UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2006

VECTOR GROUP LTD.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		1-5759 Commission File Number		65-0949535 (I.R.S. Employer Identification No.)

100 S.E. Second Street
Miami, Florida 33131
305/579-8000

(Address, including zip code and telephone number, including area code,

of the principal executive offices)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     o Large accelerated file þ Accelerated filer o Non-accelerated filer

     Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. o Yes þ No

     At August 8, 2006, Vector Group Ltd. had 54,142,085 shares of common stock outstanding.

 

 

Explanatory Note

     This Amendment No. 1 on Form 10-Q/A to Vector Group Ltd.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 is being filed to reflect the restatement of our consolidated financial statements as of June 30, 2006, initially filed with the Securities and Exchange Commission (“SEC”) on August 9, 2006 (the “Original Filing”). We have not amended and do not intend to amend our previously filed Annual Report on Form 10-K for 2004 and Quarterly Reports on Form 10-Q for periods ending prior to December 31, 2005. For this reason, the consolidated financial statements, reports of independent registered certified public accounting firm and related financial information for the affected periods contained in such reports filed prior to November 14, 2006 should no longer be relied upon. We have amended our Form 10-K/A for the year ended December 31, 2005, which was filed on November 22, 2006, and our Form 10-Q for the quarterly period ended March 31, 2006, which was filed on November 22, 2006.

     The restatement adjustments corrected the previous amortization method used in calculating the debt discount amortization created by the embedded derivative and beneficial conversion feature associated with our 5% variable interest senior convertible notes due 2011 which were issued in November 2004. We previously amortized the debt discount on our 5% variable interest senior convertible notes due 2011 using an erroneous amortization method that did not result in a consistent yield on the convertible debt over the debt’s term.

     The aggregate net effect of the restatement was to increase stockholders’ equity by $4.781 million as of June 30, 2006, $3.422 million as of December 31, 2005 and $336,000 as of December 31, 2004. The restatement also decreased net loss by $639,000 ($0.02 per diluted common share) for the three months ended June 30, 2006 and increased net income by $1.359 million ($0.02 per diluted common share) for the six months ended June 30, 2006. Further, the restatement increased net income by $1.071 million for the three months ended June 30, 2005 ($0.03 per diluted common share) and $1.802 million ($0.04 per diluted common share) for the six months ended June 30, 2005.

     The restatement adjustments corrected the previous amortization method used in calculating the debt discount amortization created by the embedded derivative and beneficial conversion feature associated with our 5% variable interest senior convertible notes due 2011 which were issued in November 2004. We previously amortized the debt discount on our 5% variable interest senior convertible notes due 2011 using an erroneous amortization method that did not result in a consistent yield on the convertible debt over the debt’s term.

     Additionally, management has determined that a control deficiency existed related to the accuracy of the debt discount amortization. Specifically, we did not maintain effective controls to ensure that the amortization of the debt discount created by the embedded derivative and beneficial conversion feature resulted in a consistent yield on our 5% variable interest senior convertible notes due 2011 over the debt’s term in accordance with generally accepted accounting principles through the application of the effective interest method. Accordingly, management has determined that this control deficiency constitutes a material weakness.

     For the convenience of the reader, this June 30, 2006 Amendment No. 1 to Form 10-Q sets forth the original filing in its entirety, although we are only amending and restating certain information in Items 1, 2, 3, and 4 of the Original Filing. The information contained in this Form 10-Q/A has not been updated to reflect other events occurring after August 9, 2006, the date of the Original Filing, to modify or to update those disclosures affected by subsequent events including the 5% stock dividend which was paid on September 29, 2006 to stockholders of record on September 20, 2006. Information regarding subsequent periods is contained in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14, 2006 and in other filings with the SEC. This filing should be read and considered in conjunction with such filings, including our amended Form 10-K/A for the year ended December 31, 2005.

     In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to include current dated certificates from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2, respectively.

VECTOR GROUP LTD.

FORM 10-Q/A

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Vector Group Ltd. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005			3
Consolidated Statements of Operations for the three and six months ended June 30, 2006 and June 30, 2005			4
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2006.			5
Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and June 30, 2005			6
Notes to Consolidated Financial Statements			7
Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations			58
Item 3. Quantitative and Qualitative Disclosures About Market Risk			86
Item 4. Controls and Procedures			86
PART II. OTHER INFORMATION 4
Item 1. Legal Proceedings			88
Item 1A. Risk Factors			88
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			88
Item 4. Submission of Matters to a Vote of Security Holders			88
Item 6. Exhibits			89
SIGNATURE			90
EX-31.1 Section 302 CEO Certification
EX-31.2 Section 302 CFO Certification
EX-32.1 Section 906 CEO Certification
EX-32.2 Section 906 CFO Certification

VECTOR GROUP LTD. AND SUBSIDIARIES

		June 30,				December 31,
		2006				2005
		Restated (1)				Restated (1)
ASSETS:
Current assets:
Cash and cash equivalents		$	155,752			$	181,059
Investment securities available for sale			25,020				18,507
Accounts receivable — trade			15,722				12,714
Inventories			71,918				70,395
Deferred income taxes			25,656				26,179
Assets held for sale			1,325				—
Other current assets			9,996				10,245
Total current assets			305,389				319,099
Property, plant and equipment, net			58,631				62,523
Long-term investments, net			7,869				7,828
Investments in non-consolidated real estate businesses			29,226				17,391
Restricted assets			6,777				6,743
Deferred income taxes			57,345				69,988
Intangible asset			107,511				107,511
Other assets			11,548				12,469
Total assets		$	584,296			$	603,552
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Current portion of notes payable and long-term debt		$	62,328			$	9,313
Accounts payable			8,161				15,394
Accrued promotional expenses			13,581				18,317
Accrued taxes payable, net			29,195				32,392
Settlement accruals			19,933				22,505
Deferred income taxes			4,843				3,891
Accrued interest			3,742				5,770
Other accrued liabilities			14,413				20,518
Total current liabilities			156,196				128,100
Notes payable, long-term debt and other obligations, less current portion			133,472				238,242
Fair value of derivatives embedded within convertible debt			37,132				39,371
Non-current employee benefits			19,256				17,235
Deferred income taxes			149,057				145,892
Other liabilities			6,509				5,646
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares.			—				—
Common stock, par value $0.10 per share, authorized 100,000,000 shares, issued 56,811,929 and 53,417,525 shares and outstanding 54,141,534 and 49,849,735 shares			5,414				4,985
Additional paid-in capital			159,583				133,325
Unearned compensation			—				(11,681	)
Accumulated deficit			(63,330	)			(70,633	)
Accumulated other comprehensive loss			(6,565	)			(10,610	)
Less: 2,670,395 and 3,567,790 shares of common stock in treasury, at cost			(12,428	)			(16,320	)
Total stockholders’ equity			82,674				29,066
Total liabilities and stockholders’ equity		$	584,296			$	603,552

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

VECTOR GROUP LTD. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2006				2005				2006				2005
		Restated (1)				Restated (1)				Restated (1)				Restated (1)
Revenues*		$	113,355			$	113,113			$	231,059			$	217,286
Expenses:
Cost of goods sold*			69,304				65,901				142,645				124,899
Operating, selling, administrative and general expenses			21,591				22,850				45,727				49,377
Operating income			22,460				24,362				42,687				43,010
Other income (expenses):
Interest and dividend income			2,321				1,170				4,102				1,880
Interest expense			(8,739	)			(7,880	)			(17,016	)			(14,222	)
Change in fair value of derivatives embedded within convertible debt			1,015				299				2,239				1,127
Loss on extinguishment of debt			(14,860	)			—				(14,860	)			—
Loss on investments, net			(17	)			(5	)			(47	)			1,425
Gain from conversion of LTS notes			—				—				—				9,461
Equity in loss on operations of LTS			—				—				—				(299	)
Equity income from non-consolidated real estate businesses			3,870				2,324				7,605				2,018
Other, net			31				57				77				56
Income from operations before provision for income taxes and minority interests			6,081				20,327				24,787				44,456
Income tax expense			8,790				9,371				17,484				22,291
Minority interests			—				392				—				(1,624	)
(Loss) income from continuing operations			(2,709	)			11,348				7,303				20,541
Discontinued operations:
Income from discontinued operations, net of minority interests and taxes			—				—				—				82
Gain on disposal of discontinued operations, net of minority interests and taxes			—				—				—				2,952
Income from discontinued operations			—				—				—				3,034
Net (loss) income		$	(2,709	)		$	11,348			$	7,303			$	23,575
Per basic common share:
(Loss) income from continuing operations		$	(0.05	)		$	0.26			$	0.14			$	0.47
Income from discontinued operations		$	—			$	—			$	—			$	0.07
Net (loss) income applicable to common shares		$	(0.05	)		$	0.26			$	0.14			$	0.54
Per diluted common share:
(Loss) income from continuing operations		$	(0.05	)		$	0.25			$	0.13			$	0.44
Income from discontinued operations		$	—			$	—			$	—			$	0.07
Net (loss) income applicable to common shares		$	(0.05	)		$	0.25			$	0.13			$	0.51
Cash distributions declared per share		$	0.40			$	0.38			$	0.80			$	0.76

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

VECTOR GROUP LTD. AND SUBSIDIARIES

																										Accumulated
										Additional																Other
		Common Stock								Paid-In				Accumulated				Unearned				Treasury				Comprehensive
		Shares				Amount				Capital				Deficit				Compensation				Stock				Loss				Total
Balance, December 31, 2005, restated (1)			49,849,735			$	4,985			$	133,325			$	(70,633	)		$	(11,681	)		$	(16,320	)		$	(10,610	)		$	29,066
Net income, restated			—				—				—				7,303				—				—				—				7,303
Forward contract adjustments, net of taxes			—				—				—				—				—				—				277				277
Unrealized gain on investment securities, net of taxes			—				—				—				—				—				—				3,768				3,768
Total other comprehensive income			—				—				—				—				—				—				—				4,045
Total comprehensive income, restated			—				—				—				—				—				—				—				11,348
Reclassifications in accordance with SFAS No. 123(R)			—				—				(11,681	)			—				11,681				—				—				—
Distributions on common stock			—				—				(44,806	)			—				—				—				—				(44,806	)
Exercise of options, net of 19,302 shares delivered to pay exercise price			91,799				9				1,135				—				—				(371	)			—				773
Conversion of debt			4,200,000				420				79,537				—				—				4,263				—				84,220
Amortization of deferred compensation			—				—				2,073				—				—				—				—				2,073
Balance, June 30, 2006, restated			54,141,534			$	5,414			$	159,583			$	(63,330	)		$	—			$	(12,428	)		$	(6,565	)		$	82,674

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

VECTOR GROUP LTD. AND SUBSIDIARIES

		Six Months Ended
		June 30,				June 30,
		2006				2005
		Revised(1)				Revised(1)
Net cash provided by operating activities:		$	11,499			$	21,978
Cash flows from investing activities:
Proceeds from sale or maturity of investment securities			3,321				5,844
Purchase of investment securities			(3,466	)			(6,497	)
Proceeds from sale or liquidation of long-term investments			176				—
Purchase of long-term investments			(186	)			(144	)
Investments in non-consolidated real estate businesses			(6,425	)			(1,377	)
Increase in restricted assets			(34	)			(842	)
Capital expenditures			(2,675	)			(4,505	)
Other			—				(153	)
Discontinued operations			—				66,912
Net cash (used in) provided by investing activities			(9,289	)			59,238
Cash flows from financing activities:
Proceeds from debt			78				47,059
Repayments of debt			(3,269	)			(2,297	)
Borrowings under revolver			257,391				201,605
Repayments on revolver			(238,107	)			(201,946	)
Distributions on common stock			(44,283	)			(33,525	)
Proceeds from exercise of options			773				2,546
Deferred financing charges			(100	)			(1,960	)
Discontinued operations			—				(39,213	)
Net cash used in financing activities			(27,517	)			(27,731	)
Net (decrease) increase in cash and cash equivalents			(25,307	)			53,485
Cash and cash equivalents, beginning of period			181,059				110,004
Cash and cash equivalents, end of period		$	155,752			$	163,489

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

VECTOR GROUP LTD.

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. The Company owned all of the limited liability company interests of New Valley at June 30, 2006 and owned 55.1% of the common shares of its corporate predecessor, New Valley Corporation, at June 30, 2005. 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 and marketing of low nicotine and nicotine-free cigarette products and 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.
			As discussed in Note 14, New Valley’s real estate leasing operations, sold in February 2005, are presented as discontinued operations for the six months ended June 30, 2005. The 2005 interim condensed consolidated statement of cash flows has been revised to separately disclose the investing and financing portions of the cash flows attributable to discontinued operations. These amounts had previously been reported on a combined basis as a separate caption outside operating, financing and investing activities.
			The interim consolidated financial statements of the Company are unaudited and, in the opinion of management, reflect all adjustments necessary (which are normal and recurring) to state fairly the Company’s consolidated financial position, results of operations and cash flows. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2005, as filed with the Securities and Exchange Commission. The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.
	(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, embedded derivative liability, the tobacco quota buy-out, settlement accruals and litigation and defense costs. Actual results could differ from those estimates.
	(c)		Share-Based Payments
			Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” using the “modified

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

			prospective method” with guidance provided by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the modified prospective method, the share-based compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not vested as of, January 1, 2006, based on the grant date fair value originally estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and (ii) all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Compensation cost is recognized ratably using the straight-line attribution method over the expected vesting period. In addition, pursuant to SFAS No. 123(R), the Company is required to estimate the amount of expected forfeitures when calculating the compensation costs, instead of accounting for forfeitures as incurred, which was the Company’s previous method. As of January 1, 2006, the cumulative effect of adopting the estimated forfeiture method was not significant. Prior periods are not restated under this transition method (see Note 10).
	(d)		Earnings Per Share:
			Information concerning the Company’s common stock has been adjusted to give effect to the 5% stock dividend paid to Company stockholders on September 29, 2005. The dividend was recorded at par value of $210 in 2005 since the Company had an accumulated deficit. In connection with the 5% stock dividend, the Company increased the number of outstanding stock options by 5% and reduced the exercise prices accordingly. All per share amounts have been presented as if the stock dividend had occurred on January 1, 2005.
			In March 2004, the FASB’s Emerging Issue Task Force (“EITF”) reached a final consensus on Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement 128”, which established standards regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. Earnings available to common stockholders for the period are reduced by the contingent interest and the non-cash interest expense associated with the beneficial conversion feature and embedded derivative related to the Company’s convertible notes issued in 2004 and 2005. These notes, which are a participating security due to the contingent interest feature, had no impact on EPS for the six months ended June 30, 2006 and 2005, as the dividends on the common stock into which the notes are convertible increased interest expense and reduced earnings available to common stockholders so there were no unallocated earnings under EITF Issue No. 03-6.
			As discussed in Note 10, 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 EITF Issue No. 03-6. Because the Company accounted for the dividend equivalent rights on these options as additional compensation cost in accordance with APB Opinion No. 25, these participating securities had no impact on the calculation of basic EPS in periods ending prior to January 1, 2006. Effective with the adoption of SFAS No. 123(R) on January 1, 2006, the Company recognizes payments of the dividend equivalent rights ($1,578 and $3,156 for the three and six months ended June 30, 2006, respectively) on these options as reductions in additional paid-in capital on the Company’s consolidated balance sheet. As a result, in its calculation of basic EPS for the six months ended June 30, 2006, the Company has adjusted its net income for the effect of these participating securities as follows:

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

		Six Months
		Ended
		June 30, 2006
Net income		$	7,303
Income attributable to participating securities			(480	)
Net income available to common stockholders		$	6,823

As a result of the Company’s net loss for the three months ended June 30, 2006, there was no adjustment related to income attributable to participating securities because the adjustment was anti-dilutive.

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding. Diluted EPS includes the dilutive effect of stock options and unvested restricted stock grants. Basic and diluted EPS were calculated using the following shares for the three and six months ended June 30, 2006 and 2005:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Weighted-average shares for basic EPS			50,153,816				43,986,884				49,689,687				43,935,399
Plus incremental shares related to stock options			—				2,022,140				1,431,787				1,956,294
Weighted-average shares for diluted EPS			50,153,816				46,009,024				51,121,474				45,891,693

The following stock options, non-vested restricted stock and shares issuable upon the conversion of convertible notes were outstanding during the three and six months ended June 30, 2005 and the six months ended June 30, 2006 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 notes were anti-dilutive to EPS. Amounts presented for the three months ended June 30, 2006 were not included in the computation of diluted EPS because the Company reported a loss during such period and the impact was anti-dilutive.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Number of stock options			8,445,909				646,391				217,776				652,770
Weighted-average exercise price		$	10.55			$	27.27			$	27.84			$	27.16
Weighted-average shares of non-vested restricted stock			653,070				—				628,570				—
Weighted-average expense per share		$	19.47				N/A			$	19.66				N/A
Weighted-average number of shares issuable upon conversion of debt			11,562,556				11,618,316				11,863,225				10,656,864
Weighted-average conversion price		$	19.82			$	20.66			$	19.96			$	20.98

	(e)		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 foreign contracts and minimum pension liability adjustments. Total comprehensive (loss) income applicable to Common Shares for the three and six months ended June 30, 2006 and 2005 is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net (loss) income		$	(2,709	)		$	11,348			$	7,303			$	23,575
Forward contract adjustments, net of income taxes			208				(310	)			277				(422	)
Net unrealized gains on investment securities available for sale:
Change in net unrealized gains			(3,380	)			(287	)			3,740				730
Net unrealized gains reclassified into net income, net of income taxes			10				3				28				(919	)
Change in unrealized gains			(3,370	)			(284	)			3,768				(189	)
Total comprehensive (loss) income		$	(5,871	)		$	10,754			$	11,348			$	22,964

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

The components of accumulated other comprehensive income were as follows as of June 30, 2006 and December 31, 2005:

		June 30,				December 31,
		2006				2005
Net unrealized gains on investment securities available for sale		$	4,396			$	628
Forward contracts adjustment			(322	)			(599	)
Additional pension liability			(10,639	)			(10,639	)
Accumulated other comprehensive loss		$	(6,565	)		$	(10,610	)

	(f)		Financial Instruments:
			As required by SFAS No. 133, derivatives embedded within the Company’s convertible debt are recognized on the Company’s balance sheet and are stated at estimated fair value as determined by a third party at each reporting period. Changes in the fair value of the embedded derivatives are reflected quarterly as an adjustment to interest expense.
			The Company uses forward foreign exchange contracts to mitigate its exposure to changes in exchange rates relating to purchases of equipment from third parties. The primary currency to which the Company is exposed is the euro. A substantial portion of the Company’s foreign exchange contracts is effective as hedges. The fair value of forward foreign exchange contracts designated as hedges is reported in other current assets or current liabilities and the change in fair value of the contracts during the period is recorded in other comprehensive income. The fair value of the hedge at June 30, 2006 was an asset of approximately $4.
	(g)		Revenue Recognition:
			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 and recoverable excise taxes. Certain sales incentives, including buydowns, are classified as reductions of net sales in accordance with EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” In accordance with EITF Issue No. 06-3, “How Sales Taxes Should be Presented in the Income Statement (Gross versus Net)”, the Company’s accounting policy is to include federal excise taxes in revenues and cost of goods sold. Such revenues totaled $39,686 and $79,803 for the three and six months ended June 30, 2006 and $37,011 and $70,443 for the three and six months ended June 30, 2005, 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.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

	(h)		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 8, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett.
			The Company records provisions in the consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed in Note 8, (i) management has not concluded that it is probable that a loss has been incurred in any of the pending smoking-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending smoking-related litigation; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation is subject to many uncertainties, and 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 such smoking-related litigation.
	(i)		New Accounting Pronouncements:
			In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. The provisions of SFAS No. 154 require, unless impracticable, retrospective application to prior periods’ financial statements of (i) all voluntary changes in accounting principles and (ii) changes required by a new accounting pronouncement, if a specific transition is not provided. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate, which requires prospective application of the new method. SFAS No. 154 is effective for all accounting changes made in fiscal years beginning after December 15, 2005. The current period impact of the application of SFAS No. 154 is discussed below in connection with the application of EITF Issue No. 05-8, “Income Tax Effects of Issuing Convertible Debt with a Beneficial Conversion Feature.”
			In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an Interpretation of SFAS Statement No. 143” (“FIN 47”). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. The application of FIN 47 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
			In September 2005, the EITF reached a consensus on Issue No. 04-13, “Inventory Exchanges”. EITF Issue No. 04-13 required two or more inventory transactions with the same party to be considered a single nonmonetary transaction subject to APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, if the transactions were entered into in contemplation of one another. EITF Issue No. 04-13 is effective for the Company for new arrangements entered into after April 2, 2006. The Company does not expect the adoption of EITF Issue No. 04-13 to have a material impact on its financial position, results of operations or cash flows.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

Effective January 1, 2006, the Company adopted EITF Issue No. 05-8, “Income Tax Effects of Issuing Convertible Debt with a Beneficial Conversion Feature.” In Issue No. 05-8, the EITF concluded that the issuance of convertible debt with a beneficial conversion feature creates a temporary difference on which deferred taxes should be provided. The consensus is required to be applied in fiscal periods beginning after December 15, 2005, by retroactive restatement of prior financial statements retroactive to the issuance of the convertible debt. The adoption of EITF Issue No. 05-8 reduced income tax expense by $165 and $318 for the three and six months ended June 30, 2006, respectively. The retrospective application of EITF Issue No. 05-8 reduced income tax expense by $97 and $169 for the three and six months ended June 30, 2005, respectively. A reconciliation of the net impact of the application of EITF Issue No. 05-8 at December 31, 2005 on the Company’s consolidated balance sheet is as follows (as restated):

		Long-Term				Additional
		Deferred				Paid-in				Accumulated				Stockholders’
		Income Taxes				Capital				Deficit				Equity
December 31, 2005, as restated, prior to adoption of EITF 05-8		$	137,381			$	141,184			$	(69,981	)		$	37,577
Application of EITF 05-8:
Establishment of deferred tax liability			7,859				(7,859	)			—				(7,859	)
Increase to income tax benefit for the year ended December 31, 2004			(27	)			—				27				27
Decrease to income tax expense for the year ended December 31, 2005			(406	)			—				406				406
Decrease to extraordinary item, unallocated goodwill			1,085				—				(1,085	)			(1,085	)
Revised balance, as restated, December 31, 2005		$	145,892			$	133,325			$	(70,633	)		$	29,066

			In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments”. SFAS No. 155 amends SFAS Nos. 133 and 140 and relates to the financial reporting of certain hybrid financial instruments. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of fiscal years commencing after September 15, 2006. The Company has not completed its assessment of the impact of this standard.
			In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)”, which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has not completed its assessment of the impact of this standard.

2.		RESTATEMENT OF FINANCIAL RESULTS
		On November 9, 2006, the Company determined it would restate its financial statements for each of the years ended December 31, 2004 and 2005, as amended, as well as the Company’s interim financial statements for all interim periods within 2005 and the first two quarters of 2006. The restatement corrected an error in the computation of the debt discount amortization created by the embedded derivative and the beneficial conversion feature associated with the Company’s 5% variable interest senior convertible notes due 2011 which were issued in the fourth quarter of 2004 and the first half of 2005. The restatement adjustments affected the Company’s previously reported interest expense, the related income tax effect, and extraordinary items, as well as the Company’s previously reported other assets, long-term debt, additional paid-in capital and accumulated deficit balances. The effects of the restatement are reflected in the Company’s consolidated financial statements and accompanying notes included herein. See Note 16 — Restated Financial Information. All periods presented are unaudited.
		The aggregate net effect of the restatement was to increase stockholders’ equity by $4,781 as of June 30, 2006, $3,422 as of December 31, 2005 and $336 as of December 31, 2004. The restatement also decreased net loss by $639 ($0.02 per diluted common share) for the three months ended June 30, 2006 and increased net income by $1,359 ($0.02 per diluted common share) for the six months ended June 30, 2006. Further, the restatement increased net income by $1,071 for the three months ended June 30, 2005 ($0.03 per diluted common share) and $1,802 ($0.04 per diluted common share) for the six months ended June 30, 2005.
		The restatement adjustments corrected the previous amortization method used in calculating the amortization of the debt discount created by the embedded derivative and beneficial conversion feature associated with the Company’s 5% variable interest senior convertible notes due 2011. The Company previously amortized the debt discount on its 5% variable interest senior convertible notes due 2011 using an erroneous amortization method that did not result in a consistent yield on the convertible debt over its term.
		There was no change to each subtotal (operating, investing and financing) in the Company’s consolidated statements of cash flows as a result of the restatement. Certain balances related to line items within certain cash flows were corrected as part of the restatement. The adjustments relating to restated amounts affected by the restatement in the consolidated financial statements as of and for the three and six months ended June 30, 2006 and 2005 are as follows.

		Previously				Restatement
		Reported				Adjustments				Restated
Three months ended June 30, 2006:
Interest expense		$	(9,817	)		$	1,078			$	(8,739	)
Income from continuing operations before benefit for income taxes and minority interests			5,003				1,078				6,081
Income tax provision			8,352				438				8,790
Net income		$	(3,349	)		$	640			$	(2,709	)

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

		Previously				Restatement
		Reported				Adjustments				Restated
Basic (loss) earnings per common share		$	(0.07	)		$	0.02			$	(0.05	)
Diluted (loss) earnings per common share		$	(0.07	)		$	0.02			$	(0.05	)
Three months ended June 30, 2005:
Interest expense		$	(9,541	)		$	1,661			$	(7,880	)
Income from continuing operations before benefit for income taxes and minority interests			18,666				1,661				20,327
Income tax provision			8,781				590				9,371
Net income		$	10,277			$	1,071			$	11,348
Basic earnings per share per common share		$	0.23			$	0.03			$	0.26
Diluted earnings per share per common share		$	0.22			$	0.03			$	0.25
Six months ended June 30, 2006:
Interest expense		$	(19,307	)		$	2,291			$	(17,016	)
Income from continuing operations before benefit for income taxes and minority interests			22,496				2,291				24,787
Income tax provision			16,552				932				17,484
Net income		$	5,944			$	1,359			$	7,303
Basic earnings per common share		$	0.11			$	0.03			$	0.14
Diluted earnings per common share		$	0.11			$	0.02			$	0.13
Six months ended June 30, 2005:
Interest expense		$	(17,016	)		$	2,794			$	(14,222	)
Income from continuing operations before benefit for income taxes and minority interests			41,662				2,794				44,456
Income tax provision			21,299				992				22,291
Income from continuing operations		$	18,739			$	1,802			$	20,541
Net income		$	21,773			$	1,802			$	23,575
Basic earnings per share from continuing operations		$	0.43			$	0.04			$	0.47
Diluted earnings per share from continuing operations		$	0.40			$	0.04			$	0.44
Basic earnings per share per common share		$	0.50			$	0.04			$	0.54
Diluted earnings per share per common share		$	0.47			$	0.04			$	0.51
As of June 30, 2006:
Assets
Other assets		$	10,939			$	609			$	11,548
Total assets			583,687				609				584,296
Liabilities
Notes payable, long-term debt and other obligations less current portion		$	140,924			$	(7,452	)		$	133,472
Deferred income taxes, long term			145,777				3,280				149,057
Stockholders’ equity
Additional paid-in capital		$	159,787			$	(204	)		$	159,583

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

		Previously				Restatement
		Reported				Adjustments				Restated
Accumulated deficit			(68,315	)			4,985				(63,330	)
Total stockholders’ equity as of June 30, 2006			77,893				4,781				82,674
As of December 31, 2005:
Assets
Other assets		$	12,047			$	422			$	12,469
Total assets			603,130				422				603,552
Liabilities
Notes payable, long-term debt and other obligations less current portion		$	243,590			$	(5,348	)		$	238,242
Deferred income taxes, long term			143,544				2,348				145,892
Stockholders’ equity
Additional paid-in capital		$	133,529			$	(204	)		$	133,325
Accumulated deficit			(74,259	)			3,626				(70,633	)
Total stockholders’ equity as of December 31, 2005			25,644				3,422				29,066

3.		RESTRUCTURING
		The components of the combined pre-tax restructuring charges relating to the 2004 Liggett Vector Brands restructurings for the six months ended June 30, 2006 are as follows:

		Employee				Contract
		Severance				Termination/
		and Benefits				Exit Costs				Total
Balance, December 31, 2005		$	713			$	1,403			$	2,116
Utilized			(424	)			(340	)			(764	)
Balance, June 30, 2006		$	289			$	1,063			$	1,352

4.		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 minority interests. For the three and six months ended June 30, 2006 and 2005, net realized (losses) gains were $(17), $(5), $(47) and $1,425 respectively.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

The components of investment securities available for sale and the associated gross unrealized gains and losses, before income tax effect, at June 30, 2006 are as follows:

						Gross				Gross
						Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
Marketable equity securities		$	10,173			$	7,571			$	50			$	17,694
Marketable debt securities			7,436				—				110				7,326
		$	17,609			$	7,571			$	160			$	25,020

		Marketable equity securities available for sale as of June 30, 2006 include New Valley’s 11,111,111 shares of Ladenburg Thalmann Financial Services Inc., which were carried at $11,111 (see Note 12).
		The Company’s marketable debt securities have a weighted average maturity of 1.94 years at June 30, 2006 and mature from July 2006 to October 2010.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

5.		INVENTORIES
		Inventories consist of:

		June 30,				December 31,
		2006				2005
Leaf tobacco		$	33,564			$	35,312
Other raw materials			3,124				3,157
Work-in-process			860				1,685
Finished goods			38,572				34,653
Inventories at cost			76,120				74,807
LIFO adjustments			(4,202	)			(4,412	)
		$	71,918			$	70,395

		The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated requirements and are at prices, including carrying costs, established at the date of the commitment. At June 30, 2006, Liggett had leaf tobacco purchase commitments of approximately $14,058. There were no leaf tobacco purchase commitments at Vector Tobacco at that date.
		Included in the above table was approximately $1,041 at June 30, 2006 and $1,208 at December 31, 2005 of leaf inventory associated with Vector Tobacco’s QUEST product, which is carried at its estimated net realizable value.
		LIFO inventories represent approximately 95% of total inventories at June 30, 2006 and 92% of total inventories at December 31, 2005.
6.		PROPERTY, PLANT AND EQUIPMENT
		Property, plant and equipment consist of:

		June 30,				December 31,
		2006				2005
Land and improvements		$	1,418			$	1,418
Buildings			13,732				13,718
Machinery and equipment			95,945				98,037
Leasehold improvements			3,215				2,724
Construction-in-progress			4,521				2,960
			118,831				118,857
Less accumulated depreciation			(60,200	)			(56,334	)
		$	58,631			$	62,523

Depreciation and amortization expense on property, plant and equipment for the three and six months ended June 30, 2006 was $2,518 and $4,991, respectively. Depreciation and amortization expense on property, plant and equipment for the three and six months ended June 30, 2005 was $2,878 and $5,486, respectively. Future machinery and equipment purchase commitments at Liggett were $5,879 at June 30, 2006.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

		During the second quarter of 2006, Liggett recognized an impairment charge of $324 associated with its decision to dispose of an asset to an unrelated third party. As a result, the Company has classified this asset with a net book value at June 30, 2006 of $1,325 as an “Asset held for sale” in its Consolidated Balance Sheet.
		In February 2005, New Valley completed the sale of its two office buildings in Princeton, New Jersey for $71,500. (Refer to Notes 12 and 14). The Company recorded a gain of $2,952, net of minority interests and income taxes, in the first quarter of 2005 in connection with the sale.
7.		NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
		Notes payable, long-term debt and other obligations consist of:

		June 30,				December 31,
		2006				2005
		Restated				Restated
Vector:
5% Variable Interest Senior Convertible Notes due 2011, net of unamortized net discount of $56,463 and $58,655*		$	55,401			$	53,209
6.25% Convertible Subordinated Notes due 2008			62,492				132,492
Liggett:
Revolving credit facility			19,284				—
Term loan under credit facility			3,095				3,482
Equipment loans			7,536				9,828
Vector Tobacco:
Notes payable — Medallion acquisition due 2007			35,000				35,000
V.T. Aviation:
Note payable			7,804				8,300
VGR Aviation:
Note payable			4,772				4,867
Other			416				377
Total notes payable, long-term debt and other obligations			195,800				247,555
Less:
Current maturities			(62,328	)			(9,313	)
Amount due after one year		$	133,472			$	238,242

		3.875% Variable Interest Senior Convertible Debentures due 2026 — Vector:
		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 Company intends to use the net proceeds of the offering to redeem its remaining 6.25% convertible subordinated notes due 2008 and for general corporate purposes.

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)

		The debentures pay interest on a quarterly basis at a rate of 3.875% per annum, with an additional amount of interest payable on each interest payment date. The additional amount is based on the amount of cash dividends paid by the Company on its common stock 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 debentures will be convertible on such record date (together, 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 initial conversion price is $21.50 per share, subject to adjustment for various events, including the issuance of stock dividends.
		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”.
		The debentures contain similar provisions to the Company’s 5% variable interest senior convertible notes due November 2011 which provide for additional interest payable based on cash dividends paid by the Company. Accordingly, the Company will have to separately value and account for the embedded derivative within the debentures. This separate valuation is also expected to result in a beneficial conversion feature similar to that recorded in connection with the issuance of the notes. The Company is currently in the process of estimating the value of the embedded derivative in order to appropriately account for the instrument and for the beneficial conversion feature, if any.
		5% Variable Interest Senior Convertible Notes Due November 2011 — Vector:
		In November 2004, the Company sold $65,500 of its 5% variable interest senior convertible notes due November 15, 2011 in a private offering to qualified institutional investors in accordance with Rule 144A under the Securities Act of 1933. The buyers of the notes had the right, for a 120-day period ending March 18, 2005, to purchase up to an additional $16,375 of the notes. At December 31, 2004, buyers had exercised their rights to purchase an additional $1,405 of the notes, and the remaining $14,959 principal amount of notes were purchased during the first quarter of 2005. In April 2005, Vector issued an additional $30,000 principal amount of 5% variable interest senior convertible notes due November 15, 2011 in a separate private offering to qualified institutional investors in accordance with Rule 144A. These notes, which were issued under a new indenture at a net price of 103.5%, were on the same terms as the $81,864 principal amount of notes previously issued in connection with the November 2004 placement.
		The notes pay interest on a quarterly basis at a rate of 5% per year with an additional amount of interest payable on the notes on each interest payment date. This additional amount is based on the amount of cash dividends actually paid by the Company per share on its common stock during the prior three-month period ending on the record date for such interest payment multiplied by the number of shares of its common stock into which the notes are convertible on such record date

VECTOR GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Amounts) — (Continued) (Unaudited)