This SETTLEMENT AGREEMENT is entered into this 20^thday of March, 1997 by and among the States listed in Appendix A hereto(collectively, "Plaintiffs") and Brooke Group Ltd., a Delawarecorporation ("Brooke Group"), Liggett & Myers Inc., a Delawarecorporation ("Myers"), and Liggett Group, Inc., a Delaware corporation(which, with Myers, is hereinafter referred to as Liggett).

WHEREAS,

A. The Plaintiffs, by and through their respective AttorneysGeneral (the "Attorneys General"), have brought [or are contemplatingbringing] civil actions ("Actions") in various jurisdictionsacross the nation ("Actions") against, among others, the AmericanTobacco Company, Inc., BAT industries, PLC, British American Tobacco Company,R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation,Philip Morris, Inc., Liggett & Myers, Inc., Lorillard Tobacco Company,Inc., and United States Tobacco Company and their various parent and relatedcompanies ("Defendants"), asserting claims for, among other things,expenses allegedly arising from tobacco-related matters and injunctiverelief concerning sales of cigarettes to minors.

B. Because of the importance of the agreements and undertakingsby Liggett and Brooke Group herein to the goals of the Plaintiffs and theAttorneys General, including the prosecution of the Actions against non-settlingdefendants, Plaintiffs have agreed to extend financial settlement termsto Liggett and Brooke Group which will not be offered to any other defendants,all as set forth in this settlement agreement.

C. On March 15, 1996, the Commonwealth of Massachusetts,the State of Florida, the State of Louisiana, the State of Mississippiand the State of West Virginia and the Liggett and Brooke Group enteredinto a settlement (the Initial Settlement") of the Actions broughtby the foregoing States, pursuant to which Liggett agreed to make certainpayments, comply with certain proposed regulations restricting the marketingand sale of cigarettes to minors and to offer certain cooperation in connectionwith the prosecutions of such Actions against the other Defendants; allin accordance with the terms of the Initial Settlement, a copy of whichis annexed hereto as Appendix B.

D. The Attorneys General, the Initial Settling Statesand Liggett and Brooke Group wish to expand upon the Initial Settlement,through this Settlement Agreement to cover all of the Actions and to providefor, among other things, significantly greater cooperation by the SettlingDefendants with the Attorneys General, all in accordance with the termsof this Settlement Agreement.

E. The Attorneys General acknowledge and agree that thisSettlement Agreement, including the cooperation provisions thereof, areimportant to the prosecutions of their Actions against the non-settlingDefendants.

F. The Attorneys General and Liggett and Brooke Grouprecognize and support the public interest in preventing smoking by, orpromotion of smoking to, children and adolescents.

G. Liggett and Brooke Group have denied, and continueto deny any wrongdoing or any legal liability of any kind in all of theabove-mentioned actions.

H. The settling States and the Attorneys General recognizeand acknowledge that the cooperation being provided is valuable to thecontinued prosecution of the claims against the tobacco industry. Further,the Settling States and the Attorneys General acknowledge that the changein warning labels provided for in this Settlement Agreement is a step towardsproperly informing consumers more fully of the truth about cigarettes andthe consequences of smoking, as is the statement by Liggett also providedfor herein.

NOW, THEREFORE, in consideration of the foregoing andof the promises and covenants set forth in this Agreement, the undersignedAttorneys General, on their own behalf and on behalf of their respectiveStates, and the Liggett and Brooke Group hereby stipulate and agree thatthe Attorney General Actions shall be settled as against the Liggett andBrooke Group, and that all claims asserted in the Attorney General Actionsagainst Liggett and Brooke Group shall be dismissed, all on the terms containedherein, as follows:

1. Definitions.

As used in and solely for the purposes of this Agreement,in addition to terms defined elsewhere in the Agreement, the followingterms shall have the following respective meanings:

"Affiliate": means a Present Affiliate or aFuture Affiliate.

"Agreement" means this Settlement Agreement.

"Arbitrator" means the person or persons agreedto by the Settling States and the Settlement Class, and/or their counsel,or appointed by the Class Action Court of the Multidistrict LitigationPanel, as the case may be, to make decisions regarding allocations of theSettlement Fund between the Settling States and the Settlement Class, andto resolve disputes of the Oversight Committee. With respect to the SettlementFund, in the event that the Settling States and the Settlement Class, and/ortheir respective counsel, cannot agree on an allocation of the SettlementFund between the Settling States and the Settlement Class, the SettlingStates and the Settlement Class will petition the Court for appointmentof an arbitrator. In so doing, the parties do not consent, nor should itbe inferred, that the Multidistrict Litigation Panel has jurisdiction overany of the parties.

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

"Attorney General Actions" or "Actions"means the actions listed in Appendix A hereto, including those actionsbrought on behalf of the State as taxpayer actions.

"Attorney General Settlement Fund Board" or"Attorney General Board" means, the entity established pursuantto Section 5 of the Initial Settlement.

"Brooke Group" means Brooke Group, Ltd. andits Present Affiliates other than Liggett.

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

"Cigarette Pack" means a unity of twenty Cigarettesor one ounce of Tobacco Snuff, or any other similar method of deliveryto consumers.

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

"Defendants" means The American Tobacco Company,Inc., BAT Industries, PLC., British American Tobacco Company, R.J. ReynoldsTobacco Company, Brown & Williamson Tobacco Corporation, Philip Morris,Inc., Liggett & Myers, Inc., Lorillard Tobacco Company, Inc., and UnitedStates Tobacco Company and their various parent and related companies.

"Domestic Tobacco Operations" means the manufactureand/or sale of cigarettes and any other tobacco products in the UnitedStates, its territories, its possessions and the Commonwealth of PuertoRico.

"FDA Rule" means the regulations promulgatedby the FDA on August 28, 1996 concerning the sale and distribution of cigarettesand other products at 60 Fed. Reg. 44396, to be codified at 21 C.F.R. Parts801, 803, 804, 807, 820, and 827.

"Future Affiliate" means any one entity, otherthan an entity with a Market Share greater than 30% as of the date of thisAgreement, which is a Non-settling Tobacco Company (including any successorto or assignee of its assets) if such entity or an Affiliate of such entitywith the prior written approval of Brooke Group, subsequent to the date,and during the term, of this Agreement but prior to the fourth anniversaryof the date of execution of this Settlement Agreement: (I) directly orindirectly acquires or is acquired by Liggett of Brooke Group; (ii) directlyor indirectly acquires all or substantially all of the stock or assetsof the Liggett or Brooke Group; (iii) all or substantially all of whosestock or assets are directly or indirectly acquired by Liggett of BrookeGroup; or ((iv) directly or indirectly merges with Liggett or Brooke Group.

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

"Global Settlement" means any national disposition,settlement, Agreement or other arrangement, such as "Tobacco ClaimsLegislation", by way of legislation, executive order, regulation,taxation, levy, fine, class Action settlement, court order or otherwise,of smoking-related litigation, in direct or indirect connection with oneor more Tobacco Companies receive the benefit of a limitation of, or totalor partial immunity from, liability to plaintiffs for the types of claimsreleased under the terms of this Agreement.

"Initial Settlement" means the settlement agreemententered into by the initial Settling States and the Settling Defendantson March 15, 1996.

"Initial Settling States" means the States ofMississippi, West Virginia, Florida, and Louisiana, the Commonwealth ofMassachusetts, and the respective Attorneys General thereof.

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

"Mandatory Class Settlement Agreement" of "MandatoryClass Agreement" means the Agreement entered into on or about March20, 1997 between Brook Group and Liggett and a nationwide class.

"Mandatory Class Final Order and Judgment" or"Mandatory Class Final Approval" means the order to be enteredby the Settlement Court with respect to Liggett and its Present Affiliates,approving the Mandatory Settlement Agreement without material alterations,as fair, adequate and reasonable under Rule 23 of the Federal Rules ofCivil Procedure, confirming the Mandatory Settlement Class certificationunder Rule 23 thereof, and making such other findings and determinationsas the Settlement Court deems necessary and appropriate to effectuate theterms of the Mandatory Class Agreement and to exercise its continuing andexclusive jurisdiction over the enforcement and administration of all termsof the Mandatory Class Agreement.

"Mandatory Settlement Class" means the SettlementClass defined in the Mandatory Class Agreement.

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

"Market Share" means, with respect to a Defendantand a specified year, the Domestic Tobacco Operations market share in thatyear of all of such Defendant's cigarettes and other tobacco products,as determined by The Maxwell Consumer Report published by Wheat First ButcherSinger or a similar or successor report.

"Medicaid Population" means, with respect toa Settling State and a specified data, the Medicaid population of suchSettling State as reported by the most recent United States Census.

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

"Non-settling Tobacco Companies" means eachof The American Tobacco Co., Lorillard Tobacco Co., Philip Morris Inc.,R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., and UnitedStates Tobacco Co., unless and until it becomes a Future Affiliate, asherein defined.

"Other Settlement" means settlement of an actionwhich is not a Global Settlement.

"Oversight Committee" means a committee, madeup of no less than nine (9) individuals, to oversee the cooperation providedby Settling Defendants under Section 4.3.1 and 4.3.2 hereof. The committeeshall have not less than 75% of its composition from representation ofthe Attorneys General.

"Parent," with respect to Liggett means BrookeGroup, and with respect to any other specified corporation or entity, meansanother corporation, partnership or other entity which directly or indirectlycontrols such specified corporation or entity.

"Parties" means the Plaintiffs and Brooke Groupand Liggett.

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

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

"Present Value" means, with respect to a specifiedamount or amounts, the present value of such amount or amounts as calculatedusing a discount rate equal to the yield on 10-year Treasury Notes as reportedin the Wall Street Journal at the time of such calculation; providedthat where such amount or amounts are not otherwise determinable, the amountor amounts to be present-valued shall be deemed to be the average for themost recent three years.

"Pretax Income," with respect to Liggett, meansfor a specified year, the "Income before Income Taxes" as determinedin accordance with generally accepted accounting principles ("GAAP")of Liggett for its most recent fiscal year, as reported in filings to theUnited States Securities and Exchange Commission or, if there is no suchfiling, as reported by Liggett's independent outside auditors. If GAAPchanges in any material respect during the term of this Agreement so thatthe benefits anticipated by the parties (in light of GAAP applicable onthe date of this Agreement), an appropriate adjustment shall be made tothe formulas and calculations hereunder to achieve the parties' expectationsas of the date hereof.

"Protective Order" or "Stipulation RegardingLiggett Documents" means, with respect to privileged documents producedby a Settling Defendant in an Attorney General Action, an order in thatAction: (a) protecting the confidentiality of such documents; (b) providingthat such documents may be used only in that Attorney General Action and,to the extent permitted by law, only under seal; (c) providing that, tothe extent such documents are or may be subject to the attorney/clientprivilege or the attorney work product doctrine, such production or useof the documents does not constitute a waiver of such privilege, doctrineor protection with respect to any party other than the Attorney Generalto whom the documents are produced subject to the order. The provisionsof the order shall not apply to documents claimed to be privileged butwhich are determined by the court in any Action or by the Settlement Courtnot to be privileged for reasons other than waiver due to production pursuantto this Agreement.

"Settlement Class" means the settlement classprovided for in the Mandatory Class Agreement.

"Settlement Class Counsel" means the firms listedas Settlement Class Counsel in Section 25.8 of the Mandatory Class SettlementAgreement.

"Settlement Fund" means the fund establishedin accordance with the terms of Section 6 of this Agreement, which shallbe established in a reputable bank or other financial institution, to providea secure and interest-bearing fund, and which shall be jointly controlledby the Settling States and the Mandatory Settlement Class.

"Settling Defendants" means Brooke Group and/orLiggett.

"Settling Defendants' Counsel" means the lawfirm of Kasowitz, Benson, Torras & Friedman L.L.P.

"Settling States" means the States listed inAppendix A hereto and Subsequent Settling States, if any.

"Smokers" means all persons who, prior to orduring the term of this Agreement, have smoked Cigarettes or have usedother tobacco products and have suffered or claim to have suffered Injuryas a consequence thereof.

"Subsequent Settling States" means States otherthan the States listed in Appendix A hereto which commence an AttorneyGeneral Action and which execute this Agreement within six months fromthe date of this Agreement (unless such six-month period is extended orreopened at the option of the Settling Defendants).

"Tobacco Companies" means Defendants.

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

2. Settlement Purposes Only.

This Agreement is for settlement purposes only, and neitherthe fact of, or any provision contained in, this Agreement nor any actiontaken hereunder shall constitute, be construed as, or be admissible inevidence against the Settling Defendants as, any admissible of the validityof any claim, any argument or any fact alleged or which could have beenalleged by Plaintiffs as to their standing or as to any jurisdictional,constitutional or any other legal or factual issue in any Attorney GeneralAction or alleged or which could have been alleged in any other actionor proceeding of any kind or of any wrongdoing, fault, violation of law,or liability or any kind on the part of the Settling Defendants or anyadmission by them of any claim or allegation made or which could have beenmade in any Attorney General Action or in any other action or proceedingof any kind, or as an admission by any of the Plaintiffs of the validityof any fact or defense asserted against them in any Attorney General Actionor in any other action or proceeding of any kind.

3. Parties.

3.1 This Agreement shall be binding, in accordance withthe terms hereof, upon Brooke Group, Liggett and the Settling States; providedthat, notwithstanding anything else contained in this Agreement, the paymentobligations of this Agreement shall be binding only upon Liggett.

3.2 No Settling Defendant shall sell, use, dispose ortransfer substantially all of its cigarette brands or businesses withoutfirst causing the acquirer, on behalf of itself and its successors, tobe bound by all of the obligations of a Settling Defendant pursuant toSections 4.2 and 4.4 through 4.8 hereunder as to such transferred brandsor businesses; provided that this Section 3.2 shall not apply to the extentsuch sale, disposition or transfer is required by the Federal Trade Commission,Department of Justice, State Attorney General or court order.

4. Public Statement; Cooperation; Advertising Limitations.

4.1 Upon execution of this Settlement Agreement, Liggettshall, by and through its Director, Bennett S. LeBow, issue a public statementsubstantially in the following form and substance:

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

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

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

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

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

4. Liggett has instructed its advertising and marketingpeople to scrupulously avoid any and all advertising or marketing whichwould appeal to children or adolescents. Liggett acknowledges that thetobacco industry markets to "youth," which means those under18 years of age, and not just those 18-24 years of age. Liggett condemnsthis practice and will not market to children. Liggett agrees that if itsees industry advertisements which in its view are aimed at children, itwill bring this to the attention of the Attorneys General.

5. In accordance with our settlement agreements, Liggettagrees to fully cooperate with the Attorneys General and Settlement ClassCounsel in their lawsuits against the other tobacco companies. To thatend, Liggett will make available to the Attorneys General, Settlement ClassCounsel and other parties with whom we have settled all relevant documentsand information, including documents subject to Liggett's own attorney-clientprivileges and work product protections, and will assist those partiesin obtaining prompt court adjudication of the rest of the industry's jointprivilege claims.

4.2 As promptly as reasonably practicable, but no laterthan six months after execution of this Settlement Agreement, SettlingDefendants shall cause to be printed boldly, on all of the Cigarette packagesand in all of their Cigarette advertising, in addition to the warningsmandated under the Federal Cigarette Labeling and Advertising Act, as amended15 U.S.C. § 1331 et seq., the statement that cigarette smokingis addictive. To the extent any Settling Defendant manufactures and sellsother tobacco products, a similar warning shall be placed on such product.

4.3.1. With respect to each Settling State, upon executionof this Agreement, each Settling Defendant shall:

(1) cooperate with such Attorney General, and the attorneysrepresenting such Attorney General, in that such Settling Defendants willtake no steps to impede or frustrate these counsels' civil investigationsinto, or civil prosecutions of, any of the Non-settling Tobacco Companiesin these actions, so as to secure the just, speedy and inexpensive determinationof all such smoking-related claims against said non-settling persons andentities;

(2) cooperate in and facilitate reasonable non-party discoveryfrom Settling Defendants in connection with such Attorney General Action;

(3) actively assist the attorneys representing the AttorneysGeneral in identifying and locating any and all persons known to such SettlingDefendant to have documents or information that is discoverable in suchproceedings, to actively assist said counsel in interviewing and obtainingdocuments and information from all such persons, and to encourage suchperson to cooperate with the Attorneys General; and shall actively assistcounsel in interpreting documents relating to litigation against Non-settlingTobacco Companies; and

(4) insofar as such Settling Defendant has or obtainsany material information concerning any fraudulent or illegal conduct onthe part of any parties, including Non-settling Tobacco Companies, theiragents, or their co-defendants designed to frustrate or defeat the claimsof the plaintiffs against such parties, companies, agents or co-defendants,or which have the effect of unlawfully suppressing evidence relevant tosmoking claims, disclose such information to the appropriate judicial andregulatory agencies.

4.3.2. With respect to each Settling State, subject to,and promptly after, the entry of a Protective Order or a Stipulation RegardingLiggett Documents by the court in which the respective Attorney GeneralAction is pending or the Settlement Court, each Settling Defendant shall:

(1) promptly provide all documents and information thatare relevant to the subject matter of the Actions or which are likely tolead to admissible evidence in connection with the claims asserted in anyof the Actions, subject to the provisions of Section 4.3.2(2) hereof;

(2) waive any and all applicable attorney-client privilegesand work product protections with respect to such documents and information.Such waiver shall not extend to (a) documents and information not relevantto the subject matter of the Actions or not likely to lead to admissibleevidence in connection with claims asserted in any of the Actions or (b)documents subject to a joint defense or other privilege or protection whichSettling Defendants cannot legally waive unilaterally, except that thewaiver by the Settling Defendant shall apply, to the extent permitted bylaw, to its own joint defenses or other privileges. To the extent thata Settling Defendant has a good faith belief, or one or more Non-settlingTobacco Companies claims, that documents to be provided pursuant to Section4.3.2(1) hereof may be subject to a joint defense or other privilege (ora claim of such privilege) of one or more of the Non-settling Tobacco Companies,such documents shall be deposited under seal for in camera inspectionby the Settlement Court or a court in which a Settling State's AttorneyGeneral Action is pending, together with a statement to such court thatsuch Settling Defendant has concerns as to whether some or all of suchdocuments should be protected from discovery, and the Parties agree torequest that such court shall retain jurisdiction to resolve that issue.Liggett will participate in proceedings, including by way of court appearancesor declarations, concerning issues of whether such documents are discoverable;

(3) offer their employees, and any and all other individualsover whom they have control, and help locate former employees, to providewitness interviews of such employees and to testify, in depositions andat trial; it being understood and agreed that Liggett will waive and herebydoes waive any and all applicable confidentiality agreements to the extentsuch confidentiality agreements would restrict testimony under this Agreement,if any, to which such witnesses may be subject; and

(4) demand from its past or current national legal counselall documents and information obtained by them in the course of representationof any Settling Defendant which in any way relates to the cooperation requiredin paragraphs 4.3.1(1) - 4.3.2(3) above, which should be provided to theSettling States as provided under this paragraph.

4.3.3. With respect to the cooperation set forth in subsections4.3.1 and 4.3.2 above, the Attorneys General and Settlement Class Counselshall appoint, on a yearly basis, an Oversight Committee, to oversee suchcooperation so that it fairly assist them and minimizes the burden on aSettling Defendant. All requests for cooperation will be first made tothe Oversight Committee. The Oversight Committee shall coordinate suchrequests giving due regard to the legitimate needs of the litigants requestingcooperation and the burden on the Settling Defendant. Nothing in this Agreementshall waive or alter the rights of the Attorneys General to obtain discoveryof Liggett as required by a court order or case management order in anyAttorneys General Action, provided that no order is sought that is inconsistentwith this Agreement.

4.3.4. In the event the Oversight Committee cannot agreeon the sharing of cooperation by litigants, any member of the Committeemay seek resolution by an Arbitrator. In the event that the Oversight Committeecannot agree on the selection of an Arbitrator, the Oversight Committeewill petition the Multidistrict Litigation Panel for appointment of anArbitrator. In the event any Settling Defendant, absent good cause, doesnot provide requested cooperation as promptly as reasonably practicable,after receiving written notice from the Committee of such request, (1)the Committee may seek relief from an Arbitrator, and (2) the Committee,upon notice to the Settling Defendant, may petition an Arbitrator for specificperformance of such requested cooperation.

4.4 Each Settling Defendant, promptly after becoming boundby this Agreement, shall consent to jurisdiction by the FDA for the solepurpose of promulgating the FDA Rule with respect to all Tobacco Companies.Further, each Settling Defendant, promptly after execution of this Agreement,shall endorse, support and assist in attempts by the FDA to have the FDARule become enforceable. Such efforts shall include, if and as reasonablyrequested by the Attorneys General, filing appropriate amicus briefs andother court papers in litigation relating to the FDA Rule.

4.5 Each Settling Defendant shall follow and abide bythe provisions of the FDA Rule, insofar as they pertain solely to suchSettling Defendant's Domestic Tobacco Operations, as set forth in, andmodified by, paragraphs 4.5.1 - 4.5.4 hereof until a final determinationis reached respecting the FDA Rule at which time the Settling Defendantwill be bound by the FDA Rule only insofar as, and to the extent that,the FDA Rule becomes an enforceable obligation binding upon all of theTobacco Companies.

4.5.1. FDA Rule § 897.16(b), as proposed.

4.5.2. FDA Rule § 897.16(d), as proposed.

4.5.3. FDA Rule § 897.30(a), as proposed.

4.5.4. FDA Rule § 897.30(b), but only to the extentthat such section applies to billboards within 1,000 feet of a clearlymarked public or private elementary or secondary school or a clearly marked,outdoor, municipal or other government-operated public playground for children.

4.6 Notwithstanding anything to the contrary in the ProposedRule or in this Agreement, Liggett will commence compliance with Section4.5 of this Agreement as soon as reasonably practicable, according priorityas to compliance to the States listed in Appendix A hereto and then toSubsequent Settling States; provided that Liggett may limit its complianceto the extent, if any, necessary to ensure that the net annual out-of-pocketcost to Liggett of such compliance not exceed $1 million; and providedfurther that Liggett shall not be obligated pursuant hereto to breach pre-existinglegal obligations, if any, it may have with respect to the matters coveredby Section 4.5 (and shall use its reasonable best efforts to minimize thedegree to which any such obligations would impede its full compliance therewith).For purposes of this paragraph, the phrase "net annual out-of-pocketcosts" means the excess of (a) the additional out-of-pocket expendituresincurred during a particular year by Liggett in complying with the mattersspecified in Section 4.5, over (b) savings, if any, in out-of-pocket expendituresrealized during such year by Liggett directly from the implementation ofthe matters covered by Section 4.5.

4.7. If, when and to the extent the FDA Rule, in wholeor in part, becomes an enforceable legal obligation binding upon all ofthe Defendants, each Settling Defendant will comply therewith, withoutconsideration of any limits or exceptions herein. If the FDA Rule doesnot so become such a legal obligation, Liggett shall, during the durationof this Agreement, continue to comply with Section 4.5.

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

4.9. Each Settling Defendant may, after becoming boundby this Settlement Agreement, continue in the lawful manufacture, advertisingand/or sale of tobacco products. This Settlement Agreement does not inany way abrogate or restrict the authority or ability of the AttorneysGeneral to enforce future compliance with the laws of their respectiveStates.

5. Global Settlement.

5.1 Effective upon the execution hereof, the AttorneysGeneral and their respective counsel, each agree (a) to exercise best effortsto ensure that the financial terms, financial obligations or financialconditions of any Global Settlement are no more onerous on, or less favorableto, Brooke Group and Liggett than the financial terms, financial obligationsor financial conditions of this Settlement Agreement, and (b) to issuea public statement substantially in the following form and substance:

The historic settlements entered into by Liggett, wherebyLiggett has agreed, among other things, to provide full cooperation totwenty-two Attorneys General and to consent to FDA regulation of tobaccomarketing, are a major advance in our efforts to prevent smoking by childrenand adolescents and to ensure that the tobacco industry markets its productslawfully. Accordingly, the undersigned Attorneys General will use theirbest efforts in Congress and elsewhere to ensure that any such industry-wideresolution provide for financial terms for Liggett that reflect appropriaterecognition of Liggett's cooperative efforts.

5.2. In the event there is a Global Settlement at anytime which contains financial terms, financial obligations or financialconditions as to Brooke Group and Liggett which are more onerous on, orless favorable to, Brooke Group and Liggett than those of this SettlementAgreement, then, in addition to and not in derogation of any other rightsor remedies Brooke Group and Liggett may have, Brooke Group and Liggettshall have the right, at their option to withdraw from further performanceof this Agreement.

6. Settlement Fund.

6.1. Except as may otherwise be provided herein, all amountsdue and owing by each Settling Defendant under this Agreement shall bepaid when due into the Settlement Fund to be allocated and distributedto Settlement Class members and Settling States in accordance with thisand the Mandatory Class Settlement Agreement. In the event that the SettlingStates and Settlement Class Counsel cannot agree to an equitable allocationof the Settlement Fund between the Settling States and the Settlement Class,the Settling States and Settlement Class Counsel shall seek to agree onthe selection of an Arbitrator to determine such allocation. In the eventthat the Settling States and Settlement Class Counsel cannot agree on theselection of an Arbitrator, the Settling States and Settlement Class Counselwill petition the Class Action Court to determine such allocation; it beingunderstood that some portion of the Settlement Fund will be allocated tocounter-market advertising.

6.2. Settling Defendants shall have no interest in orresponsibility for allocations or distributions from the Settlement Fundand do not guarantee any earnings or insure against any losses from anyportion of the Settlement Fund assets that may be maintained or administeredas provided in Section 6.1 above.

6.3. Subject to the terms of this Agreement, Liggett shallmake the following payments:

6.3.1. An initial payment of $25 million due 120 daysfrom the date of a Future Affiliate Transaction; and

6.3.2. Subject to the provisions of Sections 6.6 - 6.12,payments, each equivalent to 25% of Liggett's Pretax Income, due 120 daysafter the end of each fiscal year of Liggett. The first payment shall bemade with respect to the first full fiscal year commencing after the dateof this Settlement Agreement.

6.4. Liggett shall pay the reasonable and necessary expensesof the administration, allocation, and distribution of the Settlement Fund;provided that Liggett shall not be obligation to pay more than $1 millionin any year for such expenses.

6.5. Since the Settling Defendants are providing historicand valuable cooperation and other considerations under this Agreementand the Mandatory Class Agreement, the amounts payable hereunder to theSettlement Fund shall represent the maximum amounts payable to the SettlementFund under this Agreement and the Mandatory Class Agreement.

6.6. With respect to each Settling State, in the eventof the entry of any final non-appealable monetary judgment in such SettlingState's Attorney General Action (other than by way of settlement) againstany one or more of the Non-settling Tobacco Companies, then the SettlingDefendants shall have the right to reduce the payments they are obligatedto make pursuant to this Agreement to the extent necessary to make (i)the then Present Value of all amounts theretofore paid and thereafter payableto that Settling State pursuant to this Agreement by the Settling Defendants(such amounts being calculated for purposes of this Section 6.6 by multiplying(a) the total amount of the Settlement Fund allocated to all of the SettlingStates in that year by (b) a quotient equal to the Medicaid Populationof such Settling State in that year divided by the total Medicaid Populationof all Settling States) per percentage point of the then Market Share ofsuch Settling Defendant no more than seventy-five percent (75%) of (ii)the then Present Value of the dollar amount of such judgment per percentagepoint of the then Market Share of each such Non-settling Tobacco Company;[ Example : For purposes of this example of Section 6.6, assume: Liggetthas a 2% Market Share ( i.e. , 2 points). A Non-settling Tobacco Companyhas an 8% Market Share ( i.e. , 8 points), and in 1998 has a final judgmententered against it in an Attorney General Action that requires paymentsby such Non-settling Tobacco Company with a then Present Value of $20 million.The Present Value of the amount allocable by Liggett to the Settling Statein 1998 is $5 million. Result: In 1998, Liggett would be permitted to reduceits future payments to the extent necessary to make the Present Value ofits past and future payments $3.75 million -- i.e. , no more than 75% ofthe Present Value of the judgment, all as adjusted for relative MarketShare. The calculation would be as follows: Present Value of Liggett payment/2points = .75 x judgment/8 points Present Value of Liggett payments = .75x $20 million/4 = $3,750,000 Thus, the larger the judgment, the less thereduction. Under this example, if the judgment is $26,670,000 or more,there would be no reduction.] provided that such Settling Defendant givewritten notice of such reduction and the method of calculating such reductionto the Settling State's Attorney General as soon as practicable after theentry of the judgment.

6.7. In each year beginning with the second year afterexecution of this Agreement, the annual payment amount due under Section6.3.2 of this Agreement from a Settling Defendant shall be decreased inproportion to any decrease and (only if there shall have been a prior suchdecrease) increase in proportion to any increase, in such Settling Defendant'sMarket Share from the prior year; provided, however, that (a) such annualpayment amount shall not be so decreased to the extent, if any, that suchannual payment amount in such year is decreased as a result of a decreasein such Settling Defendant's Pretax Income and (b) such annual paymentamount shall never be increased such that the aggregate amount of any suchincreases exceeds that the aggregate amount of any such increases exceedsthe aggregate amount of any such decreases. [ Example : For purposes ofthis example of Section 6.7, assume: Liggett's Pretax Income is $11 millioneach year, thus making Liggett's obligation under the settlement $2,750,000per year. Liggett's Market Share drops from 2% in 1996 and 1997 to 1.75%in 1998, but recovers to 1.9% in 1999, and then back to 2.0% in 2000. Reduction:In 1998, Liggett's amount due will be reduced by $343,750 to $2,406,250.Since Liggett's Market Share fell by .25 points or 12.5%, its paymentswould be reduced by 12.5% or $343,750 [$2,750,000 x .125]. Recapture ofMarket Share: In 1999, Liggett's payments will climb commensurate to itsincrease of .15 in Market Share (1.75 to 1.9%) to $2,612,500 [$2,406,250+ ($2,406,250 x .15/1.75)]. In 2000, Liggett's payment would again increasecommensurate to its increase of .1 in Market Share to $2,750,000 [$2,612,500+ ($2,612,500 x .1/1.90)]. Liggett would not be entitled to a "doublereduction" for a decrease in both Pretax Income and Market Share.Thus, if Liggett's .25 point drop in Market Share in 1998 were accompaniedby a drop in Pretax Income between 1997 and 1998 from $11 million to $8million, there would be no Market Share reduction, as Liggett's paymentobligations (25% of Pretax Income) would have already fallen from $2,750,000to $2,000,000.]

6.8. In the event of a Global Settlement, the SettlingDefendants shall have the right to reduce the aggregate payments due fromLiggett in each year pursuant to this Agreement so that such aggregatepayments shall be no more than the lesser of (A) on a Cost Per CigarettePack basis, one-third of the lowest Cost Per Cigarette Pack due in suchyear from the Non-settling Tobacco Companies under such Global Settlementand (B) on a percentage of Pretax Income basis, one-third of the lowestpercentage of Pretax Income due in such year from the Non-settling TobaccoCompanies under such Global Settlement (such percentage to be computedas if the payments due from such companies were included in revenues andearnings).

6.9. Liggett shall receive as a credit against any andall amounts due hereunder, any and all amounts it is required to pay undera Global Settlement.

6.10. In the event that one or more States elect to optout of the Mandatory Settlement Class and action(s) are brought againstany Settling Defendants on behalf of such State(s), the annual paymentamount due under Sections 6.3.2 of this Agreement from a Settling Defendantshall be reduced by an amount equal to the product of (i) the ratio thatthe Medicaid Population of the States that elect to opt out of the MandatorySettlement Class then bears to the total Medicaid Population and (ii) 20%of Liggett's Pretax Income.

6.11. Insofar as the Mandatory Class Settlement Agreementis not approved or is otherwise terminated, the Settlement Fund shall beadministered solely thereafter by the Attorney General Board for the benefitof the Settling States, and the percentage of Liggett's Pretax Income payableunder Section 6.3.2 shall, in the event there is no Global Settlement,be reduced to an amount equal to the product of (i) the ratio that theMedicaid Population of the Settling States then bears to the total MedicaidPopulation and (ii) 20% of Liggett's Pretax Income.

6.12. Any allocations set forth in this Section 6 amongthe Settling States and the Settlement Class are solely for the purposesof making the calculations set forth in this Section 6 and are in no waybinding upon or evidence for the allocations of payments from the SettlementFund to any recipients thereof.

6.13. Settling Defendants agree not to take any actionthe primary purpose of which is to reduce Liggett's payment obligationsunder this Agreement.

7. Release.

7.1 Upon the date each Settling State becomes bound bythis Agreement, for good and sufficient consideration as described herein,each Settling State and each Attorney General thereof shall for the durationor term of this Agreement (whichever is shorter) be deemed to and herebydoes release, dismiss and discharge each and every civil claim, right,and cause of action (including, without limitation, all claims for damages,restitution, medical monitoring, or any other legal or equitable relief),known or unknown, asserted or unasserted, direct or indirect, which theyhad, now have or may hereafter have against each Settling Defendant (includingits past and present parents, subsidiaries, present affiliates, employees,directors and shareholders, but only in such capacities, vis-à-vis,each such Settling Defendant, and downstream distribution entities of SettlingDefendant, but only to the extent that such downstream distribution entitleswould have cross-claims against Settling Defendant), but does not in anyfashion release any Non-settling Tobacco Companies or other defendantsin any Attorney General Action except as provided for in Section 17 hereof,(i) which was asserted in that State's Attorney General Action, and/or(ii) which was not asserted in said Action but which is smoking-relatedor otherwise arises out of, or concerns, the acts, facts, transaction,occurrences, representations, or omissions set forth, alleged, referredto or otherwise embraced in the complaint of that Settling State's AttorneyGeneral Action.

Upon the date each Settling State becomes bound by thisAgreement, for good and sufficient consideration as described herein, eachsuch Settling Defendant shall for the duration or term of this Agreement(whichever is shorter) be deemed to and hereby does release, dismiss anddischarge each and every claim, right, and cause of action (including,without limitation, all claims for damages, restitution, fees, expenses,or any other legal or equitable relief), whether known or unknown, assertedor unasserted, which they had, now have or may hereafter have as of theeffective date of this Agreement against each such Settling State, itspublic officials and employees in connection with, arising out of or relatedto the acts, facts, transactions, occurrences, representations, or omissionsset forth, alleged or referred to or otherwise embraced in the complaintsof the Settling States' Attorney General Actions.

Provided, however, as follows:

1) If this Agreement expires upon completion of its fullterm, these releases set forth in this Section 7.1 shall continue and applyin full force and effect with respect to all released claims which accruedor shall accrue prior to, through and including the date of such expiration,such that such claims shall be forever released, but only as to such claimsthrough and including such date; if this Agreement terminates for any reasonprior to its full term, these releases shall be of no further force andeffect and Settling Defendants shall be entitled to a credit to the extentotherwise provided in this Agreement against all claims covered by therelease for the full amount paid by such Settling Defendants hereunder.

2) Except as specifically provided herein, these releasesset forth in this Section 7.1 do not pertain or apply to any other existingor potential party in any present or future Attorney General Action.

3) These releases set forth in this Section 7.1 do notin any way release from claims which may asserted by a releaser involvingconduct unrelated to the manufacture and/or sale of tobacco products.

4) With respect to the claims of any county, municipalityor subdivision within a Settling State that, as of the date of this agreement,has brought an action against Settling Defendants separate and apart fromthe action brought against Settling Defendants by the Settling State encompassingsuch county, municipality or subdivision, these releases set forth in thisSection 7.1 do not release the claims of such county, municipality or subdivisionexcept for the exclusively State share of the Medicaid funds claimed inany such action.

5) The provisions of this Section 7.1 apply to all Statesexcept the State of Connecticut. With respect to the State of Connecticutonly, the claims described herein as having been released shall not bereleased and shall remain in existence; provided, however, that the Stateof Connecticut and the Attorney General of Connecticut shall, upon enteringinto this agreement, covenant not to bring or prosecute any suit or actionwith respect to such claims against each Settling Defendant, and the beneficiariesof this covenant shall be the same beneficiaries of the release providedby all other States pursuant to § 7.1. It is expressly understoodthat this covenant is not intended to and does not release or affect anyclaims that the State of Connecticut has or may have against any otherpersons or entities, and in particular is not intended to and does notrelease or affect any claims that the State of Connecticut has assertedor may assert against any Non-settling Tobacco Companies or any other defendantsin its Attorney General Action.

7.2 Except as specifically provided herein, nothing inthis Agreement shall prejudice or in any way interfere with the rightsof Settling States or Settling Defendants to pursue any or all of theirrights and remedies against Non-settling Tobacco Companies or other partiesnot released hereunder.

7.3. With respect to the State of Maryland, this Section7 is deemed to include the additional statements set forth in Sections11.5 and 11.6.

8. Exclusive Remedy; Dismissal of Action; Jurisdictionof Court.

8.1. Except as otherwise provided in this Agreement, thisAgreement shall be the sole and exclusive remedy for any and all claimsof Settling States released hereby against the Settling Defendants, andupon the date a Settling State becomes bound by this Agreement, each suchSettling State shall be barred from initiating, asserting, or prosecutingany claims released hereby against each such Settling Defendant.

8.2. Promptly after each Settling State becomes boundby this Agreement, each such Settling State shall dismiss without prejudiceits corresponding Attorney General Action as against such Settling Defendant,or if defendants have not yet responded to a complaint, the Settling Statemay amend the complaint to delete the Settling Defendant from the Action.

8.3. Promptly after the date each Settling State becomesbound by this Agreement, each such Settling Defendant shall withdraw withoutprejudice from any action brought against any Settling State with respectto claims released hereby.

9. Term.

9.1. Unless earlier terminated in accordance with theprovisions of this Agreement, the duration of this Agreement shall be twenty-five(25) years from the date of this Agreement; provided that in the eventof a Global Settlement, the duration of this Agreement shall be equal tothe duration of the Global Settlement.

9.2. Each Settling Defendant shall have the right to terminatethis Agreement with respect to that Settling Defendant and with respectto the Settling State in which there is a full and final dismissal on themerits as to any of the Non-settling Tobacco Companies in that SettlingState's Attorney General Action; provided that in the event of any suchtermination, the payments due from such Settling Defendant pursuant tothis Agreement shall be thereafter reduced by an amount equal to the productof (a) the total amount of the Settlement Fund allocated to all of theSettling States at the time of such dismissal and (b) a quotient equalto the Medicaid Population of such Settling State at the time of such dismissaldivided by the total Medicaid Population of all Settling States at thetime of such dismissal); provided further that any and all payments madepursuant to this Agreement prior to any such termination by such SettlingDefendant shall be retained by the Settlement Fund. The Attorneys Generalshall provide the Settling Defendant with the information necessary todetermine the amount referred to in subpart (a) hereof. Termination underthis section does not in any fashion reduce Settling Defendants' obligationsin any other Attorney General Actions.

9.3. Each Settling Defendant shall have the right at anytime during the term of this Agreement to terminate this Agreement withrespect to such Settling Defendant in the even that, in its sole and exclusivediscretion, it determines that too many states have opted out of the MandatorySettlement Class and have not resolved such cases with respect to the SettlingDefendant by becoming bound by this Agreement in accordance with the termshereof; provided that such Settling Defendant give written notice of suchtermination to the Attorneys General of the Settling States and providedfurther that any and all payments due up to the date of such terminationmade pursuant to this Agreement prior to the giving of such notice by suchSettling Defendant must be exercised no later than sixty days after thedate that Settling Defendants determine how many states have opted outof the Mandatory Settlement Class.

9.4. In the event of a termination of this Agreement withrespect to any Settling State, such Settling Defendant shall be entitledto offset any payments made to such Settling State prior thereto againstany judgments thereafter obtained by such Settling State against such SettlingDefendant in an Attorney General Action.

9.5. If any Settling Defendant subsequently withdrawsfrom this Agreement, or this Agreement, for whatever reason, is terminatedother than by reason of expiration of its term, then the applicable statueof limitations or any similar time requirement for a Settling State ora terminating Settling Defendant to file a claim that would otherwise bereleased hereunder against, or by any Settling Defendant shall be tolledfrom the date such Settling State became bound by this Agreement untilthe later of the time permitted by applicable law or for one year fromthe date of such termination with the effect that the parties shall bein the same position as they were at the time the Settling State filedits original Attorney General action with respect to the statute of limitations.

9.6. Except as may be otherwise specifically providedin this Agreement, a termination by a Settling Defendant hereunder shallhave the effect of rendering this Agreement as having no force or effectwhatsoever, null and void ab initio, and not admissible as evidencefor any purpose in any pending or future litigation in any jurisdiction.However, a termination shall not affect any prior cooperation or requirethe return of any document produced to a Settling State pursuant to thisAgreement.

10. Continuing Enforceability

Unless earlier terminated, as to the Settling States,this Agreement and each provision of or obligation arising from this Agreementshall continue and remain fully executory and enforceable if a SettlingDefendant institutes or is subject to the institution against it of anyproceeding or voluntary case under title 11, United States Code, or otherproceeding seeking to adjudicate it insolvent or seeking liquidation, windingup, reorganization, arrangement adjustment, protection, relief or compositionof it or its debts under any law relating to bankruptcy, insolvency orreorganization or relief or protection of debtors or other proceeding seekingthe entry of an order for relief or the appointment of a receiver, trustee,custodian or other similar official for it or for any part of its property(each, a "Bankruptcy Proceeding"). The Settling States acknowledgeand agree that Brooke Group has the right but not the obligation to cureand to perform any and all obligations of Liggett under this Agreementnotwithstanding the occurrence and continuation of any Bankruptcy Proceedingwith respect to Liggett; provided, however, that until such time as Liggettdecides whether to reject or assume this Agreement, Brooke Group shallhave the obligation to pay the annual installments as provided in Section6.3.2 hereof, and so long as the Brooke Group is paying all amounts duehereunder and so such payments are voidable, then the Settling States waiveany and all rights they may have not to accept such cure or performancein any Bankruptcy Proceeding.

11. Entry of Good Faith Bar Order on Contribution andIndemnity Claims

11.1. It is the intent of the parties that the paymentsto be made by Liggett with respect to the Attorneys General Actions settledhereby, be limited to those payments set forth in this Settlement Agreementand that the Settling Defendants not be responsible for any payments relatingto any contribution or indemnity claim asserted, or to be asserted, byany non-settling defendant that may arise from any such Attorneys GeneralActions. It is further the intent of the parties to this Agreement thatin Minnesota and Wisconsin the release of the Settling Defendants and anyrights of non-settling defendants to contribution or indemnity shall beconstrued as a Pierringer release, as used in Pierringer v. Roger,21 Wisc. 2d 182, 124 N.W.2d 106 (1963); Frey v. Snelgrove, 269 N.W.2d918 (Minn. 1978). In order to effectuate such intent, the parties agreeas follows in this Section 11.

11.2. Subject to, and as promptly as reasonably practicable,under applicable law, the Parties shall request that the respective courtsin the Attorney General Actions enter orders barring and prohibiting thecommencement and prosecution of any claim or action by any non-settlingdefendant against any Settling Defendant, including but not limited toany contribution, indemnity, and/or subrogation claim seeking reimbursementfor payments made or to be made to any Settling State for claims settledunder this Agreement. Settling Defendants shall be entitled to dismissalwith prejudice of any non-settling defendantsÍ claims against them whichviolate or are inconsistent with this bar, if granted.

11.3. The Settling States shall not seek to collect anyamount on any judgment against a son-settling defendant to the extent,and only to the extent, that such non-settling defendant has a right underapplicable law of contribution or indemnification against the SettlingDefendants. This section will not apply to any agreement or understanding,known or unknown, written or otherwise, with any non-settling defendantor any other party that entitles any non-settling defendant to indemnityor contribution from Brooke Group or Liggett.

11.4. Should a Settling State receive a final monetaryjudgment against a non-settling defendant which then results in the non-settlingdefendant being legally entitled to require a Settling Defendant to makepayment toward that judgment, the Settling States shall seek Court approvalto reduce the judgment by an amount sufficient to result in the SettlingDefendant having non obligation toward the judgment.

11.5. The provisions of Sections 11.1 Ü 11.4 apply toall States except for the State of Maryland. With respect to the Stateof Maryland only, the State of Maryland shall, upon entering into thisAgreement, execute a release of Settling Defendants which shall state,among other things provide for in this Agreement: "In the event ofa verdict against non-settling defendants in this Action, and in the eventthat with respect to such verdict, any settling defendant is adjudicateda joint tortfeasor in any manner in this Action, there shall be a judgmentreduction from such verdict accounting for the status of Settling Defendantsas a joint tortfeasor in the amount of $ [the Present Value of SettlingDefendantsÍ total aggregate payments allocable to the State of Marylandas calculated pursuant to provisions of the Attorneys General SettlementAgreement]. It is the intention of the parties that this Release providefor a pro tanto reduction of any damages recoverable against allother tortfeasors in this action, and only if Settling Defendants, or anyof them, are adjudicated a joint tortfeasor. This Release does not provide,and shall not be construed to provide, for a reduction, to the extent ofthe pro rate share of Settling Defendants, or any of them, of thedamages recoverable in this action against all other tortfeasors. If ajudgment reduction occurs on a pro tanto basis as provided in thisRelease and if a non-settling joint tortfeasor pays more than its prorata share of the judgment, that tortfeasor shall receive that portionof any future payment made thereafter by Settling Defendants in accordancewith the Attorneys General Settlement Agreement that is (1) beyond theamount of the pro tanto setoff provided for in this Release, and(2) attributable to that part of claims against that joint tortfeasor forwhich Settling Defendants are jointly and severally liable."

11.6. With respect to State of Maryland only, the AttorneyGeneral of Maryland shall cause a competent appraiser to make a calculationof Present Value of Settling DefendantsÍ total aggregate payments allocableto the State of Maryland as provided for under this Settlement Agreement,which valuation is referenced and bracketed in Section 11.4 hereof. Suchcalculation of Present Value of payment allocable to the State of Marylandunder this Agreement shall be the amount stated in the bracketed portionof the language quoted in Section 11.4 above.

12. Tax Status of Settlement Fund

12.1. The Settlement Fund created under this Agreementwill be established and maintained as a Qualified Settlement Fund ("QSF")in accordance with Section 468B of the Internal Revenue Code of 1986, asamended, and the regulations promulgated thereunder. Any Settling Defendantshall be permitted, in its discretion, and at its own cost, to seek a privateletter ruling from the Internal Revenue Service ("IRS") regardingthe tax status of the Settlement Fund. The parties agree to negotiate ingood faith any changes to the Agreement which may be necessary to obtainIRS approval of the Settlement Fund as a QSF.

12.2. Representatives of the Settling States and the SettlementClass will be appointed to act as administrator of the Settlement Fund.As administrator, such representatives will undertake the following actionsin accordance with the regulations under IRC section 468B: (a) apply forthe tax identification number required for the Attorney General SettlementFund; (b) file, or cause to be filed, all tax returns the Settlement Fundis required to file under federal of state laws; (c) pay from the SettlementFund all taxes that are imposed upon the Settlement Fund by federal orstate laws; and (d) file, or cause to be filed, tax elections availableto the Settlement Fund, including a request for a prompt assessment underIRC sec. 6501(d), if and when the administrator deems it appropriate todo so.

12.3. The Settling Defendants, as transferors of the SettlementFund shall prepare and file the information statements concerning theirsettlement payments to the Settlement Fund as required to be provided tothe IRS pursuant to the regulations under IRC section 468B.

13. Effect of a Default of Settling Defendant

In the event a Settling Defendant fails to make a paymentdue and owing under the terms of this Agreement, or is in default of thisAgreement in any other respects, PlaintiffsÍ Counsel shall so notify thedefaulting Settling Defendant, which shall then be given 60 calendar daysto "cure" the default. If the defaulting Settling Defendant doesnot "cure" the default in the time provided in this Section 13,PlaintiffsÍ Counsel may apply to the Court for relief, in addition to anyother remedies it may have hereunder.

14. Representations and Warranties.

14.1. Each Settling Defendant represents and warrantsthat it (i) has all requisite corporate power and authority to execute,deliver and perform this Agreement and to consummate the transactions contemplatedhereby; (ii) the execution, delivery and performance by such Settling Defendantof this Agreement and the consummation by it of the actions contemplatedherein have been duly authorized by all necessary corporate action on thepart of such Settling Defendant; (iii) the Agreement has been duly executedand authorized by such Settling State and constitutes its legal, validand binding obligation.

15. Arbitration

In the event that the Parties are unable to agree, aftergood faith efforts, as to the determination or calculation for any applicableyear of Market Share or Pretax Income hereunder, such determination orcalculation shall be submitted to binding arbitration in accordance withthe rules of the American Arbitration Association.

16. Most Favored Nation

16.1. It is the intent of the parties hereto that theSettling Defendants enjoy a preferred position with respect to Non-SettlingTobacco Companies, in recognition of the Settling DefendantsÍ willingnessto enter into this agreement. Accordingly, it is generally contemplatedthat settlements which involve all Settling States and a Non-Settling TobaccoCompany (a "Group Other Settlement") or involving one SettlingState and a Non-Settling Tobacco Company (a "Single State Other Settlement")shall meet certain minimum requirements in terms of the initial, periodicor lump sum payments to be made by the Non-Settling Tobacco Company (eacha "Benchmark Figure"). The recital of these Benchmark Figuresherein is solely for the purposes of insuring that the Settling Defendantsenjoy a preferred position with respect to Non-Settling Tobacco Companiesand is not intended in any way to reflect the value of the Settling Statesclaims against Non-Settling Tobacco Companies, and nothing in this Agreementis intended to reflect the value of those claims. For purposes of thisSection 16, a settlement involving a Non-Settling Tobacco Company and some,but not all, Settling States shall be deemed a Single Other Settlement,and the preferred position of the Settling Defendant shall be governedby Subsections 16.1.3 and 16.1.4 hereof, and determined on a state-by-statebasis.

16.1.1. In the case of a Group Other Settlement whichincludes and initial payment such as that provided for in Section 6.3.1hereof, the Benchmark Figure shall be that figure which represents threetimes the Present Value of the initial payment made hereunder, adjustedfor the Market Share at the time of such payment. Thus, if at the timeof the initial payment hereunder, the Settling Defendant had a market shareof 2 percent and made a payment the Present Value of which has a marketshare of 10 percent the Benchmark Figure for the initial payment actuallyprovided for in such Group Other Settlement is less than the BenchmarkFigure, the Settling defendant shall receive a credit in like amount, upto the amount of the present value of the initial payment made hereunder,against all future payment obligations hereunder.

16.1.2. In the case of a (i) Group Other Settlement whichincluded only a lump sum or periodic payments, and (ii) with respect tothe periodic payments included in a Group Other Settlement which also includesan initial payment, the Benchmark figure shall be that amount which constitutesthree times the Present Value of all amounts paid or payable by the SettlingDefendant hereunder (excluding, if the Group Other Settlement containsan initial payment, the initial payment hereunder), assuming, in the caseof future payments, no increase or decrease in Market Share but assumingInflation in revenues, all adjusted for Market Share. Thus, if the PresentValue of a Settling Defendant's payments made or to be made hereunder is$60 million and such Settling Defendant enjoys a Market Share of 2%, theBenchmark Figure for a non-settling defendant which at the time of a GroupOther Settlement enjoys a Market Share of 15% would be $1,350 million.Similarly, the Benchmark Figure for a Non-Settling Defendant which at thetime of a Group Other Settlement enjoys a Market Share of 5% would be $450million. To the extent that the Present Value of the lump sum or periodicpayments to be made under a Group Other Settlement is less than the BenchmarkFigure, the Settling Defendant shall receive a credit in like amount, upto the amount of any remaining payment obligations hereunder.

16.1.3. In the case of a Single State Other Settlementwhich includes an initial payment such as that provided for in Section6.3.2 hereof, the Benchmark Figure shall be that figure which representsthree times the Present Value of the initial payment made hereunder tosuch Settling State, adjusted for Market Share at the time of such payment,computer in accordance with Section 16.1.1. To the extent that the initialpayment actually provided for in such Single State Other Settlement isless than the Benchmark Figure, the Settling Defendant shall receive acredit in like amount, up to the amount of the present value of the initialpayment made to the Settling State hereunder, against all future paymentobligations to the Settling State hereunder.

16.1.4. In the case of a Single Other Settlement whichincludes only a lump sum or periodic payments, and with respect to theperiodic payments included in a Single State Other Settlement which alsoincludes an initial payment, the Benchmark Figure shall be that amountwhich constitutes three times the Present Value of all amounts paid orpayable by the Settling Defendant to the Settling State hereunder (excluding,if the Single State Other Settlement contains an initial payment, the InitialPayment hereunder), assuming, in the case of future payments, no increaseor decrease in Market Share, computed as set forth in Section 16.1.2. Tothe extent that the Present Value of the lump sum or periodic paymentsto be made under a Single State Other Settlement is less than the BenchmarkFigure, the Settling Defendant shall receive a credit in like amount, upto the amount of any remaining payment obligations to the Settling Statehereunder.

16.1.5. Solely for the purpose of Section 16.1, the paymentsdue to each of the Settling States in a year shall be deemed be equivalentto the product of (a) 10% of the Settling Defendant's Pretax Income and(b) a quotient equal to the Medicaid Population of the Settling State dividedby the total Medicaid Population of all Settling States.

16.1.6. The Benchmark Figure set forth in Sections 16.1.1- 16.1.4 does not reflect in any fashion the Settling States' views asto an appropriate settlement or resolution with any Non-Settling TobaccoCompany.

16.2. Except as provided in Section 16.1 hereof, in theevent that, subsequent to the date of this Agreement, any settlement ofany Settling State's Attorney General Action is reached with any non-settlingdefendant which is not a Party hereto and such settlement is on any termsmore favorable to such non-settling defendant than are the terms of thisAgreement to a Settling Defendant, such Settling Defendant shall each havethe right to replace or modify any or all of the terms of this Agreementwith, or add to this Agreement, any or all such more favorable terms.

16.3. In the event that, subsequent to the date of thisAgreement, any of the Settling Defendants enters into a settlement agreementwith any State other than a Settling State on terms (relating to the thenPresent Value of amounts payable under such settlement agreement, compliancewith the Proposed Rule or cooperation) that are more favorable to the Statethan those contained herein (as adjusted for relative Medicaid Population),the Settling States shall have the right with respect to such SettlingDefendant to replace or modify any or all of the terms of this Agreementwith, or add to this Agreement, any or all such more favorable terms (adjustedfor relative Medicaid Populations).

17. Future Affiliate

17.1 The terms of this Agreement shall not be bindingupon or applicable to a Future Affiliate of the Settling Defendants, exceptas provided for in this Section 17.

17.2 (a) In the event of a Future Affiliate Transaction,the Settling States shall not seek to enjoin or otherwise challenge a spinoffor like disposition of the stock or assets of any Affiliate of the FutureAffiliate which is not engaged in Domestic Tobacco Operations. The SettlingStates reserve the right to seek to enjoin such a spinoff in the eventthat such spinoff or like disposition is sought by someone other than BrookeGroup or a Future Affiliate or an Affiliate of a Future Affiliate.

(b) In the event of and after a Future Affiliate Transaction:(i) the Settling States each release (pursuant to, mutatis mutandis,Section 7.1 hereof), and covenant not to bring suit for any claim so releasedagainst any Affiliate of the Future Affiliate, other than the Affiliateengaged in Domestic Tobacco Operations; and (ii) if prior to the FutureAffiliate Transaction, a Settling State shall have obtained a verdict orjudgment in its Attorney General Action, against an Affiliate (includingthe Parent) of the Future Affiliate, other than against the Affiliate engagedin Domestic Tobacco Operations, such Settling State shall not seek to enforcesuch verdict or judgment against any such Affiliate other than the Affiliateengaged in Domestic Tobacco Operations.

17.3. In the event a Settling State obtains a verdictor judgment against a Non-settling Tobacco Company in an Attorney GeneralAction, and a Settling Defendant commences a proxy contest or similar actionseeking control of such Non-settling Tobacco Company or an Affiliate thereof,then such Non-settling Tobacco Company or an Affiliate thereof will notbe required to post a bond in order to stay enforcement of such verdictor judgment, and such Settling State will not seek to enforce such verdictor judgment against such Non-settling Tobacco Company or such Affiliate,for a period of the earlier of (i) one year from the commencement of suchproxy contest or action, and (ii) completion or resolution of the proxyor merger vote.

17.4. In the even that subsequent to a Future AffiliateTransaction, and in conformity with § 17.2(b) hereof, a Settling Stateobtains a verdict or judgment against a Future Affiliate in an AttorneyGeneral Action, such Future Affiliate will not be required to post a bondin order to stay enforcement of such verdict or judgment, and such SettlingState will not seek to enforce such judgment against such Future Affiliateor an Affiliate of such Future Affiliate until the verdict or judgmentbecomes final and non-appealable.

17.5. Prior to a Future Affiliate Transaction, SettlingDefendants shall not enter into any agreement with any prospective FutureAffiliate which diminishes or impairs the prospective Future Affiliate'sassets, other than in the established and/or ordinary course of businessof such prospective Future Affiliate from diminishing or impairing suchassets. In the event of a Future Affiliate Transaction, Settling Statesreserve all of their rights to prevent the Future affiliate from diminishingor impairing the Future Affiliate's Tobacco assets, other than in the establishedand/or ordinary course of business of such Future Affiliate.

17.6. With respect to subsections 17.1 - 17.5 above, nothingin these provisions, or elsewhere in this Agreement, limits the authorityof the Attorneys General to challenge any transaction which they reasonablybelieve is in violation of federal or state antitrust law.

17.7. In the event of a Future Affiliate Transaction afterwhich Liggett remains as a separate entity such that Liggett's Pretax Incomeis readily calculable, Section 6.3.2 hereof shall remain in effect withrespect to Pretax Income solely attributable to such separate entity. Inthe event of a Future Affiliate Transaction, Settling Defendants and theAttorneys General and their respective counsel, each agree to exercisebest efforts to negotiate in good faith a payment schedule to replace thatset forth in Section 6.3.2. Nothing in this Section 17.7 affects in anyway Liggett's payment obligations under Section 6.3.1 hereof.

17.8. Promptly after a Future Affiliate Transaction, aFuture Affiliate shall abide by Sections 4.4 - 4.7 hereof.

17.9. Promptly after a Future Affiliate Transaction, SettlingDefendants and the Attorneys General and their respective counsel, eachagree to exercise best efforts to negotiate in good faith a settlementof all Attorney General Actions against a Future Affiliate's Domestic TobaccoOperations.

17.9. As promptly as reasonably practicable after a FutureAffiliate Transaction, a Future Affiliate shall agree to eliminate cartooncharacters such as "Joe Camel," from all of its advertising andpromotional materials and activities with respect to tobacco products.

18. Miscellaneous

18.1 All terms of this Agreement and/or obligations createdthereby shall be deemed to include a covenant of good faith and fair dealingon behalf of all parties.

18.2. Brooke Group shall provide to the Settling Statesat the time of execution of this Agreement, an opinion in form satisfactoryto the Settling States from legal counsel for the Brooke Group as to thedue execution of the Settlement Agreement by the Brooke Group and Liggettand its enforceability against the Brooke Group and Liggett and such othermatters contemplated by Section 14.1 (other than the "agreements"referenced in clause (iv)).

18.3. In the event that a termination occurs pursuantto any sections of this Agreement, no Settling State shall be requiredto return any payment.

18.4. Subject to the provisions of Section 18 herein,this Agreement, including all Appendices attached hereto, if any, shallconstitute the entire Agreement among the parties with regard to the subjectof this Agreement and shall supersede any previous agreement and understandingsbetween the Parties with respect to the subject matter of this Agreement.This Agreement may not be changed, modified, or amended except in writingsigned by all Parties.

18.5. With respect to each Settling State, this Agreementshall be construed under and governed by the laws of such State appliedwithout regard to its laws applicable to choice of law.

18.6. This Agreement may be executed by the Parties inone or more counterparts, each of which shall be deemed an original butall of which together shall constitute one and the same instrument.

18.7. Any judgment by a court that any provision of thisAgreement, as applied to any party or to any circumstance, is invalid orunenforceable shall in no way affect any other provision of this Agreementor the application thereof in any other circumstance, and such provisionso adjudged invalid or unenforceable shall be enforced to the maximum extentpermitted by law.

18.8. This Agreement shall be binding upon and inure tothe benefit of the Settling States, the Settling Defendants, and theirrepresentatives, heirs, successors, and assigns.

18.9. Nothing in this Agreement shall be construed tosubject any Settling Defendant's parent or affiliated company to the obligationsor liabilities of that Settling Defendant.

18.10. The headings of the Sections of this Agreementare included for convenience only and shall not be deemed to constitutepart of this Agreement or to affect its construction.

18.11. Any notice, request, instruction, or applicationfor Court orders sought in connection with this Agreement or other documentto be given by any Party to any other Party shall be in writing and deliveredpersonally or sent by registered or certified mail, postage prepaid, ifto the Settling Defendants to the attention of each Settling Defendant'srespective representative and to Plaintiffs' Counsel on behalf of the SettlingStates.

18.12. References to or use of a singular noun or pronounin this Agreement shall include the plural, unless the context impliesotherwise.

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

BROOKE GROUP LTD

By Bennett S. LeBow

LIGGETT GROUP, INC.

By Bennett S. LeBow

Signed, 3/20/97

KASOWITZ, BENSON, TORRES & FRIEDMAN

Marc E. Kasowitz

Signed, 3/20/97

Attorneys for BROOKE GROUP LTD. and LIGGETT GROUP, INC.

STATE OF ARIZONA

Grant Woods, Attorney General

Signed, 3/20/97

STATE OF CONNECTICUT

Richard Blumenthal, Attorney General

Signed, 3/20/97

STATE OF HAWAII

Margery Bronster, Attorney General

Signed, 3/20/97

STATE OF ILLINOIS

Jim Ryan, Attorney General

Signed, 3/20/97

STATE OF INDIANA

Jeffrey Modisett, Attorney General

Signed, 3/20/97

STATE OF IOWA

Tom Miller, Attorney General

Signed, 3/20/97

STATE OF KANSAS

Carla Stovall, Attorney General

Signed, 3/20/97

STATE OF MARYLAND

J. Joseph Curran, Attorney General

Signed, 3/20/97

STATE OF MICHIGAN

Frank Kelley, Attorney General

Signed, 3/20/97

STATE OF MINNESOTA

Hubert H. Humphrey, III, Attorney General

Signed, 3/20/97

STATE OF NEW JERSEY

Peter Verniero, Attorney General,

Signed, 3/20/97

STATE OF NEW YORK

Dennis Vacco, Attorney General

Signed, 3/20/97

STATE OF OKLAHOMA

Drew Edmondson, Attorney General

Signed, 3/20/97

STATE OF TEXAS

Dan Morales, Attorney General

Signed, 3/20/97

STATE OF UTAH

Jan Graham, Attorney General

Signed, 3/20/97

STATE OF WASHINGTON

Christine Gregoire, Attorney General

Signed, 3/20/97

STATE OF WISCONSIN

Jim Doyle, Attorney General

Signed, 3/20/97