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Footnotes:

** Based on the offered side.

# These are estimated current prices, actual prices may vary due to limited liquidity.

Brooke Group/Liggett Group recently released second quarter results (including 10Qs) ending June 30, 1998. With respect to Liggett, the Company reported its first quarterly revenue gain in several years. For the quarter (refer to attached income statement analysis), Liggett’s revenues increased 6.7% to $83.4 million versus $78.1 million the previous year -- with a 7.4% decline in unit volume. The decline in unit volume was more than offset by the impact of the significant number of industry-wide cigarette price increases over the past year. We would also note that while volume declined, there was a good sequential improvement from the first quarter, which was down 12.5%. (We believe future volume trends may show actual signs of stabilization.) Reflecting the leverage of the price increases, EBITDA increased 71% to $10.6 million (after $1.5 million was paid to the settling states) versus $6.2 million a year-ago, with EBITDA margins improving 470 b.p. to 12.7% versus 8.0% a year-ago.

For the six months, revenues increased 3.2% to $149.0 million versus $144.4 million the previous year -- with a 9.8% decline in volume. The volume decline primarily reflects the continued leverage rebate program of competitors and their increased promotional activity. Reflecting the leverage of the price increases, EBITDA was $18.5 million, an 81% increase over the previous year of $10.1 million. EBITDA margins improved 540 basis points to 12.4%. For the six months, EBITDA-to-interest (interest adjusted for non-cash charges) coverage ratio significantly improved to 1.6 times versus 0.8 times for the year-ago period.

Since our last credit update (April 22, 1998), there have been two industry-wide cigarette price increases. In May 1998, primarily due to the industry settlement with the State of Minnesota, there was a 5 cent a pack price increase. On August 1998, the industry raised prices 6 cents a pack, or 3 percent. In our last credit update, we had been forecasting EBITDA of approximately $32 million, with the assumption of no additional price increases for the remainder of the year. With these two price increases, we are raising our EBITDA estimate to more than $40 million (see Financial Summary, page 4), with the assumption of no additional price increases for the remainder of the year. Given that the second half of the year is normally the stronger seasonal half (and the Company’s EBITDA was $18.5 million in the first half), we believe our 1998 estimate is on the conservative side.

With the failure of national tobacco legislation this summer, the tobacco industry has entered into closed-door discussions with the non-settling states. The states are seeking roughly $196 billion over 25 years from the industry. While we are uncertain of the details of the discussions, we believe that both sides have a strong incentive to reach a settlement. We also believe that a settlement could be reached as soon as mid-September -- before the State of Washington’s case against the industry goes to trial.

If the industry reaches an agreement with the states, we believe cigarette prices could be raised initially by 15 cents to 30 cents a pack (or possibly higher). For Liggett, such an increase would provide the Company with significant additional revenues and EBITDA. For instance, we estimate that an initial $0.15/per pack price increase could provide Liggett roughly an additional $40 million in annual revenues and $20 million in annual EBITDA.

• The February 1999 Maturity of the Liggett Senior Notes