Vector Group

Vector Group Ltd.

2009 Stockholders’ Report

VECTOR GROUP LTD.

HOWARD M. LORBER
President
Chief Executive Officer

Dear Fellow Stockholder,

April 9, 2010

Vector Group performed well in 2009 despite an extremely challenging economic and industry environment.
At Liggett Group, our conventional tobacco business, we entered the year with a carefully constructed strategic plan
to continue to perform amidst tremendous uncertainty from a massive federal excise tax increase that raised
cigarette prices by an average of approximately 25%. We believe our results demonstrate the validity of our
approach, as Liggett significantly outperformed the market in 2009 — growing our market share while overall
industry volumes declined by nearly 10%. We were also pleased that New Valley, through its ownership stake in
Douglas Elliman, was able to maintain its strong position in the New York City metropolitan real estate market.

We continue to take steps to deploy new strategies to position Vector Group and our subsidiaries for long-term
growth, and remain confident in our business and our ability to adapt to the changing economic and regulatory
environments. As we enter 2010, we are cautiously optimistic about the near-term and are ready to build on our
momentum from the last year to continue to create value for our stockholders.

Overall Financial Results

Vector Group achieved strong results in 2009, including operating income of $143.2 million, compared to
$135.3 million for 2008. Revenues also increased over the prior year to $801.5 million, compared to $565.2 million
in 2008, primarily due to the previously referenced increase in federal excise tax (“FET”).

In 2009, we took significant steps to further strengthen our financial position, including: completing the private
placement of $85 million of our 11% senior secured notes due 2015; issuing $50 million of convertible notes to an
affiliate of Dr. Phillip Frost, one of the country’s most successful entrepreneurs; and exchanging and extending the
maturities of approximately $100 million of convertible notes.

Our liquidity remains strong with cash and cash equivalents of approximately $209.5 million as of
December 31, 2009. As of year-end, we also held investment securities and partnership interests with a fair
market value of approximately $121.7 million. Furthermore, in 2009 the Company continued to pay a substantial
cash dividend of $0.40 per share per quarter, or $1.60 per year, and, for the eleventh consecutive year, an annual
stock dividend of 5%.

Cigarette Business

As noted, our tobacco business performed well in 2009 and continued to benefit from our focus on balancing
volume growth and profit margins. In 2009, we strategically invested in key brands, developed compelling trade
programs that rewarded wholesalers and retailers, and remained focused on improving operational efficiency. We
are very proud that Liggett was able to buck industry trends in 2009 and grow market share.

For the year, the Company’s conventional cigarette business, which includes Liggett Group and USA brand
cigarettes, had revenues of $800 million, compared to $562.7 million for 2008. The vast majority of the revenue
increase was the result of the $6.17 per carton FET that went into effect on April 1, 2009. Operating income was
$168 million for 2009, compared to $170.2 million for 2008.

As anticipated, the FET had a significant impact on Liggett and the rest of the industry in 2009 and we expect it
will continue to do so going forward. Despite the significant industry contraction, Liggett increased retail shipments
in 2009 by 1.7% year over year. Liggett’s market share was approximately 3.3% in the fourth quarter of 2009,
marking the first time in 17 years that Liggett’s share has exceeded 3%.

The introduction of the newly packaged and priced Pyramid box brand in late April 2009 helped Liggett drive
volume growth. We believe Pyramid’s new box styles offer the best value proposition in the marketplace at a highly
competitive, but sustainable low price. As the tobacco market continues to evolve, Liggett is targeting the growth of
Pyramid carefully and offering Pyramid focused promotional programs that also provide support to our other
brands. Additionally, increased margins on other core brands in our portfolio, including Eve, Liggett Select and
Grand Prix, and increased manufacturing efficiencies, helped fuel Liggett’s performance in 2009.

Also of note, in June 2009 the President signed legislation granting the FDA authority to regulate tobacco
products. While the FDA bill is still somewhat ambiguous, we remain confident in our ability to fully comply with
the legislation and expect any costs associated with the implementation of the FDA requirements to be manageable
and absorbed over time. Given our extensive research activities over the years, we are hopeful that we will have an
opportunity to provide meaningful input to the FDA as this process develops and gains greater clarity.

New Valley LLC and Other Investments

Our New Valley subsidiary owns a 50% interest in Douglas Elliman Realty LLC, which operates the largest
residential brokerage business in the New York City metropolitan area through its Prudential Douglas Elliman Real
Estate subsidiaries. The brokerage companies achieved combined sales of approximately $8.6 billion in 2009.

While the real estate market remains challenging, we have begun to see positive signs of a turnaround. Douglas
Elliman Realty was able to capitalize on its strong market presence and targeted cost cutting initiatives in 2009 to
record $24.5 million of EBITDA. During the year, New Valley recorded income of $11.4 million from its equity
interest in Douglas Elliman, and received cash distributions from Douglas Elliman of $8.5 million in 2009.

Capitalizing on a unique opportunity to enhance our business, in February 2010 Prudential Douglas Elliman
acquired Bellmarc Property Management, a premier New York City property management company. This
acquisition added 50 luxury buildings to Prudential Douglas Elliman’s management portfolio, increasing its total
buildings under management to 300 in the New York City tri-state area.

Outlook

In the midst of a very difficult environment for both the tobacco and real estate industries, Vector Group
continued to perform well in 2009 and to improve its overall position. As the recovery begins, we believe we have a
strong foundation for future growth and are well prepared to make the most of the opportunities that lie ahead. We
are confident in our long-term strategy and the plans we have put in place, and look forward to continuing to deliver
value to our stockholders.

We thank our stockholders, employees and customers for their ongoing support and dedication.

Sincerely,

Howard M. Lorber
President and Chief Executive Officer

VECTOR GROUP LTD.
FORM 10-K

TABLE OF CONTENTS

PART I

Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities; Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

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ITEM 1. BUSINESS

Overview

PART I

Vector Group Ltd., a Delaware corporation, is a holding company and is principally engaged in:

(cid:129) the manufacture and sale of cigarettes in the United States through our Liggett Group LLC and Vector

Tobacco Inc. subsidiaries,

(cid:129) research relating to reduced risk cigarette products through our Vector Tobacco Inc. subsidiary, and

(cid:129) the real estate business through our New Valley LLC subsidiary, which is seeking to acquire additional
operating companies and real estate properties. New Valley owns 50% of Douglas Elliman Realty, LLC,
which operates the largest residential brokerage company in the New York metropolitan area.

Financial information relating to our business segments can be found in Note 18 to our consolidated financial
statements. For the purposes of this discussion and segment reporting in this report, references to the Liggett
segment encompass the manufacture and sale of conventional cigarettes by Liggett and Vector Tobacco. References
to the Vector Tobacco segment include research relating to reduced risk cigarette products, as well as until 2009 the
marketing of the low nicotine and nicotine-free cigarette products and, for these purposes, exclude Vector Tobacco’s
conventional cigarette products.

Strategy

Our strategy is to maximize stockholder value by increasing the profitability of our subsidiaries in the

following ways:

Liggett

(cid:129) Capitalize upon Liggett’s cost advantage in the U.S. cigarette market due to the favorable treatment that it

receives under the Master Settlement Agreement,

(cid:129) Focus marketing and selling efforts on the discount segment, continue to build volume and margin in core
discount brands (LIGGETT SELECT, GRAND PRIX, EVE and PYRAMID) and utilize core brand equity to
selectively build distribution,

(cid:129) Continue product development to provide the best quality products relative to other discount products in the

marketplace,

(cid:129) Increase efficiency by developing and adopting an organizational structure to maximize profit potential,

(cid:129) Selectively expand the portfolio of private and control label partner brands utilizing a pricing strategy that

offers long-term list price stability for customers,

(cid:129) Identify, develop and launch relevant new cigarette brands and other tobacco products to the market in the

future, and

(cid:129) Pursue strategic acquisitions of smaller tobacco manufacturers.

Vector Tobacco

(cid:129) Continue to conduct appropriate research relating to the development of cigarettes that materially reduce

risk to smokers.

New Valley

(cid:129) Continue to grow Douglas Elliman Realty operations by utilizing its strong brand name recognition and

pursuing strategic and financial opportunities,

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(cid:129) Continue to leverage our expertise as direct investors by actively pursuing real estate investments in the

United States and abroad which we believe will generate above-market returns,

(cid:129) Acquire operating companies through mergers, asset purchases, stock acquisitions or other means, and

(cid:129) Invest New Valley’s excess funds opportunistically in situations that we believe can maximize stockholder

value.

Liggett Group LLC

General. Liggett is the operating successor to Liggett & Myers Tobacco Company, which was founded in
1873. Liggett is currently the fifth-largest manufacturer of cigarettes in the United States in terms of unit sales.
Liggett’s manufacturing facilities are located in Mebane, North Carolina. At the present time, Liggett has no foreign
operations.

Liggett manufactures and sells cigarettes in the United States. According to data from Management Science
Associates, Inc., Liggett’s domestic shipments of approximately 8.6 billion cigarettes during 2009 accounted for
2.7% of the total cigarettes shipped in the United States during such year. Liggett’s market share increased 0.2% in
2009 from 2.5% in 2008 and 2007. Historically, Liggett produced premium cigarettes as well as discount cigarettes
(which include among others, control label, private label, branded discount and generic cigarettes). Premium
cigarettes are generally marketed under well-recognized brand names at higher retail prices to adult smokers with a
strong preference for branded products, whereas discount cigarettes are marketed at lower retail prices to adult
smokers who are more cost conscious. In recent years, the discounting of premium cigarettes has become far more
significant in the marketplace. This has led to some brands that were traditionally considered premium brands
becoming more appropriately categorized as branded discount, following list price reductions. Liggett’s EVE brand
falls into that category. All of Liggett’s unit sales volume in 2009, 2008 and 2007 were in the discount segment,
which Liggett’s management believes has been the primary growth segment in the industry for more than a decade.

Liggett produces cigarettes in approximately 160 combinations of length, style and packaging. Liggett’s

current brand portfolio includes:

(cid:129) LIGGETT SELECT — a leading brand in the deep discount category,

(cid:129) GRAND PRIX — re-launched as a national brand in 2005,

(cid:129) EVE — a leading brand of 120 millimeter cigarettes in the branded discount category,

(cid:129) PYRAMID — the industry’s first deep discount product with a brand identity relaunched in the second

quarter of 2009, and

(cid:129) USA and various Partner Brands and private label brands.

In 1980, Liggett was the first major domestic cigarette manufacturer to successfully introduce discount
cigarettes as an alternative to premium cigarettes. In 1989, Liggett established a new price point within the discount
market segment by introducing PYRAMID, a branded discount product which, at that time, sold for less than most
other discount cigarettes. In 1999, Liggett introduced LIGGETT SELECT, one of the leading brands in the deep
discount category. LIGGETT SELECT, which was the largest seller in Liggett’s family of brands in 2007,
comprised 32.9% in 2007, 30.1% in 2008 and 21.5% in 2009 of Liggett’s unit volume. In September 2005, Liggett
repositioned GRAND PRIX to distributors and retailers nationwide. GRAND PRIX was marketed as the “lowest
price fighter” to specifically compete with brands which are priced at the lowest level of the deep discount segment.
GRAND PRIX, which represented 32.6% in 2008 and 27.9% in 2009 of Liggett’s unit volume is now the largest
seller in Liggett’s family of brands. In April 2009, Liggett repositioned PYRAMID as a box-only brand in specific
markets with a new low price to specifically compete with brands which are priced at the lowest level of the deep
discount segment. Pyramid represented 0.6% in 2008 and 14.6% in 2009 of Liggett’s unit volume. According to the
data of Management Science Associates, Liggett held a share of approximately 9.2% of the overall discount market
segment for 2009 compared to 9.2% for 2008 and 9.3% for 2007.

Liggett Vector Brands has an agreement with Circle K Stores, Inc., which operates more than 3,000
convenience stores in the United States under the Circle K and Mac’s names, to supply MONTEGO, a deep

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discount brand, exclusively for the Circle K and Mac’s stores. The MONTEGO brand was the first to be offered
under Liggett Vector Brands’ “Partner Brands” program which offers customers quality product with long-term
price stability. Liggett Vector Brands also has an agreement with Sunoco Inc., which operates approximately 675
Sunoco APlus branded convenience stores in the United States, to manufacture SILVER EAGLE. SILVER EAGLE,
a deep discount brand, is exclusive to Sunoco and was the second brand to be offered under Liggett Vector Brands’
“Partner Brands” program. Liggett Vector Brands also manufactures BRONSON cigarettes as part of a multi-year
“Partner Brands” agreement with QuikTrip, a convenience store chain with more than 500 stores headquartered in
Tulsa, Oklahoma.

Under the Master Settlement Agreement reached in November 1998 with 46 states and various territories, the
three largest cigarette manufacturers must make settlement payments to the states and territories based on how
many cigarettes they sell annually. Liggett, however, is not required to make any payments unless its market share
exceeds approximately 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco has no payment obligation
unless its market share exceeds approximately 0.28% of the U.S. cigarette market. We believe that Liggett has
gained a sustainable cost advantage over its competitors as a result of the settlement.

Liggett’s and Vector Tobacco’s payments under the Master Settlement Agreement are based on each respective
company’s incremental market share above the minimum threshold applicable to each respective company. Thus, if
Liggett’s total market share is 2.00%, the Master Settlement Agreement payment is based on 0.35%, which is the
difference between 2.00% and Liggett’s applicable grandfathered share of 1.65%. We anticipate that both
exemptions will be fully utilized in the foreseeable future.

The source of industry data in this report is Management Science Associates, Inc., an independent third-party
database management organization that collects wholesale shipment data from various cigarette manufacturers and
distributors and provides analysis of market share, unit sales volume and premium versus discount mix for
individual companies and the industry as a whole. Management Science Associates’ information relating to unit
sales volume and market share of certain of the smaller, primarily deep discount, cigarette manufacturers is based
on estimates developed by Management Science Associates.

Business Strategy. Liggett’s business strategy is to capitalize upon its cost advantage in the United States
cigarette market due to the favorable treatment Liggett receives under its settlement agreements with the states and
the Master Settlement Agreement. Liggett’s long-term business strategy is to continue to focus its marketing and
selling efforts on the discount segment of the market, to continue to build volume and margin in its core discount
brands (LIGGETT SELECT, GRAND PRIX, PYRAMID and EVE) and to utilize its core brand equity to
selectively build distribution. Liggett intends to continue its product development to provide the best quality
products relative to other discount products in the market place. Liggett will continue to seek to increase efficiency
by developing and adapting its organizational structure to maximize profit potential. Liggett intends to expand the
portfolio of its private and control label and “Partner Brands” utilizing a pricing strategy that offers long-term list
price stability for customers. In addition, Liggett may bring niche-driven brands to the market in the future.

Sales, Marketing and Distribution. Liggett’s products are distributed from a central distribution center in
Mebane, North Carolina to 17 public warehouses located throughout the United States. These warehouses serve as
local distribution centers for Liggett’s customers. Liggett’s products are transported from the central distribution
center to the public warehouses by third-party trucking companies to meet pre-existing contractual obligations to its
customers.

Liggett’s customers are primarily tobacco and candy distributors, the military, warehouse club chains, and
large grocery, drug and convenience store chains. Liggett offers its customers prompt payment discounts, traditional
rebates and promotional incentives. Customers typically pay for purchased goods within two weeks following
delivery from Liggett, and approximately 90% of customers pay more rapidly through electronic funds transfer
arrangements. No single customer exceeded 10% of Liggett’s revenues in 2009, 2008 or 2007.

Liggett Vector Brands coordinates and executes the sales and marketing efforts, along with certain support

functions, for all of our tobacco operations.

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Trademarks. All of the major trademarks used by Liggett are federally registered or are in the process of
being registered in the United States and other markets. Trademark registrations typically have a duration of ten
years and can be renewed at Liggett’s option prior to their expiration date.

In view of the significance of cigarette brand awareness among consumers, management believes that the
protection afforded by these trademarks is material to the conduct of its business. Liggett owns all of its domestic
trademarks except for the JADE trademark, which is licensed on a long-term exclusive basis from a third-party for
use in connection with cigarettes. These trademarks are pledged as collateral for certain of our senior secured debt.

Manufacturing. Liggett purchases and maintains leaf tobacco inventory to support its cigarette manufac-
turing requirements. Liggett believes that there is a sufficient supply of tobacco within the worldwide tobacco
market to satisfy its current production requirements. Liggett stores its leaf tobacco inventory in warehouses in
North Carolina and Virginia. There are several different types of tobacco, including flue-cured leaf, burley leaf,
Maryland leaf, oriental leaf, cut stems and reconstituted sheet. Leaf components of American-style cigarettes are
generally the flue-cured and burley tobaccos. While premium and discount brands use many of the same tobacco
products, input ratios of tobacco products may vary between premium and discount products. Foreign flue-cured
and burley tobaccos, some of which are used in the manufacture of Liggett’s cigarettes, have historically been 30%
to 35% less expensive than comparable domestic tobaccos. Liggett normally purchases all of its tobacco
requirements from domestic and foreign leaf tobacco dealers, much of it under long-term purchase commitments.
As of December 31, 2009, virtually all of Liggett’s commitments were for the purchase of foreign tobacco.

Liggett’s cigarette manufacturing facility was designed for the execution of short production runs in a cost-
effective manner, which enables Liggett to manufacture and market a wide variety of cigarette brand styles. Liggett
produces cigarettes in approximately 160 different brand styles as well as private labels for other companies,
typically retail or wholesale distributors who supply supermarkets and convenience stores.

Liggett’s facility currently produces approximately 8.9 billion cigarettes per year, but maintains the capacity to
produce approximately 14.0 billion cigarettes per year. Vector Tobacco has contracted with Liggett to produce its
cigarettes at Liggett’s manufacturing facility in Mebane.

While Liggett pursues product development, its total expenditures for research and development on new

products have not been financially material over the past three years.

Competition. Liggett’s competition is now divided into two segments. The first segment is made up of the
three largest manufacturers of cigarettes in the United States: Philip Morris USA Inc., Reynolds American Inc. and
Lorillard Tobacco Company as well as the fourth largest, Commonwealth Brands, Inc. (acquired by Imperial
Tobacco PLC in 2007). The three largest manufacturers, while primarily premium cigarette based companies, also
produce and sell discount cigarettes.

The second segment of competition is comprised of a group of smaller manufacturers and importers, most of
which sell lower quality, deep discount cigarettes. Although, historically, there have been substantial barriers to
entry into the cigarette business, including extensive distribution organizations, large capital outlays for sophis-
ticated production equipment, substantial inventory investment, costly promotional spending, regulated advertising
and, for premium brands, strong brand loyalty, in recent years, a number of these smaller manufacturers have been
able to overcome these competitive barriers due to excess production capacity in the industry and the cost advantage
for certain manufacturers and importers resulting from the Master Settlement Agreement.

Many smaller manufacturers and importers that are not parties to the Master Settlement Agreement have in
recent years been impacted by the statutes enacted pursuant to the Master Settlement Agreement and have begun to
see a resultant decrease in volume after years of growth. Liggett’s management believes, while these companies still
have significant market share through competitive discounting in this segment, they are losing their cost advantage
as their payment obligations under these statutes increase.

In the cigarette business, Liggett competes on a dual front. The three major manufacturers compete among
themselves for premium brand market share advertising and promotional activities, and trade rebates and incentives
and compete with Liggett and others for discount market share, on the basis of brand loyalty. These three
competitors have substantially greater financial resources than Liggett, and most of their brands have greater sales

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and consumer recognition than Liggett’s products. Liggett’s discount brands must also compete in the marketplace
with the smaller manufacturers’ and importers’ deep discount brands.

According to Management Science Associates’ data, the unit sales of Philip Morris, Reynolds American and
Lorillard accounted in the aggregate for approximately 84.3% of the domestic cigarette market in 2009. Liggett’s
domestic shipments of approximately 8.6 billion cigarettes during 2009 accounted for 2.7% of the approximately
316 billion cigarettes shipped in the United States, compared to 8.6 billion cigarettes in 2008 (2.5%) and 9.0 billion
cigarettes (2.5%) during 2007.

Industry-wide shipments of cigarettes in the United States have been generally declining for a number of years,
with Management Science Associates’ data indicating that domestic industry-wide shipments decreased by
approximately 8.6% (approximately 30 billion units) in 2009. Liggett’s management believes that industry-wide
shipments of cigarettes in the United States will generally continue to decline as a result of numerous factors. These
factors include health considerations, diminishing social acceptance of smoking, and a wide variety of federal, state
and local laws limiting smoking in restaurants, bars and other public places, as well as increases in federal and state
excise taxes and settlement-related expenses which have contributed to higher cigarette prices in recent years.

Historically, because of their dominant market share, Philip Morris and RJR Tobacco (which is now part of
Reynolds American), the two largest cigarette manufacturers, have been able to determine cigarette prices for the
various pricing tiers within the industry. Market pressures have historically caused the other cigarette manufacturers
to bring their prices in line with the levels established by these two major manufacturers. Off-list price discounting
and similar promotional activity by manufacturers, however, has substantially affected the average price differential
at retail, which can be significantly less than the manufacturers’ list price gap. Recent discounting by manufacturers
has been far greater than historical levels, and the actual price gap between premium and deep-discount cigarettes
has changed accordingly. This has led to shifts in price segment performance depending upon the actual price gaps
of products at retail.

Philip Morris and Reynolds American dominate the domestic cigarette market with a combined market share
of approximately 73% at December 31, 2009. This concentration of United States market share makes it more
difficult for Liggett to compete for shelf space in retail outlets and could impact price competition in the market,
either of which could have a material adverse affect on its sales volume, operating income and cash flows.

The Medallion Company, Inc. We acquired Medallion, a discount cigarette manufacturer selling product in
the deep discount category, primarily under the USA brand name, in April 2002. Vector Tobacco merged into
Medallion and changed its name to Vector Tobacco Inc. As a result of the acquisition of Medallion, a participating
manufacturer under the Master Settlement Agreement, Vector Tobacco has an exemption where it has no payment
obligations under the Master Settlement Agreement unless its market share exceeds approximately 0.28% of total
cigarettes sold in the United States (approximately 900 million cigarettes in 2009). In connection with the
acquisition of Medallion, we recorded an intangible asset of $107.5 million related to the exemption under the
Master Settlement Agreement because we believe Vector Tobacco will continue to realize the benefit of the
exemption for the foreseeable future. Because the Master Settlement Agreement states that payments will continue
in perpetuity, the intangible asset is not amortized.

For purposes of this discussion and segment reporting in this report, references to the Liggett segment

encompass the manufacture and sale of conventional cigarettes produced by Vector Tobacco.

Philip Morris Brand Transaction.

In November 1998, we and Liggett granted Philip Morris options to
purchase interests in Trademarks LLC which holds three domestic cigarette brands, L&M, CHESTERFIELD and
LARK, formerly held by Liggett’s subsidiary, Eve Holdings Inc.

Under the terms of the Philip Morris agreements, Eve contributed the three brands to Trademarks, a newly-
formed limited liability company, in exchange for 100% of two classes of Trademarks’ interests, the Class AVoting
Interest and the Class B Redeemable Nonvoting Interest. Philip Morris acquired two options to purchase the
interests from Eve. In December 1998, Philip Morris paid Eve a total of $150 million for the options, $5 million for
the option for the Class A interest and $145 million for the option for the Class B interest.

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The Class A option entitled Philip Morris to purchase the Class A interest for $10.1 million. On March 19,

1999, Philip Morris exercised the Class A option, and the closing occurred on May 24, 1999.

On May 24, 1999, Trademarks borrowed $134.9 million from a lending institution. The loan was guaranteed
by Eve and was collateralized by a pledge by Trademarks of the three brands and Trademarks’ interest in the
trademark license agreement (discussed below) and by a pledge by Eve of its Class B interest. In connection with the
closing of the Class A option, Trademarks distributed the loan proceeds to Eve as the holder of the Class B interest.
The cash exercise price of the Class B option and Trademarks’ redemption price were reduced by the amount
distributed to Eve. Upon Philip Morris’ exercise of the Class B option or Trademarks’ exercise of its redemption
right, Philip Morris and Trademarks released Eve from its guaranty. The Class B interest was entitled to a
guaranteed payment of $0.5 million each year with the Class A interest allocated all remaining income or loss of
Trademarks.

Trademarks granted Philip Morris an exclusive license of the three brands for an 11-year term expiring
May 24, 2010 at an annual royalty based on sales of cigarettes under the brands, subject to a minimum annual
royalty payment of not less than the annual debt service obligation on the loan plus $1 million.

The Class B option became exercisable during the 90-day period beginning December 2, 2008 and was
exercised by Philip Morris on February 19, 2009. This option entitled Philip Morris to purchase the Class B interest
for $139.9 million, reduced by the amount previously distributed to Eve of $134.9 million. In connection with the
exercise of the Class B option, Philip Morris paid to Eve approximately $5.1 million (including a pro-rata share of
its guaranteed payment) and Eve was released from its guaranty.

Upon the closing of the exercise of the Class A option and the distribution of the loan proceeds on May 24,
1999, Philip Morris obtained control of Trademarks, and we recognized a pre-tax gain of $294.1 million in our
consolidated financial statements and established a deferred tax liability relating to the gain, which had been fully
utilized in 2009. As discussed in Note 10 to our consolidated financial statements, in July 2006, we entered into a
settlement agreement with the Internal Revenue Service with respect to taxes allegedly owed on account of the
Philip Morris brand transaction.

Vector Tobacco Inc.

Vector Tobacco, a wholly-owned subsidiary of VGR Holding, is engaged in research relating to reduced risk
cigarette products and until 2009 in the manufacture and sale of low nicotine and nicotine free cigarette products in
the United States.

QUEST.

In January 2003, Vector Tobacco introduced QUEST, its brand of low nicotine and nicotine-free

cigarette products. The manufacture and sale of QUEST brand cigarettes was discontinued in 2009.

Expenditures by Vector Tobacco for research and development activities were $1.6 million in 2009,

$3.0 million in 2008, and $4.2 million in 2007.

Manufacturing and Marketing. Liggett manufactures most of Vector Tobacco’s cigarette brands under

contract at its Mebane, North Carolina manufacturing facility.

Competition. Vector Tobacco’s competitors generally have substantially greater resources than it, including
financial, marketing and personnel resources. Other major tobacco companies have stated that they are working on
reduced risk cigarette products and have made publicly available at this time only limited additional information
concerning their activities. Philip Morris has announced that it is developing products that potentially reduce
smokers’ exposure to harmful compounds in cigarette smoke and have been pursuing patents for its technology.
RJR Tobacco has disclosed that a primary focus for its research and development activity is the development of
potentially reduced exposure products, which may ultimately be recognized as products that present reduced risks
to health. RJR Tobacco has stated that it continues to sell in limited distribution throughout the country a brand of
cigarettes that primarily heats rather than burns tobacco, which it claims reduces the toxicity of its smoke. There is a
substantial likelihood that other companies will continue to introduce new products that would compete directly
with any reduced risk products that Vector Tobacco may develop.

6

Intellectual Property. Vector Tobacco currently has patents and pending patent applications that encompass
the reduction or elimination of nicotine and carcinogens in tobacco and the use of this tobacco to prepare reduced
carcinogen tobacco products and smoking cessation kits. Vector Tobacco currently has patents and pending patent
applications that encompass the use of palladium and other compounds to reduce the presence of carcinogens and
other toxins.

Research relating to the biological basis of tobacco-related disease is being conducted at Vector Tobacco,
together with third party collaborators. This research is being directed by Dr. Anthony P. Albino, Vector Tobacco’s
Senior Vice President of Public Health Affairs. Vector Tobacco has pending patent applications in the United States
directed to technology arising from this research and as this research progresses, it may generate additional
intellectual property.

Risks. Vector Tobacco’s new product initiatives are subject to substantial risks, uncertainties and contin-
gencies which include, without limitation, the challenges inherent in new product development initiatives, potential
disputes concerning Vector Tobacco’s intellectual property, intellectual property of third parties, potential extensive
government regulation or prohibition, competition from companies with greater resources. See Item 1A. “Risk
Factors”.

Legislation, Regulation and Litigation

In the United States, tobacco products are subject to substantial and increasing legislation, regulation and
taxation, which has a negative effect on revenue and profitability. See Item 7. “Management Discussion and
Analysis of Financial Condition and Results of Operations — Legislation and Regulation”.

The cigarette industry continues to be challenged on numerous fronts. The industry is facing increased
pressure from anti-smoking groups and continued smoking and health litigation, including private class action
litigation and health care cost recovery actions brought by governmental entities and other third parties, the effects
of which, at this time, we are unable to evaluate. As of December 31, 2009, there were approximately 7,200
individual suits, seven purported class actions or actions where class certification has been sought and four health
care cost recovery actions pending in the United States in which Liggett was a named defendant. See Item 3. “Legal
Proceedings” and Note 12 to our consolidated financial statements, which contain a description of litigation.

It is possible that our consolidated financial position, results of operations or cash flows could be materially
adversely affected by an unfavorable outcome in any smoking-related litigation or as a result of additional federal or
state regulation relating to the manufacture, sale, distribution, advertising or labeling of tobacco products.

Liggett’s management believes that it is in compliance in all material respects with the laws regulating

cigarette manufacturers.

The Master Settlement Agreement and Other State Settlement Agreements

In March 1996, March 1997 and March 1998, Liggett entered into settlements of tobacco-related litigation
with 46 states and territories. The settlements released Liggett from all tobacco-related claims within those states
and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to
minors.

In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the “Original Partic-
ipating Manufacturers” or “OPMs”) and Liggett (together with any other tobacco product manufacturer that
becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”), (the OPMs and SPMs are
hereinafter referred to jointly as the “Participating Manufacturers”) entered into the Master Settlement Agreement
with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and
the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care
cost recovery and certain other claims of those Settling States. The Master Settlement Agreement received final
judicial approval in each Settling State.

7

In the Settling States, the Master Settlement Agreement released Liggett from:

(cid:129) all claims of the Settling States and their respective political subdivisions and other recipients of state health
care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development,
advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research,
statements or warnings about, tobacco products; and

(cid:129) all monetary claims of the Settling States and their respective subdivisions and other recipients of state
health care funds, relating to future conduct arising out of the use of or exposure to, tobacco products that
have been manufactured in the ordinary course of business.

The Master Settlement Agreement restricts tobacco product advertising and marketing within the Settling
States and otherwise restricts the activities of Participating Manufacturers. Among other things, the Master
Settlement Agreement prohibits the targeting of youth in the advertising, promotion or marketing of tobacco
products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each Participating
Manufacturer to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising,
with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers
based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits
Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited
under the Master Settlement Agreement; and prohibits Participating Manufacturers from using as a tobacco product
brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment
groups or individual celebrities.

The Master Settlement Agreement also requires Participating Manufacturers to affirm corporate principles to
comply with the Master Settlement Agreement and to reduce underage usage of tobacco products and imposes
restrictions on lobbying activities conducted on behalf of Participating Manufacturers.

Liggett has no payment obligations under the Master Settlement Agreement except to the extent its market
share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector
Tobacco has no payment obligations under the Master Settlement Agreement, except to the extent its market share
exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United States. According to
data from Management Science Associates, Inc., domestic shipments by Liggett and Vector Tobacco accounted for
approximately 2.5% of the total cigarettes shipped in the United States during 2007, 2.5% during 2008, and 2.7%
during 2009. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a
given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, would pay on
each excess unit an amount equal (on a per-unit basis) to that due by the OPMs for that year. Liggett and Vector
Tobacco paid approximately $36.0 million for their 2007 Master Settlement Agreement obligation. Liggett and
Vector Tobacco paid approximately $42.8 million for their 2008 Master Settlement Agreement obligation. Liggett
and Vector Tobacco paid approximately $45.5 million for their 2009 Master Settlement obligation. Additional
amounts may be due for 2009 but will not be determined by the Independent Auditor until April 2010.

Under the payment provisions of the Master Settlement Agreement, the Participating Manufacturers are
required to pay a base amount of $9.0 billion in 2010 and each year thereafter (subject to applicable adjustments,
offsets and reductions). These annual payments are allocated based on unit volume of domestic cigarette shipments.
The payment obligations under the Master Settlement Agreement are the several, and not joint, obligations of each
Participating Manufacturer and are not the responsibility of any parent or affiliate of a Participating Manufacturer.

Liggett may have additional payment obligations under the Master Settlement Agreement and its other
settlement agreements with the states. See Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operation — Recent Developments — Tobacco Settlement Agreements” and Note 12 to our
consolidated financial statements.

New Valley LLC

New Valley LLC, a Delaware limited liability company, is engaged in the real estate business and is seeking to
acquire additional real estate properties and operating companies. New Valley owns a 50% interest in Douglas
Elliman Realty, LLC, which operates the largest residential brokerage company in the New York City metropolitan

8

area. New Valley also holds, through its New Valley Realty Division, certain other significant real estate related
investments.

In December 2005, we completed an exchange offer and subsequent short-form merger whereby we acquired
the remaining 42.3% of the common shares of New Valley Corporation that we did not already own. As a result of
these transactions, New Valley Corporation became our wholly-owned subsidiary and approximately 6.1 million
shares of our common stock were issued to the New Valley Corporation shareholders in the transactions. The
surviving corporation in the short-form merger was subsequently merged into a new Delaware limited liability
company named New Valley LLC, which conducts the business of the former New Valley Corporation. Prior to
these transactions, New Valley Corporation was registered under the Securities Exchange Act of 1934 and filed
periodic reports and other information with the SEC.

Business Strategy

The business strategy of New Valley is to continue to operate its real estate business, to acquire additional real
estate properties and to acquire operating companies through merger, purchase of assets, stock acquisition or other
means, or to acquire control of operating companies through one of such means. New Valley may also seek from
time to time to dispose of such businesses and properties when favorable market conditions exist. New Valley’s cash
and investments are available for general corporate purposes, including for acquisition purposes.

Douglas Elliman Realty, LLC

During 2000 and 2001, New Valley acquired for approximately $1.7 million a 37.2% ownership interest in
B&H Associates of NY, which currently conducts business as Prudential Douglas Elliman Real Estate and was
formerly known as Prudential Long Island Realty, a residential real estate brokerage company on Long Island, and a
minority interest in an affiliated mortgage company, Preferred Empire Mortgage Company. In December 2002,
New Valley and the other owners of Prudential Douglas Elliman Real Estate contributed their interests in Prudential
Douglas Elliman Real Estate to Douglas Elliman Realty, LLC, formerly known as Montauk Battery Realty, LLC, a
newly formed entity. New Valley acquired a 50% interest in Douglas Elliman Realty as a result of an additional
investment of approximately $1.4 million by New Valley and the redemption by Prudential Douglas Elliman Real
Estate of various ownership interests. As part of the transaction, Prudential Douglas Elliman Real Estate renewed its
franchise agreement with The Prudential Real Estate Affiliates, Inc. for an additional ten-year term. In October
2004, upon receipt of required regulatory approvals, the former owners of Douglas Elliman Realty contributed to
Douglas Elliman Realty their interests in the related mortgage company.

In March 2003, Douglas Elliman Realty purchased the New York City-based residential brokerage firm,
Douglas Elliman, LLC, formerly known as Insignia Douglas Elliman, and an affiliated property management
company, for $71.25 million. With that acquisition, the combination of Prudential Douglas Elliman Real Estate with
Douglas Elliman created the largest residential brokerage company in the New York metropolitan area. Upon
closing of the acquisition, Douglas Elliman entered into a ten-year franchise agreement with The Prudential Real
Estate Affiliates, Inc. New Valley invested an additional $9.5 million in subordinated debt and equity of Douglas
Elliman Realty to help fund the acquisition. The subordinated debt, which had a principal amount of $9.5 million,
bears interest at 12% per annum and was originally due in March 2013. Approximately $2.5 million of principal
amount of the subordinated debt remained outstanding at December 31, 2009, and the balance is scheduled to be
repaid in 2010. As part of the Douglas Elliman acquisition, Douglas Elliman Realty acquired Douglas Elliman’s
affiliate, Residential Management Group LLC, which conducts business as Douglas Elliman Property Management
and is the New York metropolitan area’s largest manager of rental, co-op and condominium housing.

We account for our interest in Douglas Elliman Realty under the equity method. We recorded income of
$11.4 million in 2009, $11.8 million in 2008, and $20.3 million in 2007 associated with Douglas Elliman Realty.
Equity income from Douglas Elliman Realty includes interest earned by New Valley on the subordinated debt,
purchase accounting adjustments and management fees.

Douglas Elliman Realty has been negatively impacted by the current downturn in the residential real estate
market. The residential real estate market is cyclical and is affected by changes in the general economic conditions
that are beyond the control of Douglas Elliman Realty. The U.S. residential real estate market, including the market

9

in the New York metropolitan area where Douglas Elliman operates, is currently in a significant downturn due to
various factors including downward pressure on housing prices, credit constraints inhibiting new buyers and an
exceptionally large inventory of unsold homes at the same time that sales volumes are decreasing. The New York
metropolitan area market is further impacted by the significant downturn in the financial services industry. The
depth and length of the current downturn in the real estate industry has proved exceedingly difficult to predict. We
cannot predict whether the downturn will worsen or when the market and related economic forces will return the
U.S. residential real estate industry to a growth period.

Real Estate Brokerage Business. Douglas Elliman Realty is engaged in the real estate brokerage business
through its two subsidiaries which conduct business as Prudential Douglas Elliman Real Estate. The two brokerage
companies have 59 offices with approximately 3,700 real estate agents in the metropolitan New York area. The
companies achieved combined sales of approximately $8.6 billion of real estate in 2009, approximately $11.6 bil-
lion of real estate in 2008, and approximately $13.9 billion of real estate in 2007. Douglas Elliman Realty was
ranked as the fourth largest residential brokerage company in the United States in 2008 based on closed sales
volume by the Real Trends broker survey. Douglas Elliman Realty had revenues of $283.9 million in 2009,
$352.7 million in 2008, and $405.6 million in 2007.

The New York City brokerage operation, formerly known as Douglas Elliman, was founded in 1911 and has
grown to be one of Manhattan’s leading residential brokers by specializing in the highest end of the sales and rental
marketplaces. It has 14 New York City offices, with approximately 1,950 real estate agents, and had sales volume of
approximately $5.3 billion of real estate in 2009, approximately $8.1 billion of real estate in 2008, and approx-
imately $9.6 billion of real estate in 2007.

The Long Island brokerage operation, formerly known as Prudential Long Island Realty, is headquartered in
Huntington, New York and is the largest residential brokerage company on Long Island with 45 offices and
approximately 1,750 real estate agents. During 2009, the Long Island brokerage operation closed approximately
6,200 transactions, representing sales volume of approximately $3.3 billion of real estate. This compared to
approximately 5,900 transactions closed in 2008, representing approximately $3.5 billion of real estate, and
approximately 6,600 transactions closed in 2007, representing approximately $4.3 billion of real estate. Prudential
Douglas Elliman Real Estate serves approximately 250 communities from Manhattan to Montauk.

Prudential Douglas Elliman Real Estate acts as a broker in residential real estate transactions. In performing
these services, the company has historically represented the seller, either as the listing broker, or as a co-broker in
the sale. In acting as a broker for the seller, their services include assisting the seller in pricing the property and
preparing it for sale, advertising the property, showing the property to prospective buyers, and assisting the seller in
negotiating the terms of the sale and in closing the transaction. In exchange for these services, the seller pays to the
company a commission, which is generally a fixed percentage of the sales price. In a co-brokered arrangement, the
listing broker typically splits its commission with the other co-broker involved in the transaction. The company also
offers buyer brokerage services. When acting as a broker for the buyer, its services include assisting the buyer in
locating properties that meet the buyer’s personal and financial specifications, showing the buyer properties, and
assisting the buyer in negotiating the terms of the purchase and closing the transaction. In exchange for these
services a commission is paid to the company which also is generally a fixed percentage of the purchase price and is
usually, with the consent of the listing broker, deducted from, and payable out of, the commission payable to the
listing broker. With the consent of a buyer and seller, subject to certain conditions, the company may, in certain
circumstances, act as a selling broker and as a buying broker in the same transaction. The company’s sales and
marketing services are provided by licensed real estate sales associates, sales persons or associate brokers who have
entered into independent contractor agreements with the company. The company recognizes revenue and com-
mission expenses upon the consummation of the real estate sale.

Prudential Douglas Elliman Real Estate also offers relocation services to employers, which provide a variety of
specialized services primarily concerned with facilitating the resettlement of transferred employees. These services
include sales and marketing of transferees’ existing homes for their corporate employer, assistance in finding new
homes, moving services, educational and school placement counseling, customized videos, property marketing
assistance, rental assistance, area tours, international relocation, group move services, marketing and management

10

of foreclosed properties, career counseling, spouse/partner employment assistance, and financial services. Clients
can select these programs and services on a fee basis according to their needs.

As part of the brokerage company’s franchise agreement with Prudential, it has an agreement with Prudential
Relocation Services, Inc. to provide relocation services to the Prudential network. The company anticipates that
participation in the Prudential network will continue to provide new relocation opportunities with firms on a
national level.

In 2009, Douglas Elliman Realty, through a subsidiary, entered into a joint venture with Wells Fargo Ventures,
LLC to create DE Capital Mortgage LLC to carry on the business of residential mortgage lending, as a mortgage
broker. DE Capital Mortgage replaces the business of Preferred Empire Mortage Company, which was a mortgage
broker, wholly-owned by Douglas Elliman Realty. DE Capital primarily originates loans for purchases of properties
located on Long Island and in New York City. Approximately one-half of these loans are for home sales transactions
in which Prudential Douglas Elliman Real Estate acts as a broker. The term “origination” refers generally to the
process of arranging mortgage financing for the purchase of property directly to the purchaser or for refinancing an
existing mortgage. DE Capital’s revenues are generated from loan origination fees, which are generally a
percentage of the original principal amount of the loan and are commonly referred to as “points”, and application
and other fees paid by the borrowers. DE Capital recognizes mortgage origination revenues and costs when the
mortgage loan is consummated.

Marketing. As members of The Prudential Real Estate Affiliates, Inc., Prudential Douglas Elliman Real
Estate offer real estate sales and marketing and relocation services, which are marketed by a multimedia program.
This program includes direct mail, newspaper, internet, catalog, radio and television advertising and is conducted
throughout Manhattan and Long Island. In addition, the integrated nature of the real estate brokerage companies
services is designed to produce a flow of customers between their real estate sales and marketing business and their
mortgage business.

Competition. The real estate brokerage business is highly competitive. However, Prudential Douglas
Elliman Real Estate believes that its ability to offer their customers a range of inter-related services and its level
of residential real estate sales and marketing help position them to meet the competition and improve their market
share.

In the brokerage company’s traditional business of residential real estate sales and marketing, it competes
primarily with multi-office independent real estate organizations and, to some extent, with franchise real estate
organizations, such as Century-21, ERA, RE/MAX and Coldwell Banker. The company believes that its major
competitors in 2010 will also increasingly include multi-office real estate organizations, such as GMAC Home
Services, NRT Inc. (whose affiliates include the New York City-based Corcoran Group) and other privately owned
companies. Residential brokerage firms compete for sales and marketing business primarily on the basis of services
offered, reputation, personal contacts, and, recently to a greater degree, price.

The company’s relocation business is fully integrated with its residential real estate sales and marketing
business. Accordingly, its major competitors are many of the same real estate organizations previously noted.
Competition in the relocation business is likewise based primarily on level of service, reputation, personal contact
and, recently to a greater degree, price.

In its mortgage loan origination business, DE Capital competes with other mortgage originators, such as
mortgage brokers, mortgage bankers, state and national banks, and thrift institutions. As a mortgage broker, DE
Capital funds and sells mortgage loans through Wells Fargo, its joint venture partner.

Government Regulation. Several facets of real estate brokerage businesses are subject to government
regulation. For example, their real estate sales and marketing divisions are licensed as real estate brokers in
the states in which they conduct their real estate brokerage businesses. In addition, their real estate sales associates
must be licensed as real estate brokers or salespersons in the states in which they do business. Future expansion of
the real estate brokerage operations of Prudential Douglas Elliman Real Estate into new geographic markets may
subject it to similar licensing requirements in other states.

11

A number of states and localities have adopted laws and regulations imposing environmental controls,
disclosure rules, zoning and other land use restrictions, which can materially impact the marketability of certain real
estate. However, Prudential Douglas Elliman Real Estate does not believe that compliance with environmental,
zoning and land use laws and regulations has had, or will have, a materially adverse effect on its financial condition
or operations.

In DE Capital’s mortgage business, mortgage loan origination and funding activities are subject to the Equal
Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and the
regulations promulgated thereunder which prohibit discrimination and require the disclosure of certain information
to borrowers concerning credit and settlement costs. As an affiliate of Wells Fargo Ventures, a wholly-owned
subsidiary of Wells Fargo Bank, N.A., DE Capital is not subject to regulation by state banking departments, but
rather by the Federal Office of Currency Control. Wells Fargo Ventures is the nation’s leading alliance lender,
maintaining long-standing relationships with top real estate companies, builders and financial services institutions
across the United States.

Prudential Douglas Elliman Real Estate is not aware of any material licensing or other government regulatory
requirements governing its relocation business, except to the extent that such business also involves the rendering of
real estate brokerage services, the licensing and regulation of which are described above.

Franchises and Trade Names.

In December 2002, Prudential Long Island Realty renewed for an additional
ten-year term its franchise agreement with The Prudential Real Estate Affiliates, Inc. and has an exclusive franchise,
subject to various exceptions and to meeting annual revenue thresholds, in New York for the counties of Nassau and
Suffolk on Long Island. In addition, in June 2004, Prudential Long Island Realty was granted an exclusive franchise,
subject to various exceptions and to meeting annual revenue thresholds, with respect to the boroughs of Brooklyn
and Queens. In March 2003, Douglas Elliman entered into a ten-year franchise agreement with The Prudential Real
Estate Affiliates, Inc. and has an exclusive franchise, subject to various exceptions and to meeting annual revenue
thresholds, for Manhattan.

The “Douglas Elliman” trade name is a registered trademark in the United States. The name has been
synonymous with the most exacting standards of excellence in the real estate industry since Douglas Elliman’s
formation in 1911. Other trademarks used extensively in Douglas Elliman’s business, which are owned by Douglas
Elliman Realty and registered in the United States, include “We are New York”, “Bringing People and Places
Together”, “If You Clicked Here You’d Be Home Now” and “Picture Yourself in the Perfect Home”.

The “Prudential” name and the tagline “From Manhattan to Montauk” are used extensively in the Prudential
Douglas Elliman Real Estate business. In addition, Prudential Douglas Elliman Real Estate continues to use the
trade names of certain companies that it has acquired.

Residential Property Management Business. Douglas Elliman Realty is also engaged in the management of
cooperatives, condominiums and apartments though its subsidiary, Residential Management Group, LLC, which
conducts business as Douglas Elliman Property Management and is the leading manager of apartments, coop-
eratives and condominiums in the New York metropolitan area according to a survey in the September 2009 issue of
The Real Deal. Residential Management Group provides full service third-party fee management for approximately
250 properties, representing approximately 45,000 units in New York City, Nassau County, Northern New Jersey
and Westchester County. In January 2010, Residential Management Group acquired the assets of Bellmarc Property
Management, a company which manages approximately 50 buildings in Manhattan with approximately 5,000 units.
Accordingly, Residential Management Group now manages approximately 300 properties with approximately
50,000 units. Residential Management Group is seeking to continue to expand its property management business in
the greater metropolitan New York area in 2010. Among the notable properties currently managed are the Dakota,
Museum Tower, Worldwide Plaza, London Terrace and West Village Houses buildings in New York City.
Residential Management Group employs approximately 235 people, of whom approximately 150 work at
Residential Management Group’s headquarters and the remainder at remote offices in the New York metropolitan
area.

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New Valley Realty Division

St. Regis Hotel, Washington, D.C.

In June 2005, affiliates of New Valley and Brickman Associates formed
16th & K Holdings LLC (“Hotel LLC”), which acquired the St. Regis Hotel, a 193 room luxury hotel in
Washington, D.C., for $47 million in August 2005. New Valley, which holds a 50% interest in Hotel LLC, invested
$12.125 million in the project as of December 31, 2009. We account for our interest in Hotel LLC under the equity
method.

In March 2008, Hotel LLC closed on the sale of 90% of the St. Regis Hotel and agreed to sell certain tax credits
associated with the hotel. In addition to retaining a 3% interest, net of incentives, in the St. Regis Hotel, New Valley
received $16.4 million upon the sale of the hotel. In December 2009, New Valley received $2.1 million in
connection with the sale of the tax credits. New Valley anticipates receiving an additional $2.7 million in various
installments between 2010 and 2012.

We recorded equity losses of $3.8 million and $2.3 million for the years ended December 31, 2008 and 2007,
respectively, associated with Hotel LLC. We also recorded equity income of $2.1 million in 2009 and $16.4 million
in 2008 in connection with the gain from the sale of the St. Regis because the amount received from Hotel LLC
exceeded our basis in the investment and we have no legal obligation to make additional investments in Hotel LLC.

Escena.

In March 2008, a subsidiary of New Valley purchased a loan collateralized by a substantial portion
of a 450-acre approved master planned community in Palm Springs, California known as “Escena.” The loan, which
was in foreclosure, was purchased for its $20 million face value plus accrued interest and other costs of
approximately $1.45 million. The collateral consisted of 867 residential lots with site and public infrastructure
and an 18-hole golf course with a substantially completed clubhouse, and a seven-acre site approved for a 450-room
hotel.

In April 2009, New Valley’s subsidiary entered into a settlement agreement with a guarantor of the loan, which
requires the guarantor to satisfy its obligations under a completion guaranty by completing improvements to the
project in settlement, among other things, of its payment guarantees. In addition, the guarantor agreed to pay
approximately $250,000 in legal fees and $1 million of delinquent taxes and penalties and post a letter of credit to
secure its construction obligations.

In April 2009, New Valley completed the foreclosure process and took title to the property. We reclassified the
loan from “Mortgage receivable” at March 31, 2009 to “Investment in real estate” at June 30, 2009 on our
consolidated balance sheet. It was carried at $12.2 million as of December 31, 2009.

Aberdeen Townhomes LLC.

In June 2008, a subsidiary of New Valley purchased a preferred equity interest in
Aberdeen Townhomes LLC (“Aberdeen”) for $10 million. Aberdeen acquired five townhome residences located in
Manhattan, New York, which it was in the process of rehabilitating and selling. In the event that Aberdeen makes
distributions of cash, New Valley is entitled to a priority preferred return of 15% per annum until it has recovered its
invested capital. New Valley is entitled to 25% of subsequent cash distributions of profits until it has achieved an
annual 18% internal rate of return (“IRR”). New Valley is then entitled to 20% of subsequent cash distributions of
profits until it has achieved an annual 23% IRR. After New Valley has achieved an annual 23% IRR, it is then
entitled to 10% of any remaining cash distributions of profits.

One of these townhomes was sold in September 2009 and the mortgage was retired. Mortgages on the four
remaining Aberdeen townhomes with a balance of approximately $31.9 million as of December 31, 2009 matured
during 2009. These mortgages had not been refinanced or paid and were in default as of December 31, 2009. In
January 2010, another of the townhomes was sold and the mortgage of approximately $4.55 million was retired. In
connection with the 2010 sale, we received a preferred return distribution of approximately $1.0 million. Aberdeen
is currently in discussions with the lender on the remaining three mortgages, which remain in default, although there
are no assurances that an agreement will be reached.

In February 2009, the managing member of Aberdeen Townhomes resigned, and a subsidiary of New Valley

became the new managing member as of March 1, 2009.

Aberdeen is a variable interest entity; however even as the managing member, we are not the primary
beneficiary as other parties to the investment would absorb a majority of the variable interest entity’s losses under

13

the current arrangement. New Valley’s investment in Aberdeen is being accounted for under the cost method and
was carried at $1.2 million on our consolidated balance sheet at December 31, 2009 as a component of “Investments
in non-consolidated real estate businesses.”

New Valley Oaktree Chelsea Eleven, LLC.

In September 2008, a subsidiary of New Valley (“New Valley
Chelsea”) purchased for $12 million a 40% interest in New Valley Oaktree Chelsea Eleven, LLC, which lent
$29 million and contributed $1 million in capital to Chelsea Eleven LLC, which is developing a condominium
project in Manhattan, New York. The development consists of 54 luxury residential units and one commercial unit.
A temporary certificate of occupancy was obtained in October 2009 and, as of March 1, 2010, sales of eight units
have closed. The loan from New Valley Oaktree is subordinate to a $110 million construction loan and a $24 million
mezzanine loan plus accrued interest. The loan from New Valley Oaktree bears interest at 60.25% per annum,
compounded monthly, with $3.75 million initially being held in an interest reserve, from which five monthly
payments of $300,000 were paid to New Valley.

New Valley’s investment in New Valley Oaktree is being accounted for under the equity method and was
carried at $12.2 million on our consolidated balance sheet at December 31, 2009 as a component of “Investments in
non-consolidated real estate businesses.”

Former Broker-Dealer Operations

New Valley owned, as of December 31, 2009, 13,891,205 shares of Ladenburg Thalmann Financial Services
Inc. (NYSE Amex: LTS), which represents approximately 8.3% of the LTS shares. LTS is the parent of New
Valley’s former subsidiary, Ladenburg Thalmann & Co. Inc., which has been a member of the New York Stock
Exchange since 1879. LTS is registered under the Securities Act of 1934 and files periodic reports and other
information with the SEC.

Four of our directors, Howard M. Lorber, Henry C. Beinstein, Robert J. Eide and Jeffrey S. Podell, also serve as
directors of LTS. Mr. Lorber also serves as Vice Chairman of LTS. Richard J. Lampen, who along with Mr. Lorber is
an executive officer of ours, also serves as a director of LTS and has served as the President and Chief Executive
Officer of LTS since September 2006. In September 2006, we entered into an agreement with LTS where we agreed
to make available the services of Mr. Lampen as well as other financial and accounting services. LTS paid us
$600,000 for 2009, $500,000 for 2008 and $400,000 for 2007 related to the agreement and pays us at a rate of
$600,000 per year in 2010. These amounts are recorded as a reduction to our operating, selling, administrative and
general expenses. For 2009, 2008 and 2007, LTS paid compensation of $0, $150,000 and $600,000, respectively, to
each of Mr. Lorber and Mr. Lampen in connection with their services. See Note 14 to our consolidated financial
statements.

Other Investments

Castle Brands.

In October 2008, we acquired for $4 million an approximate 11% interest in Castle Brands
Inc. (NYSE Amex:ROX), a publicly traded developer and importer of premium branded spirits. Mr. Lampen is
serving as the interim President, Chief Executive Officer and a director of Castle. In October 2008, we entered into
an agreement with Castle where we agreed to make available the services of Mr. Lampen as well as other financial
and accounting services. We recognized management fees from Castle of $100,000 for 2009 and $22,011 for 2008
under the agreement and Castle has agreed to pay us $100,000 in 2010. In December 2009, we were part of a
consortium, which included Dr. Phillip Frost, who is a beneficial owner of approximately 11.7% of the our common
stock, and Mr. Lampen, that agreed to provide a line of credit to Castle. The three-year line was for a maximum
amount of $2.5 million, bears interest at a rate of 11% per annum on amounts borrowed, pays a 1% annual
commitment fee and is collateralized by Castle’s receivables and inventory. Our commitment under the line is
$900,000; no amounts were outstanding under the credit line as of December 31, 2009.

Long-Term Investments. As of December 31, 2009, long-term investments consisted primarily of invest-
ments in investment partnerships of $50.3 million. New Valley has committed to make an additional investment in
one of these investment partnerships of up to $61,000. In the future, we may invest in other investments including
limited partnerships, real estate investments, equity securities, debt securities and certificates of deposit depending
on risk factors and potential rates of return.

14

Employees

At December 31, 2009, we had approximately 435 employees, of which approximately 250 were employed at
Liggett’s Mebane facility, approximately two were employed at Vector Tobacco’s research facility and approx-
imately 165 were employed in sales and administrative functions at Liggett Vector Brands. Approximately 43% of
our employees are hourly employees, who are represented by unions. We have not experienced any significant work
stoppages since 1977, and we believe that relations with our employees and their unions are satisfactory.

Available Information

Our website address is www.vectorgroupltd.com. We make available free of charge on the Investor Relations
section of our website (http://vectorgroupltd.com/invest.asp) our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable
after such material is electronically filed with the Securities and Exchange Commission. We also make available
through our website other reports filed with the SEC under the Exchange Act, including our proxy statements and
reports filed by officers and directors under Section 16(a) of that Act. Copies of our Code of Business Conduct and
Ethics, Corporate Governance Guidelines, Audit Committee charter, Compensation Committee charter and
Corporate Governance and Nominating Committee charter have been posted on the Investor Relations section
of our website and are also available in print to any shareholder who requests it. We do not intend for information
contained in our website to be part of this Annual Report on Form 10-K.

ITEM 1A. RISK FACTORS

Our business faces many risks. We have described below some of the more significant risks which we and our
subsidiaries face. There may be additional risks that we do not yet know of or that we do not currently perceive to be
significant that may also impact our business or the business of our subsidiaries. Each of the risks and uncertainties
described below could lead to events or circumstances that have a material adverse effect on the business, results of
operations, cash flows, financial condition or equity of us or one or more of our subsidiaries, which in turn could
negatively affect the value of our common stock. You should carefully consider and evaluate all of the information
included in this report and any subsequent reports that we may file with the Securities and Exchange Commission or
make available to the public before investing in any securities issued by us.

We have significant liquidity commitments

During 2010, we have certain liquidity commitments that could require the use of our existing cash resources.
As of December 31, 2009, our corporate expenditures (exclusive of Liggett, Vector Tobacco and New Valley) and
other potential liquidity requirements over the next 12 months included the following:

(cid:129) cash interest expense of approximately $63.8 million,

(cid:129) dividends on our outstanding common shares

(currently at an annual

rate of approximately

$115 million), and

(cid:129) other corporate expenses and taxes.

In order to meet the above liquidity requirements as well as other liquidity needs in the normal course of
business, we will be required to use cash flows from operations and existing cash and cash equivalents. Should these
resources be insufficient to meet the upcoming liquidity needs, we may also be required to liquidate investment
securities available for sale and other long-term investments, or, if available, draw on Liggett’s credit facility. While
there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures can be
achieved.

We and our subsidiaries have a substantial amount of indebtedness.

We and our subsidiaries have significant indebtedness and debt service obligations. At December 31, 2009, we
and our subsidiaries had total outstanding indebtedness (including the embedded derivative liabilities related to our
convertible notes) of $510 million. We must redeem $11 million of our 3.875% Variable Interest Senior Convertible

15

Debentures by June 15, 2011 and may be required to purchase $99 million of the debentures on June 15, 2012.
Approximately $157.5 million of our 3.75% convertible notes mature in 2014 and $250 million of our 11% senior
secured notes matures in 2015. In addition, subject to the terms of any future agreements, we and our subsidiaries
will be able to incur additional indebtedness in the future. There is a risk that we will not be able to generate
sufficient funds to repay our debt. If we cannot service our fixed charges, it would have a material adverse effect on
our business and results of operations.

We are a holding company and depend on cash payments from our subsidiaries, which are subject to
contractual and other restrictions, in order to service our debt and to pay dividends on our common
stock.

We are a holding company and have no operations of our own. We hold our interests in our various businesses
through our wholly-owned subsidiaries, VGR Holding and New Valley. In addition to our own cash resources, our
ability to pay interest on our debt and to pay dividends on our common stock depends on the ability of VGR Holding
and New Valley to make cash available to us. VGR Holding’s ability to pay dividends to us depends primarily on the
ability of Liggett, its wholly-owned subsidiary, to generate cash and make it available to VGR Holding. Liggett’s
revolving credit agreement with Wachovia Bank, N.A. contains a restricted payments test that limits the ability of
Liggett to pay cash dividends to VGR Holding. The ability of Liggett to meet the restricted payments test may be
affected by factors beyond its control, including Wachovia’s unilateral discretion, if acting in good faith, to modify
elements of such test.

Our receipt of cash payments, as dividends or otherwise, from our subsidiaries is an important source of our
liquidity and capital resources. If we do not have sufficient cash resources of our own and do not receive payments
from our subsidiaries in an amount sufficient to repay our debts and to pay dividends on our common stock, we must
obtain additional funds from other sources. There is a risk that we will not be able to obtain additional funds at all or
on terms acceptable to us. Our inability to service these obligations and to continue to pay dividends on our common
stock would significantly harm us and the value of our common stock.

Our 11% senior secured notes contain restrictive covenants that limit our operating flexibility.

The indenture governing our 11% senior secured notes due 2015 contains covenants that, among other things,
restrict our ability to take specific actions, even if we believe them to be in our best interest, including restrictions on
our ability to:

(cid:129) incur or guarantee additional indebtedness or issue preferred stock;

(cid:129) pay dividends or distributions on, or redeem or repurchase, capital stock;

(cid:129) create liens with respect to our assets;

(cid:129) make investments, loans or advances;

(cid:129) prepay subordinated indebtedness;

(cid:129) enter into transactions with affiliates; and

(cid:129) merge, consolidate, reorganize or sell our assets.

In addition, Liggett’s revolving credit agreement requires us to meet specified financial ratios. These
covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with
these and other provisions of the indenture governing the senior secured notes and the Liggett revolving credit
agreement may be affected by changes in our operating and financial performance, changes in general business and
economic conditions, adverse regulatory developments or other events beyond our control. The breach of any of
these covenants, including those contained in the indenture governing the senior secured notes and the Liggett’s
credit agreement, could result in a default under our indebtedness, which could cause those and other obligations to
become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.

The indenture governing the senior secured notes contain restrictive covenants, which, among other things,
restrict our ability to pay certain dividends or make other restricted payments or enter into transactions with

16

affiliates if our Consolidated EBITDA, as defined in the indenture, is less than $50 million for the four quarters prior
to such transaction.

Liggett faces intense competition in the domestic tobacco industry.

Liggett is considerably smaller and has fewer resources than its major competitors, and, as a result, has a more
limited ability to respond to market developments. Management Science Associates data indicate that the three
largest cigarette manufacturers controlled approximately 84.3% of the United States cigarette market during 2009.
Philip Morris is the largest and most profitable manufacturer in the market, and its profits are derived principally
from its sale of premium cigarettes. Philip Morris had approximately 62.1% of the premium segment and 47.1% of
the total domestic market during 2009. During 2009, all of Liggett’s sales were in the discount segment, and its
share of the total domestic cigarette market was 2.7%. Philip Morris and RJR Tobacco (which is now part of
Reynolds American), the two largest cigarette manufacturers, have historically, because of their dominant market
share, been able to determine cigarette prices for the various pricing tiers within the industry. Market pressures have
historically caused the other cigarette manufacturers to bring their prices into line with the levels established by
these two major manufacturers.

Philip Morris and Reynolds American dominate the domestic cigarette market and had a combined market
share of approximately 73% at December 31, 2009. This concentration of United States market share could make it
more difficult for Liggett and Vector Tobacco to compete for shelf space in retail outlets and could impact price
competition in the market, either of which could have a material adverse affect on their sales volume, operating
income and cash flows, which in turn could negatively affect the value of our common stock.

Liggett’s business is highly dependent on the discount cigarette segment.

Liggett depends more on sales in the discount cigarette segment of the market, relative to the full-price
premium segment, than its major competitors. All of Liggett’s unit volume in 2009 and 2008 was generated in the
discount segment. The discount segment is highly competitive, with consumers having less brand loyalty and
placing greater emphasis on price. While the three major manufacturers all compete with Liggett in the discount
segment of the market, the strongest competition for market share has recently come from a group of smaller
manufacturers and importers, most of which sell low quality, deep discount cigarettes. While Liggett’s share of the
discount market was 9.2% in 2009 and 2008, a decrease from 9.3% in 2007, Management Science Associates’ data
indicate that the discount market share of these other smaller manufacturers and importers was approximately
39.4% in 2009, 38.5% in 2008 and 37.0% in 2007. If pricing in the discount market continues to be impacted by
these smaller manufacturers and importers, margins in Liggett’s only current market segment could be negatively
affected, which in turn could negatively affect the value of our common stock.

Liggett’s market share is susceptible to decline.

In years prior to 2000, Liggett suffered a substantial decline in unit sales and associated market share. Liggett’s
unit sales and market share increased during each of 2000, 2001 and 2002, and its market share increased in 2003
while its unit sales declined. Liggett’s market share, which did not change in 2008, increased compared to the prior
years in 2009, 2007, 2006, 2005 and 2004. This earlier market share erosion resulted in part from Liggett’s highly
leveraged capital structure that existed until December 1998 and its limited ability to match other competitors’
wholesale and retail trade programs, obtain retail shelf space for its products and advertise its brands. These declines
also resulted from adverse developments in the tobacco industry, intense competition and changes in consumer
preferences. According to Management Science Associates’ data, Liggett’s overall domestic market share during
2009 was 2.7% compared to 2.5% during 2008 and 2007. Liggett’s share of the discount segment was 9.2% during
2009 and 2008, down from 9.3% in 2007. If Liggett’s market share declines, Liggett’s sales volume, operating
income and cash flows could be materially adversely affected, which in turn could negatively affect the value of our
common stock.

17

The domestic cigarette industry has experienced declining unit sales in recent periods.

Industry-wide shipments of cigarettes in the United States have been generally declining for a number of years,
with Management Science Associates’ data indicating that domestic industry-wide shipments decreased by
approximately 8.6% in 2009 as compared to 2008, and by approximately 3.3% in 2008 as compared to 2007.
We believe that industry-wide shipments of cigarettes in the United States will generally continue to decline as a
result of numerous factors. These factors include health considerations, diminishing social acceptance of smoking,
and a wide variety of federal, state and local laws limiting smoking in restaurants, bars and other public places, as
well as increases in federal and state excise taxes and settlement-related expenses which have contributed to high
cigarette price levels in recent years. If this decline in industry-wide shipments continues and Liggett is unable to
capture market share from its competitors, or if the industry as a whole is unable to offset the decline in unit sales
with price increases, Liggett’s sales volume, operating income and cash flows could be materially adversely
affected, which in turn could negatively affect the value of our common stock.

Liggett’s cigarettes are subject to substantial and increasing regulation and taxation, which has a
negative effect on revenue and profitability.

Tobacco products are subject to substantial federal and state excise taxes in the United States. On February 4,
2009, President Obama signed an increase of $0.617 in the federal excise tax per pack of cigarettes, for a total of
$1.01 per pack of cigarettes, and significant tax increases on other tobacco products, to fund expansion of the State
Children’s Health Insurance Program, referred to as the SCHIP. These tax increases came into effect on April 1,
2009. The increases in federal excise tax under the SCHIP are substantial, and, as a result, Liggett’s sales volume
and profitability has been and may continue to be adversely impacted.

In addition to federal and state excise taxes, certain city and county governments also impose substantial excise
taxes on tobacco products sold. Increased excise taxes are likely to result in declines in overall sales volume and
shifts by consumers to less expensive brands.

A wide variety of federal, state and local laws limit the advertising, sale and use of cigarettes have proliferated
in recent years. For example, many local laws prohibit smoking in restaurants and other public places. Private
businesses also have adopted regulations that prohibit or restrict, or are intended to discourage, smoking. Such laws
and regulations also are likely to result in a decline in the overall sales volume of cigarettes.

The newly enacted Family Smoking Prevention and Tobacco Control Act may adversely affect our sales
and operating profit.

On June 22, 2009, President Obama signed into law the “Family Smoking Prevention and Tobacco Control
Act” (H.R. 1256). The law grants the FDA broad authority over the manufacture, sale, marketing and packaging of
tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless
tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero. Among other measures,
the law (under various deadlines):

(cid:129) increases the number of health warnings required on cigarette and smokeless tobacco products, increases the
size of warnings on packaging and in advertising, requires the FDA to develop graphic warnings for cigarette
packages, and grants the FDA authority to require new warnings;

(cid:129) requires practically all tobacco product advertising to eliminate color and imagery and instead consist solely

of black text on white background;

(cid:129) imposes new restrictions on the sale and distribution of tobacco products, including significant new
restrictions on tobacco product advertising and promotion as well as the use of brand and trade names;

(cid:129) bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;

(cid:129) bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol;

(cid:129) gives the FDA the authority to impose tobacco product standards that are appropriate for the protection of the
public health (by, for example, requiring reduction or elimination of the use of particular constituents or

18

components, requiring product testing, or addressing other aspects of tobacco product construction,
constituents, properties or labeling);

(cid:129) requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified

tobacco products;

(cid:129) requires pre-market approval by the FDA for tobacco products represented (through labels, labeling,

advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;

(cid:129) requires manufacturers to report ingredients and harmful constituents and requires the FDA to disclose

certain constituent information to the public;

(cid:129) mandates that manufacturers test and report on ingredients and constituents identified by the FDA as
requiring such testing to protect the public health, and allows the FDA to require the disclosure of testing
results to the public;

(cid:129) requires manufacturers to submit to the FDA certain information regarding the health, toxicological,

behavioral or physiologic effects of tobacco products;

(cid:129) prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal

law;

(cid:129) requires the FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing

facilities;

(cid:129) requires tobacco product manufacturers (and certain other entities) to register with the FDA;

(cid:129) authorizes the FDA to require the reduction of nicotine (although it may not require the reduction of nicotine
yields of a tobacco product to zero) and the potential reduction or elimination of other constituents, including
menthol;

(cid:129) imposes (and allows the FDA to impose) various recordkeeping and reporting requirements on tobacco

product manufacturers; and

(cid:129) grants the FDA the regulatory authority to impose broad additional restrictions.

The law also requires establishment, within the FDA’s new Center for Tobacco Products, of a Tobacco
Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the
safety, dependence or health issues related to tobacco products, including:

(cid:129) a recommendation on modified risk applications;

(cid:129) a recommendation on the effects of tobacco product nicotine yield alteration and whether there is a threshold

level below which nicotine yields do not produce dependence;

(cid:129) a report on the public health impact of the use of menthol in cigarettes; and

(cid:129) a report on the public health impact of dissolvable tobacco products.

The law imposes user fees on certain tobacco product manufacturers in order to pay for the costs of regulation.
User fees will be allocated among tobacco product classes according to a formula set out in the legislation, and then
among manufacturers and importers within each class based on market share. The FDA user fees for Liggett and
Vector Tobacco for 2009 were $2.3 million and we estimate that they will be significantly higher in the future.

The law also imposes significant new restrictions on the advertising and promotion of tobacco products. For
example, the law requires the FDA to finalize certain portions of regulations previously adopted by the FDA in 1996
(which were struck down by the Supreme Court in 2000 as beyond the FDA’s authority). As written, these
regulations would significantly limit the ability of manufacturers, distributors and retailers to advertise and promote
tobacco products, by, for example, restricting the use of color, graphics and sound effects in advertising, limiting the
use of outdoor advertising, restricting the sale and distribution of non-tobacco items and services, gifts, and
sponsorship of events and imposing restrictions on the use for cigarette or smokeless tobacco products of trade or

19

brand names that are used for non-tobacco products. The law also requires the FDA to issue future regulations
regarding the promotion and marketing of tobacco products sold through non-face-to-face transactions.

It is likely that the new tobacco law could result in a decrease in cigarette sales in the United States, including
sales of Liggett’s and Vector Tobacco’s brands. Total compliance and related costs are not possible to predict and
depend substantially on the future requirements imposed by the FDA under the new tobacco law. Costs, however,
could be substantial and could have a material adverse effect on the companies’ financial condition, results of
operations, and cash flows. In addition, failure to comply with the new tobacco law and with FDA regulatory
requirements could result in significant financial penalties and could have a material adverse effect on the business,
financial condition and results of operation of both Liggett and Vector Tobacco. At present, we are not able to
predict whether the new tobacco law will impact Liggett and Vector Tobacco to a greater degree than other
companies in the industry, thus affecting its competitive position.

Furthermore, Liggett and Vector Tobacco provide ingredient information annually, as required by law, to the
states of Massachusetts, Texas and Minnesota. Several other states are considering ingredient disclosure legislation.

Over the years, various state and local governments have continued to regulate tobacco products, including
smokeless tobacco products. These regulations relate to, among other things, the imposition of significantly higher
taxes, increases in the minimum age to purchase tobacco products, sampling and advertising bans or restrictions,
ingredient and constituent disclosure requirements and significant tobacco control media campaigns. Additional
state and local legislative and regulatory actions will likely be considered in the future, including, among other
things, restrictions on the use of flavorings.

Additional federal or state regulation relating to the manufacture, sale, distribution, advertising, labeling, or
information disclosure of tobacco products could further reduce sales, increase costs and have a material adverse
effect on our business.

Litigation will continue to harm the tobacco industry.

Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to
cigarette products. Adverse litigation outcomes could have a negative impact on the Company’s ability to operate
due to their impact on cash flows. We and our Liggett subsidiary, as well as the entire cigarette industry, continue to
be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of December 31, 2009, there were approximately 7,200 individual suits, including the Engle
progeny cases described below, seven purported class actions and four health care cost recovery actions pending in
the United States in which Liggett and/or us were named defendants. It is likely that similar legal actions,
proceedings and claims will continue to be filed against Liggett. Punitive damages, often in amounts ranging into
the billions of dollars, are specifically pled in these cases, in addition to compensatory and other damages. It is
possible that there could be adverse developments in pending cases including the certification of additional class
actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the com-
mencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could
have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett
could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.

A civil lawsuit was filed by the United States federal government seeking disgorgement of approximately
$289 billion from various cigarette manufacturers, including Liggett. In August 2006, the trial court entered a Final
Judgment and Remedial Order against each of the cigarette manufacturing defendants, except Liggett. The Final
Judgment, among other things, ordered the following relief against the non-Liggett defendants: (i) defendants are
enjoined from committing any act of racketeering concerning the manufacturing, marketing, promotion, health
consequences or sale of cigarettes in the United States; (ii) defendants are enjoined from making any material false,
misleading, or deceptive statement or representation concerning cigarettes that persuades people to purchase
cigarettes; and (iii) defendants are permanently enjoined from utilizing “lights”, “low tar”, “ultra lights”, “mild” or
“natural” descriptors, or conveying any other express or implied health messages in connection with the marketing
or sale of cigarettes as of January 1, 2007.

20

No monetary damages were awarded other than the government’s costs. In October 2006, the United States
Court of Appeals for the District of Columbia stayed the Final Judgment pending appeal. Both the government and
all defendants, other than Liggett, have filed petitions for writ of certiorari to the United States Supreme Court. In its
petition for writ of certiorari, the government is seeking reinstatement of its claims for remedies, including
disgorgement of industry profits. Although this case has been concluded as to Liggett, it is unclear what impact, if
any, the Final Judgment will have on the cigarette industry as a whole. To the extent that the Final Judgment leads to
a decline in industry-wide shipments of cigarettes in the United States or otherwise imposes regulations which
adversely affect the industry, Liggett’s sales volume, operating income and cash flows could be materially adversely
affected, which in turn could negatively affect the value of our common stock.

In December 2008, the United States Supreme Court, in Altria Group Inc. v. Good, ruled that the Federal
Cigarette Labeling and Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they
could proceed with their claims under the Maine Unfair Trade Practices Act. This ruling has resulted in additional
class action cases in other states. Although Liggett is not a party in the Good case, an adverse ruling or
commencement of additional “lights” related class actions could have a material adverse impact on us.

There are currently five individual tobacco-related actions pending where Liggett is the only tobacco company
defendant. In Ferlanti v. Liggett Group, a Florida state court jury awarded compensatory damages of $1.2 million
against Liggett, but found that the plaintiff was 40% at fault. Therefore, plaintiff was awarded $720,000 in
compensatory damages plus $96,000 in expenses. Punitive damages were not awarded. Liggett appealed the award.
In May 2009, the court granted plaintiff’s motion for an award of attorneys’ fees but the amount has not yet been
determined. In Hausrath v. Philip Morris, a case pending in New York state court, plaintiffs recently dismissed all
defendants other than Liggett. The other three individual actions, in which Liggett is the only tobacco company
defendant, are dormant.

As new cases are commenced, the costs associated with defending these cases and the risks relating to the

inherent unpredictability of litigation continue to increase.

Individual tobacco-related cases have increased as a result of the Florida Supreme Court’s ruling in
Engle.

In May 2003, a Florida intermediate appellate court overturned a $790 million punitive damages award against
Liggett and decertified the Engle v. R. J. Reynolds Tobacco Co. smoking and health class action. In July 2006, the
Florida Supreme Court affirmed in part and reversed in part the May 2003 intermediate appellate court decision.
Among other things, the Florida Supreme Court affirmed the decision decertifying the class on a prospective basis
and the order vacating the punitive damages award, but preserved several of the trial court’s Phase I findings
(including that: (i) smoking causes lung cancer, among other diseases; (ii) nicotine in cigarettes is addictive;
(iii) defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) the defendants
concealed material information; (v) all defendants sold or supplied cigarettes that were defective; and (vi) all
defendants were negligent) and allowed plaintiffs to proceed to trial on individual liability issues (using the above
findings) and compensatory and punitive damage issues, provided they commence their individual lawsuits within
one year of the date the court’s decision became final on January 11, 2007, the date of the court’s mandate. In
December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the
time of sale or supply, did not conform to the representations made by defendants.

In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco Company,
awarded $37.5 million in compensatory damages, jointly and severally, in a case involving Liggett and two other
cigarette manufacturers, which amount was subsequently reduced by the Court. The jury found Liggett 50%
responsible for the damages incurred by the plaintiff. The Lukacs case was the first case to be tried as an individual
Engle class member suit following entry of final judgment by the Engle trial court. In November 2008, the court
entered final judgment in the amount of $24.835 million (for which Liggett is 50% responsible), plus interest from
June 2002. The defendants appealed the final judgment. Plaintiff has filed a motion seeking an award of attorneys’
fees from Liggett based on their prior proposal for settlement.

Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle, former class members had one year from
January 11, 2007 to file individual lawsuits. In addition, some individuals who filed suit prior to January 11, 2007,

21

and who claim they meet the conditions in Engle, are attempting to avail themselves of the Engle ruling. Lawsuits
by individuals requesting the benefit of the Engle ruling, whether filed before or after the January 11, 2007 mandate,
are referred to as the “Engle progeny cases”. As of December 31, 2009, there were approximately 7,160 Engle
progeny cases pending where Liggett, we and other cigarette manufacturers were named as defendants. These cases
include approximately 8,585 plaintiffs. Approximately 42 cases are scheduled for trial in 2010. As of December 31,
2009, ten Engle progeny cases had been tried resulting in eight plaintiff verdicts and two defense verdicts. In one of
the cases, a judgment against Liggett was entered in the amount of $156,000.

It is possible that additional cases could be decided unfavorably and that there could be further adverse
developments in the Engle case. Liggett may enter into discussions in an attempt to settle particular cases if it
believes it is appropriate to do so. We cannot predict the cash requirements related to any future settlements and
judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able
to be met.

Regulation and legislation may negatively impact sales of tobacco products and our financial condition.

A wide variety of federal, state and local laws limit the advertising, sale and use of cigarettes and these laws
have proliferated in recent years. For example, many local laws prohibit smoking in restaurants and other public
places, and many employers have initiated programs restricting or eliminating smoking in the workplace. There are
various other legislative efforts pending on the federal and state level which seek to, among other things, eliminate
smoking in public places, further restrict displays and advertising of cigarettes, require additional warnings,
including graphic warnings, on cigarette packaging and advertising, ban vending machine sales and curtail
affirmative defenses of tobacco companies in product liability litigation. The trend has had, and is more likely
to continue to have, an adverse effect on us.

In addition to the foregoing, there have been a number of other restrictive regulatory actions from various
federal administrative bodies, including the United States Environmental Protection Agency and the FDA. There
have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette
smoking and the tobacco industry. Recently, legislation was passed by Congress providing for regulation of
cigarettes by the FDA. These developments generally receive widespread media attention. Additionally, a majority
of states have passed legislation providing for reduced ignition propensity standards for cigarettes. These
developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry,
possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar
litigation or legislation. We are not able to evaluate the effect of these developing matters on pending litigation or
the possible commencement of additional litigation, but our consolidated financial position, results of operations or
cash flows could be materially adversely affected.

Liggett may be adversely affected by the 2004 legislation to eliminate the federal tobacco quota system.

In October 2004, federal legislation was enacted which eliminated the federal tobacco quota system and price
support system through an industry funded buyout of tobacco growers and quota holders. Pursuant to the legislation,
manufacturers of tobacco products will be assessed $10.14 billion over a ten-year period to compensate tobacco
growers and quota holders for the elimination of their quota rights. Cigarette manufacturers will initially be
responsible for 96.3% of the assessment (subject to adjustment in the future), which will be allocated based on
relative unit volume of domestic cigarette shipments. Liggett’s and Vector Tobacco’s assessment was $22.9 million
in 2009, $23.6 million in 2008 and $23.3 million in 2007. The relative cost of the legislation to each of the three
largest cigarette manufacturers will likely be less than the cost to smaller manufacturers, including Liggett and
Vector Tobacco, because one effect of the legislation is that the three largest manufacturers will no longer be
obligated to make certain contractual payments, commonly known as Phase II payments, they agreed in 1999 to
make to tobacco-producing states. The ultimate impact of this legislation cannot be determined, but there is a risk
that smaller manufacturers, such as Liggett and Vector Tobacco, will be disproportionately affected by the
legislation, which could have a material adverse effect on us. The parties, other than Liggett have filed petitions for
writ of certiorari to the United States Supreme Court. The government is seeking reinstatement of its claims for
remedies, including disgorgement of profits.

22

Excise tax increases adversely affect cigarette sales.

Cigarettes are subject to substantial and increasing federal, state and local excise taxes. In February 2009,
Federal legislation to reauthorize the SCHIP, which includes funding provisions that increase the federal cigarette
excise tax from $0.39 to $1.01 per pack, was enacted, effective April 1, 2009. State excise taxes vary considerably
and, when combined with sales taxes, local taxes and the federal excise tax, may exceed $4.00 per pack. In 2009,
14 states and the District of Columbia enacted increases in excise taxes. Various states and other jurisdictions are
considering, or have pending, legislation proposing further state excise tax increases. Management believes
increases in excise and similar taxes have had, and will continue to have, an adverse effect on sales of cigarettes.

Liggett may have additional payment obligations under the Master Settlement Agreement and its other
settlement agreements with the states.

NPM Adjustment.

In March 2006, an economic consulting firm selected pursuant to the MSA rendered its
final and non-appealable decision that the MSA was a “significant factor contributing to” the loss of market share of
Participating Manufacturers for 2003. This is known as the “NPM Adjustment.” The economic consulting firm
subsequently rendered the same decision with respect to 2004, 2005 and 2006. As a result, the manufacturers are
entitled to potential NPM Adjustments to their 2003, 2004, 2005 and 2006 MSA payments. The Participating
Manufacturers are also entitled to potential NPM Adjustments to their 2007, 2008 and 2009 payments pursuant to
an agreement entered into in June 2009 between the OPMs and the settling states under which the OPMs agreed to
make certain payments for the benefit of the settling states, in exchange for which the settling states stipulated that
the MSA was a “significant factor contributing to” the loss of market share of Participating Manufacturers in 2007,
2008 and 2009. A settling state that has diligently enforced its qualifying escrow statute in the year in question may
be able to avoid application of the NPM Adjustment to the payments made by the manufacturers for the benefit of
that state or territory.

For 2003 through 2009 Liggett and Vector Tobacco disputed that they owe the settling states the NPM
Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett and Vector Tobacco
withheld payment associated with these NPM Adjustment amounts. The total amount withheld or paid into a
disputed payment account by Liggett and Vector Tobacco for 2003 through 2009 is $21.4 million. In 2003, Liggett
and Vector Tobacco paid the NPM adjustment amount of $9.3 million to the settling states although both companies
continue to dispute this amount. At December 31, 2009 included in “Other assets” on our consolidated balance sheet
was a noncurrent receivable of $6.5 million relating to such payment.

The following amounts have not been expensed by the Company as they relate to Liggett and Vector Tobacco’s
NPM Adjustment claims for 2003 through 2009: $6.5 million for 2003, $3.8 million for 2004 and $800,000 for
2005.

Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was filed in 49
Settling States over the issue of whether the application of the NPM Adjustment for 2003 is to be determined
through litigation or arbitration. These actions relate to the potential NPM Adjustment for 2003, which the
Independent Auditor under the MSA previously determined to be as much as $1.2 billion for all Participating
Manufacturers. All but one of the 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana Supreme Court,
ruled that Montana’s claim of diligent enforcement must be litigated. In response to a proposal from the OPMs and
many of the SPMs, 46 of the Settling States, representing approximately 90% of the allocable share of the Settling
States, entered into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM
Adjustment for 2003. The agreement provides for selection of the arbitration panel beginning November 1, 2009
and that the parties and the arbitrators will thereafter establish the schedule and procedures for the arbitration.
Because states representing more than 80% of the allocable share signed the agreement, signing states will receive a
20% reduction of any potential 2003 NPM adjustment. It is anticipated that the arbitration will commence in 2010.
There can be no assurance that Liggett or Vector Tobacco will receive any adjustment as a result of these
proceedings.

Gross v. Net Calculations.

In October 2004, the Independent Auditor notified Liggett and all other
Participating Manufacturers that their payment obligations under the MSA, dating from the agreement’s execution

23

in late 1998, had been recalculated using “net” unit amounts, rather than “gross” unit amounts (which had been used
since 1999).

Liggett has objected to this retroactive change and has disputed the change in methodology. Liggett contends
that the retroactive change from using “gross” to “net” unit amounts is impermissible for several reasons, including:

(cid:129) use of “net” unit amounts is not required by the MSA (as reflected by, among other things, the use of “gross”

unit amounts through 2005);

(cid:129) such a change is not authorized without the consent of affected parties to the MSA;

(cid:129) the MSA provides for four-year time limitation periods for revisiting calculations and determinations, which
precludes recalculating Liggett’s 1997 Market Share (and thus, Liggett’s market share exemption); and

(cid:129) Liggett and others have relied upon the calculations based on “gross” unit amounts since 1998.

The change in the method of calculation could, among other things, result in at least approximately
$9.5 million, plus interest, of additional MSA payments for prior years by Liggett, because the proposed change
from “gross” to “net” units would serve to lower Liggett’s market share exemption under the MSA. The Company
currently estimates that future MSA payments would be at least $2.25 million higher if the method of calculation is
changed.

No amounts have been expensed or accrued in the accompanying consolidated financial statements for any

potential liability relating to the “gross” versus “net” dispute.

Liggett may have additional payment obligations under its state settlements

In 2004, the Attorneys General for each of Florida, Mississippi and Texas advised Liggett that they believed
that Liggett had failed to make all required payments under the respective settlement agreements with these states
for the period 1998 through 2003 and that additional payments may be due for 2004 and subsequent years. Liggett
believes these allegations are without merit, based, among other things, on the language of the most favored nation
provisions of the settlement agreements and no amounts have been accrued in our consolidated financial statements
for any additional amounts that may be payable by Liggett under the settlement agreements with Florida,
Mississippi and Texas. There can be no assurance that Liggett will prevail in any of these matters and that Liggett
will not be required to make additional material payments, which payments could materially adversely affect our
consolidated financial position, results of operations or cash flows and the value of our common stock.

Vector Tobacco is subject to risks inherent in new product development initiatives.

We have made, and plan to continue to make, significant investments in Vector Tobacco’s development
projects in the tobacco industry. Vector Tobacco is in the business of developing reduced risk cigarette products.
These initiatives are subject to high levels of risk, uncertainties and contingencies, including the challenges inherent
in new product development and the increased regulation following the enactment of the Family Smoking
Prevention and Tobacco Control Act. There is a risk that continued investments in Vector Tobacco will harm
our results of operations, liquidity or cash flow.

The substantial risks facing Vector Tobacco include:

Potential extensive government regulation. Vector Tobacco’s business is currently extensively regulated, and
may become subject to extensive additional domestic and international government regulation. Various proposals
have been made for federal, state and international legislation to regulate cigarette manufacturers generally, and
reduced constituent cigarettes specifically. It is possible that laws and regulations may be adopted covering matters
such as the manufacture, sale, distribution and labeling of tobacco products as well as any health claims associated
with reduced risk and low nicotine and nicotine-free cigarette products. There could be additional regulation
established by agencies such as the FDA (including further regulation resulting from passage of the Family
Smoking Prevention and Tobacco Control Act in June 2009), the Federal Trade Commission and the United States
Department of Agriculture. The outcome of any of the foregoing cannot be predicted, but any of the foregoing could
have a material adverse effect on Vector Tobacco’s business, operating results and prospects.

24

Competition from other cigarette manufacturers with greater resources. Vector Tobacco’s competitors
generally have substantially greater resources than Vector Tobacco, including financial, marketing and personnel
resources. Other major tobacco companies have stated that they are working on reduced risk cigarette products and
have made publicly available at this time only limited additional information concerning their activities. Philip
Morris has announced it is developing products that potentially reduce smokers’ exposure to harmful compounds in
cigarette smoke. RJR Tobacco has disclosed that a primary focus for its research and development activity is the
development of potentially reduced exposure products, which may ultimately be recognized as products that present
reduced risks to health. RJR Tobacco has stated that it continues to sell in limited distribution throughout the country
a brand of cigarettes that primarily heats rather than burns tobacco, which it claims reduces the toxicity of its smoke.
There is a substantial likelihood that other major tobacco companies will continue to introduce new products that
would compete directly with any reduced risk products that Vector Tobacco may develop.

Intellectual property rights, including Vector Tobacco’s patents involve complex legal and factual issues. Any
conflicts resulting from third party patent applications and granted patents could significantly limit Vector
Tobacco’s ability to obtain meaningful patent protection or to commercialize its technology. If patents currently
exist or are issued to other companies that contain claims which encompass Vector Tobacco’s products or the
processes used by Vector Tobacco to manufacture or develop its products, Vector Tobacco may be required to obtain
licenses to use these patents or to develop or obtain alternative technology. Licensing agreements, if required, may
not be available on acceptable terms or at all. If licenses are not obtained, Vector Tobacco could be delayed in, or
prevented from, pursuing the further development of marketing of its new cigarette products. Any alternative
technology, if feasible, could take several years to develop.

Litigation, which could result in substantial cost, also may be necessary to enforce any patents to which Vector
Tobacco has rights, or to determine the scope, validity and unenforceability of other parties’ proprietary rights
which may affect Vector Tobacco’s rights. Vector Tobacco also may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine the priority of an invention or in opposition
proceedings in foreign countries or jurisdictions, which could result in substantial costs. The mere uncertainty
resulting from the institution and continuation of any technology-related litigation or any interference or opposition
proceedings could have a material adverse effect on Vector Tobacco’s business, operating results and prospects.

Vector Tobacco may also rely on unpatented trade secrets and know-how to maintain its competitive position,
which it seeks to protect, in part, by confidentiality agreements with employees, consultants, suppliers and others.
There is a risk that these agreements will be breached or terminated, that Vector Tobacco will not have adequate
remedies for any breach, or that its trade secrets will otherwise become known or be independently discovered by
competitors.

New Valley is subject to risks relating to the industries in which it operates.

Risks of real estate ventures. New Valley has three significant real estate-related investments, Douglas
Elliman Realty (50% interest), New Valley Oaktree Chelsea Eleven LLC (40% interest) and Aberdeen Townhomes
LLC (15% preferred return), where other partners hold significant interests. New Valley must seek approval from
these other parties for important actions regarding these joint ventures. Since the other parties’ interests may differ
from those of New Valley, a deadlock could arise that might impair the ability of the ventures to function. Such a
deadlock could significantly harm the ventures.

The volatility in the capital and credit markets has increased in recent years. Because the volatility in capital
and credit markets may create additional risks in the upcoming months and possibly years, the Company will
continue to perform additional assessments to determine the impact, if any, on the Company’s consolidated
financial statements. Thus, future impairment charges may occur.

New Valley may pursue a variety of real estate development projects. Development projects are subject to
special risks including potential increase in costs, changes in market demand, inability to meet deadlines which may
delay the timely completion of projects, reliance on contractors who may be unable to perform and the need to
obtain various governmental and third party consents.

25

Risks relating to the residential brokerage business. Through New Valley’s investment in Douglas Elliman
Realty, we are subject to the risks and uncertainties endemic to the residential brokerage business. Douglas Elliman
Realty’s two subsidiaries, which conduct business as Prudential Douglas Elliman Real Estate, operate as fran-
chisees of The Prudential Real Estate Affiliates, Inc. Prudential Douglas Elliman Real Estate operates each of its
offices under its franchiser’s brand name, and the franchiser has significant rights over the use of the franchised
service marks and the conduct of the two brokerage companies’ business. The franchise agreements require the
companies to:

(cid:129) coordinate with the franchiser on significant matters relating to their operations, including the opening and

closing of offices;

(cid:129) make substantial royalty payments to the franchiser and contribute significant amounts to national adver-

tising funds maintained by the franchiser;

(cid:129) indemnify the franchiser against losses arising out of the operations of their business under the franchise

agreements; and

(cid:129) maintain standards and comply with guidelines relating to their operations which are applicable to all

franchisees of the franchiser’s real estate franchise system.

The franchiser has the right to terminate Prudential Douglas Elliman Real Estate’s franchises, upon the
occurrence of certain events, including a bankruptcy or insolvency event, a change in control, a transfer of rights
under the franchise agreement and a failure to promptly pay amounts due under the franchise agreements. A
termination of Prudential Douglas Elliman Real Estate’s franchise agreements could adversely affect our invest-
ment in Douglas Elliman Realty.

The franchise agreements grant Prudential Douglas Elliman Real Estate exclusive franchises in New York for
the counties of Nassau and Suffolk on Long Island and for Manhattan, Brooklyn and Queens, subject to various
exceptions and to meeting specified annual revenue thresholds. If the company fails to achieve these levels of
revenues for two consecutive years or otherwise materially breach the franchise agreements, the franchiser would
have the right to terminate its exclusivity rights. A loss of these rights could have a material adverse on Douglas
Elliman Realty.

Real estate ventures and mortgage receivables have been negatively impacted by the current downturn in the
residential real estate market. The U.S. residential real estate market, including the New York metropolitan area
where Douglas Elliman Realty operates, is cyclical and is affected by changes in the general economic conditions
that are beyond the control of Douglas Elliman Realty. The U.S. residential real estate market is currently in a
significant downturn due to various factors including downward pressure on housing prices, credit constraints
inhibiting new buyers and an exceptionally large inventory of unsold homes at the same time that sales volumes are
decreasing. The depth and length of the current downturn in the real estate industry has proved exceedingly difficult
to predict. We cannot predict whether the downturn will worsen or when the market and related economic forces
will return the U.S. residential real estate industry to a growth period.

Any of the following could have a material adverse effect on our real estate ventures by causing a general
decline in the number of home sales and/or prices, which in turn, could adversely affect their revenues and
profitability:

(cid:129) periods of economic slowdown or recession;

(cid:129) rising interest rates;

(cid:129) the general availability of mortgage financing, including:

(cid:129) the impact of the recent contraction in the subprime and mortgage markets generally; and

(cid:129) the effect of more stringent lending standards for home mortgages;

(cid:129) adverse changes in economic and general business conditions in the New York metropolitan area;

(cid:129) a decrease in the affordability of homes;

26

(cid:129) declining demand for real estate;

(cid:129) a negative perception of the market for residential real estate;

(cid:129) commission pressure from brokers who discount their commissions;

(cid:129) acts of God, such as hurricanes, earthquakes and other natural disasters, or acts or threats of war or terrorism;

and/or

(cid:129) an increase in the cost of homeowners insurance.

The three major real estate ventures’ current operations are located in the New York metropolitan area.
Local and regional economic and general business conditions in this market could differ materially from prevailing
conditions in other parts of the country. Among other things, the New York metropolitan area residential real estate
market has been impacted by the significant downturn in the financial services industry. A continued downturn in
the residential real estate market or economic conditions in that region could have a material adverse effect on these
investments.

Potential new investments we may make are unidentified and may not succeed.

We currently hold a significant amount of marketable securities and cash not committed to any specific
investments. This subjects a security holder to increased risk and uncertainty because a security holder will not be
able to evaluate how this cash will be invested and the economic merits of particular investments. There may be
substantial delay in locating suitable investment opportunities. In addition, we may lack relevant management
experience in the areas in which we may invest. There is a risk that we will fail in targeting, consummating or
effectively integrating or managing any of these investments.

We depend on our key personnel.

We depend on the efforts of our executive officers and other key personnel. While we believe that we could find
replacements for these key personnel, the loss of their services could have a significant adverse effect on our operations.

We are exposed to risks from legislation requiring companies to evaluate their internal control over
financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to assess, and our independent
registered certified public accounting firm to attest to, the effectiveness of our internal control structure and
procedures for financial reporting. We completed an evaluation of the effectiveness of our internal control over
financial reporting for the fiscal year ended December 31, 2009, and we have an ongoing program to perform the
system and process evaluation and testing necessary to continue to comply with these requirements. We expect to
continue to incur expense and to devote management resources to Section 404 compliance. In the event that our
chief executive officer, chief financial officer or independent registered certified public accounting firm determines
that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions
and our reputation may be adversely affected and the market price of our stock could decline.

The price of our common stock may fluctuate significantly.

The trading price of our common stock has ranged between $10.23 and $15.98 per share over the past

52 weeks. We expect that the market price of our common stock will continue to fluctuate.

The market price of our common stock may fluctuate in response to numerous factors, many of which are

beyond our control. These factors include the following:

(cid:129) actual or anticipated fluctuations in our operating results;

(cid:129) changes in expectations as to our future financial performance, including financial estimates by securities

analysts and investors;

(cid:129) the operating and stock performance of our competitors;

(cid:129) announcements by us or our competitors of new products or services or significant contract, acquisitions,

strategic partnerships, joint ventures or capital commitments;

27

(cid:129) the initiation or outcome of litigation;

(cid:129) changes in interest rates;

(cid:129) general economic, market and political conditions;

(cid:129) additions or departures of key personnel; and

(cid:129) future sales of our equity or convertible securities.

We cannot predict the extent, if any, to which future sales of shares of common stock or the availability of

shares of common stock for future sale, may depress the trading price of our common stock.

In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations
that often have been unrelated or disproportionate to the operating performance of individual companies. These
broad market fluctuations may adversely affect the price of our common stock, regardless of our operating
performance. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock
drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our
management. These factors, among others, could significantly depress the price of our common stock.

We have many potentially dilutive securities outstanding.

At December 31, 2009, we had outstanding options granted to employees to purchase approximately
2,202,828 shares of our common stock, with a weighted-average exercise price of $14.51 per share, of which
options for 1,056,999 shares were exercisable at December 31, 2009. We also have outstanding convertible notes
and debentures maturing in November 2014 and June 2026, which are currently convertible into 16,326,597 shares
of our common stock. The issuance of these shares will cause dilution which may adversely affect the market price
of our common stock. The availability for sale of significant quantities of our common stock could adversely affect
the prevailing market price of the stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal executive offices are located in Miami, Florida. We lease 13,849 square feet of office space from
an unaffiliated company in an office building in Miami, which we share with various of our subsidiaries. The lease
expires in November 2014.

We lease approximately 18,000 square feet of office space in New York, New York under leases that expire in
2013. Approximately 9,000 square feet of such space has been subleased to unaffiliated third parties for the balance
of the term of the lease. New Valley’s operating properties are discussed above under the description of New
Valley’s business.

Liggett’s tobacco manufacturing facilities, and several of the distribution and storage facilities, are currently
located in or near Mebane, North Carolina. Various of such facilities are owned and others are leased. As of
December 31, 2009, the principal properties owned or leased by Liggett are as follows:

Type

Location

Owned or Leased

Approximate Total
Square Footage

Storage Facilities . . . . . . . . . . . . . . . . . . . . . . . Danville, VA
Office and Manufacturing Complex . . . . . . . . . Mebane, NC
Warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . Mebane, NC
Warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . Mebane, NC
Warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . Mebane, NC
Warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . Mebane, NC

Owned
Owned
Owned
Leased
Leased
Leased

578,000
240,000
60,000
50,000
30,000
22,000

28

Liggett Vector Brands leases approximately 20,000 square feet of office space in Morrisville, North Carolina.

The lease expires in January 2014.

Liggett’s management believes that its property, plant and equipment are well maintained and in good

condition and that its existing facilities are sufficient to accommodate a substantial increase in production.

ITEM 3. LEGAL PROCEEDINGS

Liggett and other United States cigarette manufacturers have been named as defendants in numerous, direct,
third-party and class actions predicated on the theory that they should be liable for damages from adverse health
effects alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes.

Reference is made to Note 12 to our consolidated financial statements, which contains a general description of
certain legal proceedings to which the Company, Liggett, New Valley or their subsidiaries are a party and certain
related matters. Reference is also made to Exhibit 99.1, Material Legal Proceedings, incorporated herein, for
additional information regarding the pending tobacco-related legal proceedings to which we or Liggett are parties.
A copy of Exhibit 99.1 will be furnished without charge upon written request to us at our principal executive offices,
100 S.E. Second Street, Miami, Florida 33131, Attn: Investor Relations.

ITEM 4. RESERVED

29

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed and traded on the New York Stock Exchange under the symbol “VGR”. The
following table sets forth, for the periods indicated, high and low sale prices for a share of its common stock on the
NYSE, as reported by the NYSE, and quarterly cash dividends declared on shares of common stock:

Year

High

Low

Cash Dividends

2009:
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.79
15.98
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.70
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.21
2008:
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.78
18.52
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.51
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.36
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13.50
13.06
12.14
10.23

$10.30
14.51
14.43
15.06

$.40
.38
.38
.38

$.38
.36
.36
.36

At February 23, 2010, there were approximately 2,038 holders of record of our common stock.

The declaration of future cash dividends is within the discretion of our Board of Directors and is subject to a
variety of contingencies such as market conditions, earnings and our financial condition as well as the availability of
cash.

Liggett’s revolving credit agreement currently permits Liggett to pay dividends to VGR Holding only if
Liggett’s borrowing availability exceeds $5 million for the 30 days prior to payment of the dividend, and so long as
no event of default has occurred under the agreement, including Liggett’s compliance with the covenants in the
credit facility, including maintaining minimum levels of EBITDA (as defined) if its borrowing availability is less
than $20 million and not exceeding maximum levels of capital expenditures (as defined).

Our 11% Senior Secured Notes due 2015 prohibit our payment of cash dividends or distributions on our
common stock if at the time of such payment our Consolidated EBITDA (as defined) for the most recently
completed four full fiscal quarters is less than $50 million.

We paid 5% stock dividends on September 28, 2007, September 29, 2008 and September 29, 2009 to the

holders of our common stock. All information presented in this report is adjusted for the stock dividends.

30

Performance Graph

The following graph compares the total annual return of our Common Stock, the S&P 500 Index, the S&P
MidCap 400 Index and the NYSE Arca Tobacco Index, formerly known as the AMEX Tobacco Index, for the five
years ended December 31, 2009. The graph assumes that $100 was invested on December 31, 2004 in the Common
Stock and each of the indices, and that all cash dividends and distributions were reinvested. Information for our
Common Stock includes the value of the March 30, 2005 distribution to our stockholders of shares of Ladenburg
Thalmann Financial Services common stock and assumes such stock was held by the stockholders until the end of
each year.

Vector Group Ltd.

S&P 500

S&P MidCap

NYSE Arca Tobacco

S
R
A
L
L
O
D

300

250

200

150

100

50

0

12/04

12/05

12/06

12/07

12/08

12/09

Vector Group Ltd.

S&P 500

S&P MidCap

NYSE Arca Tobacco

12/04

100

100

100

100

12/05

126

105

112

112

12/06

142

121

124

155

12/07

183

128

134

171

12/08

142

81

86

138

12/09

171

102

117

192

Unregistered Sales of Equity Securities and Use of Proceeds

On November 16, 2009, holders of our 5% Variable Interest Senior Convertible Notes exchanged $554,342
(principal amount) for $593,000 (principal amount) of our 6.75% Variable Interest Senior Convertible Notes due
2014. No other securities of ours which were not registered under the Securities Act of 1933 were issued or sold by
us during the three months ended December 31, 2009.

31

Issuer Purchases of Equity Securities

Our purchases of our common stock during the three months ended December 31, 2009 were as follows:

Period

Total
Number of
Shares
Purchased

October 1 to October 31, 2009. . . . . . . . . . . . . .
November 1 to November 30, 2009 . . . . . . . . . .
December 1 to December 30, 2009 . . . . . . . . . .

—

854,470(1)

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

854,470

Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans
or Programs

—
—
—

—

—
—
—

—

Average
Price Paid
per Share

$ —
14.47
—

$14.47

(1) Delivery of shares to us in payment of exercise price and tax withholdings in connection with exercise of

employees’ stock options. The shares were immediately cancelled.

EXECUTIVE OFFICERS OF THE REGISTRANT

The table below, together with the accompanying text, presents certain information regarding all our current
executive officers as of March 1, 2010. Each of the executive officers serves until the election and qualification of
such individual’s successor or until such individual’s death, resignation or removal by the Board of Directors.

Name

Howard M. Lorber . . . . . . . .
Richard J. Lampen . . . . . . . .
J. Bryant Kirkland III . . . . . .

Marc N. Bell . . . . . . . . . . . . .
Ronald J. Bernstein . . . . . . . .

Age

61
56
44

49
56

Position

Year Individual
Became an
Executive Officer

President and Chief Executive Officer
Executive Vice President
Vice President, Chief Financial Officer and Treasurer

Vice President, General Counsel and Secretary
President and Chief Executive Officer of Liggett

2001
1996
2006

1998
2000

Howard M. Lorber has been our President and Chief Executive Officer since January 2006. He served as our
President and Chief Operating Officer from January 2001 to December 2005 and has served as a director of ours
since January 2001. From November 1994 to December 2005, Mr. Lorber served as President and Chief Operating
Officer of New Valley, where he also served as a director. Mr. Lorber was Chairman of the Board of Hallman &
Lorber Assoc., Inc., consultants and actuaries of qualified pension and profit sharing plans, and various of its
affiliates from 1975 to December 2004 and has been a consultant to these entities since January 2005; a stockholder
and a registered representative of Aegis Capital Corp., a broker-dealer and a member firm of the National
Association of Securities Dealers, since 1984; Chairman of the Board of Directors since 1987 and Chief Executive
Officer from November 1993 to December 2006 of Nathan’s Famous, Inc., a chain of fast food restaurants; a
director of United Capital Corp., a real estate investment and diversified manufacturing company, since May 1991;
and Chairman of the Board of Ladenburg Thalmann Financial Services from May 2001 to July 2006 and Vice
Chairman since July 2006. He is also a trustee of Long Island University.

Richard J. Lampen has served as our Executive Vice President since July 1996. From October 1995 to
December 2005, Mr. Lampen served as the Executive Vice President and General Counsel of New Valley, where he
also served as a director. Since September 2006, he has served as President and Chief Executive Officer of
Ladenburg Thalmann Financial Services. Since November 1998, he has served as President and Chief Executive
Officer of CDSI Holdings Inc., an affiliate of New Valley seeking acquisition or investment opportunities. Since
October 2008, Mr. Lampen has served as interim President and Chief Executive Officer of Castle Brands Inc., a
publicly traded developer and importer of premium branded spirits in which we held an approximate 11% equity
interest at December 31, 2009. From May 1992 to September 1995, Mr. Lampen was a partner at Steel Hector &
Davis, a law firm located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a Managing

32

Director at Salomon Brothers Inc, an investment bank, and was an employee at Salomon Brothers Inc from 1986 to
April 1992. Mr. Lampen is a director of Castle, CDSI Holdings and Ladenburg Thalmann Financial Services.

J. Bryant Kirkland III has been our Vice President, Chief Financial Officer and Treasurer since April 2006.
Mr. Kirkland has served as a Vice President of ours since January 2001 and served as New Valley’s Vice President
and Chief Financial Officer from January 1998 to December 2005. He has served since November 1994 in various
financial capacities with us and New Valley. Mr. Kirkland has served as Vice President and Chief Financial Officer
of CDSI Holdings Inc. since January 1998 and as a director of CDSI Holdings Inc. since November 1998.

Marc N. Bell has been our Vice President since January 1998, our General Counsel and Secretary since May
1994 and the Senior Vice President and General Counsel of Vector Tobacco since April 2002. From November 1994
to December 2005, Mr. Bell served as Associate General Counsel and Secretary of New Valley and from February
1998 to December 2005, as a Vice President of New Valley. Prior to May 1994, Mr. Bell was with the law firm of
Zuckerman Spaeder LLP in Miami, Florida and from June 1991 to May 1993, with the law firm of
Fischbein(cid:129)Badillo(cid:129)Wagner(cid:129)Harding in New York, New York.

Ronald J. Bernstein has served as President and Chief Executive Officer of Liggett since September 1, 2000
and of Liggett Vector Brands since March 2002 and has been a director of ours since March 2004. From July 1996 to
December 1999, Mr. Bernstein served as General Director and, from December 1999 to September 2000, as
Chairman of Liggett-Ducat, our former Russian tobacco business sold in 2000. Prior to that time, Mr. Bernstein
served in various positions with Liggett commencing in 1991, including Executive Vice President and Chief
Financial Officer.

33

ITEM 6. SELECTED FINANCIAL DATA

2009

Year Ended December 31,
2007
(dollars in thousands, except per share amounts)

2008

2006

2005

Statement of Operations Data:
Revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . .
Income from discontinued operations . . . . . . . .
Income from extraordinary item . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per basic common share(2):

Income from continuing operations . . . . . . . .
Income from discontinued operations. . . . . . .
Income from extraordinary item . . . . . . . . . .
Net income applicable to common shares . . .

Per diluted common share(2):

Income from continuing operations . . . . . . . .
Income from discontinued operations. . . . . . .
Income from extraordinary item . . . . . . . . . .
Net income applicable to common shares . . .

Cash distributions declared per common

share(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, embedded derivatives, long-term

debt and other obligations, less current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current employee benefits, deferred income
taxes, minority interests and other long-term
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ (deficiency) equity . . . . . . . . . . .

$801,494
24,806
—
—
24,806

$565,186
60,504
—
—
60,504

$555,430
73,803
—
—
73,803

$506,252
42,712
—
—
42,712

$478,427
42,585
3,034
6,766
52,385

—
—
—
0.34

—
—
—
0.34

1.54

$

$

$

—
—
—
0.85

—
—
—
0.76

1.47

$

$

$

—
—
—
1.05

—
—
—
1.02

1.40

$

$

$

— $
— $
— $
$

0.63

— $
— $
— $
$

0.62

0.79
0.06
0.12
0.97

0.75
0.05
0.12
0.92

1.33

$

1.27

$

$

$

$389,208
735,542
149,008

$355,283
717,712
296,159

$395,626
785,289
109,337

$303,156
637,462
168,786

$319,099
603,552
128,100

487,936

287,545

378,760

198,777

277,613

103,280
(4,682)

100,403
33,605

196,340
100,852

174,922
94,977

168,773
29,066

(1) Revenues include federal excise taxes of $377,771, $168,170, $176,269, $174,339 and $161,753, respectively.
Effective April 1, 2009, federal excises taxes increased from $0.39 per pack of cigarettes to $1.01 per pack of
cigarettes.

(2) Per share computations include the impact of 5% stock dividends on September 29, 2009, September 29, 2008,

September 28, 2007, September 29, 2006, and September 29, 2005.

34

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Amounts)

Overview

We are a holding company and are engaged principally in:

(cid:129) the manufacture and sale of cigarettes in the United States through our Liggett Group LLC,

(cid:129) the development of reduced risk cigarette products through our Vector Tobacco Inc. subsidiary, and

(cid:129) the real estate business through our New Valley LLC subsidiary, which is seeking to acquire additional
operating companies and real estate properties. New Valley owns 50% of Douglas Elliman Realty, LLC,
which operates the largest residential brokerage company in the New York metropolitan area.

All of Liggett’s unit sales volume in 2009, 2008 and 2007 was in the discount segment, which Liggett’s
management believes has been the primary growth segment in the industry for over a decade. The significant
discounting of premium cigarettes in recent years has led to brands, such as EVE, that were traditionally considered
premium brands to become more appropriately categorized as discount, following list price reductions.

Liggett’s cigarettes are produced in approximately 160 combinations of length, style and packaging. Liggett’s

current brand portfolio includes:

(cid:129) LIGGETT SELECT — a leading brand in the deep discount category,

(cid:129) GRAND PRIX — re-launched as a national brand in 2005,

(cid:129) EVE — a leading brand of 120 millimeter cigarettes in the branded discount category,

(cid:129) PYRAMID — the industry’s first deep discount product with a brand identity re-launched in the second

quarter of 2009, and

(cid:129) USA and various Partner Brands and private label brands.

In 1999, Liggett introduced LIGGETT SELECT, one of the leading brands in the deep discount category.
LIGGETT SELECT, which was the largest seller in Liggett’s family of brands in 2007, comprised 32.9% in 2007,
30.1% in 2008 and 21.5% in 2009 of Liggett’s unit volume. In September 2005, Liggett repositioned GRAND PRIX
to distributors and retailers nationwide. GRAND PRIX, which represented 30.3% of Liggett’s volume in 2007 and
is now the largest seller in Liggett’s family of brands with 32.6% in 2008 and 27.9% in 2009 of Liggett’s unit
volume. In April 2009, Liggett repositioned PYRAMID as a box-only brand in specific markets with a new low
price to specifically compete with brands which are priced at the lowest level of the deep discount segment.
PYRAMID represented 0.6% in 2008 and 14.6% in 2009 of Liggett’s unit volume.

Under the Master Settlement Agreement reached in November 1998 with 46 states and various territories, the
three largest cigarette manufacturers must make settlement payments to the states and territories based on how
many cigarettes they sell annually. Liggett, however, is not required to make any payments unless its market share
exceeds approximately 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco has no payment obligation
unless its market share exceeds approximately 0.28% of the U.S. market. Liggett’s and Vector Tobacco’s payments
under the Master Settlement Agreement are based on each company’s incremental market share above the
minimum threshold applicable to such company. We believe that Liggett has gained a sustainable cost advantage
over its competitors as a result of the settlement.

The discount segment is a challenging marketplace, with consumers having less brand loyalty and placing
greater emphasis on price. Liggett’s competition is now divided into two segments. The first segment is made up of
the three largest manufacturers of cigarettes in the United States, Philip Morris USA Inc., Reynolds America Inc.,
and Lorillard Tobacco Company as well as the fourth largest, Commonwealth Brands, Inc. (acquired by Imperial
Tobacco PLC in 2007). The three largest manufacturers, while primarily premium cigarette based companies, also

35

produce and sell discount cigarettes. The second segment of competition is comprised of a group of smaller
manufacturers and importers, most of which sell lower quality, deep discount cigarettes.

Recent Developments

Senior Secured Notes.

In August 2007, we sold $165,000 of our Senior Secured Notes in a private offering to
qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. In September 2009, we
sold at 94% of face value an additional $85,000 principal amount of the Senior Secured Notes in a private offering to
qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. We received net
proceeds from the 2009 offering of approximately $79,900. We agreed to consummate a registered exchange offer
for the additional Senior Secured Notes within 360 days after the date of their initial issuance. If we fail to timely
comply with our registration obligations, we will be required to pay additional interest on these notes until we
comply. We are amortizing the deferred costs and debt discount related to the additional Senior Secured Notes over
the estimated life of the debt.

5% Variable Interest Senior Convertible Notes Due November 2011. Between November 2004 and April
2005, we sold $111,864 principal amount of our 5% Variable Interest Senior Convertible Notes due November 15,
2011 (the “5% Notes”). In May 2009, the holder of $11,005 principal amount of the 5% Notes exchanged its
5% Notes for $11,775 principal amount of our 6.75% Variable Interest Senior Convertible Note due 2014 (the
“6.75% Note”) as discussed below. In June 2009, certain holders of $99,944 principal amount of the 5% Notes
exchanged their 5% Notes for $106,940 principal amount of our 6.75% Variable Interest Senior Convertible
Exchange Notes due 2014 (the “6.75% Exchange Notes”). In November 2009, we retired $360 of the remaining
$915 principal amount of the 5% Notes for cash and exchanged approximately $555 of the remaining 5% Notes for
$593 principal amount of the 6.75% Exchange Notes. As of December 31, 2009, no 5% Notes remained outstanding
after these exchanges.

We recorded a loss of $18,573 associated with the extinguishment of the 5% Notes for the year ended

December 31, 2009.

6.75% Variable Interest Senior Convertible Note due 2014. On May 11, 2009, we issued in a private
placement the 6.75% Note in the principal amount of $50,000. The purchase price was paid in cash ($38,225) and by
tendering $11,005 principal amount of the 5% Notes, valued at 107% of principal amount. We will use the net
proceeds of the offering for general corporate purposes. The note pays interest (“Total Interest”) on a quarterly basis
at a rate of 3.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the
prior three-month period ending on the record date for such interest payment multiplied by the total number of
shares of its common stock into which the debt will be convertible on such record date. Notwithstanding the
foregoing, however, the interest payable on each interest payment date shall be the higher of (i) the Total Interest or
(ii) 6.75% per annum. The note is convertible into our common stock at the holder’s option. The conversion price of
$14.32 per share (approximately 69.8139 shares of common stock per $1,000 principal amount of the note) is
subject to adjustment for various events, including the issuance of stock dividends. The note matures on
November 15, 2014. We will redeem on May 11, 2014 and at the end of each interest accrual period thereafter
an additional amount, if any, of the note necessary to prevent the note from being treated as an “Applicable High
Yield Discount Obligation” under the Internal Revenue Code. If a fundamental change (as defined in the note)
occurs, we will be required to offer to repurchase the note at 100% of its principal amount, plus accrued interest.

The purchaser of this 6.75% Note is an entity affiliated with Dr. Phillip Frost, who reported, after the

consummation of the sale, beneficial ownership of approximately 11.7% of our common stock.

6.75% Variable Interest Senior Convertible Exchange Notes due 2014. On June 15, 2009, we entered into
agreements with certain holders of the 5% Notes to exchange their 5% notes for our 6.75% Exchange Notes. On
June 30, 2009, we accepted for exchange $99,944 principal amount of the 5% Notes for $106,940 principal amount
of our 6.75% Exchange Notes. In November, 2009, we exchanged approximately $555 of the remaining 5% Notes
for $593 principal amount of our 6.75% Variable Interest Senior Convertible Exchange Notes due 2014.

We issued the 6.75% Exchange Notes to the holders in reliance on the exemption from the registration
requirements of the Securities Act of 1933 afforded by Section 3(a)(9) thereof. The notes pay interest (“Total

36

Interest”) on a quarterly basis beginning August 15, 2009 at a rate of 3.75% per annum plus additional interest,
which is based on the amount of cash dividends paid during the prior three-month period ending on the record date
for such interest payment multiplied by the total number of shares of its common stock into which the debt will be
convertible on such record date. Notwithstanding the foregoing, however, the interest payable on each interest
payment date shall be the higher of (i) the Total Interest or (ii) 6.75% per annum. The notes are convertible into our
common stock at the holder’s option. The conversion price of $16.25 per share (approximately 61.5366 shares of
common stock per $1,000 principal amount of notes) is subject to adjustment for various events, including the
issuance of stock dividends. The notes will mature on November 15, 2014. We will redeem on June 30, 2014 and at
the end of each interest accrual period thereafter an additional amount, if any, of the notes necessary to prevent the
notes from being treated as an “Applicable High Yield Discount Obligation” under the Internal Revenue Code. If a
fundamental change (as defined in the indenture) occurs, we will be required to offer to repurchase the notes at
100% of their principal amount, plus accrued interest and, under certain circumstances, a “make whole” payment.

Enacted and proposed excise tax increases. Effective April 1, 2009, the federal cigarette excise tax was
increased from $3.90 per carton ($0.39 per pack) to $10.07 per carton ($1.01 per pack). Wholesale shipment volume
in the first quarter of 2009 compared to 2008 for Liggett and for the total industry was negatively impacted by tax-
driven trade purchasing patterns in anticipation of the increase in the federal excise taxes on cigarettes. This
legislation included provisions that imposed this increase in excise taxes on inventory held as of April 1, 2009. As a
result, many wholesalers and retailers significantly reduced their inventory levels as of March 31, 2009 to minimize
any such taxes owed on such inventory. In 2009, 14 states and the District of Columbia enacted increases to state
excise taxes and further increases in states’ excise taxes are expected.

Family Smoking Prevention and Tobacco Control Act (FDA Legislation). On June 22, 2009, President
Obama signed into law the Family Smoking Prevention and Tobacco Control Act, referred to as the FDA
Legislation. Under the FDA Legislation, the U.S. Food and Drug Administration has been granted broad authority
over the manufacture, sale, marketing and packaging of tobacco products. We recorded expenses associated with
the FDA Legislation of $2,300 for the year ended December 31, 2009. See “Legislation and Regulation” below.

Philip Morris Brand Transaction. On February 19, 2009, Philip Morris exercised the Class B option to
purchase interest in Trademarks LLC. This option entitled Philip Morris to purchase the Class B redeemable non-
voting interest for $139,900, reduced by the amount previously distributed to Eve of $134,900. In connection with
the exercise of the Class B option, Philip Morris paid to Eve approximately $5,000 (including a pro-rata share of its
guaranteed payment) and Eve was released from its guaranty. We recognized a gain of $5,000 in connection with the
transaction in 2009.

NPM Adjustment.

In March 2006, an economic consulting firm selected pursuant to the MSA rendered its
final and non-appealable decision that the MSA was a “significant factor contributing to” the loss of market share of
Participating Manufacturers for 2003. The economic consulting firm subsequently rendered the same decision with
respect to 2004, 2005 and 2006. As a result, the manufacturers are entitled to potential NPM Adjustments to their
2003, 2004, 2005 and 2006 MSA payments. The Participating Manufacturers are also entitled to potential NPM
Adjustments to their 2007, 2008 and 2009 payments pursuant to an agreement entered into in June 2009 between the
OPMs and the Settling States under which the OPMs agreed to make certain payments for the benefit of the Settling
States, in exchange for which the Settling States stipulated that the MSA was a “significant factor contributing to”
the loss of market share of Participating Manufacturers in 2007, 2008 and 2009. A Settling State that has diligently
enforced its qualifying escrow statute in the year in question may be able to avoid application of the NPM
Adjustment to the payments made by the manufacturers for the benefit of that state or territory.

For 2003 through 2009 Liggett and Vector Tobacco disputed that they owe the Settling States the NPM
Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett and Vector Tobacco have
withheld payment associated with these NPM Adjustment amounts. The total amount withheld or paid into a
disputed payment account by Liggett and Vector Tobacco for 2003 through 2009 is $21,446. In 2003, Liggett and
Vector Tobacco paid the NPM adjustment amount of $9,345 to the Settling States although both companies continue
to dispute this amount. At December 31, 2009, included in “Other assets” on our consolidated balance sheet was a
noncurrent receivable of $6,542 relating to such payment.

37

The following amounts have not been expensed by the Company as they relate to Liggett and Vector Tobacco’s

NPM Adjustment claims for 2003 through 2009: $6,542 for 2003, $3,789 for 2004 and $800 for 2005.

Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation has been filed in 49
Settling States over the issue of whether the application of the NPM Adjustment for 2003 is to be determined
through litigation or arbitration. These actions relate to the potential NPM Adjustment for 2003, which the
independent auditor under the MSA previously determined to be as much as $1,200,000 for all Participating
Manufacturers. All but one of the 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana Supreme Court,
ruled that Montana’s claim of diligent enforcement must be litigated. In response to a proposal from the OPMs and
many of the SPMs, 46 of the Settling States, representing approximately 90% of the allocable share of the Settling
States, entered into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM
Adjustment for 2003. The agreement provides for selection of the arbitration panel beginning November 1, 2009
and that the parties and the arbitrators will thereafter establish the schedule and procedures for the arbitration.
Because states representing more than 80% of the allocable share signed the agreement, signing states will receive a
20% reduction of any potential 2003 NPM adjustment. It is anticipated that the arbitration will commence in 2010.
There can be no assurance that Liggett or Vector Tobacco will receive any adjustment as a result of these
proceedings.

Tobacco Settlement Agreements. Vector Tobacco has not made MSA payments on sales of its QUEST 3
product as Vector Tobacco believes that QUEST 3 does not fall within the definition of a cigarette under the MSA.
Vector discontinued the manufacture and sale of QUEST in 2009. There can be no assurance that Vector Tobacco’s
assessment is correct and that additional payments under the MSA for QUEST 3 will not be owed.

In 2003, in order to resolve any potential issues with Minnesota as to Liggett’s ongoing economic settlement
obligations, Liggett negotiated a $100 a year payment to Minnesota, to be paid any year cigarettes manufactured by
Liggett are sold in that state. In 2004, the Attorneys General for each of Florida, Mississippi and Texas advised
Liggett that they believed that Liggett has failed to make all required payments under the respective settlement
agreements with these states for the period 1998 through 2003 and that additional payments may be due for 2004
and subsequent years. Liggett believes the states’ allegations are without merit, based, among other things, on the
language of the most favored nation provisions of the settlement agreements. During 2009, Liggett reversed a
previously recorded accrual of $2.5 million with respect to this matter. There can be no assurance that Liggett will
resolve these matters and that Liggett will not be required to make additional material payments, which payments
could adversely affect our consolidated financial position, results of operations or cash flows.

Vector Tobacco Restructuring.

In March 2009, Vector Research eliminated nine full-time positions in
connection with the Board of Directors 2006 decision to discontinue the genetics operation and not to pursue FDA
approval of QUEST as a smoking cessation aide, due to the projected significant additional time and expense
involved in seeking such approval.

Awards of Restricted Shares and Options.

In April 2009, our President and Chief Executive Officer was
awarded a restricted stock grant of 525,000 shares of our common stock pursuant to our Amended and Restated
1999 Long-Term Incentive Plan. Under the terms of the award, one-fifth of the shares vest on September 15, 2010,
with an additional one-fifth vesting on each of the four succeeding one-year anniversaries of the first vesting date
through September 15, 2014. In the event that his employment with us is terminated for any reason other than his
death, his disability or a change of control (as defined in this Restricted Share Agreement) of ours, any remaining
balance of the shares not previously vested will be forfeited by him. In December 2009, options for 1,120,000 shares
were issued to four of our executive officers. The options, which are exercisable at $14.07 per share, vest on
December 3, 2013. The fair market value of the restricted shares and options on the dates of grant was $11,703,
which is being amortized over the vesting period as a charge to compensation expense.

Investment in Real Estate.

In March 2008, a subsidiary of New Valley purchased a loan collateralized by a
substantial portion of a 450-acre approved master planned community in Palm Springs, California known as

38

“Escena.” The loan, which was in foreclosure, was purchased for its $20,000 face value plus accrued interest and
other costs of $1,445. The collateral consists of 867 residential lots with site and public infrastructure, an 18-hole
golf course, a substantially completed clubhouse, and a seven-acre site approved for a 450-room hotel.

In April 2009, New Valley’s subsidiary entered into a settlement agreement with a guarantor of the loan, which
requires the guarantor to satisfy its obligations under a completion guaranty by completing improvements to the
project in settlement, among other things, of its payment guarantees. In addition, the guarantor agreed to pay
approximately $250 in legal fees and $1,000 of delinquent taxes and penalties and post a letter of credit to secure its
construction obligations. As a result of this settlement, we calculated the fair market value of the investment as of
March 31, 2009, utilizing the most recent “as is” appraisal of the collateral and the value of the completion guaranty
less estimated costs to dispose of the property. Based on these estimates, we determined that the fair market value
was less than the carrying amount of the mortgage receivable at March 31, 2009, by approximately $5,000.
Accordingly, the reserve was increased and a charge of $5,000 was recorded in the first quarter of 2009. On April 15,
2009, New Valley completed the foreclosure process and on April 16, 2009, took title to the property. We
reclassified the loan from “Mortgage receivable” at March 31, 2009 to “Investment in real estate” at June 30, 2009
on our consolidated balance sheet. It was carried at $12,204 as of December 31, 2009.

We recorded a loss of $908 for the year ended December 31, 2009 from the Escena operations.

Real Estate Activities. New Valley accounts for its 50% interest in Douglas Elliman Realty LLC and its 40%
interest in New Valley Oaktree Chelsea Eleven LLC on the equity method. Douglas Elliman Realty operates the
largest residential brokerage company in the New York metropolitan area.

New Valley Oaktree Chelsea Eleven, LLC.

In September 2008, a subsidiary of New Valley (“New Valley
Chelsea”) purchased for $12,000 a 40% interest in New Valley Oaktree Chelsea Eleven, LLC, which lent $29,000
and contributed $1,000 in capital to Chelsea Eleven LLC, which is developing a condominium project in
Manhattan, New York. The development consists of 54 luxury residential units and one commercial unit. The
loan from New Valley Oaktree is subordinate to a $96,000 construction loan (approximately $49,200 outstanding at
December 31, 2009) and a $24,000 mezzanine loan plus accrued interest (approximately $28,000 at December 31,
2009). The loan from New Valley Oaktree bears interest at 60.25% per annum, compounded monthly, with $3,750
initially being held in an interest reserve, from which five monthly payments of $300 have been paid to New Valley.

New Valley Chelsea is a variable interest entity; however, we are not the primary beneficiary. Our maximum
exposure to loss as a result of our investment in Chelsea is $12,232. This investment is being accounted for under the
equity method. During the first three months of 2009, we received a distribution of $594. In July 2009, we lent $467
to New Valley Oaktree, of which $250 was repaid in August 2009.

A temporary certificate of occupancy was obtained in October 2009 and, as of March 1, 2010, sales of eight
units have closed. As of December 31, 2009, Chelsea had approximately $203,186 of total assets and $126,220 of
total liabilities, excluding amounts owed to New Valley Chelsea (approximately $56,900 at December 31, 2009).
New Valley recorded equity income of $1,500 for the twelve months ended December 31, 2009 related to New
Valley Chelsea.

Aberdeen Townhomes LLC.

In June 2008, a subsidiary of New Valley purchased a preferred equity interest in
Aberdeen Townhomes LLC for $10,000. Aberdeen acquired five townhome residences located in Manhattan, New
York, which it is in the process of rehabilitating and selling. In the event that Aberdeen makes distributions of cash,
New Valley is entitled to a priority preferred return of 15% per annum until it has recovered its invested capital. New
Valley is entitled to 25% of subsequent cash distributions of profits until it has achieved an annual 18% internal rate
of return. New Valley is then entitled to 20% of subsequent cash distributions of profits until it has achieved an

39

annual 23% IRR. After New Valley has achieved an annual 23% IRR, it is then entitled to 10% of any remaining
cash distributions of profits. Our investment in Aberdeen Townhomes consists of the following:

Balance as of January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ —
10,000
(3,500)

Purchase of preferred equity interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance as of January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred return distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,500
(3,500)
(1,752)

Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,248

In September 2009, one of the five townhomes was sold and the mortgage of approximately $8,700 was retired.
We received a preferred return distribution of approximately $1,752. We did not record a gain or loss on the sale.

Mortgages on the four remaining Aberdeen townhomes with a balance of approximately $31,887 as of
December 31, 2009 matured during 2009. These mortgages had not been refinanced or paid and were in default as of
December 31, 2009. In January 2010, one of the four remaining townhomes was sold and the mortgage of
approximately $4,550 was retired. We received a preferred return distribution of approximately $1,001 in
connection with the sale. Aberdeen is in discussions with the lender related to the three remaining mortgages,
which are in default, although there can be no assurance that an agreement will be reached.

In February 2009, the managing member of Aberdeen Townhomes resigned, and a subsidiary of New Valley
became the new managing member as of March 1, 2009. Aberdeen is a variable interest entity; however, even as the
managing member, we are not the primary beneficiary as other parties to the investment would absorb a majority of
the variable interest entity’s losses under the current arrangement. Our maximum exposure to loss on our investment
in Aberdeen is $1,248 as of December 31, 2009.

On June 15, 2009, we entered into a line of credit in the amount of $250 on behalf of Aberdeen. As of
December 31, 2009, approximately $233 was outstanding on the line of credit; however, the outstanding amount
was fully paid upon the sale of a townhome in January 2010.

Sale of St. Regis Hotel.

In March 2008, 16th and K Holdings LLC, in which New Valley holds a 50% interest,
closed on the sale of 90% of the St. Regis Hotel in Washington, D.C. In addition to retaining a 3% interest, net of
incentives, in the St. Regis Hotel, New Valley received $16,406 upon the sale of the hotel. We recorded the $16,406
as an investing activity in the consolidated statement of cash flows for the year ended December 31, 2008. New
Valley recorded equity income of $2,084 in 2009 and equity losses of $3,796 and $2,344 in 2008, and 2007,
respectively, associated with 16th and K Holdings LLC. For the year ended December 31, 2008, New Valley also
recorded equity income of $16,363 in connection with the distributions received in excess of the carrying amount of
the investment in the St. Regis Hotel and we have no legal obligation to make additional investments in the hotel. In
December 2009, we received $2,084 in connection with the sale of the tax credits which was recorded as equity
income for the year ended December 31, 2009. New Valley anticipates receiving an additional $2,700 in various
installments between 2010 and 2012.

Losses on Long-term Investments. We recorded a loss of $21,900 in 2008 due to the performance of three of
our long-term investments in various investment funds in 2008. During 2008, one of our long-term investments was
impaired due to a portion of its underlying assets being held in an account with the European subsidiary of Lehman
Brothers Holdings Inc. while our other long-term investments were impaired as a result of the funds’ performances
in 2008. We record impairment charges when it is determined an other-than-temporary decline in fair value exists in
any of our long-term investments. Thus, future impairment charges may occur. In April 2008, we elected to
withdraw our investment in Jefferies Buckeye Fund, LLC (“Buckeye Fund”), a privately managed investment
partnership, of which Jefferies Asset Management, LLC is the portfolio manager. We recorded a loss of $567 during
the first quarter of 2008 associated with the Buckeye Fund’s performance, which has been included as “Other
expense” on our consolidated statement of operations. We received proceeds of $8,328 in May 2008 and received an
additional $925 of proceeds in 2009, which was included in “Other current assets” on our consolidated balance
sheet as of December 31, 2008.

40

NASA Settlement.

In 1994, New Valley commenced an action against the United States government seeking
damages for breach of a launch services agreement covering the launch of one of the Westar satellites owned by
New Valley’s former Western Union satellite business. In March 2007, the parties entered into a Stipulation for
Entry of Judgment to settle New Valley’s claims and, pursuant to the settlement, $20,000 was paid in May 2007. In
the first quarter of 2007, we recognized a pre-tax gain of $19,590, which consisted of other non-operating income of
$20,000 and $410 of selling, general and administrative expenses, in connection with the settlement.

Recent Developments in Tobacco-Related Litigation

The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced
against Liggett and other cigarette manufacturers. As of December 31, 2009, there were approximately 7,200
individual suits (excluding approximately 100 individual cases pending in West Virginia state court as part of a
consolidated action; Liggett has been severed from the trial of the consolidated action), seven purported class
actions and four healthcare cost recovery actions pending in the United States in which Liggett or us, or both, were
named as a defendant.

Liggett Only Cases.

In April 2004, in Davis v. Liggett Group, a Florida state court jury awarded compen-
satory damages of $540 against Liggett, plus interest and attorneys’ fees. This award is final and was paid by
Liggett. There are currently five cases pending where Liggett is the only tobacco company defendant. Cases where
Liggett is the only defendant could increase substantially as a result of the Engle progeny cases. In February 2009, in
Ferlanti v. Liggett Group, a Florida state court jury awarded compensatory damages of $1,200 against Liggett, but
found that the plaintiff was 40% at fault. Therefore, plaintiff was awarded $720 in compensatory damages plus $96
in expenses. Punitive damages were not awarded. Liggett appealed the award. In May 2009, the court granted
plaintiff’s motion for an award of attorneys’ fees but the amount has not yet been determined. In Hausrath v. Philip
Morris, a case pending in New York state court, plaintiffs recently dismissed all defendants other than Liggett. The
other three individual actions, in which Liggett is the only tobacco company defendant, are dormant.

Engle Progeny Cases.

In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co.
rendered a $145,000,000
punitive damages verdict in favor of a “Florida Class” against certain cigarette manufacturers, including Liggett.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle, which decertified the class on a prospective
basis, and affirmed the appellate court’s reversal of the punitive damages award, former class members had one year
from January 11, 2007 in which to file individual lawsuits. In addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in Engle, are attempting to avail themselves of the Engle
ruling. Lawsuits by individuals requesting the benefit of the Engle ruling, whether filed before or after the
January 11, 2007 deadline, are referred to as the “Engle progeny cases.” Liggett and/or the Company have been
named in approximately 7,160 Engle progeny cases in both state and federal courts in Florida. Other cigarette
manufacturers have also been named as defendants in these cases. These cases include approximately 8,585
plaintiffs, approximately 3,860 of whom have claims pending in federal court. Duplicate cases were filed in federal
and state court on behalf of approximately 660 plaintiffs. The majority of the cases pending in federal court are
stayed pending the outcome of an appeal to the United States Court of Appeals for the Eleventh Circuit of several
district court orders in which it was found that the Florida Supreme Court’s decision in Engle was unconstitutional.
The number of progeny cases will likely increase as the courts may require multi-plaintiff cases to be severed into
individual cases. The total number of plaintiffs may also increase as a result of attempts by existing plaintiffs to add
additional parties. As of December 31, 2009, 42 alleged Engle progeny cases, where Liggett is currently named as a
defendant, were scheduled for trial in 2010. As of December 31, 2009, ten Engle progeny cases have been tried
resulting in eight plaintiff verdicts and two defense verdicts. In one of these cases, the Campbell case, the jury
awarded $7,800 in compensatory damages against all defendants, $156 of which was awarded against Liggett.
These cases are all currently on appeal. In June 2002, the jury in Lukacs v. R. J. Reynolds Tobacco Company, an
individual case brought under the third phase of the Engle case, awarded $37,500, (subsequently reduced by the
court to $24,835) of compensatory damages, plus interest, jointly and severally, against Liggett and two other
cigarette manufacturers and found Liggett 50% responsible for the damages. In November 2008, the court entered
final judgment. The defendants have appealed. The plaintiffs are seeking an award of attorneys’ fees from Liggett. It
is possible that additional cases could be decided unfavorably and that there could be further adverse developments
in the Engle case. Liggett may enter into discussions in an attempt to settle particular cases if it believes it is

41

appropriate to do so. We cannot predict the cash requirements related to any future settlements and judgments,
including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met.

Critical Accounting Policies

General. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses. Significant estimates subject to material changes in the near term include restructuring
and impairment charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional
accruals, sales returns and allowances, actuarial assumptions of pension plans, the estimated fair value of embedded
derivative liabilities, settlement accruals restructuring, valuation of investments, including other than temporary
impairments to such investments, accounting for investments in equity securities, and litigation and defense costs.
Actual results could differ from those estimates.

Revenue Recognition. Revenues from sales of cigarettes are recognized upon the shipment of finished goods
when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sale price
is determinable and collectibility is reasonably assured. We provide an allowance for expected sales returns, net of
any related inventory cost recoveries. In accordance with authoritative guidance on how taxes collected from
customers and remitted to governmental authorities should be presented in the income statement (that is, gross
versus net presentation)”, our accounting policy is to include federal excise taxes in revenues and cost of goods sold.
Such revenues and cost of sales totaled $377,771, $168,170 and $176,269 for the years ended December 31, 2009,
2008 and 2007, respectively. Since our primary line of business is tobacco, our financial position and our results of
operations and cash flows have been and could continue to be materially adversely affected by significant unit sales
volume declines, litigation and defense costs, increased tobacco costs or reductions in the selling price of cigarettes
in the near term.

Marketing Costs. We record marketing costs as an expense in the period to which such costs relate. We do not
defer the recognition of any amounts on our consolidated balance sheets with respect to marketing costs. We
expense advertising costs as incurred, which is the period in which the related advertisement initially appears. We
record consumer incentive and trade promotion costs as a reduction in revenue in the period in which these
programs are offered, based on estimates of utilization and redemption rates that are developed from historical
information.

Restructuring and Asset Impairment Charges. We have recorded charges related to employee severance and
benefits, asset impairments, contract termination and other associated exit costs during 2003, 2004, 2006 and 2009.
The calculation of severance pay requires management to identify employees to be terminated and the timing of
their severance from employment. The calculation of benefits charges requires actuarial assumptions including
determination of discount rates. The asset impairments were recorded in accordance with authoritative guidance on
accounting for the impairment or disposal of long-lived assets, which requires management to estimate the fair
value of assets to be disposed of. These restructuring charges are based on management’s best estimate at the time of
restructuring. The status of the restructuring activities is reviewed on a quarterly basis and any adjustments to the
reserve, which could differ materially from previous estimates, are recorded as an adjustment to operating income.

Contingencies. We record Liggett’s product liability legal expenses and other litigation costs as operating,
selling, general and administrative expenses as those costs are incurred. As discussed in Note 12 to our consolidated
financial statements and above under the heading “Recent Developments in Tobacco-Related Litigation”, legal
proceedings are pending or threatened in various jurisdictions against Liggett. A large number of individual product
liability cases have been filed in state and federal courts in Florida as a result of the Florida Supreme Court’s
decision in the Engle case. We record a provision for loss in litigation in our consolidated financial statements when
we believe an unfavorable outcome is probable and the amount of loss can be reasonably estimated. In all our
pending legal proceedings, management is unable to make a reasonable estimate with respect to the amount or range
of loss that could result from an unfavorable outcome of pending tobacco-related litigation or the costs of defending
such cases, and, except for the previously mentioned case, we have not provided any amounts in our consolidated
financial statements for unfavorable outcomes, if any. You should not infer from the absence of any such reserve in

42

our consolidated financial statements that Liggett will not be subject to significant tobacco-related liabilities in the
future. Litigation is subject to many uncertainties, and it is possible that our consolidated financial position, results
of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-
related litigation.

Settlement Agreements. As discussed in Note 12 to our consolidated financial statements, Liggett and Vector
Tobacco are participants in the Master Settlement Agreement, the 1998 agreement to settle governmental healthcare
cost recovery actions brought by various states. Liggett and Vector Tobacco have no payment obligations under the
Master Settlement Agreement except to the extent their market shares exceed approximately 1.65% and 0.28%,
respectively, of total cigarettes sold in the United States. Their obligations, and the related expense charges under
the Master Settlement Agreement, are subject to adjustments based upon, among other things, the volume of
cigarettes sold by Liggett and Vector Tobacco, their relative market shares and inflation. Since relative market
shares are based on cigarette shipments, the best estimate of the allocation of charges under the Master Settlement
Agreement is recorded in cost of goods sold as the products are shipped. Settlement expenses under the Master
Settlement Agreement recorded in the accompanying consolidated statements of operations were $67,158 for 2009,
$48,554 for 2008 and $48,755 for 2007. Adjustments to these estimates are recorded in the period that the change
becomes probable and the amount can be reasonably estimated.

Derivatives; Beneficial Conversion Feature. We measure all derivatives, including certain derivatives
embedded in other contracts, at fair value and recognize them in the consolidated balance sheet as an asset or
a liability, depending on our rights and obligations under the applicable derivative contract. We have issued variable
interest senior convertible debt in a series of private placements where a portion of the total interest payable on the
debt is computed by reference to the cash dividends paid on our common stock. This portion of the interest payment
is considered an embedded derivative within the convertible debt, which we are required to separately value. As a
result, we have bifurcated this embedded derivative and estimated the fair value of the embedded derivative liability.
The resulting discount created by allocating a portion of the issuance proceeds to the embedded derivative is then
amortized to interest expense over the term of the debt using the effective interest method.

At December 31, 2009 and 2008, the fair value of derivative liabilities was estimated at $153,016 and $77,245,
respectively. The increase is due to the issuance of an additional $46,029 of convertible debt in 2009 and the losses
on the changes in fair value of convertible debt.

Changes to the fair value of these embedded derivatives are reflected on our consolidated statements of
operations as “Changes in fair value of derivatives embedded within convertible debt.” The value of the embedded
derivative is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible
debt as well as projections of future cash and stock dividends over the term of the debt. We recognized a loss of
$35,925 in 2009, a gain of $24,337 in 2008 and a loss of $6,109 in 2007 due to changes in the fair value of the
embedded derivatives.

After giving effect to the recording of embedded derivative liabilities as a discount to the convertible debt, our
common stock had a fair value at the issuance date of the notes in excess of the conversion price, resulting in a
beneficial conversion feature. The intrinsic value of the beneficial conversion feature was recorded as additional
paid-in capital and as a further discount on the debt. The discount is then amortized to interest expense over the term
of the debt using the effective interest rate method.

We recognized non-cash interest expense of $5,390, $5,805 and $3,768 in 2009, 2008 and 2007, respectively,
due to the amortization of the debt discount attributable to the embedded derivatives and $2,869, $2,963 and $1,868
in 2009, 2008 and 2007, respectively, due to the amortization of the debt discount attributable to the beneficial
conversion feature.

Inventories. Tobacco inventories are stated at lower of cost or market and are determined primarily by the
last-in, first-out (LIFO) method at Liggett and Vector Tobacco. Although portions of leaf tobacco inventories may
not be used or sold within one year because of time required for aging, they are included in current assets, which is
common practice in the industry. We estimate an inventory reserve for excess quantities and obsolete items based on
specific identification and historical write-offs, taking into account future demand and market conditions.

43

Stock-Based Compensation. Our stock-based compensation uses a fair value-based method to recognize
non-cash compensation expense for share-based transactions. Under the fair value recognition provisions, we
recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for
those shares expected to vest on a straight line basis over the requisite service period of the award. We recognized
stock-based compensation expense of $292, $186 and $197 in 2009, 2008 and 2007 related to the amortization of
stock option awards and $3,350, $3,364 and $3,332 related to the amortization of restricted stock grants. As of
December 31, 2009 and 2008, there was $5,171 and $255, respectively, of total unrecognized cost related to
employee stock options and $5,705 and $2,591, respectively, of total unrecognized cost related to restricted stock
grants. See Note 11 to our consolidated financial statements.

Employee Benefit Plans. The determination of our net pension and other postretirement benefit income or
expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those
assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of
increase in compensation and healthcare costs. We determine discount rates by using a quantitative analysis that
considers the prevailing prices of investment grade bonds and the anticipated cash flow from our two qualified
defined benefit plans and our postretirement medical and life insurance plans. These analyses construct a
hypothetical bond portfolio whose cash flow from coupons and maturities match the annual projected cash flows
from our pension and retiree health plans. As of December 31, 2009, our benefit obligations and service cost were
computed assuming a discount rate of 5.75% and 6.75%, respectively. In determining our expected rate of return on
plan assets we consider input from our external advisors and historical returns based on the expected long-term rate
of return is the weighted average of the target asset allocation of each individual asset class. Our actual 10-year
annual rate of return on our pension plan assets was 3.0%, 2.5% and 6.7% for the years ended December 31, 2009,
2008 and 2007, respectively, and our actual five-year annual rate of return on our pension plan assets was 3.5%,
1.2% and 11.3% for the years ended December 31, 2009, 2008 and 2007, respectively. In computing expense for the
year ended December 31, 2010, we will use an assumption of a 7% annual rate of return on our pension plan assets.
In accordance with accounting principles generally accepted in the United States of America, actual results that
differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our
recognized income or expense in such future periods. While we believe that our assumptions are appropriate,
significant differences in our actual experience or significant changes in our assumptions may materially affect our
future net pension and other postretirement benefit income or expense.

Net pension expense for defined benefit pension plans and other postretirement benefit expense aggregated
approximately $4,435, $3,445 and $3,885 for 2009, 2008 and 2007, respectively, and we currently anticipate such
expense will be approximately $5,000 for 2010. In contrast, our funding obligations under the pension plans are
governed by the Employee Retirement Income Security Act (“ERISA”). To comply with ERISA’s minimum
funding requirements, we do not currently anticipate that we will be required to make any funding to the tax
qualified pension plans for the pension plan year beginning on January 1, 2010 and ending on December 31, 2010.

In September 2006, the FASB issued amended authoritative guidance over employers’ accounting for defined
benefit pension and other postretirement plans requiring an employer to recognize the overfunded or underfunded
status of their benefit plans as an asset or liability in its balance sheet and to recognize changes in that funded status
in the year in which the changes occur as a component of other comprehensive income. The funded status is
measured as the difference between the fair value of the plan’s assets and its benefit obligation. The prospective
requirement to recognize the funded status of a benefit plan and to provide the required disclosures became effective
for us on December 31, 2006. In addition, the amended guidance requires an employer to measure benefit plan
assets and obligations that determine the funded status of a plan as of the end of its fiscal year. Prior to the adoption
of this guidance, we measured the funded status of our plans at September 30. The new measurement date
requirements became effective for us on December 31, 2008.

Long-Term Investments and Impairments. At December 31, 2009, we had long-term investments of $50,323,
which consisted primarily of investment partnerships investing in investment securities and real estate. The
investments in these investment partnerships are illiquid and the ultimate realization of these investments is subject
to the performance of the underlying partnership and its management by the general partners. The estimated fair
value of the investment partnerships is provided by the partnerships based on the indicated market values of the
underlying assets or investment portfolio. Gains are recognized when realized in our consolidated statement of

44

operations. Losses are recognized as realized or upon the determination of the occurrence of an other-than-tempo-
rary decline in fair value. On a quarterly basis, we evaluate our investments to determine whether an impairment has
occurred. If so, we also make a determination of whether such impairment is considered temporary or oth-
er-than-temporary. We believe that the assessment of temporary or other-than-temporary impairment is facts and
circumstances driven. However, among the matters that are considered in making such a determination are the
period of time the investment has remained below its cost or carrying value, the severity of the decline, the
likelihood of recovery given the reason for the decrease in market value and our original expected holding period of
the investment.

Income Taxes. The application of income tax law is inherently complex. Laws and regulations in this area are
voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and
judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and
regulations change over time and, as a result, changes in our subjective assumptions and judgments may materially
affect amounts recognized in our consolidated financial statements. See Note 10 to our consolidated financial
statements for additional information regarding our accounting for income taxes and uncertain tax positions.

Results of Operations

The following discussion provides an assessment of our results of operations, capital resources and liquidity
and should be read in conjunction with our consolidated financial statements and related notes included elsewhere
in this report. The consolidated financial statements include the accounts of VGR Holding, Liggett, Vector Tobacco,
Liggett Vector Brands, New Valley and other less significant subsidiaries.

For purposes of this discussion and other consolidated financial reporting, our significant business segments
for the three years ended December 31, 2009 were Liggett, Vector Tobacco, and Real Estate. The Liggett segment
consists of the manufacture and sale of conventional cigarettes by Liggett and Vector Tobacco. The Vector Tobacco
segment includes research relating to reduced risk cigarette products, as well as until 2009 the marketing of the low
nicotine and nicotine-free cigarette products, and, for segment reporting purposes, excludes Vector Tobacco’s
conventional cigarette business. The Real Estate segment includes our equity income, investment in real estate and
investments in non-consolidated real estate businesses.

2009

Year Ended December 31,
2008
(Dollars in thousands)

2007

Revenues:

Liggett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $799,955(1) $562,660
2,526
Vector Tobacco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,539(2)

$551,687
3,743

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $801,494

$565,186

$555,430

Operating income (loss):

Liggett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $168,032(1) $170,181
(8,331)
Vector Tobacco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7,117)(2)

$159,347
(9,896)

Total tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

160,915
(886)
(16,862)

161,850
—
(26,546)

149,451
—
(23,947)

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . $143,167

$135,304

$125,504

(1) Includes a gain of $5,000 on the Philip Morris brand transaction completed in February 2009.

(2) Includes restructuring costs of $900 in 2009.

45

2009 Compared to 2008

Revenues. Total revenues were $801,494 for the year ended December 31, 2009 compared to $565,186 in
2008. This $236,308 (41.8%) increase in revenues was due to a $237,295 (42.2%) increase in revenues at Liggett
and a $987 (39.1%) decline in revenues at Vector Tobacco. The increase in Liggett’s revenues was primary
associated with the increase in federal excise taxes on cigarettes effective April 1, 2010 discussed below.

Tobacco Revenues.

In June 2009, Liggett increased the list price of all brands by $0.10 per carton in
conjunction with the user fees imposed by the passage of the bill granting the FDA jurisdiction over tobacco. In
April 2008, Liggett increased the list price of GRAND PRIX by $0.40 per carton. In addition, in April 2008, Liggett
decreased the early payment terms on its cigarettes from 2.75% to 2.25% of invoice amount. In August 2008,
Liggett increased the list price of LIGGETT SELECT, EVE and GRAND PRIX by $1.00 per carton. Liggett
increased the list price of LIGGETT SELECT and EVE by $0.90 per carton in February 2009 and an additional
$7.10 per carton in March 2009. Liggett increased the list price of GRAND PRIX by $7.20 per carton in March
2009.

All of Liggett’s sales for 2009 and 2008 were in the discount category. For the year ended December 31, 2009,
net sales at Liggett totaled $799,955, compared to $562,660 in 2008. Revenues increased by 42.2% ($237,295) due
to a favorable price variance of $226,469 and sales mix of $14,457 primarily related to LIGGETT SELECT and
GRAND PRIX offset by an unfavorable volume variance of $3,261 (approximately 49.9 million units). The
favorable price variance was primarily attributable to increases of $209,601 in federal excise taxes associated with
the increase in tax rate effective April 1, 2010. Net revenues of the LIGGETT SELECT brand increased $7,661 for
the year ended December 31, 2009 compared to 2008 from a favorable variance from pricing of $60,304 ($29,024
attributable to the excise tax increase) offset by a decrease in unit volume of 29.0% (751.1 million units). Net
revenues of the GRAND PRIX brand increased $45,366 for 2009 compared to 2008 from a favorable variance from
pricing of $71,332 ($48,048 attributable to the excise tax increase) offset by a decrease in volume of 14.8%
(416.5 million units). Net revenues of Liggett’s PYRAMID brand increased $103,019 due to increased volume of
1,197.7 million units following the brand’s repositioning in the second quarter of 2009.

Revenues at Vector Tobacco for the year ended December 31, 2009 were $1,539 compared to $2,526 in the
2008 period due to decreased sales volume. Vector Tobacco’s revenues in both periods related to sales of QUEST.

Tobacco Gross Profit. Tobacco gross profit was $224,109 for the year ended December 31, 2009 compared to
$229,887 in 2008. This represented a decrease of $5,778 (2.5%) when compared to the same period in 2008, due
primarily to decreased sales volume of LIGGETT SELECT and GRAND PRIX for the year ended December 31,
2009. Liggett’s brands contributed 100% to our gross profit in 2009 compared to 99.6% to tobacco gross profit in
2008.

Liggett’s gross profit of $224,278 for the year ended December 31, 2009 decreased $4,704 from gross profit of
$228,982 in 2008. As a percent of revenues (excluding federal excise taxes), gross profit at Liggett decreased to
53.1% for the year ended December 31, 2009 compared to gross profit of 58.0% for 2008. This decrease in Liggett’s
gross profit in the 2009 period was attributable primarily to volume mix.

Vector Tobacco’s gross loss was $169 for the year ended December 31, 2009 compared to gross profit of $905

in 2008. The decrease was due primarily to the reduced sales volume.

Expenses. Operating, selling, general and administrative expenses were $85,041 for the year ended Decem-
ber 31, 2009 compared to $94,583 in 2008, a decrease of $9,542 (10.1%). Expenses at Liggett were $61,246 for the
year ended December 31, 2009 compared to $58,801 in 2008, an increase of $2,445 or 4.2%. The increase in
expense at Liggett related to an increase in pension expense in the 2009 period compared to the 2008 period offset
by decreased product liability and other litigation costs. Liggett’s product liability expenses and other litigation
costs were approximately $6,000 in 2009 compared to $8,800 in 2008. Expenses at Vector Tobacco for the year
ended December 31, 2009 were $6,948 compared to expenses of $9,236 in 2008, primarily due to reduced research-
related expenses. Expenses at the corporate level decreased from $26,546 in 2008 to $15,961 in 2009 due primarily
to lower compensation expense and expenses associated with our Supplemental Retirement Plan in 2009 due to the
retirement of our former Executive Chairman on December 30, 2008. The real estate segment expenses of $886 in
2009 related to expenses incurred in connection with Escena’s operations.

46

For the year ended December 31, 2009, Liggett’s operating income decreased $2,149 to $168,032 compared to
$170,181 in 2008, primarily due to the decline in gross profit discussed above offset by the $5,000 gain from the
brands transaction. For year ended December 31, 2009, Vector Tobacco’s operating loss was $7,117 compared to a
loss of $8,331 for 2008 due to reduced employee expense and decreased research costs partially offset by lower
sales volume.

Other Income (Expenses). For the year ended December 31, 2009, other expenses were $114,630 compared
to $40,732 for the year ended December 31, 2008. For the year ended December 31, 2009, other expenses primarily
consisted of interest expense of $68,490, a loss on the extinguishment of the 5% Notes of $18,573, a loss of $8,500
associated with a decline in value of the former Escena mortgage receivable ($5,000) and the Aberdeen real estate
investment ($3,500), a loss of $35,925 for changes in fair value of derivatives embedded within convertible debt,
equity income of $15,213 on non-consolidated real estate businesses, and interest income of $492 offset by $1,153
of other expenses. The equity income of $15,213 for the 2009 period consisted of $11,429 from New Valley’s
investment in Douglas Elliman Realty, $2,084 from 16th and K, $1,500 from New Valley Oaktree Chelsea Eleven
LLC and $200 from another non-consolidated real estate business. For the year ended December 31, 2008, other
expenses consisted of interest expense of $62,335 and losses of $21,900 associated with the performance of three
investment partnerships, a decline in value of the former mortgage receivable of $4,000, a loss of $3,000 associated
with the performance of our investment securities available for sale and a loss of $3,500 associated with our
investment in Aberdeen, which was offset by equity income from non-consolidated real estate businesses of
$24,399, a gain from changes in fair value of derivatives embedded within convertible debt of $24,337, and interest
and dividend income of $5,864. The equity income of $24,399 for the 2008 period resulted from New Valley’s
investment in Douglas Elliman Realty which contributed $11,833 and $12,566 from 16th and K, which consisted of
equity losses from the operations of the St. Regis Hotel of $3,796 offset by income of $16,362 in connection with the
gain on the disposal of 16th and K’s interest in 90% of the St. Regis Hotel in Washington, D.C.

The value of the embedded derivatives is contingent on changes in interest rates of debt instruments maturing
over the duration of the convertible debt, our stock price as well as projections of future cash and stock dividends
over the term of the debt. The losses for the changes in fair value of the embedded derivatives in the year ended
December 31, 2009 was primarily the result of narrowing credit spreads in both the United States corporate credit
markets and the market for our debt in the 2009 period offset by interest payments. The gain from the embedded
derivatives in 2008 was primarily the result of interest payments during the period and increasing spreads between
corporate debt and convertible debt.

Income before income taxes.

Income before income taxes for the year ended December 31, 2009 was

$28,537 compared to income before income taxes of $94,572 in 2008.

Income tax provision. The income tax provision was $3,731 for the year ended December 31, 2009 compared
to an expense of $34,068 for the same period in 2008. Our provision for income taxes in interim periods is based on
an estimated annual effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary
operations. The annual effective income tax rate is reviewed and, if necessary, adjusted on a quarterly basis.

Vector’s income tax rates for the years ended December 31, 2009 and 2008 do not bear a customary
relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes and
interest and penalties accrued on unrecognized tax benefits offset by the impact of the domestic production
activities deduction. In addition, we recorded a benefit of $6,166 for the year ended December 31, 2009 resulting
from the reduction of a previously established valuation allowance of a deferred tax asset.

2008 Compared to 2007

Revenues. Total revenues were $565,187 for the year ended December 31, 2008 compared to $555,430 for
the year ended December 31, 2007. This $9,757 (1.8%) increase in revenues was due to a $10,973 (2.0%) increase in
revenues at Liggett offset by a decrease of $1,216 (32.5%) in revenues at Vector Tobacco.

Tobacco Revenues.

In April 2007, Liggett increased the list price of Grand Prix by an additional $1.00 per
carton. In September 2007, Liggett increased the list price of LIGGETT SELECT, EVE and GRAND PRIX by an
additional $0.70 per carton. In April 2008, Liggett increased the list price of GRAND PRIX by an additional $0.40

47

per carton. In addition, in April 2008, Liggett decreased the early payment terms on its cigarettes from 2.75% to
2.25% of invoice amount. In August 2008, Liggett increased the list price of LIGGETT SELECT, EVE and
GRAND PRIX by an additional $1.00 per carton. These price increases contributed to the increase in Liggett’s
revenues.

All of Liggett’s sales for 2008 and 2007 were in the discount category. For the year ended December 31, 2008,
net sales at Liggett totaled $562,660 compared to $551,687 for 2007. Revenues increased by 2.0% ($10,973) due to
a favorable price variance of $36,959 and sales of SNUS totaling $451 offset by a decline in unit sales volume
(approximately 399.4 million units) accounting for $24,478 in unfavorable volume variance and a $1,959 in
unfavorable sales mix. Net revenues of the LIGGETT SELECT brand decreased $12,435 for the year ended
December 31, 2008 compared to the same period in 2007, and its unit volume decreased 12.5% in the 2008 period
compared to 2007. Net revenues of the GRAND PRIX brand increased $22,832 in 2008 compared to the prior year
period and its unit volume increased by 2.7% in 2008 compared to 2007.

Revenues at Vector Tobacco were $2,527 for the year ended December 31, 2008 compared to $3,743 for the
year ended December 31, 2007 due to decreased sales volume. Vector Tobacco’s revenues in both periods related
primarily to sales of QUEST.

Tobacco Gross Profit. Tobacco gross profit was $229,887 for the year ended December 31, 2008 compared to
$218,351 for the year ended December 31, 2007. This represented an increase of $11,536 (5.3%) when compared to
the prior year, due primarily to increased prices and decreased promotional spending partially offset by higher
manufacturing expenses. Liggett’s brands contributed 99.6% of the tobacco gross profit and Vector Tobacco’s
brands contributed 0.4% for the year ended December 31, 2008. In 2007, Liggett’s brands contributed 99.5% to
tobacco gross profit and Vector Tobacco’s brands contributed 0.5%.

Liggett’s gross profit of $228,982 for the year ended December 31, 2008 increased $11,690 from gross profit of
$217,292 for the year ended December 31, 2007. As a percent of revenues (excluding federal excise taxes), gross
profit at Liggett increased to 58.0% in 2008 compared to 57.8% in 2007.

Vector Tobacco’s gross profit was $905 for the year ended December 31, 2008 compared to gross profit of

$1,059 for the same period in 2007. The decrease was due primarily increased pricing.

Expenses. Operating, selling, general and administrative expenses were $94,583 for the year ended Decem-
ber 31, 2008 compared to $92,967 in 2007, an increase of $1,616, or 1.7%. Expenses at Liggett were $58,801 for the
year ended December 31, 2008 compared to $57,996 in 2007, an increase of $805 or 1.4%. The increase in expenses
at Liggett in 2008 was due primarily to increased product liability legal expenses and other litigation costs. Liggett’s
product liability legal expenses and other litigation costs were $8,800 in 2008 compared to $7,800 in 2007.
Expenses at Vector Tobacco for the year ended December 31, 2008 were $9,236 compared to expenses of $11,024
for the year ended December 31, 2007 primarily due to reduced research-related expenses. Expenses at corporate
for the year ended December 31, 2008 were $26,546 compared to $23,947 in 2007 with the primary increase in
expenses resulting primarily from the recovery of insurance coverage in 2007. In August 2007, New Valley received
a favorable arbitral award in connection with a dispute with its insurer over reimbursement of legal fees paid in a
previously resolved stockholders’ derivative claim. New Valley and its insurer agreed to resolve this claim, and
certain other claims, for the payment to New Valley of $2,788. This settlement resulted in the recognition of a gain
in 2007 of approximately $2,400, net of legal fees, which was recorded as a reduction in corporate-level operating,
selling, administrative and general expenses.

For the year ended December 31, 2008, Liggett’s operating income increased to $170,181 compared to
$159,347 in 2007, primarily due to increased gross profit discussed above. For the year ended December 31, 2008,
Vector Tobacco’s operating loss was $8,331 compared to $9,896 for the year ended December 31, 2007 due to
reduced employee expense and decreased research costs partially offset by lower sales volume.

Other Income (Expenses). For the year ended December 31, 2008, other expenses were $40,732 compared to
income of $1,099 for the year ended December 31, 2007. For the year ended December 31, 2008, other expenses
consisted of interest expense of $62,335, losses of $21,900 associated with the performance of three investment
partnerships, a decline in value in the mortgage receivable of $4,000, a loss of $3,000 associated with the
performance of our investments securities available for sale and a loss of $3,500 associated with our investment in

48

Aberdeen, which was offset by equity income from non-consolidated real estate businesses of $24,399, a gain from
changes in fair value of derivatives embedded within convertible debt of $24,337, and interest and dividend income
of $5,864. For the year ended December 31, 2007, other income consisted of $20,000 for the NASA lawsuit
settlement, equity income from non-consolidated real estate businesses of $16,243, a gain from the exchange of the
LTS notes of $8,121 and interest and dividend income of $9,897 and was offset by interest expense of $45,762, a
loss on changes in fair value of derivatives embedded within convertible debt of $6,109 and a loss on investments of
$1,216.

The equity income of $24,399 for the 2008 period resulted from New Valley’s investment in Douglas Elliman
Realty which contributed $11,833 and $12,566 from 16th and K, which consisted of equity losses from the
operations of the St. Regis Hotel of $3,796 offset by income of $16,362 in connection with the gain on the disposal
of 16th and K’s interest in 90% of the St. Regis Hotel in Washington, D.C. The equity income from non-
consolidated real estate businesses of $16,243 for the year ended December 31, 2007 resulted from income of
$20,290 related to New Valley’s investment in Douglas Elliman Realty offset by losses of $2,344 in 16th and K and
$1,703 in two other real estate investments.

The value of the embedded derivative is contingent on changes in interest rates of debt instruments maturing
over the duration of the convertible debt, our stock price as well as projections of future cash and stock dividends
over the term of the debt. The gains from the embedded derivatives in the year ended December 31, 2008 were
primarily the result of interest payments during the period and increasing spreads between corporate convertible
debt. The loss from the embedded derivative for year ended December 31, 2007 was primarily the result of
decreasing long-term interest rates as compared to December 31, 2006 offset by the payment of interest during the
period, which reduced the fair value of derivatives embedded within convertible debt.

Income Before Income Taxes.

Income before income taxes was $94,572 and $126,603 for the years ended

December 31, 2008 and 2007, respectively.

Income Tax Provision. The income tax provision was $34,068 for the year ended December 31, 2008. This

compared to a tax provision of $52,800 for the year ended December 31, 2007.

Our income tax rate for the year ended December 31, 2008 did not bear a customary relationship to statutory
income tax rates as a result of the impact of nondeductible expenses and state income taxes offset by the impact of
the domestic production activities deduction, a reduction of $3,102 associated with the reversal of unrecognized tax
benefits as a result of the expiration of state income tax statutes. The 2007 period income tax benefit resulted
primarily from a reduction of $3,227 associated with the reversal of unrecognized tax benefits as a result of the
expiration of state income tax statutes and a $450 benefit from the settlement of a state tax assessment. The
reduction of valuation allowances occurred when deferred tax assets were recognized from net operating losses
which have previously been limited.

Liquidity and Capital Resources

Net cash and cash equivalents decreased by $1,651 in 2009 and $27,012 in 2008 and increased by $91,348 in

2007.

Net cash provided by operations was $5,667 in 2009, $91,265 in 2008 and $109,198 in 2007. The decrease
from 2008 to 2009 was primarily due to additional income tax payments in the 2009 period and the payment to the
Executive Chairman upon his retirement in accordance with our Supplemental Retirement Plan offset by increased
operating income. The decrease in cash provided by operations in 2008 compared to 2007 relates primarily to the
receipt of $19,590 in connection with the NASA settlement in 2007.

Cash used in investing activities was $6,816, $33,895 and $51,943 in 2009, 2008 and 2007, respectively. In
2009, cash was used for the purchase of investment securities of $12,427, capital expenditures of $3,848, an
increase in cash surrender value of corporate-owned life insurance policies of $839, an investment in non-
consolidated real estate assets of $474, a purchase of long-term investments of $51, offset by distributions from non-
consolidated real estate businesses of $6,730, proceeds from the liquidation of long-term investments of $2,254,
proceeds from the sale or maturity of investment securities of $78 and a decrease in restricted assets of $1,720. In
2008, cash was used for the purchase of the mortgage receivable of $21,704, the investment in Aberdeen for $10,000

49

and Chelsea for $12,000, the purchase of investment securities of $6,411, capital expenditures of $6,309, purchase
of preferred stock in other investments, including Castle Brands, of $4,250, an increase in the cash surrender value
of corporate-owned life insurance policies of $938, an increase in restricted assets of $411 and the purchase of long-
term investments of $51 offset by the distributions from non-consolidated real estate businesses of $19,393 and
from the proceeds from the liquidation of long-term investments of $8,334, and the proceeds from the sale of fixed
assets of $452. In 2007, cash was used for the net purchase of $40,091 of long-term investments, capital
expenditures of $5,189, the purchase of investment securities of $6,571, investment in non-consolidated real
estate businesses of $750, increase in the cash surrender value of corporate-owned life insurance policies of $838
and an increase in restricted assets of $492 offset by the return of capital contributions from non-consolidated real
estate businesses of $1,000.

In August 2006, we invested $25,000 in Icahn Partners, LP, a privately managed investment partnership, of
which Carl Icahn is the portfolio manager and the controlling person of the general partner and manager of the
partnership. In September 2007, we invested an additional $25,000 in Icahn Partners, LP. Based on public filings,
we believe affiliates of Mr. Icahn are the beneficial owners of approximately 19.4% of our common stock. On
November 1, 2006, we invested $10,000 in Jefferies Buckeye Fund, LLC, a privately managed investment
partnership, of which Jefferies Asset Management, LLC is the portfolio manager. Affiliates of Jefferies Asset
Management, LLC owned approximately 6.3% of our common stock at December 31, 2009. We also invested an
additional $15,000 in other investment partnerships in 2007. In April 2008, we elected to withdraw our investment
in Jefferies Buckeye Fund, LLC. We recorded a loss of $567 during the first quarter of 2008 associated with the
Buckeye Fund’s performance, which has been included as “Other expense” on our consolidated statement of
operations. We received proceeds of $8,328 in May 2008 from the Buckeye Fund and received an additional $925 of
proceeds in the first quarter of 2009.

Cash used in financing activities was $502 in 2009 and $84,382 in 2008. Cash provided by financing activities
was $34,093 in 2007. Cash used in financing activities in 2009 resulted from proceeds of debt issuance of $118,805,
excess tax benefit of options exercised of $9,162, and the proceeds from exercise of stock options of $1,194, offset
by cash used for distributions on common stock of $115,778, repayment of debt of $6,179, deferred financing
charges of $5,573, and net repayments over borrowings of debt under the revolver of $2,133. In 2008, cash was
primarily used for distributions on common stock of $103,870, repayments on debt of $6,329 and deferred financing
charges of $137, offset by the excess tax benefit of options exercised of $18,304, net borrowing under the revolver of
$4,733, debt issuance of $2,831, and the proceeds from the exercise of options of $86. In 2007, cash was provided
from the issuance of $165,000 of our 11% Senior Secured Notes due 2105, $8,000 of debt collateralized by Liggett’s
Mebane facility, $1,576 of other equipment financing at Liggett, $5,100 of proceeds from the exercise of options,
$2,055 representing the tax benefit of options exercised, offset by distributions on common stock of $99,249, the
repayment of $35,000 of debt associated with the Medallion purchase and $6,200 of other equipment debt, deferred
financing costs of $9,985 and net borrowings under the revolver of $2,796.

Liggett. Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $17,382 was
outstanding at December 31, 2009. Availability as determined under the facility was approximately $18,600
based on eligible collateral at December 31, 2009. The facility contains covenants that provide that Liggett’s
earnings before interest, taxes, depreciation and amortization, as defined under the facility, on a trailing twelve-
month basis, shall not be less than $100,000 if Liggett’s excess availability, as defined, under the facility is less than
$20,000. The covenants also require that annual capital expenditures, as defined under the facility, (before a
maximum carryover amount of $2,500) shall not exceed $10,000 during any fiscal year. At December 31, 2009,
management believed that Liggett was in compliance with all covenants under the credit facility; Liggett’s
EBITDA, as defined, were approximately $151,123 for the twelve months ended December 31, 2009.

In August 2007, Wachovia made an $8,000 term loan to 100 Maple LLC, a subsidiary of Liggett, within the
commitment under the existing credit facility. The $8,000 term loan is collateralized by the existing collateral
securing the credit facility, and is also collateralized by a lien on certain real property in Mebane, NC owned by 100
Maple LLC. The Mebane Property also secures the other obligations of Liggett under the credit facility. The $8,000
term loan did not increase the $50,000 borrowing amount of the credit facility, but did increase the outstanding
amounts under the credit facility by the amount of the term loan and proportionately reduces the maximum
borrowing availability under the facility.

50

In August 2007, Liggett and Wachovia amended the credit facility to permit the guaranty of our Senior Secured
Notes by each of Liggett and Maple and the pledging of certain assets of Liggett and Maple on a subordinated basis
to secure their guarantees. The credit facility was also amended to grant to Wachovia a blanket lien on all the assets
of Liggett and Maple, excluding any equipment pledged to current or future purchase money or other financiers of
such equipment and excluding any real property, other than the Mebane Property and other real property to the
extent its value is in excess of $5,000. In connection with the amendment, Wachovia, Liggett, Maple and the
collateral agent for the holders of our Senior Secured Notes entered into an intercreditor agreement, pursuant to
which the liens of the collateral agent on the Liggett and Maple assets will be subordinated to the liens of Wachovia
on the Liggett and Maple assets.

In August 2006, Liggett purchased equipment for $7,922 through a financing agreement, payable in 30
installments of $191 and then 30 installments of $103. Interest is calculated at 5.15%. Liggett was required to
provide a security deposit equal to 20% of the funded amount ($1,584).

In May 2007, Liggett purchased equipment for $1,576 through a financing agreement, payable in 60

installments of $32. Interest is calculated at 7.99%.

In August 2008, Liggett purchased equipment for $2,745 through a financing agreement, payable in 60
installments of $53. Interest is calculated at 5.94%. Liggett was required to provide a security deposit equal to
approximately 15% of the funded amount ($428).

Each of these equipment loans is collateralized by the purchased equipment.

Liggett and other United States cigarette manufacturers have been named as defendants in a number of direct,
third-party and purported class actions predicated on the theory that they should be liable for damages alleged to
have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. We believe, and have
been so advised by counsel handling the respective cases, that Liggett has a number of valid defenses to claims
asserted against it, however, litigation is subject to many uncertainties. In June 2002, the jury in an individual case
brought under the third phase of the Engle case awarded $24,835 of compensatory damages against Liggett and two
other defendants and found Liggett 50% responsible for the damages. As of December 31, 2009, interest on the
award was more than $15,000. It is possible that additional cases could be decided unfavorably. There are
approximately 7,160 Engle progeny cases, in state and federal courts in Florida, where Liggett (and other cigarette
manufacturers) and us, were named as defendants. These cases include approximately 8,585 plaintiffs. Approx-
imately 42 cases are currently scheduled for trial in 2010. To date, ten Engle progeny cases have gone to trial
resulting in eight plaintiff verdicts and two defense verdicts. In one of these cases, judgment was entered against
Liggett for $156. Liggett may enter into discussions in an attempt to settle particular cases if it believes it is
appropriate to do so. Management cannot predict the cash requirements related to any future settlements or
judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able
to be met. An unfavorable outcome of a pending smoking and health case could encourage the commencement of
additional similar litigation. In recent years, there have been a number of adverse regulatory, political and other
developments concerning cigarette smoking and the tobacco industry. These developments generally receive
widespread media attention. Neither we nor Liggett are able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation or regulation. See Note 12 to our
consolidated financial statements and “Legislation and Regulation” below for a description of legislation,
regulation and litigation.

Management is unable to make a reasonable estimate of the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases. It is possible that our
consolidated financial position, results of operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such tobacco-related litigation.

V.T. Aviation.

In February 2001, V.T. Aviation LLC, a subsidiary of Vector Research Ltd., purchased an
airplane for $15,500 and borrowed $13,175 to fund the purchase. The loan, which is collateralized by the airplane
and a letter of credit from us for $775, is guaranteed by Vector Research, VGR Holding and us. The loan is payable
in 119 monthly installments of $125 including annual interest of 2.31% above the 30-day commercial paper rate,
with a final payment of $2,224 in 2011, based on current interest rates.

51

VGR Aviation.

In February 2002, V.T. Aviation purchased an airplane for $6,575 and borrowed $5,800 to
fund the purchase. The loan is guaranteed by us. The loan is payable in 119 monthly installments of $40, including
annual interest at 2.75% above the 30-day commercial paper rate, with a final payment of $2,855 in 2012 based on
current interest rates. During the fourth quarter of 2003, this airplane was transferred to our direct subsidiary, VGR
Aviation LLC, which has assumed the debt.

Vector Tobacco. The purchase price for our 2002 acquisition of The Medallion Company, Inc. included
$60,000 in notes of Vector Tobacco. Of the notes, $25,000 were repaid in 2004. The remaining $35,000 of notes
bore interest at 6.5% per year, payable semiannually, and were paid in full from our available working capital on
April 2, 2007.

Vector. As described above under “Recent Developments”, our scheduled maturities in 2009 declined due to
extinguishments and exchanges of debt. On May 11, 2009, we issued in a private placement the 6.75% Note due
2014 in the principal amount of $50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005
principal amount of the 5% Notes, valued at 107% of principal amount. On June 30, 2009, we issued $106,940 of
our 6.75% Exchange Notes due 2014 in exchange for $99,944 aggregate principal amount of the 5% Notes due
2011, valued at 107% principal amount. On November 16, 2009, we exchanged approximately $555 aggregate
principal of the 5% Notes due 2011, valued at 107% principal amount, for $593 aggregate principal of our 6.75%
Exchange Notes due 2014 and retired the remaining $360 of the 5% Notes due 2011 for cash.

In August 2007, we sold $165,000 of our 11% Senior Secured Notes due 2015 in a private offering to qualified
institutional investors in accordance with Rule 144A of the Securities Act of 1933. In September 2009, we sold at
94% of face value an additional $85,000 principal amount of our 11% Senior Secured Notes due 2015. We received
net proceeds from the 2009 offering of approximately $79,900.

The Senior Secured Notes pay interest on a semi-annual basis at a rate of 11% per year and mature on
August 15, 2015. We may redeem some or all of the Senior Secured Notes at any time prior to August 15, 2011 at a
make-whole redemption price. On or after August 15, 2011 we may redeem some or all of the Senior Secured Notes
at a premium that will decrease over time, plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date. At any time prior to August 15, 2010, we may on any one or more occasions redeem up to 35% of
the aggregate principal amount of the Senior Secured Notes with the net proceeds of certain equity offerings at
111% of the aggregate principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to
the redemption date. In the event of a change of control, as defined in the indenture governing the Senior Secured
Notes, each holder of the Senior Secured Notes may require us to repurchase some or all of its Senior Secured Notes
at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and
liquidated damages, if any to the date of purchase.

The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by all of our
wholly-owned domestic subsidiaries that are engaged in the conduct of our cigarette businesses. In addition, some
of the guarantees are collateralized by second priority or first priority security interests in certain collateral of some
of the subsidiary guarantors pursuant to security and pledge agreements.

The indenture contains covenants that restrict the payment of dividends by us if our consolidated earnings
before interest, taxes, depreciation and amortization, which is defined in the indenture as Consolidated EBITDA,
for the most recently ended four full quarters is less than $50,000. The indenture also restricts the incurrence of debt
if our Leverage Ratio and our Secured Leverage Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively.
Our Leverage Ratio is defined in the indenture as the ratio of our and our guaranteeing subsidiaries’ total debt less
the fair market value of our cash, investments in marketable securities and long-term investments to Consolidated
EBITDA, as defined in the indenture. Our Secured Leverage Ratio is defined in the indenture in the same manner as

52

the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. The following table sum-
marizes the requirements of these financial covenants and the results of the calculation, as defined by the indenture.

Covenant

Indenture
Requirement

December 31,
2009

December 31,
2008

50,000
Consolidated EBITDA, as defined . . . . . . . . . . . . . . . . .
Leverage ratio, as defined . . . . . . . . . . . . . . . . . . . . . . . G3.0 to 1
Secured leverage ratio, as defined. . . . . . . . . . . . . . . . . . G1.5 to 1

$

$ 174,158
0.3 to 1
Negative

$ 181,007
0.1 to 1
Negative

We and our subsidiaries have significant indebtedness and debt service obligations. At December 31, 2009, we
and our subsidiaries had total outstanding indebtedness (including the embedded derivative liabilities related to our
convertible notes) of $510,000. We must redeem $11,000 of our 3.875% Variable Interest Senior Convertible
Debentures by June 15, 2011, and we may be required to purchase $99,000 of the debentures on June 15, 2012.
Approximately $157,500 of our 3.75% convertible debt matures in 2014 and $250,000 of our 11% senior secured
notes matures in 2015. In addition, subject to the terms of any future agreements, we and our subsidiaries will be
able to incur additional indebtedness in the future. There is a risk that we will not be able to generate sufficient funds
to repay our debt. If we cannot service our fixed charges, it would have a material adverse effect on our business and
results of operations.

We believe that our cigarette operations are positive cash flow generating units and will continue to be able to

sustain their operations without any significant liquidity concerns.

In order to meet the above liquidity requirements as well as other anticipated liquidity needs in the normal
course of business, we had cash and cash equivalents of approximately $209,000, investment securities available for
sale of approximately $52,000, long-term investments with an estimated value of approximately $70,000 and
availability under Liggett’s credit facility of approximately $18,600 at December 31, 2009. Management currently
anticipates that these amounts, as well as expected cash flows from our operations, proceeds from public and/or
private debt and equity financing, management fees and other payments from subsidiaries should be sufficient to
meet our liquidity needs over the next 12 months. We may acquire or seek to acquire additional operating businesses
through merger, purchase of assets, stock acquisition or other means, or to make other investments, which may limit
our liquidity otherwise available.

On a quarterly basis, we evaluate our investments to determine whether an impairment has occurred. If so, we
also make a determination if such impairment is considered temporary or other-than-temporary. We believe that the
assessment of temporary or other-than-temporary impairment is facts and circumstances driven. However, among
the matters that are considered in making such a determination are the period of time the investment has remained
below its cost or carrying value, the likelihood of recovery given the reason for the decrease in market value and our
original expected holding period of the investment.

We adopted authoritative guidance on accounting for income taxes as of January 1, 2007. This guidance
requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the
position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition
threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement. It requires that a liability created for unrecognized deferred tax benefits shall be
presented as a liability and not combined with deferred tax liabilities or assets. We did not recognize any adjustment
in the liability for unrecognized tax benefits, as a result of the adoption of this guidance that impacted our
accumulated deficit at December 31, 2006. The total amount of unrecognized tax benefits was $11,685 at January 1,
2007 and decreased $1,080 during the year ended December 31, 2007. The total amount of tax benefits that, if
recognized, would impact the effective tax rate was $11,685 and $10,605 at December 31, 2006 and December 31,
2007, respectively. The total amount of unrecognized tax benefits was $10,605 at January 1, 2008 and decreased
$3,102 during the year ended December 31, 2008. The total amount of unrecognized tax benefits was $7,503 at
January 1, 2009 and increased $2,713 during the year ended December 31, 2009. The total amount of tax benefits
that, if recognized, would impact the effective tax rate was $10,216 and $7,503 at December 31, 2009 and 2008,
respectively.

53

Funding obligations under

credit line. . . . . . . . . . . . . .
New Valley obligations under

limited partnership
agreements . . . . . . . . . . . . .
Interest payments(5) . . . . . . . .

We or our subsidiaries file U.S. federal income tax returns and returns with various state and local jurisdictions.
Our consolidated balance sheets include deferred income tax assets and liabilities, which represent temporary
differences in the application of accounting rules established by generally accepted accounting principles and
income tax laws. As of December 31, 2009, our deferred income tax liabilities exceeded our deferred income tax
assets by $8,382. Our current deferred income tax liabilities decreased by approximately $84,068 during 2009
primarily as a result of tax payments of approximately $75,500 made in 2009 in connection with the Philip Morris
brands transaction. These tax payments resulted from our settlement with the Internal Revenue Service in July 2006,
which required us to recognize taxable income of approximately $192,000 from the Philip Morris brand transaction
by March 1, 2009.

We continue to classify all interest and penalties as income tax expense. As of the beginning of fiscal 2007, the
liability for tax-related interest and penalties amounted to approximately $2,100. At December 31, 2009 and 2008,
the liability for tax-related interest and penalties amounted to approximately $2,650 and $2,191, respectively.

Long-Term Financial Obligations and Other Commercial Commitments

Our significant long-term contractual obligations as of December 31, 2009 were as follows:

Contractual Obligations

2010

2011

2012

2013

2014

Thereafter

Total

Long-term debt(1) . . . . . . . . .
Operating leases(2). . . . . . . . .
Inventory purchase

$ 21,889 $16,253 $103,336(8) $ 1,039 $158,144 $254,090(8) $ 554,751
13,648
1,646

4,218

3,709

3,477

598

—

commitments(3) . . . . . . . . .

12,963

Capital expenditure purchase

commitments(4) . . . . . . . . .

9,077

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

12,963

9,077

900

900

61
65,034

—
65,213

—
66,906

—
68,768

—
70,707

—
274,779

61
611,407

Total (6),(7) . . . . . . . . . . . . . .

$114,142 $85,175 $173,719

$71,453 $229,449 $528,869

$1,202,807

(1) Long-term debt is shown before discount and assumes that only the mandatory redemption amounts will be
retired on our 3.875% Variable Interest Senior Convertible Debentures due 2026 (10% and 90% of the principal
balance in 2011 and 2026, respectively). For more information concerning our long-term debt, see “Liquidity
and Capital Resources” above and Note 7 to our consolidated financial statements.

(2) Operating lease obligations represent estimated lease payments for facilities and equipment. The amounts
presented do not include amounts scheduled to be received under non-cancelable operating subleases of $946 in
2010, $2,135 in 2011, $1,920 in 2012, $651 in 2013 and $159 in 2014 and $0 thereafter. See Note 8 to our
consolidated financial statements.

(3) Inventory purchase commitments represent purchase commitments under our leaf inventory management

program. See Note 4 to our consolidated financial statements.

(4) Capital expenditure purchase commitments represent purchase commitments for machinery and equipment at

Liggett and Vector Tobacco. See Note 5 to our consolidated financial statements.

(5) Interest payments are based on current interest rates at December 31, 2009 and the assumption our current
policy of a cash dividend of $0.40 per quarter and an annual 5% stock dividend will continue. In addition,
interest payments have been computed assuming that only the mandatory amounts will be retired on our
convertible debt as discussed in Note (1) above. For more information concerning our long-term debt, see
“Liquidity and Capital Resources” above and Note 7 to our consolidated financial statements.

(6) Not included in the above table is approximately $8,382 of net deferred tax liabilities and $10,216 of

unrecognized income tax benefits.

54

(7) Because their future cash outflows are uncertain, the above table excludes our pension and postretirement

benefit plans and contractual guarantees.

(8) We may be required to redeem $99,000 of this amount in 2012, 2016 or 2021 in accordance with the terms of

our 3.875% Variable Interest Senior Convertible Debentures due 2026.

Payments under the Master Settlement Agreement, discussed in Note 12 to our consolidated financial
statements, and the federal tobacco quota legislation, discussed in “Legislation and Regulation” below, are
excluded from the table above, as the payments are subject to adjustment for several factors, including inflation,
overall industry volume, our market share and the market share of non-participating manufacturers.

Off-Balance Sheet Arrangements

We have various agreements in which we may be obligated to indemnify the other party with respect to certain
matters. Generally, these indemnification clauses are included in contracts arising in the normal course of business
under which we customarily agree to hold the other party harmless against losses arising from a breach of
representations related to such matters as title to assets sold and licensed or certain intellectual property rights.
Payment by us under such indemnification clauses is generally conditioned on the other party making a claim that is
subject to challenge by us and dispute resolution procedures specified in the particular contract. Further, our
obligations under these arrangements may be limited in terms of time and/or amount, and in some instances, we
may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum
potential amount of future payments under these indemnification agreements due to the conditional nature of our
obligations and the unique facts of each particular agreement. Historically, payments made by us under these
agreements have not been material. As of December 31, 2009, we were not aware of any indemnification
agreements that would or are reasonably expected to have a current or future material adverse impact on our
financial position, results of operations or cash flows.

In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five year agreement
with a subsidiary of the American Wholesale Marketers Association to support a program to permit tobacco
distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the
distribution of cigarettes. Under the agreement, Liggett Vector Brands has agreed to pay a portion of losses, if any,
incurred by the surety under the bond program, with a maximum loss exposure of $500 for Liggett Vector Brands.
To secure its potential obligations under the agreement, Liggett Vector Brands has delivered to the subsidiary of the
Association a $100 letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has incurred
no losses to date under this agreement, and we believe the fair value of Liggett Vector Brands’ obligation under the
agreement was immaterial at December 31, 2009.

At December 31, 2009, we had outstanding approximately $2,765 of letters of credit, collateralized by
certificates of deposit. The letters of credit have been issued as security deposits for leases of office space, to secure
the performance of our subsidiaries under various insurance programs and to provide collateral for various
subsidiary borrowing and capital lease arrangements.

As of December 31, 2009, New Valley has committed to fund up to $61 to an investment partnership in which it

is an investor.

As of December 31, 2009 we have committed to fund up to $900 in a credit line to our investee, Castle Brands

Inc.

Market Risk

We are exposed to market risks principally from fluctuations in interest rates, foreign currency exchange rates
and equity prices. We seek to minimize these risks through our regular operating and financing activities and our
long-term investment strategy. Our market risk management procedures cover all market risk sensitive financial
instruments.

As of December 31, 2009, approximately $31,700 of our outstanding debt at face value had variable interest
rates determined by various interest rate indices, which increases the risk of fluctuating interest rates. Our exposure
to market risk includes interest rate fluctuations in connection with our variable rate borrowings, which could

55

adversely affect our cash flows. As of December 31, 2009, we had no interest rate caps or swaps. Based on a
hypothetical 100 basis point increase or decrease in interest rates (1%), our annual interest expense could increase
or decrease by approximately $165.

In addition, as of December 31, 2009, approximately $74,437 ($267,530 principal amount) of outstanding debt
had a variable interest rate determined by the amount of the dividends on our common stock. The difference
between the stated value of the debt and carrying value is due principally to certain embedded derivatives, which
were separately valued and recorded upon issuance.

Changes to the estimated fair value of these embedded derivatives are reflected within our statements of
operations as “Changes in fair value of derivatives embedded within convertible debt.” The value of the embedded
derivative is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible
debt as well as projections of future cash and stock dividends over the term of the debt and changes in the closing
stock price at the end of each quarterly period. Based on a hypothetical 100 basis point increase or decrease in
interest rates (1%), our annual “Changes in fair value of derivatives embedded within convertible debt” could
increase or decrease by approximately $5,974 with approximately $513 resulting from the embedded derivative
associated with our 6.75% Note due 2014, $1,022 resulting from the embedded derivative associated with our
6.75% exchange notes due 2014, and the remaining $4,439 resulting from the embedded derivative associated with
our 3.875% variable interest senior convertible debentures due 2026. An increase in our quarterly dividend rate by
$0.10 per share would increase interest expense by approximately $6,530 per year.

We have estimated the fair market value of the embedded derivatives based principally on the results of a
valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based
principally on the present value of future dividend payments expected to be received by the convertible debt holders
over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in yield of
our debt when compared to risk-free securities with the same duration; thus, a readily determinable fair market
value of the embedded derivatives is not available. The valuation model assumes our future dividend payments and
utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and
subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible
debt. The valuation also considers items, including current and future dividends and the volatility of Vector’s stock
price. The range of estimated fair market values of our embedded derivatives was between $149,982 and $156,172.
We recorded the fair market value of our embedded derivatives at the midpoint of the inputs at $153,016 as of
December 31, 2009. The estimated fair market value of our embedded derivatives could change significantly based
on future market conditions.

We held investment securities available for sale totaling $51,742 at December 31, 2009, which includes

13,891,205 shares of Ladenburg Thalmann Financial Services Inc. carried at $8,890.

In May, June, and July 2009, we purchased 5,333,526 common shares of Strategic Hotels & Resorts, Inc. for
approximately $7,137, excluding commissions. The shares were carried at $9,920 as of December 31, 2009. On
July 20, 2009, we reported that we beneficially owned approximately 7.1% of the stock of Strategic Hotels.

See Note 3 to our consolidated financial statements. Adverse market conditions could have a significant effect

on the value of these investments.

We and New Valley also hold long-term investments in various investment partnerships. These investments are

illiquid, and their ultimate realization is subject to the performance of the underlying entities.

New Accounting Pronouncements

Refer to Note 1, Summary of Significant Accounting Policies, to our financial statements for further

information on New Accounting Pronouncements.

Legislation and Regulation

Reports with respect to the alleged harmful physical effects of cigarette smoking have been publicized for
many years and, in the opinion of Liggett’s management, have had and may continue to have an adverse effect on

56

cigarette sales. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human
Services have released a number of reports which state that cigarette smoking is a causative factor with respect to a
variety of health hazards, including cancer, heart disease and lung disease, and have recommended various
government actions to reduce the incidence of smoking. In 1997, Liggett publicly acknowledged that, as the
Surgeon General and respected medical researchers have found, smoking causes health problems, including lung
cancer, heart and vascular disease, and emphysema.

On June 22, 2009, the President signed into law the “Family Smoking Prevention and Tobacco Control Act”
(Public Law 111-31). The law grants the Food and Drug Administration (“FDA”) broad authority over the
manufacture, sale, marketing and packaging of tobacco products, although the FDA is prohibited from issuing
regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of
a tobacco product to zero. Among other measures, the law (under various deadlines):

(cid:129) increases the number of health warnings required on cigarette and smokeless tobacco products, increases the
size of warnings on packaging and in advertising, requires the FDA to develop graphic warnings for cigarette
packages, and grants the FDA authority to require new warnings;

(cid:129) requires practically all tobacco product advertising to eliminate color and imagery and instead consist solely

of black text on white background;

(cid:129) imposes new restrictions on the sale and distribution of tobacco products, including significant new
restrictions on tobacco product advertising and promotion, as well as the use of brand and trade names;

(cid:129) bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;

(cid:129) bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol;

(cid:129) gives the FDA the authority to impose tobacco product standards that are appropriate for the protection of the
public health (by, for example, requiring reduction or elimination of the use of particular constituents or
components, requiring product testing, or addressing other aspects of tobacco product construction,
constituents, properties or labeling);

(cid:129) requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified

tobacco products;

(cid:129) requires pre-market approval by the FDA for tobacco products represented (through labels, labeling,

advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;

(cid:129) requires manufacturers to report ingredients and harmful constituents and requires the FDA to disclose

certain constituent information to the public;

(cid:129) mandates that manufacturers test and report on ingredients and constituents identified by the FDA as
requiring such testing to protect the public health, and allows the FDA to require the disclosure of testing
results to the public;

(cid:129) requires manufacturers to submit to the FDA certain information regarding the health, toxicological,

behavioral or physiologic effects of tobacco products;

(cid:129) prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal

law;

(cid:129) requires the FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing

facilities;

(cid:129) requires tobacco product manufacturers (and certain other entities) to register with the FDA;

(cid:129) authorizes the FDA to require the reduction of nicotine (although it may not require the reduction of nicotine
yields of a tobacco product to zero) and the potential reduction or elimination of other constituents, including
menthol;

57

(cid:129) imposes (and allows the FDA to impose) various recordkeeping and reporting requirements on tobacco

product manufacturers; and

(cid:129) grants the FDA the regulatory authority to impose broad additional restrictions.

The law also requires establishment, within the FDA’s new Center for Tobacco Products, of a Tobacco
Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the
safety, dependence or health issues related to tobacco products, including:

(cid:129) a recommendation on modified risk applications;

(cid:129) a recommendation on the effects of tobacco product nicotine yield alteration and whether there is a threshold

level below which nicotine yields do not produce dependence;

(cid:129) a report on the public health impact of the use of menthol in cigarettes; and

(cid:129) a report on the public health impact of dissolvable tobacco products.

The law imposes user fees on certain tobacco product manufacturers in order to fund tobacco-related FDA
activities. User fees will be allocated among tobacco product classes according to a formula set out in the
legislation, and then among manufacturers and importers within each class based on market share. The FDA user
fees for Liggett and Vector Tobacco for 2009 were $2,300 and we estimate that they will be significantly higher in
the future.

The law also imposes significant new restrictions on the advertising and promotion of tobacco products. For
example, the law requires the FDA to finalize certain portions of regulations previously adopted by the FDA in 1996
(which were struck down by the Supreme Court in 2000 as beyond the FDA’s authority). As written, these
regulations would significantly limit the ability of manufacturers, distributors and retailers to advertise and promote
tobacco products, by, for example, restricting the use of color and graphics in advertising, limiting the use of
outdoor advertising, restricting the sale and distribution of non-tobacco items and services, gifts, and sponsorship of
events, and imposing restrictions on the use for cigarette or smokeless tobacco products of trade or brand names that
are used for nontobacco products.

In August 2009, several cigarette manufacturers filed a federal lawsuit against FDA challenging the consti-
tutionality of a number of the restrictions imposed by these regulations, including the ban on color and graphics,
limits on the right to make truthful statements regarding modified risk tobacco products, restrictions on the
placement of outdoor advertising, and a ban on the distribution of product samples. On January 4, 2010, a federal
judge ruled that the regulations’ ban on the use of color and graphics in certain tobacco product advertising was
unconstitutional and prohibited FDA from enforcing that ban. The judge, however, let stand numerous other
advertising and promotion restrictions. While we would expect this decision to be appealed, we cannot predict the
future course or outcome of this lawsuit.

Separately, the law also requires the FDA to issue future regulations regarding the promotion and marketing of

tobacco products sold through non-face-to-face transactions.

It is likely that the new tobacco law could result in a decrease in cigarette sales in the United States, including
sales of Liggett’s and Vector Tobacco’s brands. Total compliance and related costs are not possible to predict and
depend substantially on the future requirements imposed by the FDA under the new tobacco law. Costs, however,
could be substantial and could have a material adverse effect on the companies’ financial condition, results of
operations, and cash flows. In addition, failure to comply with the new tobacco law and with FDA regulatory
requirements could result in significant financial penalties and could have a material adverse effect on the business,
financial condition and results of operation of both Liggett and Vector Tobacco. At present, we are not able to
predict whether the new tobacco law will impact Liggett and Vector Tobacco to a greater degree than other
companies in the industry, thus affecting its competitive position.

Liggett and Vector Tobacco provide ingredient information annually, as required by law, to the states of

Massachusetts, Texas and Minnesota. Several other states are considering ingredient disclosure legislation.

58

In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA
provides for the elimination of the federal tobacco quota and price support program through an industry funded
buyout of tobacco growers and quota holders. Pursuant to the legislation, manufacturers of tobacco products have
been assessed $10,140,000 over a ten year period, commencing in 2005, to compensate tobacco growers and quota
holders for the elimination of their quota rights. Cigarette manufacturers are currently responsible for 95% of the
assessment (subject to adjustment in the future), which is allocated based on relative unit volume of domestic
cigarette shipments. Liggett’s and Vector Tobacco’s assessment was approximately $22,900 for 2009. Management
anticipates that the assessment will be higher for 2010. The relative cost of the legislation to the three largest
cigarette manufacturers will likely be less than the cost to smaller manufacturers, including Liggett and Vector
Tobacco, because one effect of the legislation is that the three largest manufacturers are no longer obligated to make
certain contractual payments, commonly known as Phase II payments, that they agreed in 1999 to make to tobacco-
producing states. The ultimate impact of this legislation cannot be determined, but there is a risk that smaller
manufacturers, such as Liggett and Vector Tobacco, will be disproportionately affected by the legislation, which
could have a material adverse effect on us.

Cigarettes are subject to substantial and increasing federal, state and local excise taxes. Effective April 1, 2009,
the federal cigarette excise tax increased from $0.39 to $1.01 per pack. State excise taxes vary considerably and,
when combined with sales taxes, local taxes and the federal excise tax, may exceed $4.00 per pack. In 2009,
14 states and the District of Columbia enacted increases in excise taxes and several other states are considering, or
have pending, legislation proposing further state excise tax increases. Management believes increases in excise and
similar taxes have had, and will continue to have, an adverse effect on sales of cigarettes.

Over the last several years a majority of states have enacted virtually identical legislation requiring cigarettes
to meet a laboratory test standard for reduced ignition propensity. Cigarettes that meet this standard are referred to
as “fire standards compliant” or “FSC,” and are sometimes commonly called “self-extinguishing.” Effective
January 1, 2009, substantially all of the cigarettes that Liggett and Vector Tobacco manufacture are fire standards
compliant. Compliance with such legislation could be burdensome and costly and could harm the business of
Liggett and Vector Tobacco, particularly if there were to be varying standards from state to state.

In November 2008, the Federal Trade Commission (“FTC”) rescinded guidance it issued in 1966 that generally
permitted statements concerning cigarette “tar” and nicotine yields if they were based on the Cambridge Filter
Method, sometimes called the FTC method. In its rescission notice, the FTC also indicated that advertisers should
no longer use terms suggesting the FTC’s endorsement or approval of any specific test method, including terms such
as “per FTC Method” or other phrases that state or imply FTC endorsement or approval of the Cambridge Filter
Method or other machine-based methods for measuring cigarette “tar” or nicotine yields. Also in its rescission
notice, the FTC indicated that cigarette descriptors such as “light” and “ultra light” have not been defined by the
FTC, nor has the FTC provided any guidance or authorization for their use. The FTC indicated that to the extent
descriptors are used in a manner that convey an overall impression that is false, misleading, or unsubstantiated, such
use could be actionable. The FTC further indicated that companies must ensure that any continued use of
descriptors does not convey an erroneous or unsubstantiated message that a particular cigarette presents a reduced
risk of harm or is otherwise likely to mislead consumers. In response to the FTC’s action, we have removed all
reference to “tar” and nicotine testing from our point-of-sale advertising. In addition, the new tobacco law imposes a
ban — scheduled to take effect in June 2010 — on the use of “light”, “mild”, “low” or similar descriptors on
tobacco product labels and in labeling or advertising. To the extent descriptors are no longer used to market or
promote our cigarettes, this may have a material adverse effect on us.

A wide variety of federal, state and local laws limit the advertising, sale and use of cigarettes, and these laws
have proliferated in recent years. For example, many local laws prohibit smoking in restaurants and other public
places, and many employers have initiated programs restricting or eliminating smoking in the workplace. There are
various other legislative efforts pending at the federal, state or local level which seek to, among other things,
eliminate smoking in public places, curtail affirmative defenses of tobacco companies in product liability litigation,
and further restrict the sale, marketing and advertising of cigarettes and other tobacco products. This trend has had,
and is likely to continue to have, an adverse effect on us. It is not possible to predict what, if any, additional
legislation, regulation or other governmental action will be enacted or implemented, or to predict what the impact of
the new FDA tobacco law will be on these pending legislative efforts.

59

In addition to the foregoing, there have been a number of other restrictive regulatory actions, adverse
legislative and political decisions and other unfavorable developments concerning cigarette smoking and the
tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to
the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of
additional similar litigation or legislation.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains “forward-looking statements” within the meaning of
the federal securities law. Forward-looking statements include information relating to our intent, belief or current
expectations, primarily with respect to, but not limited to:

(cid:129) economic outlook,

(cid:129) capital expenditures,

(cid:129) cost reduction,

(cid:129) new legislation,

(cid:129) cash flows,

(cid:129) operating performance,

(cid:129) litigation,

(cid:129) impairment charges and cost saving associated with restructurings of our tobacco operations, and

(cid:129) related industry developments (including trends affecting our business, financial condition and results of

operations).

We identify forward-looking statements in this report by using words or phrases such as “anticipate”,
“believe”, “estimate”, “expect”, “intend”, “may be”, “objective”, “plan”, “seek”, “predict”, “project” and “will be”
and similar words or phrases or their negatives.

The forward-looking information involves important risks and uncertainties that could cause our actual results,
performance or achievements to differ materially from our anticipated results, performance or achievements
expressed or implied by the forward-looking statements. Factors that could cause actual results to differ materially
from those suggested by the forward-looking statements include, without limitation, the following:

(cid:129) general economic and market conditions and any changes therein, due to acts of war and terrorism or

otherwise,

(cid:129) impact of current crises in capital and credit markets, including any continued worsening,

(cid:129) governmental regulations and policies,

(cid:129) effects of industry competition,

(cid:129) impact of business combinations, including acquisitions and divestitures, both internally for us and

externally in the tobacco industry,

(cid:129) impact of restructurings on our tobacco business and our ability to achieve any increases in profitability

estimated to occur as a result of these restructurings,

(cid:129) impact of new legislation on our competitors’ payment obligations, results of operations and product costs,
i.e. the impact of recent federal legislation eliminating the federal tobacco quota system and providing for
regulation of tobacco products by the FDA,

(cid:129) impact of substantial increases in federal, state and local excise taxes,

(cid:129) uncertainty related to litigation and potential additional payment obligations for us under the Master

Settlement Agreement and other settlement agreements with the states, and

60

(cid:129) risks inherent in our new product development initiatives.

Further information on risks and uncertainties specific to our business include the risk factors discussed above
under Item 1A. “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations”.

Although we believe the expectations reflected in these forward-looking statements are based on reasonable
assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. The
forward-looking statements speak only as of the date they are made.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption “Management’s Discussion and Analysis of Financial Condition and

Results of Operations — Market Risk” is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and Notes thereto, together with the report thereon of Pricewater-

houseCoopers LLP dated March 1, 2010, are set forth beginning on page F-1 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer
and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures are effective.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Com-
mission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our man-
agement concluded that our internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by
PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report,
which is included herein.

Material Changes in Internal Control

There were no changes in our internal control over financial reporting during the period covered by this report
that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 9B. OTHER INFORMATION

None.

61

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

This information is contained in our definitive Proxy Statement for our 2010 Annual Meeting of Stockholders,
to be filed with the SEC not later than 120 days after the end of our fiscal year covered by this report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, and incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

This information is contained in the Proxy Statement and incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

This information is contained in the Proxy Statement and incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

This information is contained in the Proxy Statement and incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

This information is contained in the Proxy Statement and incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) INDEX TO 2009 CONSOLIDATED FINANCIAL STATEMENTS:

Our consolidated financial statements and the notes thereto, together with the report thereon of Pricewa-

terhouseCoopers LLP dated March 1, 2010, appear beginning on page F-1 of this report.

(a)(2) FINANCIAL STATEMENT SCHEDULES:

Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page F-79

(c) OTHER FINANCIAL STATEMENT REQUIRED BY REGULATION SX:

Liggett Group LLC

The consolidated financial statements of Liggett Group LLC for the three years ended December 31, 2009 are

filed as Exhibit 99.2 to this report and are incorporated by reference.

Vector Tobacco Inc.

The consolidated financial statements of Vector Tobacco Inc. for the three years ended December 31, 2009 are

filed as Exhibit 99.3 to this report and are incorporated by reference.

Douglas Elliman Realty LLC

The consolidated financial statements of Douglas Elliman Realty LLC for the three years ended December 31,

2009 are filed as Exhibit 99.4 to this report and are incorporated by reference.

62

(a)(3) EXHIBITS

(a) The following is a list of exhibits filed herewith as part of this Annual Report on Form 10-K:

Exhibit
No.

INDEX OF EXHIBITS

Description

* 3.2

* 3.4

* 4.1

* 3.3

* 3.1

* 4.4

* 4.2

* 4.5

* 4.3

to the Amended and Restated Certificate of Incorporation of Vector

Amended and Restated Certificate of Incorporation of Vector Group Ltd. (formerly known as Brooke
Group Ltd.) (“Vector”) (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter
ended September 30, 1999).
Certificate of Amendment
(incorporated by reference to Exhibit 3.1 in Vector’s Form 8-K dated May 24, 2000).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Vector Group
Ltd. (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter ended June 30, 2007).
Amended and Restated By-Laws of Vector Group Ltd. (incorporated by reference to Exhibit 3.4 in
Vector’s Form 8-K dated October 19, 2007).
Amended and Restated Loan and Security Agreement dated as of April 14, 2004, by and between
Wachovia Bank, N.A., as lender, Liggett Group Inc., as borrower, 100 Maple LLC and Epic Holdings Inc.
(the “Wachovia Loan Agreement”) (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated
April 14, 2004).
Amendment, dated as of December 13, 2005, to the Wachovia Loan Agreement (incorporated by
reference to Exhibit 4.1 in Vector’s Form 8-K dated December 13, 2005).
Amendment, dated as of January 31, 2007, to the Wachovia Loan Agreement (incorporated by reference
to Exhibit 4.1 in Vector’s Form 8-K dated February 2, 2007).
Amendment, dated as of August 10, 2007, to the Wachovia Loan Agreement (incorporated by reference
to Exhibit 4.6 in Vector’s Form 8-K dated August 16, 2007).
Amendment, dated as of August 16, 2007, to the Wachovia Loan Agreement (incorporated by reference
to Exhibit 4.7 in Vector’s Form 8-K dated August 16, 2007).
Intercreditor Agreement, dated as of August 16, 2007, between Wachovia Bank, N.A., as ABL Lender,
U.S. Bank National Association, as Collateral Agent, Liggett Group LLC, as Borrower, and 100 Maple
LLC, as Loan Party (incorporated by reference to Exhibit 99.1 in Vector’s Form 8-K dated August 16,
2007).
Indenture, dated as of July 12, 2006, by and between Vector and Wells Fargo Bank, N.A., relating to the
37⁄8% Variable Interest Senior Convertible Debentures due 2026 (the “37⁄8% Debentures”), including the
form of the 37⁄8% Debenture (incorporated by reference to Exhibit 4.1 in Vector’s Form 8-K dated July 11,
2006).
Indenture, dated as of August 16, 2007, between Vector Group Ltd., the subsidiary guarantors named
therein and U.S. Bank National Association, as Trustee, relating to the 11% Senior Secured Notes due
2015, including the form of Note (incorporated by reference to Exhibit 4.1 in Vector’s Form 8-K dated
August 16, 2007).
First Supplemental Indenture, dated as of July 15, 2008, to the Indenture dated August 16, 2007 between
Vector Group Ltd., the subsidiary guarantors named therein and U.S. Bank National Association, as
Trustee (incorporated by reference to Exhibit 4.1 of Vector’s Form 8-K dated July 15, 2008).
* 4.10 Second Supplemental Indenture, dated as of September 1, 2009, to the Indenture dated August 16, 2007
between Vector Group Ltd.,
the subsidiary guarantors named therein and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit 4.1 of Vector’s Form 8-K dated
September 1, 2009).

* 4.6

* 4.7

* 4.8

* 4.9

* 4.11 Pledge Agreement, dated as of August 16, 2007, between VGR Holding LLC, as Grantor, and U.S. Bank
National Association, as Collateral Agent (incorporated by reference to Exhibit 4.2 in Vector’s Form 8-K
dated August 16, 2007).

63

Exhibit
No.

Description

* 4.12 Security Agreement, dated as of August 16, 2007, between Vector Tobacco Inc., as Grantor, and U.S.
Bank National Association, as Collateral Agent (incorporated by reference to Exhibit 4.3 in Vector’s
Form 8-K dated August 16, 2007).

* 4.13 Security Agreement, dated as of August 16, 2007, between Liggett Group LLC and 100 Maple LLC, as
Grantors, and U.S. Bank National Association, as Collateral Agent (incorporated by reference to
Exhibit 4.4 in Vector’s Form 8-K dated August 16, 2007).

* 4.14 Note, dated May 11, 2009, by Vector Group Ltd. to Frost Nevada Investments Trust (incorporated by

reference to Exhibit 4.1 of Vector’s Form 8-K dated May 11, 2009).

* 4.15 Purchase Agreement, dated as of May 11, 2009, between Vector Group Ltd. and Frost Nevada
Investments Trust (incorporated by reference to Exhibit 4.2 of Vector’s Form 8-K dated May 11, 2009).
* 4.16 Form of Issuance and Exchange Agreement, dated as of June 15, 2009, between Vector Group Ltd. and
holders of its 5% Variable Interest Senior Convertible Notes due 2011 (incorporated by reference to
Exhibit 4.1 of Vector’s Form 8-K dated June 15, 2009).

* 10.1

* 10.2

* 10.3

* 10.4

* 4.17 Indenture, dated as of June 30, 2009, between Vector Group Ltd. and Wells Fargo Bank, N.A. as trustee,
relating to the 6.75% Variable Interest Senior Convertible Exchange Notes Due 2014, including the form
of Note (incorporated by reference to Exhibit 4.1 of Vector’s Form 8-K dated June 30, 2009).
Corporate Services Agreement, dated as of June 29, 1990, between Vector and Liggett (incorporated by
reference to Exhibit 10.10 in Liggett’s Registration Statement on Form S-1, No. 33-47482).
Services Agreement, dated as of February 26, 1991, between Brooke Management Inc. (“BMI”) and
Liggett (the “Liggett Services Agreement”) (incorporated by reference to Exhibit 10.5 in VGR Holding’s
Registration Statement on Form S-1, No. 33-93576).
First Amendment to Liggett Services Agreement, dated as of November 30, 1993, between Liggett and
BMI (incorporated by reference to Exhibit 10.6 in VGR Holding’s Registration Statement on Form S-1,
No. 33-93576).
Second Amendment to Liggett Services Agreement, dated as of October 1, 1995, between BMI, Vector
and Liggett (incorporated by reference to Exhibit 10(c) in Vector’s Form 10-Q for the quarter ended
September 30, 1995).
Third Amendment to Liggett Services Agreement, dated as of March 31, 2001, by and between Vector
and Liggett (incorporated by reference to Exhibit 10.5 in Vector’s Form 10-K for the year ended
December 31, 2003).
Corporate Services Agreement, dated January 1, 1992, between VGR Holding and Liggett (incorporated
by reference to Exhibit 10.13 in Liggett’s Registration Statement on Form S-1, No. 33-47482).
Settlement Agreement, dated March 15, 1996, by and among the State of West Virginia, State of Florida,
State of Mississippi, Commonwealth of Massachusetts, and State of Louisiana, Brooke Group Holding
and Liggett (incorporated by reference to Exhibit 15 in the Schedule 13D filed by Vector on March 11,
1996, as amended, with respect to the common stock of RJR Nabisco Holdings Corp.).
Addendum to Initial States Settlement Agreement (incorporated by reference to Exhibit 10.43 in Vector’s
Form 10-Q for the quarter ended March 31, 1997).
Settlement Agreement, dated March 12, 1998, by and among the States listed in Appendix A thereto,
Brooke Group Holding and Liggett (incorporated by reference to Exhibit 10.35 in Vector’s Form 10-K for
the year ended December 31, 1997).

* 10.6

* 10.7

* 10.8

* 10.9

* 10.5

* 10.10 Master Settlement Agreement made by the Settling States and Participating Manufacturers signatories
thereto (incorporated by reference to Exhibit 10.1 in Philip Morris Companies Inc.’s Form 8-K dated
November 25, 1998, Commission File No. 1-8940).

* 10.11 General Liggett Replacement Agreement, dated as of November 23, 1998, entered into by each of the
Settling States under the Master Settlement Agreement, and Brooke Group Holding and Liggett
(incorporated by reference to Exhibit 10.34 in Vector’s Form 10-K for the year ended December 31,
1998).

64

Exhibit
No.

Description

* 10.12 Stipulation and Agreed Order regarding Stay of Execution Pending Review and Related Matters, dated
May 7, 2001, entered into by Philip Morris Incorporated, Lorillard Tobacco Co., Liggett Group Inc. and
Brooke Group Holding Inc. and the class counsel in Engel, et. al., v. R.J. Reynolds Tobacco Co., et. al.
(incorporated by reference to Exhibit 99.2 in Philip Morris Companies Inc.’s Form 8-K dated May 7,
2001).

* 10.13 Amended and Restated Employment Agreement dated as of January 27, 2006, between Vector and
Howard M. Lorber (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated January 27,
2006).

* 10.14 Employment Agreement, dated as of January 27, 2006, between Vector and Richard J. Lampen
(incorporated by reference to Exhibit 10.3 in Vector’s Form 8-K dated January 27, 2006).
* 10.15 Amended and Restated Employment Agreement, dated as of January 27, 2006, between Vector and Marc

N. Bell (incorporated by reference to Exhibit 10.4 in Vector’s Form 8-K dated January 27, 2006).

* 10.16 Employment Agreement, dated as of November 11, 2005, between Liggett Group Inc. and Ronald J.
Bernstein (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated November 11, 2005).
* 10.17 Employment Agreement, dated as of January 27, 2006, between Vector and J. Bryant Kirkland III
(incorporated by reference to Exhibit 10.5 in Vector’s Form 8-K dated January 27, 2006).
* 10.18 Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive Plan (incorporated by reference to

Appendix A in Vector’s Proxy Statement dated April 21, 2004).

10.19 Stock Option Agreement, dated December 3, 2009, between Vector and Richard J. Lampen.
10.20 Stock Option Agreement, dated December 3, 2009, between Vector and Marc N. Bell.

* 10.21 Stock Option Agreement, dated January 22, 2001, between Vector and Howard M. Lorber (incorporated
by reference to Exhibit 10.2 in Vector’s Form 10-Q for the quarter ended March 31, 2001).
10.22 Stock Option Agreement, dated December 3, 2009, between Vector and Howard M. Lorber.
10.23 Stock Option Agreement, dated December 3, 2009, between Vector and J. Bryant Kirkland III.

* 10.24 Option Letter Agreement, dated as of November 11, 2005 between Vector and Ronald J. Bernstein
(incorporated by reference to Exhibit 10.3 in Vector’s Form 8-K dated November 11, 2005).
* 10.25 Restricted Share Award Agreement, dated as of April 7, 2009, between Vector Group Ltd. and Howard M.

Lorber (incorporated by reference to Exhibit 10.1 of Vector’s Form 8-K dated April 10, 2009).

* 10.26 Vector Senior Executive Annual Bonus Plan (incorporated by reference to Exhibit 10.7 in Vector’s

Form 8-K dated January 27, 2006).

* 10.27 Vector Supplemental Retirement Plan (as amended and restated April 24, 2008) (incorporated by

reference to Exhibit 10.1 in Vector’s Form 10-Q for the quarter ended June 30, 2008).

* 10.28 Closing Agreement on Final Determination Covering Specific Matters between Vector and the
the United States of America dated July 20, 2006
the quarter ended

Commissioner of
(incorporated by reference to Exhibit 10.3 in Vector’s Form 10-Q for
September 30, 2006).

Internal Revenue of

* 10.29 Operating Agreement of Douglas Elliman Realty, LLC (formerly known as Montauk Battery Realty
LLC) dated December 17, 2002 (incorporated by reference to Exhibit 10.1 in New Valley’s Form 8-K
dated December 13, 2002).

* 10.30 First Amendment to Operating Agreement of Douglas Elliman Realty, LLC (formerly known as Montauk
Battery Realty LLC), dated as of March 14, 2003 (incorporated by reference to Exhibit 10.1 in New
Valley’s Form 10-Q for the quarter ended March 31, 2003).

* 10.31 Second Amendment to Operating Agreement of Douglas Elliman Realty, LLC, dated as of May 19, 2003
(incorporated by reference to Exhibit 10.1 in New Valley’s Form 10-Q for the quarter ended June 30,
2003).

* 10.32 Note and Equity Purchase Agreement, dated as of March 14, 2003 (the “Note and Equity Purchase
Agreement”), by and between Douglas Elliman Realty, LLC (formerly known as Montauk Battery Realty
LLC), New Valley Real Estate Corporation and The Prudential Real Estate Financial Services of
America, Inc., including form of 12% Subordinated Note due March 14, 2013 (incorporated by reference
to Exhibit 10.2 in New Valley’s Form 10-Q for the quarter ended March 31, 2003).

65

Exhibit
No.

Description

21
23.1
23.2
23.3
23.4
31.1

* 10.33 Amendment to the Note and Equity Purchase Agreement, dated as of April 14, 2003 (incorporated by
reference to Exhibit 10.3 in New Valley’s Form 10-Q for the quarter ended March 31, 2003).
Subsidiaries of Vector.
Consent of PricewaterhouseCoopers LLP.
Consent of PricewaterhouseCoopers LLP.
Consent of PricewaterhouseCoopers LLP.
Consent of PricewaterhouseCoopers LLP.
Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

31.2

32.1

99.1 Material Legal Proceedings.
99.2
99.3
99.4

Liggett Group LLC’s Consolidated Financial Statements for the three years ended December 31, 2009.
Vector Tobacco Inc.’s Consolidated Financial Statements for the three years ended December 31, 2009.
Douglas Elliman Realty LLC’s Consolidated Financial Statements for
the three years ended
December 31, 2009.

* Incorporated by reference

Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report

pursuant to Item 14(c) is listed in exhibit nos. 10.13 through 10.27.

66

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has

duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

SIGNATURES

VECTOR GROUP LTD.
(Registrant)

By: /s/

J. BRYANT KIRKLAND III

J. Bryant Kirkland III
Vice President, Treasurer and Chief Financial
Officer

Date: March 1, 2010

POWER OF ATTORNEY

The undersigned directors and officers of Vector Group Ltd. hereby constitute and appoint Richard J. Lampen,
J. Bryant Kirkland III and Marc N. Bell, and each of them, with full power to act without the other and with full
power of substitution and resubstitutions, our true and lawful attorneys-in-fact with full power to execute in our
name and behalf in the capacities indicated below, this Annual Report on Form 10-K and any and all amendments
thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the

following persons on behalf of the Registrant and in the capacities indicated on March 1, 2010.

Signature

Title

/s/ Howard M. Lorber
Howard M. Lorber

/s/

J. Bryant Kirkland III
J. Bryant Kirkland III

/s/ Henry C. Beinstein
Henry C. Beinstein

/s/ Ronald J. Bernstein
Ronald J. Bernstein

/s/ Robert J. Eide
Robert J. Eide

/s/ Bennett S. LeBow
Bennett S. LeBow

/s/

Jeffrey S. Podell
Jeffrey S. Podell

/s/

Jean E. Sharpe
Jean E. Sharpe

President and Chief Executive Officer
(Principal Executive Officer)

Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

Director

Director

Director

Director

Director

Director

67

EXHIBIT 31.1

RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Howard M. Lorber, certify that:

1. I have reviewed this annual report on Form 10-K of Vector Group Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2010

/s/ HOWARD M. LORBER

Howard M. Lorber
President and Chief Executive Officer

EXHIBIT 31.2

RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, J. Bryant Kirkland III, certify that:

1. I have reviewed this annual report on Form 10-K of Vector Group Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):

(c) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and

(d) any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2010

/s/

J. BRYANT KIRKLAND III

J. Bryant Kirkland III
Vice President, Treasurer and Chief Financial Officer

EXHIBIT 32.1

SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with the Annual Report of Vector Group Ltd. (the “Company”) on Form 10-K for the year ended
December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Howard M. Lorber, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of

1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of the Company.

March 1, 2010

/s/ HOWARD M. LORBER
Howard M. Lorber
President and Chief Executive Officer

EXHIBIT 32.2

SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER

In connection with the Annual Report of Vector Group Ltd. (the “Company”) on Form 10-K for the year ended
December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J.
Bryant Kirkland III, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of

1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and

results of operations of the Company.

March 1, 2010

J. BRYANT KIRKLAND III

/s/
J. Bryant Kirkland III
Vice President, Treasurer and Chief Financial Officer

VECTOR GROUP LTD.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009
ITEMS 8, 15(a)(1) AND (2), 15(c)

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Schedules of the Registrant and its subsidiaries required to be included in Items 8,

15(a) (1) and (2), 15(c) are listed below:

FINANCIAL STATEMENTS:

Vector Group Ltd. Consolidated Financial Statements
Report of Independent Registered Certified Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . .
Vector Group Ltd. Consolidated Balance Sheets as of December 31, 2009 and 2008 . . . . . . . . . . . . .
Vector Group Ltd. Consolidated Statements of Operations for the years ended December 31, 2009,

Page

F-2
F-3

2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-4

Vector Group Ltd. Consolidated Statement of Stockholders’ (Deficiency) Equity for the years ended

December 31, 2009, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-5

Vector Group Ltd. Consolidated Statements of Cash Flows for the years ended December 31, 2009,

2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-6
F-8

FINANCIAL STATEMENT SCHEDULE:

Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-79

Financial Statement Schedules not listed above have been omitted because they are not applicable or the

required information is contained in our consolidated financial statements or accompanying notes.

Liggett Group LLC

The consolidated financial statements of Liggett Group LLC for the three years ended December 31, 2009 are

filed as Exhibit 99.2 to this report and are incorporated by reference.

Vector Tobacco Inc.

The consolidated financial statements of Vector Tobacco Inc. for the three years ended December 31, 2009 are

filed as Exhibit 99.3 to this report and are incorporated by reference.

Douglas Elliman Realty LLC

The consolidated financial statements of Douglas Elliman Realty LLC for the three years ended December 31,

2009 are filed as Exhibit 99.4 to this report and are incorporated by reference.

F-1

Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Stockholders
of Vector Group Ltd.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all
material respects, the financial position of Vector Group Ltd. and its subsidiaries at December 31, 2009 and 2008,
and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the
financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.

As discussed in Note 1(n), Note 1(p) and Note 10 to the consolidated financial statements, the Company

changed the manner in which it accounts for defined benefit and other post retirement plans in 2008.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Miami, Florida
March 1, 2010

F-2

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
2009

December 31,
2008

Dollars in thousands, except per
share amounts

ASSETS:
Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable — trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments accounted for at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in non-consolidated real estate businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$209,454
51,743
8,098
98,486
14,154
3,138
4,135

389,208
44,026
—
12,204
50,323
49,566
4,835
39,838
107,511
8,994
29,037

$211,105
28,518
9,506
92,581
3,642
2,653
7,278

355,283
50,691
17,704
—
51,118
50,775
6,555
45,222
107,511
2,901
29,952

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$735,542

$717,712

LIABILITIES AND STOCKHOLDERS’ (DEFICIENCY) EQUITY:

Current liabilities:

Current portion of notes payable and long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued promotional expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued excise and payroll taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, long-term debt and other obligations, less current portion . . . . . . . . . . . . . . . . .
Fair value of derivatives embedded within convertible debt
. . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ (deficiency) equity:

Preferred stock, par value $1.00 per share, 10,000,000 shares authorized . . . . . . . . . . . . . . . .
Common stock, par value $0.10 per share, 150,000,000 shares authorized, 74,510,595 and

69,107,320 shares issued and 71,262,684 and 66,014,070 shares outstanding . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: 3,247,911 and 3,093,250 shares of common stock in treasury, at cost . . . . . . . . . . . . . .

Total stockholders’ (deficiency) equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 21,889
1,029
4,355
12,745
19,924
24,093
18,803
17,254
13,840
15,076

149,008
334,920
153,016
34,247
45,120
23,913

740,224

$ 97,498
21,840
6,104
10,131
11,803
7,004
20,668
92,507
9,612
18,992

296,159
210,301
77,245
34,856
48,807
16,739

684,107

—

—

7,126
15,928
—
(14,879)
(12,857)

(4,682)

6,601
65,103
—
(25,242)
(12,857)

33,605

Total liabilities and stockholders’ (deficiency) equity . . . . . . . . . . . . . . . . . . . . . . . . . .

$735,542

$717,712

The accompanying notes are an integral part of the consolidated financial statements.

F-3

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
2009
2007
2008
Dollars in thousands, except per
share amounts

Revenues* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $801,494 $565,186 $555,430
Expenses:

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating, selling, administrative and general expenses . . . . . . . . . . . . . . . . . . . . . .
Gain on brand transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

577,386
85,041
(5,000)
900
143,167

335,299
94,583
—
—
135,304

337,079
92,967
—
(120)
125,504

Other income (expenses):

Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value of derivatives embedded within convertible debt . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loss on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from conversion of LTS notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity income from non-consolidated real estate businesses . . . . . . . . . . . . . . . . . .
Income from lawsuit settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,897
(45,762)
(6,109)
—
(1,216)
8,121
16,243
— 20,000
(75)
126,603
(52,800)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,806 $ 60,504 $ 73,803

492
(68,490)
(35,925)
(18,573)
(8,500)
—
15,213
—
1,153
28,537
(3,731)

5,864
(62,335)
24,337
—
(32,400)
—
24,399

(597)
94,572
(34,068)

Per basic common share:

Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

0.34 $

0.85 $

1.05

Per diluted common share:

Net income applicable to common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

0.34 $

0.76 $

Cash distributions declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

1.54 $

1.47 $

1.02

1.40

* Revenues and cost of goods sold include federal excise taxes of $377,771, $168,170 and $176,269 for the years

ended December 31, 2009, 2008 and 2007, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

F-4

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIENCY) EQUITY

Common Stock
Shares

Amount

Additional
Paid-In
Capital

Unearned

Compensation Deficit

Dollars in thousands

Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balance, January 1, 2007 . . . . . . . . . . . . . . . . . . . 57,031,269
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,703
—

$132,807
—

$—
—

$(28,192)
73,803

$ (2,587)
—

$(12,754) $ 94,977
73,803

—

Change in net loss and prior service cost, net of

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward contract adjustments, net of taxes . . . . . . .
Unrealized gain on long-term investments accounted

for under the equity method, net of taxes . . . . . . .

Unrealized gain on investment securities, net of

—
—

—

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . .
Distributions and dividends on common stock . . . . . . .
Effect of stock dividend . . . . . . . . . . . . . . . . . . . .
Restricted stock grants . . . . . . . . . . . . . . . . . . . . .
Tax benefit of options exercised . . . . . . . . . . . . . . .
Exercise of options, net of 7,627 shares delivered to pay
419,210
exercise price . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred compensation . . . . . . . . . . .
—
Balance, December 31, 2007 . . . . . . . . . . . . . . . . . 60,361,068
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
—
2,870,589
40,000
—

Change in net loss and prior service cost, net of

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward contract adjustments, net of taxes . . . . . . .
Unrealized gain on long-term investments accounted

for
under the equity method, net of taxes . . . . . . . . .

Unrealized gain on investment securities, net of

—
—

—

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive loss . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . .
Adoption of SFAS No. 158, measurement date . . . . . .
Distributions and dividends on common stock . . . . . . .
Effect of stock dividend . . . . . . . . . . . . . . . . . . . .
Tax benefit of options exercised . . . . . . . . . . . . . . .
Exercise of options, net of 1,375,895 shares delivered to
2,510,242
pay exercise price . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred compensation . . . . . . . . . . .
—
Balance, December 31, 2008 . . . . . . . . . . . . . . . . . 66,014,070
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
—
—
3,142,760
—

Change in net loss and prior service cost, net of

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward contract adjustments, net of taxes . . . . . . .
Unrealized gain on investment securities, net of

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . .
Distributions and dividends on common stock . . . . . . .
Restricted stock grant
. . . . . . . . . . . . . . . . . . . . .
Effect of stock dividend . . . . . . . . . . . . . . . . . . . .
Tax benefit of options exercised . . . . . . . . . . . . . . .
Exercise of options, net of 2,814,866 shares delivered to
pay exercise price . . . . . . . . . . . . . . . . . . . . . .

Surrender of shares in connection with option

exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred compensation . . . . . . . . . . .
Beneficial conversion feature of notes payable, net of

—
—

—
—
—
—
500,000
3,326,623
—

1,582,074

—
—

—

—
—
—
—
287
4
—

42
—
6,036
—

—
—

—

—
—
—
—
—
314
—

251
—
6,601
—

—
—

—
—
—
—
50
333
—

158

—
—

—

—
—
—
(54,054)
—
(4)
2,055

5,161
3,529
89,494
—

—
—

—

—
—
—
—
(46,081)
—
18,304

(164)
3,550
65,103
—

—
—

—
—
—
(88,110)
—
—
9,162

986

—
—

—

—
—
—
—
—
—
—

—
—
—
—

—
—

—

—
—
—
—
—
—
—

—
—
—
—

—
—

—
—
—
—
—
—
—

—

—
—

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
Balance, December 31, 2009 . . . . . . . . . . . . . . . . . 71,262,684

—
$7,126

27,443
$ 15,928

—
$—

$

(160,083)
—

(16)
—

(2,298)
3,642

—
—

—

—
—
—
(45,324)
(287)
—
—

—
—
—
60,504

—
—

—

—
—
—
(509)
(59,681)
(314)
—

—
—
—
24,806

—
—

—
—
—
(24,473)
—
(333)
—

—

—
—

—
—

11,545
28

226

8,967
—
—
—
—
—
—

—
—
18,179
—

(30,989)
35

—
—

—

—
—

—
—
—

11,545
28

226

8,967
20,766
94,569
(99,378)
—
—
2,055

(103)
—
(12,857)
—

5,100
3,529
100,852
60,504

— (30,989)
35
—

(399)

—

(399)

(12,263)
—
—
195
—
—
—

—
—
(25,242)
—

6,232
34

4,097
—
—
—
—
—
—

—

—
—

—
$(14,879)

— (12,263)
— (43,616)
16,888
(314)
(105,762)
—
18,304

—
—

—

—
—
(12,857)
—

—
—

—
—

—
—
—

—

—
—

—

$(12,857) $

87
3,550
33,605
24,806

6,232
34

4,097
10,363
35,169
(112,583)
50
—
9,162

1,144

(2,314)
3,642

27,443
(4,682)

The accompanying notes are an integral part of the consolidated financial statements.

F-5

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

2009

Year Ended December 31,
2008
Dollars in thousands, except per share
amounts

2007

$ 24,806

$ 60,504

$ 73,803

Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating

activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock-based expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash portion of restructuring and impairment charges . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from conversion of LTS notes . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loss on mortgage receivable . . . . . . . . . . . . . . . . . . . .
Provision for loss on non-consolidated real

10,398
3,642
100
18,573
127
(110,183)
—
5,000

10,057
3,550
53
—
—
432
—
4,000

estate businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,500

3,500

Provision for loss on long-term investments accounted

for at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

21,900

Loss on long-term investments accounted

under the equity method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loss on marketable securities. . . . . . . . . . . . . . . . . . . .
Equity income in non-consolidated real estate businesses . . . . . . . . .
Distributions from non-consolidated real estate businesses . . . . . . . .
Non-cash interest (income) expense . . . . . . . . . . . . . . . . . . . . . . . . .

Changes in assets and liabilities:

Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in book overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . .
Cash payments on restructuring liabilities . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
(15,213)
6,466
51,209

1,408
(5,905)
—
4,035
(902)
8,606

568
3,000
(24,399)
8,462
(11,907)

(6,393)
(5,756)
198
11,850
(154)
11,800

10,202
3,529
(120)
—
—
44,656
(6,388)
—

—

—

—
1,216
(16,243)
8,878
13,912

12,367
4,474
(179)
(46,960)
(884)
6,935

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .

5,667

91,265

109,198

The accompanying notes are an integral part of the consolidated financial statements.

F-6

VECTOR GROUP LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

Year Ended December 31,
2008
2007
2009
Dollars in thousands, except per share
amounts

Cash flows from investing activities:

Proceeds from sale of businesses and assets . . . . . . . . . . . . . . . . . . .
Proceeds from sale or maturity of investment securities . . . . . . . . . .
Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale or liquidation of long-term investments . . . . . . . .
Purchase of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of mortgage receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Castle Brands and other minority equity interests . . . . . .
Decrease (increase) in restricted assets . . . . . . . . . . . . . . . . . . . . . . .
Investments in non-consolidated real estate businesses . . . . . . . . . . .
Distributions from non-consolidated real estate businesses . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of life insurance policies . . . . . . . . .

41
78
(12,427)
2,254
(51)
—
—
1,720
(474)
6,730
(3,848)
(839)

452
—
(6,411)
8,334
(51)
(21,704)
(4,250)
(411)
(22,000)
19,393
(6,309)
(938)

917
—
(6,571)
71
(40,091)
—
—
(492)
(750)
1,000
(5,189)
(838)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,816)

(33,895)

(51,943)

Cash flows from financing activities:

Proceeds from issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of Vector options and warrants . . . . . . . . . . .
Tax benefit of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118,805
(6,179)
(5,573)
749,474
(751,607)
(115,778)
1,194
9,162

2,831
(6,329)
(137)
531,251
(526,518)
(103,870)
86
18,304

174,576
(41,200)
(9,985)
537,746
(534,950)
(99,249)
5,100
2,055

Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . .

(502)

(84,382)

34,093

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . .

(1,651)
211,105

(27,012)
238,117

91,348
146,769

Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . .

$ 209,454

$ 211,105

$ 238,117

The accompanying notes are an integral part of the consolidated financial statements.

F-7

VECTOR GROUP LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation:

The consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts
of VGR Holding LLC (“VGR Holding”), Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”),
Liggett Vector Brands Inc. (“Liggett Vector Brands”), New Valley LLC (“New Valley”) and other less significant
subsidiaries. All significant intercompany balances and transactions have been eliminated.

Liggett is engaged in the manufacture and sale of cigarettes in the United States. Vector Tobacco is engaged in
the development of reduced risk cigarette products. New Valley is engaged in the real estate business and is seeking
to acquire additional operating companies and real estate properties.

(b) Estimates and Assumptions:

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and
expenses. Significant estimates subject to material changes in the near term include restructuring and impairment
charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans, the estimated fair value of embedded derivative
liabilities, settlement accruals, restructuring, valuation of investments, including other than temporary impairments
to such investments, accounting for investments in equity securities, and litigation and defense costs. Actual results
could differ from those estimates.

(c) Cash and Cash Equivalents:

For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in banks and cash
equivalents, comprised of short-term investments which have an original maturity of 90 days or less. Interest on
short-term investments is recognized when earned. The Company places its cash and cash equivalents with large
commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection
Corporation (“SIPC”) insure these balances, up to $250 and $500, respectively. Substantially all of the Company’s
cash balances at December 31, 2009 are uninsured.

(d) Financial Instruments:

The carrying value of cash and cash equivalents, restricted assets and short-term loans approximate their fair

value.

The carrying amounts of short-term debt reported in the consolidated balance sheets approximate fair value.
The fair value of long-term debt for the years ended December 31, 2009 and 2008 was estimated based on current
market quotations.

As required by authoritative guidance, derivatives embedded within the Company’s convertible debt are
recognized on the Company’s balance sheet and are stated at estimated fair value at each reporting period. Changes
in the fair value of the embedded derivatives are reflected quarterly as “Changes in fair value of derivatives
embedded within convertible debt.”

The estimated fair values for financial instruments presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair values.

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

(e)

Investment Securities:

The Company classifies investments in debt and marketable equity securities as available for sale. Investments
classified as available for sale are carried at fair value, with net unrealized gains and losses included as a separate
component of stockholders’ equity. The cost of securities sold is determined based on average cost. Investments in
marketable equity securities represent less than a 20 percent interest in the investees and the Company does not
exercise significant influence over such entities.

Gains are recognized when realized in the Company’s consolidated statements of operations. Losses are
recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair value.
The Company’s policy is to review its securities on a periodic basis to evaluate whether any security has experienced
an other-than-temporary decline in fair value. If it is determined that an other-than-temporary decline exists in one
of the Company’s marketable securities, it is the Company’s policy to record an impairment charge with respect to
such investment in the Company’s consolidated statements of operations. The Company recorded a loss related to
other-than-temporary declines in the fair value of its marketable equity securities of $3,018 and $1,216 for the years
ended December 31, 2008 and 2007, respectively.

(f) Significant Concentrations of Credit Risk:

Financial instruments which potentially subject the Company to concentrations of credit risk consist prin-
cipally of cash and cash equivalents and trade receivables. The Company places its temporary cash in money market
securities (investment grade or better) with what management believes are high credit quality financial institutions.

Liggett’s customers are primarily candy and tobacco distributors, the military and large grocery, drug and
convenience store chains. No single customer represented more than 10% of Liggett’s revenues in 2009, 2008 and
2007. Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of
customers, located primarily throughout the United States, comprising Liggett’s customer base. Ongoing credit
evaluations of customers’ financial condition are performed and, generally, no collateral is required. Liggett
maintains reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded
management’s expectations.

(g) Accounts Receivable:

Accounts receivable-trade are recorded at their net realizable value.

The allowance for doubtful accounts and cash discounts was $354 and $255 at December 31, 2009 and 2008,

respectively.

(h)

Inventories:

Tobacco inventories are stated at the lower of cost or market and are determined primarily by the last-in, first-
out (LIFO) method at Liggett and Vector Tobacco. Although portions of leaf tobacco inventories may not be used or
sold within one year because of the time required for aging, they are included in current assets, which is common
practice in the industry. It is not practicable to determine the amount that will not be used or sold within one year.

(i) Restricted Assets:

Long-term restricted assets of $4,835 and $6,555 at December 31, 2009 and 2008, respectively, consist
primarily of certificates of deposit which collateralize letters of credit and deposits on long-term debt. The
certificates of deposit mature at various dates from February 2010 to June 2010.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

(j) Property, Plant and Equipment:

Property, plant and equipment are stated at cost. Property, plant and equipment are depreciated using the
straight-line method over the estimated useful lives of the respective assets, which are 20 to 30 years for buildings
and 3 to 10 years for machinery and equipment.

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

(k)

Investment in Non-Consolidated Real Estate Businesses:

In accounting for its investment in non-consolidated real estate businesses, the Company identified its
participation in Variable Interest Entities (“VIE”), which are defined as entities with a level of invested equity
insufficient to fund future activities to operate on a stand-alone basis, or whose equity holders lack certain
characteristics typical to holders of equity interests, such as voting rights. For entities identified as VIEs,
authoritative guidance sets forth a model to evaluate potential consolidation based on an assessment of which
party, if any, bears a majority of the exposure to the expected losses, or stands to gain from a majority of the expected
returns. In addition, certain disclosures are required regarding interests in VIEs that are deemed significant, even if
consolidation is not required.

New Valley accounts for its interests in Douglas Elliman Realty LLC and New Valley Oaktree Chelsea Eleven,
LLC on the equity method because the entities neither meet the definition of a VIE nor is New Valley the entity’s
primary beneficiary, as defined in authoritative guidance.

The authoritative guidance over VIEs includes a scope exception for certain entities that are deemed to be
“businesses” and meet certain other criteria. Entities that meet this scope exception are not subject to the accounting
and disclosure rules governing VIEs, but are subject to the pre-existing consolidation rules, which are based on an
analysis of voting rights. This scope exception applies to New Valley’s investment in Douglas Elliman Realty LLC
and, as a result, the Company is not required to consolidate this business. Further, New Valley is deemed to exert
significant influence over these entities.

(l)

Intangible Assets:

The Company reviews intangible assets for impairment annually or whenever events or changes in business
circumstances indicate that the carrying amount of the intangible assets may not be fully recoverable. Indefinite life
intangible assets as of December 31, 2009 and 2008, consisted of $107,511, respectively. This intangible asset
relates to the exemption of The Medallion Company (“Medallion”), acquired in April 2002, under the Master
Settlement Agreement, which states payments under the MSA continue in perpetuity. As a result, the Company
believes it will realize the benefit of the exemption for the foreseeable future.

Other intangible assets, included in other assets, consisting of trademarks and patent rights, are amortized
using the straight-line method over 10-12 years and had a net book value of $0 and $45 at December 31, 2009 and
2008, respectively.

(m)

Impairment of Long-Lived Assets:

The Company reviews long-lived assets for impairment annually or whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs
undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist,
any related impairment loss is calculated based on fair value of the asset on the basis of discounted cash flow.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of
disposal.

(n) Pension, Postretirement and Postemployment Benefits Plans:

The cost of providing retiree pension benefits, health care and life insurance benefits is actuarially determined
and accrued over the service period of the active employee group. On September 29, 2006, the FASB issued new
guidance on employers’ accounting for defined benefit pension and other postretirement plans. The new guidance
required, among other things, the recognition of the funded status of each defined benefit pension plan, retiree
health care and other postretirement benefit plans and postemployment benefit plans on the balance sheet. The
Company adopted the new guidance and changed its measurement date for the funded status of the plans from
September 30 to December 31 in 2008. (See Note 9.)

(o) Stock Options:

The Company accounts for employee stock compensation plans by measuring compensation cost for share-
the Company’s former Executive Chairman delivered
based payments at fair value. In September 2009,
2,120,479 shares of common stock in payment of the exercise price in connection with the exercise of an employee
stock option for 3,218,998 shares. In November 2009, four executive officers of the Company delivered
854,470 shares of common stock in payment of the exercise price and income and payroll taxes in connection
with the exercise of employee stock options for 1,132,065 shares. In June 2008, the Company’s former Executive
Chairman delivered 1,444,690 shares of common stock in payment of the exercise price in connection with the
exercise of an employee stock option for 4,072,233 shares. The Company immediately cancelled the shares
delivered in these transactions.

(p)

Income Taxes:

The Company adopted new authoritative guidance for accounting for uncertainty in income taxes on January 1,
2007. The new guidance requires an entity to recognize the financial statement impact of a tax position when it is
more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-
than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than
50% likely of being realized upon ultimate settlement. The new guidance requires that a liability created for
unrecognized deferred tax benefits shall be presented as a liability and not combined with deferred tax liabilities or
assets.

The Company accounts for income taxes under the liability method and records deferred taxes for the impact
of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax
assets when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized.
A current tax provision is recorded for income taxes currently payable.

(q) Distributions and Dividends on Common Stock:

The Company records distributions on its common stock as dividends in its consolidated statement of
stockholders’ equity to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a
reduction to additional paid-in-capital. The Company’s stock dividends are recorded as stock splits and given
retroactive effect to earnings per share for all years presented.

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

(r) Revenue Recognition:

Sales: Revenues from sales are recognized upon the shipment of finished goods when title and risk of loss
have passed to the customer, there is persuasive evidence of an arrangement, the sale price is determinable and
collectibility is reasonably assured. The Company provides an allowance for expected sales returns, net of any
related inventory cost recoveries. Certain sales incentives, including buydowns, are classified as reductions of net
sales. The Company’s accounting policy is to include federal excise taxes in revenues and cost of goods sold. Such
revenues and cost of goods sold totaled $377,771, $168,170, and $176,269 for the years ended December 31, 2009,
2008 and 2007, respectively. Since the Company’s primary line of business is tobacco, the Company’s financial
position and its results of operations and cash flows have been and could continue to be materially adversely
affected by significant unit sales volume declines, litigation and defense costs, increased tobacco costs or reductions
in the selling price of cigarettes in the near term.

Shipping and Handling Fees and Costs: Shipping and handling fees related to sales transactions are neither
billed to customers nor recorded as revenue. Shipping and handling costs, which were $4,059 in 2009, $4,509 in
2008, and $4,717 in 2007 are recorded as operating, selling, administrative and general expenses.

(s) Advertising and Research and Development:

Advertising costs, which are expensed as incurred and included within operating, selling, administration and
general expenses, were $3,159, $3,282 and $3,083 for the years ended December 31, 2009, 2008 and 2007,
respectively.

Research and development costs, primarily at Vector Tobacco, are expensed as incurred and included within
operating, selling, administration and general expenses, and were $2,533, $3,988, and $4,220 for the years ended
December 31, 2009, 2008 and 2007, respectively.

(t) Earnings Per Share:

Information concerning the Company’s common stock has been adjusted to give effect to the 5% stock
dividends paid to Company stockholders on September 29, 2009, September 29, 2008, and September 28, 2007,
respectively. The dividends were recorded at par value of $333 in 2009, $314 in 2008, and $287 in 2007 since the
Company did not have retained earnings in each of the aforementioned years. In connection with the 5% stock
dividends, the Company increased the number of shares subject to outstanding stock options by 5% and reduced the
exercise prices accordingly.

For purposes of calculating basic EPS, earnings available to common stockholders for the period are reduced
by the contingent interest and the non-cash interest expense associated with the discounts created by the beneficial
conversion features and embedded derivatives related to the Company’s convertible debt issued. The convertible
debt issued by the Company are participating securities due to the contingent interest feature and had no impact on
EPS for the years ended December 31, 2009, 2008 and 2007 as the dividends on the common stock reduced earnings
available to common stockholders so there were no unallocated earnings.

As discussed in Note 11, the Company has stock option awards which provide for common stock dividend
equivalents at the same rate as paid on the common stock with respect to the shares underlying the unexercised
portion of the options. These outstanding options represent participating securities under authoritative guidance.
The Company recognizes payments of the dividend equivalent rights ($4,342, net of taxes of $1,725, $4,865, net of
taxes of $2,144, and $6,475, net of taxes of $200, for the years ended December 31, 2009, 2008 and 2007,
respectively) on these options as reductions in additional paid-in capital on the Company’s consolidated balance

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

sheet. As a result, in its calculation of basic EPS for the years ended December 31, 2009, 2008 and 2007,
respectively, the Company has adjusted its net income for the effect of these participating securities as follows:

2009

2008

2007

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to participating securities . . . . . . . . . . . . . . . . .

$24,806
(956)

$60,504
(2,783)

$73,803
(4,817)

Net income available to common stockholders . . . . . . . . . . . . . . . .

$23,850

$57,721

$68,986

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average

number of shares outstanding, which includes vested restricted stock.

Diluted EPS includes the dilutive effect of stock options, unvested restricted stock grants and convertible
securities. Diluted EPS is computed by dividing net income available to common stockholders by the diluted
weighted-average number of shares outstanding, which includes dilutive non-vested restricted stock grants, stock
options and convertible securities.

Basic and diluted EPS were calculated using the following shares for the years ended December 31, 2009, 2008

and 2007:

2009

2008

2007

Weighted-average shares for basic EPS . . . . . . . . . . . . . . . 69,513,609
Plus incremental shares related to stock options and

67,708,495

65,724,435

warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus incremental shares related to convertible debt . . . . . .

66,427

753,078
— 6,219,710

1,836,293
—

Weighted-average shares for diluted EPS . . . . . . . . . . . . . 69,580,036

74,681,283

67,560,728

The following stock options, non-vested restricted stock and shares issuable upon the conversion of convertible
debt were outstanding during the years ended December 31, 2009, 2008 and 2007 but were not included in the
computation of diluted EPS because the exercise prices of the options and the per share expense associated with the
restricted stock were greater than the average market price of the common shares during the respective periods, and
the impact of common shares issuable under the convertible debt were anti-dilutive to EPS.

Year Ended December 31,
2008

2007

2009

Number of stock options. . . . . . . . . . . . . . . . . . . . . . . .

1,629,442

540,472

183,383

Weighted-average exercise price . . . . . . . . . . . . . . . . . .

$

15.66

$

18.30

$

24.98

Weighted-average shares of non-vested restricted

stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

158,926

69,941

Weighted-average expense per share . . . . . . . . . . . . . . .

$

16.28

$

16.79

N/A

N/A

Weighted-average number of shares issuable upon

conversion of debt . . . . . . . . . . . . . . . . . . . . . . . . . .

15,015,099

7,359,474

13,579,184

Weighted-average conversion price . . . . . . . . . . . . . . . .

$

16.86

$

15.20

$

16.34

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Diluted EPS are calculated by dividing income by the weighted average common shares outstanding plus
dilutive common stock equivalents. The Company’s convertible debt was anti-dilutive in 2009 and 2007. As a result
of the dilutive nature in 2008 of the Company’s 3.875% variable interest senior convertible debentures due 2026, the
Company adjusted its net income for the effect of these convertible securities for purposes of calculating diluted
EPS as follows:

Year Ended December 31,
2008

2007

2009

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to 3.875% variable

$24,806

$60,504

$73,803

interest senior convertible debentures due 2026 . . . . . . . . . . . . . .
Income attributable to participating securities . . . . . . . . . . . . . . . . .

—
(971)

(962)
(2,783)

—
(4,817)

Net income for diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,835

$56,759

$68,986

(u) Comprehensive Income:

Other comprehensive income is a component of stockholders’ equity and includes such items as the unrealized
gains and losses on investment securities available for sale, forward contracts and minimum pension liability
adjustments. Total comprehensive income was as follows:

Year Ended December 31,
2008

2009

2007

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains (losses) on investment securities available for

$24,806

$ 60,504

$73,803

sale:

Change in net unrealized gains (losses), net of income taxes . . . . .
Net unrealized losses reclassified into net income, net of income

4,097

(14,047)

8,248

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

1,784

719

Net unrealized gains (losses) on investment securities available for
sale, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,097

(12,263)

8,967

Change in net unrealized (losses) gains, net of income taxes . . . . .
Net unrealized losses reclassified into net income, net of income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

(674)

275

226

—

Net unrealized (losses) gains on long-term investments accounted

for under the equity method . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in pension-related amounts, net of income taxes . . . . .

—
34
6,232

(399)
35
(30,989)

226
28
11,545

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$35,169

$ 16,888

$94,569

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The components of accumulated other comprehensive income (loss), net of income taxes, were as follows:

Net unrealized gains on investment securities available
for sale, net of income taxes of $4,238, $1,456 and
$9,943, respectively . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized gains on long-term investment accounted
for under the equity method, net of income taxes of
$0, 0, and $276, respectively . . . . . . . . . . . . . . . . . . .

Forward contracts adjustment, net of income taxes of

December 31,
2009

December 31,
2008

December 31,
2007

$ 6,201

$ 2,104

$14,367

399

$170, $195 and $219, respectively . . . . . . . . . . . . . . .

(248)

(282)

(317)

Pension-related amounts, net of income taxes of

$13,513, $17,408 and $2,452, respectively . . . . . . . . .

(20,832)

(27,064)

3,730

Accumulated other comprehensive income (loss) . . . . . .

$(14,879)

$(25,242)

$18,179

(v) Fair Value of Derivatives Embedded within Convertible Debt:

The Company has estimated the fair market value of the embedded derivatives based principally on the results
of a valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based
principally on the present value of future dividend payments expected to be received by the convertible debt holders
over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the
yield of the Company’s debt when compared to risk-free securities with the same duration; thus, a readily
determinable fair market value of the embedded derivatives is not available. The valuation model assumes future
dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt,
unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the
derivatives embedded within the convertible debt. The valuation also considers other items, including current and
future dividends and the volatility of Vector’s stock price. The range of estimated fair market values of the
Company’s embedded derivatives was between $149,982 and $156,172. The Company recorded the fair market
value of its embedded derivatives at the midpoint of the inputs at $153,016 as of December 31, 2009. The estimated
fair market value of the Company’s embedded derivatives could change significantly based on future market
conditions. (See Note 7.)

(w) Capital and Credit Market Crisis:

The Company has performed additional assessments to determine the impact, if any, of market developments,
on the Company’s consolidated financial statements. The Company’s additional assessments have included a
review of access to liquidity in the capital and credit markets, counterparty creditworthiness, value of the
Company’s investments (including long-term investments, mortgage receivable and employee benefit plans)
and macroeconomic conditions. The volatility in capital and credit markets may create additional risks in the
upcoming months and possibly years and the Company will continue to perform additional assessments to
determine the impact, if any, on the Company’s consolidated financial statements. Thus, future impairment charges
may occur.

On a quarterly basis, the Company evaluates its investments to determine whether an impairment has occurred.
If so, the Company also makes a determination of whether such impairment
is considered temporary or
other-than-temporary. The Company believes that the assessment of temporary or other-than-temporary impair-
ment is facts and circumstances driven. However, among the matters that are considered in making such a
determination are the period of time the investment has remained below its cost or carrying value, the likelihood of
recovery given the reason for the decrease in market value and the Company’s original expected holding period of
the investment.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

(x) Contingencies:

The Company records Liggett’s product liability legal expenses and other litigation costs as operating, selling,
general and administrative expenses as those costs are incurred. As discussed in Note 12, legal proceedings covering
a wide range of matters are pending or threatened in various jurisdictions against Liggett and the Company.

The Company and its subsidiaries record provisions in their consolidated financial statements for pending
litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably
estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur,
(i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-
related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an
unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not
provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs
are expensed as incurred.

(y) New Accounting Pronouncements:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards
Codification (the “Codification”). The Codification is the single source of authoritative nongovernmental
U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging
Issues Task Force (EITF) and related literature. The Codification eliminates the GAAP hierarchy contained in
Statement of Financial Accounting Standards and establishes one level of authoritative GAAP. All other literature is
considered non-authoritative. The Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. In response, the Company has used plain English or included the
references to the Codification, as appropriate, in these consolidated financial statements.

In January 2008, the FASB issued new accounting guidance on fair value measurement. The guidance does not
require any new fair value measurements but provides a definition of fair value, establishes a framework for
measuring fair value, and expands disclosure about fair value measurements. On January 1, 2009, the Company
adopted the guidance as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value in the financial statements on at least an annual basis. The guidance defines fair value,
establishes a framework for measuring fair value in accounting principles generally accepted in the United States of
America (“GAAP”), and expands disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value measurements and are to be applied
prospectively with limited exceptions. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements. (See Note 11.)

In April 2009, the FASB issued a staff position providing additional guidance that clarifies the methodology
used to determine fair value when there is no active market or where the price inputs being used represent distressed
sales. The staff position guidance reaffirms the objective of fair value measurement, as stated in the original
guidance which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need
to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values
when markets have become inactive. The adoption of the staff position guidance had no impact on the Company’s
consolidated financial statements.

In January 2009, the FASB’s revised guidance on business combinations became effective. The revision is
intended to simplify existing guidance and converge rulemaking under U.S. GAAP with international accounting
rules. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements.

In January 2009, the FASB guidance on the disclosures about derivative instruments and hedging activities
became effective. The guidance seeks qualitative disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

credit-risk-related contingent features in hedged positions. The guidance also seeks enhanced disclosure around
how derivative instruments and related hedged items are accounted for under the standard and its related
interpretations and how derivative instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The adoption of the guidance did not have a material impact on the
Company’s consolidated financial statements.

In May 2008, the FASB issued guidance on the accounting for convertible debt instruments that may be settled
in cash upon conversion. The adoption of the guidance had no impact on the Company’s consolidated financial
statements.

On January 1, 2009, the FASB’s amended guidance on determining whether instruments granted in share-
based payment transactions are participating securities became effective for the Company. The amended guidance
states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The adoption of the amended guidance had no impact on the
Company’s consolidated financial statements.

In April 2009, the FASB issued authoritative guidance on the methodology for determining whether an
other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in
earnings through increased consistency in the timing of impairment recognition and enhanced disclosures related to
the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition,
increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses. The adoption of the guidance did not have an impact on the
Company’s consolidated financial statements.

In April 2009, FASB issued authoritative guidance on disclosures about fair value of financial instruments
whenever summarized financial information for interim reporting periods is presented in order to provide more
timely information about the effects of current market conditions on financial instruments. Prior to the new
guidance, the fair values of those assets and liabilities were disclosed only once each year. With the new guidance,
the Company discloses this information on a quarterly basis, providing quantitative and qualitative information
about fair value estimates for all financial instruments not measured in the consolidated balance sheets at fair value.
The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2008, the FASB issued authoritative guidance on employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan. The objective of the guidance is to provide users of financial
statements with an understanding of how investment allocation decisions are made, the major categories of plan
assets held by the plans, the inputs and valuation techniques used to measure the fair value of plan assets, significant
concentration of risk within the company’s plan assets, and for fair value measurements determined using
significant unobservable inputs a reconciliation of changes between the beginning and ending balances. The
Company has adopted the new disclosure requirements (see Note 9).

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of
financial assets. The guidance requires additional disclosures for transfers of financial assets and changes the
requirements for derecognizing financial assets. The Company will adopt this Statement for interim and annual
reporting periods beginning on January 1, 2010. The Company does not expect the adoption of this amended
guidance to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the
consolidation of variable interest entities. The amended guidance eliminates exceptions to consolidating qualifying
special purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency
of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity.
This guidance also contains a new requirement that any term, transaction, or arrangement that does not have a
substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity,

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded. The
elimination of the qualifying special-purpose entity concept and its consolidation exception means more entities
will be subject to consolidation assessments and reassessments. The Company will adopt these statements for
interim and annual reporting periods beginning on January 1, 2010. The Company is currently evaluating any
potential impact of the adoption of this amended guidance on its consolidated financial statements.

In May 2009, the FASB issued guidance which establishes general standards of: 1) the period after the balance
sheet date during which management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the
disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The
adoption of this guidance did not impact the Company’s consolidated financial statements.

In January 2010, the FASB issued authoritative guidance intended to improve disclosure about fair value
measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy
levels and the reasons for the transfers and to present information about purchases, sales, issuances, and settlements
separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3).
Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of
assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using
significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is
effective for interim and annual periods beginning after December 15, 2009 except for the disclosure about
purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for interim and
annual periods beginning after December 15, 2010. As this guidance provides only disclosure requirements, the
adoption of this standard will not impact the Company’s consolidated financial statements.

2. RESTRUCTURINGS

In March 2009, Vector Tobacco eliminated nine full-time positions. Vector Tobacco recognized pre-tax
restructuring charges of $900 in 2009. The restructuring charges primarily related to employee severance and
benefit costs.

The components of the combined pre-tax restructuring charges relating to the Vector Tobacco’s 2006 and 2009

restructurings for the years ended December 31, 2009, 2008 and 2007, respectively, were as follows:

Employee
Severance
and Benefits

Non-Cash
Asset
Impairment

Contract
Termination/
Exit Costs

Balance, January 1, 2007 . . . . . . . . . . . . . . . . . .
Change in estimate . . . . . . . . . . . . . . . . . . . . . . .
Utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance, December 31, 2007 . . . . . . . . . . . . . . . .
Change in estimate . . . . . . . . . . . . . . . . . . . . . . .
Utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance, December 31, 2008 . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . .
Change in estimate . . . . . . . . . . . . . . . . . . . . . . .
Utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 484
(71)
(343)

70
(14)
(56)

—
738
(47)
(586)

$ —
—
—

—
—
—

—
30
(3)
(27)

$ 338
8
(346)

—
—
—

—
232
(50)
(167)

Total

$ 822
(63)
(689)

70
(14)
(56)

—
1,000
(100)
(780)

Balance, December 31, 2009 . . . . . . . . . . . . . . . .

$ 105

$ —

$ 15

$ 120

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Liggett Vector Brands Restructuring. During 2004, Liggett Vector Brands adopted a restructuring plan in its
continuing effort to adjust the cost structure of the Company’s tobacco business and improve operating efficiency. In
connection with the restructuring, the Company eliminated approximately 330 full-time positions and 135 part-time
positions as of December 15, 2004. The Company also consolidated its operations, subletting its New York office
space and relocating several employees. The Company recognized pre-tax restructuring charges of $10,583 in 2004,
with approximately $5,659 of the charges related to employee severance and benefit costs and approximately
$4,924 to contract termination and other associated costs. Approximately $2,503 of these charges represented non-
cash items.

The components of the combined pre-tax restructuring charges relating to the 2004 Liggett Vector Brands

restructurings for the years ended December 31, 2009, 2008 and 2007 are as follows:

Employee
Severance
and Benefits

Non-Cash
Asset
Impairment

Contract
Termination/
Exit Costs

Balance, January 1, 2007 . . . . . . . . . . . . . . . . . . .
Change in estimate . . . . . . . . . . . . . . . . . . . . . . . .
Utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance, December 31, 2007 . . . . . . . . . . . . . . . .
Change in estimate . . . . . . . . . . . . . . . . . . . . . . . .
Utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance, December 31, 2008 . . . . . . . . . . . . . . . .
Change in estimate . . . . . . . . . . . . . . . . . . . . . . . .
Utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$—
—
—

—
—
—

—
—
—

$—
—
—

—
—
—

—
—
—

$ 850
(57)
(195)

598
(39)
(98)

461
—
(122)

Total

$ 850
(57)
(195)

598
(39)
(98)

461
—
(122)

Balance, December 31, 2009 . . . . . . . . . . . . . . . .

$—

$—

$ 339

$ 339

3.

INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities classified as available for sale are carried at fair value, with net unrealized gains or losses
included as a component of stockholders’ equity, net of taxes and non-controlling interests. The Company recorded
a loss related to other-than-temporary declines in the fair value of its marketable equity securities of $3,018 and
$1,216 for the years ended December 31, 2008 and 2007, respectively. (See Note 1.)

The components of investment securities available for sale at December 31, 2009 and 2008 were as follows:

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
Value

Cost

2009
Marketable equity securities . . . . . . . . . . . . . . . . . . . $41,304

$13,051

$(2,613)

$51,742

2008
Marketable equity securities . . . . . . . . . . . . . . . . . . . $24,958

$ 5,024

$(1,464)

$28,518

Investment securities available for sale as of December 31, 2009 and 2008 include New Valley’s
13,891,205 shares of Ladenburg Thalmann Financial Services Inc. (“LTS”) common stock, which were carried
at $8,890 and $10,000, respectively.

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

4.

INVENTORIES

Inventories consist of:

December 31,
2009

December 31,
2008

Leaf tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 48,942
3,497
2,388
59,293

Inventories at current cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIFO adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114,120
(15,635)

$ 48,880
5,128
314
46,202

100,524
(7,943)

$ 98,485

$ 92,581

The Company has a leaf inventory management program whereby, among other things, it is committed to
purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of
anticipated requirements and are at prices, including carrying costs, established at the commitment date. At
December 31, 2009, Liggett had leaf tobacco purchase commitments of approximately $12,963. During 2007 the
Company entered into a single source supply agreement for fire safe cigarette paper through 2012.

The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in ending

inventory.

LIFO inventories represent approximately 100% and 95% of total inventories at December 31, 2009 and 2008,

respectively.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of:

Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2009

December 31,
2008

$ 1,493
13,575
107,607
2,215
924

125,814
(81,788)

$ 1,418
13,575
105,645
2,269
730

123,637
(72,946)

$ 44,026

$ 50,691

Depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 was $10,398,
$10,057 and $10,202, respectively. Future machinery and equipment purchase commitments at Liggett were $9,077
and $1,072 at December 31, 2009 and 2008, respectively.

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

6. LONG-TERM INVESTMENTS

Long-term investments consist of investments in the following:

December 31,
2009

December 31,
2008

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value

Investment partnerships accounted for at cost . . . . . . . .

$50,323

$69,940

$51,118

$54,997

The principal business of these investment partnerships is investing in investment securities and real estate.
The estimated fair value of the investment partnerships was provided by the partnerships based on the indicated
market values of the underlying assets or investment portfolio. New Valley is an investor in real estate partnerships
where it has committed to make additional investments of up to an aggregate of $61 at December 31, 2009. The
investments in these investment partnerships are illiquid and the ultimate realization of these investments is subject
to the performance of the underlying partnership and its management by the general partners.

In August 2006, the Company invested $25,000 in Icahn Partners, LP, a privately managed investment
partnership, of which Carl Icahn is the portfolio manager and the controlling person of the general partner, and
manager of the partnership. In September 2007, the Company invested an additional $25,000 in Icahn Partners, LP.
Based on information available in public filings, the Company believes affiliates of Mr. Icahn are the beneficial
owners of approximately 18.8% of Vector’s common stock at December 31, 2009.

The Company’s investments constituted less than 3% of the invested funds in each of the other partnerships at
December 31, 2009 and 2008 and, in accordance with authoritative guidance for accounting for limited partnership
investments, the Company has accounted for such investments using the cost method of accounting.

On November 1, 2006, the Company invested $10,000 in Jefferies Buckeye Fund, LLC (“Buckeye Fund”), a
privately managed investment partnership, of which Jefferies Asset Management, LLC is the portfolio manager.
The Company believes affiliates of Jefferies Asset Management, LLC beneficially owned approximately 6.3% of
Vector’s common stock as of December 31, 2009. The Company recorded a loss of $118 associated with the
Buckeye Fund for the year ended December 31, 2007.

In April 2008, the Company elected to withdraw its investment in the Buckeye Fund. The Company recorded a
loss of $567 during 2008 associated with the Buckeye Fund’s performance, which has been included as “Other
expense” on the Company’s consolidated statement of operations. The Company received proceeds of $8,328 in
May 2008 and received an additional $925 of proceeds in 2009, which was included in “Other current assets” on the
Company’s consolidated balance sheet at December 31, 2008.

The Company recorded a loss of $21,900 in 2008 due to the performance of three of our long-term investments
in various investment funds in 2008. During 2008, one of the Company’s long-term investments was impaired due to
a portion of its underlying assets being held in an account with the European subsidiary of Lehman Brothers
Holdings Inc. while the Company’s other long-term investments were impaired as a result of the funds’ perfor-
mances in 2008. The Company determined that an other-than-temporary impairment had occurred during 2008 as a
result of its quarterly evaluation of long-term investments. If it is determined that an other-than-temporary decline in
fair value exists in long-term investments, the Company records an impairment charge with respect to such
investment in its consolidated statements of operations.

The Company received a cash distribution of approximately $847 from one limited partnership in 2009.

The long-term investments are carried on the consolidated balance sheet at cost. The fair value determination
disclosed above would be classified as Level 3 under fair value hierarchy disclosed in Note 15 if such assets were
recorded on the consolidated balance sheet at fair value. The fair values were determined based on unobservable
inputs and were based on company assumptions, and information obtained from the partnerships based on the
indicated market values of the underlying assets of the investment portfolio.

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The changes in the fair value of these investments as of December 31, 2009 were as follows:

Investment
Partnerships
Accounted for at
Cost

Balance as of January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on long-term
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$54,997
52
(847)

15,738

Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$69,940

The changes in the fair value of these investments as of December 31, 2008 were as follows:

Investment
Partnerships
Accounted for at
Cost

Investment
Partnerships
Accounted for on
the
Equity Method

Balance as of January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions (distributions) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable classified as “Other currents assets” . . . . . . . . . . . .
Unrealized loss on long-term investments . . . . . . . . . . . . . . . . .
Other than temporary impairment on long-term investments . . .
Realized loss on long-term investments. . . . . . . . . . . . . . . . . . .

$ 89,007
47
—
(12,157)
(21,900)
—

Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . .

$ 54,997

$10,495
(8,328)
(925)
(675)
—
(567)

$ —

Because of the recent capital and credit market crisis, the Company will continue to perform additional
assessments to determine the impact, if any, on the Company’s consolidated financial statements. Thus, future
impairment charges may occur.

In the future, the Company may invest in other investments, including limited partnerships, real estate
investments, equity securities, debt securities, derivatives and certificates of deposit, depending on risk factors and
potential rates of return.

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

7. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS

Notes payable, long-term debt and other obligations consist of:

December 31,
2009

December 31,
2008

Vector:
11% Senior Secured Notes due 2015, net of unamortized

discount of $4,849 and $0. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$245,151

$165,000

6.75% Variable Interest Senior Convertible Note due 2014, net of

unamortized discount of $39,755 and $0* . . . . . . . . . . . . . . . . . . . . .

10,245

6.75% Variable Interest Senior Convertible Exchange Notes due 2014,

net of unamortized discount of $69,749 and $0* . . . . . . . . . . . . . . . .

37,781

—

—

3.875% Variable Interest Senior Convertible Debentures due 2026, net

of unamortized discount of $83,589 and $83,993* . . . . . . . . . . . . . . .

26,411

26,007

5% Variable Interest Senior Convertible Notes due 2011, net of

unamortized net discount of $0 and $39,565* . . . . . . . . . . . . . . . . . .

—

72,299

Liggett:
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loan under credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
V.T. Aviation:
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VGR Aviation:
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total notes payable, long-term debt and other obligations . . . . . . . . . . .
Less:

17,382
6,755
4,852

19,515
7,290
8,307

3,882

5,266

3,687
663

4,053
62

356,809

307,799

Current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(21,889)

(97,498)

Amount due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$334,920

$210,301

* The fair value of the derivatives embedded within the 6.75% Variable Interest Convertible Note ($23,890 and $0
at December 31, 2009 and 2008, respectively), 6.75% Variable Interest Senior Convertible Exchange Notes
($47,552 and $0 at December 31, 2009 and 2008, respectively), 3.875% Variable Interest Senior Convertible
Debentures ($81,574 and $51,829 at December 31, 2009 and 2008, respectively) and the 5% Variable Interest
Senior Convertible Notes ($0 and $25,416 at December 31, 2009 and 2008, respectively) is separately classified
as a derivative liability in the consolidated balance sheets.

11% Senior Secured Notes due 2015 — Vector:

In August 2007, the Company sold $165,000 of its 11% Senior Secured Notes due 2015 (the “Senior Secured
Notes”) in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act
of 1933. On May 28, 2008, the Company completed an offer to exchange the Senior Secured Notes for an equal
amount of newly issued 11% Senior Secured Notes due 2015. The new Senior Secured Notes have substantially the
same terms as the original notes, except that the new Senior Secured Notes have been registered under the Securities
Act.

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In September 2009, the Company sold an additional $85,000 principal amount of the Senior Secured Notes at
94% of face value in a private offering to qualified institutional investors in accordance with Rule 144A of the
Securities Act of 1933. The Company received net proceeds from the offering of approximately $79,900. The
Company will amortize the deferred costs and debt discount related to the additional Senior Secured Notes over the
estimated life of the debt. In connection with the September 2009 offering, the Company agreed to consummate a
registered exchange offer for these Senior Secured Notes within 360 days after the date of their initial issuance. If
the Company fails to timely comply with its registration obligations, it will be required to pay additional interest on
these Senior Secured Notes until it complies.

The Senior Secured Notes pay interest on a semi-annual basis at a rate of 11% per year and mature on
August 15, 2015. The Company may redeem some or all of the Senior Secured Notes at any time prior to August 15,
2011 at a make-whole redemption price. On or after August 15, 2011 the Company may redeem some or all of the
Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date. At any time prior to August 15, 2010, the Company may on any one or more
occasions redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net proceeds of
certain equity offerings at 111% of the aggregate principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date. In the event of a change of control, as defined in the indenture
governing the Senior Secured Notes, each holder of the Senior Secured Notes may require the Company to
repurchase some or all of its Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal
amount plus accrued and unpaid interest and liquidated damages, if any to the date of purchase.

The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by all of the
100% owned domestic subsidiaries of the Company that are engaged in the conduct of the Company’s cigarette
businesses. In addition, some of the guarantees are collateralized by second priority or first priority security interests
in certain collateral of some of the subsidiary guarantors, including their common stock, pursuant to security and
pledge agreements.

Variable Interest Senior Convertible Debt — Vector:

Vector has issued four series of variable interest senior convertible debt. All four series of debt pay interest on a
quarterly basis at a stated rate plus an additional amount of interest on each payment date. The additional amount is
based on the amount of cash dividends paid during the prior three-month period ending on the record date for such
interest payment multiplied by the total number of shares of its common stock into which the debt would be
convertible on such record date (the “Additional Interest”).

5% Variable Interest Senior Convertible Notes due November 2011:

Between November 2004 and April 2005, the Company sold $111,864 principal amount of its 5% Variable
Interest Senior Convertible Notes due November 15, 2011 (the “5% Notes”). In May 2009, the holder of $11,005
principal amount of the 5% Notes exchanged its 5% Notes for $11,775 principal amount of the Company’s 6.75%
Variable Interest Senior Convertible Note due 2014 (the “6.75% Note”) as discussed below. In June 2009, certain
holders of $99,944 principal amount of the 5% Notes exchanged their 5% Notes for $106,940 principal amount of
the Company’s 6.75% Variable Interest Senior Convertible Exchange Notes due 2014 (the “6.75% Exchange
Notes”). In November 2009, the Company retired $360 of the remaining $915 principal amount of the 5% Notes for
cash and exchanged approximately $555 of the remaining 5% Notes for $593 principal amount of the 6.75%
Exchange Notes. As of December 31, 2009, no 5% Notes remained outstanding after these exchanges.

6.75% Variable Interest Senior Convertible Note due 2014:

On May 11, 2009, the Company issued in a private placement the 6.75% Note in the principal amount of
$50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005 principal amount of the
5% Notes, valued at 107% of principal amount. The note pays interest (“Total Interest”) on a quarterly basis at a rate

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

of 3.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the prior
three-month period ending on the record date for such interest payment multiplied by the total number of shares of
its common stock into which the debt will be convertible on such record date. Notwithstanding the foregoing,
however, the interest payable on each interest payment date shall be the higher of (i) the Total Interest and (ii) 6.75%
per annum. The note is convertible into the Company’s common stock at the holder’s option. The conversion price
as of December 31, 2009 of $14.32 per share (approximately 69.8139 shares of common stock per $1,000 principal
amount of the note) is subject to adjustment for various events, including the issuance of stock dividends. The note
will mature on November 15, 2014. The Company will redeem on May 11, 2014 and at the end of each interest
accrual period thereafter an additional amount, if any, of the note necessary to prevent the note from being treated as
an “Applicable High Yield Discount Obligation” under the Internal Revenue Code. If a fundamental change (as
defined in the note) occurs, the Company will be required to offer to repurchase the note at 100% of its principal
amount, plus accrued interest.

The purchaser of the 6.75% Note is an entity affiliated with Dr. Phillip Frost, who reported, after the

consummation of the sale, beneficial ownership of approximately 11.7% of the Company’s common stock.

6.75% Variable Interest Senior Convertible Exchange Notes due 2014:

In June 2009, the Company entered into agreements with certain holders of the 5% Notes to exchange their
5% Notes for the Company’s 6.75% Exchange Notes. In June 2009, certain holders of $99,944 principal amount of
the 5% Notes exchanged their 5% Notes for $106,940 of the 6.75% Exchange Notes. In November 2009, certain
holders of $555 of the 5% Notes exchanged their 5% Notes for $593 of the Company’s 6.75% Exchange Notes.

The Company issued its 6.75% Exchange Notes to the holders in reliance on the exemption from the
registration requirements of the Securities Act of 1933, as amended, afforded by Section 3(a)(9) thereof. The notes
pay interest (“Total Interest”) on a quarterly basis beginning August 15, 2009 at a rate of 3.75% per annum plus
additional interest, which is based on the amount of cash dividends paid during the prior three-month period ending
on the record date for such interest payment multiplied by the total number of shares of its common stock into which
the debt will be convertible on such record date. Notwithstanding the foregoing, however, the interest payable on
each interest payment date shall be the higher of (i) the Total Interest and (ii) 6.75% per annum. The notes are
convertible into the Company’s common stock at the holder’s option. The conversion price as of December 31, 2009
of $16.25 per share (approximately 61.5366 shares of common stock per $1,000 principal amount of notes) is
subject to adjustment for various events, including the issuance of stock dividends. The notes will mature on
November 15, 2014. The Company will redeem on June 30, 2014 and at the end of each interest accrual period
thereafter an additional amount, if any, of the notes necessary to prevent the notes from being treated as an
“Applicable High Yield Discount Obligation” under the Internal Revenue Code. If a fundamental change (as
defined in the indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their
principal amount, plus accrued interest and, under certain circumstances, a “make whole” payment.

3.875% Variable Interest Senior Convertible Debentures due 2026:

In July 2006, the Company sold $110,000 of its 3.875% variable interest senior convertible debentures due
2026 in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of
1933.

The debentures pay interest on a quarterly basis at a rate of 3.875% per annum plus Additional Interest (the
“Debenture Total Interest”). Notwithstanding the foregoing, however, the interest payable on each interest payment
date shall be the higher of (i) the Debenture Total Interest and (ii) 5.75% per annum. The debentures are convertible
into the Company’s common stock at the holder’s option. The conversion price at December 31, 2009 was $17.69
per share (approximately 56.535 shares of common stock per $1,000 principal amount of the note), is subject to
adjustment for various events, including the issuance of stock dividends.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The debentures will mature on June 15, 2026. The Company must redeem 10% of the total aggregate principal
amount of the debentures outstanding on June 15, 2011. In addition to such redemption amount, the Company will
also redeem on June 15, 2011 and at the end of each interest accrual period thereafter an additional amount, if any, of
the debentures necessary to prevent the debentures from being treated as an “Applicable High Yield Discount
Obligation” under the Internal Revenue Code. The holders of the debentures will have the option on June 15, 2012,
June 15, 2016 and June 15, 2021 to require the Company to repurchase some or all of their remaining debentures.
The redemption price for such redemptions will equal 100% of the principal amount of the debentures plus accrued
interest. If a fundamental change (as defined in the Indenture) occurs, the Company will be required to offer to
repurchase the debentures at 100% of their principal amount, plus accrued interest and, under certain circumstances,
a “make-whole premium”.

Embedded Derivatives on the Variable Interest Senior Convertible Debt:

The portion of the interest on the Company’s convertible debt which is computed by reference to the cash
dividends paid on the Company’s common stock is considered an embedded derivative within the convertible debt,
which the Company is required to separately value. In accordance with authoritative guidance on accounting for
derivatives and hedging, the Company has bifurcated these embedded derivatives and estimated the fair value of the
embedded derivative liability including using a third party valuation. The resulting discount created by allocating a
portion of the issuance proceeds to the embedded derivative is then amortized to interest expense over the term of
the debt using the effective interest method. Changes to the fair value of these embedded derivatives are reflected
quarterly in the Company’s consolidated statements of operations as “Change in fair value of derivatives embedded
within convertible debt.” The value of the embedded derivative is contingent on changes in interest rates of debt
instruments maturing over the duration of the convertible debt as well as projections of future cash and stock
dividends over the term of the debt.

A summary of non-cash interest expense associated with the amortization of the debt discount created by the
embedded derivative liability associated with the Company’s variable interest senior convertible debt is as follows:

Year Ended December 31,
2008

2007

2009

6.75% note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 331
1,210
6.75% exchange notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
455
3.875% convertible debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,394
5% convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ — $ —
—
(28)
3,796

—
360
5,445

Interest expense associated with embedded derivatives . . . . . . . . . . . . . $5,390

$5,805

$3,768

A summary of non-cash changes in fair value of derivatives embedded within convertible debt is as follows:

Year Ended December 31,
2008

2009

2007

6.75% note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,323)
(3,237)
6.75% exchange notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(29,745)
3.875% convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . .
(620)
5% convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ — $ —
—
(8,104)
1,995

—
16,082
8,255

Loss (gain) on changes in fair value of derivatives embedded

within convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(35,925)

$24,337

$(6,109)

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The following table reconciles the fair value of derivatives embedded within convertible debt:

Balance at January 1, 2007 . . . . . . . . .
Loss (gain) from changes in fair value

of embedded derivatives. . . . . . . . . .

Balance at December 31, 2007 . . . . . .
Gain from changes in fair value of

embedded derivatives . . . . . . . . . . . .

Balance at December 31, 2008 . . . . . .
Issuance of 6.75% Note . . . . . . . . . . . .
Issuance of 6.75% Exchange Notes . . .
Loss from changes in fair value of

6.75%
Note

6.75%
Exchange
Notes

3.875%
Convertible
Debentures

5%
Convertible
Notes

Total

$ — $ — $ 59,807

$ 35,666

$ 95,473

—

—

—

—

—

—

8,104

67,911

(1,995)

6,109

33,671

101,582

(16,082)

(8,255)

(24,337)

—
21,567
—

—
—
44,315

51,829
—
—

25,416
(2,485)
(23,551)

77,245
19,082
20,764

embedded derivatives . . . . . . . . . . . .

2,323

3,237

29,745

620

35,925

Balance at December 31, 2009 . . . . . .

$23,890

$47,552

$ 81,574

$

— $153,016

Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:

After giving effect to the recording of the embedded derivative liability as a discount to the convertible debt,
the Company’s common stock had a fair value at the issuance date of the debt in excess of the conversion price
resulting in a beneficial conversion feature. The accounting guidance on debt with conversion and other options
requires that the intrinsic value of the beneficial conversion feature be recorded to additional paid-in capital and as a
discount on the debt. The discount is then amortized to interest expense over the term of the debt using the effective
interest method. The beneficial conversion feature has been recorded, net of income taxes, as an increase to
stockholders’ equity.

A summary of non-cash interest expense associated with the amortization of the debt discount created by the

beneficial conversion feature on the Company’s variable interest senior convertible debt is as follows:

Year Ended December 31,
2008

2007

2009

Amortization of beneficial conversion feature:
6.75% note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 289
748
6.75% exchange notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.875% convertible debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(51)
1,883
5% convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ — $ —
—
(215)
2,083

—
(54)
3,017

Interest expense associated with beneficial conversion feature . . . . . . . . $2,869

$2,963

$1,868

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Unamortized Debt Discount on Variable Interest Senior Convertible Debt:

The following table reconciles unamortized debt discount within convertible debt:

Balance at January 1, 2007 . . . . . . . . .
Amortization of embedded

derivatives . . . . . . . . . . . . . . . . . . . .

Amortization of beneficial conversion

feature. . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2007 . . . . . .
Amortization of embedded

derivatives . . . . . . . . . . . . . . . . . . . .

Amortization of beneficial conversion

feature. . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2008 . . . . . .
Issuance of convertible notes -

6.75%
Note

6.75%
Exchange
Notes

3.875%
Convertible
Debentures

5%
Convertible
Notes

Total

$ — $ — $84,056

$ 53,906

$137,962

—

—

—

—

—

—

—

—

—

—

28

215

(3,796)

(3,768)

(2,083)

(1,868)

84,299

48,027

132,326

(360)

(5,445)

(5,805)

54

(3,017)

(2,963)

83,993

39,565

123,558

embedded derivative . . . . . . . . . . . .

21,567

44,315

Issuance of convertible notes -

beneficial conversion feature . . . . . .

18,808

27,392

Issuance of 6.75% Note-write-off of

unamortized debt discount . . . . . . . .

Issuance of 6.75% Exchange Notes-
write-off of unamortized debt
discount

. . . . . . . . . . . . . . . . . . . . .

Amortization of embedded

—

—

—

—

—

—

—

—

—

—

65,882

46,200

(3,311)

(3,311)

(30,977)

(30,977)

derivatives . . . . . . . . . . . . . . . . . . . .

(331)

(1,210)

(455)

(3,394)

(5,390)

Amortization of beneficial conversion

feature. . . . . . . . . . . . . . . . . . . . . . .

(289)

(748)

51

(1,883)

(2,869)

Balance at December 31, 2009 . . . . . .

$39,755

$69,749

$83,589

$

— $193,093

Loss on Extinguishment of Debt:

The exchange of the 5% Notes for the 6.75% Notes and the 6.75% Exchange Notes qualifies as extinguishment
of debt due to the significant change in terms. The loss was $18,573 for the year ended December 31, 2009. A
summary of the Company’s loss on the extinguishment of the 5% Notes for the year ended December 31, 2009 is as
follows:

Issuance of additional notes payable . . . . . . . . . . . . . . . . . . . . . . .
Termination of embedded derivative . . . . . . . . . . . . . . . . . . . . . . .
Write-off of deferred finance costs . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of unamortized debt discount, net . . . . . . . . . . . . . . . . .

6.75%
Note

$
770
(2,485)
257
3,311

6.75%
Exchange
Notes

$ 7,034
(23,551)
2,260
30,977

Total

$ 7,804
(26,036)
2,517
34,288

Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,853

$ 16,720

$ 18,573

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Revolving Credit Facility — Liggett:

Liggett has a $50,000 credit facility with Wachovia Bank, N.A. (“Wachovia”) under which $17,382 was
outstanding at December 31, 2009. Availability as determined under the facility was approximately $18,600 based
on eligible collateral at December 31, 2009. The facility is collateralized by all inventories and receivables of
Liggett and a mortgage on Liggett’s manufacturing facility. The facility requires Liggett’s compliance with certain
financial and other covenants including a restriction on Liggett’s ability to pay cash dividends unless Liggett’s
borrowing availability, as defined, under the facility for the 30-day period prior to the payment of the dividend, and
after giving effect to the dividend, is at least $5,000 and no event of default has occurred under the agreement,
including Liggett’s compliance with the covenants in the credit facility.

The term of the Wachovia facility expires on March 8, 2012, subject to automatic renewal for additional one-
year periods unless a notice of termination is given by Wachovia or Liggett at least 60 days prior to such date or the
anniversary of such date. Prime rate loans under the facility bear interest at a rate equal to the prime rate of
Wachovia with Eurodollar rate loans bearing interest at a rate of 2.0% above Wachovia’s adjusted Eurodollar rate.
The facility contains covenants that provide that Liggett’s earnings before interest, taxes, depreciation and
amortization, as defined under the facility, on a trailing twelve month basis, shall not be less than $100,000 if
Liggett’s excess availability, as defined, under the facility, is less than $20,000. The covenants also require that
annual capital expenditures, as defined under the facility (before a maximum carryover amount of $2,500), shall not
exceed $10,000 during any fiscal year.

Equipment Loans — Liggett:

In August 2006, Liggett purchased equipment for $7,922 through a financing agreement, payable in 30
installments of $191 and then 30 installments of $103. Interest is calculated at 5.15%. Liggett was required to
provide a security deposit equal to 20% of the funded amount ($1,584).

In May 2007, Liggett purchased equipment for $1,576 through a financing agreement, payable in 60

installments of $32. Interest is calculated at 7.99% per annum.

In August 2008, Liggett purchased equipment for $2,745 through a financing agreement, payable in 60
installments of $53. Interest is calculated at 5.94% per annum. Liggett was required to provide a security deposit
equal to approximately 15% of the funded amount ($428).

Each of these equipment loans is collateralized by the purchased equipment.

Note Payable — V.T. Aviation:

In February 2001, V.T. Aviation LLC, a subsidiary of Vector Research Ltd., purchased an airplane for $15,500
and borrowed $13,175 to fund the purchase. The loan, which is collateralized by the airplane and a letter of credit
from the Company for $775, is guaranteed by Vector Research, VGR Holding and the Company. The loan is payable
in 119 monthly installments of $125, including annual interest of 2.31% above the 30-day commercial paper rate,
with a final payment of $2,224 based on current interest rates.

Note Payable — VGR Aviation:

In February 2002, V.T. Aviation purchased an airplane for $6,575 and borrowed $5,800 to fund the purchase.
The loan is guaranteed by the Company. The loan is payable in 119 monthly installments of $40, including annual
interest of 2.75% above the 30-day average commercial paper rate, with a final payment of $2,855 based on current
interest rates. During the fourth quarter of 2003, this airplane was transferred to the Company’s direct subsidiary,
VGR Aviation LLC, which assumed the debt.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Fair Value of Notes Payable and Long-term Debt:

The estimated fair value of the Company’s notes payable and long-term debt has been determined by the
Company using available market information and appropriate valuation methodologies including the evaluation of
the Company’s credit risk as described in Note 1. However, considerable judgment is required to develop the
estimates of fair value and, accordingly, the estimate presented herein are not necessarily indicative of the amount
that could be realized in a current market exchange.

Notes payable and long-term debt . . . . . . . . . . . . . $334,920

$573,439

$307,799

$447,520

December 31,
2009

December 31,
2008

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value

Scheduled Maturities:

Scheduled maturities of long-term debt are as follows:

Principal

Unamortized
Discount

Net

Year Ending December 31:
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,889
16,253
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103,336
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,039
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
158,144
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
254,090
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

— $ 21,889
14,983
21,017
1,039
48,640
249,241

1,270
82,319
—
109,504
4,849

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $554,751

$197,942

$356,809

The scheduled maturities of $103,336 (principal amount) in 2012 reflect $99,000 (principal amount), which
may be required to be redeemed in 2012 in accordance with the terms of its 3.875% Variable Interest Senior
Convertible Debentures due 2026.

Weighted-Average Interest Rate on Current Maturities of Long-Term Debt:

The weighted-average interest rate on the Company’s current maturities of long-term debt at December 31,

2009 was approximately 11.74%.

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

8. COMMITMENTS

Certain of the Company’s subsidiaries lease facilities and equipment used in operations under both
month-to-month and fixed-term agreements. The aggregate minimum rentals under operating leases with non-
cancelable terms of one year or more as of December 31, 2009 are as follows:

Lease
Commitments

Sublease
Rentals

Net

Year Ending December 31:
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,218
3,709
3,477
1,646
598
—

$ 946
2,135
1,920
651
159
—

$3,272
1,574
1,557
995
439
—

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,648

$5,811

$7,837

In 2001, the Company entered into an operating sublease for space in an office building in New York. The
lease, as amended, expires in 2013. Minimum rental expense over the entire period is $10,584. A rent abatement
received upon entering into the lease is recognized on a straight line basis over the life of the lease. The Company
pays operating expense escalation ($40 in 2009) in monthly installments along with installments of the base rent.

The Company’s rental expense for the years ended December 31, 2009, 2008 and 2007 was $3,904, $3,825 and

3,928, respectively.

9. EMPLOYEE BENEFIT PLANS

Defined Benefit Plans and Postretirement Plans:

Defined Benefit Plans. The Company sponsors three defined benefit pension plans (two qualified and one
non-qualified) covering virtually all individuals who were employed by Liggett on a full-time basis prior to 1994.
Future accruals of benefits under these three defined benefit plans were frozen between 1993 and 1995. These
benefit plans provide pension benefits for eligible employees based primarily on their compensation and length of
service. Contributions are made to the two qualified pension plans in amounts necessary to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974. The plans’ assets and benefit
obligations were measured at December 31, 2009 and 2008, respectively.

The Company also sponsors a Supplemental Retirement Plan (“SERP”) where the Company will pay
supplemental retirement benefits to certain key employees, including executive officers of the Company. In
January 2006, the Company amended and restated its SERP (the “Amended SERP”), effective January 1, 2005. The
amendments to the plan were intended, among other things, to cause the plan to meet the applicable requirements of
Section 409A of the Internal Revenue Code. The Amended SERP is intended to be unfunded for tax purposes, and
payments under the Amended SERP will be made out of the general assets of the Company except that, under the
terms of the Chairman’s amended employment agreement, the Company agreed during 2006, 2007 and 2008 to pay
$125 per quarter into a separate trust for him that was used to fund a portion of his benefits under the Amended
SERP. Under the Amended SERP, the benefit payable to a participant at his normal retirement date is a lump sum
amount which is the actuarial equivalent of a predetermined annual retirement benefit set by the Company’s board
of directors. Normal retirement date is defined as the January 1 following the attainment by the participant of the
later of age 60 or the completion of eight years of employment following January 1, 2002 with the Company or a
subsidiary, except that, under the terms of the Chairman’s amended employment agreement, his normal retirement
date was accelerated by one year to December 30, 2008.

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In connection with the retirement of the Chairman, he received in July 2009 a payment of $20,860 under the
terms of the Company’s Supplemental Retirement Plan. The payment was partially funded by approximately
$1,554 held in the separate trust discussed above.

In April 2008, the SERP was amended to provide the Company’s President and Chief Executive Officer with
an additional benefit under the SERP equal to a $736 lifetime annuity beginning January 1, 2013. This additional
benefit vests in full on January 1, 2013, subject to his remaining continuously employed by the Company through
that date, subject to partial vesting for termination of employment under certain circumstances. In addition, in the
event of a termination of his employment under the circumstances where he is entitled to severance payments under
his employment agreement, he will be credited with an additional 36 months of service towards vesting under the
SERP. As a result of the additional benefit granted to him, the President and Chief Executive Officer will be eligible
to receive a total lump sum retirement benefit of $20,546 in 2013, an increase of $7,122 over the benefit he would
have been entitled to receive under the SERP prior to the amendment, assuming a January 1, 2013 retirement date.
The $7,122 increase will be recognized as an expense in the years ended December 31, 2010, 2011 and 2012.

At December 31, 2009, the aggregate lump sum equivalents of the annual retirement benefits payable under the
Amended SERP at normal retirement dates occurring during the following years is as follows: 2010 – $0; 2011 –
$1,676; 2012 – $1,703; 2013 – $20,647; 2014 – $7,232 and 2015 to 2019 – $0. In the case of a participant who
becomes disabled prior to his normal retirement date or whose service is terminated without cause, the participant’s
benefit consists of a pro-rata portion of the full projected retirement benefit to which he would have been entitled
had he remained employed through his normal retirement date, as actuarially discounted back to the date of
payment. A participant who dies while working for the Company or a subsidiary (and before becoming disabled or
attaining his normal retirement date) will be paid an actuarially discounted equivalent of his projected retirement
benefit; conversely, a participant who retires beyond his normal retirement date will receive an actuarially increased
equivalent of his projected retirement benefit.

Postretirement Medical and Life Plans. The Company provides certain postretirement medical and life
insurance benefits to certain employees. Substantially all of the Company’s manufacturing employees as of
December 31, 2009 are eligible for postretirement medical benefits if they reach retirement age while working for
Liggett or certain affiliates. Retirees are required to fund 100% of participant medical premiums and, pursuant to
union contracts, Liggett reimburses approximately 400 hourly retirees, who retired prior to 1991, for Medicare
Part B premiums. In addition, the Company provides life insurance benefits to approximately 215 active employees
and 475 retirees who reach retirement age and are eligible to receive benefits under one of the Company’s defined
benefit pension plans. The Company’s postretirement liabilities are comprised of Medicare Part B and life insurance
premiums.

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the

pension plans and other postretirement benefits:

Pension Benefits

Other
Postretirement
Benefits

2009

2008

2009

2008

Change in benefit obligation:

Benefit obligation at January 1 . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gap period cash flow . . . . . . . . . . . . . . . . . . . . . .
Gap period service and interest cost . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses paid . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . .

$(156,318)
(1,319)
(9,385)
—
—
32,903
507
(8,431)

$(159,776)
(3,789)
(9,525)
3,192
(3,328)
12,583
—
4,325

$(8,743)
(15)
(566)
—
—
596
—
(677)

$(9,836)
(14)
(591)
194
(151)
642
—
1,013

Benefit obligation at December 31 . . . . . . . . . . . .

$(142,043)

$(156,318)

$(9,405)

$(8,743)

Change in plan assets:

Fair value of plan assets at January 1 . . . . . . . . . .
Gap period cash flow . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . .
Expenses paid . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 111,266
—
26,085
(507)
21,225
(32,903)

$ 169,465
(3,278)
(42,810)
—
472
(12,583)

$ — $ —
—
—
—
643
(643)

—
—
—
596
(596)

Fair value of plan assets at December 31 . . . . . . .

$ 125,166

$ 111,266

$ — $ —

Funded status at December 31 . . . . . . . . . . . . . . . . .

$ (16,877)

$ (45,052)

$(9,405)

$(8,743)

Amounts recognized in the consolidated balance

sheets:

Prepaid pension costs . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . .
Non-current employee benefit liabilities . . . . . . . . . .

$

8,994
(357)
(25,514)

$

2,901
(21,139)
(26,814)

$ — $ —
(701)
(8,042)

(680)
(8,725)

Net amounts recognized. . . . . . . . . . . . . . . . . . . . . .

$ (16,877)

$ (45,052)

$(9,405)

$(8,743)

Pension Benefits
2008

2007

2009

Other Postretirement
Benefits
2008

2009

2007

Service cost — benefits earned during the

period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on projected benefit obligation . . . .
Expected return on assets . . . . . . . . . . . . . . . . .
Prior service cost . . . . . . . . . . . . . . . . . . . . . . .
Time contractual termination benefits . . . . . . . .
Amortization of net loss (gain) . . . . . . . . . . . . .

$ 1,319
9,385
(7,817)
801
(1,808)
2,136

$ 4,139
9,525
(12,145)
1,402
—
98

$ 4,246
9,122
(12,726)
1,402
632
705

$ 15
567
—
—
—
(163)

$ 15
591
—
—
—
(180)

$ 18
591
—
—
—
(105)

Net expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,016

$ 3,019

$ 3,381

$ 419

$ 426

$ 504

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The following table summarizes amounts in accumulated other comprehensive loss that are expected to be

recognized as components of net periodic benefit cost for the year ending December 31, 2010.

Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,018
1,358

$ —
(130)

Defined
Benefit
Pension Plans

Post-
Retirement
Plans

Total

$2,018
1,228

As of December 31, 2009, current year accumulated other comprehensive income, before income taxes,

consists of the following:

Defined
Benefit
Pension Plans

Post-
Retirement
Plans

Prior year accumulated other comprehensive income . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . . . . . . . .
Effect of settlement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) gain arising during the year . . . . . . . . . . . . . . . . . .

$(46,314)
801
(1,808)
2,136
9,837

$1,842
—
—
(163)
(676)

Total

$(44,472)
801
(1,808)
1,973
9,161

Current year accumulated other comprehensive (loss)

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(35,348)

$1,003

$(34,345)

As of December 31, 2009, there was $34,345 of items not yet recognized as a component of net periodic
pension benefit, which consisted of future pension benefits of $35,348 associated with the amortization of net loss.

As of December 31, 2009, there was $1,003 of items not yet recognized as a component of net periodic

postretirement benefit, which consisted of future benefits associated with the amortization of net gains.

As of December 31, 2008, current year accumulated other comprehensive income, before income taxes,

consists of the following:

Prior year accumulated other
comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service costs . . . . . . . . . . . . . . . . . . . .
Amortization of gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) gain arising during the year . . . . . . . . . . . . . . . . . .
Gap period adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current year accumulated other comprehensive (loss)

Defined
Benefit
Pension Plans

Post-
Retirement
Plans

Total

$ 5,128
1,402
99
(53,316)
373

$1,054
—
(180)
1,013
(45)

$ 6,182
1,402
(81)
(52,303)
328

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(46,314)

$1,842

$(44,472)

As of December 31, 2008, there was $46,314 of items not yet recognized as a component of net periodic
pension benefit, which consisted of future pension expense of $801 associated with the amortization of prior service
cost and future pension benefits of $45,513 associated with the amortization of net loss.

As of December 31, 2008, there was $1,842 of items not yet recognized as a component of net periodic

postretirement benefit, which consisted of future benefits associated with the amortization of net gains.

As of December 31, 2009, three of the Company’s four defined benefit plans experienced accumulated benefit
obligations in excess of plan assets, for which in the aggregate the projected benefit obligation, accumulated benefit

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

obligation and fair value of plan assets were $90,216, $90,216 and $64,345, respectively. As of December 31, 2008,
three of the Company’s four defined benefit plans experienced accumulated benefit obligations in excess of plan
assets, for which in the aggregate the projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $105,677, $105,677 and $57,723, respectively.

Pension Benefits

Other Postretirement
Benefits

2009

2008

2007

2009

2008

2007

Weighted average assumptions:

Discount rates — benefit obligation . . . . . . . . . . . . . . . . . . . . 5.75% 6.75% 6.25% 5.75% 6.75% 6.25%
. . . . . . . . . . . . . . . . . . . . . . . . 6.75% 6.25% 5.85% 6.75% 6.25% 5.85%
Discount rates — service cost
Assumed rates of return on invested assets . . . . . . . . . . . . . . . 7.50% 7.50% 8.50% —
Salary increase assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . N/A

—
3.00% 3.00% 3.00%

N/A

N/A

—

Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality
bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analysis analyzes
the cash flow from each of the Company’s four benefit plans as well as a separate analysis of the cash flows from the
postretirement medical and life insurance plans sponsored by Liggett. The aforementioned analyses then construct a
hypothetical bond portfolio whose cash flow from coupons and maturities match the year-by-year, projected benefit
cash flow from the respective pension or retiree health plans. The Company uses the lower discount rate derived
from the two independent analyses in the computation of the benefit obligation and service cost for each respective
retirement liability. The Company uses the discount rate derived from the analysis in the computation of the benefit
obligation and service cost for all the plans respective retirement liability.

The Company considers input from its external advisors and historical returns in developing its expected rate
of return on plan assets. The expected long-term rate of return is the weighted average of the target asset allocation
of each individual asset class. The Company’s actual 10-year annual rate of return on its pension plan assets was
3.0%, 2.5% and 6.7% for the years ended December 31, 2009, 2008 and 2007, respectively, and the Company’s
actual five-year annual rate of return on its pension plan assets was 3.5%, 1.2% and 11.3% for the years ended
December 31, 2009, 2008 and 2007, respectively.

Gains and losses resulting from changes in actuarial assumptions and from differences between assumed and
actual experience, including, among other items, changes in discount rates and changes in actual returns on plan
assets as compared to assumed returns. These gains and losses are only amortized to the extent that they exceed 10%
of the greater of Projected Benefit Obligation and the fair value of assets. For the year ended December 31, 2009,
Liggett used a 16.14-year period for its Hourly Plan and an 18.11-year period for its Salaried Plan to amortize
pension fund gains and losses on a straight line basis. Such amounts are reflected in the pension expense calculation
beginning the year after the gains or losses occur. The amortization of deferred losses negatively impacts pension
expense in the future.

Plan assets are invested employing multiple investment management firms. Managers within each asset class
cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk is controlled
through a diversification among asset classes, managers, styles and securities. Risk is further controlled both at the
manager and asset class level by assigning excess return and tracking error targets. Investment managers are
monitored to evaluate performance against these benchmark indices and targets.

Allowable investment types include equity, investment grade fixed income, high yield fixed income, hedge
funds and short term investments. The equity fund is comprised of common stocks and mutual funds of large,
medium and small companies, which are predominantly U.S. based. The investment grade fixed income fund
includes managed funds investing in fixed income securities issued or guaranteed by the U.S. government, or by its
respective agencies, mortgage backed securities, including collateralized mortgage obligations, and corporate debt
obligations. The high yield fixed income fund includes a fund which invests in non-investment grade corporate debt

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

securities. The hedge funds invest in both equity, including common and preferred stock, and debt obligations,
including convertible debentures, of private and public companies. The Company generally utilizes its short term
investments, including interest-bearing cash, to pay benefits and to deploy in special situations.

In 2008, the Liggett Employee Benefits Committee temporarily suspended its target asset allocation per-
centages due to the volatility in the financial markets. Even though such allocation percentages were suspended,
investment manager performance versus their respective benchmarks was still monitored on a regular basis.

Vector’s defined benefit retirement plan allocations at December 31, 2009 and 2008, by asset category, were as

follows:

Asset category:

Plan Assets at
December 31,
2009
2008

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment grade fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High yield fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50% 44%
26% 26%
5%
2%
8%
8%
14% 17%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100% 100%

The defined benefit plans’ recurring financial assets and liabilities subject to fair value measurements and the

necessary disclosures are as follows:

Description

Assets:

Insurance contracts . . . . . . . . .
Amounts in individually
managed investment
accounts:

Cash, mutual funds and

common stock . . . . . . . . . .
Common collective trusts . . . .
Investment partnership . . . . . .

Fair Value Measurements as of December 31, 2009

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Total

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

$

2,684

$ —

$ 2,684

$ —

71,726
40,210
10,182

71,726
—
—

—
38,752
—

$41,436

—
1,458
10,182

$11,640

Total

. . . . . . . . . . . . . . . . .

$124,802

$71,726

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Fair Value Measurements as of December 31, 2008

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Total

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable Inputs
(Level 3)

$

2,280

$ —

$ 2,280

$ —

Description

Assets:

Insurance contracts . . . . . . . . .
Amounts in individually
managed investment
accounts:

Cash, mutual funds and

common stock . . . . . . . . . .
Common collective trusts . . . .
Investment partnership . . . . . .

Total . . . . . . . . . . . . . . . . . . .

$109,934

$58,634

58,634
39,273
9,747

58,634
—
—

—
33,735
—

$36,015

—
5,538
9,747

$15,285

The fair value determination disclosed above of assets as Level 3 under the fair value hierarchy was determined
based on unobservable inputs and were based on company assumptions, and information obtained from the
investments based on the indicated market values of the underlying assets of the investment portfolio.

The changes in the fair value of these Level 3 investments as of December 31, 2009 and 2008 were as follows:

December 31,
2009

December 31,
2008

Prior year balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on long-term investments . . . . . . . . . . . . . . . . . . . . .
Realized gain on long-term investments . . . . . . . . . . . . . . . . . . . . . .

$15,285
(8,978)
3,913
1,420

$ 34,637
(12,700)
(8,307)
1,655

Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . .

$11,640

$ 15,285

For 2009 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates
between (7.24)% and 24.69% between 2010 and 2018 and 4.5% after 2019. For 2008 measurement purposes,
annual increases in Medicare Part B trends were assumed to equal rates between 0.0% and 6.6% between 2009 and
2017 and 4.5% after 2018.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.

A 1% change in assumed health care cost trend rates would have the following effects:

1% Increase

1% Decrease

Effect on total of service and interest cost components . . . . . . . . . . . . . .
Effect on benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9
$
$164

(9)
$
$(151)

To comply with ERISA’s minimum funding requirements, the Company does not currently anticipate that it
will be required to make any funding to the pension plans for the pension plan year beginning on January 1, 2010
and ending on December 31, 2010. Any additional funding obligation that the Company may have for subsequent
years is contingent on several factors and is not reasonably estimable at this time.

F-37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Estimated future pension and postretirement medical benefits payments are as follows:

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 — 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pension

12,370
13,706
13,339
31,920
18,048
48,386

Postretirement
Medical

680
756
703
687
674
3,347

Profit Sharing and Other Plans:

The Company maintains 401(k) plans for substantially all U.S. employees which allow eligible employees to
invest a percentage of their pre-tax compensation. The Company contributed to the 401(k) plans and expensed
$1,098, $1,095 and $828 for the years ended December 31, 2009, 2008 and 2007, respectively.

10.

INCOME TAXES

The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S. sub-

sidiaries. The amounts provided for income taxes are as follows:

Year Ended December 31,

2009

2008

2007

Current:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 94,640
19,274

$25,747
7,889

$ 5,035
3,109

$ 113,914

$33,636

$ 8,144

Deferred:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (85,158)
(25,025)

$ 5,170
(4,738)

$40,575
4,081

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,731

$34,068

$52,800

(110,183)

432

44,656

F-38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and

liabilities are as follows:

Excess of tax basis over book basis- non-

consolidated entities . . . . . . . . . . . . . . . . . . . . . . .
Deferral on Philip Morris brand transaction . . . . .
Employee benefit accruals . . . . . . . . . . . . . . . . . .
Book/tax differences on fixed and Intangible

assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book/tax differences on inventory . . . . . . . . . . . .
Book/tax differences on long-term investments . . .
Impact of accounting on convertible debt . . . . . . .
Impact of timing of settlement payments . . . . . . .
Various U.S. state tax loss carryforwards . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . .

December 31, 2009

December 31, 2008

Deferred Tax
Assets

Deferred Tax
Liabilities

Deferred Tax
Assets

Deferred Tax
Liabilities

$ 8,876
—
11,084

$ —
—
—

$ 3,938
—
18,803

$

—
75,466
—

—
—
9,950
—
10,099
15,138
8,354
(9,509)

29,671
13,015

13,467
—
—
6,221
—

—

26,908

—
—
15,211
26,123
(15,211)

18,890
7,854
—
12,196
—

$53,992

$62,374

$ 48,864

$141,314

The Company provides a valuation allowance against deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation
allowance of $9,509 and $15,211 at December 31, 2009 and 2008, respectively, consisted primarily of a reserve
against various state and local net operating loss carryforwards, primarily resulting from Vector Tobacco’s losses.

The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which
represent temporary differences in the application of accounting rules established by generally accepted accounting
principles and income tax laws.

Deferred federal income tax expense differs in 2009, 2008 and 2007 as a result of the utilization of net
operating losses in 2007 and reclassifications between current and deferred tax liabilities resulting from the brands
transaction in 2009. The deferred federal tax expense in 2007 related to the deferred income tax expenses associated
with the utilization of net operating losses and the impact of a change in accounting method for deductibility of
accrued settlement costs. The deferred tax expense in 2008 related to the deferred tax expenses associated with the
utilization of tax credits. The deferred federal tax benefit in 2009 related to the deferred income tax benefit
associated with the reclassification of taxable income on the brands transaction from deferred taxable income to
current taxable income (see Note 16) and from the reduction of a previously established valuation allowance against
a deferred tax asset. The valuation allowance was reduced for the recognition of state tax net operating losses at
Vector Tobacco after evaluating the impact of the negative and positive evidence that such asset would be realized.
The Company based its conclusion on the fact that Vector Tobacco reported state taxable income on a separate
company basis for the second consecutive year in 2009.

As of December 31, 2009, the Company’s deferred income tax liabilities exceeded its deferred income tax
assets by $8,382. As of December 31, 2008, the Company’s deferred income tax liabilities exceeded its deferred
income tax assets by $92,450. The largest component of the Company’s deferred tax liabilities at December 31,
2008 existed because of differences that resulted from a 1998 and 1999 transaction with Philip Morris Incorporated
where a subsidiary of Liggett contributed three of its premium cigarette brands to Trademarks LLC, a newly-formed
limited liability company. Philip Morris exercised its option to purchase the remaining interest in Trademarks on
February 19, 2009. (See Note 16.)

F-39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In connection with the transaction, the Company recognized in 1999 a pre-tax gain of $294,078 in its
consolidated financial statements and established a deferred tax liability of $103,100 relating to the gain. As a result
of the exercise of the option, the Company was required to pay tax in the amount of the deferred tax liability. In
connection with an examination of the Company’s 1998 and 1999 federal income tax returns, the Internal Revenue
Service issued to the Company in September 2003 a notice of proposed adjustment. The notice asserted that, for tax
reporting purposes, the entire gain should have been recognized in 1998 and in 1999 in the additional amounts of
$150,000 and $129,900, respectively, rather than upon the exercise of the options. In July 2006, the Company
entered into a settlement with the Internal Revenue Service with respect to the Philip Morris brand transaction. As
part of the settlement, the Company agreed that $87,000 of the gain on the transaction would be recognized by the
Company as income for tax purposes in 1999 and that the balance of the remaining gain, net of previously
capitalized expenses of $900, ($192,000) would be recognized by the Company as income in 2009, upon exercise of
the option.

Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax

rate are summarized as follows:

Year Ended December 31,
2008

2007

2009

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$28,537

$94,572

$126,603

Federal income tax expense at statutory rate . . . . . . . . . . . . . . . . .
Increases (decreases) resulting from:

State income taxes, net of federal income tax benefits . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of domestic production deduction . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity and other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of tax audit settlements . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other tax contingencies. . . . . . . . . . . . . . . . . . . . . . .
Changes in valuation allowance, net of equity and tax audit

9,988

33,100

44,311

261
1,682
(1,201)
(833)
—
—
—

2,048
1,771
(1,608)
—
381
—
—

4,674
2,950
—
—
115
(468)
2,114

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6,166)

(1,624)

(896)

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,731

$34,068

$ 52,800

F-40

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The following table summarizes the activity related to the unrecognized tax benefits:

Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to current year. . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$11,685
—
2,242
(95)
—
(3,227)

Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to current year. . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to current year. . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expirations of the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,605
—
747
(317)
—
(3,532)

7,503
3,380
2,619
(550)
(903)
(1,833)

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,216

In the event the unrecognized tax benefits of $10,216 and $7,503 at December 31, 2009 and 2008, respectively,
were recognized, such recognition would impact the annual effective tax rates. During 2009, the accrual for
potential penalties and interest related to these unrecognized tax benefits was increased by $459, and in total, as of
December 31, 2009, a liability for potential penalties and interest of $2,650 has been recorded. During 2008, the
accrual for potential penalties and interest related to these unrecognized tax benefits was reduced by $619, and in
total, as of December 31, 2008, a liability for potential penalties and interest of $2,191 has been recorded. The
Company classifies all tax-related interest and penalties as income tax expense.

It is reasonably possible the Company may recognize up to approximately $1,900 of currently unrecognized
tax benefits over the next 12 months, pertaining primarily to expiration of statutes of limitations of positions
reported on state and local income tax returns. The Company files U.S. and state and local income tax returns in
jurisdictions with varying statutes of limitations.

In 2009, the Internal Revenue Service concluded an audit of the Company’s income tax return for the year
ended December 31, 2005. There was no material impact on the Company’s consolidated financial statements as a
result of the audit.

11. STOCK COMPENSATION

The Company grants equity compensation under its Amended and Restated 1999 Long-Term Incentive Plan
(the “1999 Plan”). As of December 31, 2009, there were approximately 3,783,653 shares available for issuance
under the 1999 Plan.

Stock Options. The Company accounts for stock compensation by valuing unvested stock options granted
prior to January 1, 2006 under the fair value method of accounting and expensing this amount in the statement of
operations over the stock options’ remaining vesting period.

F-41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The Company recognized compensation expense of $292 ($173 net of income taxes), $186 ($110 net of
income taxes) and $197 ($116 net of income taxes) related to stock options in the years ended December 31, 2009,
2008 and 2007 respectively.

The terms of certain stock options awarded under the 1999 Plan in December 2009 and January 2001 provide
for common stock dividend equivalents (at the same rate as paid on the common stock) with respect to the shares
underlying the unexercised portion of the options. The Company recognizes payments of the dividend equivalent
rights on these options as reductions in additional paid-in capital on the Company’s consolidated balance sheet
($4,342, $4,865 and $6,475 net of taxes, for the years ended December 31, 2009, 2008 and 2007, respectively),
which is included as “Distributions on common stock” in the Company’s consolidated statement of changes in
stockholders’ equity.

The fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model.
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including expected stock price characteristics which are significantly different from
those of traded options, and because changes in the subjective input assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based
compensation awards.

The assumptions used under the Black-Scholes option pricing model in computing fair value of options are
based on the expected option life considering both the contractual term of the option and expected employee
exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal to the expected
option life and the expected volatility of the Company’s common stock over the expected term of the option. The
assumptions used for grants in the year ended December 31, 2009 were as follows:

2009

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected holding period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.0% – 3.4%
24.97% – 35.93%
0.0%
4.79 – 10 years
$3.58 – $7.40

F-42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

A summary of employee stock option transactions follows:

Number of
Shares

Weighted Average
Exercise Price

Outstanding on January 1, 2007 . . . .
Granted. . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . .

10,338,476
—
(492,605)
(10,784)

Outstanding on December 31, 2007 . .
Granted. . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . .

Outstanding on December 31, 2008 . .
Granted. . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . .

9,835,087
—
(4,284,490)
(1,473)

5,549,124
1,120,000
(4,398,627)
(67,669)

Outstanding on December 31, 2009 . .

2,202,828

Options exercisable at:

December 31, 2007 . . . . . . . . . . . .
December 31, 2008 . . . . . . . . . . . .
December 31, 2009 . . . . . . . . . . . .

9,159,824
5,169,119
1,056,999

$ 8.83
—
$ 7.91
$21.60

$ 8.80
—
$ 5.45
$29.46

$11.03
$14.07
$10.02
$16.75

$14.51

Weighted-Average
Remaining
Contractual Term
(Years)

2.8

Aggregate
Intrinsic
Value(1)

$69,246

1.8

$95,238

1.7

$13,708

6.6

$ 1,947

(1) The aggregate intrinsic value represents the amount by which the fair value of the underlying common stock
($14.00, $12.97 and $18.19 at December 31, 2009, 2008 and 2007, respectively) exceeds the option exercise
price.

Additional information relating to options outstanding at December 31, 2009 follows:

Range of
Exercise Prices

$0.00 – 8.83
$8.84 – 11.78
$11.79 – 14.73
$14.74 – 17.67
$17.68 – 20.62
$20.63 – 23.56
$23.57 – 26.51
$26.52 – 29.46

Outstanding
as of
12/31/2009

11,082
55,457
1,930,723
54,693
5,892
4,644
56,138
84,199

2,202,828

Options Outstanding

Weighted-Average
Remaining
Contractual Life
(Years)

Weighted-Average
Exercise Price

3.0
0.8
7.2
5.9
2.1
1.6
1.7
1.7

6.6

$ 8.55
$ 9.31
$13.75
$16.83
$18.76
$22.64
$25.04
$26.92

$14.51

Options Exercisable

Exercisable
as of
12/31/2009

11,082
55,457
798,568
41,019
5,892
4,644
56,138
84,199

1,056,999

Weighted-Average
Exercise Price

$ 8.55
$ 9.31
$13.31
$16.83
$18.76
$22.64
$25.04
$26.92

$14.96

As of December 31, 2009, there was $5,171 of total unrecognized compensation cost related to unvested stock
options. The cost is expected to be recognized over a weighted-average period of approximately four years at
December 31, 2009.

F-43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

As of December 31, 2008, there was $255 of total unrecognized compensation cost related to unvested stock
options. The cost is expected to be recognized over a weighted-average period of approximately one year at
December 31, 2008.

The Company reflects the tax savings resulting from tax deductions in excess of expense reflected in its

financial statements as a component of “Cash Flows from Financing Activities.”

Non-qualified options for 1,120,000 shares of common stock were issued during 2009. The exercise price of
the options granted was $14.07 in 2009. The exercise prices of the options granted in 2009 were at the fair value on
the dates of the grants. No options were granted in 2008 and 2007.

The Company has elected to use the long-form method under which each award grant is tracked on an
employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such
award. The Company then compares the fair value expense to the tax deduction received for each grant and
aggregates the benefits and deficiencies to establish its hypothetical APIC Pool.

The Company recognizes windfall tax benefits associated with the exercise of stock options directly to
stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized by the
Company upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated
with the award that the Company had recorded.

The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was
$22,771, $44,755 and $3,841, respectively. Tax benefits related to option exercises of $9,162, $18,304 and $2,055
were recorded as increases to stockholders’ equity for the years ended December 31, 2009, 2008 and 2007,
respectively.

During 2009, 4,384,907 options, exercisable at prices ranging from $9.48 to $14.15 per share, were exercised
for $1,144 in cash and the delivery to the Company of 2,814,866 shares of common stock with a fair market value of
$42,768, or $14.61, per share on the date of exercise.

During 2008, 4,080,467 options, exercisable at prices ranging from $5.99 to $12.69 per share, were exercised
for $87 in cash and the delivery to the Company of 1,375,895 shares of common stock with a fair market value of
$24,395, or $17.73, per share on the date of exercise.

During 2007, 469,148 options, exercisable at prices ranging from $7.25 to $14.45 per share, were exercised for
$5,100 in cash and the delivery to the Company of 8,008 shares of common stock with a fair market value of $168,
or $20.98, per share on the date of exercise.

Restricted Stock Awards.

In 2005, the President of the Company was awarded a restricted stock grant of
703,255 shares of the Company’s common stock, pursuant to the 1999 Plan. Pursuant to the restricted share
agreements, one-fourth of the shares vested on September 15, 2006, with an additional one-fourth vesting on each of
the three succeeding one-year anniversaries of the first vesting date through September 15, 2009. The Company
recorded deferred compensation of $11,340 representing the fair market value of the total restricted shares on the
dates of grant. The deferred compensation will be amortized over the vesting period as a charge to compensation
expense. The Company recorded an expense of $1,996, $2,843, and $2,835 associated with the grants for the years
ended December 31, 2009, 2008 and 2007, respectively.

In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted stock grant of
60,775 shares of the Company’s common stock pursuant to the 1999 Plan. Pursuant to his restricted share
agreement, one-fourth of the shares vested on November 1, 2006, with an additional one-fourth vesting on each of
the three succeeding one-year anniversaries of the first vesting date through November 1, 2009. The Company
recorded deferred compensation of $1,018 representing the fair market value of the restricted shares on the date of
grant. The Company recorded an expense of $218, $254 and $254 associated with the grant for each of the years
ended December 31, 2009, 2008 and 2007, respectively.

F-44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In June 2004, the Company granted 13,401 restricted shares of the Company’s common stock pursuant to the
1999 Plan to each of its four outside directors. The shares vested over a period of three years. The Company
recognized $644 of expense over the vesting period, including $89 of expense for the year ended December 31,
2007, respectively.

In June 2007, the Company granted 11,576 restricted shares of the Company’s common stock pursuant to the
1999 Plan to each of its four outside directors. The shares will vest over three years and the Company will recognize
$792 of expense over the vesting period. The Company recognized expense of $264, $264 and $154 for the years
ended December 31, 2009, 2008 and 2007, respectively, in connection with this restricted stock award.

In April 2009, the President of the Company was awarded a restricted stock grant of 525,000 shares of Vector’s
common stock pursuant to the 1999 Plan. Under the terms of the award, one-fifth of the shares vest on September 15,
2010, with an additional one-fifth vesting on each of the four succeeding one-year anniversaries of the first vesting
date through September 15, 2014. In the event that his employment with the Company is terminated for any reason
other than his death, his disability or a change of control (as defined in this Restricted Share Agreement) of the
Company, any remaining balance of the shares not previously vested will be forfeited by him. The fair market value
of the restricted shares on the date of grant was $6,467 is being amortized over the vesting period as a charge to
compensation expense. The Company recorded an expense of $872 for the year ended December 31, 2009.

As of December 31, 2009, there was $5,705 of total unrecognized compensation costs related to unvested
restricted stock awards. The cost is expected to be recognized over a weighted-average period of approximately
three years at December 31, 2009.

As of December 31, 2008, there was $2,591 of total unrecognized compensation costs related to unvested
restricted stock awards. The cost is expected to be recognized over a weighted-average period of approximately one
year at December 31, 2008.

The Company’s accounting policy is to treat dividends paid on unvested restricted stock as a reduction to

additional paid-in capital on the Company’s consolidated balance sheet.

12. CONTINGENCIES

Tobacco-Related Litigation:

Overview

Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in
numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers
should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke
from cigarettes. New cases continue to be commenced against Liggett and other cigarette manufacturers. The cases
generally fall into the following categories: (i) smoking and health cases alleging personal injury brought on behalf
of individual plaintiffs (“Individual Actions”); (ii) smoking and health cases primarily alleging personal injury or
seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging the use of the terms
“lights” and/or “ultra lights” constitutes a deceptive and unfair trade practice, common law fraud or violation of
federal law, purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); and (iii) health
care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental
plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or
disgorgement of profits (“Health Care Cost Recovery Actions”). As new cases are commenced, the costs associated
with defending these cases and the risks relating to the inherent unpredictability of litigation continue to increase.
The future financial impact of the risks and expenses of litigation and the effects of the tobacco litigation settlements
discussed below are not quantifiable at this time. For the years ended December 31, 2009, 2008 and 2007, Liggett
incurred legal expenses and other litigation costs totaling approximately $6,000, $8,800 and $7,800, respectively.

F-45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or
future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage
the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are or can
be significant.

Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to
prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that
such relief may not be obtainable in all cases. This risk has been reduced given that 43 states now limit the dollar
amount of bonds or require no bond at all. Liggett has secured approximately $3,130 in bonds as of December 31,
2009, although $2,000 of the bonds were subsequently released.

The Company and its subsidiaries record provisions in their consolidated financial statements for pending
litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably
estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur:
(i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-
related cases; or (ii) management is unable to estimate the possible loss or range of loss that could result from an
unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any
amounts in the consolidated financial statements for unfavorable outcomes, if any. Liggett believes, and has been so
advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of
adverse verdicts. All such cases are, and will continue to be vigorously defended. However, Liggett may enter into
settlement discussions in particular cases if it believes it is in the best interest of the Company to do so.

Individual Actions

As of December 31, 2009, there were 41 individual cases pending against Liggett and/or the Company, where
one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or
exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. In addition, there were
approximately 7,160 Engle progeny cases (defined below) pending against Liggett and the Company, in state and
federal courts in Florida, and approximately 100 individual cases pending in West Virginia state court as part of a
consolidated action. The following table lists the number of individual cases by state that are pending against
Liggett or its affiliates as of December 31, 2009 (excluding Engle progeny cases and the consolidated cases in West
Virginia):

State

Number
of Cases

Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15
9
8
5
2
1
1

Liggett Only Cases.

In April 2004, in Davis v. Liggett Group, a Florida state court jury awarded compen-
satory damages of $540 against Liggett, plus interest and attorneys’ fees. This award is final and was paid by
Liggett. There are currently five cases pending where Liggett is the only tobacco company defendant. Cases where
Liggett is the only defendant could increase substantially as a result of the Engle progeny cases. In February 2009, in
Ferlanti v. Liggett Group, a Florida state court jury awarded compensatory damages of $1,200 against Liggett, but
found that the plaintiff was 40% at fault. Therefore, plaintiff was awarded $720 in compensatory damages plus $96
in expenses. Punitive damages were not awarded. Liggett appealed the award. In May 2009, the court granted
plaintiff’s motion for an award of attorneys’ fees but the amount has not yet been determined. In Hausrath v. Philip

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Morris, a case pending in New York state court, plaintiffs recently dismissed all defendants other than Liggett. The
other three individual actions, in which Liggett is the only tobacco company defendant, are dormant.

The plaintiffs’ allegations of liability in cases in which individuals seek recovery for injuries allegedly caused
by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of
special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express
and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public
nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity
and violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act
(“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages,
plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of
profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law
governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction,
compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts
ranging into the hundreds of millions and even billions of dollars.

Defenses raised in individual cases include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, lack of design defect, statute of limitations, equitable defenses such as “unclean
hands” and lack of benefit, failure to state a claim and federal preemption.

In addition to the awards against Liggett in Davis and Ferlanti, jury awards in individual cases have also been
returned against other cigarette manufacturers in recent years. The awards in these individual actions, often in
excess of millions of dollars, may be for both compensatory and punitive damages. There are several significant jury
awards against other cigarette manufacturers which are currently on appeal and several awards which are final and
have been paid.

Engle Progeny Cases.

In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co.
rendered a $145,000,000
punitive damages verdict in favor of a “Florida Class” against certain cigarette manufacturers, including Liggett.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle, which decertified the class on a prospective
basis, and affirmed the appellate court’s reversal of the punitive damages award, former class members had one year
from January 11, 2007 in which to file individual lawsuits. In addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in Engle, are attempting to avail themselves of the Engle
ruling. Lawsuits by individuals requesting the benefit of the Engle ruling, whether filed before or after the
January 11, 2007 deadline, are referred to as the “Engle progeny cases.” Liggett and the Company have been named
in approximately 7,160 Engle progeny cases in both state and federal courts in Florida. Other cigarette manu-
facturers have also been named as defendants in these cases. These cases include approximately 8,585 plaintiffs,
approximately 3,860 of whom have claims pending in federal court. Duplicate cases were filed in federal and state
court on behalf of approximately 660 plaintiffs. The majority of the cases pending in federal court are stayed
pending the outcome of an appeal to the United States Court of Appeals for the Eleventh Circuit of several district
court orders in which it was found that the Florida Supreme Court’s decision in Engle was unconstitutional. The
number of Engle progeny cases will likely increase as the courts may require multi-plaintiff cases to be severed into
individual cases. The total number of plaintiffs may also increase as a result of attempts by existing plaintiffs to add
additional parties.

As of December 31, 2009, 42 alleged Engle progeny cases, where Liggett is currently named as a defendant,
were scheduled for trial in 2010. As of December 31, 2009, ten Engle progeny cases were tried resulting in eight
plaintiff verdicts and two defense verdicts. In one of these cases, the Campbell case, the jury awarded $7,800 in
compensatory damages against all defendants, $156 of which was awarded against Liggett. These cases are all
currently on appeal. For further information on the Engle case and on Engle progeny cases, including a description
of the Lukacs case, see “Class Actions — Engle Case,” below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Class Actions

As of December 31, 2009, there were seven actions pending for which either a class had been certified or
plaintiffs were seeking class certification, where Liggett is a named defendant, including one alleged price fixing
case. Other cigarette manufacturers are also named in these actions. Many of these actions purport to constitute
statewide class actions and were filed after May 1996 when the United States Court of Appeals for the Fifth Circuit,
in Castano v. American Tobacco Co., reversed a federal district court’s certification of a purported nationwide class
action on behalf of persons who were allegedly “addicted” to tobacco products.

Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including
negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance,
breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of
deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-
racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and
punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical
monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.

Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate,
assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal
preemption.

Engle Case.

In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The
class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died
from diseases and medical conditions caused by their addiction to cigarette smoking.” In July 1999, after the
conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on
certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. The jury
made several findings adverse to the defendants including that defendants’ conduct “rose to a level that would
permit a potential award or entitlement to punitive damages.” Phase II of the trial was a causation and damages trial
for three of the class plaintiffs and a punitive damages trial on a class-wide basis, before the same jury that returned
the verdict in Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class plaintiffs,
to be reduced in proportion to the respective plaintiff’s fault. In July 2000, the jury awarded approximately
$145,000,000 in punitive damages, including $790,000 against Liggett.

In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case with
instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831,
was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs.

In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held
that the class should be decertified prospectively, but preserved several of the trial court’s Phase I findings, including
that: (i) smoking causes lung cancer, among other diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants
placed cigarettes on the market that were defective and unreasonably dangerous; (iv) defendants concealed material
information knowing that the information was false or misleading or failed to disclose a material fact concerning the
health effects or addictive nature of smoking; (v) defendants agreed to conceal or omit information regarding the
health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to
their detriment; (vi) defendants sold or supplied cigarettes that were defective; and (vii) defendants were negligent.
The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability
issues (using the above findings) and compensatory and punitive damage issues, provided they filed their individual
lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or
supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. As
a result of the decision, approximately 8,585 former Engle class members have cases pending against the Company
and Liggett as well as other cigarette manufacturers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Three federal district courts (in the Merlob, Brown and Burr cases) have ruled that the findings in Phase I of the
Engle proceedings cannot be used to satisfy elements of plaintiffs’ claims, and two of those rulings (Brown and
Burr) were certified by the trial court for interlocutory review. The certification was granted by the United States
Court of Appeals for the Eleventh Circuit and the appeals were consolidated (in February 2009, the appeal in Burr
was dismissed for lack of prosecution). Oral argument was held in January 2010. A decision is pending. Engle
progeny cases pending in the federal district courts in the Middle District of Florida have been stayed pending
interlocutory review by the Eleventh Circuit. Several state trial court judges have issued contrary rulings that
allowed plaintiffs to use the Engle findings to establish elements of their claims and required certain defenses to be
stricken.

Lukacs Case.

In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco
Co., awarded $37,500 in compensatory damages, jointly and severally, in a case involving Liggett and two other
cigarette manufacturers, which amount was subsequently reduced by the court. The jury found Liggett 50%
responsible for the damages incurred by the plaintiff. The Lukacs case was the first case to be tried as an individual
Engle progeny case, but was tried almost five years prior to the Florida Supreme Court’s final decision in Engle. In
November 2008, the court entered final judgment in the amount of $24,835 (for which Liggett is 50% responsible),
plus interest from June 2002 which, as of December 31, 2009, was in excess of $15,000 (for which Liggett is 50%
responsible). Defendants filed a notice of appeal in December 2008. Oral argument is scheduled for March 1, 2010.
Plaintiff filed a motion seeking an award of attorneys’ fees from Liggett based on plaintiff’s prior proposal for
settlement. All proceedings relating to the motion for attorneys’ fees are stayed pending a final resolution of
appellate proceedings.

In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all
Engle progeny lawsuits in the aggregate and establishes individual bond caps for individual Engle progeny cases in
amounts that vary depending on the number of judgments in effect at a given time. The legislation, which became
effective in June 2009, applies to judgments entered after the effective date and remains in effect until December 31,
2012.

Other Class Actions.

In Smith v. Philip Morris, a Kansas state court case filed in February 2000, plaintiffs
allege that cigarette manufacturers conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs seek to
recover an unspecified amount in actual and punitive damages. Class certification was granted in November 2001.
Discovery is ongoing.

Class action suits have been filed in a number of states against cigarette manufacturers, alleging, among other
things, that use of the terms “light” and “ultra light” constitutes unfair and deceptive trade practices, among other
things. One such suit, Schwab [McLaughlin] v. Philip Morris, pending in federal court in New York since 2004,
sought to create a nationwide class of “light” cigarette smokers. In September 2006, the United States District Court
for the Eastern District of New York certified the class. In April 2008, the United States Court of Appeals for the
Second Circuit decertified the class. The case was returned to the trial court for further proceedings. In December
2008, the United States Supreme Court, in Altria Group v. Good, ruled that the Federal Cigarette Labeling and
Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they could proceed with their
claims under the Maine Unfair Trade Practices Act. This ruling has resulted in the filing of additional “lights” class
action cases in other states. Although Liggett is not a defendant in the Good case, an adverse ruling or
commencement of additional “lights” related class actions could have a material adverse effect on the Company.

In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was
commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves
cigarette smokers, are alleged to have been exposed to secondhand smoke from cigarettes which were manufactured
by the defendants, and who suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified
amount of compensatory and punitive damages. In October 2004, the trial court stayed this case pending the
outcome of the appeal in Scott v. American Tobacco Co. (see discussion below).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In June 1998, in Cleary v. Philip Morris, a putative class action was brought in Illinois state court on behalf of
persons who were allegedly injured by: (i) defendants’ purported conspiracy to conceal material facts regarding the
addictive nature of nicotine (“Class A”); (ii) defendants’ alleged acts of targeting their advertising and marketing to
minors; and (iii) defendants’ claimed breach of the public’s right to defendants’ compliance with laws prohibiting
the distribution of cigarettes to minors. Plaintiffs seek disgorgement of all profits unjustly received through
defendants’ sale of cigarettes to plaintiffs and the class. In March 2009, plaintiffs filed a third amended complaint
adding, among other things, allegations regarding defendants’ sale of “light” cigarettes. In September 2009, the
court granted summary judgment to all defendants other than Philip Morris as to the “lights” claims. In November
2009, plaintiffs filed a revised motion for class certification as to the three proposed classes, which motion was
denied by the court on February 23, 2010. The court granted leave to the plaintiffs to reinstate the motion as to
Class A, if the plaintiffs identify another class representative on or before April 1, 2010. On February 1, 2010, the
court granted summary judgment in favor of defendants as to all claims, other than a “lights” claim involving
another cigarette manufacturer.

In April 2001, in Brown v. Philip Morris USA, a California state court granted in part plaintiffs’ motion for
class certification and certified a class comprised of adult residents of California who smoked at least one of
defendants’ cigarettes “during the applicable time period” and who were exposed to defendants’ marketing and
advertising activities in California. In March 2005, the court granted defendants’ motion to decertify the class based
on a recent change in California law. In June 2009, the California Supreme Court reversed and remanded the case to
the trial court for further proceedings regarding whether the class representatives have, or can, demonstrate
standing. In August 2009, the California Supreme Court denied defendants’ rehearing petition and issued its
mandate. In September 2009, plaintiffs sought reconsideration of the court’s September 2004 order finding that
plaintiffs’ allegations regarding “lights” cigarettes were preempted by federal law, in light of the recent United
States Supreme Court decision in Altria Group v. Good. The court is reviewing the question. A hearing is scheduled
for March 11, 2010.

Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases), a West Virginia
state court consolidated approximately 750 individual smoker actions that were pending prior to 2001 for trial of
certain common issues. In January 2002, the court severed Liggett from the trial of the consolidated action, which is
scheduled for June 2010. If the case were to proceed against Liggett, it is estimated that Liggett could be a defendant
in approximately 100 of the individual cases.

Class certification motions are pending in a number of other cases and a number of orders denying class
certification are on appeal. In addition to the cases described above, numerous class actions remain certified against
other cigarette manufacturers, including Scott. In that case, a Louisiana jury returned a $591,000 verdict (sub-
sequently reduced by the court to $263,500 plus interest from June 2004) against other cigarette manufacturers to
fund medical monitoring or smoking cessation programs for members of the class. Oral argument on the appeal
occurred in September 2009. A decision is pending.

Health Care Cost Recovery Actions

As of December 31, 2009, there were three active Health Care Cost Recovery Actions pending against Liggett.
Other cigarette manufacturers are also named in these matters. The claims asserted in health care cost recovery
actions vary. Although, typically, no specific damage amounts are pled, it is possible that requested damages might
be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was
“unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement
of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other
statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of
research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and
payment of attorney and expert witness fees.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Other claims asserted include the equitable claim of indemnity, common law claims of negligence, strict
liability, breach of express and implied warranty, breach of special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under RICO.

DOJ Case.

In September 1999, the United States government commenced litigation against Liggett and
other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to
recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer,
heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious
conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other
allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful
conduct. Claims were asserted under RICO.

In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the cigarette
manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for the District of
Columbia affirmed most of the district court’s decision. Both the government and all defendants, other than Liggett,
have filed petitions for writ of certiorari to the United States Supreme Court. In its petition for writ of certiorari, the
government is seeking reinstatement of its claims for remedies, including disgorgement of industry profits.
Although this case has been concluded as to Liggett, it is unclear what impact, if any, the Final Judgment will have
on the cigarette industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide
shipments of cigarettes in the United States or otherwise results in restrictions that adversely affect the industry,
Liggett’s sales volume, operating income and cash flows could be materially adversely affected.

In City of St. Louis v. American Tobacco Company, a case pending in Missouri state court since December
1998, the City of St. Louis and approximately 40 hospitals seek recovery of costs expended by the hospitals on
behalf of patients who suffer, or have suffered, from illnesses allegedly resulting from the use of cigarettes. In June
2005, the court granted defendants’ motion for summary judgment as to claims for damages which accrued prior to
November 16, 1993. The claims for damages which allegedly accrued after November 16, 1993 are pending.
Discovery is ongoing. In September 2009, the defendants filed a motion for partial summary judgment on the
plaintiffs’ claims for future damages and for fraud. In December 2009, the defendants filed motions for summary
judgment based upon, among other things, plaintiffs’ failure to prove unreimbursed costs and plaintiffs’ failure to
show fact of injury or damage. These motions are pending before the court. Trial is scheduled to commence
January 10, 2011.

In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action commenced in
1998 by the largest private insurer in that country, General Health Services, against the major United States cigarette
manufacturers. The plaintiff seeks to recover the past and future value of the total expenditures for health care
services provided to residents of Israel resulting from tobacco related diseases, court ordered interest for past
expenditures from the date of filing the statement of claim, increased and/or punitive and/or exemplary damages and
costs. The court ruled that, although Liggett had not sold product in Israel since at least 1978, it might still have
liability for cigarettes sold prior to that time. Motions filed by defendants are pending before the Israel Supreme
Court seeking appeal from a lower court’s decision granting leave to plaintiff for foreign service of process.

In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris USA, a case
pending in the United States District Court for the Eastern District of New York, plaintiffs commenced an action to
recover twice the amount paid by Medicare for the health care services provided to Medicare beneficiaries to treat
diseases allegedly attributable to smoking defendants’ cigarettes from May 21, 2002 to the present, for which
treatment defendants’ allegedly were required to make payment under the Medicare Secondary Payer provisions of
the Social Security Act. Defendants’ Motion to Dismiss and plaintiffs’ Motion for Partial Summary Judgment were
filed in July 2008 and, in March 2009, the court granted the defendants’ motion and dismissed the case. Plaintiffs
appealed the decision. In September 2009, defendants filed a motion for summary disposition of the appeal and for a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

stay of the briefing schedule. The stay was granted. In January 2010, the Second Circuit Court of Appeals referred
the motion for summary affirmance to the Merits Panel and ordered briefing on the motion.

Upcoming Trials

In addition to the June 2010 trial in the City of St. Louis case discussed above, as of December 31, 2009, there
were approximately 42 Engle progeny cases that are scheduled for trial in 2010. The Company and Liggett and
other cigarette manufacturers are currently named as defendants in each of these cases. Cases against other cigarette
manufacturers are also scheduled for trial in 2010. Trial dates are subject to change.

MSA and Other State Settlement Agreements

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

In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the “Original Partic-
ipating Manufacturers” or “OPMs”) and Liggett (together with any other tobacco product manufacturer that
becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are
hereinafter referred to jointly as the “Participating Manufacturers”) entered into the Master Settlement Agreement
(the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands,
American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and
unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial
approval in each Settling State.

As a result of the MSA, the Settling States released Liggett from:

(cid:129) all claims of the Settling States and their respective political subdivisions and other recipients of state health
care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development,
advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research,
statements or warnings about, tobacco products; and

(cid:129) all monetary claims of the Settling States and their respective subdivisions and other recipients of state
health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that
have been manufactured in the ordinary course of business.

The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts
the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of youth in the
advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco
advertising and promotion; limits each Participating Manufacturer to one tobacco brand name sponsorship during
any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco
product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient
proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to
advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers
from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the
names of sports teams, entertainment groups or individual celebrities.

The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA
and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf
of Participating Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to
calculate and determine the amounts of payments owed pursuant to the MSA.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual
payments of $9,000,000 (subject to applicable adjustments, offsets and reductions). These annual payments are
allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the
several, and not joint, obligation of each Participating Manufacturer and are not the responsibility of any parent or
affiliate of a Participating Manufacturer.

Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share
exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco has no payment
obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately
0.28% of total cigarettes sold in the United States. According to data from Management Science Associates, Inc.,
domestic shipments by Liggett and Vector Tobacco accounted for approximately 2.5%, 2.5% and 2.7% of the total
cigarettes shipped in the United States in 2007, 2008 and 2009 respectively. If Liggett’s or Vector Tobacco’s market
share exceeds their respective market share exemption in a given year, then on April 15 of the following year,
Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit
basis) to that due from the OPMs for that year. Liggett and Vector Tobacco paid $35,995 for their 2007 MSA
obligations and paid $42,799 for their 2008 MSA obligations. In December 2009, Liggett and Vector Tobacco
prepaid $45,500 of their 2009 MSA obligations. Additional amounts may be due for 2009 but will not be
determined by the Independent Auditor until April 2010.

Certain MSA Disputes

NPM Adjustment.

In March 2006, an economic consulting firm selected pursuant to the MSA rendered its
final and non-appealable decision that the MSA was a “significant factor contributing to” the loss of market share of
Participating Manufacturers, to non-participating manufacturers, for 2003. This is known as the “NPM Adjust-
ment.” The economic consulting firm subsequently rendered the same decision with respect to 2004, 2005 and
2006. As a result, the manufacturers are entitled to potential NPM Adjustments to their 2003, 2004, 2005 and 2006
MSA payments. The Participating Manufacturers are also entitled to potential NPM Adjustments to their 2007,
2008 and 2009 payments pursuant to an agreement entered into in June 2009 between the OPMs and the Settling
States under which the OPMs agreed to make certain payments for the benefit of the Settling States, in exchange for
which the Settling States stipulated that the MSA was a “significant factor contributing to” the loss of market share
of Participating Manufacturers in 2007, 2008 and 2009. A Settling State that has diligently enforced its qualifying
escrow statute in the year in question may be able to avoid application of the NPM Adjustment to the payments
made by the manufacturers for the benefit of that Settling State.

For 2003 through 2009, Liggett and Vector Tobacco disputed that they owe the Settling States the NPM
Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett and Vector Tobacco have
withheld payment associated with these NPM Adjustment amounts. The total amount withheld or paid into a
disputed payment account by Liggett and Vector Tobacco for 2003 through 2009 is $21,446. In 2003, Liggett and
Vector Tobacco paid the NPM adjustment amount of $9,345 to the Settling States although both companies continue
to dispute this amount. At December 31, 2009, included in “Other assets” on the Company’s consolidated balance
sheet was a noncurrent receivable of $6,542 relating to such payment.

The following amounts have not been expensed by the Company as they relate to Liggett and Vector Tobacco’s

NPM Adjustment claims for 2003 through 2009: $6,542 for 2003, $3,789 for 2004 and $800 for 2005.

Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was filed in 49
Settling States over the issue of whether the application of the NPM Adjustment for 2003 is to be determined
through litigation or arbitration. These actions relate to the potential NPM Adjustment for 2003, which the
independent auditor under the MSA previously determined to be as much as $1,200,000 for all Participating
Manufacturers. All but one of the 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana Supreme Court,
ruled that Montana’s claim of diligent enforcement must be litigated. This decision has been appealed. In response

F-53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

to a proposal from the OPMs and many of the SPMs, 45 of the Settling States, representing approximately 90% of
the allocable share of the Settling States, entered into an agreement providing for a nationwide arbitration of the
dispute with respect to the NPM Adjustment for 2003. The agreement provides for selection of the arbitration panel
beginning November 1, 2009 and that the parties and the arbitrators will thereafter establish the schedule and
procedures for the arbitration. Because states representing more than 80% of the allocable share signed the
agreement, signing states will receive a 20% reduction of any potential 2003 NPM adjustment. It is anticipated that
the arbitration will commence in 2010. There can be no assurance that Liggett or Vector Tobacco will receive any
adjustment as a result of these proceedings.

Gross v. Net Calculations.

In October 2004, the independent auditor notified Liggett and all other Partic-
ipating Manufacturers that their payment obligations under the MSA, dating from the agreement’s execution in late
1998, had been recalculated using “net” unit amounts, rather than “gross” unit amounts (which had been used since
1999).

Liggett has objected to this retroactive change and has disputed the change in methodology. Liggett contends
that the retroactive change from using “gross” to “net” unit amounts is impermissible for several reasons, including:

(cid:129) use of “net” unit amounts is not required by the MSA (as reflected by, among other things, the use of “gross”

unit amounts through 2005);

(cid:129) such a change is not authorized without the consent of affected parties to the MSA;

(cid:129) the MSA provides for four-year time limitation periods for revisiting calculations and determinations, which
precludes recalculating Liggett’s 1997 Market Share (and thus, Liggett’s market share exemption); and

(cid:129) Liggett and others have relied upon the calculations based on “gross” unit amounts since 1998.

The change in the method of calculation could, among other things, result in at least approximately $9,500,
plus interest, of additional MSA payments for prior years, by Liggett because the proposed change from “gross” to
“net” units would serve to lower Liggett’s market share exemption under the MSA. The Company currently
estimates that future MSA payments would be approximately $2,250 higher per year if the method of calculation is
changed. No amounts have been expensed or accrued in the accompanying consolidated financial statements for
any potential liability relating to the “gross” versus “net” dispute.

Litigation Challenging the MSA.

In Freedom Holdings Inc. v. Cuomo, litigation pending in federal court in
New York, certain importers of cigarettes allege that the MSA and certain related New York statutes violate federal
antitrust and constitutional law. The district court granted New York’s motion to dismiss the complaint for failure to
state a claim. On appeal, the United States Court of Appeals for the Second Circuit held that if all of the allegations
of the complaint were assumed to be true, plaintiffs had stated a claim for relief on antitrust grounds. In January
2009, the district court granted New York’s motion for summary judgment, dismissing all claims brought by the
plaintiffs, and dissolving the preliminary injunction. Plaintiffs appealed the decision. Oral argument on the appeal
occurred in December 2009. A decision is pending.

In Grand River Enterprises Six Nations, Ltd. v. King, another proceeding pending in federal court in New York,
plaintiffs seek to enjoin the statutes enacted by New York and other states in connection with the MSA on the
grounds that the statutes violate the Commerce Clause of the United States Constitution and federal antitrust laws.
In September 2005, the United States Court of Appeals for the Second Circuit held that if all of the allegations of the
complaint were assumed to be true, plaintiffs had stated a claim for relief and that the New York federal court had
jurisdiction over the other defendant states. On remand, the trial court held that plaintiffs are unlikely to succeed on
the merits. Discovery is pending. Similar challenges to the MSA and MSA-related state statutes are pending in
Kentucky, Arkansas, Kansas, Louisiana, Tennessee and Oklahoma. Liggett and the other cigarette manufacturers
are not defendants in these cases. Litigation challenging the validity of the MSA, including claims that the MSA
violates antitrust laws, has not been successful to date.

F-54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (“Vibo”) commenced litigation in the United
States District Court for the Western District of Kentucky against each of the Settling States and certain
Participating Manufacturers. Vibo alleged, among other things, that the market share exemptions (i.e., grand-
fathered shares) provided to certain SPMs under the MSA, including Liggett and Vector Tobacco, violate federal
antitrust and constitutional law. In January 2009, the court issued a memorandum opinion and order dismissing
Vibo’s lawsuit. On January 5, 2010, the court entered judgment in favor of the defendants. On January 13, 2010,
Vibo appealed to the United States Court of Appeals for the Sixth Circuit. Briefing is underway.

In December 2008, Vibo filed a second lawsuit, seeking declaratory relief under the MSA, in California state
court against California and certain cigarette manufacturers, including Liggett and Vector Tobacco, seeking a
determination that the proposed amendment to Vibo’s agreement to join the MSA, under which it would no longer
have to make certain MSA payments, did not trigger the MSA’s “most favored nation” provision. In March 2009, the
OPMs and SPMs each filed motions for summary judgment. In July 2009, the trial court granted the OPMs’ and
SPMs’ motions for summary judgment. In September 2009, Vibo filed a notice of appeal which they voluntarily
withdrew in January 2010.

Other State Settlements. The MSA replaces Liggett’s prior settlements with all states and territories except
for Florida, Mississippi, Texas and Minnesota. Each of these four states, prior to the effective date of the MSA,
negotiated and executed settlement agreements with each of the other major tobacco companies, separate from
those settlements reached previously with Liggett. Liggett’s agreements with these states remain in full force and
effect, and Liggett made various payments to these states under the agreements. These states’ settlement agreements
with Liggett contained most favored nation provisions which could reduce Liggett’s payment obligations based on
subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999,
Liggett determined that, based on each of these four states’ settlements with United States Tobacco Company,
Liggett’s payment obligations to those states had been eliminated. With respect to all non-economic obligations
under the previous settlements, Liggett believes it is entitled to the most favorable provisions as between the MSA
and each state’s respective settlement with the other major tobacco companies. Therefore, Liggett’s non-economic
obligations to all states and territories are now defined by the MSA.

In 2003, in order to resolve any potential issues with Minnesota as to Liggett’s ongoing economic settlement
obligations, Liggett negotiated a $100 a year payment to Minnesota, to be paid any year cigarettes manufactured by
Liggett are sold in that state. In 2004, the Attorneys General for Florida, Mississippi and Texas advised Liggett that
they believed that Liggett had failed to make all required payments under the respective settlement agreements with
these states for the period 1998 through 2003 and that additional payments may be due for 2004 and subsequent
years. Liggett believes the states’ allegations are without merit, based, among other things, on the language of the
most favored nation provisions of the settlement agreements. There can be no assurance that Liggett will resolve
these matters or that Liggett will not be required to make additional material payments, which payments could
adversely affect the Company’s consolidated financial position, results of operations or cash flows. During 2009,
Liggett reversed a previously recorded accrual of $2,500 with respect to this matter.

Cautionary Statement. Management is not able to predict the outcome of the litigation pending or threatened
against Liggett. Litigation is subject to many uncertainties. For example, in addition to $540 awarded in the Davis
case, plus legal (which has been paid by Liggett), and $816 awarded in the Ferlanti case, plus legal fees, in June
2002, the jury in the Lukacs case, an individual case brought under Phase III of the Engle case, awarded
compensatory damages against Liggett and two other defendants and found Liggett 50% responsible for the
damages. In November 2008, the court entered final judgment in favor of the plaintiff for $24,835, plus interest from
June 11, 2002 which, as of December 31, 2009, exceeded $15,000. Both the Ferlanti and Lukacs verdicts are on
appeal. Recently, Liggett was found liable in an Engle progeny case and its portion of the total award is $156. It is
possible that additional cases could be decided unfavorably against Liggett. As a result of the Engle decision,

F-55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

approximately 8,585 former Engle class members have claims pending against Liggett and the Company and other
cigarette manufacturers. Liggett may enter into discussions in an attempt to settle particular cases if it believes it is
in its best interest to do so.

Management cannot predict the cash requirements related to any future defense costs, settlements or
judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be
able to be met. An unfavorable outcome of a pending smoking and health case could encourage the commencement
of additional similar litigation, or could lead to multiple adverse decisions in the Engle progeny cases. Management
is unable to make a reasonable estimate with respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not
provided any amounts in its consolidated financial statements for unfavorable outcomes. The complaints filed in
these cases rarely detail alleged damages. Typically, the claims set forth in an individual’s complaint against the
tobacco industry seek money damages in an amount to be determined by a jury, plus punitive damages and costs.

The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation
and use of tobacco products imposed by local, state and federal governments. There have been a number of
restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of
potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation,
and may prompt the commencement of additional similar litigation or legislation.

It is possible that the Company’s consolidated financial position, results of operations or cash flows could be

materially adversely affected by an unfavorable outcome in any of the smoking-related litigation.

Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions affecting
their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations are conducted
in material compliance with all environmental laws and regulations and other laws and regulations governing
cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials
into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the
capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco.

Other Matters:

In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five year agreement
with a subsidiary of the American Wholesale Marketers Association to support a program to permit certain tobacco
distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the
distribution of cigarettes. This agreement was extended through 2014.

Under the agreement, Liggett Vector Brands has agreed to pay a portion of losses, if any, incurred by the surety
under the bond program, with a maximum loss exposure of $500 for Liggett Vector Brands. To secure its potential
obligations under the agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100
letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has incurred no losses to date
under this agreement, and the Company believes the fair value of Liggett Vector Brands’ obligation under the
agreement was immaterial at December 31, 2009.

In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of a deceased
woman who died in 2007 in a house fire allegedly caused by the ignition of contents of the house by a Liggett
product. Plaintiff is suing under the Alabama Extended Manufacturers Liability Doctrine and for breach of warranty
and negligence. The plaintiff seeks both punitive and compensatory damages.

There may be several other proceedings, lawsuits and claims pending against the Company and certain of its
consolidated subsidiaries unrelated to tobacco or tobacco product liability. Management is of the opinion that the

F-56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially affect
the Company’s financial position, results of operations or cash flows.

13. SUPPLEMENTAL CASH FLOW INFORMATION

Year Ended December 31,

2009

2008

2007

I. Cash paid during the period for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 52,487
94,449

$48,794
4,015

$30,491
18,967

II. Non-cash investing and financing activities:

Issuance of stock dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issued in debt exchange . . . . . . . . . . . . . . . . . . . . . . . . .
Debt retired in debt exchange . . . . . . . . . . . . . . . . . . . . . . . . .

333
119,305
(111,501)

314
—
—

287
—
—

14. RELATED PARTY TRANSACTIONS

In connection with the Company’s private offering of convertible notes in November 2004, in order to permit
hedging transactions by the purchasers, the purchasers of the notes required a principal stockholder of the Company,
who serves as the Chairman of the Company, to enter into an agreement granting the placement agent for the
offering the right, in its sole discretion, to borrow up to 4,432,364 shares of common stock from this stockholder or
an entity affiliated with him during a 30-month period through May 2007, subject to extension under various
conditions, and that he agreed not to dispose of such shares during this period, subject to limited exceptions. In
consideration for this stockholder agreeing to lend his shares in order to facilitate the Company’s offering and
accepting the resulting liquidity risk, the Company agreed to pay him or an affiliate designated by him an annual
fee, payable on a quarterly basis in cash or, by mutual agreement of the Company and this stockholder, shares of
Common Stock, equal to 1% of the aggregate market value of 4,432,364 shares of Common Stock. In addition, the
Company agreed to hold this stockholder harmless on an after-tax basis against any increase, if any, in the income
tax rate applicable to dividends paid on the shares as a result of the share loan agreement. For the years ended
December 31, 2009, 2008 and 2007, the Company recognized expense of $0, $41 and $504 for amounts payable to
an entity affiliated with this stockholder under this agreement. This stockholder had the right to assign to one of the
Company’s other principal stockholders, who serves as the Company’s President, some or his entire obligation to
lend the shares under such agreement. In May 2006, this stockholder assigned to the other stockholder the
obligation to lend 650,996 shares of Common Stock under the agreement.

In connection with the April 2005 placement of additional convertible notes, the Company entered into a
similar agreement through May 2007 with this other principal stockholder, who is the President of the Company,
with respect to 382,884 shares of common stock. For the years ended December 31, 2009, 2008 and 2007, the
Company recognized expense of $0, $0, and $62, respectively, for amounts payable to an entity affiliated with this
stockholder under this agreement and for the assigned obligation to lend shares.

In September 2006, the Company entered into an agreement with Ladenburg Thalmann Financial Services Inc.
(“LTS”) pursuant to which the Company agreed to make available to LTS the services of the Company’s Executive
Vice President to serve as the President and Chief Executive Officer of LTS and to provide certain other financial
and accounting services, including assistance with complying with Section 404 of the Sarbanes-Oxley Act of 2002.
LTS paid the Company $600 for 2009, $500 for 2008 and $400 for 2007 under the agreement and pays the Company
at a rate of $600 per year in 2010. These amounts are recorded as a reduction to the Company’s operating, selling,
administrative and general expenses. LTS paid compensation of $0, $150 and $600 for 2009, 2008 and 2007,
respectively, to each of the President of the Company, who serves as Vice Chairman of LTS, and to the Executive
Vice President of the Company, who serves as President and CEO of LTS. (See Note 17.)

F-57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

The Company’s President, a firm he serves as a consultant to, and affiliates of that firm received ordinary and
customary insurance commissions aggregating approximately $329, $221 and $241 in 2009, 2008 and 2007,
respectively, on various insurance policies issued for the Company and its subsidiaries and equity investees.

In October 2008, the Company acquired for $4,000 an approximate 11% interest in Castle Brands Inc. (NYSE
Amex: ROX), a publicly traded developer and importer of premium branded spirits. The Company’s Executive Vice
President is serving as the interim President and Chief Executive Officer. In October 2008, the Company entered
into an agreement with Castle where the Company agreed to make available the services of its Executive Vice
President as well as other financial and accounting services. The Company recognized management fees of $100 in
2009 and $22 in 2008 under the agreement. Castle pays the Company at a rate of $100 per year in 2010. In
December 2009, Vector was part of a consortium, which included Dr. Phillip Frost, who is a beneficial owner of
approximately 11.7% of the Company’s common stock and the Company’s Executive Vice President, that agreed to
provide a line of credit to Castle. The three-year line was for a maximum amount of $2,500, bears interest at a rate of
11% per annum on amounts borrowed, pays a 1% annual commitment fee and is collateralized by Castle’s
receivables and inventory. The Company’s commitment under the line is $900. No amounts were outstanding under
the credit line as of December 31, 2009.

In addition to its investment in Castle, the Company has made investments in entities where Dr. Frost has a
relationship. These include the following: (i) three investments in 2006, 2008 and 2009 totaling approximately
$11,000 for 10,057,110 shares in OPKO Inc. (NYSE Amex: OPK) and its predecessor eXegenics Inc.; (ii) a $500
investment in 2008 for 2,259,796 shares in Cardo Medical Inc. (OTC BB: CDOM); (iii) a $250 investment in 2008
in Cocrystal Discovery Inc.; and (iv) the investments in Castle discussed above. Dr. Frost is a director, executive
officer and/or more than 10% shareholder in these entities. Additional investments in entities where Dr. Frost has a
relationship may be made in the future.

On May 11, 2009, the Company issued in a private placement the 6.75% Note in the principal amount of
$50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005 principal amount of the
5% Notes, valued at 107% of principal amount. The purchaser of the 6.75% Note is an entity affiliated with
Dr. Frost.

The Company is an investor in investment partnerships affiliated with certain stockholders of the Company.

(See Note 6.)

Jefferies & Company, Inc. beneficially own approximately 6.3% of the Company’s common stock at
December 31, 2009. Jefferies or its affiliates have from time to time provided investment banking, general
financing and banking services to the Company and its affiliates, for which they have received customary
compensation. During 2009, 2008 and 2007, the Company paid to Jefferies and its affiliates fees in the amount
of approximately $4,547, $0 and $8,663, respectively.

15.

INVESTMENTS AND FAIR VALUE MEASUREMENTS

The Company utilizes a three-tier framework for assets and liabilities required to be measured at fair value. In
addition, the Company uses valuation techniques, such as the market approach (comparable market prices), the
income approach (present value of future income or cash flow), and the cost approach (cost to replace the service
capacity of an asset or replacement cost) to value these assets and liabilities as appropriate. The Company uses an
exit price when determining the fair value. The exit price represents amounts that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants.

The Company utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation techniques used to

measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1 Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or

liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Level 2 Inputs other than quoted prices that are observable for the assets or liability, either directly or
indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in markets that are not active.

Level 3 Unobservable inputs in which there is little market data, which requires the reporting entity to develop

their own assumptions

This hierarchy requires the use of observable market data, when available, and to minimize the use of

unobservable inputs when determining fair value.

The Company’s recurring financial assets and liabilities subject to fair value measurements and the necessary

disclosures are as follows:

Description

Assets:

Fair Value Measurements as of December 31, 2009

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Money market funds . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale . . . .

$199,423
2,785
3,128
51,742

$199,423
—
3,128
38,706

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$257,078

$241,257

$ —
2,785
—
13,036

$15,821

$

$

—
—
—
—

—

Liabilities:

Fair value of derivatives embedded within

convertible debt . . . . . . . . . . . . . . . . . . .

$153,016

$

—

$ —

$153,016

Description

Assets:

Fair Value Measurements as of December 31, 2008

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Money market funds . . . . . . . . . . . . . . . .
Investment securities available for sale . . .

$192,348
28,518

$192,348
20,627

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$220,866

$212,975

$ —
7,891

$7,891

$ —
—

$ —

Liabilities:

Fair value of derivatives embedded within
convertible debt . . . . . . . . . . . . . . . . . .

$ 77,245

$

—

$ —

$77,245

The fair value of investment securities available for sale included in Level 1 are based on quoted market prices
from various stock exchanges. The Level 2 investment securities available for sale were not registered and therefore
do not have direct market quotes or have certain restrictions.

The fair value of derivatives embedded within convertible debt were derived using a valuation model and have
been classified as Level 3. The valuation model assumes future dividend payments by the Company and utilizes
interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated

F-59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The
changes in fair value of derivatives embedded within convertible debt as of December 31, 2009, 2008 and 2007 are
disclosed. (See Note 7.)

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required
to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities are recorded at
fair value on a nonrecurring basis as a result of impairment charges.

The Company’s nonrecurring nonfinancial assets subject to fair value measurements are as follows:

Description

Assets:
Investment in real estate . . . . . . . . .
Investment in non-consolidated real
estate businesses . . . . . . . . . . . . .

Year
Ended
December 31,
2009
Impairment
Charge

Total

$5,000

$12,204

3,500

1,248

Total . . . . . . . . . . . . . . . . . . . .

$8,500

$13,452

Fair Value Measurements Using:

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

$—

—

$—

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

$—

—

$—

$12,204

1,248

$13,452

The Company estimated the fair value of its mortgage receivable and non-consolidated real estate using
observable inputs such as market pricing based on recent events, however, significant judgment was required to
select certain inputs from observed market data. The decrease in the mortgage receivable and the non-consolidated
real estate were attributed to the decline in the New York and California real estate markets due to various factors
including downward pressure on housing prices, the impact of the recent contraction in the subprime and mortgage
markets generally and a large inventory of unsold homes at the same time that sales volumes were decreasing. The
$8,500 of impairment charges taken in the first quarter of 2009 were included in the results from operations for the
year ended December 31, 2009.

16. PHILIP MORRIS BRAND TRANSACTION

In November 1998, the Company and Liggett granted Philip Morris options to purchase interests in
Trademarks LLC which holds three domestic cigarette brands, L&M, Chesterfield and Lark, formerly held by
Liggett’s subsidiary, Eve Holdings Inc.

Under the terms of the Philip Morris agreements, Eve contributed the three brands to Trademarks, a newly-
formed limited liability company, in exchange for 100% of two classes of Trademarks’ interests, the Class AVoting
Interest and the Class B Redeemable Nonvoting Interest. Philip Morris acquired two options to purchase the
interests from Eve. In December 1998, Philip Morris paid Eve a total of $150,000 for the options, $5,000 for the
option for the Class A interest and $145,000 for the option for the Class B interest.

The Class A option entitled Philip Morris to purchase the Class A interest for $10,100. On March 19, 1999,

Philip Morris exercised the Class A option, and the closing occurred on May 24, 1999.

On May 24, 1999, Trademarks borrowed $134,900 from a lending institution. The loan was guaranteed by Eve
and is collateralized by a pledge by Trademarks of the three brands and Trademarks’ interest in the trademark
license agreement (discussed below) and by a pledge by Eve of its Class B interest. In connection with the closing of
the Class A option, Trademarks distributed the loan proceeds to Eve as the holder of the Class B interest. The cash
exercise price of the Class B option and Trademarks’ redemption price were reduced by the amount distributed to
Eve. Upon Philip Morris’ exercise of the Class B option or Trademarks’ exercise of its redemption right, Philip

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Morris and Trademarks released Eve from its guaranty. The Class B interest was entitled to a guaranteed payment of
$500 each year with the Class A interest allocated all remaining income or loss of Trademarks.

Trademarks granted Philip Morris an exclusive license of the three brands for an 11-year term expiring
May 24, 2010 at an annual royalty based on sales of cigarettes under the brands, subject to a minimum annual
royalty payment of not less than the annual debt service obligation on the loan plus $1,000.

The Class B option became exercisable during the 90-day period beginning December 2, 2008 and was
exercised by Philip Morris on February 19, 2009. This option entitled Philip Morris to purchase the Class B interest
for $139,900, reduced by the amount previously distributed to Eve of $134,900. In connection with the exercise of
the Class B option, Philip Morris paid to Eve $5,067 (including a pro-rata share of its guaranteed payment) and Eve
was released from its guaranty.

See Note 10 regarding the settlement with the Internal Revenue Service relating to the Philip Morris brand

transaction.

17. NEW VALLEY CORPORATION

Investments in non-consolidated real estate businesses. New Valley accounts for its 50% interest in Douglas
Elliman Realty LLC and 16th and K Holdings and its 40% interest in New Valley Oaktree Chelsea Eleven LLC on
the equity method. (See Note 1(k).) New Valley accounts for its investment in Aberdeen Townhomes LLC at cost.
Douglas Elliman Realty operates a residential real estate brokerage company in the New York metropolitan area.
16th and K Holdings acquired the St. Regis Hotel, a 193 room luxury hotel in Washington, D.C. in August 2005, of
which 90% was sold in March 2008.

The components of “Investments in non-consolidated real estate businesses” were as follows as of Decem-

ber 31, 2009 and 2008:

Douglas Elliman Realty LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aberdeen Townhomes LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16th and K Holdings LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Valley Oaktree Chelsea Eleven LLC . . . . . . . . . . . . . . . . . . . . . . .

$36,086
1,248
—
12,232

Investments in non-consolidated real estate businesses . . . . . . . . . . . . . .

$49,566

$33,175
6,500
—
11,100

$50,775

December 31,
2009

December 31,
2008

Residential Brokerage Business. New Valley recorded income of $11,429, $11,833, and $20,290 for the
years ended December 31, 2009, 2008 and 2007, respectively, associated with Douglas Elliman Realty. Summa-
rized financial information as of December 31, 2009 and 2008 and for the three years ended December 31, 2009 for
Douglas Elliman Realty is presented below. New Valley’s equity income from Douglas Elliman Realty includes
$966, $1,465, and $1,319, respectively, of interest income earned by New Valley on a subordinated loan to Douglas
Elliman Realty, as well as increases to income resulting from amortization of negative goodwill which resulted from
purchase accounting of $145, $193, and $316 and management fees of $1,100, $800 and $1,300 earned from
Douglas Elliman for the years ended December 31, 2009, 2008 and 2007, respectively. New Valley received cash
distributions from Douglas Elliman Realty LLC of $8,517, $10,550, and $8,878 for the years ended December 31,
2009, 2008 and 2007, respectively.

F-61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

December 31, 2009

December 31,
2008

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable — current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of notes payable to member — Prudential Real

Estate Financial Services of America, Inc. . . . . . . . . . . . . . . . . .
Current portion of notes payable to member — New Valley . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable — long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable to member — Prudential Real

Estate Financial Services of America, Inc. . . . . . . . . . . . . . . . . .
Notes payable to member — New Valley . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Members’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,920
6,664
13,498
21,663
38,601
742
2,871
776

2,487
2,487
20,724
2,136

—
—
7,747
74,602

$22,125
7,496
15,868
21,663
38,578
939
1,024
833

4,729
4,729
23,617
2,833

2,030
2,030
6,170
60,722

Year Ended December 31,
2008

2009

2007

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $283,851
259,867
Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,448
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
255
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,090
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,413
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$352,680
324,641
5,448
298
—
3,290
253

$405,595
359,333
6,047
448
—
4,309
748

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,785

$ 18,750

$ 34,710

Douglas Elliman Realty has been negatively impacted by the current downturn in the residential real estate
market. The residential real estate market is cyclical and is affected by changes in the general economic conditions
that are beyond Douglas Elliman Realty’s control. The U.S. residential real estate market, including the market in
the New York metropolitan area where Douglas Elliman operates, is currently in a significant downturn due to
various factors including downward pressure on housing prices, the impact of the recent contraction in the subprime
and mortgage markets generally and an exceptionally large inventory of unsold homes at the same time that sales
volumes are decreasing. The depth and length of the current downturn in the real estate industry has proved
exceedingly difficult to predict. The Company cannot predict whether the downturn will worsen or when the market
and related economic forces will return the U.S. residential real estate industry to a growth period.

All of Douglas Elliman Realty’s current operations are located in the New York metropolitan area. Local and
regional economic and general business conditions in this market could differ materially from prevailing conditions
in other parts of the country. Among other things, the New York metropolitan residential real estate market has been

F-62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

impacted by the significant decline in the financial services industry. A continued downturn in the residential real
estate market or economic conditions in that region could have a material adverse effect on Douglas Elliman Realty.

St. Regis Hotel, Washington, D.C.

In June 2005, affiliates of New Valley and Brickman Associates formed
16th & K Holdings LLC (“Hotel LLC”), which acquired the St. Regis Hotel in Washington, D.C. for $47,000 in
August 2005. The Company, which holds a 50% interest in Hotel LLC, had invested $12,125 in the project at
December 31, 2007. In connection with the purchase of the hotel, a subsidiary of Hotel LLC entered into
agreements to borrow up to $50,000 of senior and subordinated debt. In April 2006, Hotel LLC purchased for
approximately $3,000 a building adjacent to the hotel to house various administrative and sales functions.

New Valley accounts for its interest in Hotel LLC under the equity method and recorded income of 2,084 in
2009 and losses of $3,796, and $2,344 in 2008 and 2007, respectively. In addition, the Company recorded $16,363
of income related to the sale of the hotel in 2008. The St. Regis Hotel, which was temporarily closed on August 31,
2006 for an extensive renovation, reopened in January 2008. Hotel LLC capitalized all costs other than management
fees related to the renovation of the property during the renovation phase. New Valley received cash distributions
from Hotel LLC of $1,000 for the year ended December 31, 2007.

In September 2007, Hotel LLC entered into an agreement to sell 90% of the St. Regis Hotel. In October 2007,
Hotel LLC entered into an agreement to sell certain tax credits associated with the hotel. The sale closed in March
2008. In addition to retaining a 3% interest, net of incentives, in the St. Regis Hotel, New Valley received $16,406 in
2008 associated with the sale of the hotel, which was recorded as an investing activity in the consolidated statement
of cash flows. New Valley also recorded equity income of $16,363 in connection with the gain from the sale of the
St. Regis because the amount received from 16th and K Holdings exceeded the Company’s basis in the investment
and the Company has no legal obligation to make additional investments to 16th and K Holdings.

In December 2009, the Company received $2,084 in connection with the sale of the tax credits which was
recorded as equity income for the year ended December 31, 2009. The Company anticipates receiving an additional
$2,700 in various installments between 2010 and 2012.

Aberdeen Townhomes LLC.

In June 2008, a subsidiary of New Valley purchased a preferred equity interest in
Aberdeen Townhomes LLC (“Aberdeen”) for $10,000. Aberdeen acquired five townhome residences located in
Manhattan, New York, which it is in the process of rehabilitating and selling. The Company had recorded an
impairment loss of $3,500 related to Aberdeen in each of 2008 and 2009. The Company’s investment in Aberdeen
Townhomes consists of the following:

Balance as of January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of preferred equity interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ —
10,000
(3,500)

Balance as of January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred return distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,500
(3,500)
(1,752)

Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,248

In September 2009, one of the five townhomes was sold and the mortgage of approximately $8,700 was retired.
The Company received a preferred return distribution of approximately $1,752. The Company did not record a gain
or loss on the sale.

Mortgages on the four remaining Aberdeen townhomes with a balance of approximately $31,887 as of
December 31, 2009 matured during 2009. These mortgages had not been refinanced or paid and were in default as of
December 31, 2009. In January 2010, one of the four townhomes was sold and the mortgage of approximately
$4,550 was retired. The Company received a preferred return distribution of approximately $1,001 in connection

F-63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

with the sale. Aberdeen is in discussions with the lender related to the three remaining mortgages which are in
default. There can be no assurance that an agreement will be reached.

In February 2009, the managing member of Aberdeen Townhomes resigned, and a subsidiary of New Valley
became the new managing member as of March 1, 2009. Aberdeen is a variable interest entity; however even as the
managing member, the Company is not the primary beneficiary as other parties to the investment would absorb a
majority of the variable interest entity’s losses under the current arrangement. The Company’s maximum exposure
to loss on its investment in Aberdeen is $1,248 at December 31, 2009.

On June 15, 2009, the Company entered into a line of credit in the amount of $250 on behalf of Aberdeen. As of
December 31, 2009, approximately $233 was outstanding on the line of credit, however, the outstanding amount
was fully paid upon the sale of a townhome in January 2010.

New Valley Oaktree Chelsea Eleven, LLC.

In September 2008, a subsidiary of New Valley (“New Valley
Chelsea”) purchased for $12,000 a 40% interest in New Valley Oaktree Chelsea Eleven, LLC, which lent $29,000 and
contributed $1,000 for 29% of the capital in Chelsea Eleven LLC (“Chelsea”), which is developing a condominium
project in Manhattan, New York. The development consists of 54 luxury residential units and one commercial unit.
The loan from New Valley Oaktree is subordinate to a $96,000 construction loan (approximately $49,200 outstanding
at December 31, 2009) and a $24,000 mezzanine loan plus accrued interest (approximately $28,000 at December 31,
2009). The loan from New Valley Oaktree bears interest at 60.25% per annum, compounded monthly, with $3,750
being held in an interest reserve, of which five monthly payments of $300 have been paid to New Valley.

New Valley Chelsea is a variable interest entity; however, the Company is not the primary beneficiary. The
Company’s maximum exposure to loss as a result of its investment in Chelsea is $12,232. This investment is being
accounted for under the equity method. During the first three months of 2009, the Company received a distribution
of $594. In July 2009, the Company lent $467 to New Valley Oaktree, of which $250 was repaid in August 2009.

New Valley Chelsea is operating as an investment vehicle for the Chelsea real estate development project. A
temporary certificate of occupancy was obtained in October 2009 and, as of March 1, 2010, sales of eight units have
closed. As of December 31, 2009, Chelsea had approximately $203,186 of total assets and $126,220 of total liabilities,
excluding amounts owed to New Valley Chelsea (approximately $56,900 at December 31, 2009). New Valley
recorded equity income of $1,500 for the twelve months ended December 31, 2009 related to New Valley Chelsea.

Investment in Real Estate:

Escena.

In March 2008, a subsidiary of New Valley purchased a loan collateralized by a substantial portion
of a 450-acre approved master planned community in Palm Springs, California known as “Escena.” The loan, which
was in foreclosure, was purchased for its $20,000 face value plus accrued interest and other costs of $1,445. The
collateral consists of 867 residential lots with site and public infrastructure, an 18-hole golf course, a substantially
completed clubhouse, and a seven-acre site approved for a 450-room hotel.

In April 2009, New Valley’s subsidiary entered into a settlement agreement with Lennar Corporation, a
guarantor of the loan, which requires the guarantor to satisfy its obligations under a completion guaranty by
completing improvements to the project in settlement, among other things, of its payment guarantees. In addition,
the guarantor agreed to pay approximately $250 in legal fees and $1,000 of delinquent taxes and penalties and post a
letter of credit to secure its construction obligations. As a result of this settlement, the Company calculated the fair
market value of the investment as of March 31, 2009, utilizing the most recent “as is” appraisal of the collateral and
the value of the completion guaranty less estimated costs to dispose of the property. Based on these estimates, the
Company determined that the fair market value was less than the carrying amount of the mortgage receivable at
March 31, 2009 by approximately $5,000. Accordingly, a charge of $5,000 was recorded during the three months
ended March 31, 2009, which resulted in the loan being carried at its net basis of $12,704 as of March 31, 2009.

F-64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

In April 2009 New Valley completed the foreclosure process and took title to the collateral. In June 2009, the
Company received $500 from the guarantor pursuant to the settlement agreement. The assets have been classified as
an “Investment in real estate”, and were carried on the Company’s consolidated balance sheet at $12,204 as of
December 31, 2009.

The components of the Company’s investment in real estate at December 31, 2009 are as follows:

December 31,
2009

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Golf course and club house . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,817
3,387

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$12,204

The Company recorded an operating loss of $886 for 2009 from Escena.

Real Estate Market Conditions. Because the real estate markets may continue to worsen, the Company will
continue to perform additional assessments to determine the impact of the markets, if any, on the Company’s
consolidated financial statements. Thus, future impairment charges may occur.

Ladenburg Thalmann Financial Services.

In February 2007, LTS entered into a Debt Exchange Agreement
(the “Exchange Agreement”) with New Valley, the holder of $5,000 principal amount of its promissory notes due
March 31, 2007. Pursuant to the Exchange Agreement, New Valley agreed to exchange the principal amount of its
notes for LTS common stock at an exchange price of $1.80 per share, representing the average closing price of the
LTS common stock for the 30 prior trading days ending on the date of the Exchange Agreement.

The debt exchange was consummated in June 2007 following approval by the LTS shareholders of the
transaction at its annual meeting of shareholders. At the closing, the $5,000 principal amount of notes was
exchanged for 2,777,778 shares of LTS’s common stock, and accrued interest on the notes of approximately $1,730
was paid in cash. As a result of the debt exchange, New Valley’s ownership of LTS common stock increased to
13,891,205 shares or approximately 8.6% of the outstanding LTS shares.

New Valley provided a full reserve against the LTS notes in 2002 and carried the notes on its consolidated
balance sheet at $0 prior to the exchange. In connection with the debt exchange, the Company recorded a gain in
2007 of $8,121, which consisted of the fair value of the 2,777,778 shares of LTS common stock on the transaction
date and interest received in connection with the exchange.

NASA Settlement.

In 1994, New Valley commenced an action against the United States government seeking
damages for breach of a launch services agreement covering the launch of one of the Westar satellites owned by
New Valley’s former Western Union satellite business. In March 2007, the parties entered into a Stipulation for
Entry of Judgment to settle New Valley’s claims and, pursuant to the settlement, $20,000 was paid in May 2007. The
Company recognized a pre-tax gain of $19,590 in 2007, which consisted of other non-operating income of $20,000
and $410 of selling, general and administrative expenses, in connection with the settlement.

18. SEGMENT INFORMATION

The Company’s significant business segments for each of the three years ended December 31, 2009 were
Liggett, Vector Tobacco, and Real Estate. The Liggett segment consists of the manufacture and sale of conventional
cigarettes by Liggett and Vector Tobacco. The Vector Tobacco segment includes the research relating to reduced
risk products, as well as until 2009, the marketing of the low nicotine and nicotine-free cigarette products for
segment reporting purposes, and excludes Vector Tobacco’s conventional cigarette business. The Real Estate
segment includes the Company’s equity income, investment in real estate and investments in non-consolidated real
estate businesses. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.

F-65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

Financial information for the Company’s operations before taxes and minority interests for the years ended

December 31, 2009, 2008 and 2007 follows:

Liggett

Vector
Tobacco

Real
Estate

Corporate
and Other

Total

2009
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $799,955
Operating income (loss) . . . . . . . . . . . . . . . . . . . .
Equity income from non-consolidated real estate

168,032(1)

businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .

—
288,688
7,982
2,720

2008
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $562,660
Operating income (loss) . . . . . . . . . . . . . . . . . . . .
170,181
Equity income from non-consolidated real estate

businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .

—
277,532
7,601
6,220

2007
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $551,687
159,347
Operating income (loss) . . . . . . . . . . . . . . . . . . . .
Equity income from non-consolidated real estate

businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable assets . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . .

—
314,242
7,723
4,997

$ 1,539

(7,117)(2)

$ — $
(886)

— $801,494
143,167

(16,862)

— 15,213

—
61,770(3) 376,185
2,246
—

74
1,114

8,899
96
14

15,213
735,542
10,398
3,848

$ 2,526
(8,331)

$ — $
—

— $565,186
135,304

(26,546)

— 23,899

—
70,979(3) 355,471
2,338
—

—
—

13,730
118
89

23,899
717,712
10,057
6,309

$ 3,743
(9,896)

$ — $
—

— $555,430
125,504

(23,947)

— 16,243

—
35,731(3) 432,857
2,345
—

—
—

2,459
134
192

16,243
785,289
10,202
5,189

(1) Operating income includes a gain of $5,000 on the Philip Morris brand transaction completed February 2009.

(2) Operating income includes restructuring costs of $900.
(3) Includes investments accounted for under the equity method of accounting of $48,318, $44,725 and $35,731 as

of December 31, 2009, 2008 and 2007, respectively.

F-66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

19. QUARTERLY FINANCIAL RESULTS (UNAUDITED)

Unaudited quarterly data for the years ended December 31, 2009 and 2008 are as follows:

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Net income (loss) applicable to common

December 31,
2009(1)

September 30,
2009

June 30,
2009(2)

$236,748
57,451
36,188

$236,736
58,937
36,972

$206,794
59,032
38,847

March 31,
2009(3)

$121,216
48,689
31,160

shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,433

$ 16,219

$ (7,946)

$

3,100

Per basic common share(4):
Net income applicable to common shares. . . .

Per diluted common share(4):
Net income applicable to common shares. . . .

$

$

0.19

0.19

$

$

0.22

0.22

$

$

(0.11)

(0.11)

$

$

0.04

0.04

(1) Fourth quarter 2009 net income applicable to common shares includes pre-tax loss on extinguishment of debt of

$129 and an adjustment to reduce restructuring charges for 2009 by $100.

(2) Second quarter 2009 net income applicable to common shares includes pre-tax loss on extinguishment of debt

of $18,444.

(3) First quarter 2009 net income applicable to common shares includes pre-tax gain of $5,000 on brand
transaction, restructuring charges of $1,000, and impairment charges of $8,500 on investments in non-
consolidated real estate businesses.

(4) Per share computations include the impact of a 5% stock dividend paid on September 29, 2009. Quarterly basic
and diluted net income per common share were computed independently for each quarter and do not necessarily
total to the year to date basic and diluted net income per common share.

December 31,
2008(1)

September 30,
2008(2)

June 30,
2008

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Net income applicable to common shares. . . .

$144,420
60,157
35,383
$ 12,245

Per basic common share(4):
Net income applicable to common shares. . . .

Per diluted common share(4):
Net income applicable to common shares. . . .

$

$

0.17

0.08

$145,601
60,602
37,535
$ 14,827

$

$

0.21

0.20

March 31,
2008(3)

$132,205
52,198
28,041
$ 14,307

$142,960
56,930
34,345
$ 19,125

$

$

0.27

0.23

$

$

0.21

0.20

(1) Fourth quarter 2008 net income applicable to common shares includes pre-tax impairment charges of $24,400
on long-term investments, $3,000 on investments held for sale and $3,500 on investments in non-consolidated
real estate businesses.

(2) Third quarter 2008 net income applicable to common shares includes pre-tax impairment charges on a

mortgage receivable of $4,000 and long-term investments of $3,000.

(3) First quarter 2008 net income applicable to common shares includes $12,000 of pre-tax income from the

Company’s investment in the St. Regis hotel, which was sold in March 2008.

F-67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

(4) Per share computations include the impact of a 5% stock dividend paid on September 29, 2008. Quarterly basic
and diluted net income per common share were computed independently for each quarter and do not necessarily
total to the year to date basic and diluted net income per common share.

20. SUBSEQUENT EVENTS

The Company has evaluated events that occurred subsequent to December 31, 2009, through the financial

statement issue date and determined that there were no recordable or reportable subsequent events.

21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying condensed consolidating financial information has been prepared and presented pursuant
to Securities and Exchange Commission Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and
Issuers of Guaranteed Securities Registered or Being Registered”. Each of the subsidiary guarantors are 100%
owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several.
The Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting.

The 11% Senior Secured Notes due 2015, $165,000, principal amount, issued on August 16, 2007 and $85,000,
principal amount, issued on September 1, 2009 by Vector, are fully and unconditionally guaranteed on a joint and
several basis by all of the 100% owned domestic subsidiaries of the Company that are engaged in the conduct of its
cigarette businesses. (See Note 7.) The notes are not guaranteed by any of the Company’s subsidiaries engaged in
the real estate businesses conducted through its subsidiary New Valley LLC. Presented herein are Condensed
Consolidating Balance Sheets as of December 31, 2009 and 2008 and the related Condensed Consolidating
Statements of Operations and Cash Flows for the years ended December 31, 2009, 2008 and 2007 of Vector Group
Ltd. (Parent/issuer), the guarantor subsidiaries (Subsidiary Guarantors) and the subsidiaries that are not guarantors
(Subsidiary Non-Guarantors). The Company does not believe that the separate financial statements and related
footnote disclosures concerning the Guarantors would provide any additional information that would be material to
investors making an investment decision.

The indenture contains covenants that restrict the payment of dividends by the Company if the Company’s
consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”), as defined in
the indenture, for the most recently ended four full quarters is less than $50,000. The indenture also restricts the
incurrence of debt if the Company’s Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture,
exceed 3.0 and 1.5, respectively. The Company’s Leverage Ratio is defined in the indenture as the ratio of the
Company’s and the guaranteeing subsidiaries’ total debt less the fair market value of the Company’s cash,
investments in marketable securities and long-term investments to Consolidated EBITDA, as defined in the
indenture. The Company’s Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage
Ratio, except that secured indebtedness is substituted for indebtedness.

F-68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING BALANCE SHEETS

ASSETS:
Current assets:

Cash and cash equivalents . . . . . . . . . .
Investment securities available for

sale . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable — trade . . . . . . . .
Intercompany receivables . . . . . . . . . . .
Inventories. . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . .
Restricted assets . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . .

Total current assets. . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . .
Investment in real estate . . . . . . . . . . . . .
Long-term investments accounted for at

December 31, 2009

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

$204,133

$ 5,004

$

317

$

—

$209,454

51,743
—
—
—
11,240
—
—
497

267,613
623
—

—
8,089
43
98,485
2,914
26,086
3,138
3,512

147,271
42,363
—

—
9
—
1
—
—
—
126

453
1,040
12,204

—
—
(43)
—
—
(26,086)
—
—

(26,129)
—
—

51,743
8,098
—
98,486
14,154
—
3,138
4,135

389,208
44,026
12,204

cost . . . . . . . . . . . . . . . . . . . . . . . . . . .

49,486

—

837

—

50,323

Investments in non- consolidated real

estate businesses . . . . . . . . . . . . . . . . .
Investments in consolidated subsidiaries . .
Restricted assets . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . .
Prepaid pension costs . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . .

—
282,010
2,685
28,729
—
—
14,942

—
—
2,150
94,088
107,511
8,994
14,095

49,566
—
—
9,667
—
—
—

—
(282,010)
—
(92,646)
—
—
—

49,566
—
4,835
39,838
107,511
8,994
29,037

Total assets . . . . . . . . . . . . . . . . . . .

$646,088

$416,472

$73,767

$(400,785)

$735,542

F-69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

December 31, 2009

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

LIABILITIES AND STOCKHOLDERS’

EQUITY:

Current liabilities:

Current portion of notes payable and

long-term debt . . . . . . . . . . . . . . . . .
Current portion of employee benefits . .
Accounts payable. . . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . . . . .
Accrued promotional expenses . . . . . . .
Income taxes payable, net . . . . . . . . . .
Accrued excise and payroll taxes

payable, net . . . . . . . . . . . . . . . . . . .
Settlement accruals . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . .
Accrued interest. . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . .

Notes payable, long-term debt and other

obligations, less current portion . . . . . .
Fair value of derivatives embedded within
convertible debt . . . . . . . . . . . . . . . . . .
Non-current employee benefits. . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . .

Total liabilities and stockholders’

$ 21,889
1,029
4,355
—
12,745
19,924

24,093
18,803
17,254
13,840
15,076

$

— $ 21,773
1,029
—
2,763
1,490
—
43
12,745
—
547
14,472

$

116
—
102
—
—
30,991

$

—
—
—
(43)
—
(26,086)

—
—
14,992
13,840
6,039

50,876

24,088
18,803
2,262
—
8,427

92,437

319,588

14,853

153,016
13,301
113,667
322

650,770
—
(4,682)

—
20,946
24,040
22,763

175,039
—
241,433

5
—
—
—
610

—
—
—
—
—

31,824

(26,129)

149,008

479

—
—
59
828

33,190
—
40,577

—

334,920

—
—
(92,646)
—

(118,775)
—
(282,010)

153,016
34,247
45,120
23,913

740,224
—
(4,682)

equity . . . . . . . . . . . . . . . . . . . . .

$646,088

$416,472

$73,767

$(400,785)

$735,542

F-70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2008

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

$200,066

$ 11,039

$ —

$

—

$211,105

ASSETS:
Current assets:

Cash and cash equivalents . . . . . . . . . .
Investment securities available for

sale . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable — trade . . . . . . . .
Intercompany receivables . . . . . . . . . . .
Inventories. . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . .

Total current assets. . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . .
Mortgage receivable . . . . . . . . . . . . . . . .
Long-term investments accounted for at

28,440
—
1,938
—
3,304
25,125
3,962

262,835
735
—

cost . . . . . . . . . . . . . . . . . . . . . . . . . . .

50,332

Long-term investments accounted under

the equity method . . . . . . . . . . . . . . . .

Investments in non- consolidated real

estate businesses . . . . . . . . . . . . . . . . .
Investments in consolidated subsidiaries . .
Restricted assets . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . .
Prepaid pension costs . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . .

—

—
164,917
3,845
37,177
—
—
16,295

—
9,506
—
92,581
338
—
5,969

119,433
49,956
—

—

—

—
—
2,710
870
107,511
2,901
13,657

78
—
—
—
—
—
—

78
—
17,704

786

—

50,775
—
—
7,175
—
—
—

—
—
(1,938)
—
—
(25,125)
—

(27,063)
—
—

—

—

—
(164,917)
—
—
—
—
—

28,518
9,506
—
92,581
3,642
—
9,931

355,283
50,691
17,704

51,118

—

50,775
—
6,555
45,222
107,511
2,901
29,952

Total assets . . . . . . . . . . . . . . . . . . .

$536,136

$297,038

$76,518

$(191,980)

$717,712

F-71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

December 31, 2008

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

LIABILITIES AND STOCKHOLDERS’

EQUITY:

Current liabilities:

Current portion of notes payable and

long-term debt . . . . . . . . . . . . . . . . .
Current portion of employee benefits . .
Accounts payable. . . . . . . . . . . . . . . . .
Intercompany payables . . . . . . . . . . . . .
Accrued promotional expenses . . . . . . .
Income taxes payable, net. . . . . . . . .

Accrued excise and payroll taxes

payable, net . . . . . . . . . . . . . . . . . . .
Settlement accruals . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . .
Accrued interest. . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . .

$ 72,299
20,789
3,219
—
—
—

—
—
81,961
9,612
—

$ 25,199
1,051
2,885
3
10,131
10,754

7,004
20,668
10,546
—
20,017

$ —
—
—
—
—
26,174

—
—
—
—
910

$

—
—
—
(3)
—
(25,125)

—
—
—
—
(1,935)

$ 97,498
21,840
6,104
—
10,131
11,803

7,004
20,668
92,507
9,612
18,992

Total current liabilities . . . . . . . . . . .

187,880

108,258

27,084

(27,063)

296,159

Notes payable, long-term debt and other

obligations, less current portion . . . . . .
Fair value of derivatives embedded within
convertible debt . . . . . . . . . . . . . . . . . .
Non-current employee benefits. . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .

Total liabilities . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . . . .

Total liabilities and stockholders’

191,007

19,294

—

77,245
17,388
28,573
438

502,531
—
33,605

—
17,468
20,125
15,219

180,364
—
116,674

—
—
109
1,082

28,275
—
48,243

—

—
—
—
—

(27,063)
—
(164,917)

210,301

77,245
34,856
48,807
16,739

684,107
—
33,605

equity . . . . . . . . . . . . . . . . . . . . .

$536,136

$297,038

$76,518

$(191,980)

$717,712

F-72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2009

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Revenues . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:

Cost of goods sold . . . . . . . . . . . . . . . .
Operating, selling, administrative and

general expenses . . . . . . . . . . . . . . .
Gain on brand transaction . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . .
Management fee expense . . . . . . . . . . .

$

— $801,494

$ —

$

—

577,386

—

20,679
—
—
—

63,277
(5,000)
900
8,223

1,085
—
—
—

Operating income (loss) . . . . . . . . . . . .

(20,679)

156,708

(1,085)

Other income (expenses):

Interest and dividend income . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . .
Changes in fair value of derivatives

embedded within convertible debt . . .
Provision for loss on investments . . . . .
Equity income from non-consolidated

real estate businesses . . . . . . . . . . . .

Equity income in consolidated

subsidiaries . . . . . . . . . . . . . . . . . . .
Management fee income . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . .

387
(67,420)
(18,573)

(35,925)
—

—

196,356
8,223
1,153

105
(1,048)
—

—
—

—

—
—
—

—
(22)
—

—
(8,500)

15,213

—

—

—
—
—
(8,223)

8,223

—
—
—

—
—

—

—
—
—

(196,356)
(8,223)
—

Consolidated
Vector Group
Ltd.

$801,494

577,386

85,041
(5,000)
900
—

143,167

492
(68,490)
(18,573)

(35,925)
(8,500)

15,213

—
—
1,153

Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . .

63,522
(38,716)

155,765
37,261

5,606
(2,276)

(196,356)
—

28,537
(3,731)

Net income . . . . . . . . . . . . . . . . . . . . . . .

$ 24,806

$193,026

$ 3,330

$(196,356)

$ 24,806

F-73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Year Ended December 31, 2008

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Revenues . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:

Cost of goods sold . . . . . . . . . . . . . . . .
Operating, selling, administrative and

general expenses . . . . . . . . . . . . . . .
Management fee expense . . . . . . . . . . .

$

— $565,186

$ —

$

—

335,299

—

29,577
—

65,135
7,940

Operating income (loss) . . . . . . . . . . . .

(29,577)

156,812

Other income (expenses):

Interest and dividend income . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Changes in fair value of derivatives

embedded within convertible debt . . .
Provision for loss on investments . . . . .
Equity income from non-consolidated

real estate businesses . . . . . . . . . . . .

Equity income in consolidated

subsidiaries . . . . . . . . . . . . . . . . . . .
Management fee income . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . .

4,911
(60,172)

24,337
(24,900)

—

108,539
7,940
(593)

953
(2,163)

—
—

—

—
—
—

Income before provision for income

—

—

—
(7,940)

7,940

—
—

—
—

—

Consolidated
Vector Group
Ltd.

$565,186

335,299

94,583
—

135,304

5,864
(62,335)

24,337
(32,400)

24,399

—
—
(597)

—
—
(4)

(108,539)
(7,940)
—

(129)
—

129

—
—

—
(7,500)

24,399

taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . .

30,485
30,019

155,602
(57,056)

17,024
(7,031)

(108,539)
—

94,572
(34,068)

Net income . . . . . . . . . . . . . . . . . . . . . . .

$ 60,504

$ 98,546

$ 9,993

$(108,539)

$ 60,504

F-74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Revenues . . . . . . . . . . . . . . . . . . . . . . . .
Expenses:

Cost of goods sold . . . . . . . . . . . . . . . .
Operating, selling, administrative and

general expenses . . . . . . . . . . . . . . .
Management fee expense . . . . . . . . . . .
Restructuring and impairment

charges . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2007

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

$

— $555,430

$

—

337,079

$

—

—

—

—

25,974
—

65,835
7,669

1,158
—

—

(120)

—

Operating income (loss) . . . . . . . . . . . .

(25,974)

144,967

(1,158)

Other income (expenses):

Interest and dividend income . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
Changes in fair value of derivatives

embedded within convertible debt . . .
Provision for loss on investments, net . .
Gain from conversion of LTS notes . . .
Equity income from non-consolidated

real estate businesses . . . . . . . . . . . .
Income from lawsuit settlement . . . . . .
Equity income in consolidated

subsidiaries . . . . . . . . . . . . . . . . . . .
Management fee income . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . .

Income before provision for income

13,618
(43,217)

1,406
(7,672)

(6,109)
—
—

—
—

111,400
7,669
(107)

—
—
—

—
—

—
—
—

—
—

—
(1,216)
8,121

16,243
20,000

—
—
32

(111,400)
(7,669)
—

Consolidated
Vector Group
Ltd.

$555,430

337,079

92,967
—

(120)

125,504

9,897
(45,762)

(6,109)
(1,216)
8,121

16,243
20,000

—
—
(75)

—
(7,669)

—

7,669

(5,127)
5,127

—
—
—

—
—

taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . .

57,280
16,523

138,701
(52,604)

42,022
(16,719)

(111,400)
—

126,603
(52,800)

Net income . . . . . . . . . . . . . . . . . . . . . . .

$ 73,803

$ 86,097

$ 25,303

$(111,400)

$ 73,803

F-75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2009

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

Net cash provided by operating

activities . . . . . . . . . . . . . . . . . . . . . . $ 10,517

$ 80,572

$ 5,547

$(90,969)

$

5,667

—

—
—

—
—

—

—

—

—
3,800
—
3,800

—
—
—
—
—
(3,800)
90,969

—

—

—

41

78
(12,427)

2,254
(51)

(474)

6,730

(839)

1,720
—
(3,848)
(6,816)

118,805
(6,179)
(5,573)
749,474
(751,607)
—
—

(115,778)

1,194

9,162

Cash flows from investing activities:

Proceeds from sale of businesses and

assets . . . . . . . . . . . . . . . . . . . . . . .

Proceeds from sale or maturity of

investment securities . . . . . . . . . . . .
Purchase of investment securities . . . .
Proceeds from sale or liquidation of

long-term investments . . . . . . . . . . .
Purchase of long-term investments . . .
Investment in non-consolidated real

estate businesses . . . . . . . . . . . . . . .

Distributions from non-consolidated

real estate businesses . . . . . . . . . . .

Increase in cash surrender value of

life insurance policies . . . . . . . . . . .

Decrease in non-current restricted

assets . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . .
Net cash used in investing activities . . . .
Cash flows from financing activities:

Proceeds from debt issuance . . . . . . . .
Repayments of debt . . . . . . . . . . . . . .
Deferred financing charges . . . . . . . . .
Borrowings under revolver . . . . . . . . .
Repayments on revolver . . . . . . . . . . .
Capital contributions received . . . . . . .
Intercompany dividends paid . . . . . . .
Dividends and distributions on

—

—
(12,427)

2,254
—

—

—

41

—
—

—
—

—

—

(413)

(426)

1,160
(3,800)
—
(13,226)

560
—
(2,734)
(2,559)

—

78
—

—
(51)

(474)

6,730

—

—
—
(1,114)
5,169

35
118,125
(5,769)
(360)
(6)
(5,567)
749,474
—
— (751,607)
3,800
—
(79,975)
—

645
(50)
—
—
—
—
(10,994)

common stock . . . . . . . . . . . . . . . .

(115,778)

1,194

9,162

—

—

—

—

—

—

Proceeds from exercise of Vector

options and warrants . . . . . . . . . . . .

Excess tax benefit of options

exercised . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . . . . .

Net decrease in cash and cash

equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . .

Cash and cash equivalents, end of

period . . . . . . . . . . . . . . . . . . . . . . . . $ 204,133

$

5,004

$

F-76

6,776

(84,048)

(10,399)

87,169

(502)

4,067

(6,035)

317

200,066

11,039

—

—

—

(1,651)

211,105

$ 209,454

—

—

$

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2008

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

Net cash provided by operating

activities . . . . . . . . . . . . . . . . . . . . . . $ 82,821

$ 125,279

$ 7,415

$(124,250)

$ 91,265

Cash flows from investing activities:

Proceeds from sale of businesses

and assets . . . . . . . . . . . . . . . . . .
Purchase of investment securities . .
Proceeds from sale or liquidation of
long-term investments . . . . . . . . .

Purchase of long-term

investments . . . . . . . . . . . . . . . . .
Purchase of mortgage receivable . . .
Purchase of Castle Brands equity . .
Investment in non-consolidated real
estate businesses . . . . . . . . . . . . .
Distributions from non-consolidated
real estate businesses. . . . . . . . . .

Increase in cash surrender value of

life insurance policies . . . . . . . . .

Decrease in non-current restricted

assets . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . .
Capital expenditures . . . . . . . . . . . .
Net cash used in investing activities . . . .
Cash flows from financing activities:

Proceeds from debt . . . . . . . . . . . . .
Repayments of debt . . . . . . . . . . . .
Deferred financing charges . . . . . . .
Borrowings under revolver . . . . . . .
Repayments on revolver . . . . . . . . .
Capital contributions received . . . . .
Intercompany dividends paid . . . . . .
Dividends and distributions on

Proceeds from exercise of Vector

options and warrants . . . . . . . . . .

Excess tax benefit of options

exercised . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . . . . .

Net decrease in cash and cash

common stock . . . . . . . . . . . . . .

(103,870)

—
(6,411)

8,334

—
—
(4,250)

—

—

452
—

—

—
—
—

—

—

—
—

—

(51)
(21,704)
—

(22,000)

19,393

(500)

(438)

—

(1,465)
(21,747)
—
(26,039)

1,054
—
(6,309)
(5,241)

—
—
—
(24,362)

2,831
—
(6,329)
—
—
(137)
—
531,251
— (526,518)
—
4,800
— (124,250)

86

18,304

—

—

—

—
—
—
—
—
16,947
—

—

—

—

—
—

—

—
—
—

—

—

—

—
21,747
—
21,747

—
—
—
—
—
(21,747)
124,250

—

—

—

452
(6,411)

8,334

(51)
(21,704)
(4,250)

(22,000)

19,393

(938)

(411)
—
(6,309)
(33,895)

2,831
(6,329)
(137)
531,251
(526,518)
—
—

(103,870)

86

18,304

(85,617)

(118,215)

16,947

102,503

(84,382)

equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . .

(28,835)

228,901

1,823

9,216

Cash and cash equivalents, end of

period . . . . . . . . . . . . . . . . . . . . . . . . $ 200,066

$ 11,039

$

—

—

—

$

—

—

—

(27,012)

238,117

$ 211,105

F-77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

VECTOR GROUP LTD.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2007

Parent/
Issuer

Subsidiary
Guarantors

Subsidiary
Non-
Guarantors

Consolidating
Adjustments

Consolidated
Vector Group
Ltd.

Net cash provided by (used in) operating

activities . . . . . . . . . . . . . . . . . . . . . . . $115,616

$ 80,376

$ 30,549

$(117,343)

$ 109,198

Cash flows from investing activities:

Proceeds from sale of businesses and
assets . . . . . . . . . . . . . . . . . . . . . .
Purchase of investment securities . . .
Proceeds from sale or liquidation of

long-term investments . . . . . . . . .
Purchase of long-term investments . .
(Increase) decrease in restricted

assets . . . . . . . . . . . . . . . . . . . . . .
Investments in non-consolidated real
estate businesses . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . .
Distributions from non-consolidated

real estate businesses . . . . . . . . . .

Receipt of repayment of
notes receivable . . . . . . . . . . . . . . . .
Capital expenditures. . . . . . . . . . . . .
Increase in cash surrender value of

life insurance policies . . . . . . . . . .

—
(6,571)

—
(40,000)

(521)

—
(39,150)

—

4,000
—

917
—

—
—

29

—
—

—

—
(5,189)

(460)

(378)

—
—

71
(91)

—

(750)
—

1,000

—
—

—

—
—

—
—

—

—
39,150

917
(6,571)

71
(40,091)

(492)

(750)
—

—

1,000

(4,000)
—

—

—
(5,189)

(838)

Net cash (used in) provided by investing

activities . . . . . . . . . . . . . . . . . . . . . . .

(82,702)

(4,621)

230

35,150

(51,943)

Cash flows from financing activities:
Proceeds from issuance of debt
. . . .
Repayments of debt . . . . . . . . . . . . .
Deferred financing charges . . . . . . . .
Borrowings under revolver . . . . . . . .
Repayments on revolver . . . . . . . . . .
Capital contributions received. . . . . .
Intercompany dividends paid . . . . . .
Dividends and distributions on

9,576
165,000
(45,200)
—
(122)
(9,863)
—
537,746
— (534,950)
39,150
—
(86,536)
—

—
—
—
—
—
—
(30,807)

common stock . . . . . . . . . . . . . . .

(99,249)

Proceeds from exercise of Vector

options and warrants . . . . . . . . . .
Tax benefit of options exercised . . . .

5,100
2,055

—

—
—

—

—
—

—
4,000
—
—
—
(39,150)
117,343

—

—
—

174,576
(41,200)
(9,985)
537,746
(534,950)
—
—

(99,249)

5,100
2,055

Net cash provided by (used in) financing

activities . . . . . . . . . . . . . . . . . . . . . . .

63,043

(80,336)

(30,807)

82,193

34,093

Net increase (decrease) in cash and cash

equivalents . . . . . . . . . . . . . . . . . . . . .

95,957

(4,581)

Cash and cash equivalents, beginning of

year . . . . . . . . . . . . . . . . . . . . . . . . . .

132,944
Cash and cash equivalents, end of year . . $228,901

13,797
9,216

$

$

(28)

28
—

$

—

—
—

91,348

146,769
$ 238,117

F-78

VECTOR GROUP LTD.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)

Description

Year Ended December 31, 2009
Allowances for:

Balance at
Beginning
of Period

Additions
Charged to
Costs and
Expenses

Deductions

Balance
at End
of Period

Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . .
Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

51
203
15,939
4,000

105
$
19,901
—
3,618

2
$
19,903
6,430
3,281

$

154
201
9,509
4,337

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$20,193

$23,624

$29,616

$14,201

Year Ended December 31, 2008
Allowances for:

Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . .
Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

51
69
16,835
3,700

$ —
14,797
—
2,897

$ — $
14,662
896
2,597

51
204
15,939
4,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$20,655

$17,694

$18,155

$20,194

Year Ended December 31, 2007
Allowances for:

Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . .
Sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

55
556
17,731
3,651

$ —
18,470
—
1,806

$
4
18,957
896
1,757

$

51
69
16,835
3,700

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,993

$20,276

$21,614

$20,655

F-79

Independent Accountants:

Transfer Agent and Registrar:

Corporate Officers:

PricewaterhouseCoopers LLP
1441 Brickell Avenue
Suite 1100
Miami, FL 33131

Corporate Headquarters:

Vector Group Ltd.
100 S.E. Second Street
Miami, FL 33131

Website:

www.vectorgroupltd.com

Additional Information:

Requests for general information
should be directed to corporate
headquarters.
Attn: Investor Relations
(305) 579-8000

Requests for exhibits not attached to
the Annual Report, including
Exhibit 99, Material Legal
Proceedings, must be in writing, and
should be sent to corporate
headquarters.
Attn: Investor Relations
Please specify the exhibits
requested.

Company Stock:

Vector Group Ltd. common stock is
listed on the New York Stock
Exchange (ticker symbol VGR).

American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
Telephone: (800) 937-5449

Board of Directors:

Bennett S. LeBow 1
Chairman of the Board

Howard M. Lorber 1
President and Chief Executive
Officer

Ronald J. Bernstein
President and Chief Executive
Officer, Liggett Group LLC and
Liggett Vector Brands Inc.

Henry Beinstein 2, 3, 4
Partner,
Gagnon Securities LLC

Robert J. Eide 1, 2, 4
Chairman and Chief Executive
Officer,
Aegis Capital Corp.

Jeffrey S. Podell 2, 3
Chairman of the Board and
President,
Newsote, Inc.

Jean E. Sharpe 2, 3, 4
Private Investor

1 Executive Committee
2 Audit Committee
3 Compensation Committee
4 Corporate Governance and
Nominating Committee

Howard M. Lorber
President and Chief Executive
Officer

Richard J. Lampen
Executive Vice President

J. Bryant Kirkland III
Vice President, Treasurer and
Chief Financial Officer

Marc N. Bell
Vice President, Secretary and
General Counsel

Ronald J. Bernstein
President and Chief Executive
Officer, Liggett Group LLC and
Liggett Vector Brands Inc.

Corporate Governance:

The Company timely submitted to
the New York Stock Exchange a
Section 303A(12)(a) CEO
Certification without qualification
in 2009. In 2010, the Company filed
with the Securities and Exchange
Commission the CEO/CFO
certifications required by Section
302 of the Sarbanes-Oxley Act as
Exhibits to its Form 10-K.