CAROL FLETCHER, RETHA                                )
COLCLOUGH, and BETTY CLARK,                          )
THOMAS POLYDORUS, LEO H.                             )
HEADRICK, WILLIAM O. PARKER, and                     )
PREFERRED HEALTH ALLIANCE,                           )
INC., on behalf of themselves and all                )
others similarly situated,                           )      CV-97-913

                                                     )
                  Plaintiffs,                        )      CLASS ACTION
                                                     )

         vs.                                         )
                                                     )

BROOKE GROUP LTD., LIGGETT                           )
GROUP INC., and LIGGETT &                            )
MYERS INC.                                           )
                                                     )
                  Defendants.                        )
                                                     )
                                                     )

AMENDED CLASS SETTLEMENT AGREEMENT

AMENDED CLASS SETTLEMENT AGREEMENT

This AMENDED CLASS SETTLEMENT AGREEMENT is entered into this 2nd day of July 1998 by and between the named and representative plaintiffs Carol Fletcher, Retha Colclough, Betty Clark and proposed class representatives William O. Parker, Thomas Polydoris, Leo H. Headrick, and Preferred Health Alliance, Inc. (collectively, "Plaintiffs") in CAROL FLETCHER, ET AL. V. LIGGETT GROUP INC., ET AL., CV-97-13, In the Circuit Court of Mobile, Alabama (the "FLETCHER Action"), for themselves and on behalf of the plaintiff settlement class as hereinafter defined ("Settlement Class"); and Brooke Group Ltd., a Delaware corporation ("Brooke Group"), Liggett & Myers, Inc., a Delaware corporation ("Myers"), and Liggett Group Inc., a Delaware corporation (which, with Myers, is hereinafter referred to as "Liggett").

RECITALS

WHEREAS,

A. On March 19, 1997 Plaintiffs filed a complaint to commence the FLETCHER Action against Liggett and Brooke Group asserting claims on behalf of a putative nationwide class of all persons and entities which have incurred or are alleged to have incurred costs or other damages arising from cigarette smoking, seeking, among other things, equitable/injunctive relief, a declaratory judgment, and compensatory and/or punitive damages, according to proof, as set forth in the complaint. On March 20, 1997, the Circuit Court granted the parties' motion to certify this action as a settlement class and preliminarily approved the proposed settlement (the "March 20, 1997 Agreement"). This Amended Class Settlement Agreement is intended to expand upon the March 20, 1997 Settlement Agreement and to address certain of the objections raised thereto.

B. The primary purpose of this Amended Class Settlement Agreement is to provide certain injunctive relief sought by Plaintiffs and other settlement class members, including the cooperation of Liggett and Brooke Group, and to create a fund for the equitable settlement of the claims of the settlement class members, free of the risks and costs of prolonged litigation. The mechanism for accomplishing this purpose is the creation of a settlement fund board, to which the claims of all settlement class members against Liggett and Brooke Group shall be directed.

C. The injunctive relief, cooperation, and monetary settlement are components of an integrated settlement set forth in this Amended Class Settlement Agreement. Liggett and Brooke Group agree to provide cooperation and to submit to the injunctive relief set forth herein in the context of a mandatory class settlement.

D. Apart from the FLETCHER Action, hundreds of individual actions and putative class actions, as well as numerous actions brought on behalf of various third-party payors, have been filed against Liggett and Brooke Group and other tobacco defendants seeking, among other things, equitable relief and damages allegedly arising from cigarette smoking. In addition to the hundreds of smoking-related claims that have already been filed against these defendants in jurisdictions throughout the United States, many more are expected to be filed in the future. Smoking-related litigation has resulted in extensive discovery concerning the potential liability of Liggett and Brooke Group as well as extensive consideration of the legal and factual bases of smoking-related litigation.

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

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

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

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

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

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

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

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

M. Plaintiffs recognize and acknowledge that the continued prosecution of the FLETCHER Action and other smoking-related litigation against Liggett and Brooke Group through trial and appeals would require considerable time and expense and would entail uncertainty, risk and delay, including the risk of bankruptcy or other insolvency of Liggett and Brooke Group. Plaintiffs and Liggett and Brooke Group recognize that this settlement with Liggett provides uniquely favorable terms to Liggett in recognition of its unique situation, including its willingness to be the first tobacco industry defendant to settle with any of the public or private plaintiffs, its agreement to provide documents and cooperation expected to be of material benefit to the litigation against the other, much larger tobacco defendants, Liggett's small market share, and its precarious financial situation. Plaintiffs have determined that the settlement, in accordance with this Amended Class Settlement Agreement, of the claims asserted in the FLETCHER Action against Liggett and Brooke Group will be beneficial to the settlement class by providing all settlement class members with substantial and critical non-monetary equitable relief, as well as the opportunity to share equitably in the common fund created by this Amended Class Settlement Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the promises and covenants set forth in this Amended Class Settlement Agreement, Plaintiffs, on their own behalf and on behalf of the Settlement Class (as defined below), and Liggett and Brooke Group hereby stipulate and agree that, conditional upon the approval of the Court as required by Rule 23 of the Alabama Rules of Civil Procedure and as provided herein, the Action shall be settled as against Liggett and Brooke Group and that all claims asserted by or on behalf of the putative class members in the FLETCHER Action against the Settling Defendants shall be dismissed with prejudice, all on the terms and conditions contained herein, as follows:

1. DEFINITIONS.

As used in and solely for the purposes of this Amended Class Settlement Agreement, the following terms shall have the following respective meanings:

"Affiliate" means a Present Affiliate or a Future Affiliate. "Agreement" means this Amended Class Settlement Agreement.

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

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

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

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

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

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

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

"Currently-Injured Smokers" means Smokers who prior to the date of this Agreement have suffered Injury as a consequence of smoking Cigarettes and/or the use of other tobacco products manufactured by Liggett, its affiliates, or its predecessors.

"Currently-Injured Smoker Subclass" means a settlement subclass composed of:

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

(b) the estates, representatives, and administrators of such Currently-Injured Smokers; and

(c) the spouses, children, relatives and significant others of such Currently-Injured Smokers as their heirs or survivors; and

(d) all persons who have been exposed to environmental or second-hand tobacco smoke who, prior to the date of this Agreement, have suffered Injury as a consequence thereof, and who reside in the United States, its territories, possessions and the Commonwealth of Puerto Rico;

provided that excluded from such settlement subclass are (i) officers and directors of any of the Settling Defendants, (ii) any person or entity which has entered into any prior or contemporaneous settlement with Liggett of a Tobacco Action, and (iii) all members of the judiciary of the State of Alabama and the families of such members.

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

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

"Future Affiliate" means any one entity, other than an entity with a Market Share greater than 30% as of the date of this Agreement, which is a Non-settling Tobacco Company (including any successor to or assignee of its assets) if such entity or an Affiliate of such entity with the prior written approval of Brooke Group, subsequent to the date, and during the term, of this Agreement but prior to the fourth anniversary of the date of execution of this Agreement: (i) directly or indirectly acquires or is acquired by Liggett or Brooke Group; (ii) directly or indirectly acquires all or substantially all of the stock or assets of Liggett or Brooke Group; (iii) all or substantially all of whose stock or assets are directly or indirectly acquired by Liggett or Brooke Group; or (iv) directly or indirectly merges with Liggett or Brooke Group or otherwise combines on any basis with Liggett or Brooke Group.

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

"Future-Injured Smokers" means Smokers who during the term of this Agreement suffer Injury as a consequence of smoking Cigarettes and/or the use of other tobacco products manufactured by Liggett or its predecessors.

"Future-Injured Smoker Subclass" means a settlement subclass composed of:

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

(b) the estates, representatives, and administrators of such Future-Injured Smokers; and

(c) the spouses, children, relatives and significant others of such Future-Injured Smokers as their heirs or survivors; and

(d) all persons who are or have been exposed to environmental or second-hand tobacco smoke, who, during the term of this Agreement, suffer Injury as a consequence thereof and who reside in the United States, its territories, possessions and the Commonwealth of Puerto Rico;

provided that excluded from such settlement subclass are (i) officers and directors of any of the Settling Defendants; (ii) any person or entity which has entered into any prior or contemporaneous settlement with Liggett of a Tobacco Action; and (iii) all members of the judiciary of the State of Alabama and the families of such members.

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

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

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

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

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

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

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

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

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

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

"National" means actually covering or potentially covering (whether by block grants to states, localities or other governmental entities or otherwise) the United States or the United States and one or more of its territories, possessions and the Commonwealth of Puerto Rico.

"Non-Liggett Smokers" means all Smokers who prior to the date of this Agreement or during the term of this Agreement have suffered Injury as a consequence of smoking Cigarettes and/or the use of other tobacco products, but have not smoked Cigarettes and/or used other tobacco products manufactured by Liggett or its predecessors.

"Non-Liggett Smoker Subclass" means a settlement subclass composed of:

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

(b) the estates, representatives, and administrators of such Non-Liggett Smokers; and

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

provided that excluded from such settlement subclass are (i) officers and directors of any of the Settling Defendants; (ii) any person or entity which has entered into any prior or contemporaneous settlement with Liggett of a Tobacco Action; and (iii) all members of the judiciary of the State of Alabama and the families of such members.

"Non-Settling Tobacco Companies" means each of The American Tobacco Co., Lorillard Tobacco Co., Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., and United States Tobacco Co., unless and until it becomes a Future Affiliate, as herein defined.

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

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

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

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

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

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

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

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

"Present Value" means, with respect to a specified amount or amounts, the present value of such amount or amounts as calculated using a discount rate equal to the yield on 10-year Treasury Notes as reported in the WALL STREET JOURNAL at the time of such calculation; provided that where such amount or amounts are not otherwise determinable, the amount or amounts to be present-valued shall be deemed to be the average for the most recent three years.

"Pretax Income", with respect to Liggett, means for a specified year, the "Income before Income Taxes" as determined in accordance with generally accepted accounting principles ("GAAP") of Liggett for its most recent fiscal year, as report in filings to the United States Securities and Exchange Commission or, if there is no such filing, as reported by Liggett's independent outside auditors. If GAAP changes in any material respect during the term of this Agreement so that the benefits anticipated by the parties (in light of GAAP applicable on the date of this Agreement), an appropriate adjustment shall be made to the formulas and calculations hereunder to achieve the parties' expectations as of the date hereof.

"Protective Order" or "Stipulation Regarding Liggett Documents" means, with respect to privileged documents produced by a Settling Defendant pursuant to paragraph 5.3, an order of the Court: (a) protecting the confidentiality of such documents; (b) providing that such documents may be used only in actions against Non-Settling Tobacco Companies and, to the extent permitted by law, only under seal; (c) providing that, to the extent such documents are or may be subject to the attorney/client privilege or attorney work product doctrine, such production or use of the documents does not constitute a waiver of such privilege, doctrine or protection with respect to any party other than the parties to whom the documents are produced subject to the order. The provisions of the Protective Order shall not apply to documents claimed to be privileged but which are determined by the Court or by any other court not to be privileged for reasons other than waiver due to production pursuant to this Agreement.

"Recoupment Subclass" means a settlement subclass composed of:
all persons or entities (including, without limitation, any territory, city, county, parish, possession or any other political subdivision thereof, or any agency or instrumentality of any of the foregoing, or any insurance company) in the United States, its territories, possessions, and the Commonwealth of Puerto Rico, which, prior to or during the term of this Agreement, have incurred or claim to have incurred, directly or indirectly, economic loss as a result of paying for the treatment of diseases, illnesses, or medical conditions allegedly caused by Cigarettes (or exposure thereto, including by way of environmental or second hand smoke) or other tobacco products; provided that excluded from such settlement subclass are (i) officers and directors of any of the Settling Defendants, (ii) any person or entity which has entered into any prior or contemporaneous settlement with Liggett of a Tobacco Action, (iii) all members of the judiciary of the State of Alabama and the families of such members, and
(iv) the States.

"Settlement Class" means a settlement class composed of the Currently-Injured Smoker Subclass, the Future-Injured Smoker Subclass, the Non-Liggett Smoker Subclass and the Recoupment Subclass as herein defined.

"Settlement Class Counsel" means the firms listed as Currently-Injured Smoker Subclass Counsel, Future-Injured Smoker Subclass Counsel, Non-Liggett Smoker Subclass Counsel and Recoupment Settlement Subclass Counsel in Section 24.8 of this Agreement.

"Settlement Class Representatives" means the Plaintiffs approved by the Court to serve as Settlement Class representatives for their respective settlement subclasses.

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

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

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

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

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

"Smokers" means all persons who, prior to or during the term of this Agreement, have smoked Cigarettes or have used other tobacco products.

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

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

"Tobacco Action" means any individual lawsuit, putative or certified class action lawsuit or action on behalf of a governmental entity brought against one or more Tobacco Companies in connection with smoking-related claims such as (without limitation) those asserted in the FLETCHER Action or any Attorney General Action.

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

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

2. SETTLEMENT PURPOSES ONLY.

This Agreement is for settlement purposes only, and neither the fact of, nor any provision contained in, this Agreement nor any action taken hereunder shall constitute, be construed as, or be admissible in evidence against the Settling Defendants as, any admission of the validity of any claim, any argument or any fact alleged

or which could have been alleged by Plaintiffs in the Action or alleged or which could have been alleged in any other action or proceeding of any kind or of any wrongdoing, fault, violation of law, or liability of any kind on the part of the Settling Defendants or any admission by them of any claim or allegation made or which could have been made in the Action or in any other action or proceeding of any kind, or as an admission by any of the Plaintiffs or members of the Settlement Class of the validity of any fact or defense asserted or which could have been asserted against them in the Action or in any other action or proceeding of any kind.

3. SUBMISSION TO THE CIRCUIT COURT.

Promptly after execution of this Agreement, the Parties shall, through their respective attorneys, jointly submit this Agreement to the Court and move the Court for an order reaffirming Preliminary Approval of this Amended Settlement Agreement and approving dissemination of Initial Notice.

4. PARTIES.

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

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

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

5. CONSENT DECREES; WARNINGS; COOPERATION.

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

I am, and have been for a number of years, a Director of Liggett Group, Inc., a manufacturer of cigarettes. Cigarettes were identified as a cause of lung cancer and other diseases as early as 1950. I, personally, am not a scientist. But, like all of you, I am aware of the many reports concerning the ill-effects of cigarette smoking. We at Liggett know and acknowledge that, as the Surgeon General, the FDA and respected medical researchers have found, cigarette smoking causes health problems, including lung cancer, heart and vascular disease and emphysema. We at Liggett also know and acknowledge that, as the Surgeon General, the Food and Drug Administration and respected medical researchers have found, nicotine is addictive.

Liggett will continue to engage in the legal activity of selling cigarettes to adults, but will endeavor to ensure that these adults are aware of the health risks and addictive nature of smoking. As part of our efforts, we will do the following:

1. In accordance with a court-approved settlement, Liggett will set up a fund to compensate equitably those who claim to have been injured by our products.

2. Liggett will add a prominent warning to each of our packages of cigarettes and all of our cigarette advertising stating that "Smoking is Addictive".

3. Liggett supports and will not challenge Food and Drug Administration regulations concerning the sale and distribution of nicotine-containing cigarettes and smokeless tobacco products to children and adolescents. Accordingly, Liggett has agreed to comply with many of these regulations even before they apply to the tobacco industry generally.

4. Liggett has instructed its advertising and marketing people to scrupulously avoid any and all advertising or marketing which would appeal to children or adolescents. Liggett acknowledges that the tobacco industry markets to "youth," which means those under 18 years of age, and not just those 18-24 years of age. Liggett condemns this practice and will not market to children. Liggett agrees that if it sees industry advertisements which in its view are aimed at children, it will bring this to the attention of the Attorneys General.

5. In accordance with our settlement agreements, Liggett agrees to fully cooperate with the Attorneys General and Settlement Class Counsel in their lawsuits against the other tobacco companies. To that end, Liggett will make available to the Attorneys General, Settlement Class Counsel and other parties with whom we have settled all relevant documents and information, including documents subject to Liggett's own attorney-client privileges and work product protections and will assist those parties in obtaining prompt court adjudication of the rest of the industry's joint privilege claims.

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

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

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

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

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

(4) actively assist the Settlement Class, its members and counsel, by requesting, and (if necessary) moving the Court to compel, the Non-settling Tobacco Companies to produce to Liggett all documents (1) that are relevant to the subject matter of Tobacco Actions or which are likely to lead to admissible evidence in connection with the claims asserted in a Tobacco Action or which are likely to lead to admissible evidence in connection with the claims asserted in a Tobacco Action, and (2) that the Non-settling Tobacco Companies claim are subject to a joint defense or common interest privilege. Settling Defendants will review such documents, and shall deposit those documents with respect to which Settling Defendants have concerns regarding whether such documents should be protected from discovery under seal for IN CAMERA inspection by the Court, together with a statement to the Court of such Settling Defendants' concerns; and

(5) insofar as such Settling Defendant has or obtains any material information concerning any fraudulent or illegal conduct on the part of any parties, including Non-settling Tobacco Companies, their agents, or their co-defendants designed to frustrate or defeat the claims of the plaintiffs against such parties, companies, agents or co-defendants, or which have the effect of unlawfully suppressing evidence relevant to smoking claims, disclose such information to the appropriate judicial and regulatory agencies. 5.3.2. With respect to each Settlement Class member and his or her counsel, subject to, and promptly after (i) the entry of a Protective Order by the Court, and (ii) an agreement by such Settlement Class member and his or her counsel to abide by, and not object to this Settlement Agreement, each Settling Defendant shall:

(1) promptly provide all documents and information that are relevant to the subject matter of the Actions or which are likely to lead to admissible evidence in connection with the claims asserted in a Tobacco Action, subject to the provisions of Section 5.3.2(2) hereof;

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

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

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

5.3.3. Notwithstanding anything to the contrary in this Agreement, Settling Defendants will commence compliance with Sections 5.3.1 and 5.3.2 of this Agreement, including their subparagraphs, as soon as reasonably practicable, according priority as to compliance to the Recoupment Subclass and the Currently-Injured Smoker Subclass

5.4. Each Settling Defendant, promptly after becoming bound by this Agreement, shall

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

5.5. Each Settling Defendant shall follow and abide by the provisions of the FDA Rule, insofar as they pertain solely to such Settling Defendant's Domestic Tobacco Operations, as set forth in, and modified by, paragraphs 5.5.1 - 5.5.9 hereof until a final determination is reached respecting the FDA Rule at which time the Settling Defendants will be bound by the FDA Rule only insofar as, and to the extent that, the FDA Rule becomes an enforceable obligation binding upon all of the Tobacco Companies.

5.5.1. FDA Rule section 897.16(a), as proposed.

5.5.2. FDA Rule section 897.16(b), as proposed.

5.5.3. FDA Rule section 897.16(d), as proposed.

5.5.4. FDA Rule section 897.30, as stated, and further extended such that no Settling Defendant shall locate, disseminate or cause to be disseminated advertising of any Tobacco Products in the out-of-doors, including, but not limited to, advertising on billboards.

5.5.5. FDA Rule section 897.34(A), as stated.

5.5.6. FDA Rule section 897.34(B), as stated.

5.5.7. FDA Rule section 897.34(C), as stated.

5.6. Each Settling Defendant shall follow and abide by the provisions set forth in paragraphs 5.6.1 - 5.6.7 herein.

5.6.1. No Settling Defendant shall encourage placement of point of sale advertisements within two feet of any fixture on which gum, candy or confection food is displayed for sale.

5.6.2. No Settling Defendant shall make or cause to be made direct or indirect payments for tobacco product placement in movies (screen, video, or made for television), television programs or video games.

5.6.3. No Settling Defendant shall make or cause to be made direct or indirect payments to glamorize or otherwise encourage or promote tobacco use in any media outlets appealing to minors, including, but not limited to, recorded and live performances of music.

5.6.4. No Settling Defendant shall locate, post, disseminate or cause to be disseminated any form of tobacco product advertising on the Internet or any other electronic information distribution system, unless such advertising is designed to be inaccessible in or from the United States of America.

5.6.5. Audio and video format advertising otherwise permitted under the FDA Rule may be distributed to adult consumers at point of sale (i.e., no "static video displays").

5.6.6. Subject to the provisions of Section 5.7, the Settling Defendants agree that in the event of any future Settlement Agreements and/or Consent Decrees between any Settling State and the Non-Settling Defendants related to restrictions on advertising and marketing, or requirements for labeling and packaging of Tobacco Products, in connection with a National or legislative settlement the terms of this Settlement Agreement will be revised such that Liggett and Brooke Group will be required to abide by any additional restrictions or more restrictive requirements which may be adopted by such Settlement Agreement or Consent Decree.

5.7. Notwithstanding anything to the contrary in the FDA Rule or in this Agreement, Liggett will commence compliance with Sections 5.5 and 5.6 of this Agreement as soon as reasonably practicable, provided that Liggett may limit its compliance to the extent, if any, necessary to ensure that the net annual out-of-pocket cost to Liggett of such compliance not exceed $1 million; and provided further that Liggett shall not be obligated pursuant hereto to breach pre-existing legal obligations, if any, it may have with respect to the matters covered by Sections 5.5 and 5.6 (and shall use its reasonable best efforts to minimize the degree to which any such obligations would impede its full compliance therewith). For purposes of this paragraph, the phrase "net annual out-of-pocket costs" means the excess of (a) the additional out-of-pocket expenditures incurred during a particular year by Liggett in complying with the matters specified in Sections 5.5 and 5.6, over (b) savings, if any, in out-of-pocket expenditures realized during such year by Liggett directly from the implementation of the matters covered by Sections 5.5 and 5.6.

5.8. If, when and to the extent that the FDA Rule, in whole or in part, becomes an enforceable legal obligation binding upon all of the Tobacco Companies, each Settling Defendant will comply therewith, without consideration of any limits or exceptions herein. If the FDA Rule does not become such a legal obligation, Liggett shall, during the duration of this Agreement, continue to comply with Section 5.5 and 5.6.

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

5.10. Each Settling Defendant may, after becoming bound by this Agreement, continue in the lawful manufacture, advertising and/or sale of tobacco products. This Agreement does not in any way abrogate or restrict the authority or ability of the Recoupment Subclass members, to the extent such members possess such authority or ability, to enforce compliance with the laws of their respective jurisdictions.

6. GLOBAL SETTLEMENT.

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

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

6.2. In the event there is a Global Settlement at any time which contains financial terms, financial obligations or financial conditions as to Brooke Group and Liggett which are more onerous on, or less favorable to, Brooke Group and Liggett than those of this Settlement Agreement, then, in addition to and not in derogation of any other rights or remedies Brooke Group and Liggett may have, Brooke Group and Liggett shall have the right, at their option, to withdraw from future performance of the payment obligations of
Section 7 of this Agreement.

6.3. Subject to and in accordance with applicable law, in the event of a Global Settlement which does not impose financial terms, financial obligations or financial conditions as to Brooke Group and Liggett which are more onerous on, or less favorable to, Brooke Group and Liggett than those of this Settlement Agreement (at least to the extent Liggett's Market Share does not exceed 3%; such Market Share limitation being included solely for purposes of this Section 6.3), and pursuant to which Brooke Group and Liggett receive a limitation of liability for smoking-related claims, and any other benefits conferred thereunder, at least to the same extent as received by the Non-settling Tobacco Companies, Liggett agrees to abide by the provisions of such Global Settlement that pertain to the pricing of Cigarettes. The purpose of this Section 6.3, consistent with the advertising restrictions in Section 5 and other provisions of this Agreement, is to make certain that Liggett cigarettes do not become a preferred choice of youth smokers.

7. SETTLEMENT FUND.

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

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

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

7.3.1. An initial payment of $25 million due 120 days from the date of a Future Affiliate Transaction. The amount payable under this
Section 7.3.1 represents the same amount, and not in addition to the amount, payable under Section 6.3.1 of the March 1997 Attorneys General Settlement Agreement; and

7.3.2. Subject to the provisions of Sections 7.7, 7.8 and 7.9, payments, each equivalent to 7.5% of Liggett's Pretax Income, due 120 days after the end of each fiscal year of Liggett; provided that each of such payments shall be no less than $1 million. The first payment shall be made with respect to the first full fiscal year commencing after the date of Mandatory Class Final Order and Judgment.

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

7.5. The amounts payable hereunder to the Settlement Fund shall represent the maximum amounts payable to the Settlement Fund under this Agreement. Subject to the approval of the Court, the Settlement Fund Board shall institute a process for the allocation of the Settlement Fund among the subclasses and their members, for among other purposes, compensation to Smokers who have incurred Injury, medical monitoring for Future-Injured Smokers and to defray Settlement Class members' costs of litigation of Tobacco Actions against other Tobacco Companies.

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

7.7. In the event of a Global Settlement, the Settling Defendants shall have the right to reduce (PRO RATA with any such reduction under all Attorney General Settlement Agreements) the payments due from Liggett in each year pursuant to this Agreement so that the aggregate payments due under this Agreement and such Attorney General Settlement Agreements shall be no more than the lesser of (A) on a Cost Per Cigarette Pack basis, one-third of the lowest Cost Per Cigarette Pack due in such year from the Non-Settling Tobacco Companies under such Global Settlement and (B) on a percentage of Pretax Income basis, one-third of the lowest percentage of Pretax Income due in such year from the Non-Settling Tobacco Companies under such Global Settlement (such percentage to be computed as if the payments due from such companies were included in revenues and earnings).

7.8. Liggett shall receive as a credit against any and all amounts due hereunder, a share (PRO RATA with any such credit under such Attorneys General Settlement Agreements) of any and all amounts it is required to pay under a Global Settlement.

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

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

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

8. NOTICE TO THE SETTLEMENT CLASS.

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

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

The allocation of the Settlement Fund to specific uses or among particular claimants has not been determined. Future allocation and distribution of the Settlement Fund will be administered by the Settlement Fund Board. The Board shall be comprised of representatives appointed by the Attorneys General of certain settling states and by Settlement Class Counsel with the approval of the Court, and it shall include representatives of the public health community. The Board shall be responsible for recommending and implementing guidelines and procedures for the administration of claims. The Settlement Agreement does not specify any particular allocation of Settlement proceeds. Settlement Class members will be given notice and an opportunity to be heard and make suggestions regarding allocation before any final allocation or distribution decisions are made.

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

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

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

9. MANDATORY CLASS CERTIFICATION AS TO LIGGETT.

9.1. The mandatory certification of the Settlement Class under Rule 23(b)(1)(B) and/or 23(b)(2) of the Alabama Rules of Civil Procedure is essential to the ability of the Parties to perform the terms and conditions set forth in this Settlement Agreement. It is the intent and understanding of the Parties that the undertakings of Liggett and Brooke Group as described in
Section 5 of this Settlement Agreement, with respect to Liggett's promotional, advertising, marketing and sales practices in order to inform the Settlement Class and the American public of the dangers of smoking and the addictive nature of nicotine, to prevent sales of cigarettes to children and adolescents, and to provide active and meaningful cooperation in the prosecution of smokers' claims against Non-Settling Tobacco Companies constitute injunctive, equitable, and declaratory relief of real, immediate, and ongoing benefit to the Settlement Class and the public, sufficient to satisfy the criteria of mandatory class certification under Rule 23. It is also the understanding of the Parties that the Settlement Class can only be assured that it will actually receive the benefits of the foregoing undertakings through the commitment of the Settling Defendants' current Boards of Directors. Accordingly, (i) the Parties shall cooperate in establishing, to the satisfaction of the Court, the evidentiary predicates for the Court's determination of a "limited fund" under Rule 23, (ii) if the Settlement Class is not certified under one or more of these mandatory provisions, or is later decertified by the Court or on appeal, Liggett and Brooke Group shall each have the right to withdraw from this Settlement Agreement, and (iii) this Settlement Agreement shall terminate and be void ab initio if Liggett (without the consent of Brooke Group) or Brooke Group undergo a change in control from that existing as of the date hereof.

10. FUTURE AFFILIATE.

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

10.2. In the event of a Future Affiliate Transaction, the Settlement Class, or any of its members, shall not (a) seek to enjoin or otherwise challenge a spinoff or like disposition of the stock or assets of any Affiliate of the Future Affiliate which is not as of the date of the execution of this Agreement a Parent of a company engaged in Domestic Tobacco Operations or itself engaged in Domestic Tobacco Operations ("Spinoff Affiliate"), (b) bring suit or otherwise take action against the Parent of the Future Affiliate with respect to such spinoff or like disposition of stock or assets, or (c) bring suit or otherwise take action against a Spinoff Affiliate for claims asserted in or related to a Tobacco Action (and thereby release such Spinoff Affiliate pursuant to, MUTATIS MUTANDIS, Section 11.1 hereof). The Settlement Class reserves the right to take the actions described in this Section 10.2 in the event that such spinoff or like disposition is sought by someone other than Brooke Group or a Future Affiliate or an Affiliate of a Future Affiliate.

10.3. With respect to subsection 10.2, nothing in this provision, or elsewhere in this Agreement, limits the authority of the Settlement Class to challenge any transaction which they reasonably believe is in violation of federal or state antitrust law.

10.4. Promptly after a Future Affiliate Transaction, a Future Affiliate shall abide by Sections 4.4 through 4.8 of the March 1997 Attorneys General Agreement.

10.5. Promptly after a Future Affiliate Transaction, Settling Defendants and the Settlement Class and Settlement Class Counsel, each agree to exercise best efforts to negotiate in good faith a settlement of all Tobacco Actions against a Future Affiliate's Domestic Tobacco Operations.

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

11. RELEASE.

11.1. Upon the Mandatory Class Settlement Date, with respect to each Settling Defendant, for good and sufficient consideration as described herein, all members of the Settlement Class, collectively and individually, on behalf of themselves, the persons they represent, their heirs, executors, administrators, trustees, beneficiaries, agents, attorneys, successors, assigns, affiliates, officers, directors, employees and shareholders shall be deemed to and do hereby release, dismiss and discharge each and every claim, right, and cause of action (including, without limitation, all claims for damages, medical expenses, restitution, medical monitoring, or any similar legal or equitable relief, under federal, state or common law), known or unknown, asserted or unasserted, direct or indirect, which they had, now have, or may hereafter have against each Settling Defendant (including its past, present and future parents, subsidiaries, affiliates and their past, present and future agents, servants, attorneys, employees, officers, directors, shareholders, and beneficial owners) (and downstream distribution entities of Liggett, but only to the extent that such downstream distribution entities would have cross-claims against Liggett) which is based on any and all harm, injury or damages claimed by members of the Settlement Class to be caused by smoking, addiction to, or dependence upon, cigarettes or which is asserted in the Action in connection with, or arising out of the conduct, acts, facts, transactions, occurrences, representations or omissions set forth, alleged, referred to or otherwise embraced in the Action complaint or any and all other Tobacco Actions or any other smoking-related actions.

Provided, however, as follows:

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

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

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

11.2 In addition to the provisions of Section 11.1, each member of the Settlement Class hereby expressly waives and releases, upon this Settlement Agreement becoming final, any and all provisions, rights and benefits conferred by section 1542 of the California Civil Code, which reads:

Section 1542. Certain Claims not Affected by General Release. A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor;

or by any law of any state or territory of the United States, or principle of common law, which is similar, comparable or equivalent to section 1542 of the California Civil Code. Each member of the Class may hereafter discover facts other than or different from those which he, she or it knows or believes to be true with respect to the claims which are the subject matter of the provisions of Section 11.1 hereof, but each member of the Settlement Class hereby expressly waives and fully, finally, and forever settles and releases, upon this Settlement Agreement becoming final, any known or unknown, suspected or unsuspected, contingent or non-contingent claim with respect to the subject matter of the provisions of Section 11.1, whether or not concealed or hidden, without regard to the subsequent discovery or existence of such different or additional facts.

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

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

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

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

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

13. TERM.

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

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

13.3. Except as may be otherwise specifically provided in this Agreement, a termination by a Settling Defendant hereunder shall have the effect of rendering this Agreement as having no force or effect whatsoever, null and void AB INITIO, and not admissible as evidence for any purpose in any pending or future litigation in any jurisdiction. However, a termination shall not affect any prior cooperation or require the return of any documents produced to a Settlement Class member pursuant to this Agreement.

14. CONTINUING ENFORCEABILITY.

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

14.2. Unless earlier terminated, as to the Settlement Class, this Agreement and each provision of or obligation arising from this Agreement shall continue and remain fully enforceable if a Settling Defendant institutes or is subject to the institution against it of any proceeding or voluntary case under title 11 of the United States Code, or other proceeding seeking to adjudicate it insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or other proceeding seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any part of its property (each, a "Bankruptcy Proceeding"). Brooke Group has the right but not the obligation to cure and to perform any of Liggett's monetary obligations under this Agreement (calculated as if Liggett were meeting such monetary obligations) notwithstanding the occurrence and continuation of any Bankruptcy Proceeding with respect to Liggett. The Settlement Class agrees that it has no right to terminate this Agreement, to call a default under this Agreement, or to compel Liggett to take or not to take any action with respect to this Agreement during any period in which Brooke Group is performing Liggett's post-bankruptcy proceeding monetary obligations hereunder.

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

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

15.2. No Settlement Class member shall make a claim against a non-settling person for what would be a claim settled under this Agreement if asserted against a Settling Defendant.

15.3. Claims by or on behalf of any Settlement Class members against any non-settling parties are not released and shall not be barred, precluded, limited, or reduced as a consequence of this Agreement or the subsequent award and distribution of funds to such Settlement Class members from the Settlement Fund, except if and to the extent required under federal or state law applicable under choice-of-law doctrines in the forum in which any such claims may be instituted or pursued.

16. EXPENSES AND FEES.

16.1. Subject to Section 7.5 hereof, all reasonable and necessary expenses incurred by the Board in administering, allocating and distributing the Settlement Fund, and the costs of Initial and Subsequent Notices, shall be paid by the Settling Defendants in addition to, and without reducing, their payments into the Settlement Fund.

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

16.3. In the event of a failure by the Court to issue the Final Order and Judgment or a decision by any Settling Defendant to exercise its right to withdraw pursuant to Section 14 of this Agreement, the Settling Defendants will bear, in accordance with the terms of this Agreement, the costs of the Initial Notice incurred to such point (in the case of Brooke Group and Liggett not to exceed a total of $1 million; provided that Brooke Group, Liggett and Plaintiffs shall each have the right to terminate this Agreement in the event that the Court orders Initial Notice costing in excess of $1 million, unless Brooke Group and/or Liggett and/or Plaintiffs and/or Settlement Class Counsel agree to pay such excess.)

17. TAX STATUS OF SETTLEMENT FUND.

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

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

17.3. The Settling Defendants, as transferors of the Settlement Fund, shall prepare and file the information statements concerning their settlement payments to the Settlement Fund as required to be provided to the IRS pursuant to the regulations under IRC Section 468B.

18. COURT'S SETTLEMENT APPROVAL ORDER.

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

19. EFFECT OF DEFAULT OF ANY SETTLING DEFENDANT.

In the event any Settling Defendant fails to make a payment due and owing under the terms of this Agreement, or is in default of this Agreement in any other respect, the Settlement Class Counsel shall so notify the Court. The defaulting Settling Defendant shall then be given up to sixty (60) calendar days to "cure" the default. If the defaulting Settling Defendant does not "cure" the default in the time provided in this Section 19, and if no other Settling Defendant elects to cure such default, the Settlement Class Counsel may apply to the Court for relief, including withdrawal from the Agreement.

20. REPRESENTATIONS AND WARRANTIES; COVENANTS.

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

20.2. Each Settling Defendant covenants and agrees for the benefit of the Settlement Class that it will not enter into any transaction involving the borrowing of funds in excess of $100 million unless such transaction is fair from a financial perspective to the Settling Defendant and represents the reasonable exercise of such Settling Defendant's business judgment. Liggett agrees that, other than after a sale of all or substantially all of its assets or stock in a transaction approved by Brooke Group, it will not pay any dividends (in cash or property), or engage in any transaction with, or transfer any cash or property to, any affiliate in excess of $500,000, unless it is reasonably fair from a financial perspective to Liggett, represents the reasonable exercise of Liggett's business judgment, and is approved in writing by Brooke Group.

21. ARBITRATION.

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

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

22. MOST FAVORED NATION.

22.1. In the event of any Other Settlement with any Non-settling Tobacco Company, the payments due from each Settling Defendant in each year under this Agreement shall be reduced to the extent, if any, necessary to ensure that such payments are the lesser of (a) on a percentage of Pretax Income basis, payments such that the percentage in each year of such Settling Defendant's Pretax Income represented by such payments is no more than one-third of the percentage in such year of such Non-Settling Tobacco Company's Pretax Income represented by the product of (i) the average annual payments due from such Non-Settling Tobacco Company under such Other Settlement and (ii) the Population Quotient with respect to such Other Settlement and (b) on a Cost Per Cigarette Pack basis, no more than the product of (i) one-third of the lowest Cost Per Cigarette Pack due in such year from the Non-Settling Tobacco Companies under such Other Settlement and (ii) the Population Quotient with respect to such Other Settlement. The Benchmark Figure set forth in this Section 22.1 does not reflect in any fashion the Settlement Class's or Settlement Class Counsels' views as to an appropriate settlement or resolution with any Non-Settling Tobacco Company.

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

22.3. In each year beginning with the second year a Settling Defendant becomes bound by this Agreement, the annual payment amount due under
Section 7.3 of this Agreement from such Settling Defendant shall be decreased in proportion to any decrease, and (only if there shall have been a prior such decrease) increased in proportion to any increase, in such Settling Defendant's Market Share from the prior year; provided, however, that (a) such annual payment amount shall not be so decreased to the extent, if any, that such annual payment amount in such year is decreased as a result of a decrease in such Settling Defendant's Pretax Income and (b) such annual payment amount shall never be increased such that the aggregate amount of any such increases exceeds the aggregate amount of any such decreases. Such Settling Defendant, as soon as practicable after the end of such year, shall give written notice of any such decrease or increase and the method of calculating it to the Court and Settlement Class Counsel. [Example: For purposes of this example of Section 22.3, assume Liggett's Pretax Income is $50 million each year, thus making Liggett's obligation under Section 7.3 of the settlement $3,750,000 per year during the term of this Agreement (7.5% of 50,000,000). Liggett's Market Share drops from 2% in 1997 and 1998 to 1.75% in 1999, but recovers to 1.9% in 2000, and then back to 2.0% in 2001. Reduction under this Section: In 1999, Liggett's amount due will be reduced by $468,750 to $3,281,250. Since Liggett's Market Share fell by .25 points or 12.5%, its payments would be reduced by 12.5% or $468,750 ($3,750,000 x .125). Recapture of Market Share: In 2000, Liggett's payments to climb commensurate to its increase of .15 in Market Share (1.75 to 1.9% to $3,562,500 (($3,281,250 plus ($3,281,250 plus .15/1.75)). In 2001, Liggett's payment would again increase commensurate to its increase of .1 in Market Share to $3,750,000 (($3,562,500 plus $3,562,500 x .1/1.90)). Liggett would not be entitled to a "double reduction" for a decrease in both Pretax Income and Market Share. Thus, if Liggett's .25 point drop in Market Share in 1998 were accompanied by a drop in Pretax Income between 1997 and 1998 from $50 million to $35 million, there would be no Market Share reduction, as Liggett's payment obligations (7.5% of Pretax Income) would have already fallen from $3,750,000 to $2,625,000.]

22.4. The Plaintiffs, on behalf of themselves (upon the execution hereof) and the Settlement Class (upon Preliminary Approval), Settlement Class Counsel, and any attorneys or representatives of any of the foregoing, agree that for the next fifteen (15) years neither the Plaintiffs, the Settlement Class, nor any attorneys or representatives of the foregoing will, without the express written consent of Brooke Group (which may be withheld for any reason or for no reason) discuss, negotiate, support, approve or enter into any agreement or understanding with any creditor, claimant, trustee, receiver or other party-in-interest, of Liggett, Brooke Group or any of their affiliates, other than Brooke Group itself (collectively, "Prohibited Parties"), with respect to any restructuring, liquidation or reorganization of Liggett, Brooke Group or any of their affiliates, including with respect to any plan under Chapter 11 or Chapter 7 of title 11, United States Code (the "Bankruptcy Code").

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

23. FURTHER ACTIONS.

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

24. MISCELLANEOUS.

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

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

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

24.4. This Agreement shall be binding upon and inure to the benefit of the Settlement Class, the Settling Defendants, and their representatives, heirs, successors, and assigns; provided, however, that, upon any assignment of this Agreement by or on behalf of Liggett, or succession to this Agreement through any combination with Liggett, other than with the prior written consent of Brooke Group (which can be withheld for any or no reason), the obligations of this Agreement shall be binding upon such assignee or successor and each of its affiliates as if they each were Settling Defendants on the date of execution hereof.

24.5. Other than as provided in Section 24.4, nothing in this Agreement shall be construed to subject any Settling Defendant's parent or affiliated company to the obligations or liabilities of that Settling Defendant.

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

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

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

CURRENTLY INJURED SMOKER SETTLEMENT SUBCLASS COUNSEL

Norwood S. Wilner

Gregory Maxwell
SPOHRER WILNER MACIEJEWSKI &

STANFORD P.A.
444 E. Duval Street
Jacksonville, Florida 32202

FUTURE INJURED SMOKER SETTLEMENT SUBCLASS COUNSEL

Steven A. Martino
JACKSON, TAYLOR & MARTINO, PC
South Trust Bank Building
61 St. Joseph St., Suite 1600
Mobile, Alabama 33602

NON-LIGGETT SMOKER SETTLEMENT SUBCLASS COUNSEL

Wyman O. Gilmore
Post Office Box 729
Grove Hill, Alabama 36451

RECOUPMENT SETTLEMENT SUBCLASS COUNSEL

William J. McDaniel
McDANIEL, BAINS, & NORRIS
2 Metroplex Drive, Suite 504
Birmingham, Alabama 35209

James H. Pearson
PEARSON & PEARSON
3525 Citicorp Center
1200 Smith Street
Houston, Texas 77002

Robert G. Taylor II
TAYLOR & CIRE
One Allen Center
3400 Penthouse
Houston, Texas 77002

BROOKE GROUP AND LIGGETT

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

Mr. Marc E. Kasowitz

Mr. Daniel R. Benson
KASOWITZ, BENSON, TORRES & FRIEDMAN LLP

1301 Avenue of the
Americas New York, New York 10019

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

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

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

SETTLEMENT CLASS COUNSEL

/s/ Norwood S. Wilner
-----------------------------------------


/s/ Steven A. Martino
-----------------------------------------

/s/ Wyman O. Gilmore
-----------------------------------------

/s/ William J. Mcdaniel
-----------------------------------------

/s/ James H. Pearson
-----------------------------------------

/s/ Robert G. Taylor II
-----------------------------------------

/s/ Marc E. Kasowitz
-----------------------------------------

/s/ Daniel R. Benson
-----------------------------------------

BROOKE GROUP LTD.

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

Date:    7/2/1998
     ------------------------------------

LIGGETT GROUP INC.

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

Date:    7/2/1998
     ------------------------------------

LIGGETT & MYERS, INC.

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

Date:    7/2/1998
     ------------------------------------

EXHIBIT 10.34

GENERAL LIGGETT REPLACEMENT AGREEMENT

This General Liggett Replacement Agreement is entered into as of November 23, 1998 by and among each of the Settling States (as that term is defined in the Master Settlement Agreement referenced below); and Liggett Group Inc., a Delaware corporation, Liggett & Myers, Inc., a Delaware corporation (together collectively referred to as "Liggett"), and Brooke Group Ltd., a Delaware corporation ("Brooke").

W I T N E S S E T H:

WHEREAS, the Settling States and the Original Participating Manufacturers have entered into the Master Settlement Agreement to settle and resolve with finality all Released Claims against the Released Parties, including the Original Participating Manufacturers, as set forth in the Master Settlement Agreement dated November of 1998 (as those terms are defined in the Master Settlement Agreement);

WHEREAS, previous settlement agreements have been entered into between various state attorneys general and Liggett and Brooke that is, the Attorneys General Settlement Agreement dated March 15, 1996 as amended, the Attorneys General Settlement Agreement dated March 20, 1997 (and subsequent agreements between Liggett and Brooke and Alaska, California, Nevada and Oregon that incorporate the terms of the March 20, 1997 Agreement) and the Attorneys General Settlement Agreement dated March 12, 19998 (collectively, the "Previous Liggett Settlement Agreements"); and

WHEREAS, the parties wish to enable Liggett to join in the terms and conditions of the Master Settlement Agreement by replacing the Previous Liggett Settlement Agreements with the Master Settlement Agreement as provided herein;

NOW, THEREFORE, Liggett, Brooke and the Settling States hereby covenant and agree as follows:

1. Liggett shall become a Subsequent Participating Manufacturer as defined by, and in accordance with, the terms of the Master Settlement Agreement.

2. Upon State Specific Finality (as that term is defined in the Master Settlement Agreement) as to each Settling State that is also a party to a Previous Liggett Settlement Agreement, such Previous Liggett Settlement Agreement shall be null and void and of no further force and effect as to that Settling State, and the rights and obligations of Liggett and such Settling State shall be thereafter governed by the Master Settlement Agreement; provided, however, that if the Master Settlement Agreement is terminated as to any such Settling State for

whatever reason, the Previous Liggett Settlement Agreement (subject to the deletion of the provisions relating, and only to the extent such provisions relate, to a Future Affiliate as defined therein) shall be reinstated as to such Settling State.

3. Liggett and each such Settling State agree to take such action as may be necessary and appropriate to request any court that may have previously endorsed the Prior Liggett Settlement Agreements to vacate any such previous order(s) endorsing any provision of the Previous Liggett Settlement Agreements, and to replace such order(s) with an order approving this General Liggett Replacement Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this document as an instrument under seal

BROOKE GROUP LTD.                                 LIGGETT GROUP INC.



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

LIGGETT & MYERS, INC.

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

SETTLING STATES

By:

IRON WORKERS LOCAL UNION                             )
NO. 17 INSURANCE FUND AND                            )
ITS TRUSTEES, et al.,                                )
                                                     )    CASE NO. 1:97-CV-1422
                                                     )
                                                     )
                  Plaintiffs,                        )
                                                     )
                                                     )
         v.                                          )    Judge James S. Gwin
                                                     )
PHILIP MORRIS INCORPORATED,                          )
et al.,                                              )    CLASS ACTION
                                                     )
                                                     )
                  Defendants.                        )

CLASS SETTLEMENT AGREEMENT

This CLASS SETTLEMENT AGREEMENT is entered into this 14th day of January 1999 by and between the named and representative plaintiffs Iron Workers Local Union No. 17 Insurance Fund, IBEW Local No. 38 Health & Welfare Fund, Ohio Laborers' District Council-Ohio Contractors' Association Insurance Fund, Dealers-Unions Insurance Fund, and Local 47 Welfare Fund No. 1, Toledo Electrical Welfare Fund, through their trustees (collectively, "Plaintiff Funds") in IRON WORKERS LOCAL UNION NO. 17 INSURANCE FUND, ET AL. V. PHILIP
MORRIS INC., ET AL., Case No. 1:97-CV-1422, United States District Court, Norther District of Ohio, Eastern Division (the "Action"), for themselves and on behalf of the class as hereinafter defined ("Class"), and Brooke Group Ltd., a Delaware corporation ("Brooke Group"), Liggett & Myers, Inc., a Delaware corporation ("Myers"), and Liggett Group Inc., a Delaware corporation (which, with Myers, is hereinafter referred to as "Liggett").

RECITALS

WHEREAS,

A. On May 20, 1997, Plaintiff Funds commenced the Action against various tobacco-related entities, including, among others, Philip Morris, Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., Lorillard Tobacco Co., American Tobacco Co., Liggett Group Inc., United States Tobacco Company and British American Tobacco Co. Ltd. and their various parent and related companies ("Defendants"), asserting claims on behalf of a putative class of health and welfare trusts, for, among other things, expenses allegedly incurred in providing medical treatment for tobacco-related illnesses. On October 20, 1998, the Court, in an order to be published at 182 F.R.D. 523, granted the Plaintiff Funds' motion to certify their cause as a class action.

B. Plaintiff Funds allege that Liggett has acted improperly on grounds generally applicable to the Class.

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

D. Liggett and Brooke Group have made available relevant information, and Plaintiff Funds, through counsel, have investigated these entities and other relevant information, and have concluded that it would be in the best interests of the Class to enter into this Agreement, and further, that Plaintiff Funds and counsel consider the settlement set forth herein to be fair, reasonable and adequate and in the best interests of the Class.

E. Liggett and Brooke Group recognize and acknowledge that this Agreement is in their best interests as defending the Action, through trial and appeals, would require considerable resources and expense and would entail uncertainty and risk.

NOW, THEREFORE, in consideration of the foregoing and of the promises and covenants set forth in this Class Settlement Agreement, Plaintiff Funds, on their own behalf and on behalf of the Class, and Liggett and Brooke Group hereby stipulate and agree that, conditional upon the approval of the Court as required by Rule 23 of the Federal Rules of Civil Procedure and as provided herein, the Action shall be settled as against Liggett and Brooke Group and that all claims asserted by or on behalf of the Class in the Action against the Liggett and Brooke Group shall be dismissed with prejudice, all on the terms and conditions contained herein, as follows:

1. DEFINITIONS.

As used in and solely for the purposes of this Settlement Agreement, the following terms shall have the following respective meanings:

"Action" means the action captioned IRON WORKERS LOCAL UNION NO. 17 INSURANCE FUND, ET AL. V. PHILIP MORRIS INC., ET AL., Case No.
1:97-CV-1422, United States District Court, Norther District of Ohio, Eastern Division.

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

"Agreement" means this Class Settlement Agreement.

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

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

"Class" means all members of the class certified by the Court in the Action, which class is defined as all jointly-administered, multi-employer health and welfare trusts in Ohio, through their respective trustees.

"Class Counsel" means those law firms listed in Section 19.9 hereof.

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

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

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

"Court" means the United States District Court, Northern District of Ohio, Eastern Division.

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

"Downstream Distribution Entity" means any person or entity that furthers the distribution of tobacco products at any point from the original place of manufacture to individuals for personal consumption, including, without limitation, wholesalers, retailers, private label purchasers and control label purchasers. Such term shall not include common carriers.

"Future Affiliate" means any one entity, other than an entity with a Market Share greater than 30% as of the date of this Agreement, which is a Non-settling Tobacco Company (including any successor to or assignee of its assets) if such entity or an Affiliate of such entity with the prior written approval of Brooke Group, subsequent to the date, and during the term, of this Agreement but prior to the fourth anniversary of the date of execution of this Agreement: (i) directly or indirectly acquires or is acquired by Liggett or Brooke Group; (ii) directly or indirectly acquires all or substantially all of the stock or assets of Liggett or Brooke Group; (iii) all or substantially all of whose stock or assets engaged in Domestic Tobacco Operations are directly or indirectly acquired by Liggett or Brooke Group or any Subsidiary of either of them; or (iv) directly or indirectly merges with Liggett or Brooke Group or otherwise combines on any basis with Liggett or Brooke Group.

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

"Health and Welfare Trust" means a non-profit, union-sponsored tax-exempt trust organized under the Employee Retirement Income Security Act, 29 U.S.C. section 1001 et seq. to provide health-related benefits to workers and their families.

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

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

"Membership Population" means, with respect to a specified Health and Welfare Trust, including Class members, the number of participants in and beneficiaries to such Health and Welfare Trust.

"Non-Settling Tobacco Companies" means each of The American Tobacco Co., Lorillard Tobacco Co., Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., and United States Tobacco Company.

"Notice" means the written notice document to be provided to Class members as defined in Section 8.1 of this Agreement.

"Notice Date" means the first date upon which Notice is given to the Class pursuant to Section 8.1 of this Agreement.

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

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

"Plaintiff Funds" means each of Iron Workers Local Union No. 17 Insurance Fund, IBEW Local No. 38 Health & Welfare Fund, Ohio Laborers' District Council-Ohio Contractors' Association Insurance Fund, Dealers-Unions Insurance Fund, and Local 47 Welfare Fund No. 1, Toledo Electrical Welfare Fund, through their trustees.

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

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

"Present Value" means, with respect to a specified amount or amounts, the present value of such amount or amounts as calculated using a discount rate equal to the yield on 10-year Treasury Notes as reported in the WALL STREET JOURNAL at the time of such calculation; provided that where such amount or amounts are not otherwise determinable, the amount or amounts to be present-valued shall be deemed to be the average for the most recent three years.

"Pretax Income", with respect to Liggett, means for a specified year, the "Income before Income Taxes" as determined in accordance with generally accepted accounting principles ("GAAP") of Liggett for its most recent fiscal year, as report in filings to the United States Securities and Exchange Commission or, if there is no such filing, as reported by Liggett's independent outside auditors. If GAAP changes in any material respect during the term of this Agreement so that the benefits anticipated by the parties (in light of GAAP applicable on the date of this Agreement), an appropriate adjustment shall be made to the formulas and calculations hereunder to achieve the parties' expectations as of the date hereof.

"Protective Order" or "Stipulation Regarding Liggett Documents" means, with respect to privileged documents produced by a Settling Defendant pursuant to Section 5.2, an order of the Court: (a) protecting the confidentiality of such documents; (b) providing that such documents may be used only in actions against Non-Settling Tobacco Companies and, to the extent permitted by law, only under seal; (c) providing that, to the extent such documents are or may be subject to the attorney/client privilege or attorney work product doctrine, such production or use of the documents does not constitute a waiver of such privilege, doctrine or protection with respect to any party other than the parties to whom the documents are produced subject to the order. The provisions of the Protective Order shall not apply to documents claimed to be privileged but which are determined by the Court or by any other court not to be privileged for reasons other than waiver due to production pursuant to this Agreement.

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

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

"Subsidiary" means with respect to a specified corporation, another corporation, partnership or other entity of which securities or other interests having the power to elect a majority of that corporation?s, partnership?s or other entity?s board of directors or similar governing body, or otherwise having the power to direct the management and policies of that corporation, partnership or other entity, are owned, directly or indirectly, by such specified corporation and/or one or more of its Subsidiaries.

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

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

2. SETTLEMENT PURPOSES ONLY.

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

3. SUBMISSION TO THE COURT.

Promptly after execution of this Agreement, the Parties shall, through their respective attorneys, jointly submit this Agreement to the Court and seek an order granting Preliminary Approval of this Agreement and approving dissemination of Notice.

4. PARTIES.

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

4.2. The Parties acknowledge and agree that the willingness of Brooke Group and Liggett to enter into this Agreement, and in particular their willingness to agree to provide cooperation as set forth in Section 5 hereof, is important to the interests of the Settlement Class.

5. COOPERATION.

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

(1) cooperate with the Plaintiff Funds, the Class and counsel, in that such Settling Defendant will take no steps to impede or frustrate their investigations into, or prosecutions of, any of the Non-settling Tobacco Companies in the Action, so as to secure the just, speedy and inexpensive determination of the Action against said non-settling persons and entities;

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

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

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

5.2. Subject to, and promptly after the entry of a Protective Order by the Court, each Settling Defendant shall:

(1) promptly provide all documents and information that are relevant to the subject matter of the Action or which are likely to lead to admissible evidence in connection with the claims asserted in the Action, subject to the provisions of Section 5.2(2) hereof;

(2) waive any and all applicable attorney-client privileges and work product protections with respect to such documents and information. Such waiver shall not extend to (a) documents and information not relevant to the subject matter of the Action or not reasonably likely to lead to admissible evidence in connection with claims asserted in the Action, or
(b) documents subject to a joint defense or other privilege or protection which Settling Defendants cannot legally waive unilaterally, except that the waiver by the Settling Defendant shall apply, to the extent permitted by law, to its own joint defenses or other privileges. To the extent that a Settling Defendant has a good faith belief, or one or more Non-settling Tobacco Companies claims, that documents to be provided pursuant to Section 5.2(1) hereof may be subject to a joint defense or other privilege (or a claim of such privilege) of one or more of the Non-settling Tobacco Companies, such documents shall be deposited under seal for IN CAMERA inspection by the Court together with a statement to the Court that such Settling Defendant has concerns as to whether some or all of such documents should be protected from discovery, and the Parties agree to request that the Court shall retain jurisdiction to resolve that issue. Liggett will participate in proceedings, including by way of court appearances or declarations, concerning issues of whether such documents are discoverable;

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

(4) demand from its past or current national legal counsel all documents and information obtained in the course of representation of any Settling Defendant which in any way relates to the cooperation required in paragraphs 5.1(1) - 5.2(3) above, which shall be provided to the Plaintiff Funds, the Class and counsel as provided under this paragraph.

6. MONETARY COMPENSATION.

6.1. It is the intent of the Parties hereto that the Settling Defendants enjoy a preferred position with respect to the Non-Settling Tobacco Companies, in recognition of the Settling Defendants? willingness to enter into this Agreement and provide cooperation in the Action. For this reason, the Settling Defendants will not be obligated to pay money to the Plaintiff Funds or to the Class unless such Settling Defendants enter into monetary settlements with other Health and Welfare Trusts, as set forth in Section 6.2.

6.2. In the event that, subsequent to the date of this Agreement, any of the Settling Defendants enters into a settlement agreement ("Other Settlement") with any Health and Welfare Trust other than a Plaintiff Fund or a Class member on financial terms that are more favorable to the Health and Welfare Trust than those contained herein (as adjusted for relative Membership Population), the Plaintiff Funds and the Class shall have the right with respect to such Settling Defendant to replace or modify any or all of the financial terms of this Agreement with, or add to this Agreement, any or all such more favorable terms (adjusted for relative Membership Population) from the Other Settlement; provided that any reduction, credit, most favored nation, termination or other provision contained in such Other Settlement, the application of which provision would result in an adjustment of Settling Defendants' payment obligations, shall also be added to this Agreement.

6.3. Any and all payments made by a Settling Defendant pursuant to Section 5 hereof relating to preparation of witnesses to testify in the Action, including but not limited to payment of counsel fees for such witnesses, shall be credited against any and all amounts that may become payable by such Settling Defendant pursuant to Section 6.2 hereof.

6.4. Insofar as a final non-appealable judgment has not been entered in the Action within three years of the date of this Agreement with respect to the Non-Settling Tobacco Companies and there is no pending plaintiffs' verdict or scheduled trial date in the Action, the Settling Defendants and the Plaintiff Funds shall have the right to terminate this Agreement; provided that the Settling Defendants and Plaintiff Funds provide written notice of such termination to the respective parties and provided further that any and all payments due up to the date of such termination made to the Plaintiff Funds and/or the Class pursuant to this Agreement, if any, by the Settling Defendants shall be retained by the Plaintiff Funds and/or the Class.

7. NOTICE TO THE SETTLEMENT CLASS.

7.1. Upon Preliminary Approval, and as the Court may direct, the Parties shall cause notice of the settlement embodied herein (the "Notice") to be mailed to the members of the Class.

7.2. The Notice, in a form to be approved by the Court, shall be disseminated over the course of a period not to exceed thirty (30) days from the Notice Date, subject to approval by the Court. Class members shall have until the end of this period to file, in the manner specified in the Notice, any objection or other response to the Proposed Settlement. A hearing with respect to final approval of this Settlement shall be set by the Court (and specified in the Notice to the Class).

8. FUTURE AFFILIATE.

8.1. The terms of this Agreement shall not be binding upon or applicable to a Future Affiliate of the Settling Defendants, except as provided for in this Section 8.

8.2. In the event of a Future Affiliate Transaction, the Plaintiff Funds, the Class, or any of its members, shall not (a) seek to enjoin or otherwise challenge a spinoff or like disposition of the stock or assets of any Affiliate of the Future Affiliate which is not as of the date of the execution of this Agreement a Parent of a company engaged in Domestic Tobacco Operations or itself engaged in Domestic Tobacco Operations ("Spinoff Affiliate"), (b) bring suit or otherwise take action against the Parent of the Future Affiliate with respect to

such spinoff or like disposition of stock or assets, or (c) bring suit or otherwise take action against a Spinoff Affiliate for claims asserted in or related to the Action (and thereby release such Spinoff Affiliate pursuant to, MUTATIS MUTANDIS, Section 9.1 hereof). The Plaintiff Funds and the Class reserve the right to take the actions described in this Section 8.2 in the event that such spinoff or like disposition is sought by someone other than Brooke Group or a Future Affiliate or an Affiliate of a Future Affiliate. For purposes of this
Section 8.2, the Affiliates of such Future Affiliate shall be deemed to be those entities that were Affiliates of the Future Affiliate immediately prior to the Future Affiliate Transaction.

8.3. With respect to subsection 8.2, nothing in this provision, or elsewhere in this Agreement, limits the authority of the Class to challenge any transaction which they reasonably believe is in violation of federal or state antitrust law.

8.4. Promptly after a Future Affiliate Transaction, Settling Defendants and the Settlement Class and Settlement Class Counsel, each agree to exercise best efforts to negotiate in good faith a settlement of the Action against a Future Affiliate's Domestic Tobacco Operations.

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

9. RELEASE.

9.1. Upon the Class Settlement Date, with respect to each Settling Defendant, for good and sufficient consideration as described herein, the Plaintiff Funds and all members of the Class, collectively and individually, on behalf of themselves, their heirs, executors, administrators, trustees, agents, attorneys, successors, assigns, affiliates, officers, directors, employees, members and shareholders shall be deemed to and do hereby release, dismiss and discharge each and every claim, right, and cause of action (including, without limitation, all claims for damages, medical expenses, restitution, medical monitoring, or any similar legal or equitable relief, under federal, state or common law), known or unknown, asserted or unasserted, direct or indirect, which they had, now have, or may hereafter have against each Settling Defendant (including its past, present and future parents, subsidiaries, affiliates and their past, present and future agents, servants, attorneys, employees, officers, directors, shareholders, and beneficial owners) (and Downstream Distribution Entities of Liggett, but only to the extent that such downstream distribution entities would have cross-claims against Liggett) which is based on any and all harm, injury or damages claimed by members of the Class to be caused by smoking, addiction to, or dependence upon, cigarettes or which is asserted in the Action in connection with, or arising out of the conduct, acts, facts, transactions, occurrences, representations or omissions set forth, alleged, referred to or otherwise embraced in the Action complaint or any other smoking-related actions.

Provided, however, as follows:

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

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

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

9.2 In addition to the provisions of Section 9.1, each member of the Class hereby expressly waives and releases, upon this Agreement becoming final, any and all provisions, rights and benefits conferred by Section 1542 of the California Civil Code, which reads:

Section 1542. Certain Claims not Affected by General Release. A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor;

or by any law of any state or territory of the United States, or principle of common law, which is similar, comparable or equivalent to paragraph 1542 of the California Civil Code. Each member of the Class may hereafter discover facts other than or different from those which he, she or it knows or believes to be true with respect to the claims which are the subject matter of the provisions of Section 9.1 hereof, but each member of the Class hereby expressly waives and fully, finally, and forever settles and releases, upon this Settlement Agreement becoming final, any known or unknown, suspected or unsuspected, contingent or non-contingent claim with respect to the subject matter of the provisions of
Section 9.1, whether or not concealed or hidden, without regard to the subsequent discovery or existence of such different or additional facts.

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

10. EXCLUSIVE REMEDY; DISMISSAL OF ACTION; JURISDICTION OF COURT.

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

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

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

11. TERM.

11.1. Unless earlier terminated in accordance with the provisions of this Agreement, the duration of this Agreement shall be twenty-five (25) years from the Class Settlement Date.

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

11.3. Except as may be otherwise specifically provided in this Agreement, a termination by a Settling Defendant hereunder shall have the effect of rendering this Agreement as having no force or effect whatsoever, null and void AB INITIO, and not admissible as evidence for any purpose in any pending or future litigation in any jurisdiction. However, a termination shall not affect any prior cooperation or require the return of any documents produced to the Plaintiff Funds or the Class pursuant to this Agreement.

12. CONTINUING ENFORCEABILITY.

12.1. The parties acknowledge and agree that a primary purpose of this Agreement is to provide the Class with certain equitable and other relief made available by Settling Defendants and their current Boards of Directors, while ensuring that Liggett may perform its obligations and make its payments hereunder, if any, without unduly risking insolvency, bankruptcy or liquidation; this Agreement is intended to be a mutually beneficial and equitable alternative to the prospect of bankruptcy.

12.2. Unless earlier terminated, this Agreement and each provision of or obligation arising from this Agreement shall continue and remain fully enforceable if a Settling Defendant institutes or is subject to the institution against it of any proceeding or voluntary case under title 11 of the United States Code, or other proceeding seeking to adjudicate it insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or other proceeding seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any part of its property (each, a "Bankruptcy Proceeding"). Brooke Group has the right but not the obligation to cure and to perform any of Liggett's monetary obligations, if any, under this Agreement (calculated as if Liggett were meeting such monetary obligations) notwithstanding the occurrence and continuation of any Bankruptcy Proceeding with respect to Liggett. The Class agrees that it has no right to terminate this Agreement, to call a default under this Agreement, or to compel Liggett to take or not to take any action with respect to this Agreement during any period in which Brooke Group is performing Liggett's post-bankruptcy proceeding monetary obligations hereunder.

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

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

13.2. No Class member shall make a claim against a non-settling person for what would be a claim settled under this Agreement if asserted against a Settling Defendant.

13.3. Claims by or on behalf of any Class members against any non-settling parties are not released and shall not be barred, precluded, limited, or reduced as a consequence of this Agreement or the subsequent award and distribution of funds to such Class members, except if and to the extent required under federal or state law applicable under choice-of-law doctrines in the forum in which any such claims may be instituted or pursued.

14. EXPENSES AND FEES.

14.1. The costs of Notice shall be paid by the Settling Defendants.

14.2 The reasonable fees and expenses of Class Counsel, if and as approved by the Court, shall be paid by the Settling Defendants after the Settlement Date.

15. COURT'S SETTLEMENT APPROVAL ORDER.

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

16. EFFECT OF DEFAULT OF ANY SETTLING DEFENDANT.

In the event any Settling Defendant fails to make a payment due and owing under the terms of this Agreement, or is in default of this Agreement in any other respect, the Class Counsel shall so notify the Court. The defaulting Settling Defendant shall then be given up to sixty (60) calendar days to "cure" the default. If the defaulting Settling Defendant does not "cure" the default in the time provided in this Section 16, and if no other Settling Defendant elects to cure such default, the Class Counsel may apply to the Court for relief, including withdrawal from the Agreement.

17. REPRESENTATIONS AND WARRANTIES; COVENANTS.

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

18. FURTHER ACTIONS.

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

19. MISCELLANEOUS.

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

19.2. This Agreement shall be construed under and governed by the laws of the State of Ohio.

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

19.4. This Agreement shall be binding upon and inure to the benefit of the Plaintiff Funds, the Class, the Settling Defendants, and their representatives, heirs, successors, and assigns; provided, however, that, upon any assignment of this Agreement by or on behalf of Liggett, or succession to this Agreement through any combination with Liggett, other than with the prior written consent of Brooke Group (which can be withheld for any or no reason), the obligations of this Agreement shall be binding upon such assignee or successor and each of its affiliates as if they each were Settling Defendants on the date of execution hereof.

19.5. Other than as provided in Section 19.4, nothing in this Agreement shall be construed to subject any Settling Defendant's parent or affiliated company to the obligations or liabilities of that Settling Defendant.

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

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

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

Plaintiff Funds:

MILBERG WEISS BERSHAD HYNES & LERACH
600 W. Broadway, Suite 1800
San Diego, California 92101-3356

Attn: Patrick J. Coughlin
Frank J. Janecek, Jr.

SCHWARZBALD & ROCK

616 Bond Court Building
1300 East Ninth Street
Cleveland, Ohio 44114-1503
Attn: Eben McNair

Attn:    Marc E. Kasowitz
         Daniel R. Benson
         Aaron H. Marks

         The above designated representatives may be changed from time

to time by any Party upon giving notice to all other Parties in conformance with this Section 19.8.

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

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

CLASS COUNSEL

/s/ Patrick J. Coughlin
-------------------------------------------

/s/ Frank J. Janecek, Jr.
-------------------------------------------

/s/ Eben McNair
-------------------------------------------

/s/ Marc E. Kasowitz
-------------------------------------------

/s/ Daniel R. Benson
-------------------------------------------

/s/ Aaron H. Marks
-------------------------------------------

BROOKE GROUP LTD.

By: /s/ Marc N. Bell
    ---------------------------------------
    Marc N. Bell


Date:  January 14, 1999

LIGGETT GROUP INC.

By: /s/ Marc N. Bell
    ---------------------------------------
    Marc N. Bell

Date:  January 14, 1999

LIGGETT & MYERS, INC.

By: /s/ Marc N. Bell
    ---------------------------------------
    Marc N. Bell


Date:  January 14, 1999

EXHIBIT 10.60

FORMATION AND

LIMITED LIABILITY COMPANY AGREEMENT

OF

BRANDS LLC

TABLE OF CONTENTS

                                                                                                               PAGE
                                                                                                               ----
                                                        ARTICLE I

                                                      DEFINED TERMS

Section 1.1             Definitions.........................................................................      1
Section 1.2             Headings............................................................................      9

                                                       ARTICLE II

                                              FORMATION AND TERM; CLOSING

Section 2.1             Formation...........................................................................      9
Section 2.2             Name................................................................................      9
Section 2.3             Term................................................................................     10
Section 2.4             Registered Agent and Office.........................................................     10
Section 2.5             Principal Place of Business.........................................................     10
Section 2.6             Qualification in Other Jurisdictions................................................     10
Section 2.7             Closing.............................................................................     10
Section 2.8             Conditions to Closing...............................................................     11
Section 2.9             Liggett Parties'Indemnification Obligation..........................................     12
Section 2.10            Reasonable Best Efforts.............................................................     13

                                                      ARTICLE III

                                REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES

Section 3.1             Corporate Authority.................................................................     13
Section 3.2             No Conflict; Required Filings and Consents..........................................     13
Section 3.3             Intellectual Property...............................................................     14

                                                      ARTICLE IV

                                        REPRESENTATIONS AND WARRANTIES OF PM

Section 4.1             Corporate Authority.................................................................     15
Section 4.2             No Conflict; Required Filings and Consents..........................................     15

                                                      ARTICLE V

                                                      COVENANTS

Section 5.1             Activities of Liggett Relating to the Brands........................................     16

                                                                                                               PAGE
                                                                                                               ----
Section 5.2             Loan Agreement......................................................................     16
Section 5.3             HSR Clearance.......................................................................     16
Section 5.4             Tax Basis of Marks..................................................................     16
Section 5.5             Access to Information...............................................................     16
Section 5.6             Representations and Warranties......................................................     17
Section 5.7             Retention of Certain Trademarks, etc................................................     17

                                                     ARTICLE VI

                                          PURPOSE AND POWERS OF THE COMPANY

Section 6.1             Purpose.............................................................................     17
Section 6.2             Powers of the Company...............................................................     18

                                                     ARTICLE VII

                                                       MEMBERS

Section 7.1             Members.............................................................................     18
Section 7.2             Powers of Members...................................................................     18
Section 7.3             Member's Shares.....................................................................     18
Section 7.4             Classes.............................................................................     18
Section 7.5             Partition...........................................................................     19
Section 7.6             Resignation.........................................................................     19
Section 7.7             Member Meetings.....................................................................     19
Section 7.8             Voting..............................................................................     19
Section 7.9             Quorum..............................................................................     19
Section 7.10            Notice of Meetings..................................................................     20
Section 7.11            Action Without a Meeting............................................................     20

                                                    ARTICLE VIII

                                                     MANAGEMENT

Section 8.1             Board of Directors..................................................................     20
Section 8.2             Manager.............................................................................     20
Section 8.3             Officers............................................................................     21

                                                     ARTICLE IX

                                             SHARES AND CAPITAL ACCOUNTS

Section 9.1             Capital Contributions...............................................................     21
Section 9.2             Status of Capital Contributions.....................................................     21
Section 9.3             Capital Accounts....................................................................     21
Section 9.4             Advances............................................................................     22

                                                                                                               PAGE
                                                                                                               ----
Section 9.5             Redemption of Shares................................................................     22
Section 9.6             Liggett Parties' Class B Put Option.................................................     23
Section 9.7             Liggett Parties' Class B Conversion Right...........................................     23
Section 9.8             Assignment and Encumbrance of Interests.............................................     23

                                                      ARTICLE X

                                                     ALLOCATIONS

Section 10.1            Allocation of Gross Income..........................................................     24
Section 10.2            Allocation of Profits...............................................................     24
Section 10.3            Allocation of Losses................................................................     24
Section 10.4            Allocation Rules....................................................................     25
Section 10.5            Regulatory Allocations..............................................................     25
Section 10.6            Treatment of Regulatory Allocations.................................................     27
Section 10.7            Tax Allocations; sections 704(c) of the Code........................................     27

                                                     ARTICLE XI

                                                    DISTRIBUTIONS

Section 11.1            Distributions.......................................................................     28
Section 11.2            Mandatory Distributions.............................................................     28
Section 11.3            Limitations on Distribution.........................................................     28

                                                     ARTICLE XII

                                                  BOOKS AND RECORDS

Section 12.1            Books, Records and Financial Statements.............................................     29
Section 12.2            Accounting Method...................................................................     29
Section 12.3            Annual Audit........................................................................     30

                                                    ARTICLE XIII

                                                     TAX MATTERS

Section 13.1            Tax Matters ........................................................................     30
Section 13.2            Section 709 Election................................................................     30
Section 13.3            Taxation as Partnership.............................................................     30

                                                     ARTICLE XIV

                                     LIABILITY, EXCULPATION AND INDEMNIFICATION

Section 14.1            Liability...........................................................................     31

                                                                                                               PAGE
                                                                                                               ----
Section 14.2            Exculpation.........................................................................     31
Section 14.3            Fiduciary Duty......................................................................     31
Section 14.4            Indemnification.....................................................................     31
Section 14.5            Expenses............................................................................     32
Section 14.6            Insurance...........................................................................     32
Section 14.7            Outside Businesses..................................................................     32
Section 14.8            Third-Party Beneficiaries...........................................................     33

                                                     ARTICLE XV

                                                 ADDITIONAL MEMBERS

Section 15.1            Admission...........................................................................     33

                                                     ARTICLE XVI

                                                     ASSIGNMENTS

Section 16.1            Recognition of Assignment by the Company............................................     33
Section 16.2            Effect of Assignment................................................................     33

                                                    ARTICLE XVII

                                      DISSOLUTION, LIQUIDATION AND TERMINATION

Section 17.1            No Dissolution......................................................................     33
Section 17.2            Liquidation.........................................................................     34
Section 17.3            Termination.........................................................................     34
Section 17.4            Claims of the Members...............................................................     34

                                                    ARTICLE XVIII

                                                    MISCELLANEOUS

Section 18.1            Notices.............................................................................     35
Section 18.2            Formation Expenses..................................................................     36
Section 18.3            Failure to Pursue Remedies..........................................................     36
Section 18.4            Cumulative Remedies.................................................................     36
Section 18.5            Binding Effect......................................................................     36
Section 18.6            Interpretation......................................................................     36
Section 18.7            Severability........................................................................     37
Section 18.8            Counterparts........................................................................     37
Section 18.9            Integration.........................................................................     37
Section 18.10           Governing Law.......................................................................     37
Section 18.11           Consent to Jurisdiction.............................................................     37
Section 18.12           Confidentiality.....................................................................     37

                                                                                                               PAGE
                                                                                                               ----
Section 18.13           Governmental Notices................................................................     37
Section 18.14           Prior Agreement.....................................................................     38

                                                     ARTICLE XIX

                                                     AMENDMENTS

Section 19.1            Amendments..........................................................................     38

SCHEDULE A              Members

EXHIBIT A                  Form of License Agreement
EXHIBIT B                  Form of Assignment

FORMATION AND LIMITED LIABILITY COMPANY AGREEMENT

OF

BRANDS LLC

This Formation and Limited Liability Company Agreement (this "AGREEMENT") of Brands LLC (the "COMPANY"), dated as of January 12, 1999, is entered into among Brooke Group Ltd., a Delaware corporation ("Brooke"), Liggett & Myers Inc., a Delaware corporation ("LMI"), Eve Holdings Inc., a Delaware corporation ("Eve"), Liggett Group Inc., a Delaware corporation ("LIGGETT", and, together with Brooke, Eve and LMI, the "LIGGETT PARTIES"), and Philip Morris Incorporated, a Virginia corporation ("PM" and, together with the Liggett Parties, the "PARTIES").

WHEREAS, the Parties intend to form the Company for purposes of the transactions described herein;

WHEREAS, Eve desires to contribute the Marks to the Company in exchange for 100% of the Class A Shares and 100% of the Class B Shares of the Company;

WHEREAS, concurrently with the execution of this Agreement, the Liggett Parties and PM will execute the Class A Option Agreement and the Class B Option Agreement pursuant to which Eve will grant to PM an option to purchase the Class A Shares and Class B Shares, respectively;

WHEREAS, if PM exercises the Class A Option, the Company and PM will enter into the License Agreement, pursuant to which PM and its Affiliates will receive an exclusive, domestic license of the Marks;

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members hereby agree to form a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 DEL. C. section 18-101, ET SEQ.), as amended from time to time (the "DELAWARE Act"), as provided herein, and hereby agree as follows:

ARTICLE I

DEFINED TERMS

Section 1.1 DEFINITIONS. Unless the context otherwise requires, the terms defined in this Article I shall, for the purposes of this Agreement, have the meanings herein specified.

"ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:

(a) Credit to such Capital Account any amounts which such Member is deemed to be obligated to restore pursuant to the penultimate sentence of either of Treasury Regulation sections 1.704-2(g)(1) or 1.704-2(i)(5); and

(b) Debit to such Capital Account the items described in Treasury Regulation sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).

The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulation section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

"AFFILIATE" shall mean, with respect to any Person, any direct or indirect subsidiary of such Person, any other Person that directly or through one or more intermediaries, is controlled by, or is under common control with, the specified Person, and, if such a Person is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, the term "CONTROL" (including with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities or partnership or other ownership interests, by contract or otherwise. Notwithstanding the foregoing, for purposes of this Agreement (i) the Liggett Parties and their Subsidiaries shall not be deemed to be Affiliates of PM, and
(ii) PM and its Subsidiaries (including the Company) shall not be deemed to be Affiliates of the Liggett Parties.

"AGREEMENT" shall have the meaning set forth in the recitals hereof.

"ASSIGN" shall mean to, directly or indirectly, sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any Shares (and "ASSIGNMENT" shall mean such an act).

"BRANDS" shall mean the "Lark," "Chesterfield" and "L&M" brands produced by the Liggett Parties.

"BROOKE" shall have the meaning set forth in the preamble hereof.

"CAPITAL ACCOUNT" shall mean, with respect to any Member and any Share, the account maintained for such Member and such Share in accordance with the provisions of Section 9.3 hereof.

"CAPITAL CONTRIBUTION" shall mean, with respect to any Member and any Share, the aggregate amount of cash and the initial Gross Asset Value of any property (other than cash) contributed to the Company pursuant to Section 9.1 hereof with respect to such Share, net of any liabilities of such Member that are assumed by the Company in connection with such contribution or that are secured by property so contributed, and shall include the Initial Capital Contribution and any Subsequent Capital Contribution.

"CERTIFICATE" shall mean the Certificate of Formation of the Company and any and all amendments thereto and restatements thereof filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.

"CLAIMS" shall have the meaning in Section 2.9 of this Agreement.

"CLASS A EXERCISE PRICE" shall have the meaning in Section 2.3 of the Class A Option Agreement.

"CLASS B EXERCISE PRICE" shall have the meaning in Section 2.3 of the Class B Option Agreement.

"CLASS A MEMBER" shall mean a permitted holder of a Class A Share pursuant to this Agreement.

"CLASS B MEMBER" shall mean a permitted holder of a Class B Share pursuant to this Agreement.

"CLASS A OPTION AGREEMENT" shall mean that certain option agreement, dated as the date hereof, pursuant to which PM (or its designee) may purchase from the Liggett Parties the Class A Shares owned by the Liggett Parties and their Affiliates. Such right to purchase the Class A Shares is the "CLASS A OPTION".

"CLASS B OPTION AGREEMENT" shall mean that certain option agreement, dated as of the date hereof, pursuant to which PM (or its designee) may purchase from the Liggett Parties the Class B Shares owned by the Liggett Parties and their Affiliates. Such right to purchase the Class B Shares is the "CLASS B OPTION".

"CLASS A OPTION CONSIDERATION" shall have the meaning set forth in Section 2.1 of the Class A Option Agreement.

"CLASS B OPTION CONSIDERATION" shall have the meaning set forth in Section 2.1 of the Class B Option Agreement.

"CLASS A SHARE" and "CLASS B SHARE" shall have the respective meanings set forth in Section 7.4 hereof.

"CLOSING" shall have the meaning set forth in Section 2.7(a).

"CLOSING DATE" shall mean the date on which the Closing occurs.

"CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any corresponding United States federal tax statute enacted after the date of this Agreement. A reference to a specific section (ss.) of the Code refers not only to such specific section but also to any corresponding provision of any United States federal tax statute enacted after the date of this Agreement, as such specific section or corresponding provision is in effect on the date of application of the provisions of this Agreement containing such reference.

"COMPANY" shall have the meaning set forth in the preamble hereto.

"COMPANY MINIMUM GAIN" shall have the meaning given the term "partnership minimum gain" in Treasury Regulation section 1.704-2(b)(2) and shall be computed in accordance with Treasury Regulation section 1.704-2(d).

"COVERED PERSON" shall mean any Officer or director of the Company or its Affiliates (but shall not include an officer, director or employee of any Member or their respective Affiliates who is not an Officer of the Company or its Affiliates).

"DELAWARE ACT" shall have the meaning set forth in the preamble hereof.

"DEPRECIATION" shall mean, for each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Fiscal Year or other period; PROVIDED, HOWEVER, that, if the Gross Asset Value of an asset differs from its adjusted basis for United States federal income tax purposes at the beginning of such Fiscal Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the United States federal income tax depreciation, amortization or other cost recovery deduction with respect to such asset for such Fiscal Year or other period bears to such beginning adjusted tax basis; and PROVIDED, FURTHER, that if the United States federal income tax depreciation, amortization or other cost recovery deduction for such Fiscal Year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Manager.

"DISTRIBUTIONS" shall mean distributions of cash or other property made by the Company with respect to the Class A Shares or the Class B Shares. Distributions shall not mean payments of cash or other property to holders of Shares for reasons other than their ownership of such Shares.

"ECONOMIC RISK OF LOSS" shall have the meaning set forth in Treasury Regulation section 1.752-2.

"EVE" shall have the meaning set forth in the preamble hereof.

"FISCAL YEAR" shall mean (a) the period commencing upon the date of this Agreement and ending on December 31, 1999, (b) any subsequent twelve-month period commencing on January 1 and ending on December 31, (c) any other twelve-month period required by the Code or the Treasury Regulations to be used as the taxable year of the Company or (d) any portion of the periods described in clauses (a), (b) or (c) of this sentence for which the Company is required to allocate Profits, Losses and other items of Company income, gain, loss or deduction pursuant to Article X hereof.

"GAAP" means generally accepted accounting principles in the United States as in effect from time to time.

"GOVERNMENTAL ENTITY" has the meaning set forth in Section 3.2 of this Agreement.

"GROSS ASSET VALUE" means, with respect to any asset, such asset's adjusted basis for United States federal income tax purposes, except as follows:

(a) the initial Gross Asset Value of the Marks shall be as set forth on Schedule A hereto, and of any other asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the Manager;

(b) the Gross Asset Value of all Company assets shall be adjusted to equal their respective gross fair market values (taking section 7701(g) of the Code into account), as determined by the Manager, as of the following times: (i) immediately prior to the acquisition of an additional Share in the Company by any new or existing Member in exchange for more than a DE MINIMIS Capital Contribution; (ii) immediately prior to the distribution by the Company to a Member of more than a DE MINIMIS amount of Company assets in redemption of a Share in the Company; and (iii) the liquidation of the Company within the meaning of Treasury Regulation section 1.704-1(b)(2)(ii)(g);

(c) the Gross Asset Value of any Company asset distributed to any Member shall be the gross fair market value (taking section 7701(g) of the Code into account) of such asset on the date of distribution, as determined by the Manager; and

(d) the Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to section 734(b) or section 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulation section 1.704-1(b)(2)(iv)(m) and subparagraph (f) of the definition of "Profits" and "Losses" or Section 10.5(e) hereof; PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent that an adjustment pursuant to subparagraph (b) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraph (a), paragraph (b) or paragraph (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

"GUARANTORS" shall mean the guarantors of the Company's obligations under the Loan Agreement.

"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended.

"HSR CLEARANCE" means expiration or termination of the waiting period under the HSR Act with respect to the filings made in connection with the exercise of the Class A Option.

"INDEMNIFIED PARTIES" shall have the meaning set forth in
Section 2.9.

"LMI" shall have the meaning set forth in the preamble hereof.

"LICENSE AGREEMENT" shall mean that certain license agreement attached hereto as Exhibit A, dated as of the Closing Date, between the Company and PM pursuant to which PM and its Affiliates will obtain the exclusive (including with respect to the Company) license to use the Marks in the United States (as defined in the License Agreement).

"LIENS" shall have the meaning set forth in Section 3.3.

"LIGGETT" and "LIGGETT PARTIES" shall have the respective meanings set forth in the preamble hereof.

"LOAN AGREEMENT" shall mean the loan agreement entered into between the Company and the lending institutions named therein, with respect to the Loan Amount, which borrowing shall be guaranteed by Eve or such other entity designated by the Liggett Parties which has received the Option Consideration and by any other holder of Class B Shares (such entities are referred to herein as the Guarantors).

"LOAN AMOUNT" shall mean $134.9 million or, if less, the maximum amount that the Company is able to borrow in the circumstances described in Section 5.2 hereof.

"MANAGER" shall have the meaning set forth in Section 8.2 hereof.

"MARKS" shall mean all of the interest of the Liggett Parties and any Affiliate of any Liggett Party in all trademarks, trade names, trade dress, service marks, registrations and applications for registrations therefor, in each case relating to "Lark," "Chesterfield" and "L&M" brands, including any variation or product line extension thereof and any derivative pertaining thereto, but shall not include the rights retained by the Liggett Parties pursuant to Section 5.7 hereof.

"MEMBER" shall mean any Person named as a member of the Company on Schedule A hereto and includes any Person who acquires a Share pursuant to the provisions of this Agreement. For purposes of the Delaware Act, the Members shall constitute two (2) classes or groups of members.

"MEMBER MINIMUM GAIN" means an amount, with respect to each Member Nonrecourse Liability, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt was treated as a Nonrecourse Liability, determined in accordance with Treasury Regulation section 1.704-2(i)(3).

"MEMBER NONRECOURSE DEBT" has the same meaning as the term "member nonrecourse debt" in Treasury Regulation section 1.704-2(b)(4).

"MEMBER NONRECOURSE DEDUCTIONS" has, with respect to a Member, the same meaning as the "partner nonrecourse deductions" in Treasury Regulation sections 1.704-2(i)(1) and 1.704-2(i)(2).

"MEMBER NONRECOURSE LIABILITY" has, with respect to a Member, the same meaning as the term "partner nonrecourse debt" or "partner nonrecourse liability" in Treasury Regulation section 1.704-2(b)(4).

"NONRECOURSE DEDUCTIONS" has the meaning set forth in Treasury Regulation section 1.704-2(b)(3).

"NOTICE OF EXERCISE" shall have the meaning set forth in
Section 2.5 of the Class A Option Agreement.

"OFFICERS" means those Persons appointed by the Manager to manage the day-to-day affairs of the Company pursuant to Section 8.3 hereof.

"OPTION AGREEMENTS" means the Class A Option Agreement and the Class B Option Agreement.

"OPTION CONSIDERATION" means the sum of the Class A Option Consideration and the Class B Option Consideration.

"PM" shall have the meaning set forth in the preamble hereof.

"PERMITTED ASSIGNEE" shall have the meaning set forth in
Section 2.2(d) of the Class A Option Agreement.

"PERSON" includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company or other legal entity or organization.

"PROFITS" and "LOSSES" means, for each Fiscal Year, an amount equal to the Company's taxable income or loss for such Fiscal Year, determined in accordance with section 703(a) of the Code (but including in taxable income or loss, for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to section 703(a)(1) of the Code), with the following adjustments:

(a) any income of the Company exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss;

(b) any expenditures of the Company described in section 705(a)(2)(B) of the Code (or treated as expenditures described in section 705(a)(2)(B) of the Code pursuant to Treasury Regulation section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss;

(c) in the event the Gross Asset Value of any Company asset is adjusted in accordance with paragraph (b) or paragraph (c) of the definition of "Gross Asset Value" above, the amount of such adjustment shall be taken into account as gain (if the adjustment increases the Gross Asset Value of an asset) or loss (if the adjustment decreases the Gross Asset Value of an asset) from the disposition of such asset for purposes of computing Profits or Losses;

(d) gain or loss resulting from any disposition of any asset of the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the asset disposed of, notwithstanding that the adjusted tax basis of such asset differs from its Gross Asset Value;

(e) in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with the definition of "Depreciation";

(f) to the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code section 734(b) is required, pursuant to Treasury Regulation section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and

(g) any items of income, gain, loss or deduction specially allocated under Section 10.5 shall be excluded.

"PUT OPTION" shall have the meaning set forth in Section 9.6.

"PUT PERIOD" shall have the meaning set forth in Section 9.6.

"REDEMPTION PRICE" shall have the meaning set forth in Section 9.5(b).

"REGULATORY ALLOCATIONS" shall have the meaning set forth in
Section 10.6.

"SHARE" shall mean a unit of limited liability company interest owned by a Member in the Company which represents, in respect of any Class A Share or Class B Share, a right to allocations of the Profits and Losses of the Company, a right to participate in certain voting and/or management rights and a right to receive distributions as provided in Article XI hereof, in each case in accordance with the provisions of this Agreement and the Delaware Act.

"SUBSIDIARIES" shall mean, with respect to any Person, any other Person in which such Person owns, directly or indirectly, 50% or more of the voting interests.

"TAX MATTERS PARTNER" shall have the meaning set forth in
Section 13.1(a) hereof.

"TOTAL VOTING POWER" means the total number of votes represented by the Class A Shares, with each Share entitled to one vote.

"TRADE LOADING" shall mean selling to any supplier or distributor more inventory than such supplier or distributor can reasonably be expected to sell in the ordinary course.

"TREASURY REGULATIONS" means the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

Section 1.2 HEADINGS. The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof.

ARTICLE II

FORMATION AND TERM; CLOSING

Section 2.1 FORMATION. (a) Subject to, and effective upon, the filing of the Certificate with the Office of the Secretary of State of the State of Delaware as provided in Section 2.3, the Members hereby form the Company as a limited liability company under and pursuant to the provisions of the Delaware Act, and agree that the rights, duties and liabilities of the Members shall be as provided in the Act, except as otherwise provided herein.

(b) Brooke and PM, acting jointly, by their respective duly authorized officers, are hereby designated as authorized persons, within the meaning of the Delaware Act, to jointly execute, deliver and file, or cause the execution, delivery and filing of the Certificate. The Secretary of the Company and any assistant secretary are hereby designated as authorized Persons, within the meaning of the Delaware Act, to execute, deliver and file, or cause the execution, delivery and filing of, all certificates, notices or other instruments (and any amendments and/or restatements thereof) required or permitted by the Delaware Act to be filed in the office of the Secretary of State of Delaware and any other certificates, notices or other instruments (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business.

Section 2.2 NAME. The name of the Company shall be "Brands LLC."

Section 2.3 TERM. The term of the Company shall commence on the date the Certificate is filed in the office of the Secretary of State of the State of Delaware, which shall be as soon as practicable after HSR Clearance is received, and shall continue perpetually unless the Company is dissolved pursuant to Section 17.2, which dissolution shall be carried out pursuant to the Delaware Act and the provisions of this Agreement.

Section 2.4 REGISTERED AGENT AND OFFICE. The Company's registered agent and office in Delaware shall be the Corporation Trust Company, Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle.

Section 2.5 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Company shall be in New York or such other location as the Manager may designate from time to time and embody in a writing to be filed with the records of the Company.

Section 2.6 QUALIFICATION IN OTHER JURISDICTIONS. The Officers shall cause the Company to be qualified, formed or registered under assumed or fictitious name statutes or similar laws in any jurisdiction in which the Company transacts business and such qualification, formation or registration is necessary or appropriate for the transaction of such business.

Section 2.7 CLOSING. (a) Subject to the conditions set forth herein, the closing of the transactions contemplated by this Section (the "CLOSING") shall take place at the offices of Wachtell, Lipton, Rosen & Katz at 10:00 a.m. on a date that is set forth in the Notice of Exercise delivered by PM pursuant to the Class A Option Agreement. In the event that PM is not obligated to, and does not, exercise the Class A Option and deliver the related Notice of Exercise, the Closing shall not occur. The completion of all transactions described in this Section shall be deemed to occur simultaneously, and the Closing shall not be deemed to have occurred until all such transactions have been completed.

(b) At the Closing, the following transactions shall occur and circumstances shall exist:

(i) Eve will sell, transfer, convey and assign to the Company, as a contribution to the capital of the Company, all right, title and interest in and to the Marks, together with that part of the goodwill of the business connected with the use of and symbolized by the Marks (the "ASSOCIATED GOODWILL"), pursuant to the Assignment Agreement, a form of which is attached as Exhibit B hereto, such assignment to result in the capital account allocations set forth on Schedule A hereto.

(ii) Neither the Company nor PM or any of their respective Affiliates shall assume any past, present or future liabilities of any nature, express or implied, whether or not contingent, relating to the Marks or the Brands and arising from production, sales, marketing, consumption or use of or exposure to any product or any activity or omission of the Liggett Parties and their Affiliates prior to the Closing. Neither the Company's nor PM's acquisition, registration or enforcement of the Marks, or any "goodwill" or other intangible asset attributable to the Marks, shall be deemed an assumption, express or implied, of any liability excluded under this paragraph or indemnified under Section 2.9.

(iii) The Company shall acquire from the Liggett Parties only the Marks and the Associated Goodwill, and shall not acquire any assets other than the Marks and the Associated Goodwill.

(iv) The Company shall have no other equity or voting interests of any kind, and no rights to acquire any such interests, outstanding (other than as contemplated by this Agreement, the Class A Option Agreement and the Class B Option Agreement).

(v) PM and the Company shall execute the License Agreement in the form attached as Exhibit B hereto.

(vi) The Company and the lending institutions shall enter into (or have entered into) the Loan Agreement and the Company shall borrow the Loan Amount.

(vii) The Company shall distribute to the Liggett Parties holding the Class B Shares as distributions on such Shares the proceeds of the borrowing under the Loan Agreement, and the Class B Exercise Price shall be reduced by the aggregate amount of such distributions.

(viii) PM or any Permitted Assignee under the Class A Option Agreement shall purchase all of the Class A Shares from the Liggett Parties for the Class A Exercise Price, and the Liggett Parties shall deliver such Class A Shares, free and clear of any Liens whatsoever.

(ix) The Parties shall take such other actions and execute such other documents as may be reasonably appropriate or necessary to effect the transactions described in clauses (i) through (viii).

Notwithstanding the foregoing and for the avoidance of doubt, the inability of the Company to enter into the Loan Agreement or obtain the Loan Amount (and therefore the non-occurrence of the distributions described in clause (vii)) will not interfere with or otherwise delay the consummation of the other transactions contemplated by this Section. In the event such events do not occur at the Closing, the Parties shall use their reasonable best efforts to cause the Loan Agreement to be entered into, the Loan Amount to be borrowed and the distributions contemplated by clause (vii) to occur as promptly as practicable following the Closing Date.

Section 2.8 CONDITIONS TO CLOSING.

(a) EXERCISE OF CLASS A OPTION. PM shall exercise, or be obligated to exercise the Class A Option, as provided in the Class A Option Agreement.

(b) REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LIGGETT PARTIES. The representations and warranties of the Liggett Parties made in this Agreement shall be true and correct in all material respects as of the date hereof and, except as specifically contemplated by this Agreement, on and as of the Closing Date, as though made on and as of the Closing Date, and the Liggett Parties shall have performed or complied in all material respects with the obligations and covenants required by this Agreement to be performed or complied with by the Liggett Parties by the time of the Closing; the Liggett Parties shall have delivered to PM a certificate dated the Closing Date and signed by an authorized officer confirming the foregoing.

(c) REPRESENTATIONS, WARRANTIES AND COVENANTS OF PM. The representations and warranties of PM made in this Agreement shall be true and correct in all material respects as of the date hereof and, except as specifically contemplated by this Agreement, on and as of the Closing Date, as though made on and as of the Closing Date, and PM shall have performed or complied in all material respects with the obligations and covenants required by this Agreement be performed or complied with by it by the time of the Closing; PM shall have delivered to the Liggett Parties a certificate dated the Closing Date and signed by an authorized officer confirming the foregoing.

(d) SATISFACTION OF CONDITIONS IN THE CLASS A OPTION AGREEMENT. The obligations of PM under this Agreement are subject to the satisfaction of the conditions set forth in Article VIII of the Class A Option Agreement and the obligations of the Liggett Parties under this Agreement are subject to the satisfaction of the conditions set forth in Article VII of the Class A Option Agreement.

(e) LETTER AGREEMENT. Neither PM nor any of the Liggett Parties shall have breached any of its material obligations under paragraph 9 of that certain letter agreement dated November 20,1998 between PM and the Liggett Parties, which obligations shall survive the execution of this Agreement and the Closing.

(f) WAIVER OF CONDITIONS. The conditions in Section 2.8(b) and
2.8(e) (with respect to the obligations of the Liggett Parties) and Article VIII of the Class A Option Agreement are for the sole benefit of PM and may be waived by PM, and the conditions in 2.8(c) and 2.8(e) (with respect to PM's obligations) and Article VII of the Class A Option Agreement are for the sole benefit of the Liggett Parties and may be waived by the Liggett Parties.

Section 2.9 LIGGETT PARTIES' INDEMNIFICATION OBLIGATION. The Liggett Parties jointly and severally shall indemnify and hold harmless the Company, PM, their respective Affiliates, officers, directors, employees, agents and representatives (collectively, the "INDEMNIFIED PARTIES") from and against any and all claims, actions, suits, demands, assessments, judgments, losses, liabilities, damages, costs and expenses (including without limitation, penalties, attorneys' fees and accounting fees and investigation costs) (collectively, "CLAIMS") that may be incurred by the Indemnified Parties resulting or arising from or related to, or incurred in connection with, (i) the liabilities described in Section 2.7(b)(ii), none of which are being assumed by the Company, (ii) the failure by the Liggett Parties to transfer the Marks as provided in Section 2.7(b)(i), and (iii) any failure to comply with the limitations set forth in Section 2.7(b)(iii) regarding any other assets of the Liggett Parties other than the Marks. The rights of the Indemnified Parties to indemnification as set forth in this Section shall be in addition to, and not in limitation of, any other remedies they may have, whether in law or equity, and shall survive any termination of this Agreement or dissolution of the Company.

Section 2.10 REASONABLE BEST EFFORTS. Each of the Parties agrees to use its reasonable best efforts to cause the conditions to the Closing to be satisfied; PROVIDED, however, that, subject to the terms and conditions of the License Agreement, PM shall not be required to agree to divest or hold separate any brand, product, business or assets or to take or agree to take

any action that limits its freedom of action with respect to, or its ability to retain, any of the Marks or any brand, product, business or other asset of PM or its Affiliates.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES

Each of the Liggett Parties hereby jointly and severally represents and warrants to PM as follows:

Section 3.1 CORPORATE AUTHORITY. Each of the Liggett Parties is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization. Each Liggett Party has all requisite corporate power and authority to enter into this Agreement, the Class A Option Agreement and the Class B Option Agreement (collectively, the "TRANSACTION AGREEMENTS") and to consummate the transactions contemplated thereby. All corporate acts and other proceedings required to be taken by each Liggett Party to authorize the execution, delivery and performance of each of the Transaction Agreements and the consummation of the transactions contemplated thereby have been duly and properly taken. The Transaction Agreements have been duly executed and delivered by each Liggett Party, and each such agreement constitutes the legal, valid and binding obligations of each Liggett Party, enforceable against each Liggett Party in accordance with its terms.

Section 3.2 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and delivery of each of the Transaction Agreements by each Liggett Party, the consummation by each Liggett Party of the transactions contemplated thereby and compliance by each Liggett Party with all of the provisions of each of the Transaction Agreements to which it is a party will not (i) conflict with or violate the certificate of incorporation or by-laws of any Liggett Party or any comparable organizational documents, (ii) conflict with or violate any statute, ordinance, rule, regulation, order, judgment or decree applicable to any Liggett Party, or by which any of them or any of their respective properties or assets are bound, encumbered or affected, or (iii) result in a violation or breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in any loss of any material benefit to, or result in increased, additional, accelerated or guaranteed rights or entitlements of any person under, or the creation of any Lien on any of the Marks pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which any Liggett Party is a party or by which any of the Marks are bound or affected. None of the execution and delivery of any of the Transaction Agreements by any Liggett Party, the consummation by each Liggett Party of the transactions contemplated thereby or compliance by each Liggett Party with any of the provisions of any of the Transaction Agreements to which it is a party will require any consent, waiver, approval, authorization or permit of, license, or registration or filing with, or notification to any government or subdivision thereof, domestic, foreign or supranational or any administrative, governmental or regulatory authority, agency, commission, tribunal or body, domestic, foreign or supranational (a "GOVERNMENTAL ENTITY"),

except for (i) the filing of the Certificate pursuant to the Delaware Act and
(ii) compliance with the HSR Act.

Section 3.3 INTELLECTUAL PROPERTY. At the Closing, the Company will own and have the right in the United States (as defined in the License Agreement) to use, execute, reproduce, display, modify, enhance, distribute, prepare derivative works of and license the Marks without payment to any other person and the consummation of the transactions contemplated by the Transaction Agreements will not conflict with, alter or impair such right. Other than the Transaction Agreements and the License Agreement, none of the Liggett Parties or any of their respective Subsidiaries has granted any options, licenses or agreements of any kind relating to the Marks or the marketing or distribution thereof. At the Closing, the Company will hold the Marks free and clear of the claims of others and of all liens, claims, charges, security interests, options or other legal or equitable encumbrances or restrictions whatsoever (any of the foregoing, a "LIEN"). The present use of the Marks by the Liggett Parties and their Subsidiaries does not violate, conflict with or infringe the intellectual property of any other person or entity. No claims are pending, or to the best knowledge of any of the Liggett Parties, threatened, by any person with respect to the ownership, validity, enforceability, effectiveness or use of the Marks, and during the past three years, none of the Liggett Parties has received any communications alleging that any of the Liggett Parties or any of their Subsidiaries through their use of the Marks has violated any rights relating to the intellectual property of any person or entity. None of the Liggett Parties will retain any interest whatsoever in the Marks except for its ownership of the Class A Shares and the Class B Shares, subject to the exercise of the Class A Option and the exercise of the Class B Option.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PM

PM hereby represents and warrants to the Liggett Parties as follows:

Section 4.1 CORPORATE AUTHORITY. PM is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia. PM has all requisite corporate power and authority to enter into each of Transaction Agreements and the License Agreement and to consummate the transactions contemplated thereby. All corporate acts and other proceedings required to be taken by PM to authorize the execution, delivery and performance of the Transaction Agreements and the License Agreement and the consummation of the transactions contemplated thereby have been duly and properly taken. The Transaction Agreements have been, and, when executed and delivered, the License Agreement will have been, duly executed and delivered by PM, and each such agreement, once executed and delivered, does and will constitute the legal, valid and binding obligations of PM, enforceable against it in accordance with its terms.

Section 4.2 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. The execution and delivery of each of the Transaction Agreements and the License Agreement by PM, the consummation by PM of the transactions contemplated thereby and compliance by PM with all

of the provisions of each of the Transaction Agreements and the License Agreement will not (i) conflict with or violate the certificate of incorporation or by-laws of PM, (ii) conflict with or violate any statute, ordinance, rule, regulation, order, judgment or decree applicable to PM, or by which it or any of its properties or assets are bound, encumbered or affected, or (iii) result in a violation or breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in any loss of any material benefit to, or result in increased, additional, accelerated or guaranteed rights or entitlements of any person under, or the creation of any Lien on any of the property or assets of PM pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which PM is a party or by which any of its properties are bound or affected. None of the execution and delivery of any of the Transaction Agreements and the License Agreement by PM, the consummation by PM of the transactions contemplated thereby or compliance by PM with any of the provisions of any of the Transaction Agreements and the License Agreement will require any consent, waiver, approval, authorization or permit of, license, or registration or filing with, or notification to Governmental Entity, except for (i) the filing of the Certificate pursuant to the Delaware Act and (ii) compliance with the HSR Act.

ARTICLE V

COVENANTS

Section 5.1 ACTIVITIES OF LIGGETT RELATING TO THE BRANDS. Prior to the Closing, the Liggett Parties may only sell inventory related to the Marks in the normal course and may not engage in any Trade Loading with respect to the Marks. Promptly after the Closing, the Liggett Parties shall destroy any inventory of finished goods related to the Brands, as well as all point-of-sale, packaging, advertising and marketing materials related to the Brands.

Section 5.2 LOAN AGREEMENT. PM shall cooperate with the Liggett Parties and the Company and use its respective reasonable best efforts to assist the Company to obtain the Loan Amount; PROVIDED, however, that PM shall not be required pursuant to the foregoing to directly or indirectly guarantee or subsidize the obtaining of the Loan Amount. The Liggett Parties shall cooperate with PM and the Company and shall use their respective reasonable best efforts to assist the Company to obtain the Loan Amount. In connection with the cooperation contemplated by this Section 5.2, PM shall consent to the pledge by the Company of the Marks and of the Company's interest in the License Agreement to the lenders under the Loan Agreement, and the Liggett Parties shall (or shall cause the holder thereof to) pledge all of the Class B Shares (including the put right set forth in Section 9.6 hereof) to such lenders.

Section 5.3 HSR CLEARANCE. The Parties shall comply with the covenants set forth in Sections 5.1 and 6.1 of the Option Agreements regarding obtaining HSR Clearance and any other Governmental Filings.

Section 5.4 TAX BASIS OF MARKS. The Liggett Parties shall provide the Company with such information as it may reasonably request concerning the basis of the Marks for federal income tax purposes.

Section 5.5 ACCESS TO INFORMATION. Prior to the Closing, the Liggett Parties shall, and shall cause each of their respective Subsidiaries to, give PM and its representatives, employees, counsel and accountants full access, during normal business hours and upon reasonable notice, to the employees, agents, independent contractors, properties, books and records relating to the Marks, only to the extent, in the reasonable judgment of counsel, permitted by law, including antitrust law, and provided that the Liggett Parties and their Subsidiaries shall not be obligated to make any disclosure which would cause forfeiture of attorney-client privilege. The Liggett Parties shall notify PM in writing if any disclosure is withheld in order to avoid such forfeiture. No investigation pursuant to this Section shall affect or be deemed to affect any representation or warranty made by the Liggett Parties. PM agrees that all information received pursuant to this Section shall be kept confidential and PM shall not disclose such information to any third party unless required to do so by applicable law.

Section 5.6 REPRESENTATIONS AND WARRANTIES. Each of the Parties shall give written notice to the other Party promptly upon the occurrence of any event that would cause or constitute a material breach or would have caused a material breach, had such event occurred or been known to it prior to the date hereof, of any of its representations or warranties contained in any of the Transaction Agreements.

Section 5.7 RETENTION OF CERTAIN TRADEMARKS, ETC. (a) PM and the Company each acknowledge that the Liggett Parties shall continue to own in the United States (as defined in the License Agreement) all right, title and interest in, to and under the "LIGGETT," "MYERS" and "LIGGETT & MYERS" trademarks, trade names, service marks, Internet domain names or any similar electronic designation, and all registrations and applications for registration therefor, PROVIDED, HOWEVER, that any use by the Liggett Parties of "LIGGETT & MYERS" as a trademark shall be subject to the consent of PM or the Company, which consent shall not be unreasonably withheld or delayed so long as such use does not encroach upon the prior trade dress, type style or logo associated with the "L&M" Mark. Neither PM nor the Company shall use or register any trademarks, service marks, trade dress, trade names, Internet domain names or any similar electronic designation that is the same as or confusingly similar to "LIGGETT," "MYERS" or "LIGGETT & MYERS." None of the Liggett Parties shall use or register any trademarks, service marks, trade dress, trade names, Internet domain names or any similar electronic designation that is the same as or confusingly similar to "L&M," "LARK" or "CHESTERFIELD."

(b) Except as set forth in the proviso to the first sentence of Section 5.7(a), neither PM nor the Company, nor any of their respective Affiliates shall (i) take any action, or permit any Affiliate to take any action, which (x) is inconsistent with the ownership rights of the Liggett Parties in, to and under the "LIGGETT," "MYERS" or "LIGGETT & MYERS" marks or
(y) will impair the ownership, validity, enforceability, effectiveness or use of the "LIGGETT," "MYERS" or "LIGGETT & MYERS" marks, or (ii) challenge the ownership, validity, enforceability, effectiveness or use of the "LIGGETT," "MYERS" or "LIGGETT & MYERS" marks.

ARTICLE VI

PURPOSE AND POWERS OF THE COMPANY

Section 6.1 PURPOSE. The Company is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Company is, engaging in any lawful act or activity for which limited liability companies may be formed under the Delaware Act.

Section 6.2 POWERS OF THE COMPANY. The Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose set forth in Section 6.1.

ARTICLE VII

MEMBERS

Section 7.1 MEMBERS. The name and mailing address of each Member and the number and class of Shares owned thereby shall be listed on Schedule A attached hereto. The Secretary or other designated Officer shall be required to update Schedule A from time to time as necessary to accurately reflect changes in address and/or the ownership of Shares. Any amendment or revision to Schedule A made to reflect an action taken in accordance with this Agreement shall not be deemed an amendment to this Agreement. Any reference in this Agreement to Schedule A shall be deemed to be a reference to Schedule A as amended and in effect from time to time. No Person, whether or not such Person holds any Shares, shall be deemed a Member of the Company hereunder or under the Delaware Act unless approved as such pursuant to the provisions of Article XV of this Agreement.

Section 7.2 POWERS OF MEMBERS. The Members shall have the power to exercise any and all rights or powers granted to the Members pursuant to the express terms of this Agreement. Members shall not have the authority to bind the Company by virtue of their status as Members.

Section 7.3 MEMBER'S SHARES. A Member's Shares shall for all purposes be personal property. No holder of a Share or Member shall have any interest in specific Company assets or property, including any assets or property contributed to the Company by such Member as part of any Capital Contribution.

Section 7.4 CLASSES. (a) The Shares shall be divided between Class A Shares and Class B Shares.

(b) The Class A Shares and Class B Shares may not be subdivided, and each of such Shares shall have identical rights and terms in all respects except as specifically set forth in this Agreement.

(c) The Class A Shares and Class B Shares shall be securities governed by Article 8 of the Uniform Commercial Code as in effect in the States of New York and Delaware. Each Member shall be entitled to receive one or more certificates registered in its name and representing all or any portion of the Class A Shares or the Class B Shares then held by it (each, a "CERTIFICATE OF INTEREST"). A security interest in any Class A Shares or Class B Shares shall be perfected through possession of a Certificate of Interest representing such Class A Shares or Class B Shares and the Company hereby makes any elections which may be required under the Uniform Commercial Code as in effect in the States of New York and Delaware to give effect to the provisions of this paragraph (c).

Section 7.5 PARTITION. Each Member waives any and all rights that it may have to maintain an action for partition of the Company's property.

Section 7.6 RESIGNATION. A Member shall cease to be a Member at the time such Member ceases to own any Shares. Shares are redeemable only pursuant to Section 9.5 of this Agreement.

Section 7.7 MEMBER MEETINGS. (a) A meeting of Class A Members for such business as may be stated in the notice of the meeting shall be held at such dates, time and place as is determined by the Manager. At each annual meeting, the Class A Members shall transact such business as shall be stated in the notice of the meeting.

(b) Special meetings of the Class A Members for any purpose or purposes may be called only by the Manager.

(c) Class B Members shall have no right to attend any meeting of the Company.

Section 7.8 VOTING. Each Member entitled to vote in accordance with the terms of this Agreement may vote in person or by proxy. The Members shall be entitled to vote only to the extent expressly set forth herein or required by law. Unless otherwise provided for by this Agreement, all matters to be decided by the Members shall be decided by an affirmative vote (or consent in writing) of the majority of the Total Voting Power of the holders of the Class A Shares, voting together as a single class, and no matter may be decided without such affirmative vote or consent in writing. Except as required by applicable law and the following sentence, Class B Members shall have no voting rights as a Member of the Company, and the Class A Members shall have all voting rights of the Members. Any amendment, modification or waiver to, or with respect to, the License Agreement, or any other action under or with respect to the License Agreement, that would shorten the term of the License Agreement or decrease the amount of the Minimum Royalty (as defined in the License Agreement) or postpone the date on which any royalty under the License Agreement is payable shall require the approval of the holders of the Class B Shares as a separate class.

Section 7.9 QUORUM. Except as otherwise required by law, the presence, in person or by proxy, of a majority of the holders of the Class A Shares shall constitute a quorum at all meetings of the Members. In case a quorum shall not be present at any meeting, Members holding a majority of the Total Voting Power held by Members represented thereat, in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of Shares shall be present. At any such adjourned meeting at which the requisite amount of Shares shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

Section 7.10 NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, shall be given to each Class A Member, at such Member's address as it appears on the records of the Company, not less than two business days before the date of the meeting (except that notice to any Member may be waived in writing by such Member).

Section 7.11 ACTION WITHOUT A MEETING. Any action required or permitted to be taken at any annual or special meeting of Members may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the number of Members as would be required to take such action at a meeting, notice of such action shall be given to those Members who have not so consented in writing to such action without a meeting and such written consent is filed with the minutes of proceedings of the Members.

ARTICLE VIII

MANAGEMENT

Section 8.1 BOARD OF DIRECTORS. The Company shall have a Board of Directors consisting of one or more persons elected by the Class A Members. Each person elected to the Board of Directors shall hold office for one year or until his successor is elected and duly qualified. A majority of the total number of directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The number of directors shall be determined from time to time by the Class A Members. No director (as such) shall have authority to bind the Company. The Board of Directors shall act on behalf of the Members to select the Manager as provided in Section 8.2.

Section 8.2 MANAGER. In accordance with Section 18-402 of the Delaware Act, management of the Company shall be vested in the manager of the Company (the "MANAGER"), who shall be elected by the Board of Directors. The Manager shall continue as such until such time as a new Manager is elected by the Board of Directors. The business and affairs of the Company shall be managed exclusively by and under the direction of the Manager in accordance with the terms of this Agreement, and the Manager shall have the sole and exclusive responsibility and authority for the management of the Company.

Section 8.3 OFFICERS. The Manager may designate and appoint such Officers as may be appropriate, as determined by the Manager, to conduct the business and affairs of the Company, and such Officers shall hold office until their successors are duly appointed. The Manager may also establish additional or alternate offices of the Company as it deems advisable, and such offices shall be filled with such Officers, who shall perform such duties and serve such terms, as the Manager shall determine from time to time.

ARTICLE IX

SHARES AND CAPITAL ACCOUNTS

Section 9.1 CAPITAL CONTRIBUTIONS. The agreed value of the initial capital contributions contemplated by Section 2.7 shall be as set forth on Schedule A.

Section 9.2 STATUS OF CAPITAL CONTRIBUTIONS. (a) No Member shall receive any interest, salary or drawing with respect to its Capital Contributions or its Capital Account or for services rendered on behalf of the Company or otherwise in its capacity as a Member, except as otherwise specifically provided in this Agreement with respect to allocations and distributions.

(b) Except as otherwise provided herein and by the Delaware Act, the Members shall be liable only to make their Capital Contributions pursuant to Section 2.7 hereof, and no Member shall be required to lend any funds to the Company or to make any additional Capital Contributions to the Company except as provided herein or therein. Other than as provided under the Delaware Act, no Member shall have any personal liability for the payment of any Capital Contribution of any other Member who is not an Affiliate of such Member.

Section 9.3 CAPITAL ACCOUNTS. (a) An individual Capital Account shall be established and maintained for each Member by class of Share.

(b) The Capital Account of each Member by class of Share shall be maintained in accordance with the following provisions:

(i) to such Member's Capital Account there shall be credited such Member's Capital Contributions, if any, when and as received, Profits and Gross Income and other items of Company income and gain allocated to such Member pursuant to Sections 10.1 and 10.2 hereof and the amount of any Company liabilities that are assumed by such Member or that are secured by any Company assets distributed to such Member;

(ii) to such Member's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Company assets (other than cash) transferred in kind to such Member in a Distribution pursuant to any provision of this Agreement, Losses and other items of Company loss and deduction allocated to such Member pursuant to Sections 10.1 and 10.2 hereof and the amount of any liabilities of such Member that are assumed by the Company (other than liabilities taken into account in determining a Member's Capital Contribution);

(iii) in determining the amount of any liability for purposes of this subsection (b), there shall be taken into account ss. 752(c) of the Code and any other applicable provisions of the Code and the Treasury Regulations;

(iv) Capital Accounts shall be otherwise adjusted in accordance with Treasury Regulation ss. 1.704-1(b); and

(v) if Shares are transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Shares.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation ss. 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Treasury Regulation.

Section 9.4 ADVANCES. If any Member shall advance any funds to the Company in addition to its Capital Contributions, the amount of such advance shall neither increase its Capital Account nor entitle it to any increase in its share of the Distributions of the Company. The amount of any such advance shall be a debt obligation of the Company to such Member and shall be repaid to it by the Company with such interest rate, conditions and terms as mutually agreed upon by such Member and the Manager. Any such advance shall be payable and collectible only out of Company assets, and the other Members shall not be personally obligated to repay any part thereof. No Person who makes any nonrecourse loan to the Company shall have or acquire, as a result of making such loan, any direct or indirect interest in the profits, capital or property of the Company, other than as a creditor.

Section 9.5 REDEMPTION OF SHARES. (a) Class A Shares shall not be redeemable by the Company.

(b) The Class B Shares shall be redeemable in whole by the Company during the exercise period for the Class B Option, as set forth in the Class B Option, for an aggregate redemption price of $139.9 million, less the aggregate amount of all distributions made on the Class B Shares (other than the distributions required by Section 11.2) PLUS the aggregate amount of capital contributed by the holder on the Class B Shares (other than the Marks) (as adjusted pursuant to this paragraph, the "REDEMPTION PRICE"). Upon such redemption, PM shall be required to cause each Guarantor to be released from its obligation as guarantor of the Loan and for any related Liens on the Class B Shares to be released. In the event of such redemption, the Company shall provide notice to the Liggett Parties, which notice shall set forth a date for the redemption to be effected, which date shall be a date not less than 20 days following the date such notice is provided. At the specified date, the Liggett Parties shall deliver to the Company any certificates or other evidence of the Class B Shares, free and clear of all Liens (other than Liens relating to the Loan), against payment of the Redemption Price, and the parties shall execute such other customary documents as may be required to effect the redemption of the Class B Shares. In the event that the outstanding principal amount under the Loan Agreement has been reduced due to payments to the lenders by any Guarantor, then, provided that the Company or a Class A Member (i) has no further liability (contingent or otherwise) with respect to the Loan

amount so repaid (whether to the lender, the Guarantor or another) and (ii) has not previously repaid or otherwise reimbursed such Guarantor for such payment, the Redemption Price shall be increased by the amount of such reduction.

Section 9.6 LIGGETT PARTIES' CLASS B PUT OPTION. Provided that either the Class A Option has been exercised or was required to have been exercised pursuant to the Class A Option Agreement, the Liggett Parties shall have a put option pursuant to which, upon written notice provided by the Liggett Parties to PM, PM (or its designee) shall be required to purchase, and the Liggett Parties shall be required to sell, all, but not less than all, of the then-outstanding Class B Shares to PM (or PM's designee) at a put price that is $5 million less than the then-applicable Redemption Price but in no event less than $500,000 (the "PUT OPTION"). The Put Option shall be exercisable at any time during the period (the "PUT PERIOD") beginning on March 2, 2010 and ending at 5:00 p.m. (New York City time) on May 31, 2010. The Put Option shall be consummated on the date specified in the written notice described in this paragraph, which date shall be a date not less than 20 days following the date such notice is provided. Upon consummation of the Put Option exercise, PM shall be required to cause each Guarantor to be released from its obligations as guarantor of the Loan and for any related Liens on the Class B Shares to be released. At the specified date, the Liggett Parties shall deliver to PM (or its designee) any certificates or other evidence of the Class B Shares, free and clear of all encumbrances and restrictions, against payment of the Put Option price, and the parties shall execute such other customary documents as may be required to effect the exchange of the Class B Shares.

Section 9.7 LIGGETT PARTIES' CLASS B CONVERSION RIGHT. At the expiration of the Put Period, if the Class B Option has not been exercised, and the Class B Shares have not been redeemed by the Company pursuant to Section 9.5, the holders of the Class B Shares shall be entitled, at their election, to convert all, but not less than all, of the then-outstanding Class B Shares into an equivalent number of Class A Shares, which newly issued Class A Shares shall have the same rights to share in future profits and losses of the Company, and the same aggregate voting power, as the Class A Shares issued at the Closing. The Class A Shares issued pursuant to this Section shall represent 50% of the aggregate capital of the Company created pursuant to Section 2.7.

Section 9.8 ASSIGNMENT AND ENCUMBRANCE OF INTERESTS. (a) Except as otherwise provided herein or in the Class A Option Agreement or the Class B Option Agreement, the Class A Shares and the Class B Shares shall not be transferable or otherwise subject to Assignment by any party, except that the Class A Shares (or, upon exercise of the Class B Option or the Put Option, the Class B Shares) may be Assigned by PM so long as the acquiring party assumes the obligations of PM under this Agreement (or the PRO RATA portion thereof, based on the percentage interest transferred) and such transfer shall not relieve PM of any of its obligations hereunder.

(b) The Liggett Parties shall not in any way Assign any Class A Shares or Class B Shares owned by them; PROVIDED, HOWEVER, that the Class B Shares may be pledged by a Guarantor to secure the borrowing under the Loan Agreement, so long as such pledge, by its

terms, provides that the encumbrance shall be eliminated when the Guarantor is released from its obligations under the Loan Agreement (including upon repayment of the entire Loan Amount).

ARTICLE X

ALLOCATIONS

Section 10.1 ALLOCATION OF GROSS INCOME. Beginning on the date immediately following the Closing Date, gross income in an amount equal to $500,000 (prorated for periods less than twelve months) shall be credited annually (and at such other times that such allocation would make a difference in connection with another allocation, distribution or other event under this Agreement) PRO RATA to the holders of Class B Shares.

Section 10.2 ALLOCATION OF PROFITS. Subject to Sections 10.3 and 10.4, the Company's Profits (taking into account the amount of any gross income allocated under Section 10.1 above as an item of deduction) shall be allocated annually (and at such other times that such allocation would make a difference in connection with another allocation, distribution or other event under this Agreement) to the Class A Members in the following order:

(i) first, PRO RATA to the holders of the Class A Shares until they have been allocated Profits equal to the amount of Losses previously allocated under Section 10.3(i) below not previously offset by an allocation of Profits under this clause; and

(ii) second, PRO RATA to the holders of the Class A Shares.

Section 10.3 ALLOCATION OF LOSSES. Subject to Sections 10.3 and 10.4, the Company's Losses (taking into account the amount of gross income allocated under Section 10.1 above as an item of deduction) shall be allocated annually (and at such other times that such allocation would make a difference in connection with another allocation, distribution or other event under this Agreement) to the Class A Shares in the following order:

(i) first, PRO RATA until such holders have been allocated an amount of Losses equal to the amount of Net Income previously allocated to the holders of Class A Shares under Section 10.2(ii) not previously offset by an allocation of Net Losses under this clause; and

(ii) second, PRO RATA to the holders of Class A Shares.

Section 10.4 ALLOCATION RULES. (a) In the event there is a change in the respective ownership interests of Class A Members during the year, the Profits (or Losses) allocated to the Members for each Fiscal Year during which there is a change in the respective ownership interests of Members during the year shall be allocated among the Members in proportion to the ownership interests during such Fiscal Year in accordance with section 706 of the Code, using any convention permitted by law and selected by the Company Board.

(b) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as determined by the Manager using any method that is permissible under section 706 of the Code and the Treasury Regulations thereunder.

(c) Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, credit and any other allocations not otherwise provided for shall be divided among the Class A Members in the same proportions as they share Profits and Losses for the Fiscal Year in question.

(d) The Members agree to report their shares of Company income, gain, loss, deduction and credit in conformity with the allocation provisions contained in this Article X.

Section 10.5 REGULATORY ALLOCATIONS. The following allocations shall be made in the following order of priority:

(a) COMPANY MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Treasury Regulation section 1.704-2(f), notwithstanding any other provision of this Article X, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Treasury Regulation section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 10.5(a) is intended to comply with the minimum gain chargeback requirements set forth in Treasury Regulation section 1.704-2(f) and shall be interpreted consistently therewith.

(b) MEMBER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Treasury Regulation section 1.704-2(i)(4), notwithstanding any other provision of this Article X, if there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulation section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to the portion of such Member's share of the net decrease in Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulations section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 10.5(b) is intended to comply with Treasury Regulation section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(c) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any Fiscal Year shall be specially allocated among the Class A Members in proportion to the allocations for such Fiscal Year of Profits under Section 10.2 or Losses under Section 10.3, as applicable.

(d) ALLOCATION OF MEMBER NONRECOURSE DEDUCTIONS. Any Member Nonrecourse Deduction for any Fiscal Year shall be specially allocated to the Member who bears the Economic Risk of Loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Treasury Regulation section 1.704-2(i)(1). The Members acknowledge and agree that, as collateralized guarantor of the Loan Amount, Eve shall be deemed for purposes of this Section 10.5(d) during the period of such guaranty to bear the Economic Risk of Loss with respect to the Loan Amount which, for such period, shall constitute Member Nonrecourse Debt.

(e) QUALIFIED INCOME OFFSET. In the event any Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6), items of Company income and gain (consisting of a PRO RATA portion of each item of Company income, including gross income, and gain for the Fiscal Year) shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulation, the Adjusted Capital Account Deficit of such Member created by such adjustments, allocations or distributions as quickly as possible; PROVIDED that an allocation pursuant to this Section 10.5(e) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 10.5 have been tentatively made as if this Section 10.5(e) were not in this Agreement. This
Section 10.5(e) is intended to comply with the qualified income offset requirement in Treasury Regulation section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

(f) GROSS INCOME ALLOCATION. In the event any Member has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to the terms of this Agreement or otherwise, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentence of each of Treasury Regulations sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this
Section 10.5(f) shall be made if and only to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 10.5 have been tentatively made as if Section 10.5(e) and this Section 10.5(f) were not in this Agreement.

(g) MEMBER NONRECOURSE DEDUCTIONS. If any Class A Member bears the Economic Risk of Loss with respect to a Member Nonrecourse Liability, any Member Nonrecourse Deduction for any Fiscal Year shall be specially allocated to the Member who bears the Economic Risk of Loss with respect to the Member Nonrecourse Liability to which such Member Nonrecourse Deductions are attributable in accordance with Treasury Regulation section 1.704-2(i).

(h) ADJUSTMENTS OCCASIONED BY CODE SECTION 754 ELECTION. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code section 734(b) or Code section 743(b) is required pursuant to an election under Code section 754 to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of its

interest, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Member in accordance with their interests in the event Treasury Regulation section 1.704-1(b)(2)(IV)(M)(2) applies, or to the Member to whom such distribution was made in the event Treasury Regulation section 1.704-1(b)(2)(IV)(M)(4) applies.

(i) DEDUCTIONS UNDER SECTION 709 OF THE CODE. Deductions under section 709 of the Code for amortization of amounts paid or incurred to organize the Company or, in the case of liquidation of the Company prior to the end of the amortization period specified in section 709 of the Code, deductions under section 165 of the Code for the previously unrecovered portion of such amounts, shall be specially allocated to the Member who paid or incurred such amounts and such Member's Capital Account shall be credited for amounts paid or incurred by such Member.

Section 10.6 TREATMENT OF REGULATORY ALLOCATIONS. The allocations set forth in Section 10.5 (the "REGULATORY ALLOCATIONS") are intended to comply with and shall be interpreted consistently with certain requirements of Treasury Regulations sections 1.704-1 and 1.704-2. Notwithstanding any other provisions of this Article VI (other than the Regulatory Allocations), the Regulatory Allocations shall be taken into account in allocating other Net Profits and Net Losses and items of income, gain, loss and deduction among Members so that, to the extent possible, the net amount of such allocations of other Profits and Losses and other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to such Unitholder if the Regulatory Allocations had not occurred.

Section 10.7 TAX ALLOCATIONS; SECTION 704(c) OF THE CODE. (a) In accordance with section 704(c) of the Code and Treasury Regulation section 1.704-3(c) thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for income tax purposes, be allocated among the Members using the traditional method of allocation under section 704(c) of the Code so as to take account of any variation between the adjusted basis of such property to the Company for United States federal income tax purposes and its initial Gross Asset Value (computed in accordance with paragraph (a) of the definition of "GROSS ASSET VALUE" contained in Section 1.1 hereof).

(b) In the event the Gross Asset Value of any Company asset is adjusted pursuant to paragraph (b) of the definition of "GROSS ASSET VALUE" contained in Section 1.1 hereof, subsequent allocations of income, gain, loss and deduction with respect to such asset shall, solely for income tax purposes, take account of any variation between the adjusted basis of such asset for United States federal income tax purposes and its Gross Asset Value in the same manner as under section 704(c) of the Code and the Treasury Regulations thereunder.

(c) Allocations pursuant to this Section 10.7 are solely for purposes of United States federal, state and local taxes, and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement.

ARTICLE XI

DISTRIBUTIONS

Section 11.1 DISTRIBUTIONS. Subject to Section 11.2, the Manager may make PRO RATA Distributions in accordance with the Class A Members' respective ownership interests of cash and property, in each case in proportion to the respective ownership interests at such times as it deems appropriate, at its sole discretion.

Section 11.2 MANDATORY DISTRIBUTIONS. Notwithstanding Section 11.1 above, but subject to Section 2.7(b)(vii), during each Fiscal Year that the Class B Shares are outstanding, all Distributions made by the Company shall be made 50% to the Class A Shares and 50% to the Class B Shares until such time as the Class B Shares shall have received Distributions equal to $500,000 and thereafter shall be made entirely to the Class A Members. Such Distribution shall be made to all Class B Members in accordance with their percentage ownership of the Class B Shares.

Section 11.3 LIMITATIONS ON DISTRIBUTION. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make any Distribution if such Distribution would violate Section 18-607 of the Delaware Act or other applicable law, but shall instead make such Distribution as soon as practicable after the making of such Distribution would not cause such violation.

ARTICLE XII

BOOKS AND RECORDS

Section 12.1 BOOKS, RECORDS AND FINANCIAL STATEMENTS. (a) The Company shall at all times maintain, at its principal place of business, separate books of account for the Company that shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the operation of the Company in accordance with GAAP consistently applied, and, to the extent inconsistent therewith, in accordance with this Agreement. Such books of account, together with a copy of this Agreement and the Certificate, shall at all times be maintained at the principal place of business of the Company and shall be open to inspection and examination at reasonable times by each Class A Member and its duly authorized representatives for any proper purpose reasonably related to such Member's interest in the Company.

(b) The Officers shall prepare and maintain, or cause to be prepared and maintained, the books of account of the Company. The following financial information, prepared in accordance with GAAP and applied on a basis consistent with prior periods, shall be transmitted by the Company to each Class A Member as soon as reasonably practicable after the close of each Fiscal Year:

(i) balance sheet of the Company as of the beginning and close of such Fiscal Year;

(ii) statement of profits and losses for such Fiscal Year;

(iii) statement of each Member's Capital Account as of the close of such Fiscal Year, and changes therein during such Fiscal Year; and

(iv) statement of the Company's cash flows during such Fiscal Year.

(c) The Company shall prepare in accordance with United States federal income tax principles and transmit to each Member as soon as reasonably practicable after the close of each Fiscal Year a statement indicating such Member's share of each item of the Company income, gain, loss, deduction or credit for such Fiscal Year for income tax purposes, which statement shall include or consist of a Schedule K-1 to the Company's Internal Revenue Service Form 1065 (or any corresponding schedule to any successor form) for such Fiscal Year.

Section 12.2 ACCOUNTING METHOD. For both financial and tax reporting purposes and for purposes of determining Profits and Losses, the books and records of the Company shall be kept on the accrual method of accounting and shall reflect all Company transactions and be appropriate and adequate for the Company's business.

Section 12.3 ANNUAL AUDIT. The financial statements of the Company shall be audited by an independent certified public accountant, selected by the Manager, with such audit to be accompanied by a report of such accountant containing its opinion. The cost of such audit shall be an expense of the Company.

ARTICLE XIII

TAX MATTERS

Section 13.1 TAX MATTERS. (a) PM shall be the "TAX MATTERS PARTNER" of the Company for purposes of section 6231(a)(7) of the Code; PROVIDED, HOWEVER, that if PM shall at any time not own a majority of the Class A Interests, the Tax Matters Partner shall be the Member owning the largest percentage of the Class A Interests. The Tax Matters Partner shall cause to be prepared for each taxable year of the Company the federal, state and local tax returns and information returns, if any, which the Company is required to file.

(b) The Company shall, within ten (10) days of the receipt of any notice from the Internal Revenue Service or any state, local or foreign tax authority in any administrative proceeding at the Company level relating to the determination of any Company item of income, gain, loss, deduction or credit, mail a copy of such notice to each Member.

Section 13.2 SECTION 709 ELECTION. The Tax Matters Partner may cause the Company to file, with the Company's Internal Revenue Service Form 1065 for the taxable year in which the Company begins business, an election under section 709 of the Code (meeting the

requirements of Treasury Regulation section 1.709-1(c)) to amortize its organizational expenses over 60 months. Each Member agrees to (i) treat any amounts paid or incurred by such Member to organize the Company as deferred expenses of the Company that are subject to section 709 of the Code and (ii) maintain records of any such amounts that are sufficiently detailed to enable the Company to file an election meeting the requirements of Treasury Regulation section 1.709-1(c).

Section 13.3 TAXATION AS PARTNERSHIP. The Company will elect to be treated as a partnership for United States federal income tax purposes.

ARTICLE XIV

LIABILITY, EXCULPATION AND INDEMNIFICATION

Section 14.1 LIABILITY. Except as otherwise provided by the Delaware Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person or Member shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Covered Person or Member. Except as expressly provided herein, no Member in its capacity as such, shall have liability to the Company, any other Member or the creditors of the Company.

Section 14.2 EXCULPATION. (a) No Covered Person shall be liable to the Company or any other Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of authority conferred on such Covered Person by this Agreement, the Company's board of directors (if any) or an appropriate Officer or employee of the Company, except that a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Person's gross negligence, fraud or willful misconduct.

(b) A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Person's professional or expert competence, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, Profits or Losses or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid.

Section 14.3 FIDUCIARY DUTY. To the extent that, at law or in equity, a Covered Person has duties (including fiduciary duties) and liabilities relating thereto to the Company or to any Member, a Covered Person acting under this Agreement shall not be liable to the Company or to any Member for its good faith acts or omissions in reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties and liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Covered Person.

Section 14.4 INDEMNIFICATION. To the fullest extent permitted by applicable law, a Covered Person shall be entitled to indemnification from the Company for any loss, damage or claim incurred by such Covered Person by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of authority conferred on such Covered Person by this Agreement, except that no Covered Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Covered Person by reason of gross negligence, fraud or willful misconduct with respect to such acts or omissions; PROVIDED, HOWEVER, that any indemnity under this Section shall be provided out of and to the extent of Company assets only, and no Covered Person shall have any personal liability on account thereof.

Section 14.5 EXPENSES. To the fullest extent permitted by applicable law, reasonable expenses (including reasonable legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 14.4 hereof.

Section 14.6 INSURANCE. The Company may purchase and maintain insurance, to the extent and in such amounts as the Manager shall deem reasonable or appropriate, on behalf of Covered Persons and such other Persons as the Manager shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. The Members and the Company may enter into indemnity contracts with Covered Persons and such other Persons as the Manager shall determine and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 10.5 hereof and containing such other procedures regarding indemnification as are appropriate.

Section 14.7 OUTSIDE BUSINESSES. Any Member (including any Member that is the Manager) or Affiliate thereof may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Company, and the Company and the Members shall have no rights by virtue of this Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Company, shall not be deemed wrongful or improper. No Member or Affiliate thereof shall be obligated to present any particular investment opportunity to the Company even if such opportunity is of a character that, if presented to the Company, could be taken by the Company, and any Member or Affiliate thereof shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment opportunity. The Members acknowledge and agree that the Manager, and the Officers, employees and agents of the Company may be Affiliates of a Member, or employees of a Member or its Affiliates, and the Members hereby waive, with respect only to their interest in the Company, any claims against

such Persons in respect of "corporate opportunities" or similar doctrines. The provisions of this Section 14.7 shall not in any way limit, modify or amend the terms of any noncompetition, license or employment agreement that may be entered into between the Company and any Member, which terms shall be binding on the parties thereto.

Section 14.8 THIRD-PARTY BENEFICIARIES. There shall be no third-party beneficiaries of this Agreement, except that the Indemnified Parties shall be third-party beneficiaries of the provisions of Section 2.9 and Covered Persons shall be third-party beneficiaries of this Article XIV.

ARTICLE XV

ADDITIONAL MEMBERS

Section 15.1 ADMISSION. Except as provided in Section 2.7, Article VI or Section 9.7, the Company may not admit any new Members and may issue no new Class A Shares or Class B Shares.

ARTICLE XVI

ASSIGNMENTS

Section 16.1 RECOGNITION OF ASSIGNMENT BY THE COMPANY. No Assignment of Shares in violation of this Agreement or the Class A Option or Class B Option shall be valid or effective, and neither the Company nor the Members shall recognize the same for the purpose of making allocations or Distributions. Neither the Company nor the Members shall incur any liability as a result of refusing to make any such allocations or Distributions with respect to Assigned Shares in violation of this Article.

Section 16.2 EFFECT OF ASSIGNMENT. No Assignment by any Party of its rights under this Agreement or of any interest in the Company shall relieve such Party of its obligations hereunder.

ARTICLE XVII

DISSOLUTION, LIQUIDATION AND TERMINATION

Section 17.1 NO DISSOLUTION. The death, retirement, resignation, expulsion, bankruptcy or dissolution of any Member or the occurrence of any other event that terminates the continued membership of a Member in the Company shall not, in and of itself, cause the dissolution of the Company. In such event, the business of the Company shall be continued by the remaining Members.

Section 17.2 LIQUIDATION. Upon dissolution of the Company, unless the Members reconstitute the Company, the Person or Persons approved by the Class A Members to carry out the winding up of the Company shall immediately commence to wind up the Company's affairs; PROVIDED, HOWEVER, that a reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the satisfaction of liabilities to creditors so as to enable the Members to minimize the normal losses attendant upon a liquidation. The Members shall continue to share income, Profits and Losses during liquidation as specified in Article X hereof. The proceeds of liquidation shall be distributed in the following order and priority:

(a) to secured creditors of the Company whether or not they are Members and to unsecured creditors that are not Members, to the extent otherwise permitted by law, in satisfaction of the liabilities of the Company (whether by payment or the making of reasonable provision for payment thereof);

(b) to unsecured creditors of the Company that are Members, to the extent otherwise permitted by law, in satisfaction of the liabilities of the Company (whether by payment or the making of reasonable provision for payment thereof);

(c) to the holders of the Class B Shares on a PRO RATA basis in accordance with their respective Capital Accounts;

(d) to the holders of the Class A Shares on a PRO RATA basis in accordance with their respective Capital Accounts; and

(e) to the holders of the Class A shares on a PRO RATA basis in accordance with their respective ownership of Class A Shares.

Section 17.3 TERMINATION. The Company shall terminate when all of the assets of the Company, after payment, or due provision for all debts, liabilities and obligations, of the Company shall have been distributed to the Members in the manner provided for in this Article XVII and the Certificate shall have been canceled in the manner required by the Delaware Act.

Section 17.4 CLAIMS OF THE MEMBERS. The Members and former Members shall look solely to the Company's assets for the return of their Capital Contributions, and if the assets of the Company remaining after payment of or due provision for all debts, liabilities and obligations of the Company are insufficient to return such Capital Contributions, the Members and former Members shall have no recourse against the Company or any other Member.

ARTICLE XVIII

MISCELLANEOUS

Section 18.1 NOTICES. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be hand delivered, faxed or mailed by registered or certified mail or overnight courier service, as follows:

(a) if given to the Company:

Brands LLC
c/o Philip Morris Incorporated 120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399 Attention: General Counsel, PM USA

(b) if given to any Member:

(i) to PM or its designee:

Philip Morris Incorporated 120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399 Attention: General Counsel, PM USA

with a copy to:

Wachtell, Lipton, Rosen & Katz 51 West 52nd Street
New York, NY 10019
Facsimile: (212) 403-2000 Attention: Elliott V. Stein;

(ii) to the Liggett Parties:

c/o Brooke Group Ltd.

100 S.E. Second Street, 32nd floor
Miami, FL 33131

Facsimile: (305) 579-8009 Attention: Richard J. Lampen Executive Vice President

with a copy to:

Milbank, Tweed, Hadley & McCloy One Chase Manhattan Plaza New York, NY 10005
Facsimile: (212) 530-5219

Attention: Michael W. Goroff and Simon Friedman

All such notices shall be deemed to have been given when received. The address for receipt of notice may be changed by providing written notice to the Company.

Section 18.2 FORMATION EXPENSES. Each party shall pay its own expenses incurred in connection with the formation of the Company.

Section 18.3 FAILURE TO PURSUE REMEDIES. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.

Section 18.4 CUMULATIVE REMEDIES. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise.

Section 18.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors, legal representatives and assigns.

Section 18.6 INTERPRETATION. All references herein to "Articles," "Sections" and "Paragraphs" shall refer to corresponding provisions of this Agreement. Whenever the words "INCLUDE," "INCLUDES" or "INCLUDING" are used in this Agreement, they shall be deemed to be followed by the words "WITHOUT limitation." The words "HEREOF," "HEREIN" and "HEREUNDER" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent in writing and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.

Section 18.7 SEVERABILITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.

Section 18.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one instrument.

Section 18.9 INTEGRATION. There are no oral agreements, understandings, representations or warranties between the Parties with respect to the subject matter hereof.

Section 18.10 GOVERNING LAW. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of New York (other than with respect to matters relating to the obligations, rights and powers of the Company and the Members under the Delaware Act), and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws.

Section 18.11 CONSENT TO JURISDICTION. Each of the Parties (i) consents to submit itself to the personal jurisdiction of any Federal or state court located in the State of New York in the event that any dispute arises out of this Agreement or any of the transactions contemplated hereby, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a Federal or state court sitting in the State of New York.

Section 18.12 CONFIDENTIALITY. Each Member expressly acknowledges that such Member will receive confidential and proprietary information relating to the Company, including, without limitation, information relating to the Company's financial condition and business plans, and that the disclosure of such confidential information to a third party would cause irreparable injury to the Company. Except with the prior written consent of the Company or as required by law, no Member shall disclose any such information to a third party (other than on a "need to know" basis to any Affiliate or any employee, agent or representative of such Member or its Affiliates (each of whom shall agree to maintain the confidentiality of such information)), and each Member shall use reasonable efforts to preserve the confidentiality of such information.

Section 18.13 GOVERNMENTAL NOTICES. A Member shall, within 10 days of receipt of any notice from a Governmental Entity, including but not limited to, the Department of Justice, the Federal Trade Commission or the Internal Revenue Service, relating to the formation, operation or treatment of the Company or to the transactions contemplated by the Transaction Agreements, mail a copy of such notice to each Member.

Section 18.14 PRIOR AGREEMENT. The letter agreement of November 20, 1998 among Brooke, LMI, Liggett and PM regarding a prior conditional settlement of certain litigation is unaffected by this Agreement and remains in full force and effect.

ARTICLE XIX

AMENDMENTS

Section 19.1 AMENDMENTS. Any amendment to this Agreement shall be adopted and be effective as an amendment hereto if approved by the affirmative vote of a majority of the Total Voting Power, except that any amendment which would adversely affect the rights or obligations of any Member (or of the Class B Shares) shall also be approved by such Member (or by the holders of a majority of the Class B Shares).

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above stated.

BROOKE GROUP LTD.

By: /s/ Bennett S. LeBow
    -----------------------------------------
   Name:  Bennett S. LeBow
   Title:  Chairman of the Board and President

LIGGETT & MYERS INC.

By: /s/ Samuel M. Veasey
    -----------------------------------------
    Name:  Samuel M. Veasey
    Title:  Vice President

EVE HOLDINGS INC.

By: /s/ Bennett S. LeBow
    -----------------------------------------
    Name:  Bennett S. LeBow
    Title: Chairman of the Board and President

LIGGETT GROUP INC.

By: /s/ Samuel M. Veasey
    -----------------------------------------
    Name:  Samuel M. Veasey
    Title:  Senior Vice President

PHILIP MORRIS INCORPORATED

By: /s/ M.E. Szymanczyk
    -----------------------------------------
    Name:  M.E. Szymanczyk
    Title:  Chief Executive Officer

                                     Members

                             Agreed Value of Initial Capital         Number of
Name                                 Contribution (a)                Shares (a)
----                         -------------------------------         ---------
CLASS A SHARES                                                        CLASS A

                              Lark Mark
                              Chesterfield Mark
                              L&M Mark

CLASS B SHARES                                                        CLASS B

                              Lark Mark
                              Chesterfield Mark
                              L&M Mark

         Total
                                     --------------------             ---------

(a) To be determined prior to Closing Date.

EXHIBIT A

TRADEMARK LICENSE AGREEMENT

TRADEMARK LICENSE AGREEMENT (the "Agreement") dated as of ____________, 1999, by and between Brands LLC, a Delaware limited liability company ("Licensor"), and Philip Morris Incorporated, a Virginia corporation ("Licensee").

WHEREAS, an Affiliate of Licensee acquired in 1978 the entire business of Liggett Group Inc. in the International Territory;

WHEREAS, Licensor owns and has the right to license the Trademarks in the United States (as defined herein) and desires to grant the Licensee such rights in accordance with the terms of this Agreement; and

WHEREAS, upon execution of this Agreement, Licensee will have the exclusive right (including with respect to Licensor) to use the Trademarks in the United States (as defined herein).

NOW THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensor and Licensee agree as follows:

1. DEFINITIONS. The following terms shall have the specified meanings when used in this Agreement:

(a) AFFILIATES: shall mean, with respect to any Person, any direct or indirect subsidiary of such Person, any other Person that directly or through one or more intermediaries, is controlled by, or is under common control with, the specified Person, and, if such a Person is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, the term "CONTROL" (including with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities or partnership or other ownership interests, by contract or otherwise. Notwithstanding the foregoing, for the purposes of this Agreement, (i) Licensor and Licensee shall not be deemed to be Affiliates and (ii) Licensor shall not be deemed to be an Affiliate of Eve Holdings Inc., a Delaware corporation ("Eve"), or of any Affiliate of Eve.

(b) BRANDS: shall mean "Lark," "Chesterfield" and "L&M."

(c) CONFIDENTIAL INFORMATION: shall mean all proprietary information relating to the business and operations of Licensor or any of Licensor's Affiliates, other than information that (i) is in the possession of Licensee prior to the execution of this Agreement, (ii) becomes available to the public other than as a result of a disclosure by Licensee or its officers, employees or advisors, or (iii) is not acquired from Licensor or persons known by Licensee to be in breach of an obligation of secrecy to Licensor.

(d) INTERNATIONAL TERRITORY: means (i) any place in the world outside the United States, (ii) ships and aircraft, purchasing duty-free, located within or outside the United States, (iii) duty-free shops, embassies, legations and others enjoying duty-free privileges (in each case to the extent they enjoy such privileges from time to time) located within or outside the United States and
(iv) embassies, legations and other presences of the government of the United States of America enjoying duty-free privileges (in each case to the extent they enjoy such privileges from time to time) located outside the United States, but excluding sales to the United States Military wherever situated.

(e) INVENTORY: shall mean Licensee's inventory of Licensed Products and of related work in progress then on hand as reflected in Licensee's books and records.

(f) LICENSED PRODUCTS: shall mean the cigarettes sold in the United States under any of the Trademarks, conforming to the Quality Standards and Specifications.

(g) LLC AGREEMENT: shall mean that certain Formation and Limited Liability Company Agreement dated as of January 12, 1999 between the Liggett Parties (as defined therein) and Licensee.

(h) NONTOBACCO MATERIALS: shall mean all components and ingredients, other than tobacco, used in manufacturing the Licensed Products, including casings and flavorings, tow and additives, cigarette paper, tipping paper and packaging.

(i) PERSON: shall include any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company or other legal entity or organization.

(j) QUALITY STANDARDS AND SPECIFICATIONS: shall mean such specifications, standards and directions of Licensor, as Licensor shall provide to Licensee from time to time.

(k) TAXES: shall mean any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all interest, penalties, or other liabilities with respect thereto, excluding income taxes and franchise taxes measured by the income of Licensor.

(l) TRADEMARKS: shall mean all of the interest of the Licensor in all trademarks, trade names, trade dress, service marks, registrations and applications for registrations therefor, in each case relating to "Lark," "Chesterfield" and "L&M" brands, including any variation or product line extension thereof and any derivative pertaining thereto, as set forth in Schedule A hereto.

(m) UNITED STATES: means the present fifty states of the United States of America and the District of Columbia and shall exclude (a) its territories, possessions and the Commonwealth of Puerto Rico, all as presently constituted, and (b) all of the International Territory. When used herein, "sales in the United States" include sales to the United States Military, wherever situated.

(n) UNITED STATES MILITARY: shall mean appropriated and non-appropriated fund activities of the United States Department of Defense, Departments of the Army, Navy, Air Force, United States Marine Corps and United States Coast Guard.

2. LICENSE GRANT.

(a) Licensor hereby grants to Licensee, upon the terms and subject to the conditions and restrictions of this Agreement, the exclusive right to use the Trademarks upon and in connection with the manufacture, marketing distribution and sale of the Licensed Products in the United States.

(b) Licensor acknowledges and agrees that the license granted hereunder is exclusive as to Licensee, and Licensor agrees that it shall not use the Trademarks in any manner whatsoever.

(c) Licensee agrees that, subject to the rights granted in this Agreement, Licensor owns all right, title and interest in the United States to the Trademarks in the United States. No rights to the Trademarks in the United States are granted herein other than those expressly enumerated.

3. PROTECTION OF TRADEMARKS.

(a) Licensee shall do everything in its power to protect the Trademarks. To that end, Licensee shall fully comply with all the laws and regulations in the United States which are applicable to the manufacture, sale or purchase of cigarettes or to the use of trademarks for cigarettes; shall give prompt notice in writing to Licensor of any infringement or possible infringement of the Trademarks which may come to its attention; shall not at any time claim any right, title or interest in or to the Trademarks, other than the right to use the same under all the terms and conditions hereof; shall not at any time use or register any trademark or trade name identical or confusingly similar to any of the Trademarks; and shall, without charge, assign to Licensor, upon the request of Licensor, all such registrations and applications therefor and any right it may acquire through use or otherwise (except the right to use the same under all the terms and conditions hereof) in or to the Trademarks. When and if requested by Licensor so to do, Licensee shall, at its cost and expense, take such action as may be necessary or advisable to stop any infringement of the Trademarks and to recover profits, damages and costs. If any sum in excess of the costs and expenses incurred by Licensee in connection therewith is recovered in any such suit, Licensor shall have the exclusive right thereto.

(b) Licensee may in its discretion, either in its own name or the name of Licensor or in both names, take such action (including the initiation of proceedings and participation in proceedings initiated by Licensor and the defense of proceedings brought against Licensor) as it may deem necessary or desirable, at law or in equity or otherwise, either in the United States or elsewhere, to stop any infringement of the Trademarks or to defend the use of the Trademarks and, in the event any sum in excess of the costs and expenses incurred by Licensee in connection therewith is recovered, Licensor shall have the exclusive right thereto. In the event that Licensee decides to take any action in the name of Licensor pursuant to this Section 3(b), it shall first obtain the consent of Licensor and such consent shall not be unreasonably withheld; provided, however, that nothing herein shall prevent Licensee from taking any action in its own name at any time in its absolute discretion.

4. QUALITY STANDARDS AND SPECIFICATIONS.

Licensee shall manufacture cigarettes for sale under the Trademarks in accordance with Licensor's Quality Standards and Specifications, and shall not sell under the Trademarks any cigarettes that do not meet or exceed the Quality Standards and Specifications. Licensee represents and warrants that the Licensed Products will be manufactured, sold and distributed in strict compliance with the terms and conditions of this Agreement and all applicable laws, regulations and standards in force at any time in any place in the United States. Licensee will take all steps required with respect to the Licensed Products, their advertising, marketing and distribution to ensure compliance with such laws, regulations and standards.

5. PURCHASE OF SUPPLIES. Licensee shall be free to purchase the tobaccos and Non-Tobacco Materials necessary for the manufacture of the Licensed Products from such suppliers as it may select; PROVIDED that such tobaccos and NonTobacco Materials comply in all respects with the Quality Standards and Specifications.

6. CONFIDENTIALITY. Licensee shall not during the term of this Agreement disclose any Confidential Information to any person. Upon the expiration or termination of this Agreement, Licensee shall cease to utilize and not thereafter utilize any Confidential Information.

7. ROYALTIES.

(a) In consideration of the right and license granted to Licensee to use the Trademarks pursuant to this Agreement, Licensee shall pay to Licensor a royalty at the rate of four and one-half percent (4.5%) of the Licensee's Net Sales Value of Licensed Products during each calendar year (or portion thereof) that this Agreement is in effect, but in no event shall such royalty for any such calendar year (or portion thereof) in which this Agreement is in effect be less than the Minimum Royalty. For purposes of this paragraph, the term "Net Sales Value"

shall mean the gross sales price from Licensee's factories of the Licensed Products, less any federal excise tax that is included in such price. For purposes of this paragraph, the term "Minimum Royalty" in any period shall mean the greater of (i) the product of $10,500,000 times a fraction, the numerator of which is the number of days in such period, and the denominator of which is 365, and (ii) the sum of (x) the amount of the debt service obligation of Licensor for such period and (y) the product of $1,000,000 times a fraction, the numerator of which is the number of days in such period and the denominator of which is 365.

(b) Licensee shall keep proper and accurate accounts and records of all cigarettes manufactured and of all cigarettes sold under this agreement and shall, within thirty days after the end of each calendar quarter and within thirty days after the expiration or termination of this Agreement for any reason, render to Licensor a written statement setting forth separately the quantities of cigarettes manufactured and the quantities sold under the Trademarks in the most recently completed calendar quarter or in the period between the end of the preceding calendar quarter and the effective date of expiration or termination, as the case may be, such statement to be signed by an officer of Licensee. As used in this paragraph, the term "cigarettes sold" in any period shall mean the physical volume of cigarettes sold during such period less the physical volume of cigarettes accepted during such period by Licensee as returned merchandise. It shall in no event include cigarettes distributed by Licensee without charge.

(c) Licensor, by its duly authorized representatives, shall have the right, at reasonable intervals and times, to enter Licensee's premises and examine those books and records of Licensee which are relevant to the manufacture and sale of cigarettes hereunder, and to take excerpts therefrom.

(d) At the time Licensee renders each written statement to Licensor pursuant to Section 7(b), Licensee shall pay the royalty specified in Section 7(a) with respect to cigarettes shown as sold in such statement; PROVIDED that the Minimum Royalty for the period covered by such written statement shall be paid on the second business day following the last day of such period.

8. WITHHOLDING TAXES AND OTHER TAXES & CHARGES.

Any and all payments made by Licensee in connection with this Agreement shall be made free and clear of and without deduction for any and all Taxes. If Licensee shall be required by law to deduct and withhold from the payments to be made to Licensor any Taxes, (i) the sum payable shall be increased as may be necessary so that after making all required deductions for Taxes Licensor receives an amount equal to the sum it would have received had no such deductions been made, (ii) Licensee shall make such deductions and pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law, and (iii) Licensee shall mail to Licensor due evidence thereof in the form specified by Licensor which shall include in all instances the original tax receipts related to such royalty payments. Licensee shall reimburse Licensor for the amount of any tax credits that Licensor is unable to obtain due to the failure of Licensee to provide Licensor with the tax receipts as required by this Section. In the event such taxes are not paid when due, all resulting penalties and interest shall be borne by Licensee.

9. EFFECTIVE DATE; TERM; TERMINATION.

(a) EFFECTIVE DATE; TERM. This Agreement shall continue in effect through ______, 2010, unless earlier terminated pursuant to the provisions of this Agreement; PROVIDED that, this Agreement will renew automatically for successive one year periods unless one party hereto gives written notice of its desire to terminate at least 60 days prior to the date on which the Agreement would otherwise be renewed.

(b) EARLY TERMINATION FOR CAUSE.

(i) BY LICENSOR. Licensor may terminate this Agreement immediately in the event that:

(1) Licensee fails to perform in any material respect any of the terms of this Agreement or otherwise breaches in any material respect any part of this Agreement, including, without limitation, if Licensee fails to make any payment to Licensor in accordance with the terms of this Agreement for any reason, and such default or breach shall continue uncured for a period of thirty (30) days after Licensor gives Licensee written notice of such default or breach; or

(2) any part of this Agreement is not considered to be, or ceases to be, in conformity with the laws, regulations, consistent jurisprudence or court or administrative decisions (relevant to this Agreement) of the United States and, as a result thereof, any provision herein reasonably deemed by Licensor to be material to this Agreement cannot be legally performed or enforced or if, as a consequence thereof, any of the Licensed Products cannot be manufactured or sold in accordance with the Quality Standards and Specifications.

(ii) BY LICENSEE. Licensee may terminate this Agreement immediately in the event that (i) Licensor fails to perform any of the terms of this Agreement or otherwise breaches any part of this Agreement and such default or breach shall continue uncured for a period of ten (10) days after Licensee gives Licensor written notice of such default or breach or (ii) there shall have occurred a Material Breach by the Liggett Parties as defined in the Class A Option Agreement dated as of January 12, 1999 among Licensee, Eve, Brooke Group Ltd., Liggett & Myers Inc. and Liggett Group Inc.

(iii) BY MUTUAL CONSENT: Licensor and Licensee may agree in writing at any time to terminate this Agreement.

(c) EFFECT OF TERMINATION. Upon the expiration or termination of this Agreement for any reason:

(i) All of the rights of Licensee granted hereunder shall terminate forthwith and shall revert immediately to Licensor, PROVIDED that Licensee's obligations under Sections 6 and 8 of this Agreement shall survive. All royalties on previously made sales shall become immediately due and payable, and Licensee shall (a) discontinue forthwith all manufacture, sale and distribution of the Licensed Products and all use of the Trademarks in the United States; (b) no longer have the right to use the Trademarks in the United States or any variation or simulation thereof; (c) promptly transfer to Licensor, free of charge, all related documentary evidence of the validity of the Trademarks in the United States and Licensee's rights as a licensee which Licensee may have possessed at any time; (d) remove and erase forthwith all reference to the Trademarks from the printed material and advertising used in the United States or maintained by Licensee; and (e) cease to utilize, and thereafter not utilize, any Confidential Information disclosed to it by Licensor hereunder, and return to Licensor or its designee, at no charge, all Confidential Information received by Licensee from Licensor or any of its Affiliates before or during the term of this Agreement, and all copies of any documents containing, reflecting, or relating to the foregoing; and not thereafter hold forth in any manner whatsoever that Licensee has any connection with the Licensed Products

(ii) If this Agreement expires or is terminated for reasons other than Licensee's default or bankruptcy or insolvency, Licensee shall be entitled, for an additional period of three (3) months only, on a nonexclusive basis, to sell the Inventory. After Licensee exercises its rights, if any, pursuant to this Subsection, Licensee shall promptly deliver to Licensor a complete and accurate schedule of the Inventory. Such schedule shall be prepared as of a date as close to the date of such expiration or termination (following exercise of Licensee's rights, if any, pursuant to this Subsection) as is reasonably feasible given Licensee's usual and customary accounting practices, but in no event later than fifteen (15) days after the end of Licensee's fiscal month during which the termination or expiration occurs, and shall reflect Licensee's cost of each item of Inventory. Licensor thereupon shall have the option, exercisable by notice in writing delivered to Licensee within thirty
(30) days after its receipt of the complete Inventory schedule, to purchase any or all of the Inventory at such cost of each item of the Inventory being purchased. In the event such notice is sent by Licensor, Licensee shall deliver to Licensor or its designee all the Inventory referred to therein as promptly as practicable after Licensor's said notice, and Licensor shall pay Licensee for such Inventory as is in salable condition, and also shall pay for applicable shipping and handling charges, within thirty (30) days after its receipt thereof, provided in the event Licensor is unable to meet Licensee's customary and usual credit clearance standards, such merchandise shall be sold on a cash on delivery basis. Licensee shall have no obligation to pay royalties on Inventory purchased by Licensor pursuant to this paragraph. To the extent that Licensor does not elect to purchase Inventory, Licensee shall promptly destroy such Inventory.

(iii) The expiration or termination of this Agreement for any reason shall not release either party hereto from any liability which, at the time of expiration or termination, had already accrued to the other party or which may accrue in respect of any act or omission prior to such expiration or termination; PROVIDED that Licensee shall in no event be

entitled, based on such expiration or termination, to any compensation, damages or payment for goodwill that may have been established with respect to the Licensed Products during the term of this Agreement and that Licensee hereby irrevocably waives and renounces any claim, based on such expiration or termination, for any such compensation, damages, or other legal or equitable relief which it may hereafter be entitled to assert against Licensor. Notwithstanding any termination in accordance with this Section, Licensor shall have and hereby reserves all rights and remedies which it has, or which are granted to it by operation of law, including, but not limited to, the right to be compensated for damages for breach of this Agreement and to enjoin the unlawful or unauthorized use of the Trademarks and to collect royalties and fees payable by Licensee hereunder through the date of termination.

10. NOTICES. All notices, requests, demands, approvals, consents or other communications under this Agreement shall be in writing and delivered in person, by telefax or telex, by overnight courier service or by registered or certified mail, return receipt requested, to the following addresses or such other address or addresses as either party shall designate with respect to its own address:

If to Licensor:

Brands LLC
c/o Philip Morris Incorporated
120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399
Attention: General Counsel, PM USA

If to Licensee:

Philip Morris Incorporated
120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399
Attention: General Counsel, PM USA

11. GOVERNMENT APPROVALS.

This Agreement shall be subject to such United States government approvals and consents as may from time to time be necessary or desirable in connection with this Agreement. If any such approval or consent is not obtained or if obtaining such consent or approval would materially diminish the value of this Agreement to Licensor, Licensor may terminate this Agreement in accordance with its termination provisions.

12. GOVERNING LAW. The provisions of this Agreement shall be governed by and construed in accordance with the laws of New York, without regard for choice of law provisions.

13. REPRESENTATIONS AND WARRANTIES.

In addition to their other representations, warranties, and covenants elsewhere herein contained, the parties represent, each to the other, as follows:

(a) LICENSOR. Licensor represents and warrants that it has full right, power and authority to enter into this Agreement and to perform all of its obligations hereunder. Licensor further represents , that it has granted no other existing license to use the Trademarks in the United States as provided for in this Agreement, and that it shall grant no such other license during the term of this Agreement.

(b) LICENSEE. Licensee represents and warrants that it has full right, power, and authority to enter into this Agreement and to perform all of its obligations hereunder. Licensee shall not assert as a defense in any action brought under this Agreement any claim that this Agreement is unenforceable or invalidated by any applicable law.

14. AMENDMENT.

This Agreement shall not be modified or amended except by an agreement in writing signed by the parties hereto.

15. BINDING EFFECT; ASSIGNMENTS AND SUBLICENSE.

This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, successors and assigns. Licensor shall not assign its interest in this Agreement without the consent of Licensee, except to secure indebtedness of Licensor. It is expressly understood and agreed that Licensee shall have the right to sell, assign or sublicense its rights under this Agreement; PROVIDED that any such purchaser, assignee or sublicensee agrees in writing to be subject to and bound by the terms and conditions of this Agreement as if it were a party hereto.

16. COUNTERPARTS.

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of such counterparts shall constitute but one and the same agreement.

17. NO RIGHTS OF THIRD PARTIES.

Except as specifically contemplated herein, this Agreement shall not be deemed to confer any rights or benefits on any person not a party to this Agreement.

18. PARTIAL INVALIDITY.

If one or more provisions of this Agreement shall be invalid, illegal, or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality, or unenforceability in such jurisdiction or with respect to such party shall not, to the fullest extent permitted by applicable law, invalidate or render illegal or unenforceable such provision in any other jurisdiction or with respect to any other party, or any other provision of this Agreement. To the fullest extent it may effectively do so under applicable law, each of the parties hereto waives any provision of law which renders any provision hereof invalid or illegal in any respect.

19. NO WAIVER; CUMULATIVE REMEDIES.

No delay or omission or failure to exercise, or any abandonment or discontinuance of steps to enforce, any right or remedy provided for herein shall be deemed to be a waiver thereof or acquiescence in the event giving rise to such right or remedy, but every such right and remedy may be exercised from time to time and so often as may be deemed expedient by the party exercising such right or remedy. The rights and remedies provided herein are cumulative and not exclusive of any remedies provided by law.

20. RELATIONSHIP OF THE PARTIES.

Nothing contained herein shall be construed to create a partnership, joint venture, or agency relationship between Licensee and Licensor, and neither Licensee nor Licensor shall become bound by any representation, act or omission of the other.

IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed and their corporate seals to be hereunto affixed as of the day and year first above written.

BRANDS LLC

Title:

PHILIP MORRIS INCORPORATED

Title:

EXHIBIT B

FORM OF ASSIGNMENT

This Assignment is made the day of _______________, 1999.

BETWEEN Eve Holdings Inc., a Delaware corporation ("Eve"), 100 S.E. Second Street, Miami, Florida 33131,

AND Brands LLC, a Delaware limited liability company ("Brands LLC"), 120 Park Avenue, New York, New York 10017.

WHEREAS, Eve is the owner of the trademarks referred to in the attached Schedule A which are registered in the United States Patent and Trademark Office.

WHEREAS, Brands LLC desires to acquire all right, title and interest in and to the aforesaid trademarks and the registrations therefor, and that part of the goodwill of the business connected with the use of and symbolized by said trademarks;

NOW, THEREFORE, for and in consideration for the sum of Ten Dollars ($10.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, Eve hereby sells, transfers, conveys and assigns unto Brands LLC, all right, title and interest in and to the aforesaid trademarks and the registrations therefor, together with that part of the goodwill of the business connected with the use of and symbolized by said trademarks.

IN WITNESS WHEREOF, Eve has caused this Assignment to be executed with full effect from the day and year first above written.

EVE HOLDINGS INC.

Title:

SCHEDULE A: TRADEMARKS

EXHIBIT 10.61

THIS CLASS A OPTION AGREEMENT (the "AGREEMENT"), dated as of January 12, 1999, is entered into among Brooke Group Ltd., a Delaware corporation ("BROOK"), Liggett & Myers Inc., a Delaware corporation ("LMI"), Liggett Group Inc., a Delaware corporation ("LIGGETT"), and Eve Holdings Inc., a Delaware corporation (the "GRANTOR", and together with Brooke, LMI and Liggett, the "LIGGETT PARTIES"), on the one hand, and Philip Morris Incorporated, a Virginia corporation ("PM"), on the other hand.

WHEREAS, concurrently with the execution of this Agreement, the Liggett Parties and PM will execute the Formation and Limited Liability Company Agreement of Brands LLC, a Delaware limited liability company (the "COMPANY"), pursuant to which, among other things, the Grantor will contribute the Marks to the Company in exchange for 100% of the Class A Shares and 100% of the Class B Shares of the Company; and

WHEREAS, the Grantor desires to grant to PM an option to acquire all of the Class A Shares, on the terms and subject to the conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

As used in this Agreement the following terms shall have the following respective meanings:

"AFFILIATE" shall mean, with respect to any Person, any direct or indirect subsidiary of such Person, any other Person that directly or through one or more intermediaries, is controlled by, or is under common control with, the specified Person, and, if such a Person is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any person who is controlled by any such member or trust. As used in this definition, the term "CONTROL" (including with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities or partnership or other ownership interests, by contract or otherwise. Notwithstanding the foregoing, for purposes of this Agreement (i) the Liggett Parties and their Subsidiaries shall not be deemed to be Affiliates of PM, and
(ii) PM and its Subsidiaries (including the Company) shall not be deemed to be Affiliates of the Liggett Parties.

"AGREEMENT" shall have the meaning set forth in the recitals hereof.

"ASSIGN" shall mean to, directly or indirectly, sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any Class A Shares.

"BRANDS" shall mean "Lark," "Chesterfield" and "L&M."

"BROOKE" shall have the meaning set forth in the preamble hereof.

"CERTIFICATE" shall mean the Certificate of Formation of the Company filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.

"CLASS A EXERCISE PRICE" shall have the meaning set forth in
Section 2.3.

"CLASS A OPTION" shall have the meaning set forth in
Section 2.1.

"CLASS B OPTION Agreement" shall mean that certain option agreement, dated as of the date hereof, pursuant to which PM (or any Permitted Assignee thereunder) may purchase from the Grantor the Class B Shares owned by it. Such right to purchase the Class B Shares is the "CLASS B OPTION".

"CLASS A OPTION CONSIDERATION" shall have the meaning set forth in Section 2.1.

"CLASS A OPTION TERMINATION Date" shall have the meaning set forth in Section 2.2(d).

"CLOSING" shall have the meaning set forth in Section 2.5.

"CLOSING DATE" shall mean the date on which the Closing occurs.

"COMPANY" shall have the meaning set forth in the preamble hereto.

"DELAWARE ACT" means the Delaware Limited Liability Company Act (6 Del. Co. section 18-101, ET SEQ.), as amended from time to time.

"DOJ" shall have the meaning set forth in Section 5.1 (b).

"DUE DILIGENCE PERIOD" shall have the meaning set forth in
Section 2.2(a).

"EXTENDED DUE DILIGENCE PERIOD" shall have the meaning set forth in Section 2.2(a).

"FTC" shall have the meaning set forth in Section 5.1 (b).

"GOVERNMENTAL ENTITY" means any government or subdivision thereof, domestic, foreign or supranational or any administrative, governmental or regulatory authority, agency, commission, tribunal or body, domestic, foreign or supranational.

"GOVERNMENTAL FILINGS" shall have the meaning set forth in
Section 5.1 (a).

"GRANTOR" shall have the meaning set forth in the preamble hereof

"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

"HSR CLEARANCE" means expiration or termination of the waiting period under the HSR Act with respect to the filings made in connection with the exercise of the Class A Option and the entering into of the License Agreement.

"INITIAL DUE DILIGENCE PERIOD" shall have the meaning set forth in Section 2.2(a).

"LICENSE AGREEMENT" shall mean that certain license agreement, attached as Exhibit A to the LLC Agreement, between the Company and PM and dated as of the Closing Date, pursuant to which PM and its Affiliates will obtain the exclusive (including with respect to the Company) license to use the Marks within the United States (as defined in the License Agreement).

"LIEN" shall have the meaning set forth in Section 3.2.

"LIGGETT" and "LIGGETT PARTIES" shall have the respective meanings set forth in the preamble hereof.

"LLC AGREEMENT" shall mean that certain Formation and Limited Liability Company Agreement to be entered into by the Liggett Parties and PM concurrently with the execution of this Agreement.

"LMI" shall have the meaning set forth in the preamble hereof.

"MARKS" shall mean all of the interest of the Liggett Parties and any Affiliate of any Liggett Party in all trademarks, trade names, trade dress, service marks, registrations and applications for registrations therefor, in each case relating to each of the Brands, including any variation or product line extension thereof and any derivative pertaining thereto.

"MATERIAL BREACH BY THE LIGGETT PARTIES" shall have the

meaning set forth in Section 2.4(a).

"MATERIAL BREACH BY PM" shall have the meaning set forth in
Section 6.1(c).

"NOTICE OF EXERCISE" shall have the meaning set forth in
Section 2.5.

"PERSON" includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company or other legal entity or organization.

"PERMITTED ASSIGNEE" shall have the meaning set forth in
Section 2.2(d).

"PM" shall have the meaning set forth in the preamble hereof.

"SUBSIDIARIES" shall mean, with respect to any Person, any other Person in which such Person owns, directly or indirectly, 50% or more of the voting interests.

"TRANSACTION AGREEMENTS" mean this Agreement, the Class B Option Agreement and the LLC Agreement.

ARTICLE II

GRANT AND EXERCISE OF OPTION, FURTHER INVESTIGATION; CLOSING

SECTION 2.1. GRANT OF CLASS A OPTION. The Grantor hereby grants to PM (or a Permitted Assignee) an irrevocable option (THE "CLASS A OPTION") to purchase 100% of the Class A Shares, on the terms and subject to the conditions set forth in this Agreement. In consideration of the grant of the Class A Option, PM has delivered to the Grantor $5.0 million (the "CLASS A OPTION CONSIDERATION"), receipt of which is hereby acknowledged.

SECTION 2.2. FURTHER INVESTIGATION; EXERCISE OF OPTION.

(a) PM may conduct further due diligence with respect to the Marks from the date hereof until 5:00 P.M. (New York City time) on the 10th day following HSR Clearance (the "INITIAL DUE DILIGENCE PERIOD"); PROVIDED, that in the event any information requested by PM in the course of its due diligence is withheld due to competitive considerations or otherwise, such information will be provided to PM by the Liggett Parties no later than 5:00 P.M. (New York City time) on the 10th day following HSR Clearance, and PM may continue its due diligence until 5:00 P.M. (New York City time) on the 30th day following HSR Clearance (such period, the "EXTENDED DUE DILIGENCE PERIOD" and together with the Initial Due Diligence Period, the "DUE DILIGENCE PERIOD").

(b) Subject to terms and conditions herein, unless at any time during the Due Diligence Period, as a result of matters learned through such due diligence, PM reasonably determines that (i) there exists substantial doubt as to the validity or enforceability of one or more of the Marks, or (ii) there exists substantial and previously unknown to PM (x) litigation liability affecting or relating to one or more of the Marks, which liability is material in relation to the transactions contemplated by the Transaction Agreements, or
(y) regulatory risk affecting or relating to one or more of the Marks, PM must exercise the Class A Option prior to or at the expiration of the Due Diligence Period in accordance with the procedures set forth in Section 2.5 of this Agreement. In the event PM makes the due diligence determination described in the preceding sentence, PM shall promptly deliver a notice upon making any such determination (and in any event prior to or at the expiration of the Due Diligence Period) stating that the completion of its due diligence was not satisfactory as provided herein.

(c) In the event that PM delivers a notice that the completion of its due diligence was not satisfactory, the Liggett Parties shall have a period of 120 days from the date of

4-

such notice in which to cure the condition or conditions that were the basis of such notice. If such condition or conditions are cured, the obligation of PM to exercise the Class A Option shall be reinstated.

(d) If PM Assigns the Class A Option to a third party in accordance with Section 10.6 (such assignee, a "PERMITTED ASSIGNEE"), the Class A Option shall be exercisable by such Permitted Assignee (or any subsequent Permitted Assignee) (together with PM, a "CLASS A OPTIONHOLDER") at any time prior to March 1, 2009 (the "CLASS A OPTION TERMINATION DATE"); PROVIDED, however, that such Permitted Assignee shall assume PM's obligations with respect to obtaining HSR Clearance and exercising the Class A Option in accordance with this Section 2.2.

SECTION 2.3. CLASS A EXERCISE PRICE.

(a) Subject to Sections 2.3(b) and 23(c), the Class A Exercise Price shall be $10.1 million.

(b) If a Material Breach by PM occurs, and upon payment of the amount required by the last sentence of Section 6.1 (c) hereof, the Class A Exercise Price shall become $1.00.

(c) If the Liggett Parties refund the Class A Option Consideration in accordance with Section 2.4 hereof and PM does not terminate this Agreement in accordance with Section 9.1 (a)(ii) hereof, the Class A Exercise Price shall become $15.1 million.

SECTION 2.4. REFUND OF CLASS A OPTION CONSIDERATION.

(a) The Class A Option Consideration shall be repayable to PM by the Liggett Parties in full promptly following demand by PM, whether before or after the Closing, upon any of the following events that is not cured to PM's reasonable satisfaction within 120 days of written notice thereof from PM to the Liggett Parties (a "MATERIAL BREACH BY THE LIGGETT PARTIES"):

(i) the material failure of the Liggett Parties or any of their Affiliates to comply prior to the Closing with their obligations set forth in Section 5.1 (a) (subject to
Section 5.1 (b)); or

(ii) the material failure of the Liggett Parties to deliver to the Company the Marks free and clear of all encumbrances, restrictions or conditions arising as a result of settlement agreements (it being expressly understood that any obligation of any Liggett Party under any settlement agreement that is imposed on the Company or PM or their Affiliates as a result of the transactions contemplated by the Transaction Agreements or the License Agreement would be such an encumbrance, restriction or condition) and to keep the Marks free of such encumbrances, restrictions or conditions through the Closing Date; or

(iii) the material failure of the Liggett Parties or any of their Affiliates to comply, prior to the approval by all relevant courts of the settlement

agreement referred to in paragraph 9 of that certain letter agreement dated November 20, 1998 between PM and the Liggett Parties, with the obligations imposed by such paragraph 9.

(b) In the event that a demand for repayment of the Class A Option Consideration is made by PM pursuant to Section 2.4(a) after the Closing, PM shall reconvey the Class A Shares to Eve in exchange for the repayment by Eve of the Class A Exercise Price, with such exchange to take place concurrently with the repayment of the Class A Option Consideration.

SECTION 2.5. NOTICE OF EXERCISE; CLOSING. In order to exercise the Class A Option, a Class A Optionholder must give written notice (A "NOTICE OF EXERCISE") to the Liggett Parties reciting its intention to exercise the Class A Option and setting forth the time and place of the closing (the "CLOSING"); PROVIDED that the date of the Closing set forth in such Notice of Exercise may not be more than 90 days from the date thereof. At the Closing, the events set forth in Section 2.7 of the LLC Agreement shall also occur or have occurred. Notwithstanding the foregoing and for the avoidance of doubt the failure of any such event to occur is not a condition to the Closing unless set forth in Article VII or Article VIII hereof.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES

Each of the Liggett Parties hereby jointly and severally represents and warrants to PM as follows:

SECTION 3.1. INCORPORATION OF CERTAIN REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Liggett Parties contained in Article III of the LLC Agreement are hereby incorporated by reference in this Agreement and shall have the same effect as if made in this Agreement.

SECTION 3.2. OWNERSHIP OF CLASS A SHARES. Immediately prior to the Closing, the Grantor will have good and valid title to the Class A Shares free and clear of any liens, claims, charges, security interests, options or other legal or equitable encumbrances or restrictions (any of the foregoing, a "LIEN"), and assuming the person exercising the Class A Option has the requisite power and authority to enter into this Agreement and to be the lawful owner of the Class A Shares, upon delivery of the Class A Shares, good and valid title to such Class A Shares will pass to the person exercising the Class A Option free and clear of any Lien. Other than the Transaction Agreements, the Class A Shares are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any such agreement, arrangement, commitment or understanding restricting or otherwise relating to voting, distribution rights or disposition of such Class A Shares.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

PM hereby represents and warrants to the Liggett Parties as follows:

SECTION 4.1. INCORPORATION OF CERTAIN REPRESENTATIONS AND WARRANTIES. The representations and warranties of PM contained in Article IV of the LLC Agreement are hereby incorporated by reference in this Agreement and shall have the same effect as if made in this Agreement.

ARTICLE V

COVENANTS OF THE LIGGETT PARTIES

SECTION 5.1. HSR ACT.

(a) The Liggett Parties shall promptly prepare and file all filings required to be made by it in connection with the Transaction Agreements and the License Agreement under the HSR Act, as well as any other filings required to be made with any other Governmental Entity in connection with the Transaction Agreements and the License Agreement (collectively, "GOVERNMENTAL FILINGS"). The Liggett Parties shall provide any information required by the HSR Act and any other Governmental Filing, and shall cooperate with PM in connection with obtaining any approval required from any Governmental Entity in order to consummate the transactions contemplated hereby and thereby. The Liggett Parties shall use their respective reasonable best efforts to obtain promptly any consent, order or approval of, or any exemption by, any Governmental Entity in connection with the consummation of the transactions contemplated by the Transaction Agreements and the License Agreement (including without limitation to cause the prompt expiration of the waiting period under the HSR Act applicable to the exercise of the Class A Option and the entering into of the License Agreement).

(b) In the event a Liggett Party fails to comply (prior to exercise of the Class A Option) with Section 5.1 (a) and shall not have cured such failure to comply to PM's reasonable satisfaction within 120 days of written notice thereof from PM to the Liggett Parties, a Material Breach by the Liggett Parties shall be deemed to occur, PROVIDED, however, that a Material Breach by the Liggett Parties shall not be deemed to have occurred pursuant to this Section 5.1 unless, as a direct or indirect result of such failure, within nine months following the initial filings for HSR Clearance (i) HSR Clearance has not been obtained, or the Federal Trade Commission (the "FTC") or the Department of Justice ("DOJ") has commenced litigation to enjoin the transactions contemplated by the Transaction Agreements, or (ii) PM has had to make a material concession to the FTC or DOJ to obtain HSR Clearance or to avoid the litigation described in clause (i).

SECTION 5.2. REPRESENTATIONS AND WARRANTIES. Each of the Liggett Parties shall give written notice to PM promptly upon the occurrence of any event that would cause or

constitute a material breach or would have caused a material breach, had such event occurred or been known to the Liggett Parties prior to the date hereof, of any representations or warranties of the Liggett Parties contained in any of the Transaction Agreements.

SECTION 5.3. ACCESS TO INFORMATION. Prior to the Closing, the Liggett Parties shall, and shall cause each of their respective Subsidiaries to, give PM and its representatives, employees, counsel and accountants full access, during normal business hours, and upon reasonable notice to the employees, agents, independent contractors, properties, books and records relating to the Marks, only to the extent, in the reasonable judgment of counsel, permitted by law, including antitrust law, and provided that the Liggett Parties and their Subsidiaries shall not be obligated to make any disclosure which would cause forfeiture of attorney-client privilege. The Liggett Parties shall notify PM in writing if any disclosure is withheld in order to avoid such forfeiture. No investigation pursuant to this Section shall affect or be deemed to affect any representation or warranty made by the Liggett Parties. PM agrees that all information received pursuant to this Section 5.3 shall be kept confidential and PM shall not disclose such information to any third party unless, and only to the extent, required to do so by applicable law.

ARTICLE VI

COVENANTS OF PM

PM covenants and agrees as follows:

SECTION 6.1. HSR ACT.

(a) PM shall promptly prepare and file all filings required to be made by it in connection with the Transaction Agreements and the License Agreement under the HSR Act, as well as any other Governmental Filings. PM shall provide any information required by the HSR Act and any other Governmental Filing, and shall cooperate with the Liggett Parties in connection with obtaining any approval required from any Governmental Entity in order to consummate the transactions contemplated hereby and thereby. PM shall use its reasonable best efforts to obtain promptly any consent, order or approval of, or any exemption by, any Governmental Entity in connection with the consummation of the transactions contemplated by the Transaction Agreements and the License Agreement (including without limitation to cause the prompt expiration of the waiting period under the HSR Act applicable to the exercise of the Class A Option and the entering into of the License Agreement); PROVIDED, HOWEVER, that notwithstanding anything to the contrary in this Agreement, PM shall not be required to agree to divest or hold separate any brand, product, business or assets or to take or agree to take any action that limits its freedom of action with respect to, or its ability to retain, any of the Marks or the Brands or any brand, product, business or other asset of PM or its Affiliates.

(b) Unless and until HSR Clearance is obtained, PM shall, upon the request of the Liggett Parties, attempt periodically to obtain HSR Clearance; PROVIDED, HOWEVER, that PM shall not be required to attempt to obtain HSR Clearance more than once in any two-year period or more than four times during the period ending on the Class A Option Termination Date. The

Liggett Parties shall cooperate with PM (pursuant to the terms of Section 5.1 hereof) in obtaining HSR Clearance each time that PM seeks HSR Clearance. Notwithstanding the foregoing, PM shall not be required to attempt to obtain any such approval (other than the initial filings for HSR Clearance) at any time at which it reasonably believes that attempting to obtain such approval is likely to interfere with any pending transaction so long as PM does not defer any request for more than six months or more than once in any two-year period.

(c) In the event PM fails to comply (prior to exercise of the Class A Option) with Section 6.1 (a) hereof and shall not have cured such failure to comply to Brooke's reasonable satisfaction within 120 days of written notice thereof from Brooke to PM, a "MATERIAL BREACH BY PM" shall be deemed to occur; PROVIDED, HOWEVER, that a Material Breach by PM shall not be deemed to have occurred unless as a direct or indirect result of such failure, (i) HSR Clearance shall not have been obtained within nine months of the initial filings for HSR Clearance or (ii) the FTC or DOJ has commenced litigation to enjoin the transactions contemplated by the Transaction Agreements. In the event a Material Breach by PM has occurred, PM shall promptly prepay to the Liggett Parties the fall amount of the Class A Exercise Price of the Class A Option minus $1.00, and the Class A Exercise Price shall be reduced to $1.00.

ARTICLE VII

CONDITIONS TO THE OBLIGATIONS OF THE LIGGETT PARTIES

The obligations of the Liggett Parties under this Agreement are subject to the fulfillment of the following conditions prior to or at the Closing Date (any of which may be waived by them):

SECTION 7.1. REPRESENTATIONS, WARRANTIES, COVENANTS. The representations and warranties of PM made or incorporated in this Agreement shall be true and correct in all material respects as of the date hereof and, except as specifically contemplated by this Agreement, on and as of the Closing Date, as though made on and as of the Closing Date, and PM shall have performed or complied in all material respects with the obligations and covenants required by this Agreement or the LLC Agreement to be performed or complied with by it by the time of the Closing; PM shall have delivered to the Liggett Parties a certificate dated the Closing Date and signed by an authorized officer confirming the foregoing.

SECTION 7.2. NO INJUNCTION OR GOVERNMENTAL LITIGATION. There shall be no effective temporary restraining order, preliminary or permanent injunction or order issued by any Governmental Entity which would prevent the consummation of the transactions contemplated by the Transaction Agreements or the License Agreement, and no Governmental Entity shall have commenced litigation to enjoin the transactions contemplated by the Transaction Agreements or the License Agreement.

SECTION 7.3. REGULATORY APPROVALS. The HSR Clearance shall have been received and all other authorizations, approvals, consents and waivers of any Governmental Entities required to consummate the transactions contemplated by this Agreement, the other Transaction Agreements or the License Agreement shall have been obtained and shall not have been terminated, suspended or withdrawn as of the Closing Date.

ARTICLE VIII

CONDITIONS TO THE OBLIGATIONS OF PM

Once PM has delivered a Notice of Exercise, its obligation to purchase the Class A Shares is subject to the fulfillment of the following conditions prior to or at the Closing Date (any of which may be waived by it):

SECTION 8.1. REPRESENTATIONS, WARRANTIES, COVENANTS. The representations and warranties of the Liggett Parties made or incorporated in this Agreement shall be true and correct in all material respects as of the date hereof on and as of the Closing Date, as though made on and as of the Closing Date, and the Liggett Parties shall have performed or complied in all material respects with the obligations and covenants required by this Agreement or the LLC Agreement to be performed or complied with by the Liggett Parties by the time of the Closing; the Liggett Parties shall have delivered to PM a certificate dated the Closing Date and signed by an authorized officer confirming the foregoing.

SECTION 8.2. NO INJUNCTION OR GOVERNMENTAL LITIGATION. There shall be no effective temporary restraining order, preliminary or permanent injunction or order issued by any Governmental Entity which would prevent the consummation of the transactions contemplated by the Transaction Agreements or the License Agreement, and no Governmental Entity shall have commenced litigation to enjoin the transactions contemplated by the Transaction Agreements or the License Agreements.

SECTION 8.3. REGULATORY APPROVALS. The HSR Clearance shall have been received and all other authorizations, approvals, consents and waivers of any Governmental Entities required to consummate the transactions contemplated by this Agreement shall have been obtained and shall not have been terminated, suspended or withdrawn as of the Closing Date.

ARTICLE IX

TERMINATION

SECTION 9.1. TERMINATION.

(a) This Agreement may be terminated at any time prior to the Closing by:

(i) the mutual consent of the Liggett Parties and PM; or

(ii) by PM upon a Material Breach by the Liggett Parties; PROVIDED that a termination under this
Section 9.1(a)(ii) must occur no later than 10 days after the date of repayment of the Class A Option Consideration.

(b) This Agreement will terminate automatically on March 1, 2009 if the Class A Option is not exercised prior to such date.

SECTION 9.2. PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Agreement by either or both of PM and the Liggett Parties pursuant to Section 9.1, written notice thereof shall forthwith be given by the terminating party to the other party hereto, and this Agreement shall thereupon terminate and become void and have no effect, and the transactions contemplated hereby shall be abandoned without further action by the parties hereto; PROVIDED, HOWEVER, that such termination shall not relieve any party hereto of any liability for any breach of any representation or warranty made herein as of the date hereof or of any covenant contained herein. If this Agreement is terminated as provided herein, all filings, applications and other submissions made hereunder shall, to the extent practicable, be withdrawn from the persons to which they were made.

ARTICLE X

MISCELLANEOUS

SECTION 10.1. REASONABLE BEST EFFORTS. Each of the parties to this Agreement agrees to use its reasonable best efforts to cause the conditions to the Closing to be satisfied; PROVIDED, HOWEVER, that, subject to the terms and conditions of the License Agreement, PM shall not be required to agree to divest or hold separate any brand, product, business or assets or to take or agree to take any action that limits its freedom of action with respect to, or its ability to retain, any of the Marks or any brand, product, business or other asset of PM or its Affiliates.

SECTION 10.2. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. Copies of executed counterparts transmitted by telecopy, telefax or other electronic transmission service shall be considered original executed counterparts for purposes of this Section, provided receipt of copies of such counterparts is confirmed.

SECTION 10.3. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to the choice of law principles thereof.

SECTION 10.4. ENTIRE AGREEMENT. There are no oral agreements, understandings, representations or warranties between the parties with respect to the subject matter hereof.

SECTION 10.5. EXPENSES. Whether or not the transactions contemplated hereby are consummated, all legal and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses.

SECTION 10.6. NOTICES. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be hand delivered, faxed or mailed by registered or certified mail or overnight courier service, as follows:

(a) if given to PM or its designee:

Philip Morris Incorporated 120 Park Avenue New York,NY 10017 Facsimile: (917) 663-5399 Attention: General Counsel, PM USA

with a copy to:

Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Facsimile: (212) 403-2000 Attention: Elliott V. Stein

(b) if given to the Liggett Parties:

c/o Brooke Group Ltd.

100 S.E. Second Street, 32nd Floor
Miami, Florida 33131
Facsimile: (305) 579-8009
Attention: Richard J. Lampen

with a copy to:

Milbank Tweed Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Facsimile: (212) 530-5219
Attention: Michael W. Goroff

All such notices shall be deemed to have been given when received. The address for receipt of notice may be changed by providing written notice to the Company.

SECTION 10.7. SUCCESSORS AND ASSIGNS. PM may Assign this Agreement at any time; PROVIDED, that the assignee assumes all obligations of PM under this Agreement, and PM is not relieved of any payment obligations hereunder. The Liggett Parties may not Assign this Agreement without the written consent of PM.

SECTION 10.8. HEADINGS; DEFINITIONS. The Section, Article and other headings contained in this Agreement are inserted for convenience of reference only and will not

affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained herein mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms.

SECTION 10.9. AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. PM, on the one hand, or the Liggett Parties, on the other hand, may, only by an instrument in writing, waive compliance by the other with any term or provision hereof on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision hereof shall not be construed as a waiver of any subsequent breach.

SECTION 10.10. INTERPRETATION; ABSENCE OF PRESUMPTION. (a) For the purposes hereof, (i) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (ii) the terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph and Exhibit references are to the Articles, Sections, paragraphs and Exhibits to this Agreement unless otherwise specified,
(iii) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall apply, when appropriate, to successive events and transactions.

(b) This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted.

SECTION 10.11. SEVERABILILY. Any provision hereof which is invalid or unenforceable shall be ineffective to the extent of such invalidity or unenforceability, without affecting in any way the remaining provisions hereof.

SECTION 10.12. FURTHER ASSURANCES; SPECIFIC PERFORMANCE. The Liggett Parties, and PM agree that, from time to time, whether before, at or after the Closing Date, each of them will, and will cause their respective Affiliates to, execute and deliver such further instruments of conveyance and transfer and take such other action as may be necessary to carry out the purposes and intents hereof. PM and the Liggett Parties each acknowledge that, in view of the uniqueness of the Marks, PM would not have an adequate remedy at law for money damages in the event that this Agreement were not performed in accordance with its terms, and therefore agree that PM shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which PM may be entitled at law or in equity.

SECTION 10.13. NO LIMITATION OF REMEDIES. The remedies provided herein with respect to a Material Breach by the Liggett Parties or a Material Breach by PM are not liquidated damages, and the parties shall be entitled to pursue all remedies available at law or equity in addition to such remedies.

IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties as of the day first above written.

BROOKE GROUP LTD.

By: /s/ Bennett S. LeBow
    ------------------------------------------
    Name: Bennett S. LeBow
    Title: Chairman of the Board and President

LIGGETT & MYERS INC.

By: /s/ Samuel M. Veasey
    ------------------------------------------
    Name: Samuel M. Veasey
    Title: Vice President

EVE HOLDINGS INC.

By: /s/ Bennett S. LeBow
    ------------------------------------------
    Name: Bennett S. LeBow
    Title: Chairman of the Board and President

LIGGETT GROUP INC.

By: /s/ Samuel M. Veasey
    ------------------------------------------
    Name: Samuel M. Veasey
    Title: Senior Vice President

PHILIP MORRIS INCORPORATED

By: /s/ M.E. Szymanczyk
    ------------------------------------------
    Name: M.E. Szymanczyk
    Title: Chief Executive Officer

EXHIBIT 10.62

THIS CLASS B OPTION AGREEMENT (the "AGREEMENT"), dated as of January 12, 1999, is entered into among Brooke Group Ltd., a Delaware corporation ("BROOKE"), Liggett & Myers Inc., a Delaware corporation ("LMI"), Liggett Group Inc., a Delaware corporation ("LIGGETT"), and Eve Holdings Inc., a Delaware corporation (the "GRANTOR", and together with Brooke, LMI and Liggett, the "LIGGETT PARTIES"), on the one hand, and Philip Morris Incorporated, a Virginia corporation ("PM"), on the other hand.

WHEREAS, concurrently with the execution of this Agreement, the Liggett Parties and PM will execute the Formation and Limited Liability Company Agreement of Brands LLC, a Delaware limited liability company (the "COMPANY"), pursuant to which, among other things, the Grantor will contribute the Marks to the Company in exchange for 100% of the Class A Shares and 100% of the Class B Shares of the Company; and

WHEREAS, the Grantor desires to grant to PM an option to acquire all of the Class B Shares, on the terms and subject to the conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

As used in this Agreement the following terms shall have the following respective meanings:

"AFFILIATE" shall mean, with respect to any Person, any direct or indirect subsidiary of such Person, any other Person that directly or through one or more intermediaries, is controlled by, or is under common control with, the specified Person, and, if such a Person is an individual, any member of the immediate family (including parents, spouse and children) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any person who is controlled by any such member or trust. As used in this definition, the term "CONTROL" (including with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities or partnership or other ownership interests, by contract or otherwise. Notwithstanding the foregoing, for purposes of this Agreement (i) the Liggett Parties and their Subsidiaries shall not be deemed to be Affiliates of PM, and
(ii) PM and its Subsidiaries (including the Company) shall not be deemed to be Affiliates of the Liggett Parties.

"AGREEMENT" shall have the meaning set forth in the recitals hereof.

"ASSIGN" shall mean to, directly or indirectly, sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any Class B Shares.

"BRANDS" shall mean "Lark," "Chesterfield" and "L&M."

"BROOKE" shall have the meaning set forth in the preamble hereof.

"CERTIFICATE" shall mean the Certificate of Formation of the Company filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.

"CLASS A CLOSING" shall mean the closing of the exercise of the Class A Option, as defined in Section 2.5 of the Class A Option.

"CLASS A OPTION AGREEMENT" shall mean that certain option agreement, dated as of the date hereof pursuant to which PM (or any Permitted Assignee thereunder) may purchase from the Grantor the Class A Shares owned by it.

"CLASS B EXERCISE PRICE" shall have the meaning set forth in
Section 2.3.

"CLASS B OPTION" shall have the meaning set forth in
Section 2.1.

"CLASS B OPTION CONSIDERATION" shall have the meaning set forth in Section 2.1.

"CLASS B OPTION EXERCISE PERIOD" shall have the meaning set forth in Section 2.2.

"CLASS B OPTIONHOLDER" shall have the meaning set forth in
Section 2.2.

"CLOSING" shall have the meaning set forth in Section 2.5(a).

"CLOSING DATE" shall mean the date on which the Closing occurs.

"COMPANY" shall have the meaning set forth in the preamble hereto.

"DELAWARE ACT" means the Delaware Limited Liability Company Act (6 Del. Co. section 18-101, ET SEQ.), as amended from time to time.

"GOVERNMENTAL ENTITY" means any government or subdivision thereof, domestic, foreign or supranational or any administrative, governmental or regulatory authority, agency, commission, tribunal or body, domestic, foreign or supranational.

"GRANTOR" shall have the meaning set forth in the preamble hereof.

"GUARANTORS" shall mean the guarantors of the Company's obligations under the Loan Agreement (see definition of Loan Agreement below).

"LICENSE AGREEMENT" shall mean that certain license agreement, attached as Exhibit A to the LLC Agreement, between the Company and PM and dated as of the Closing Date, pursuant to which PM and its Affiliates will obtain the exclusive (including with respect to the Company) license to use the Marks within the United States (as defined in the License Agreement).

"Lien" shall have the meaning set forth in Section 3.2. preamble hereof.

"LIGGETT" and "LIGGETT PARTIES" shall have the respective meanings set forth in the preamble hereof.

"LLC AGREEMENT" shall mean that certain Formation and Limited Liability Company Agreement to be entered into by the Liggett Parties and PM concurrently with the execution of this Agreement.

"LMI" shall have the meaning set forth in the preamble hereof.

"LOAN AGREEMENT" shall mean the loan agreement entered into between the Company and the lending institutions named therein, with respect to the Loan Amount, which borrowing shall be guaranteed by the Grantor or such other entity designated by the Liggett Parties which has received the Class B Option Consideration and by any other holder of Class B Shares (such entities are referred to herein as the Guarantors).

"LOAN AMOUNT" shall mean $134.9 million or, if less, the maximum amount that the Company is able to borrow in the circumstances described in Section 5.2 of the LLC Agreement.

"MARKS" shall mean all of the interest of the Liggett Parties and any Affiliate of any Liggett Party in all trademarks, trade names, trade dress, service marks, registrations and applications for registrations therefor, in each case relating to each of the Brands, including any variation or product line extension thereof and any derivative pertaining thereto.

"MATERIAL BREACH BY THE LIGGETT PARTIES" shall have the

meaning set forth in Section 2.4(a) of the Class A Option Agreement.

"MATERIAL BREACH BY PM" shall have the meaning set forth in
Section 6.1(c) of the Class A Option Agreement.

"NOTICE OF EXERCISE" shall have the meaning set forth in
Section 2.5(a).

"PERSON" includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company or other legal entity or organization.

"PERMITTED ASSIGNEE" shall have the meaning set forth in
Section 2.2.

"PERMITTED LIEN" shall have the meaning set forth in
Section 3.2.

"PM" shall have the meaning set forth in the preamble hereof.

"REDEMPTION PRICE" shall have the meaning set forth in Section 9.5(b) of the LLC Agreement.

"SUBSIDIARIES" shall mean, with respect to any Person, any other Person in which such Person owns, directly or indirectly, 50% or more of the voting interests.

"TRANSACTION AGREEMENTS" mean this Agreement, the Class A Option Agreement and the LLC Agreement.

ARTICLE 11

GRANT AND EXERCISE OF OPTION; RELEASE OF OBLIGATIONS OF GUARANTORS; CLOSING

SECTION 2.1. GRANT OF CLASS B OPTION. The Grantor hereby grants to PM (or a Permitted Assignee) an irrevocable option (THE "CLASS B OPTION") to purchase 100% of the Class B Shares, on the terms and subject to the conditions set forth in this Agreement. In consideration of the grant of the Class B Option, PM has delivered to the Grantor $145 million (the "CLASS B OPTION CONSIDERATION"), receipt of which is hereby acknowledged.

SECTION 2.2. EXERCISE PERIOD. PM, any third party to whom PM assigns the Class B Option in accordance with Section 10.6 (such assignee, a "PERMITTED ASSIGNEE"), or any subsequent Permitted Assignee (a "CLASS B OPTIONHOLDER") may exercise the Class B Option during the period beginning on December 2, 2008 and ending at 5: 00 p.m. (New York City time) on March 1, 2009; PROVIDED, however, that the Class B Optionholder may give the Liggett Parties written notice extending such period to 5:00 p.m. (New York City time) on September 1, 2009 if for any reason (including any legal or financial impediment) the Class B Optionholder is unable to exercise the Class B Option (or to cause the Company to redeem the Class B Shares in accordance with the LLC Agreement) prior to March 1, 2009 (such period, as extended, the "CLASS B OPTION EXERCISE PERIOD").

SECTION 2.3. CLASS B EXERCISE PRICE.

(a) Subject to Sections 2.3(b) and 23(c), the Class B Exercise Price shall be the Redemption Price.

(b) If a Material Breach by PM occurs, and upon payment of the amount required by the last sentence of Section 6.1(c) hereof, the Class B Exercise Price shall become $1.00.

(c) If the Liggett Parties refund the Class B Option Consideration in accordance with Section 2.4 hereof, the Class B Exercise Price shall become the sum of the Redemption Price and $145 million.

SECTION 2.4. REFUND OF CLASS B OPTION CONSIDERATION.

The Class B Option Consideration shall be repayable to PM by the Liggett Parties in full promptly following demand by PM upon any Material Breach by the Liggett Parties that is not cured to PM's reasonable satisfaction within 120 days of written notice thereof from PM to the Liggett Parties.

SECTION 2.5. NOTICE OF EXERCISE; CLOSING; RELEASE OF GUARANTOR OBLIGATIONS.

(a) In order to exercise the Class B Option, the Class B Optionholder must give written notice (a "NOTICE OF EXERCISE") to the Liggett Parties reciting its intention to exercise the Class B Option and setting forth the time and place of the closing (the "CLOSING"); PROVIDED that the date of the Closing set forth in such Notice of Exercise may not be more than 30 days from the date thereof.

(b) At the Closing, the Liggett Parties shall deliver the Class B Shares to the Class B Optionholder free and clear of any Liens, other than Permitted Liens, and the Class B Optionholder shall deliver the Class B Option Exercise Price and shall cause each Guarantor to be released of its obligations as guarantor under the Loan Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES

Each of the Liggett Parties hereby jointly and severally represents and warrants to PM as follows:

SECTION 3. 1. INCORPORATION OF CERTAIN REPRESENTATIONS AND Warranties. The representations and warranties of the Liggett Parties contained in Article III of the LLC Agreement are hereby incorporated by reference in this Agreement and shall have the same effect as if made in this Agreement.

SECTION 3.2. OWNERSHIP OF CLASS B SHARES. Immediately prior to the Closing, the Grantor will have good and valid title to the Class B Shares free and clear of any liens, claims, charges, security interests, options or other legal or equitable encumbrances or restrictions (any of the foregoing, a "Lien") other than Liens under the Loan Agreement ("PERMITTED LIENS"), and assuming the person exercising the Class B Option has the requisite power and authority to enter into this Agreement and to be the lawful owner of the Class B Shares, upon delivery of the Class B Shares, good and valid title to such Class B Shares will pass to the person exercising the Class B Option free and clear of any Lien (other than Permitted Liens). Other than the Transaction Agreements, the Class B Shares are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any such agreement, arrangement, commitment or understanding restricting or otherwise relating to voting, distribution rights or disposition of such Class B Shares.

ARTICLE TV

REPRESENTATIONS AND WARRANTIES OF PM

PM hereby represents and warrants to the Liggett Parties as follows:

SECTION 4.1. INCORPORATION OF CERTAIN REPRESENTATIONS AND WARRANTIES. The representations and warranties of PM contained in Article IV of the LLC Agreement are hereby incorporated by reference in this Agreement and shall have the same effect as if made in this Agreement.

ARTICLE V

COVENANTS OF THE LIGGETT PARTIES

SECTION 5.1. APPROVALS. The Liggett Parties shall use their respective reasonable best efforts to obtain promptly any consent, order or approval of, or any exemption by, any Governmental Entity in connection with the consummation of the transactions contemplated by this Agreement, if any such consent, order, approval or exemption is required.

SECTION 5.2. REPRESENTATIONS AND WARRANTIES. Each of the Liggett Parties shall give written notice to PM promptly upon the occurrence of any event that would cause or constitute a material breach or would have caused a material breach, had such event occurred or been known to the Liggett Parties prior to the date hereof, of any representations or warranties of the Liggett Parties contained in any of the Transaction Agreements.

SECTION 5.3. ACCESS TO INFORMATION. Prior to the Closing, the Liggett Parties shall, and shall cause each of their respective Subsidiaries to, give PM and its representatives, employees, counsel and accountants full access, during normal business hours and upon reasonable notice, to the employees, agents, independent contractors, properties, books and records relating to the Marks, only to the extent, in the reasonable judgment of counsel, permitted by law, including antitrust law, and provided that the Liggett Parties and their Subsidiaries shall not be obligated to make any disclosure which would cause forfeiture of attorney-client privilege. The Liggett Parties shall notify PM in writing if any disclosure is withheld in order to avoid such forfeiture. No investigation pursuant to this Section shall affect or be deemed to affect any representation or warranty made by the Liggett Parties. PM agrees that all information received pursuant to this Section 5.3 shall be kept confidential and PM shall not disclose such information to any third party unless, and only to the extent, required to do so by applicable law.

ARTICLE VI

COVENANTS OF PM

PM covenants and agrees as follows:

SECTION 6.1. APPROVALS.

(a) PM shall use its reasonable best efforts to obtain promptly any consent, order or approval of, or any exemption by, any Governmental Entity in connection with the consummation of the transactions contemplated by this Agreement, if any such consent, order, approval or exemption is required.

(b) In the event a Material Breach by PM has occurred, PM shall promptly prepay to the Liggett Parties the full amount of the Class B Exercise Price minus $1.00, and the Class B Exercise Price shall be reduced to $1.00.

ARTICLE VII

CONDITIONS TO THE OBLIGATIONS OF THE LIGGETT PARTIES

The obligations of the Liggett Parties under this Agreement are subject to the fulfillment of the following conditions prior to or at the Closing Date (any of which may be waived by them):

SECTION 7.1. REPRESENTATIONS, WARRANTIES, COVENANTS. The representations and warranties of PM made or incorporated in this Agreement shall be true and correct in all material respects as of the date hereof and, except as specifically contemplated by this Agreement, on and as of the Closing Date, as though made on and as of the Closing Date, and PM shall have performed or complied in all material respects with the obligations and covenants required by this Agreement to be performed or complied with by it by the time of the Closing; PM shall have delivered to the Liggett Parties a certificate dated the Closing Date and signed by an authorized officer confirming the foregoing.

SECTION 7.2. NO INJUNCTION OR GOVERNMENTAL LITIGATION. There shall be no effective temporary restraining order, preliminary or permanent injunction or order issued by any Governmental Entity which would prevent the consummation of the transactions contemplated by the Transaction Agreements or the License Agreement, and no Governmental Entity shall have commenced litigation to enjoin the transactions contemplated by the Transaction Agreements or the License Agreement.

SECTION 7.3. REGULATORY APPROVALS. All authorizations, approvals, consents and waivers of any Governmental Entities required to consummate the transactions contemplated by this Agreement, the other Transaction Agreements or the License Agreement shall have been obtained and shall not have been terminated, suspended or withdrawn as of the Closing Date.

ARTICLE VIII

CONDITIONS TO THE OBLIGATIONS OF PM

Once PM has delivered a Notice of Exercise, its obligation to purchase the Class B Shares is subject to the fulfillment of the following conditions prior to or at the Closing Date (any of which may be waived by it):

SECTION 8.1. REPRESENTATIONS, WARRANTIES, COVENANTS. The representations and warranties of the Liggett Parties made or incorporated in this Agreement (other than those contained in Section 3.3 of the LLC Agreement) shall be true and correct in all material respects as of the date hereof and, except as specifically contemplated by this Agreement, on and as of the Closing Date, as though made on and as of the Closing Date, and the Liggett Parties shall have performed or complied in all material respects with the obligations and covenants required by this Agreement to be performed or complied with by the Liggett Parties by the time of the Closing; the representations and warranties of the Liggett Parties contained in Section 3.3 of the LLC Agreement shall be true and correct in all material respects as of the date hereof and on and as of the date of the closing under the Class A Option Agreement, as though made on and as of such date; and the Liggett Parties shall have delivered to PM a certificate dated the Closing Date and signed by an authorized officer confirming the foregoing.

SECTION 8.2. NO INJUNCTION OR GOVERNMENTAL LITIGATION. There shall be no effective temporary restraining order, preliminary or permanent injunction or order issued by any Governmental Entity which would prevent the consummation of the transactions contemplated by the Transaction Agreements or the License Agreement, and no Governmental Entity shall have commenced litigation to enjoin the transactions contemplated by the Transaction Agreements or the License Agreements.

SECTION 8.3. REGULATORY APPROVALS. All authorizations, approvals, consents and waivers of any Governmental Entities required to consummate the transactions contemplated by this Agreement, if any, shall have been obtained and shall not have been terminated, suspended or withdrawn as of the Closing Date.

ARTICLE IX

TERMINATION

SECTION 9.1. TERMINATION.

(a) This Agreement may be terminated at any time prior to the Closing by:

(i) the mutual consent of the Liggett Parties and PM; or

(ii) by PM upon a Material Breach by the Liggett Parties; provided that a termination under this

SECTION 9.1 (a)(ii) must occur no later than 10 days after the date of repayment of the Class B Option Consideration.

(b) This Agreement will terminate automatically at the expiration of the Class B Option Exercise Period if the Class B Optionholder does not deliver a Notice of Exercise during the Class B Option Exercise Period.

SECTION 9.2. PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Agreement by either or both of PM and the Liggett Parties pursuant to Section 9.1, written notice thereof shall forthwith be given by the terminating party to the other party hereto, and this Agreement shall thereupon terminate and become void and have no effect, and the transactions contemplated hereby shall be abandoned without further action by the parties hereto; PROVIDED, HOWEVER, that such termination shall not relieve any party hereto of any liability for any breach of any representation or warranty made herein as of the date hereof or of any covenant contained herein. If this Agreement is terminated as provided herein, all filings, applications and other submissions made hereunder shall, to the extent practicable, be withdrawn from the persons to which they were made.

ARTICLE X

MISCELLANEOUS

SECTION 10.1. REASONABLE BEST EFFORTS. Each of the parties to this Agreement agrees to use its reasonable best efforts to cause the conditions to the Closing to be satisfied; PROVIDED, HOWEVER, that, subject to the terms and conditions of the License Agreement, PM shall not be required to agree to divest or hold separate any brand, product, business or assets or to take or agree to take any action that limits its freedom of action with respect to, or its ability to retain, any of the Marks or any brand, product, business or other asset of PM or its Affiliates.

SECTION 10.2. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. Copies of executed counterparts transmitted by telecopy, telefax or other electronic transmission service shall be considered original executed counterparts for purposes of this Section, provided receipt of copies of such counterparts is confirmed.

SECTION 10.3. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to the choice of law principles thereof.

SECTION 10.4. ENTIRE AGREEMENT. There are no oral agreements, understandings, representations or warranties between the parties with respect to the subject matter hereof

SECTION 10.5. EXPENSES. Whether or not the transactions contemplated hereby are consummated, all legal and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses.

SECTION 10.6. NOTICES. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be hand delivered, faxed or mailed by registered or certified mail or overnight courier service, as follows:

(a) if given to PM or its designee:

Philip Morris Incorporated 120 Park Avenue New York, NY 10017 Facsimile: (917) 663-5399 Attention: General Counsel, PM USA

with a copy to:

Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York,NY 10019 Facsimile: (212) 403-2000 Attention: Elliott V. Stein

(b) if given to the Liggett Parties:

c/o Brooke Group Ltd.

100 S.E. Second Street, 32nd floor
Miami, Florida 33131
Facsimile: (305) 579-8009
Attention: Richard J. Lampen

with a copy to:

Milbank Tweed Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
Facsimile: (212) 530-5219
Attention: Michael W. Goroff

All such notices shall be deemed to have been given when received. The address for receipt of notice may be changed by providing written notice to the Company.

SECTION 10.7. SUCCESSORS AND ASSIGNS. PM may Assign this Agreement at any time; PROVIDED, that the assignee assumes all obligations of PM under this Agreement, and

PM is not relieved of any payment obligations hereunder. The Liggett Parties may not Assign this Agreement without the written consent of PM.

SECTION 10.8. HEADINGS; DEFINITIONS. The Section, Article and other headings contained in this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained herein mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms.

SECTION 10.9. AMENDMENTS AND WAIVERS. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. PM, on the one hand, or the Liggett Parties, on the other hand, may, only by an instrument in writing, waive compliance by the other with any term or provision hereof on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision hereof shall not be construed as a waiver of any subsequent breach.

SECTION 10.10. INTERPRETATION; ABSENCE OF PRESUMPTION. (a) For the purposes hereof, (i) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (ii) the terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph and Exhibit references are to the Articles, Sections, paragraphs and Exhibits to this Agreement unless otherwise specified,
(iii) the word "including" and words of similar import when used in this Agreement shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall apply, when appropriate, to successive events and transactions.

(b) This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted.

SECTION 10.11. SEVERABILITY. Any provision hereof which is invalid or unenforceable shall be ineffective to the extent of such invalidity or unenforceability, without affecting in any way the remaining provisions hereof.

SECTION 10.12. FURTHER ASSURANCES; SPECIFIC PERFORMANCE. The Liggett Parties, and PM agree that, from time to time, whether before, at or after the Closing Date, each of them will, and will cause their respective Affiliates to, execute and deliver such further instruments of conveyance and transfer and take such other action as may be necessary to carry out the purposes and intents hereof. PM and the Liggett Parties each acknowledge that, in view of the uniqueness of the Marks, PM would not have an adequate remedy at law for money damages in the event that this Agreement were not performed in accordance with its terms, and therefore agree that PM shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which PM may be entitled at law or in equity.

SECTION 10. 13. NO LIMITATION OF REMEDIES. The remedies provided herein with respect to a Material Breach by the Liggett Parties or a Material Breach by PM are not liquidated damages, and the parties shall be entitled to pursue all remedies available at law or equity in addition to such remedies.

IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties as of the day first above written.

BROOKE GROUP LTD.

By: /s/ Bennett S. LeBow
    ------------------------------------------
    Name: Bennett S. LeBow
    Title: Chairman of the Board and President

LIGGETT & MYERS INC.

By: /s/ Samuel M. Veasey
    ------------------------------------------
    Name: Samuel M. Veasey
    Title: Vice President

EVE HOLDINGS INC.

By: /s/ Bennett S. LeBow
    ------------------------------------------
    Name: Bennett S. LeBow
    Title: Chairman of the Board and President

LIGGETT GROUP INC.

By: /s/ Samuel M. Veasey
    ------------------------------------------
    Name: Samuel M. Veasey
    Title: Senior Vice President



By: /s/ M.E. Szymanczyk
    ------------------------------------------
    Name: M.E. Szymanczyk
    Title: Chief Executive Officer

EXHIBIT 10.63

AMENDMENT

This AMENDMENT (the "Amendment"), dated as of February 19, 1999, to the Class A Option Agreement, dated as of January 12, 1999 (the "Class A Option Agreement"), is entered into among Brooke Group Ltd., a Delaware corporation ("Brooke"), Liggett & Myers Inc., a Delaware corporation ("LMI"), Liggett Group Inc., a Delaware corporation ("Liggett"), and Eve Holdings Inc., a Delaware corporation (the "Grantor", and together with Brooke, LMI and Liggett, the "Liggett Parties"), on the one hand, and Philip Morris Incorporated, a Virginia corporation ("PM"), on the other hand. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Class A Option Agreement.

WHEREAS, the Liggett Parties and PM are parties to the Class A Option Agreement pursuant to which, among other things, PM has certain due diligence rights with respect to the Marks; and

WHEREAS, the Liggett Parties and PM desire to amend the Class A Option Agreement to extend certain deadlines set forth therein which relate to PM's due diligence rights.

NOW, THEREFORE, in consideration of the mutual promises set forth herein and in the Class A Option Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:

1. The references in paragraph (a) of Section 2.2 of the Class A Option Agreement to "the 10th day following HSR Clearance" and "the 30th day following HSR Clearance" are hereby being amended to refer to "the 17th day following HSR Clearance" and "the 37th day following HSR Clearance", respectively, and accordingly paragraph (a) of Section 2.2 of the Class A Option Agreement is hereby amended to read in its entirety as follows:

"(a) PM may conduct further due diligence with respect to the Marks from the date hereof until 5:00 P.M. (New York City time) on the 17th day following HSR Clearance (the "INITIAL DUE DILIGENCE Period"); PROVIDED, that in the event any information requested by PM in the course of its due diligence is withheld due to competitive considerations or otherwise, such information will be provided to PM by the Liggett Parties no later than 5:00 P.M. (New York City time) on the 17th day following HSR Clearance, and PM may continue its due diligence until 5:00 P.M. (New York City time) on the 37th day following HSR Clearance (such period, the "EXTENDED DUE DILIGENCE PERIOD" and together with the Initial Due Diligence Period, the "DUE DILIGENCE PERIOD")."

2. The reference to "90 days" contained in the PROVISO in
Section 2.5 of the Class A Option Agreement is hereby being amended to refer to the "83 days" and accordingly Section 2.5 of the Class A Option Agreement is hereby amended to read in its entirety as follows:

"Section 2.5. NOTICE OF EXERCISE; CLOSING. In order to exercise the Class A Option, a Class A Optionholder must give written notice ( a "NOTICE OF EXERCISE") to the Liggett Parties reciting its intention to exercise the Class A Option and setting forth the time and place of the closing (the "CLOSING"); PROVIDED that the date of the Closing set forth in such Notice of Exercise may not be more than 83 days from the date thereof. At the Closing, the events set forth in
Section 2.7 of the LLC Agreement shall also occur or have occurred. Notwithstanding the foregoing and for the avoidance of doubt the failure of any such event to occur is not a condition to the Closing unless set forth in Article VII or Article VIII hereof."

3. The foregoing amendments to paragraph (a) of Section 2.2 and to Section 2.5 of the Class A Option Agreement are, and shall be deemed for all purposes to be, effective on the date hereof.

4. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

5. Except as expressly amended hereby, the Class A Option Agreement shall continue in full force and effect in accordance with the provisions thereof.

6. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

IN WITNESS WHEREOF, this Amendment has been signed by or on behalf of each of the parties as of the day first written above.

BROOKE GROUP LTD.

By: /s/ Bennett S. LeBow
    ---------------------------------------
    Name:       Bennett S. LeBow
    Title:      Chairman of the Board and
                 President

LIGGETT & MYERS INC.

By: /s/ Samuel M. Veasey
    ---------------------------------------
    Name:       Samuel M. Veasey
    Title:      Vice President

LIGGETT GROUP INC.

By: /s/ Samuel M. Veasey
    ---------------------------------------
    Name:       Samuel M. Veasey
    Title:      Senior Vice President

EVE HOLDINGS INC.

By: /s/ Bennett S. LeBow
    ---------------------------------------
    Name:       Bennett S. LeBow
    Title:      Chairman of the Board and
                 President

PHILIP MORRIS INCORPORATED

By: /s/ Michael Szymanczyk
    ---------------------------------------
    Name:       Michael Szymanczyk
    Title:      President

EXHIBIT 10.64

February 17, 1999

BGLS, Inc.
100 S.E. Second Street
Miami, Florida 33131

RE: PURCHASE AND SALE OF $31,139,000 ORIGINAL PRINCIPAL AMOUNT OF
BGLS, INC. 15.75% SERIES B SENIOR SECURED NOTES DUE 2001
(THE "SECURITIES")

Gentlemen/Ladies:

BGLS, Inc. ("Buyer") hereby agrees to purchase from U.S. Bancorp Investments, Inc., acting through its U.S. Bancorp Libra division ("Seller"), and Seller hereby agrees to sell to Buyer, the above described Securities (including Seller's rights to all accrued but unpaid interest with respect to the Securities) at the price, on the terms and subject to the conditions hereinafter set forth.

The purchase price payable by Buyer to Seller for the Securities shall be equal to 95.0% of the sum of (i) the original principal amount of the Securities of $31,139,000 and (ii) the accrued but unpaid interest due with respect to the Securities as of the settlement date of the purchase and sale of the Securities contemplated hereby (the "Settlement Date"), with such interest to accrue in accordance with the Indenture for the Securities and that certain Amended and Restated Standstill Agreement, dated as of February 9, 1999. According to Buyer, as of February 17, 1999, the principal and accrued interest per each $1,000 of original principal amount of the Securities is $1,364.78.

Settlement of the purchase and sale contemplated hereby (the "Sale") shall be effected through accounts of Seller and Buyer maintained at Schroder & Co., Inc. ("Schroder") in the manner in which transactions in securities similar to the Securities are customarily consummated. Buyer acknowledges that Seller is a broker-dealer with a clearing arrangement with Schroder, and Buyer agrees to open an account with Schroder introduced by Seller as soon as practicable after the date hereof for the purpose of such settlement.

Buyer's and Seller's obligation hereunder to consummate the sale shall be subject to Buyer and/or one or more affiliates of Buyer, including without limitation, Liggett Group, Inc. or an affiliate thereof, receiving proceeds in amounts (in addition to the $150 million option fee paid in December 1998 by Philip Morris Incorporated ("Philip Morris")) of approximately $145 million substantially in accordance with and in transactions substantially consistent with the terms of the transactions between Buyer and Philip Morris as referred to in Buyer's Form 8-K, dated November 20, 1998 (the "Closing Condition") on or before close of business (New York City Time) on July 31, 1999 (the "Condition Deadline"); provided, that Seller, at its option exercisable by written notice to Buyer received on or prior to close of business (New York City Time) on July 20, 1999, may extend the Condition Deadline to a date not later than close of business (New York City Time) on August 31, 1999; provider further, that Buyer may, at its option upon written notice to Seller, elect to so consummate the sale and purchase of the securities together with accrued interest thereon, prior to the Condition Deadline.

BGLS, Inc.
February 17, 1999

Upon occurrence of the Closing Condition on or prior to the Condition Deadline (or if Buyer at its option elects to so consummate the sale and purchase of the Securities prior to the Condition Deadline), Buyer and Seller shall settle the Sale as soon as practicable thereafter. To effect such settlement, Seller shall cause Schroder to issue a trade confirmation to Buyer setting forth the Settlement Date and the purchase price for the Securities (as determined hereunder as of such Settlement Date), and Buyer and Seller shall cause the Sale to be effected on the Settlement Date as set forth in the trade confirmation. If the Closing Condition is not satisfied by the Condition Deadline this agreement shall terminate and neither Seller nor Buyer shall have any obligation hereunder.

Please confirm your agreement to the foregoing by signing in the place indicated below. This agreement may be executed in counterparts, all of which taken together constituting a single agreement.

Very truly yours,

U.S. BANCORP INVESTMENTS, INC.

By: /s/ Jess M. Ravich
    --------------------------------
        Jess M. Ravich
        Co-Chief Executive Officer

AGREED TO AND ACCEPTED:

BGLS, INC.

By: /s/ Richard J. Lampen
    ----------------------------------
    Name:    Richard J. Lampen

    Title:   Executive Vice President

By: /s/ Bennett S. LeBow
    ----------------------------------
    Name:  Bennett S. Lebow
    Title: Chairman of the Board,
           President and Chief
           Executive Officer


  /s/ Marc N. Bell
  ------------------------------------
  Marc N. Bell

      NAME OF SUBSIDIARY                JURISDICTION OF INCORPORATION
      ------------------                -----------------------------
BGLS Inc.                                         Delaware
      Liggett Group Inc.                          Delaware
      Brooke (Overseas) Ltd.                      Delaware
      New Valley Holdings, Inc.                   Delaware
           New Valley Corporation                 Delaware

as such term is defined by Rule 1-02(w) of Regulation S-X.

/S/ PRICEWATERHOUSECOOPERS LLP

Miami, Florida


April 6, 1999

                                                     /s/ ARTHUR ANDERSEN LLP
                                                     --------------------------
                                                     ARTHUR ANDERSEN LLP

Boston, Massachusetts


April 6, 1999

                                                                  EXHIBIT  99.1


16.      ATCHESON V. R.J. REYNOLDS, ET AL., Case No. 97-31148-CICU, Circuit
         Court of the 7th Judicial Circuit, State of Florida, Volusia County
         (case filed 7/29/97). One individual suing.

                                                                  EXHIBIT  99.1


112.     PITRE, ET AL. V. R.J. REYNOLDS ,ET AL., Case No. 97 CA 0059, 19th
         Judicial District Court, State of Louisiana, East Baton Rouge Parish
         (case filed 8/7/92). Five individuals suing.

113.     RACCA, ET AL. V. R.H. REYNOLDS, ET AL., Case No. 10-14999, 38th
         Judicial District Court, State of Louisiana, Cameron Parish (case
         filed 7/16/98). Eleven individuals suing.

114.     BAKOIAN, ESTATE OF MYDA V. R.J. REYNOLDS, ET AL., Case No. 98-3737,
         Superior Court of Massachusetts, Middlesex County (case filed
         6/22/98). One individual suing.

                                                                  EXHIBIT  99.1


181.     LABROILA, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case No.
         97-12855, Supreme Court of New York, Suffolk County (case filed
         7/20/97). Four individuals suing.

182.     LEHMAN, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case No.
         112446/97, Supreme Court of New York, New York County (case filed
         8/11/97). One individual suing.

183.     LEIBSTEIN, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case No.
         97-019145, Supreme Court of New York, Nassau County (case filed
         7/25/97). Six individuals suing.

184.     LEIDERMAN, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case No.
         22691/97, Supreme Court of New York, Kings County (case filed
         7/23/97). Three individuals suing.

                                                                  EXHIBIT  99.1


223.     SHAPIRO, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case No.
         111179/97, Supreme Court of New York, New York County (case filed
         7/21/96). Four individuals suing.

224.     SIEGEL, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case No.36857/96,
         Supreme Court of New York, Kings County (case filed 10/8/96). Two
         individuals suing.

                                                                  EXHIBIT  99.1


237.     TOMPKIN, ET AL. V. AMERICAN BRANDS, ET AL., Case No. 5:94 CV 1302,
         USDC, Northern District of Ohio (case filed 7/25/94). One individual
         suing.

                                                                                                      PAGE
                                                                                                      ----
FINANCIAL STATEMENTS
    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

/s/ PricewaterhouseCoopers LLP

Miami, Florida
March 30, 1999

                                                                                    DECEMBER 31,
                                                                           -----------------------------
                                                                            1998                 1997
                                                                           -------              -------
                                                      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
                                                                           =======              =======

                                                                                           DECEMBER 31,
                                                                                    -------------------------
                                                                                      1998            1997
                                                                                    -------        ----------
                                  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
                                                                                   =========       =========

                                                                 YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------
                                                           1998            1997            1996
                                                         ---------       ---------       ---------
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)
                                                         =========       =========       =========

                                                           Common                         Total
                                                          Stock and                    Stockholder's
                                                         Contributed                      Equity
                                                           Capital        Deficit         Deficit
                                                         -----------     ---------       ---------
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)
                                                         =========       =========       =========

                                                                                               YEAR ENDED DECEMBER 31,
                                                                                      -----------------------------------------
                                                                                         1998            1997           1996
                                                                                      ---------       ---------       ---------
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

                                                         December 31,     December 31,
                                                             1998            1997
                                                         ------------     ------------
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
                                                           ========       ========

                                                          December 31,   December 31,
                                                             1998           1997
                                                          ------------   -----------
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
                                                           ========       ========

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

                                                                  1998         1997         1996
                                                                  ----         ----         ----
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
                                                                  ====          ====         ====

                                                                          1998             1997
                                                                          ----             ----
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)
                                                                       ========           ========

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

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

                                                        1998                           1997
                                                ----------------------       ----------------------
                                                     Deferred Tax                  Deferred Tax
                                                ----------------------       ----------------------
                                                 Asset       Liability        Asset       Liability
                                                --------     ---------       --------     ---------
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       $     --       $     --
                                                ========      ========       ========       ========

                                                                    Year Ended December 31,
                                                           ---------------------------------------
                                                             1998           1997           1996
                                                           --------       --------       --------
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
                                                           ========       ========       ========

                                                                          December 31,
                                                           ---------------------------------------
                                                                    1998                   1997
                                                           -------------------------     ---------
                                                           Estimated      Carrying       Carrying
                                                           Fair Value      Value          Value
                                                           ----------     --------       --------
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
                                                           =========      =========      =========

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

  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

                                                                                                          Page

Report of Independent Accountants...................................................................        2

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

Statements of Operations for the years ended December 31, 1998,
      December 31, 1997 and December 31, 1996.......................................................        4

Statements of Stockholder's Equity (Deficit) for the years ended
      December 31, 1998, December 31, 1997 and December 31, 1996....................................        5

Statements of Cash Flows for the years ended December 31, 1998,
      December 31, 1997 and December 31, 1996.......................................................        6

Notes to Financial Statements.......................................................................        7

/s/ PricewaterhouseCoopers LLP

Miami, Florida
March 30, 1999