required to prepare the properties
for sale and selling costs. (See Note 14 for sales to affiliates.)



                                       12
<PAGE>   14


8.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>

                                                          December 31,   December 31,
                                                             1998           1997     
                                                          ------------   -----------
<S>                                                        <C>            <C>     
Land and improvements ...............................      $    412       $    411
Buildings ...........................................         5,823          6,228
Machinery and equipment .............................        40,853         40,569
                                                           --------       --------
Property, plant and equipment .......................        47,088         47,208
Less accumulated depreciation .......................       (30,893)       (29,452)
                                                           --------       --------
Property, plant and equipment, net ..................      $ 16,195       $ 17,756
                                                           ========       ========

</TABLE>

         In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase from a third party. The loan, which is
collateralized by the equipment, is payable in 60 monthly installments of $56
including annual interest of 7.67% with a final payment of $2,550.

9.       EMPLOYEE BENEFITS PLANS

         DEFINED BENEFIT RETIREMENT PLANS

         Prior to 1994, substantially all of Liggett's employees participated in
two noncontributory defined benefit retirement plans sponsored by BGLS. The
Company records as an expense the portion of BGLS' annual funding requirements
applicable to the Company. There was no pension expense recorded in 1998, 1997
or 1996.

         FUTURE PENSION BENEFITS TO BE FUNDED BY BGLS

         Actuarial estimates of the total future minimum pension benefits to be
funded by BGLS, prior to the effect of unamortized purchase accounting
adjustments, are as follows:

          1999  ............................      $  200
          2000  ............................         200
          2001  ............................         200
          2002  ............................         200
          2003  ............................         200
          Thereafter .......................       2,000
                                                  ------
              Total ........................      $3,000
                                                  ======


         POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLANS

         Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Effective January 1, 1995, retirees are required to fund 100% of
participant medical premiums.



                                       13
<PAGE>   15


      The components of net periodic postretirement benefit cost for the years
      ended December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>

                                                                        1998         1997         1996
                                                                        ----         ----         ----
      <S>                                                              <C>           <C>          <C>
      Service cost benefits earned during the year............         $  43         $  24        $  68
      Interest cost on accumulated postretirement
           benefit obligation.................................           583           703          829
      Charge for special termination benefits.................                          47          137
      Amortization of net (gain) loss.........................          (284)         (193)         (92)
                                                                        ----          ----         ----
      Net periodic postretirement benefit expense.............          $342          $581         $942
                                                                        ====          ====         ====

</TABLE>

      The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") at December 31, 1998 and 1997
applicable to each employee group for benefits:

<TABLE>
<CAPTION>

                                                                          1998             1997
                                                                          ----             ----
<S>                                                                    <C>                <C>      
Change in benefit obligation:
     Benefit obligation at Janaury 1..........................         $ (8,178)          $ (9,225)
     Service cost.............................................              (43)               (24)
     Interest cost............................................             (583)              (703)
     Benefits paid............................................              934                960
     Actuarial (losses) gains.................................           (1,246)               814
                                                                       --------           --------
     Benefit obligation at December 31........................         $ (9,116)          $ (8,178)
                                                                       ========           ========

Change in plan assets:
     Contributions............................................         $    934           $    960
     Benefits paid............................................             (934)              (960)
                                                                       --------           --------
     Fair value of plan assets at December 31.................         $                  $
                                                                       ========           ========

Accumulated post retirement benefit obligation in excess
         of the plan assets..................................         $ (9,116)          $ (8,178)
     Unrecognized actuarial gains ...........................           (2,462)            (3,992)
Purchase accounting valuation adjustments relating to
     income taxes............................................              676              1,002   
                                                                       --------           --------
Postretirement liability included in the December 31 
     balance sheet...........................................         $(10,902)          $(11,168)
                                                                       ========           ========

</TABLE>
      The APBO at December 31, 1998 and 1997 was determined using discount rates
      of 7.5% and 7.5%, respectively, and a health care cost trend rate of 4% in
      1998 and 1997. A 1% increase in the trend rate for health care costs would
      have increased the APBO and net periodic postretirement benefit cost by
      $363 and $26, respectively, for the year ended December 31, 1998. The
      Company does not hold any assets reserved for use in the plan.

         PROFIT SHARING PLANS

         Liggett's 401(k) plans originally called for Company contributions
matching up to a 3% employee contribution, plus additional Company contributions
of up to 6% of salary based on the achievement of Company profit objectives.
Effective January 1, 1994, the Company suspended the 3% match for the salaried
employees' 401(k) Plan, but reinstated it on April 1, 1996. The Company
contributed and expensed $469, $497 and $591 to the 401(k) plans for the years
ended December 31, 1998, 1997 and 1996, respectively.

10.      INCOME TAXES

         Liggett's operations are included in the consolidated federal income
tax return of its indirect parent, BGL. Pursuant to a tax allocation agreement,
the Company's federal income tax provision is calculated as if the Company filed
a separate federal income tax return except that the tax sharing agreement with
BGL effectively limits the ability of the Company to carry back losses for
refunds.




                                       14
<PAGE>   16


         The amounts provided for income taxes are as follows:

<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                                           -------------------------------------
                                                             1998           1997           1996
                                                           --------       --------      --------
<S>                                                        <C>            <C>           <C>     
Current:
    Federal .........................................      $    374       $     --      $     --
    State ...........................................            --             --            --

Deferred:
    Federal .........................................       (11,587)            --         3,800
    State ...........................................            --             --            --
                                                           --------       --------      --------
Total tax provision .................................      $(11,213)      $     --      $  3,800
                                                           ========       ========      ========

</TABLE>

         Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>

                                                        1998                           1997
                                                ----------------------       ----------------------
                                                     Deferred Tax                  Deferred Tax
                                                ----------------------       ----------------------
                                                 Asset       Liability        Asset       Liability
                                                --------     ---------       --------     ---------
<S>                                             <C>           <C>            <C>           <C>     
Sales and product allowances .............      $  3,465      $     --       $ 1,738       $     --
Inventory ................................           560         1,220           457          1,568
Coupon accruals ..........................         1,004            --         2,369             --
Property, plant and equipment ............            --         3,695            --          4,427
Employee benefit plan accruals ...........         4,289            --         4,680             --
USDA marketing assessment ................           471            --         1,312             --
Tobacco litigation settlements ...........         1,565            --         7,872             --
Difference in basis in investment ........            --            --         2,535             --
Net operating loss carryforward ..........         5,148            --        11,506             --
Valuation allowance ......................            --            --       (26,474)            --
Reclassifications ........................            --            --        (5,995)        (5,995)
                                                --------      --------       --------       --------
Total deferred taxes .....................      $ 16,502      $  4,915       $     --       $     --
                                                ========      ========       ========       ========
</TABLE>
         The Company reversed its valuation allowance against deferred tax 
assets in 1998, based on the weight of evidence that it is more likely than not
that its deferred tax assets will be realized.

         Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rates are summarized as follows:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                           ---------------------------------------
                                                             1998           1997           1996
                                                           --------       --------       --------
<S>                                                        <C>            <C>            <C>      
Income (loss) before income taxes ...................      $ 29,296       $(16,757)      $(14,572)
                                                           ========       ========       ========

Federal income tax at statutory rates ...............      $ 10,253       $ (5,865)      $ (5,100)
Increases (decreases) resulting from:
    State income tax expense (benefit) net of
       federal income tax expense (benefit)  ........            --             --           (634)
    Alternative Minimum Tax .........................           374             --             --
    Other, net ......................................         4,634           (596)          (247)
    Change in valuation allowance ...................       (26,474)         6,461          9,781
                                                           --------       --------       --------
Total tax provision .................................      $(11,213)      $     --       $  3,800
                                                           ========       ========       ========

</TABLE>




                                       15
<PAGE>   17


         As of December 31, 1998, the Company's net operating loss ("NOL")
carryforward pursuant to its tax sharing agreement with BGL is approximately
$13,000 which expires from 2007 to 2012. However, if the Company were
deconsolidated from BGL, its allocable share of NOL could be significantly
different. The liability method of accounting for deferred income taxes requires
a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company established a valuation allowance
against deferred tax assets of $26,474 at December 31, 1997.

11.      LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                          December 31,
                                                           ---------------------------------------
                                                                    1998                   1997
                                                           -------------------------     --------- 
                                                           Estimated      Carrying       Carrying
                                                           Fair Value      Value          Value
                                                           ----------     --------       --------
<S>                                                        <C>            <C>            <C>      
11.5% Senior Secured Notes due February 1, 1999
   net of unamortized discount of $ -0-  and $206 ...      $      --      $      --      $ 112,406
Variable Rate Series C Senior Secured Notes due
   February 1, 1999 .................................             --             --         32,279
Borrowings outstanding under revolving credit
   facility .........................................          2,538          2,538         23,427
Other ...............................................             --             --             28
                                                           ---------      ---------      ---------
                                                               2,538          2,538        168,140
Current portion .....................................             --             --            (28)
                                                           ---------      ---------      ---------
Amount Due After One Year ...........................      $   2,538      $   2,538      $ 168,112
                                                           =========      =========      =========
</TABLE>

         SENIOR SECURED NOTES

              On February 14, 1992, Liggett issued $150,000 in Series B Notes.
Interest on the Series B Notes was payable semiannually on February 1 and August
1 at an annual rate of 11.5%. The Liggett Series B and Series C Notes, which
were issued in 1994 and are discussed below, required mandatory principal
redemptions of $7,500 on February 1 in each of the years 1993 through 1997 and
$37,500 on February 1, 1998 with the balance of the Liggett Notes due on
February 1, 1999. In February 1997, $7,500 of the Series B Notes were purchased
using revolver availability and credited against the mandatory redemption
requirements. The transaction resulted in a net gain of $2,963. The Liggett
Notes were redeemed on December 28, 1998 at a price equal to 100% of the
principal amount together with accrued interest. As discussed in Note 3,
proceeds of $150,000 from the purchase by PM of the two options to purchase the
Class A Interest and the Class B Interest in the LLC were used to fund the
redemption.

              On January 30, 1998, with the consent of the required majority of
the holders of the Liggett Notes, Liggett had entered into various amendments to
the Indenture governing the Liggett Notes, which provided, among other things,
for a deferral of the February 1, 1998 mandatory redemption payment of $37,500
to the date of final maturity of the Liggett Notes on February 1, 1999. In
connection with the deferral, on February 2, 1998, the Company issued 483,002
shares of the Company's common stock to the holders of record on January 15,
1998 of the Liggett Notes. As a result of this transaction, Liggett recorded a
deferred charge of $4,105 during the first quarter of 1998 reflecting the fair
value of the instruments issued. This deferred charge was amortized over a
period of eleven months.





                                       16
<PAGE>   18

         The Series C Notes had the same terms (other than interest rate which
was 19.75%) and stated maturity as the Series B Notes. As discussed above, they
were also redeemed on December 28, 1998 together with accrued interest.

         REVOLVING CREDIT FACILITY

         On March 8, 1994, Liggett entered into the Facility under which it can
borrow up to $40,000 (depending on the amount of eligible inventory and
receivables as determined by the lenders) from a syndicate of commercial
lenders. The Facility, which expires March 8, 2000, is collateralized by all
inventories and receivables of the Company. Availability under the Facility was
approximately $18,607 based upon eligible collateral at December 31, 1998.
Borrowings under the Facility whose interest is calculated at a rate equal to
1.5% above Philadelphia National Bank's prime rate bore a rate of 9.25% at
December 31, 1998. The Facility requires Liggett's compliance with certain
financial and other covenants including restrictions on the payment of cash
dividends and distributions by Liggett. In addition, the Facility, as amended
April 8, 1998, imposes requirements with respect to Liggett's permitted maximum
adjusted net worth (not to fall below a deficit of $195,000 as computed in
accordance with the agreement, this computation was $141,414 at December 31,
1998) and net working capital (not to fall below a deficit of $17,000 as
computed in accordance with the agreement, this computation was $6,168 at
December 31, 1998).

         On August 29, 1997, the Facility was amended to permit Liggett to
borrow an additional $6,000 which was used on that date in making the interest
payment of $9,700 due on August 1, 1997 to the holders of the Liggett Notes.
BGLS guaranteed the additional $6,000 advance under the Facility and
collateralized the guarantee with $6,000 in cash, deposited with Liggett's
lender. At December 31, 1998, BGLS had recovered the $6,000 collateral from the
lender together with accrued interest.

12.      OPERATING LEASES

         At December 31, 1998, the Company has operating leases for building
space and computer equipment. The future minimum lease payments are as follows:

          1999  ............................      $1,172
          2000 .............................         458
          2001 .............................          --
          2002 .............................          --
          2003 .............................          --
                                                  ------
               Total .......................      $1,630
                                                  ======

         Rental expense for the years ended December 31, 1998, 1997 and 1996
amounted to approximately $2,068, $2,919 and $3,121, respectively.


13.      COMMITMENTS AND CONTINGENCIES

         TOBACCO-RELATED LITIGATION:

                  OVERVIEW. Since 1954, Liggett and other United States
cigarette manufacturers have been named as defendants in numerous direct and
third-party actions predicated on the theory that cigarette manufacturers should
be liable for damages from cancer and other adverse health effects alleged to
have been caused by cigarette smoking or by exposure to secondary smoke
(environmental tobacco smoke, "ETS") from cigarettes. These cases are reported
hereinafter as though having been commenced against Liggett (without regard to
whether such cases were actually commenced against Liggett or BGL). There 




                                       17
<PAGE>   19

has been a noteworthy increase in the number of cases commenced against Liggett
and the other cigarette manufacturers in recent years. The cases generally fall
into four categories: (i) smoking and health cases alleging personal injury
brought on behalf of individual smokers ("Individual Actions"); (ii) smoking and
health cases alleging personal injury and purporting to be brought on behalf of
a class of individual plaintiffs ("Class Actions"); (iii) health care cost
recovery actions brought by various governmental entities ("Governmental
Actions"); and (iv) health care cost recovery actions brought by third-party
payors including insurance companies, union health and welfare trust funds,
asbestos manufacturers and others ("Third-Party Payor Actions"). As new cases
are commenced, defense costs and the risks attendant to the inherent
unpredictability of litigation continue to increase. The future financial impact
of the risks and expenses of litigation and the effects of the tobacco
litigation settlements discussed below is not quantifiable at this time. In 1996
and 1997, Liggett incurred counsel fees and costs in connection with
tobacco-related litigation in the amount of approximately $3,500 and $5,750,
respectively. Certain fees and expenses were paid by others in the industry,
but, this assistance terminated in 1997. In 1998, Liggett incurred counsel fees
and costs totaling approximately $7,828.

         INDIVIDUAL ACTIONS. As of December 31, 1998, there were approximately
270 cases pending against Liggett, and in most cases the other tobacco
companies, where individual plaintiffs allege injury resulting from cigarette
smoking, addiction to cigarette smoking or exposure to ETS and seek compensatory
and, in some cases, punitive damages. Of these, 89 are pending in Florida, 91 in
New York, 29 in Massachusetts and 19 in Texas. The balance of the individual
cases were pending in 21 states. There are four individual cases pending where
Liggett is the only named defendant.

         The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability and
violations of deceptive trade practices laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. Defenses raised
by defendants in these cases include lack of proximate cause, assumption of the
risk, comparative fault and/or contributory negligence, lack of design defect,
statute of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.

         CLASS ACTIONS. As of December 31, 1998, there were approximately 50
actions pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named defendant.
Two of these cases, FLETCHER, ET AL. v. BROOKE GROUP LTD., ET AL. and WALKER, ET
AL. v. LIGGETT GROUP INC., ET AL., have been settled by the Company, subject to
court approval. These two settlements are more fully discussed below under the
"Settlements" section.

         In October 1991, an action entitled BROIN, ET AL. v. PHILIP MORRIS
INCORPORATED, ET AL., Circuit Court of the Eleventh Judicial District in and for
Dade County, Florida, was filed against Liggett and others. This case was
brought by plaintiffs on behalf of all flight attendants that worked or are
presently working for airlines based in the United States and who never
regularly smoked cigarettes but allege that they have been damaged by
involuntary exposure to ETS. In October 1997, the other major tobacco companies
settled this matter, which settlement provides for a release of Liggett and BGL.
In February 1998, the Circuit Court approved the settlement; however, an
objector filed a Notice of Appeal of the settlement in the Third District Court
of Appeal. (See "Subsequent Events" below.)

         In March 1994, an action entitled CASTANO, ET AL. v. THE AMERICAN
TOBACCO COMPANY INC., ET AL., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged addiction
to nicotine. In February 1995, the District Court granted plaintiffs' motion for
class certification (the "Class Certification Order").





                                       18
<PAGE>   20

         In May 1996, the Court of Appeals for the Fifth Circuit reversed the
Class Certification Order and instructed the District Court to dismiss the class
complaint. The Fifth Circuit ruled that the District Court erred in its analysis
of the class certification issues by failing to consider how variations in state
law affect predominance of common questions and the superiority of the class
action mechanism. The appeals panel also held that the District Court's
predominance inquiry did not include consideration of how a trial on the merits
in CASTANO would be conducted. The Fifth Circuit further ruled that the
"addiction-as-injury" tort is immature and, accordingly, the District Court
could not know whether common issues would be a "significant" portion of the
individual trials. According to the Fifth Circuit's decision, any savings in
judicial resources that class certification may bring about were speculative and
would likely be overwhelmed by the procedural problems certification brings.
Finally, the Fifth Circuit held that in order to make the class action
manageable, the District Court would be forced to bifurcate issues in violation
of the Seventh Amendment.

         The extent of the impact of the CASTANO decision on tobacco-related
class action litigation is still uncertain, although the decertification of the
CASTANO class by the Fifth Circuit may preclude other federal courts from
certifying a nationwide class action for trial purposes with respect to
tobacco-related claims. The CASTANO decision has had to date, however, only
limited effect with respect to courts' decisions regarding narrower
tobacco-related classes or class actions brought in state rather than federal
court. For example, since the Fifth Circuit's ruling, courts in New York,
Louisiana and Maryland have certified "addiction-as-injury" class actions that
covered only citizens in those states. Two class actions pending in state court
in Florida have also been certified one of which, the BROIN case, was settled in
1997. The CASTANO decision has had no measurable impact on litigation brought by
or on behalf of single individual claimants.

         Class certification motions are pending in a number of putative class
actions. Class certification has been denied or reversed in 13 actions while
classes remain certified in two cases in Florida and Maryland. A number of class
certification decisions are on appeal.

         GOVERMENTAL ACTIONS. As of December 31, 1998, actions against Liggett
and BGL were filed by each of the 50 states and certain territories. As more
fully discussed below, Liggett and BGL have settled these actions. In addition,
actions against Liggett and BGL have been filed by foreign countries and
counties, municipalities and public hospitals. As of December 31, 1998, there
were approximately 15 Governmental Actions pending against Liggett. In these
proceedings, the governmental entities seek reimbursement for Medicaid and other
health care expenditures allegedly caused by use of tobacco products. The claims
asserted in these health care cost recovery actions vary. In most of these
cases, plaintiffs assert the equitable claim that the tobacco industry was
"unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other claims made
by some but not all plaintiffs include the equitable claim of indemnity, common
law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and federal
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under RICO.

         THIRD-PARTY PAYOR ACTIONS. As of December 31, 1998, there were
approximately 70 Third-Party Payor Actions pending against Liggett. The claims
in these cases are similar to those in the Governmental Actions but have been
commenced by insurance companies, union health and welfare trust funds, asbestos
manufacturers and others. In April 1998, a group known as the "Coalition for
Tobacco Responsibility", which represents Blue Cross and Blue Shield Plans in
more than 35 states, filed federal lawsuits against the industry seeking payment
of health-care costs allegedly incurred as a result of cigarette smoking and
ETS. The lawsuits were filed in Federal District Courts in New York, Chicago,
and Seattle and seek billions of dollars in damages. The lawsuits allege
conspiracy, fraud, misrepresentation and violation of federal 




                                       19
<PAGE>   21

racketeering and antitrust laws as well as other claims. In other Third-party
Payor Actions claimants have set forth several additional theories of relief
sought: funding of corrective public education campaigns relating to issues of
smoking and health; funding for clinical smoking cessation programs;
disgorgement of profits from sales of cigarettes; restitution; treble damages;
and attorneys' fees. Nevertheless, no specific amounts are provided. It is
understood that requested damages against the tobacco company defendants in
these cases might be in the billions of dollars. (See "Subsequent Events"
below.)

         SETTLEMENTS. In March 1996, Liggett and BGL entered into an agreement,
subject to court approval, to settle the CASTANO class action tobacco
litigation. Under the CASTANO settlement agreement, upon final court approval of
the settlement, the CASTANO class would be entitled to receive up to five
percent of Liggett's pretax income (income before income taxes) each year (up to
a maximum of $50,000 per year) for the next 25 years, subject to certain
reductions provided for in the agreement and a $5,000 payment from Liggett if
Liggett or BGL fail to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of
settlement. Liggett and BGL have the right to terminate the CASTANO settlement
under certain circumstances. On March 14, 1996, Liggett, the CASTANO Plaintiffs
Legal Committee and the CASTANO plaintiffs entered into a letter agreement.
According to the terms of the letter agreement, for the period ending nine
months from the date of Final Approval (as defined in the letter), if granted,
of the CASTANO settlement or, if earlier, the completion by Liggett or BGL of a
combination with any defendant in CASTANO, except PM, the CASTANO plaintiffs and
their counsel agree not to enter into any more favorable settlement agreement
with any CASTANO defendant which would reduce the terms of the CASTANO
settlement agreement. If the CASTANO plaintiffs or their counsel enter into any
such settlement during this period, they shall pay Liggett $250,000 within 30
days of the more favorable agreement and offer Liggett and BGL the option to
enter into a settlement on terms at least as favorable as those included in such
other settlement. The letter agreement further provides that during the same
time period, and if the CASTANO settlement agreement has not been earlier
terminated by Liggett in accordance with its terms, Liggett and its affiliates
will not enter into any business transaction with any third party which would
cause the termination of the CASTANO settlement agreement. If Liggett or its
affiliates enter into any such transaction, then the CASTANO plaintiffs will be
entitled to receive $250,000 within 30 days from the transacting party. In May
1996, the CASTANO Plaintiffs Legal Committee filed a motion with the United
States District Court for the Eastern District of Louisiana seeking preliminary
approval of the CASTANO settlement. In September 1996, shortly after the class
was decertified, the CASTANO plaintiffs withdrew the motion for approval of the
CASTANO settlement.

         In March 1996, March 1997 and March 1998, Liggett and BGL entered into
settlements of tobacco-related litigation with the Attorneys General of 45
states and territories. The settlements released Liggett and BGL from all
tobacco claims including claims for health care cost reimbursement and claims
concerning sales of cigarettes to minors.

         On November 23, 1998, PM, B&W, R.J. Reynolds Tobacco Company ("RJR")
and Lorillard Tobacco Company ("Lorillard") (collectively, the "Original
Participating Manufacturers" or "OPMs") and Liggett (together with the OPMs and
any other tobacco product manufacturer that becomes a signatory, the
"Participating Manufacturers") entered into the Master Settlement Agreement (the
"MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the United
States Virgin Islands, American Samoa and the Northern Marianas (collectively,
the "Settling States") to settle the asserted and unasserted health care cost
recovery and certain other claims of those Settling States. As described below,
Liggett and BGL had previous settlements with a number of these Settling States
and also had previously settled similar claims brought by Florida, Mississippi,
Texas and Minnesota.

         The MSA is subject to final judicial approval in each of the Settling
States, which approval has been obtained, to date, in 40 states and territories.

         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





                                       20
<PAGE>   22

cartoon characters in all tobacco advertising and promotion; limits each
Participating Manufacturer to one tobacco brand name sponsorship during any
12-month period; bans all outdoor advertising, with the exception of signs 14
square feet or less in dimension at retail establishments that sell tobacco
products; prohibits payments for tobacco product placement in various media;
bans gift offers based on the purchase of tobacco products without sufficient
proof that the intended recipient is an adult; prohibits Participating
Manufacturers from licensing third parties to advertise tobacco brand names in
any manner prohibited under the MSA; prohibits Participating Manufacturers from
using as a tobacco product brand name any nationally recognized non-tobacco
brand or trade name or the names of sports teams, entertainment groups or
individual celebrities; and prohibits Participating Manufacturers from selling
packs containing fewer than twenty cigarettes.

         The MSA also requires Participating Manufacturers to affirm corporate
principles to comply with the MSA and to reduce underage usage of tobacco
products and imposes requirements applicable to lobbying activities conducted on
behalf of Participating Manufacturers.

         Pursuant to the MSA, Liggett has no payment obligations unless its
market share exceeds 125% of its 1997 market share (the "Base Share"). In the
year following any year in which Liggett's market share does exceed the Base
Share, Liggett will pay on each excess unit an amount equal (on a per-unit
basis) to that paid during such following year by the OPMs pursuant to the
annual and strategic contribution payment provisions of the MSA, subject to
applicable adjustments, offsets and reductions. Pursuant to the annual and
strategic contribution payment provisions of the MSA, the OPMs (and Liggett to
the extent its market share exceeds the Base Share) will pay the following
annual amounts (subject to certain adjustments):

            Year                          Amount
            ----                          ------
          2000                          $4,500,000
          2001                          $5,000,000
          2002 - 2003                   $6,500,000
          2004 - 2007                   $8,000,000
          2008 - 2017                   $8,139,000
          2018 and each                 $9,000,000
               year thereafter

         These annual payments will be allocated based on relative unit volume
of domestic cigarette shipments. The payment obligations under the MSA are the
several, and not joint, obligations of each Participating Manufacturer and are
not the responsibility of any parent or affiliate of a Participating
Manufacturer.

         The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. In the event
the MSA does not receive final judicial approval in any state or territory,
Liggett's prior settlement with that state or territory, if any, will be
revived.

         The states of Florida, Mississippi, Texas and Minnesota, prior to the
effective date of the MSA, negotiated and executed settlement agreements with
each of the other major tobacco companies separate from those settlements
reached previously with Liggett. Because these states' settlement agreements
with Liggett provided for "most favored nations" protection for both Liggett and
BGL, the payments due these states by Liggett (other than Minnesota and
Mississippi) have been eliminated. With respect to all non-economic obligations
under the previous settlements, both Liggett and BGL are entitled to the most
favorable provisions as between the MSA and each state's respective settlement
with the other major tobacco companies. Therefore, Liggett's non-economic
obligations to all states and territories are now defined by the MSA.





                                       21
<PAGE>   23

         In March 1997, Liggett, BGL and a nationwide class of individuals that
allege smoking-related claims filed a mandatory class settlement agreement in an
action entitled FLETCHER, ET AL. v. BROOKE GROUP LTD., ET AL., Circuit Court of
Mobile County, Alabama, where the court granted preliminary approval and
preliminary certification of the class, and in May 1997, a similar mandatory
class settlement agreement was filed in an action entitled WALKER, ET AL. v.
LIGGETT GROUP INC., ET AL., United States District Court, Southern District of
West Virginia. On July 2, 1998, Liggett, BGL and plaintiffs filed an amended
class action settlement agreement in FLETCHER which agreement was preliminarily
approved by the court on December 8, 1998. A hearing on final approval of the
settlement is scheduled for April 27, 1999. Effectiveness of the mandatory
settlement is conditioned on final court approval of the settlement. There can
be no assurance as to whether, or when, such court approval will be obtained.
Pursuant to the amended agreement, Liggett is required to pay to the class 7.5%
of Liggett's pre-tax income each year for 25 years, with a minimum annual
payment guarantee of $1,000 over the term of the agreement. The amended
agreement does not set forth a formula with respect to the distribution of
settlement proceeds to the class. If the court issues a final order and judgment
approving the settlement, such an order, Liggett anticipates, would preclude
further prosecution by class members of tobacco-related claims against both
Liggett and BGL. Under the Full Faith and Credit Act, a final judgment entered
in a nationwide class action pending in a state court has a preclusive effect
against any class member with respect to the claims settled and released. As the
class definition in FLETCHER encompasses all persons in the United States who
could claim injury as a result of cigarette smoking or ETS and any third-party
payor claimants, it is anticipated that, upon final order and judgment, all such
persons and third-party payor claimants would be barred from further prosecution
of tobacco-related claims against Liggett and BGL.

         The WALKER court also granted preliminary approval and preliminary
certification of the nationwide class; however, in August 1997, the court
vacated its preliminary certification of the settlement class, which decision is
currently on appeal. The WALKER court relied on the Supreme Court's decision in
AMCHEM PRODUCTS INC. v. WINDSOR in reaching its decision to vacate preliminary
certification of the class. In AMCHEM, the Supreme Court affirmed a decision of
the Third Circuit vacating the certification of a settlement class that involved
asbestos-exposure claims. The Supreme Court held that the proposed settlement
class did not meet the requirements of Rule 23 of the Federal Rules of Civil
Procedure for predominance of common issues and adequacy of representation. The
Third Circuit had held that, although classes could be certified for settlement
purposes, Rule 23's requirements had to be satisfied as if the case were going
to be litigated. The Supreme Court agreed that the fairness and adequacy of the
settlement are not pertinent to the predominance inquiry under Rule 23(b)(3),
and thus, the proposed class must have sufficient unity so that absent class
members can fairly be bound by decisions of class representatives.

         After the AMCHEM opinion was issued by the Supreme Court in June 1997,
objectors to Liggett's settlement in WALKER moved for decertification. Although
Liggett's settlement in the WALKER action is a "limited fund" class action
settlement proceeding under Rule 23(b)(1) and AMCHEM was a Rule 23 (b)(3) case,
the court in the WALKER action, nonetheless, decertified the WALKER class.
Applying AMCHEM to the WALKER case, the District Court, in a decision issued in
August 1997, determined that while plaintiffs in WALKER have a common interest
in "maximizing the limited fund available from the defendants," there remained
"substantial conflicts among class members relating to distribution of the fund
and other key concerns" that made class certification inappropriate.

         The AMCHEM decision's ultimate affect on the viability of both the
WALKER and FLETCHER settlements remains uncertain given the Fifth Circuit's
recent ruling reaffirming a limited fund class action settlement in IN RE
ASBESTOS LITIGATION ("AHEARN"). In June 1997, the Supreme Court remanded AHEARN
to the Fifth Circuit for consideration in light of AMCHEM. On remand, the Fifth
Circuit made two decisive distinctions between AMCHEM and AHEARN. First, the
AHEARN class action proceeded under Rule 23(b)(1) while AMCHEM was a Rule
23(b)(3) case, and second, in AHEARN, there was no allocation or difference in
award, according to nature or severity of injury, as there was in AMCHEM. The
Fifth Circuit concluded that all members of the class and all class
representatives share common interests and none of the uncommon questions
abounding in AMCHEM exist. On June 22, 1998, the Supreme Court granted
certiorari to review the Fifth Circuit decision.





                                       22
<PAGE>   24

         Liggett accrued approximately $4,000 for the present value of the fixed
payments under the March 1996 Attorneys General settlements and $16,902 for the
present value of the fixed payments under the March 1998 Attorneys General
settlements. As a result of Liggett's treatment under the MSA, $14,928 of net
charges accrued for the prior settlements were reversed in 1998.

         Copies of the various settlement agreements are filed as exhibits to
BGL's Form 10-K and the discussion herein is qualified in its entirety by
reference thereto.

         TRIALS. In July 1998, trial commenced in the ENGLE, ET AL. v. PHILIP
MORRIS INCORPORATED, ET al., case, a class action pending in Miami Dade County,
Florida, brought on behalf of all Florida residents allegedly injured by
smoking. Plaintiffs seek compensatory and punitive damages ranging into the
billions of dollars, as well as equitable relief including, but not limited to,
a medical fund for future health care costs, attorneys' fees and court costs.
The class consists of all Florida residents and citizens, and their survivors,
who claim to have suffered, presently suffer or have died from diseases and
medical conditions caused by their addiction to cigarettes that contain
nicotine.

         The current trial plan calls for the case to be tried in three
"Phases". Phase One, which is currently underway, involves evidence concerning
certain "common" class issues relating to the plaintiff class' causes of action.
Entitlement to punitive damages will be decided at the end of Phase One, but no
amount will be set at that time.

         If plaintiffs prevail in Phase One, the first two stages of Phase Two
will involve individual determinations of specific causation and other
individual issues regarding entitlement to compensatory damages for the class
representatives. Stage three of Phase Two will involve an assessment of the
amount of punitive damages, if any, that individual class representatives will
be awarded. Stage four of Phase Two will involve the setting of a percentage or
ratio of punitive damages for absent class members, assuming entitlement was
found at the end of Phase One.

         Phase Three of the trial will be held before separate juries to address
absent class members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages.

         Additional cases are currently scheduled for trial during 1999,
including two Third-Party Payor Actions brought by unions in Washington
(September) and New York (September), and three Class Actions in Alabama
(August), Wisconsin (September) and New York (November). Also, six Individual
Actions are currently scheduled for trial during 1999. Trial dates, however, are
subject to change.

         OTHER RELATED MATTERS. A grand jury investigation is being conducted by
the office of the United States Attorney for the Eastern District of New York
(the "Eastern District Investigation") regarding possible violations of criminal
law relating to the activities of The Council for Tobacco Research - USA, Inc.
(the "CTR"). Liggett was a sponsor of the CTR at one time. In May 1996, Liggett
received a subpoena from a Federal grand jury sitting in the Eastern District of
New York, to which Liggett has responded.




                                       23

<PAGE>   25

         In March 1996, and in each of March, July, October and December 1997,
Liggett and/or BGL received subpoenas from a Federal grand jury in connection
with an investigation by the United States Department of Justice (the "DOJ
Investigation") involving the industry's knowledge of: the health consequences
of smoking cigarettes; the targeting of children by the industry; and the
addictive nature of nicotine and the manipulation of nicotine by the industry.
Liggett has responded to the March 1996, March 1997 and July 1997 subpoenas and
is in the process of responding to the October and December 1997 subpoenas The
Company understands that the Eastern District Investigation and the DOJ
Investigation essentially have been consolidated into one investigation
conducted by the Department of Justice (the "DOJ"). Liggett and BGL are unable,
at this time, to predict the outcome of this investigation.

         In April 1998, BGL announced that Liggett had reached an agreement with
the DOJ to cooperate in both the Eastern District Investigation and the DOJ
Investigation. The agreement does not constitute an admission of any wrongful
behavior by Liggett. The DOJ has not provided immunity to Liggett and has full
discretion to act or refrain from acting with respect to Liggett in the
investigation.

         In September 1998, Liggett received a subpoena from a federal grand
jury in the Eastern District of Philadelphia investigating possible antitrust
violations in connection with the purchase of tobacco by and for tobacco
companies. Liggett has responded to this subpoena. Liggett and BGL are unable,
at this time, to predict the outcome of this investigation.

         Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against Liggett
or BGL. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Liggett is unable
to make a meaningful estimate with respect to the amount of loss that could
result from an unfavorable outcome of many of the cases pending against the
Company, because the complaints filed in these cases rarely detail alleged
damages. Typically, the claims set forth in an individual's complaint against
the tobacco industry pray for money damages in an amount to be determined by a
jury, plus punitive damages and costs. These damage claims are typically stated
as being for the minimum necessary to invoke the jurisdiction of the court.

         It is possible that Liggett's consolidated financial position, results
of operations or cash flow could be materially adversely affected by an
unfavorable outcome in any such tobacco-related litigation.

         Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rises to the level of
materiality. Liggett's management believes that current operations are conducted
in material compliance with all environmental laws and regulations. Management
is unaware of any material environmental conditions affecting its existing
facilities. 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, earnings or competitive position of Liggett.

         There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to smoking or tobacco product liability. Management is
of the opinion that the liabilities, if any, ultimately resulting from such
other proceedings, lawsuits and claims should not materially affect Liggett's
financial position, results of operations or cash flows.

         SUBSEQUENT EVENTS. On January 4, 1999, a federal judge in Seattle
dismissed a Third-Party Payor Action brought by seven Blue Cross/Blue Shields
against the tobacco industry. The court ruled that the insurance providers did
not have standing to bring the lawsuit. However, on February 26, 1999, a federal
judge in the Eastern District of New York denied pleas by the industry to
dismiss the Third-Party Payor Action brought by 24 Blue Cross/Blue Shields.

         On February 10, 1999, a state court jury in San Francisco awarded 
$51,500 in damages to a woman who claimed lung cancer from smoking Marlboro
cigarettes made by PM. The award includes $1,500 in compensatory damages and
$50,000 in punitive damages.





                                       24
<PAGE>   26

         On February 17, 1999, Liggett settled the IRON WORKERS LOCAL UNION NO.
17 INSURANCE FUND, ET AL. v. PHILIP MORRIS INC., ET AL. matter. This Third-Party
Payor Action was brought on behalf of all health and welfare union funds in Ohio
in order to recover monies allegedly expended to treat members' smoking-related
illnesses. Liggett has no payment obligations under the settlement unless
Liggett reaches a monetary settlement with any other health and welfare fund. On
March 18, 1999, a defense verdict was rendered in this action.

         On January 19, 1999, at the State of the Union Address, President
Clinton announced that the DOJ was preparing a litigation plan to take the
tobacco industry to court to recover monies that Medicare and other programs
allegedly expended to treat smoking-related illnesses. The effects of this
lawsuit cannot be predicted at this time; however, an adverse verdict could have
a material adverse effect on the Company and Liggett.

          On March 24, 1999, the Florida appeals court upheld the 1997 BROIN 
settlement involving the other major tabacco companies.

          On March 30, 1999, a state court jury in Portland awarded $80,311 in 
damages to the family of a deceased smoker who smoked Marlboro made by PM. The 
award includes $79,500 in punitive damages.

LEGISLATION AND REGULATION:

         In January 1993, the United States Environmental Protection Agency
("EPA") released a report on the respiratory effect of ETS which concludes that
ETS is a known human lung carcinogen in adults and in children, causes increased
respiratory tract disease and middle ear disorders and increases the severity
and frequency of asthma. In June 1993, the two largest of the major domestic
cigarette manufacturers, together with other segments of the tobacco and
distribution industries, commenced a lawsuit against the EPA seeking a
determination that the EPA did not have the statutory authority to regulate ETS,
and that given the current body of scientific evidence and the EPA's failure to
follow its own guidelines in making the determination, the EPA's classification
of ETS was arbitrary and capricious. Whatever the outcome of this litigation,
issuance of the report may encourage efforts to limit smoking in public areas.
In July 1998, the court ruled that the EPA made procedural and scientific
mistakes when it declared in its 1993 report that secondhand smoke caused as
many as 3,000 cancer deaths a year among nonsmokers.

         In February 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("TRQ") should be allocated.
Currently, tobacco imported under the TRQ is allocated on a "first-come,
first-served" basis, meaning that entry is allowed on an open basis to those
first requesting entry in the quota year. Others in the cigarette industry have
suggested an "end-user licensing" system under which the right to import tobacco
under the quota would be initially assigned based on domestic market share. Such
an approach, if adopted, could have a material adverse effect on Liggett and
BGL.

         In August 1996, the FDA filed in the Federal Register a Final Rule (the
"FDA Rule") classifying tobacco as a drug, asserting jurisdiction by the FDA
over the manufacture and marketing of tobacco products and imposing restrictions
on the sale, advertising and promotion of tobacco products. Litigation was
commenced in the United States District Court for the Middle District of North
Carolina challenging the legal authority of the FDA to assert such jurisdiction,
as well as challenging the constitutionality of the rules. The court, after
argument, granted plaintiffs' motion for summary judgment prohibiting the FDA
from regulating or restricting the promotion and advertising of tobacco products
and denied plaintiffs' motion for summary judgment on the issue of whether the
FDA has the authority to regulate access to, and labeling of, tobacco products.
The Fourth Circuit Court reversed the district court on appeal and on August 14,
1998 held that the FDA cannot regulate tobacco products because Congress had not
given them the authority to do so. Liggett and BGL support the FDA Rule and have
begun to phase in compliance with certain of the proposed interim FDA
regulations. See discussions of the CASTANO and Governmental Actions settlements
above.




                                       25
<PAGE>   27

         In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. In December 1997, the
United States District Court for the District of Massachusetts enjoined this
legislation from going into effect; however, in December 1997, Liggett began
complying with this legislation by providing ingredient information to the
Massachusetts Department of Public Health. Several other states have enacted, or
are considering, legislation similar to that enacted in Massachusetts.

         As part of the 1997 budget agreement approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002. Additionally, in
November 1998, the citizens of California voted in favor of a 50 cents per pack
tax on cigarettes sold in that state.

               In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
the effects of which, at this time, Liggett is not able to evaluate.

YEAR 2000 COSTS:

         Liggett utilizes management information systems and software technology
that may be affected by Year 2000 issues throughout its operations. The Company
has evaluated the costs to implement century date change compliant systems
conversions and is in the process of executing a planned conversion of its
systems prior to the Year 2000. To date, the focus of Year 2000 compliance and
verification efforts has been directed at the implementation of new customer
service, inventory control and financial reporting systems at each of the three
regional Strategic Business Units, part of the Company's reorganization which
began in January 1997. Liggett estimates that approximately $138 of the
expenditures related to this reengineering effort related to Year 2000
compliance, validation and testing. In January of 1998, Liggett initiated a
major conversion of factory accounting, materials management and information
systems at its Durham production facility with upgrades that have been
successfully tested for Year 2000 compliance. This conversion was completed in
November 1998. Program upgrades to Liggett's human resources and payroll
systems, budgeted at $160, are scheduled for completion in July of 1999.
Enhancements to the Company's finished goods inventory system are expected to be
completed in September 1999. It is anticipated that all factory, corporate,
field sales and physical distribution systems will be completed in sufficient
time to support Year 2000 compliance and verification.

         Although such costs may be a factor in describing changes in operating
profit in any given reporting period, the Company currently does not believe
that the anticipated costs of Year 2000 systems conversions will have a material
impact on its future consolidated results of operations. Based on the progress
Liggett has made in addressing Year 2000 issues and its strategy and timetable
to complete its compliance program, the Company does not foresee significant
risks associated with its Year 2000 initiatives at this time. Although the 
Company is in the process of confirming that service providers are adequately 
addressing Year 2000 issues, there can be no complete assurance of success, or 
that interaction with other service providers will not impair the Company's 
service.





                                       26
<PAGE>   28

14.      RELATED PARTY TRANSACTIONS

         During the third quarter of 1998, BGL contributed 470,000 shares of its
common stock to Liggett. On August 28, 1998, Liggett transferred the 470,000
shares of BGL common stock to members of a law firm which represents the Company
and BGL. The Company recognized charges of $1,686 related to this transaction.

         On March 12, 1998, BGL granted an option for 1,250,000 shares of BGL's
common stock to a law firm that represents Liggett and BGL. On October 12, 1998,
BGL amended the option agreement by reducing the original exercise price from
$17.50 per share to $6.00 per share and extending the initial exercise date on
all 1,250,000 shares to April 1, 2000, subject to earlier exercise under certain
circumstances. The option expires on March 31, 2003. The fair value of the
equity instrument was estimated based on the Black-Scholes option pricing model
and the following assumptions: volatility 77.6%, risk-free interest rate of
5.47%, expected life of two years and a dividend rate of 0%. Liggett will
recognize expenses of $5,113 over the vesting period.

         On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000. The difference of $2,578 between the sale price and the
carrying value is accounted for as a credit to contributed capital.

         On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat's tobacco operations from BOL, for $2,100. Liggett also acquired
on that date for $3,400 a ten-year option to purchase from BOL at the same per
share price up to 292,407 additional shares of Liggett-Ducat, thereby entitling
Liggett to increase its interest in Liggett-Ducat to approximately 62%. On March
13, 1997, Liggett acquired a second ten-year option to purchase BOL's remaining
shares in Liggett-Ducat (an additional 33%) for $2,200 of which $2,049 was paid
in cash, with the balance settled through intercompany accounts. Liggett's
equity in the net income of Liggett-Ducat amounted to $498 for the year ended
December 31, 1997 and its equity in the loss of Liggett-Ducat amounted to $1,116
for the year ended December 31, 1996. On December 31, 1997, the carrying value
of Liggett-Ducat amounted to $1,208. The excess of the cost of the option over
the carrying amount of net assets to be acquired under the option was charged to
stockholder's deficit. On January 30, 1998, in connection with the restructuring
of the Liggett Notes, BOL acquired the Liggett-Ducat shares and options held by
Liggett. (Refer to Note 11.)

         During 1996, Liggett provided certain administrative and technical
support to Liggett-Ducat in exchange for which Liggett-Ducat provided assistance
to Liggett in its pursuit of selling cigarettes in the Russian Republic. The
expenses associated with Liggett's activities amounted to $76 for the year ended
December 31, 1996.

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

         In addition, Liggett has entered into an annually renewable Corporate
Services Agreement with BGLS wherein BGLS agreed to provide corporate services
to the Company at an annual fee paid in monthly installments. Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to
$3,484 in 1998, $3,318 in 1997 and $3,160 in 1996.

         Since before January, 1996, the Company has leased equipment from BGLS
for $50 per month.




                                       27

<PAGE>   29

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

15.      RESTRUCTURING CHARGES

         During 1997, the Company reduced its headcount by 108 full-time
positions and recorded a $1,964 restructuring charge to operations ($407 of
which was included in cost of sales) for severance programs, primarily salary
continuation and related benefits for terminated employees. The Company expects
to continue its cost reduction programs. Of the total restructuring recorded
during 1997, $1,671 was funded during 1997, and $293 during 1998.

         During 1996, the Company reduced its headcount by 38 positions and
recorded a $3,428 restructuring charge to operations ($132 of which was included
in cost of sales) for severance programs, primarily salary continuation and
related benefits for terminated employees. Of the total restructuring recorded
during 1996, $1,416 was funded during 1996, with $2,012 funded in subsequent
years.





                                       28