UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

VECTOR GROUP LTD.

(Exact name of registrant as specified in its charter)

100 S.E. Second Street

Miami, Florida 33131

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

Joselynn D. Van Siclen

Vice President and Chief Financial Officer

Vector Group Ltd.

100 S.E. Second Street

Miami, Florida 33131

(305) 579-8000

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

Copy to:

Roland Hlawaty, Esq.

Milbank, Tweed, Hadley & McCloy LLP

1 Chase Manhattan Plaza

New York, New York 10005

(212) 530-5735

     Approximate date of commencement of proposed sale of the securities to the public: As promptly as practicable after this Registration Statement becomes effective and upon consummation of the transactions described herein.

     If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    o

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

THE INFORMATION IN THIS PROSPECTUS MAY CHANGE. WE MAY NOT COMPLETE THIS OFFER AND ISSUE SHARES OF OUR COMMON STOCK UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION TO WHICH THIS PROSPECTUS RELATES IS EFFECTIVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SHARES OF OUR COMMON STOCK, AND WE ARE NOT SOLICITING OFFERS TO EXCHANGE OUR SHARES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

Offer by VGR Holding Inc.

to Exchange

0.461 of a Share of Common Stock

of

Vector Group Ltd.

for

Each Outstanding Common Share

of

New Valley Corporation

        THIS OFFER, AND YOUR RIGHT TO WITHDRAW THE COMMON SHARES OF NEW VALLEY CORPORATION YOU TENDER INTO THIS OFFER, WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, DECEMBER 1, 2005, UNLESS WE EXTEND THIS OFFER.

      We are offering to exchange 0.461 of a share of Vector Group Ltd., or Vector, common stock for each outstanding common share of New Valley Corporation, or New Valley, on the terms and conditions contained in this Prospectus and in the related Letter of Transmittal.

      Stockholders who wish to tender should follow the instructions included in this Prospectus and the accompanying Letter of Transmittal.

      VGR Holding Inc., or VGR Holding, is a wholly-owned subsidiary of Vector, and we currently own approximately 57.7% of the outstanding common shares of New Valley. This offer is conditioned on, among other things, the tender of a sufficient number of the outstanding common shares of New Valley such that, after giving effect to the offer, we own at least 90% of the outstanding common shares of New Valley. If this minimum tender condition is satisfied, more than a majority of the minority stockholders of New Valley (i.e., stockholders unaffiliated with Vector and its subsidiaries and stockholders who are not directors or officers of New Valley) will have also validly tendered and not properly withdrawn their common shares of New Valley in our offer. Our obligation to exchange shares of Vector common stock for common shares of New Valley is also subject to other conditions described in this Prospectus under “The Offer — Conditions of the Offer” beginning on page 58. We do not intend to have a subsequent offering period.

      If we successfully complete this offer, we will own more than 90% of the outstanding common shares of New Valley, and we would then effect a “short form” merger of one of our wholly-owned subsidiaries with New Valley. Under Delaware law, this short form merger would be effected without the approval of New Valley’s board of directors or the remaining holders of New Valley’s common shares. We will effect the subsequent merger as soon as practicable after we complete this offer, unless we are prevented from doing so by a court or other legal requirement. Each common share of New Valley that we do not own or acquire in this offer would be converted in the subsequent merger into the right to receive 0.461 of a share of Vector common stock, unless the holder of the common shares of New Valley properly perfects appraisal rights under Delaware law. After we complete the subsequent merger, New Valley will be our wholly-owned subsidiary.

      See “Risk Factors” beginning on page 10 for a discussion of issues that you should consider in determining whether to tender your shares into this offer.

      Vector’s common stock is listed on the New York Stock Exchange and trades under the symbol “VGR”. New Valley’s common shares are listed on The Nasdaq Stock Market and trade under the symbol “NVAL”.

      NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE VECTOR COMMON STOCK TO BE ISSUED IN THIS OFFER AND THE SUBSEQUENT MERGER OR DETERMINED IF THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The Dealer Manager for the Offer is:

Georgeson Shareholder Securities Corporation

The date of this prospectus is October 20, 2005.

TABLE OF CONTENTS

      As permitted under the rules of the Securities and Exchange Commission, or SEC, this Prospectus incorporates important business and financial information about Vector and New Valley that is contained in documents filed with the SEC but that is not included in or delivered with this Prospectus. You may obtain copies of these documents, without charge, from the website maintained by the SEC at www.sec.gov, as well as other sources. See “Where You Can Find More Information” beginning on page 74.

      You may also obtain copies of these documents, without charge, upon written or oral request to our Information Agent, Georgeson Shareholder Communications Inc., at (877) 388-2794 (toll free), or from our Dealer Manager for this offer, Georgeson Shareholder Securities Corporation, collect at (212) 440-9800. To obtain timely delivery of copies of these documents, you should request them no later than five business days prior to the expiration of this offer. Unless this offer is extended, the latest you should request copies of these documents is Tuesday, November 22, 2005.

      Except as otherwise specifically noted, “we”, “our”, “us” and similar words in this Prospectus refer to VGR Holding Inc., or “VGR Holding”, and/or Vector Group Ltd., or “Vector”. In addition, we refer to New Valley Corporation as “New Valley”.

      In “Questions and Answers About the Offer” below and in the “Summary” beginning on page 1, we highlight selected information from this Prospectus but we have not included all of the information that may be important to you. To better understand the offer and the subsequent merger and for a more complete description of their legal terms, you should read carefully this entire Prospectus, including the Annexes, as well as the documents we have incorporated by reference into this Prospectus. See “Where You Can Find More Information” beginning on page 74.

QUESTIONS AND ANSWERS ABOUT THE OFFER

The Information Agent for the Offer is:

Georgeson Shareholder Communications Inc.

17 State Street, 10th Floor

New York, NY 10004

(877) 388-2794 (Toll Free)

Banks and Brokerage Firms please call:

(212) 440-9800

The Dealer Manager for the Offer is:

Georgeson Shareholder Securities Corporation

17 State Street, 10th Floor

New York, NY 10004

(212) 440-9800

	•	the manufacture and sale of cigarettes in the United States through our subsidiary Liggett Group Inc., and
	•	the development and marketing of the low nicotine and nicotine-free QUEST cigarette products and the development of reduced risk cigarette products through our subsidiary Vector Tobacco Inc.

	•	deliver certificates for your shares, a properly completed and duly executed Letter of Transmittal or a copy thereof that has been manually signed, along with any other required documents, to the Exchange Agent and Depositary at one of its addresses set forth on the back cover of this Prospectus prior to the expiration of the offer;
	•	arrange for a book-entry transfer of your shares to be made to the Exchange Agent and Depositary’s account at DTC and receipt by the Exchange Agent and Depositary of a confirmation of this transfer prior to the expiration of the offer, and the delivery of a properly completed and

		duly executed Letter of Transmittal or a copy thereof that has been manually signed, and any other required documents to the Exchange Agent and Depositary at one of its addresses set forth on the back cover of this Prospectus prior to the expiration of the offer; or
	•	arrange for a book-entry transfer of your shares to the Exchange Agent and Depositary’s account at DTC and receipt by the Exchange Agent and Depositary of confirmation of this transfer, including an “agent’s message”, prior to the expiration of the offer.

			As of and for the
			Six Months Ended
			June 30,								Year Ended December 31,
			2005				2004				2004				2003				2002				2001				2000
			(In thousands, except per share amounts)
Statement of Operations Data:
Revenues(1)			$	217,286			$	246,618			$	498,860			$	529,385			$	503,078			$	447,382			$	415,055
Income (loss) from continuing operations(2)				18,257				(12,542	)			4,039				(16,132	)			(31,819	)			21,200				165,933
Income (loss) from discontinued operations				3,034				267				2,689				522				25				(537	)			8,285
Net income (loss)				21,291				(12,275	)			6,728				(15,610	)			(31,794	)			20,663				174,218
Per basic common share(3):
	Income (loss) from continuing operations		$	0.41			$	(0.29	)		$	0.09			$	(0.39	)		$	(0.79	)		$	0.59			$	5.53
	Income (loss) from discontinued operations		$	0.07			$	0.01			$	0.06			$	0.02				—			$	(0.01	)		$	0.28
	Net income (loss) applicable to common shares		$	0.48			$	(0.28	)		$	0.15			$	(0.37	)		$	(0.79	)		$	0.58			$	5.81
Per diluted common share(3):
	Income (loss) from continuing operations		$	0.40			$	(0.29	)		$	0.09			$	(0.39	)		$	(0.79	)		$	0.49			$	4.70
	Income (loss) from discontinued operations		$	0.06			$	0.01			$	0.06			$	0.02				—			$	(0.01	)		$	0.23
	Net income (loss) applicable to common shares		$	0.46			$	(0.28	)		$	0.15			$	(0.37	)		$	(0.79	)		$	0.48			$	4.93
Cash distributions declared per common share (3)			$	0.76			$	0.73			$	1.47			$	1.40			$	1.33			$	1.27			$	0.99
Balance Sheet Data:
Current assets			$	282,922			$	236,774			$	242,124			$	314,741			$	376,815			$	515,727			$	269,942
Total assets				527,474				551,504				535,895				628,212				707,270				688,903				425,848
Current liabilities				110,203				131,540				119,835				173,086				184,384				141,629				138,775
Notes payable, embedded derivatives, long-term debt and other obligations, less current portion				280,908				297,573				280,289				299,977				307,028				225,415				39,890
Noncurrent employee benefits, deferred income taxes, minority interests and other long-term liabilities				227,786				209,013				220,574				201,624				193,561				208,501				234,734
Stockholders’ equity (deficit)				(91,423	)			(86,622	)			(84,803	)			(46,475	)			22,297				113,358				12,449

(1)	Revenues include excise taxes of $70,443, $90,103, $175,674, $195,342, $192,664, $151,174 and $116,116, respectively.
(2)	Includes a gain of $161,000 in 2000, net of taxes and minority interests, from the sale of Vector’s Russian tobacco business, Liggett Ducat; restructuring charges of $3,500 at Liggett in 2002; restructuring and impairment charges of $21,300 at Vector Tobacco in 2003; and restructuring and impairment charges of $11,100 at Liggett and $2,600 at Vector Tobacco and a $37,000 inventory charge at Vector Tobacco in 2004.
(3)	Per share computations include the impact of 5% stock dividends on September 29, 2005, September 29, 2004, September 29, 2003, September 27, 2002, September 28, 2001 and September 28, 2000.

			As of and For the Six
			Months Ended June 30,								Year Ended December 31,
			2005				2004				2004				2003				2002				2001				2000
			(In thousands, except per share amounts)
Operating Results:
Total revenues			$	—			$	—			$	—			$	—			$	661			$	9,966			$	3,199
Total costs and expenses				7,168				5,638				13,773				11,901				14,391				22,930				18,612
Other results from continuing operations				13,809				11,024				19,227				3,873				(8,446	)			(3,071	)			51,138
Income (loss) from continuing operations before income taxes and minority interests				6,641				5,386				5,454				(8,028	)			(22,176	)			(16,035	)			35,725
Income tax provision (benefit)				3,027				(456	)			(13,861	)			(952	)			(46	)			260				—
Minority interests in income (loss) from continuing operations of consolidated subsidiaries				—				—				5				(20	)			(151	)			(594	)			(323	)
Income (loss) from continuing operations				3,614				5,842				19,310				(7,056	)			(21,979	)			(15,701	)			36,048
Discontinued operations:
Income (loss) from discontinued operations				231				713				1,220				1,394				67				(5,829	)			5,002
Gain on disposal of discontinued operations				8,290				—				5,927				—				—				4,346				17,879
Income (loss) from discontinued operations				8,521				713				7,147				1,394				67				(1,483	)			22,881
Net income (loss) applicable to common shares			$	12,135			$	6,555			$	26,457			$	(5,662	)		$	(21,912	)		$	(17,184	)		$	58,929
Per common and equivalent share:
Basic:
	Income (loss) from continuing operations		$	0.15			$	0.27			$	0.87			$	(0.32	)		$	(0.96	)		$	(0.69	)		$	1.57
	Income (loss) from discontinued operations			0.37				0.03				0.33				0.06				—				(0.06	)			0.99
	Net income (loss) per common share			0.52				0.30				1.20				(0.26	)			(0.96	)			(0.75	)			2.56
Diluted:
	Income (loss) from continuing operations		$	0.15			$	0.27			$	0.87			$	(0.32	)		$	(0.96	)		$	(0.69	)		$	1.56
	Income (loss) from discontinued operations			0.37				0.03				0.33				0.06				—				(0.06	)			0.99
	Net income (loss) per common share			0.52				0.30				1.20				(0.26	)			(0.96	)			(0.75	)			2.55
Cash dividends declared				—				—				—				—				—				—				—
Book value			$	5.57			$	4.89			$	5.69			$	4.69			$	4.59			$	5.63			$	6.54
Balance Sheet Data:
Total assets			$	135,464			$	164,971			$	175,178			$	161,896			$	163,548			$	162,698			$	263,130
Long-term notes payable				—				38,891				38,569				39,266				39,856				11,142				11,900
Prepetition claims(1)				300				600				300				600				674				2,700				10,229
Stockholders’ equity				129,860				108,251				125,636				103,748				103,057				128,480				149,685
Working capital(2)				99,294				69,300				82,877				70,986				80,159				113,628				72,720

(1)	Represents prepetition claims against New Valley in its bankruptcy case.
(2)	Working capital represents current assets less current liabilities on the New Valley consolidated balance sheets.

															New Valley
			Vector				Vector				New Valley				Equivalent
			Historical				Pro Forma				Historical				Pro Forma
			Per Share				Per Share				Per Share				Per Share
			Data				Data(1)(2)(3)				Data				Data(1)
			For the Six Months Ended June 30, 2005
Earnings from continuing operations per share of common stock:
	Basic		$	0.41			$	0.39			$	0.15			$	0.18
	Diluted		$	0.40			$	0.38			$	0.15			$	0.18
Cash dividends per share of common stock			$	0.76			$	0.76			$	—			$	0.35
Book value per share of common stock(4)			$	(2.07	)		$	0.40			$	5.57			$	0.19

			For the Year Ended December 31, 2004
Earnings from continuing operations per share of common stock:
	Basic		$	0.09			$	0.25			$	0.87			$	0.12
	Diluted		$	0.09			$	0.24			$	0.87			$	0.11
Cash dividends per share of common stock			$	1.47			$	1.47			$	—			$	0.68

(1)	The Vector unaudited pro forma combined earnings from continuing operations per share and book value per common share are based on New Valley stockholders receiving 0.461 of a share of Vector common stock for each common share of New Valley. The New Valley equivalent unaudited pro forma per share data are calculated by multiplying the unaudited pro forma combined per share data by 0.461.
(2)	Reflects the historical operations of Vector and New Valley adjusted to reflect the impact of purchase accounting by Vector and the issuance of Vector common stock.
(3)	Based on the price of Vector common stock as of September 27, 2005 and the exchange ratio of 0.461 of a share of Vector common stock for each outstanding common share of New Valley, we have estimated a purchase price of approximately $85.6 million for the common shares of New Valley not owned by Vector. For purposes of the calculation of pro forma earnings from continuing operations per share, we have performed a preliminary allocation of this purchase price. Of the $90.5 million total consideration, approximately $17.9 million is estimated to be recorded as goodwill, which will not be subject to amortization.
(4)	Historical book value per share of common stock at June 30, 2005 is computed by dividing stockholders’ equity (deficit) of $(91.4) million and of $129.9 million for Vector and New Valley, respectively, by the number of shares of common stock outstanding as of June 30, 2005. Pro forma book value per share is computed by dividing pro forma stockholders’ equity by the pro forma number of shares of common stock outstanding as of June 30, 2005.

	•	the prices per share of Vector’s common stock and New Valley’s common shares as of the close of trading on September 26, 2005, the day prior to the public announcement of the 0.461 exchange ratio of our offer; and
	•	the equivalent price per share of New Valley’s common shares, based on the exchange ratio.

		Vector				New Valley				New Valley
		Historical				Historical				Equivalent(1)
As of closing on September 26, 2005, price per share of common stock		$	19.54			$	7.45			$	9.00

(1)	We calculated the New Valley equivalent data by multiplying the applicable Vector closing price by the exchange ratio in the offer and the subsequent merger of 0.461 of a share of Vector common stock for each common share of New Valley.

RISK FACTORS

      In deciding whether to tender your shares pursuant to the offer, you should read carefully this Prospectus and the documents which we incorporate by reference into this Prospectus. You should also carefully consider the following factors:

Risks Related to the Offer and the Subsequent Merger

      In the offer and the subsequent merger, each common share of New Valley will be exchanged for 0.461 of a share of Vector common stock. This is a fixed exchange ratio. We will not adjust the exchange ratio as a result of any change in the market price of Vector common stock between the date of this Prospectus and the date you receive shares of Vector common stock in exchange for common shares of New Valley. The market price of the Vector common stock will likely be different on the date you receive shares of Vector common stock than it is today because of changes in the business, operations or prospects of Vector, market reactions to our offer, general market and economic conditions and other factors. You are urged to obtain current market quotations for Vector common stock and New Valley common shares. See “Comparative Per Share Market Price and Dividend Information” beginning on page 46.

      If we successfully complete the offer and the subsequent merger, holders of New Valley’s common shares will become holders of Vector’s common stock. Although we currently own approximately 57.7% of New Valley’s outstanding common shares, we also own and operate other businesses. Accordingly, our results of operations and business, as well as the trading price of our common stock, may be affected by factors in addition to those affecting New Valley’s results of operations and business and the price of New Valley’s common shares. The price of Vector’s common stock may decrease after we accept common shares of New Valley for exchange in the offer and complete the subsequent merger.

      In evaluating this offer, you should be aware that we have not negotiated the price or terms of this offer or the subsequent merger with New Valley, its board of directors or any special committee of its board. We have also not requested that New Valley, its board of directors or any special committee of its board approve this offer or the subsequent merger. New Valley will be required, however, under the rules of the SEC, to either make a recommendation, or state that it is neutral or is unable to take a position with respect to the offer, and file with the SEC a solicitation/recommendation statement on Schedule 14D-9 describing its position, if any, and certain related information, no later than ten business days from the date of the distribution of this Prospectus.

      You should be aware that there exist conflicts of interest among members of the New Valley board. Not only does Vector own approximately 57.7% of the outstanding New Valley common shares, but four of the eight members of the New Valley board are directors and/or executive officers of Vector. For additional information on the interests that New Valley’s board members and executive officers may have in the offer and subsequent merger, see “Interests of Certain Persons in the Offer and Subsequent Merger” beginning on page 67.

      The offer and the subsequent merger are intended to qualify as a “reorganization” for United States federal income tax purposes under which you would generally not recognize gain or loss upon the receipt of shares of Vector common stock in exchange for your common shares of New Valley, other than any gain or loss recognized on the receipt of cash instead of fractional shares. If the offer and the subsequent merger are consummated but fail to be treated as a “reorganization” for United States federal income tax purposes, however, the offer and the subsequent merger will be taxable to you. Reorganization treatment depends on numerous factors. If the subsequent merger does not qualify as a reorganization, you would generally be taxed on any gain you realize upon the receipt of shares of Vector common stock in exchange for your common shares of New Valley in the offer or the subsequent merger. The offer does not include a condition relating to the tax-free treatment of the offer and the subsequent merger.

      We will promptly complete a “short form” merger following the completion of the offer unless we are prevented from doing so by a court or other legal requirement. However, if we successfully complete the offer but are not able to complete promptly the “short form” merger, common shares of New Valley not tendered into the offer would remain outstanding until we are able to effect such a merger, if ever. In these circumstances, the liquidity of and market for those remaining publicly held common shares of New Valley could be adversely affected. New Valley’s common shares are currently listed on The Nasdaq Stock Market. Depending upon the number of common shares of New Valley purchased in the offer, New Valley’s common shares may no longer meet the requirements for continued listing and may be delisted from The Nasdaq Stock Market. It is possible that New Valley’s common shares would continue to trade in the over-the-counter market and that price quotations would be reported by other sources. The extent of the public market for New Valley’s common shares and the availability of these quotations would depend, however, upon the number of holders of New Valley’s common shares remaining at that time, the interests in maintaining a market in New Valley’s common shares on the part of securities firms, the possible termination of registration of New Valley’s common shares under the Exchange Act, as described below, and other factors.

      In addition, New Valley’s registration under the Exchange Act could be terminated upon application of New Valley to the SEC if the shares are no longer listed on a securities exchange and there are fewer than 300 holders of record of New Valley common shares. The termination of the registration of New Valley’s common shares under the Exchange Act would substantially reduce the information required to be furnished by New Valley to its stockholders and to the SEC. It would also make certain of the provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with stockholders’ meetings, the related requirement of an annual report to stockholders, and the requirements of SEC Rule 13e-3 with respect to going private transactions, no longer applicable.

      Common shares of New Valley are currently “margin securities” under the regulations of the Board of Governors of the Federal Reserve System. This has the effect of allowing brokers to extend credit on common shares of New Valley as collateral. Depending on factors similar to those described above regarding listing and market quotations, it is possible that New Valley’s common shares would no longer constitute “margin securities” for purposes of the Federal Reserve Board’s margin regulations. If registration of New Valley’s common shares under the Exchange Act is terminated, New Valley’s common shares would no longer be “margin securities”.

Risks Related to Our Business

      Our business activities are subject to hazards and risks. The following is a summary of the material risks relating to our business activities. Before tendering your common shares of New Valley in the offer,

you should carefully consider the material risks described below, as well as the other information contained in this Prospectus and the documents incorporated by reference in this Prospectus under the caption “Where You Can Find More Information” beginning on page 74. If any of the events described below occur, our business, financial condition and/or results of operations could be materially harmed, and you could lose part or all of your investment.

      We and our subsidiaries have significant indebtedness and debt service obligations. At June 30, 2005, we and our subsidiaries had total outstanding indebtedness (including embedded derivative liability and beneficial conversion feature related to convertible notes) of $302.1 million. In addition, subject to the terms of any future agreements, we and our subsidiaries will be able to incur additional indebtedness in the future. There is a risk that we will not be able to generate sufficient funds to repay our debt. If we cannot service our fixed charges, it would have a material adverse effect on our business and results of operations.

      We are a holding company and have no operations of our own. We hold our interests in our various businesses through our wholly-owned subsidiary, VGR Holding. In addition to our own cash resources, our ability to pay interest on our convertible notes and to pay dividends on our common stock depends on the ability of VGR Holding to make cash available to us. VGR Holding’s ability to pay dividends to us depends primarily on the ability of Liggett Group Inc., or Liggett, its wholly-owned subsidiary, and New Valley, in which we indirectly hold an approximately 57.7% interest, to generate cash and make it available to VGR Holding. Liggett’s revolving credit agreement permits Liggett to pay cash dividends to VGR Holding only if Liggett’s borrowing availability exceeds $5.0 million for the 30 days prior to payment of the dividend and immediately after giving effect to the dividend, and so long as no event of default has occurred under the agreement, including Liggett’s compliance with the covenants in the credit facility, including an adjusted net worth and working capital requirement.

      As the controlling stockholder of New Valley, we must deal fairly with New Valley, which may limit our ability to enter into transactions with New Valley that result in the receipt of cash from New Valley and to influence New Valley’s dividend policy. In addition, since we indirectly own only approximately 57.7% of the common shares of New Valley, a significant portion of any cash and other assets distributed by New Valley will be received by persons other than us and our subsidiaries. This risk would be eliminated if we successfully complete our offer and subsequent “short form” merger.

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

      In connection with the 1998 and 1999 transaction with Philip Morris Incorporated, in which a subsidiary of Liggett contributed three of its premium cigarette brands to Trademarks LLC, or Trademarks, a newly-formed limited liability company, we recognized in 1999 a pre-tax gain of $294.1 million in our consolidated financial statements and established a deferred tax liability of $103.1 million relating to the gain. In such transaction, Philip Morris acquired an option to purchase the remaining interest in Trademarks for a 90-day period commencing in December 2008, and we have an

option to require Philip Morris to purchase the remaining interest for a 90-day period commencing in March 2010. Upon exercise of the options during either of the 90-day periods commencing in December 2008 or in March 2010, we will be required to pay tax in the amount of the deferred tax liability, which will be offset by the benefit of any deferred tax assets, including any net operating losses, available to us at that time. In connection with an examination of our 1998 and 1999 federal income tax returns, the Internal Revenue Service issued to us in September 2003 a notice of proposed adjustment. The notice asserts that, for tax reporting purposes, the entire gain should have been recognized in 1998 and in 1999 in the additional amounts of $150.0 million and $129.9 million, respectively, rather than upon the exercise of the options during either of the 90-day periods commencing in December 2008 or in March 2010. If the Internal Revenue Service were to ultimately prevail with the proposed adjustment, it would result in the potential acceleration of tax payments of approximately $124.0 million, including interest, net of tax benefits, through June 30, 2005. These amounts have been previously recognized in our consolidated financial statements as tax liabilities. In addition, we have filed a protest with the Appeals Division of the Internal Revenue Service. Although no payment is due with respect to these matters during the appeal process, interest is accruing on the disputed amounts.

      There is a risk that the taxing authorities will ultimately prevail in their assertion that we incurred a tax obligation prior to the exercise dates of these options and we will be required to make such tax payments prior to 2009 or 2010. If that were to occur and any necessary financing were not available to us, our liquidity could be materially adversely affected, which in turn would materially adversely affect the value of our common stock.

      Liggett is considerably smaller and has fewer resources than its major competitors and, as a result, has a more limited ability to respond to market developments. Management Science Associates data indicate that the three largest cigarette manufacturers controlled approximately 83.2% of the United States cigarette market during 2004. Philip Morris is the largest and most profitable manufacturer in the market, and its profits are derived principally from its sale of premium cigarettes. Philip Morris had approximately 62.3% of the premium segment and 47.5% of the total domestic market during 2004. During 2004, all of Liggett’s sales were in the discount segment, and its share of the total domestic cigarette market was 2.3%. Philip Morris and RJR Tobacco (which is now part of Reynolds American Inc., or Reynolds American), the two largest cigarette manufacturers, have historically, because of their dominant market share, been able to determine cigarette prices for the various pricing tiers within the industry. Market pressures have historically caused the other cigarette manufacturers to bring their prices into line with the levels established by these two major manufacturers.

      In July 2004, RJR Tobacco and Brown & Williamson, the second and third largest cigarette manufacturers, completed the combination of their United States tobacco businesses to create Reynolds American. This transaction has further consolidated the dominance of the domestic cigarette market by Philip Morris and the newly created Reynolds American, who had an initial combined market share of approximately 76%. This concentration of United States market share could make it more difficult for Liggett and Vector Tobacco to compete for shelf space in retail outlets and could impact price competition in the market, either of which could have a material adverse affect on their sales volume, operating income and cash flows, which in turn could negatively affect the value of our common stock.

      Liggett depends more on sales in the discount cigarette segment of the market, relative to the full-price premium segment, than its major competitors. All of Liggett’s unit volume in 2004, and approximately 94.6% of Liggett’s unit sales in 2003, were generated in the discount segment. The discount segment is highly competitive, with consumers having less brand loyalty and placing greater emphasis on price. While the three major manufacturers all compete with Liggett in the discount segment of the market, the strongest competition for market share has recently come from a group of small manufacturers and importers, most of which sell low quality, deep discount cigarettes. While Liggett’s share of the

discount market increased to 7.4% in 2004 from 7.3% in 2003 and 6.7% in 2002, Management Science Associates data indicate that the discount market share of these other smaller manufacturers and importers increased to 39% in 2004 from 37.8% in 2003 and 33.5% in 2002 due to their increased competitive discounting. If pricing in the discount market continues to be impacted by these smaller manufacturers and importers, margins in Liggett’s only current market segment could be negatively affected, which in turn could negatively affect the value of our common stock.

      In years prior to 2000, Liggett suffered a substantial decline in unit sales and associated market share. Liggett’s unit sales and market share increased during each of 2000, 2001 and 2002, and its market share increased in 2003 while its unit sales declined. During 2004, Liggett’s unit sales and market share declined compared to the prior year. This earlier market share erosion resulted in part from Liggett’s highly leveraged capital structure that existed until December 1998 and its limited ability to match other competitors’ wholesale and retail trade programs, obtain retail shelf space for its products and advertise its brands. The decline in recent years also resulted from adverse developments in the tobacco industry, intense competition and changes in consumer preferences. According to Management Science Associates data, Liggett’s overall domestic market share during 2004 was 2.3% compared to 2.4% during 2003 and 2002. Liggett’s share of the premium segment was 0.2% in 2003 and 0.3% in 2002, and its share of the discount segment during 2004 was 7.4%, up from 7.3% in 2003 and 6.7% in 2002. If Liggett’s market share continues to decline, Liggett’s sales volume, operating income and cash flows could be materially adversely affected, which in turn could negatively affect the value of our common stock.

      Industry-wide shipments of cigarettes in the United States have been generally declining for a number of years, with published industry sources estimating that domestic industry-wide shipments decreased by approximately 1.7% during 2004. According to Management Science Associates data, domestic industry-wide shipments decreased by 4.1% in 2003 compared to 2002. Liggett’s management believes that industry-wide shipments of cigarettes in the United States will generally continue to decline as a result of numerous factors. These factors include health considerations, diminishing social acceptance of smoking, and a wide variety of federal, state and local laws limiting smoking in restaurants, bars and other public places, as well as federal and state excise tax increases and settlement-related expenses which have contributed to high cigarette price levels in recent years. If this decline in industry-wide shipments continues and Liggett is unable to capture market share from its competitors, or if the industry as a whole is unable to offset the decline in unit sales with price increases, Liggett’s sales volume, operating income and cash flows could be materially adversely affected, which in turn could negatively affect the value of our common stock.

      The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. As of June 30, 2005, there were approximately 361 individual suits, 11 purported class actions and nine governmental and other third-party payor health care reimbursement actions pending in the United States in which Liggett was a named defendant. A civil lawsuit has been filed by the United States federal government seeking disgorgement of approximately $289 billion from various cigarette manufacturers, including Liggett. A federal appellate court ruled in February 2005 that disgorgement is not an available remedy in the case. In October 2005, the United States Supreme Court declined to review this decision. Trial of the case concluded on June 15, 2005. On June 27, 2005, the government sought to restructure its potential remedies and filed a proposed Final Judgment and Order. That relief can be grouped into four categories: (1) a cessation and counter marketing program; (2) so-called “corrective statements”; (3) disclosures; and (4) enjoined activities. The judge has directed the parties to file various post-trial submissions between August 8, 2005 and October 9, 2005. In one of the other cases pending against Liggett, in 2000, an action against cigarette manufacturers

involving approximately 1,000 named individual plaintiffs was consolidated before a single West Virginia state court. Liggett is a defendant in most of the cases pending in West Virginia. In January 2002, the court severed Liggett from the trial of the consolidated action. Two purported class actions have been certified in state court in Kansas and New Mexico against the cigarette manufacturers for alleged antitrust violations. As new cases are commenced, the costs associated with defending these cases and the risks relating to the inherent unpredictability of litigation continue to increase.

      There are six individual actions where Liggett is the only defendant, with trial in one of these cases currently scheduled for October 2005 and trial in another scheduled for November 2005. In April 2004, in one of these cases, a jury in a Florida state court action awarded compensatory damages of $0.5 million against Liggett. In addition, plaintiff’s counsel was awarded legal fees of $0.8 million. Liggett has appealed the verdict. In February 2005, in another of these cases, a Florida state court jury returned a verdict in favor of Liggett. In July 2005, the court denied the plaintiff’s post-trial motion seeking a new trial. The plaintiff did not appeal the decision. In March 2005, in another case in Florida state court in which Liggett is the only defendant, the court granted Liggett’s motion for summary judgment disposing of the case in its entirety. The plaintiff has appealed.

      In May 2003, a Florida intermediate appellate court overturned a $790 million punitive damages award against Liggett and decertified the Engle smoking and health class action. In May 2004, the Florida Supreme Court agreed to review the case. Oral argument was held in November 2004. If the intermediate appellate court’s ruling is not upheld on appeal, it will have a material adverse effect on us. In November 2000, Liggett filed the $3.45 million bond required under the bonding statute enacted in 2000 by the Florida legislature which limits the size of any bond required, pending appeal, to stay execution of a punitive damages verdict. In May 2001, Liggett reached an agreement with the class in the Engle case, which provided assurance to Liggett that the stay of execution, in effect under the Florida bonding statute, would not be lifted or limited at any point until completion of all appeals, including to the United States Supreme Court. As required by the agreement, Liggett paid $6.27 million into an escrow account to be held for the benefit of the Engle class, and released, along with Liggett’s existing $3.45 million statutory bond, to the court for the benefit of the class upon completion of the appeals process, regardless of the outcome of the appeal. In June 2002, the jury in an individual case brought under the third phase of the Engle case awarded $37.5 million (subsequently reduced by the court to $25.1 million) of compensatory damages against Liggett and two other defendants and found Liggett 50% responsible for the damages. The verdict, which is subject to the outcome of the Engle appeal, has been overturned as a result of the appellate court’s ruling discussed above. It is possible that additional cases could be decided unfavorably and that there could be further adverse developments in the Engle case. Liggett may enter into discussions in an attempt to settle particular cases if it believes it is appropriate to do so. We cannot predict the cash requirements related to any future settlements and judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met.

      In recent years, there have been a number of proposed restrictive regulatory actions from various federal administrative bodies, including the United States Environmental Protection Agency and the Food and Drug Administration. There have also been adverse political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, including the commencement and certification of class actions and the commencement of third-party payor actions. These developments generally receive widespread media attention. We are not able to evaluate the effect of these developing matters on pending litigation or the possible commencement of additional litigation, but our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any smoking-related litigation, which in turn could negatively affect the value of our common stock.

      Liggett has recently been notified that all Participating Manufacturers’ payment obligations under the Master Settlement Agreement, dating from the agreement’s execution in late 1998, have been recalculated

utilizing net unit amounts, rather than gross unit amounts (which have been utilized since 1999). The change in the method of calculation could, among other things, require additional payments by Liggett under the Master Settlement Agreement of approximately $2.3 million per year for the period 2001 through 2004, or a total of approximately $9.2 million, and require Liggett to pay an additional amount of approximately $2.4 million per year in 2005 and in future periods by lowering Liggett’s market share exemption under the Master Settlement Agreement. Liggett contends that the retroactive change from utilizing gross unit amounts to net unit amounts is impermissible and has objected to the change. Liggett intends to challenge the change in methodology.

      On March 30, 2005, the Independent Auditor under the Master Settlement Agreement calculated $28.7 million in Master Settlement Agreement payments for Liggett’s 2004 sales. On April 15, 2005, Liggett paid $11.7 million of this amount and, in accordance with its rights under the Master Settlement Agreement, disputed the balance of $17.0 million. Of the disputed amount, Liggett paid $9.3 million into the disputed payments account under the Master Settlement Agreement and withheld from payment $7.7 million. The $9.3 million paid into the disputed payments account represents the amount claimed by Liggett as an adjustment to its 2003 payment obligation under the Master Settlement Agreement for market share loss to non-participating manufacturers. The $7.7 million withheld from payment represents $5.3 million claimed as an adjustment to Liggett’s 2004 Master Settlement Agreement obligation for market share loss to non-participating manufacturers and $2.4 million relating to the retroactive change, discussed above, to the method for computing payment obligations under the Master Settlement Agreement which Liggett contends, among other things, is not in accordance with the Master Settlement Agreement. On May 31, 2005, New York State filed a motion on behalf of the Settling States in New York state court seeking to compel Liggett and the other Subsequent Participating Manufacturers that paid into the disputed payments account to release to the Settling States the amounts paid into such account. The Settling States contend that Liggett had no right under the Master Settlement Agreement and related agreements to pay into the disputed payments account any amount claimed as an adjustment for market share loss to non-participating manufacturers for 2003, although they acknowledge that Liggett has the right to dispute such amounts. By stipulation among the parties dated July 25, 2005, New York’s motion was dismissed and Liggett authorized the release to the Settling States of the $9.3 million it had paid into the account, although Liggett continues to dispute that it owes this amount.

      In 2004, the Attorneys General for each of Florida, Mississippi and Texas advised Liggett that they believed that Liggett had failed to make all required payments under the settlement agreements with these three states for the period 1998 through 2003 and that additional payments might be due for 2004 and subsequent years. Liggett believes these allegations are without merit, based, among other things, on the language of the most-favored nation provisions of the settlement agreements. In December 2004, the State of Florida offered to settle all amounts allegedly owed by Liggett for the period through 2003 for the sum of $13.5 million. In November 2004, the State of Mississippi offered to settle all amounts allegedly owed by Liggett for the period through 2003 for the sum of $6.5 million. In March 2005, the State of Florida reaffirmed its December 2004 offer to settle and provided Liggett with a 60 day notice to cure the alleged defaults. In April 2005, the State of Mississippi reaffirmed its November 2004 offer to settle and provided Liggett with a 60 day notice to cure the alleged defaults. Liggett has met with representatives of the three states to discuss the issues relating to the alleged defaults. No resolution has been reached.

      No amounts have been accrued in our financial statements for any additional amounts that may be payable by Liggett under the Master Settlement Agreement, due to the recalculation of the Participating Manufacturers’ payment obligations, or under the settlement agreements with Florida, Mississippi and Texas. There can be no assurance that Liggett will prevail in any of these matters and that Liggett will not be required to make additional material payments, which payments could materially adversely affect our consolidated financial position, results of operations or cash flows and the value of our common stock.

      During 2004, 13.8% of Liggett’s total revenues and 13.4% of our consolidated revenues were generated by sales to Liggett’s largest customer. Liggett’s contract with this customer currently extends through

March 31, 2009. If this customer discontinues its relationship with Liggett or experiences financial difficulties, Liggett’s results of operations could be materially adversely affected.

      In October 2004, federal legislation was enacted which abolished the federal tobacco quota system and price support system. Pursuant to the legislation, manufacturers of tobacco products will be assessed $10.1 billion over a ten year period to compensate tobacco growers and quota holders for the elimination of their quota rights. Cigarette manufacturers will initially be responsible for 96.3% of the assessment (subject to adjustment in the future), which will be allocated based on relative unit volume of domestic cigarette shipments. We currently estimate that Liggett’s assessment will be approximately $25 million for the first year of the program which began January 1, 2005. The cost of the legislation to the three largest cigarette manufacturers will likely be less than the cost to smaller manufacturers, including Liggett and Vector Tobacco, because one effect of the legislation is that the three largest manufacturers will no longer be obligated to make certain contractual payments, commonly known as Phase II payments, they agreed in 1999 to make to tobacco-producing states. The ultimate impact of this legislation cannot be determined, but there is a risk that smaller manufacturers, such as Liggett and Vector Tobacco, will be disproportionately affected by the legislation, which could have a material adverse effect on us.

      Cigarettes are subject to substantial and increasing federal, state and local excise taxes. The federal excise tax on cigarettes is currently $0.39 per pack. State and local sales and excise taxes vary considerably and, when combined with the current federal excise tax, may currently exceed $4.00 per pack. In 2004, ten states enacted increases in excise taxes, and nine states have enacted increases in 2005. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and various states and other jurisdictions have currently under consideration or pending legislation proposing further state excise tax increases. We believe that increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Further substantial federal or state excise tax increases could accelerate the trend away from smoking and could have a material adverse effect on Liggett’s sales and profitability, which in turn could negatively affect the value of our common stock.

      We have made, and currently plan to continue to make, significant investments in Vector Tobacco’s development projects in the tobacco industry. Vector Tobacco is in the business of developing and marketing the low nicotine and nicotine-free QUEST cigarette products and developing reduced risk cigarette products. These initiatives are subject to high levels of risk, uncertainties and contingencies, including the challenges inherent in new product development. There is a risk that continued investments in Vector Tobacco will harm our results of operations, liquidity or cash flow.

      The substantial risks facing Vector Tobacco include:

      Risks of market acceptance of new products. In November 2001, Vector Tobacco launched nationwide its reduced carcinogen OMNI cigarettes. During 2002, acceptance of OMNI in the marketplace was limited, with revenues of only approximately $5.1 million on sales of 70.7 million units. Since 2003, OMNI sales activity has been minimal as Vector Tobacco has not been actively marketing the OMNI product, and the product is not currently in distribution. Vector Tobacco was unable to achieve the anticipated breadth of distribution and sales of the OMNI product due, in part, to the lack of success of its advertising and marketing efforts in differentiating OMNI from other conventional cigarettes with consumers through the “reduced carcinogen” message. Over the next several years, our in-house research program, together with third-party collaborators, plans to conduct appropriate studies relating OMNI’s reduction of carcinogens to reduced risk in smokers and, based on these studies, we will review the marketing and positioning of the OMNI brand in order to formulate a strategy for its long-term success.

OMNI has not been a commercially successful product to date, and there is a risk that we will be unable to take action to significantly increase the level of OMNI sales in the future.

      Vector Tobacco introduced its low nicotine and nicotine-free QUEST cigarettes in an initial seven-state market in January 2003 and in Arizona in January 2004. During the second quarter of 2004, based on an analysis of the market data obtained since the introduction of the QUEST product, we determined to postpone indefinitely the national launch of QUEST. A national launch of the QUEST brands would require the expenditure of substantial additional sums for advertising and sales promotion, with no assurance of consumer acceptance. Low nicotine and nicotine-free cigarettes may not ultimately be accepted by adult smokers and also may not prove to be commercially successful products. Adult smokers may decide not to purchase cigarettes made with low nicotine and nicotine-free tobaccos due to taste or other preferences, or due to the use of genetically modified tobacco or other product modifications.

      Recoverability of costs of inventory. At June 30, 2005, approximately $1.4 million of our leaf inventory was associated with Vector Tobacco’s QUEST product. We estimate an inventory reserve for excess quantities and obsolete items, taking into account future demand and market conditions. During the second quarter of 2004, we recognized a non-cash charge of $37 million to adjust the carrying value of excess leaf tobacco inventory for the QUEST product, based on estimates of future demand and market conditions. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required.

      Third party allegations that Vector Tobacco products are unlawful or bear deceptive or unsubstantiated product claims. Vector Tobacco is engaged in the development and marketing of low nicotine and nicotine-free cigarettes and the development of reduced risk cigarette products. With respect to OMNI, which is not currently being distributed by Vector Tobacco, reductions in carcinogens have not yet been proven to result in a safer cigarette. Like other cigarettes, the OMNI and QUEST products also produce tar, carbon monoxide, other harmful by-products, and, in the case of OMNI, increased levels of nitric oxide and formaldehyde. There are currently no specific governmental standards or parameters for these products and product claims. There is a risk that federal or state regulators may object to Vector Tobacco’s low nicotine and nicotine-free cigarette products and reduced risk cigarette products it may develop as unlawful or allege they bear deceptive or unsubstantiated product claims, and seek the removal of the products from the marketplace, or significant changes to advertising. Various concerns regarding Vector Tobacco’s advertising practices have been expressed to Vector Tobacco by certain state attorneys general. Vector Tobacco has engaged in discussions in an effort to resolve these concerns and Vector Tobacco has agreed to suspend all print advertising for its QUEST brand while discussions are pending. If Vector Tobacco is unable to advertise its QUEST brand, it could have a material adverse effect on sales of QUEST. Allegations by federal or state regulators, public health organizations and other tobacco manufacturers that Vector Tobacco’s products are unlawful, or that its public statements or advertising contain misleading or unsubstantiated health claims or product comparisons, may result in litigation or governmental proceedings. Vector Tobacco’s defense against such claims could require it to incur substantial expense and to divert significant efforts of its scientific and marketing personnel. An adverse determination in a judicial proceeding or by a regulatory agency could have a material and adverse impact on Vector Tobacco’s business, operating results and prospects.

      Potential extensive government regulation. Vector Tobacco’s business may become subject to extensive additional domestic and international government regulation. Various proposals have been made for federal, state and international legislation to regulate cigarette manufacturers generally, and reduced constituent cigarettes specifically. It is possible that laws and regulations may be adopted covering matters such as the manufacture, sale, distribution and labeling of tobacco products as well as any health claims associated with reduced carcinogen and low nicotine and nicotine-free cigarette products and the use of genetically modified tobacco. A system of regulation by agencies such as the Food and Drug Administration, the Federal Trade Commission and the United States Department of Agriculture may be established. In addition, a group of public health organizations submitted a petition to the Food and Drug Administration, alleging that the marketing of the OMNI product is subject to regulation by the Food and Drug Administration under existing law. Vector Tobacco has filed a response in opposition to the petition.

The Federal Trade Commission has expressed interest in the regulation of tobacco products made by tobacco manufacturers, including Vector Tobacco, which bear reduced carcinogen claims. The outcome of any of the foregoing cannot be predicted, but any of the foregoing could have a material adverse impact on Vector Tobacco’s business, operating results and prospects.

      Necessity of obtaining Food and Drug Administration approval to market QUEST as a smoking cessation product. In October 2003, we announced that Jed E. Rose, Ph.D., Director of Duke University Medical Center’s Nicotine Research Program and co-inventor of the nicotine patch, had conducted a study at Duke University Medical Center to provide preliminary evaluation of the use of the QUEST technology as a smoking cessation aid. We have received guidance from the Food and Drug Administration as to the additional clinical research and regulatory filings necessary to market QUEST as a smoking cessation product. We are currently conducting a multi-centered clinical trial with QUEST cigarettes, which should be completed by the end of the first quarter of 2006. We believe that obtaining the Food and Drug Administration’s approval to market QUEST as a smoking cessation product will be an important factor in the long-term commercial success of the QUEST brand. No assurance can be given that such approval can be obtained or as to the timing of any such approval if received.

      Competition from other cigarette manufacturers with greater resources. Vector Tobacco’s competitors generally have substantially greater resources than Vector Tobacco has, including financial, marketing and personnel resources. Other major tobacco companies have stated that they are working on reduced risk cigarette products and have made publicly available at this time only limited additional information concerning their activities. Philip Morris has announced it is developing products that potentially reduce smokers’ exposure to harmful compounds in cigarette smoke. RJR Tobacco has stated that in 2003 it began a phased expansion into a select number of retail chain outlets of a cigarette product that primarily heats rather than burns tobacco, which it claims reduces the toxicity of its smoke. In 2002, Brown & Williamson Tobacco Corporation announced it was test marketing a new cigarette with reduced levels of many toxins which it may introduce on a national basis. There is a substantial likelihood that other major tobacco companies will continue to introduce new products that are designed to compete directly with Vector Tobacco’s reduced carcinogen and low nicotine and nicotine-free products.

      Potential disputes concerning intellectual property. Vector Tobacco’s ability to commercially exploit its proprietary technology for its reduced carcinogen and low nicotine and nicotine-free products depends in large part on its ability to obtain and defend issued patents, to obtain further patent protection for its existing technology in the United States and other jurisdictions, and to operate without infringing on the patents and proprietary rights of others both in the United States and abroad. Additionally, it must be able to obtain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur, both in the United States and in foreign countries.

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

      Litigation which could result in substantial cost also may be necessary to enforce any patents to which Vector Tobacco has rights, or to determine the scope, validity and unenforceability of other parties’ proprietary rights which may affect Vector Tobacco’s rights. Vector Tobacco also may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of an invention or in opposition proceedings in foreign counties or jurisdictions, which could result in substantial costs. There is a risk that its licensed patents would be held invalid by a court or administrative body or that an alleged infringer would not be found to be infringing. The mere uncertainty resulting from

the institution and continuation of any technology-related litigation or any interference or opposition proceedings could have a material and adverse effect on Vector Tobacco’s business, operating results and prospects.

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

      Dependence on key scientific personnel. Vector Tobacco’s business depends on the continued services of key scientific personnel for its continued development and growth. The loss of Dr. Anthony Albino, Vice President of Public Health, could have a serious negative impact upon Vector Tobacco’s business, operating results and prospects.

      Ability to raise capital and manage growth of business. If Vector Tobacco succeeds in introducing to market and increasing consumer acceptance for its new cigarette products, Vector Tobacco will be required to obtain significant amounts of additional capital and manage substantial volume from its customers. There is a risk that adequate amounts of additional capital will not be available to Vector Tobacco to fund the growth of its business. To accommodate growth and compete effectively, Vector Tobacco will also be required to attract, integrate, motivate and retain additional highly skilled sales, technical and other employees. Vector Tobacco will face competition for these people. Its ability to manage volume also will depend on its ability to scale up its tobacco processing, production and distribution operations. There is a risk that it will not succeed in scaling its processing, production and distribution operations and that its personnel, systems, procedures and controls will not be adequate to support its future operations.

      Potential delays in obtaining tobacco, other raw materials and any technology needed to produce products. Vector Tobacco is dependent on third parties to produce tobacco and other raw materials that Vector Tobacco requires to manufacture its products. In addition, the growing of new tobacco and new seeds is subject to adverse weather conditions. Vector Tobacco may also need to obtain licenses to technology subject to patents or proprietary rights of third parties to produce its products. The failure by such third parties to supply Vector Tobacco with tobacco, other raw materials and technology on commercially reasonable terms, or at all, in the absence of readily available alternative sources, would have a serious negative impact on Vector Tobacco’s business, operating results and prospects. There is also a risk that interruptions in the supply of these materials and technology may occur in the future. Any interruption in their supply could have a serious negative impact on Vector Tobacco.

      In recent years, we have undertaken a number of initiatives to streamline the cost structure of our tobacco business and improve operating efficiency and long-term earnings. For example, during 2002, the sales, marketing and support functions of our Liggett and Vector Tobacco subsidiaries were combined. Effective year-end 2003, we closed Vector Tobacco’s Timberlake, North Carolina manufacturing facility and moved all production to Liggett’s facility in Mebane, North Carolina. In April 2004, we eliminated a number of positions in our tobacco operations and subleased excess office space. In October 2004, we announced a plan to restructure the operations of Liggett Vector Brands, effective December 15, 2004. We may consider various additional opportunities to further improve efficiencies and reduce costs. These prior and current initiatives have involved material restructuring and impairment charges, and any future actions taken are likely to involve material charges as well. These restructuring charges are based on our best estimate at the time of restructuring. The status of the restructuring activities is reviewed on a quarterly basis and any adjustments to the reserve, which could differ materially from previous estimates, are recorded as an adjustment to operating income. Although we may estimate that substantial cost savings will be associated with these restructuring actions, there is a risk that these actions could have a serious

negative impact on our tobacco business and that any estimated increases in profitability cannot be achieved.

      Risks of real estate ventures. New Valley has three significant investments, Douglas Elliman Realty, LLC, the Sheraton Keauhou Bay Resort & Spa (which reopened in the fourth quarter 2004) and the St. Regis Hotel in Washington, D.C. (since August 2005), in each of which it holds only a 50% interest. New Valley must seek approval from other parties for important actions regarding these joint ventures. Since these other parties’ interests may differ from those of New Valley, a deadlock could arise that might impair the ability of the ventures to function. Such a deadlock could significantly harm the ventures.

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

      Risks relating to the residential brokerage business. Through its investment in Douglas Elliman Realty, LLC, New Valley is subject to the risks and uncertainties endemic to the residential brokerage business. Both Douglas Elliman and Prudential Douglas Elliman Real Estate operate as franchisees of The Prudential Real Estate Affiliates, Inc. Prudential Douglas Elliman operates each of its offices under its franchiser’s brand name, but generally does not own any of the brand names under which it operates. The franchiser has significant rights over the use of the franchised service marks and the conduct of the two brokerage companies’ business. Prudential Douglas Elliman’s franchiser also has the right to terminate Douglas Elliman’s and Prudential Douglas Elliman’s franchises, upon the occurrence of certain events, including a bankruptcy or insolvency event, a change in control, a transfer of rights under the franchise agreements and a failure to promptly pay amounts due under the franchise agreements. A termination of Douglas Elliman’s or Prudential Douglas Elliman’s franchise agreement could adversely affect New Valley’s investment in Douglas Elliman Realty, LLC.

      Interest rates in the United States are currently at historically low levels. The low interest rate environment in recent years has significantly contributed to high levels of existing home sales and residential prices and has positively impacted Douglas Elliman Realty’s operating results. However, the residential real estate market tends to be cyclical and typically is affected by changes in the general economic conditions that are beyond Douglas Elliman Realty’s control. Any of the following could have a material adverse effect on Douglas Elliman Realty’s residential business by causing a general decline in the number of home sales and/or prices, which in turn, could adversely affect its revenues and profitability:

      All of Douglas Elliman Realty’s current operations are located in the New York metropolitan area. Local and regional economic conditions in this market could differ materially from prevailing conditions in other parts of the country. A downturn in the residential real estate market or economic conditions in that region could have a material adverse effect on Douglas Elliman Realty and New Valley’s investment in that company.

      New Valley currently holds a significant amount of marketable securities and cash not committed to any specific investments. This subjects a security holder to increased risk and uncertainty because a security holder will not be able to evaluate how this cash will be invested and the economic merits of particular investments. There may be substantial delay in locating suitable investment opportunities. In

addition, New Valley may lack relevant management experience in the areas in which New Valley may invest. There is a risk that New Valley will fail in targeting, consummating or effectively integrating or managing any of these investments.

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

      We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act. Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

      The closing price of our common stock has ranged between $20.27 and $14.02 per share over the past 52 weeks. We expect that the market price of our common stock will continue to fluctuate.

      The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include the following:

      We cannot predict the extent, if any, to which future sales of shares of common stock or the availability of shares of common stock for future sale may depress the trading price of our common stock.

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

      At December 31, 2004, we had outstanding options granted to employees to purchase approximately 9,292,462 shares of our common stock, at prices ranging from $6.93 to $35.81 per share, of which options for 8,897,497 shares were exercisable at December 31, 2004. We also have outstanding two series of convertible notes maturing in July 2008 and November 2011, which are currently convertible into 12,042,939 shares of our common stock. The issuance of these shares will cause dilution which may adversely affect the market price of our common stock. The availability for sale of significant quantities of our common stock could adversely affect the prevailing market price of the stock.

FORWARD-LOOKING INFORMATION

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

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

      The forward-looking information involves important risks and uncertainties that could cause our actual results, performance or achievements to differ materially from our anticipated results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause actual

results to differ materially from those suggested by the forward-looking statements include, without limitation, the following:

Further information on risks and uncertainties specific to our business include the risk factors discussed above under “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” incorporated by reference into this Prospectus.

      Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. The forward-looking statements speak only as of the date they are made. We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Prospectus to reflect any changes in our expectations or any change in events, conditions or circumstances on which any statement is based.

BACKGROUND AND REASONS FOR THE OFFER AND SUBSEQUENT MERGER

      The following discussion presents background information concerning the offer and the subsequent merger and describes our reasons for undertaking the proposed transaction at the present time. Please see “Additional Factors for Consideration by New Valley Stockholders” beginning on page 36 for further information relating to the proposed transaction.

Vector’s Long-Term Investment in New Valley

      In a series of transactions commencing in 1987, we and various predecessor companies of ours acquired an indirect controlling equity interest in New Valley, which was then named Western Union Corporation. The investments were made in connection with various restructurings of Western Union Corporation’s debt and equity capital. In 1991, bankruptcy proceedings were commenced against New Valley. In January 1995, when New Valley emerged from bankruptcy, we owned approximately 42% of New Valley’s common shares and 43% of New Valley’s Class A preferred stock. As part of the reorganization, New Valley sold the Western Union money transfer and messaging service businesses and all allowed claims in the bankruptcy were paid in full.

      In 1999, New Valley consummated a plan of recapitalization pursuant to which all of its common and preferred shares were converted into common shares and warrants of New Valley, and our ownership of New Valley’s common shares increased from 42.3% to 55.1%. We currently own 57.7% of the outstanding common shares of New Valley.

Key Factors Motivating the Offer

      A number of factors have led to our decision to undertake the offer and subsequent merger at the present time. Some of the key factors are as follows:

      We believe that there would be opportunities to reduce Vector’s and New Valley’s pretax costs by between approximately $1,000,000 and $2,000,000 a year by eliminating unnecessary functions and activities. We anticipate that these significant cost savings could be achieved through the following steps:

      Until 2005, Vector had been utilizing its tax loss carryforward to reduce its taxable income and has now used all of its available tax loss carryforwards. The New Valley consolidated tax group currently has an aggregate of $143,750,000 in tax loss carryforwards, approximately $50,000,000 of which expire in 2006 and 2007. The New Valley consolidated tax group also has approximately $13,900,000 of tax credit carryforwards. Historically, the New Valley consolidated tax group has not been able to fully utilize its tax loss and credit carryforwards because the group has not earned enough taxable income. After the offer and subsequent merger, members of the New Valley consolidated tax group will become members of the Vector consolidated tax group. Despite its recent net operating losses in 2001, 2002, 2003 and 2004, Vector believes it should be able to use the New Valley consolidated tax group’s tax loss and credit carryforwards to offset certain Vector group income that is generated after members of the New Valley consolidated tax group join the Vector consolidated tax group. The New Valley consolidated tax group also has net cumulative differences where the tax basis of its assets exceeds the book basis by approximately $24,500,000, which could produce tax benefits for the Vector consolidated tax group after completion of the offer and subsequent merger. As a Vector stockholder, former New Valley stockholders will receive a proportionate benefit from this potential tax savings, which they would not otherwise receive unless the New Valley consolidated tax group was able to generate taxable income.

      We believe that among the benefits of the proposed transaction with New Valley is the elimination of the potential for conflicts of interest between Vector and New Valley. Consequently, time and resources can be focused on the combined business as opposed to general corporate governance concerns. You should review “Interests of Certain Persons in the Offer and Subsequent Merger” beginning on page 67 for a description of arrangements between Vector and New Valley and between New Valley and directors and executive officers of New Valley.

      If conflicts of interest between New Valley and Vector were to develop, there would be increased risk of claims for breach of fiduciary duty against the officers of Vector who serve as directors of New Valley. An additional benefit of the subsequent merger to Vector would be the elimination of the possibility of claims as to future activities being made against these Vector officers or that they could be found liable for damages for breach of fiduciary duty. By virtue of its obligation to indemnify its officers who serve as directors of New Valley at Vector’s request, Vector would be responsible for defending and indemnifying such officers against any such claims or liabilities.

Financial Impact of the Offer on Vector

      As part of the offer and the subsequent merger, Vector would issue up to approximately 4,339,000 shares of common stock (or, if all New Valley stock options vest and are exercised, up to a maximum of 4,433,355 shares of Vector common stock would be issued). The acquisition of New Valley is expected to be immediately accretive to Vector’s cash earnings. Furthermore, we anticipate the acquisition would increase access to available annual cash flow as a result of utilizing the tax loss carryforwards, which could be reinvested in Vector’s or New Valley’s businesses or used for debt reduction or dividend payments.

No Prior Discussions Relating to Potential Extraordinary Transaction

      From time to time prior to the announcement of our offer on September 27, 2005, the management and directors of Vector considered the desirability of acquiring the common shares of New Valley not owed by Vector. Prior to the announcement of the offer, Vector did not make any proposals to New Valley or its board of directors regarding Vector’s acquisition of the minority interest in New Valley. Vector’s decision to proceed with the offer, and to announce it on September 27, 2005, was made without the participation of New Valley’s board of directors or its management.

Vector Board’s Decision to Commence the Offer

      Our board of directors held a meeting on September 27, 2005 to determine whether to proceed with the offer and subsequent merger, and to determine an exchange ratio for the offer. In evaluating this decision, our board considered many factors. Our board believed that greater value could be achieved for both Vector and New Valley stockholders by combining Vector’s and New Valley’s business operations. In our board’s judgment, the proposed offer and subsequent merger would yield significant efficiencies and, by fully integrating New Valley into Vector, New Valley stockholders would be able to share in a greater scope of opportunities than are available to them solely as New Valley stockholders. As a result of exchanging their common shares of New Valley for shares of Vector common stock, New Valley stockholders would have access to cash dividends, which are not currently paid by New Valley, and greater liquidity for their shares by holding the more widely traded Vector common stock. Accordingly, we believe that both existing Vector stockholders and New Valley stockholders who receive shares of Vector common stock in this transaction would benefit from our successful execution of these strategies, and that we can realize greater long-term shareholder value as a combined company.

      In evaluating its decision whether to pursue the offer and subsequent merger, our board considered many factors that were relevant to its decision, including (i) the potential costs savings and synergies that could be obtained by combining Vector and New Valley, (ii) the current market prices and trading volumes of Vector common stock and New Valley common shares relative to their respective recent trading histories, and (iii) the financial analyses of New Valley prepared by Jefferies & Company, Inc., or Jefferies, the board’s financial advisor, which were presented to the board and which are summarized below under the caption “— Opinion of Jefferies.”

      Jefferies’ financial analyses of New Valley and the effects of a consummated transaction that were presented to the board consisted of (i) a discounted cash flow analysis of New Valley which resulted in an estimated value range per share of New Valley common shares of $8.83 to $9.90 per share, (ii) an accretion and dilution analysis which demonstrated that a consummated transaction would be accretive to Vector’s estimated EPS (after giving effect to the pro forma tax savings) in calendar years 2005 and 2006 by $0.72 and $0.55 per share, respectively, and (iii) a balance sheet asset/liability analysis which resulted in an estimated value per common share of New Valley of $9.47. In connection with the balance sheet asset/liability analysis that Jefferies presented to the board, our board discussed, among other things, the contemplated issuance of 500,000 shares of Vector common stock to Mr. Lorber in connection with his being elected as our Chief Executive Officer effective January 1, 2006, that could be deemed to equate to

an additional cost to us of $0.43 per common share of New Valley and the following items which were open to subjective assumptions and included as assets of New Valley in the Jefferies’ analysis:

      Based on the foregoing considerations, our board determined that the exchange ratio for the proposed exchange offer should reflect a value for each common share of New Valley of $9.00. Accordingly, based on the closing price of Vector’s stock for September 26, 2005, the prior trading day, our board determined that the exchange ratio for the proposed exchange offer should be set at 0.461 shares of Vector common stock for each common share of New Valley.

      Jefferies then delivered to our board its oral opinion as investment bankers, subsequently confirmed in writing, to the effect that, as of such date and based upon and subject to the various considerations and assumptions set forth therein, the exchange ratio of 0.461 shares of Vector common stock to be issued in exchange for each common share of New Valley was fair, from a financial point of view, to Vector. Please see “— Opinion of Jefferies” beginning on page 29 for further information relating to this topic.

      Our board then authorized us to propose the offer and subsequent merger in which New Valley’s public stockholders would be offered 0.461 of a share of Vector common stock in exchange for each validly tendered common share of New Valley owned by stockholders of New Valley other than VGR Holding and its affiliates. Messrs. Howard M. Lorber and Henry C. Beinstein, two of our directors who are also significant New Valley stockholders, did not participate in any discussion of whether to commence the offer or the determination of the proposed exchange ratio for the offer and subsequent merger.

      After the September 27, 2005 board meeting, Bennett S. LeBow, Vector’s Chairman of the Board of Directors and Chief Executive Officer, delivered a letter to the New Valley board outlining the offer. Simultaneously, we issued a press release disclosing to the public the offer and its material terms. The following is the text of Mr. LeBow’s letter to the New Valley board:

      On September 28, 2005, New Valley announced that it was in receipt of Mr. LeBow’s letter. Then, on September 30, 2005, New Valley announced that a special committee of its board of directors, comprised solely of independent directors, would evaluate our exchange offer and retain an independent financial advisor and legal counsel.

      On October 12, 2005, at the request of the special committee of the board of directors of New Valley, we announced that we were postponing the commencement of our offer and that we expected to file offering materials with the SEC on or about October 19, 2005 and to commence our offer shortly thereafter. On October 18, 2005, we declined a request of the special committee to further postpone the commencement of our offer.

      On October 19, 2005, the special committee announced that it engaged The Blackstone Group L.P. as financial advisors and Kirkland & Ellis LLP as legal advisor to assist in its evaluation of our offer.

      We commenced the offer on October 20, 2005.

Opinion of Jefferies

      Vector engaged Jefferies pursuant to an engagement letter dated as of September 27, 2005 to serve as its financial advisor in connection with the offer. On September 27, 2005, Jefferies rendered to Vector’s board its opinion as investment bankers to the effect that, as of that date and based upon and subject to the various considerations and assumptions set forth therein, the exchange ratio to be offered by VGR Holding in the offer was fair, from a financial point of view, to Vector. Vector does not intend to request an updated opinion from Jefferies.

      The full text of the Jefferies opinion delivered to the Vector board, which sets forth the assumptions made, matters considered and limitations on the scope of review undertaken by Jefferies in rendering its opinion, is attached hereto as Annex D. Vector and Vector’s board encourage Vector stockholders to read the Jefferies opinion carefully and in its entirety. The summary of the Jefferies opinion in this Prospectus is qualified in its entirety by reference to the full text of the Jefferies opinion. The Jefferies opinion was provided to Vector’s board in connection with its consideration of the offer, and therefore addresses only the fairness to Vector, from a financial point of view and as of the date of the Jefferies opinion, of the exchange ratio to be offered by VGR Holding in the offer. The Jefferies opinion does not (1) address the fairness of the exchange ratio to the New Valley stockholders or any other aspect of the offer, or (2) constitute a recommendation as to (i) how any Vector stockholder should vote on the issuance of shares of Vector common stock or any other matter relevant to the offer, or (ii) whether any New Valley stockholder should tender their common shares of New Valley in the offer. Jefferies did not establish the exchange ratio, which was determined by Vector’s board.

      In connection with its opinion, Jefferies, among other things,:

      In addition, Jefferies conducted such other quantitative reviews, analyses and inquiries relating to Vector and New Valley as Jefferies considered appropriate in rendering its opinion. Jefferies noted that it did not have the opportunity to review any non-public information of or financial forecasts provided by New Valley other than such information and financial forecasts provided to Jefferies by Vector.

      In its review and analysis and in rendering its opinion, Jefferies assumed and relied upon, but has not assumed any responsibility to independently investigate or verify, the accuracy, completeness and fair presentation of all financial and other information that was provided to Jefferies by Vector or that was publicly available (including, without limitation, the information described in the bullet points above), or that was otherwise reviewed by Jefferies. Jefferies’ opinion was expressly conditioned upon such information, whether written or oral, being complete, accurate and fair in all respects material to its analysis.

      With respect to the financial forecasts provided to and examined by Jefferies, Jefferies noted that projecting future results of any company is inherently subject to uncertainty. Vector informed Jefferies, however, and Jefferies assumed, that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of Vector’s management as to the future performance of Vector and New Valley, respectively. Jefferies expressed no opinion as to Vector’s or New Valley’s financial forecasts or the assumptions on which they were made. In addition, in rendering its opinion Jefferies assumed that each of Vector and New Valley will perform in accordance with such financial forecasts for all periods specified therein. Although such financial forecasts did not form the principal basis for Jefferies’ opinion, but rather constituted one of many items that it employed, changes to such financial forecasts could affect its opinion.

      In its review, Jefferies did not obtain any independent evaluation or appraisal of the assets or liabilities of, nor did it conduct a comprehensive physical inspection of any of the assets of, Vector or New Valley, nor was Jefferies furnished with any such evaluations or appraisals or reports of such physical inspections, nor did Jefferies assume any responsibility to obtain any such evaluations, appraisals or inspections. Jefferies’ opinion was based on economic, monetary, regulatory, market and other conditions existing and which could be evaluated as of the date thereof. Jefferies expressly disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion of which Jefferies became aware after the date of its opinion. Jefferies made no independent investigation of any legal or accounting matters affecting Vector or New Valley, and Jefferies assumed the correctness in all respects material to its analysis of all legal and accounting advice given to Vector and Vector’s board, including, without limitation, advice as to the legal, accounting and tax consequences (including, but not

limited to, the treatment of New Valley’s net operating losses after giving effect to the subsequent merger upon completion of the offer) of the terms of the offer to Vector.

      Jefferies’ opinion was for the use and benefit of Vector’s board in its consideration of the offer, and its opinion did not address the relative merits of the offer and subsequent merger as compared to any alternative transactions that might be available to Vector, nor did it address the underlying business decision by Vector to engage in the offer. Jefferies expressed no opinion as to the price at which Vector’s common stock will trade at any future time.

      In preparing its opinion, Jefferies performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis and the applications of those methods to the particular circumstances and, therefore, is not necessarily susceptible to partial analysis or summary description. Jefferies believes that its analyses must be considered as a whole. Considering any portion of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the conclusion expressed in its opinion.

      In addition, Jefferies may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuation resulting from any particular analysis described below should not be taken to be Jefferies’ view of Vector’s or New Valley’s actual value. Accordingly, the conclusions reached by Jefferies are based on all analyses and factors taken as a whole and also on the application of Jefferies’ own experience and judgment.

      In performing its analyses, Jefferies made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond Vector’s and Jefferies’ control. The analyses performed by Jefferies are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses or assets do not purport to be appraisals or to necessarily reflect the prices at which businesses or assets may actually be sold and are inherently subject to uncertainty. The analyses performed were prepared solely as part of Jefferies’ analysis of the fairness, from a financial point of view, of the exchange ratio and were provided to Vector’s board in connection with the delivery of Jefferies’ opinion.

      The following is a summary of the material financial and comparative analyses performed by Jefferies that was presented to Vector’s board on September 27, 2005 in connection with the delivery of its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand Jefferies’ financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data described below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Jefferies’ financial analyses.

      Transaction Overview. Based upon the closing price per share of Vector’s common stock on September 26, 2005 of $19.54 and an exchange ratio of 0.461 shares of Vector’s common stock to be issued in exchange for each issued and outstanding common share of New Valley that VGR Holding does not already own, Jefferies noted that the implied value of the consideration to be issued in the offer per common share of New Valley was $9.00 per share, which is referred to as the “Implied Share Purchase Price”. Based upon the Implied Share Purchase Price of $9.00 and approximately 22.466 million common shares of New Valley outstanding on a fully diluted basis (excluding approximately 1.07 million unvested, restricted common shares of New Valley owned by Mr. Lorber that were contemplated to be cancelled after delivery of Jefferies’ opinion), Jefferies also noted that the implied aggregate equity value of New Valley was approximately $202.2 million.

      Jefferies compared the Implied Share Purchase Price of $9.00 to the daily closing price for New Valley common shares on September 26, 2005 and over various periods ending on that date and noted the following implied offer premiums:

Implied Offer Premiums

      Historical Trading Analysis. Jefferies reviewed the share price trading history of Vector’s common stock and New Valley’s common shares for the one-year period ending September 26, 2005 on a stand-alone basis. Jefferies also reviewed the closing share price and the respective trading volumes for New Valley’s common shares for the one-year period ending September 26, 2005.

      Premiums Paid Analysis. Using publicly available information, Jefferies analyzed the premiums offered in public merger and acquisition transactions completed since January 2001 in which majority shareholders acquired the remaining minority interest in the company with transaction values between $100 million and $500 million. For these transactions, Jefferies calculated the average premium represented by the offer price over the target company’s share price for the one day, one week and four week periods prior to the transaction’s announcement and compared them to the proposed purchase price premium relative to the closing price of New Valley’s common shares for the one-day, one-week and four-week period prior to September 26, 2005. This analysis indicated the following:

      Balance Sheet Asset/ Liability Analysis. Jefferies performed an analysis of the assets and liabilities set forth on the balance sheet of New Valley, in which it compared the book value of the assets and liabilities on New Valley’s balance sheet as of June 30, 2005 to the estimated value of such assets and

liabilities as of September 26, 2005. The comparison balance sheet analysis included a valuation of the following assets and liabilities:

New Valley Balance Sheet

     For purposes of the balance sheet analysis, Jefferies considered or performed the following analyses with respect to the assets and liabilities of New Valley:

      Based on the foregoing balance sheet analysis, the implied equity value per common share of New Valley was estimated at $9.47 as of September 26, 2005, compared to the Implied Share Purchase Price of $9.00 per common share of New Valley. Jefferies noted, however, that Vector would be directly issuing an additional 500,000 shares of Vector common stock to Mr. Lorber in connection with his election as the Chief Executive Officer of Vector effective January 1, 2006 and Mr. Lorber’s relinquishment and waiver of his approximately 1.07 million unvested, restricted common shares of New Valley. Taking into account the 500,000 shares of Vector common stock contemplated to be issued to Mr. Lorber could be deemed to decrease the implied equity value per common share of New Valley by approximately $0.43 per share.

      Discounted Cash Flow Analysis. Jefferies also performed a discounted cash flow analysis of New Valley by performing a discounted cash flow analysis of New Valley’s interest in Douglas Elliman Realty and Koa Investors, and then adding the market value of New Valley’s non-operating assets and subtracting

New Valley’s non-operating liabilities, in each case, as of September 26, 2005. The purpose of the discounted cash flow analysis was to establish a range for the potential per share equity value of New Valley.

      First, Jefferies performed a discounted cash flow analysis of the after-tax free cash flows of Douglas Elliman Realty using projections provided by Vector’s management for the six months ended December 31, 2005 and the years ending December 31, 2006 through 2010. Jefferies discounted the projected, after-tax free cash flows through December 31, 2010 using discount rates ranging from 9% to 11%, which discount rates were based upon Douglas Elliman Realty’s weighted average cost of capital as measured by Jefferies. Jefferies then added to the present value of the after-tax free cash flows the terminal value of Douglas Elliman Realty at December 31, 2010, discounted back at the same discount rate to represent a present value. The terminal value was computed by multiplying Douglas Elliman Realty’s earnings before interest, taxes and depreciation and amortization (“EBITDA”) by a terminal EBITDA multiple for Douglas Elliman Realty ranging from 3.5x to 4.5x. Jefferies then aggregated (i) the present value of the after-tax free cash flows over the applicable projection period with (ii) the present value of the terminal value. The aggregate present value of these items represented the enterprise value of Douglas Elliman Realty. To determine the implied total equity value of Douglas Elliman Realty, Jefferies subtracted Douglas Elliman Realty’s debt and working capital from the implied enterprise value for Douglas Elliman Realty. This total equity value was multiplied by New Valley’s 50% ownership stake in Douglas Elliman Realty, and the $9.5 million loan payable by Douglas Elliman Realty to New Valley was added to this amount to arrive at the estimated value of New Valley’s ownership stake in Douglas Elliman Realty. Based on the discounted cash flow analysis for Douglas Elliman Realty described above, the analysis implied an equity valuation range of $51.0 million to $68.5 million for New Valley’s 50% interest in Douglas Elliman Realty.

      Next, Jefferies performed a discounted cash flow analysis of the after-tax free cash flows of Koa Investors using projections provided by Vector’s management for the years ending December 31, 2006 through 2010. Jefferies discounted the projected, after-tax free cash flows through December 31, 2010 using discount rates ranging from 7% to 9%, which discount rates were based upon Koa Investors’ weighted average cost of capital as measured by Jefferies. Jefferies then added to the present value of the after-tax free cash flows the terminal value of Koa Investors at December 31, 2010, discounted back at the same discount rate to represent a present value. The terminal value was estimated to be a range of sale valuations for the business ranging from proceeds of $100 million to $110 million. Jefferies aggregated (i) the present value of the after-tax free cash flows over the applicable projection period with (ii) the present value of the terminal value. The aggregate present value of these items represented the enterprise value of Koa Investors. To determine the implied total equity value of Koa Investors, Jefferies subtracted Koa Investors debt from the implied enterprise value for Koa Investors and then multiplied this total equity value by New Valley’s ownership stake in Koa Investors. Based on the discounted cash flow analysis for Koa Investors described above, the analysis implied an equity valuation range of $0.0 million to $6.6 million for New Valley’s interest in Koa Investors.

      Finally, Jefferies aggregated the low, medium and high equity valuation ranges described in the discounted cash flow analyses of Douglas Elliman Realty and Koa Investors set forth above, and added the market value of the non-operating assets of New Valley and subtracted the non-operating liabilities of New Valley, in each case, as of September 26, 2005, to determine a total implied equity value for New Valley. This discounted cash flow analysis implied an equity value range per share of $8.83 to $9.90 for New Valley, compared to the Implied Share Purchase Price of $9.00 per share based on an exchange ratio of 0.461 shares of Vector’s common stock to be issued in exchange for each outstanding common share of New Valley.

      Jefferies also analyzed the potential pro forma financial effect of the offer and the subsequent merger on Vector’s estimated earnings per share, or EPS, for calendar years 2005 and 2006 after giving effect to the potential cost savings that could result from the offer and the subsequent merger. Estimated data for

Vector and New Valley, including estimates of potential cost savings that could result from the offer and the subsequent merger, were based on Vector management’s estimates. Based on the exchange ratio, this analysis suggested that the offer and the subsequent merger could be accretive to Vector’s estimated EPS (after giving effect to the pro forma tax savings) in calendar years 2005 and 2006. The actual results achieved by the combined company may vary from projected results and the variations may be material.

      Jefferies’ opinion was one of many factors taken into consideration by the Vector board in making its determination to approve the exchange ratio and to commence the offer and should not be considered determinative of the views of the Vector board or Vector’s management with respect to the exchange ratio or the offer.

      Jefferies was selected by the Vector board based on Jefferies’ qualifications, expertise and reputation. Jefferies is an internationally recognized investment banking and advisory firm. Jefferies, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements, financial restructurings and other financial services.

      In the ordinary course of business, Jefferies and its affiliates may trade or hold such securities of Vector or New Valley for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions in those securities. Jefferies or its affiliates have also, in the past, provided financial advisory services to Vector and certain stockholders of Vector and may continue to do so, and have received, and may receive, customary fees for such services. In addition, Jefferies or its affiliates currently are and have, in the past, provided financial advisory services to certain stockholders of New Valley and may continue to do so, and will receive, have received, and may receive, customary fees for such services. In connection with Vector’s convertible note offering in November 2004, the purchasers of the notes required Mr. LeBow to enter into an agreement granting Jefferies, as placement agent for such offering, the right, in its sole discretion, to borrow up to 3,646,518 shares of Vector common stock from Mr. LeBow or an entity affiliated with him during a 30-month period, subject to extension under various conditions, and that he agree not to dispose of such shares during this period, subject to limited exceptions. In addition, in connection with Vector’s convertible note offering in April 2005, Jefferies, as initial purchaser in such offering, entered into a similar arrangement through May 2007 with Mr. Lorber with respect to 315,000 shares of Vector common stock.

      Pursuant to an engagement letter between Vector and Jefferies dated as of September 27, 2005, Vector has agreed to pay Jefferies a customary fee for its services in connection with the offer upon delivery of its opinion. Jefferies will also be reimbursed for reasonable expenses incurred, including the fees and disbursements of Jefferies’ counsel. Vector has agreed to indemnify Jefferies against liabilities arising out of or in connection with the services rendered or to be rendered by it under its engagement.

ADDITIONAL FACTORS FOR CONSIDERATION BY

NEW VALLEY STOCKHOLDERS

      In deciding whether or not to tender your common shares of New Valley, you should consider the factors set forth under “Risk Factors” beginning on page 10 and the other factors set forth in this Prospectus. While we believe the offer should be attractive to you as a New Valley stockholder, you should also consider the following matters:

      In addition to the foregoing, we are aware that on or about September 29, 2005, an individual stockholder of New Valley filed a complaint in the Delaware Court of Chancery purporting to commence a class action lawsuit against Vector, New Valley, and each of the individual directors of New Valley. On or about September 29, 2005, a separate action was filed in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. In general, the complaints allege, among other things: (1) breaches of fiduciary duty by Vector, New Valley and the members of New Valley’s board in connection with the offer and the subsequent merger; (2) that the consideration Vector is offering is inadequate; and (3) that Vector is acting to further its own interests at the expense of the holders of New Valley’s common shares. Among other remedies, the complaints seek to enjoin the offer and subsequent merger or, alternatively, damages in an unspecified amount and rescission in the event the subsequent merger occurs. See “Certain Legal Matters and Regulatory Approvals — Stockholder Litigation” beginning on page 63 for a more detailed discussion of these lawsuits.

FINANCIAL FORECASTS

New Valley Forecasts

      It is our understanding that New Valley does not as a matter of course make public any projections as to future performance, earnings or net asset value, and the projections set forth below are included in this Prospectus only because this information was prepared by Vector and provided to Jefferies in connection with its discounted cash flow valuation of New Valley’s Douglas Elliman business and Koa Investors and are based on information received by Vector as a stockholder of New Valley. The prospective financial information was not prepared with a view to public disclosure or compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding the preparation of prospective financial information. The projections do not purport to present operations or financial condition in accordance with accounting principles generally accepted in the U.S. The prospective financial information included in this Prospectus has been prepared by, and is the responsibility of, Vector’s management. PricewaterhouseCoopers LLP has neither examined nor compiled the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this Prospectus relates to Vector’s and New Valley’s historical financial information. It does not extend to the prospective financial information and should not be read to do so. It is Vector’s belief that these projections are subjective in many respects and thus susceptible to interpretations and periodic revision based on actual experience and business developments. The projections also reflect numerous assumptions made by Vector, and, Vector believes, by management of New Valley, with respect to industry performance, general business, economic, market and financial conditions and other matters, all of which are difficult to predict, and many of which are beyond New Valley’s control. Accordingly, there can be no assurance that the assumptions made in preparing the projections will prove accurate. It is expected that there will be differences between actual and projected results, and actual results may be materially greater or less than those contained in the projections. The inclusion of the projections herein should not be regarded as an indication that any of Vector or New

Valley or their respective affiliates or representatives considered or consider the projections to be a reliable prediction of future events, and the projections should not be relied upon as such.

      The projections anticipate results for the years 2006 through 2010 and do not reflect our offer and the subsequent merger. Management believes that Douglas Elliman Realty’s future earnings before interest, income taxes, depreciation and amortization (“EBITDA”) and its projected cash available for distribution, net of tax distributions, in each of those years will not vary significantly from its estimated EBITDA for 2005 of $37.2 million and cash available for distribution, net of tax distributions, of $18.3 million. The projections for Douglas Elliman Realty are based on management’s assumption that Douglas Elliman Realty’s number of brokers will remain stable, any increases in operating expenses will be offset by increases in net commission income and the number of sales transactions and home prices in New York City and Long Island will remain stable. Nonetheless, the real estate market is a volatile industry and the length of the period covered by these projections makes it difficult to predict whether future results will be indicative of past performance. Accordingly, investors are cautioned not to place undue reliance on these projections. For Koa Investors, the projected net operating income for each of those years is $5.7 million, $6.0 million, $6.5 million, $7.5 million and $8.5 million, respectively; and the projected cash available for distribution in each of those years is $3.4 million, $3.6 million, $3.9 million, $4.5 million and $5.1 million, respectively. The projections for Koa Investors are based on the property manager’s estimates of average occupancy rates in the hotel of 64%, 69%, 73%, 76% and 76% from 2006 to 2010, respectively, and increases in average daily room rates of 8%, 8%, 3% and 3% from 2006 to 2010, respectively, with costs increasing at approximately 3% per year. Management then reduced the property manager’s projections to reflect potential shortfalls in the operating budget. Accordingly, investors are cautioned not to place undue reliance on these projections.

      Neither Vector nor any of its affiliates or representatives has made or makes any representation to any person regarding the ultimate performance of New Valley compared to the information contained in the projections, and to Vector’s knowledge, none of them intends to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error.

      For important information regarding the foregoing forward looking statements, please see “Forward-Looking Information” beginning on page 23.

Vector Forecasts

      Vector does not as a matter of course make public any projections as to future performance, earnings or net asset value and the projections set forth below are included in this Prospectus only because this information was prepared by Vector and provided to Jefferies in connection with its accretion/dilution analysis. The prospective financial information was not prepared with a view to public disclosure or compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding the preparation of prospective financial information. The projections do not purport to present operations or financial condition in accordance with accounting principles generally accepted in the U.S. The prospective financial information included in this Prospectus has been prepared by, and is the responsibility of, Vector’s management. PricewaterhouseCoopers LLP has neither examined nor compiled the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this Prospectus relates to Vector’s and New Valley’s historical financial information. It does not extend to the prospective financial information and should not be read to do so. Vector’s internal financial forecasts (upon which the projections provided herein were based) are, in general, prepared solely for internal use and capital budgeting and other management decisions and are subjective in many respects and thus susceptible to interpretations and periodic revision based on actual experience and business developments. The projections also reflect numerous assumptions made by management of Vector with respect to industry performance, general business, economic, market and financial conditions and other matters, all of which are difficult to predict, many of which are beyond Vector’s control, and none of which are subject to approval by Vector.

Accordingly, there can be no assurance that the assumptions made in preparing the projections will prove accurate. It is expected that there will be differences between actual and projected results, and actual results may be materially greater or less than those contained in the projections. The inclusion of the projections herein should not be regarded as an indication that any of Vector or its respective affiliates or representatives considered or consider the projections to be a reliable prediction of future events, and the projections should not be relied upon as such.

      The projections anticipate results for the year 2006 and do not reflect our offer and the subsequent merger. The projected revenues for that year are $581.1 million; the projected operating income for that year is $92.8 million; and the projected net income for that year is $43.1 million. The Vector projections are based on an anticipated increase in unit sales, primarily in the deep discount cigarette segment, with stable pricing, an increase of approximately 3% in selling, general and administrative expenses, and net interest expense of approximately $31.0 million.

      Neither Vector nor any of its affiliates or representatives has made or makes any representation to any person regarding the ultimate performance of Vector compared to the information contained in the projections, and to Vector’s knowledge, none of them intends to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error.

      For important information regarding the foregoing forward looking statements, please see “Forward-Looking Information” beginning on page 23.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

      The following Unaudited Pro Forma Consolidated Statements of Operations for the year ended December 31, 2004 and the six months ended June 30, 2005 and the Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 2005 have been prepared to give effect to the offer and the subsequent merger. The Unaudited Pro Forma Consolidated Statements of Operations assume that the offer and the subsequent merger had been consummated as of the beginning of the periods presented and the Unaudited Pro Forma Consolidated Balance Sheet is presented as if the offer and the subsequent merger had occurred as of June 30, 2005. The unaudited pro forma financial information does not purport to be indicative of the results of operations or the financial position which would have actually been obtained if the offer and the subsequent merger had been consummated as of the beginning of the periods or the date indicated. In addition, the unaudited pro forma financial information does not purport to be indicative of results of operations or financial position which may be obtained in the future.

      The Unaudited Pro Forma Consolidated Statements of Operations do not include the realization of any cost savings from operating efficiencies and synergies that may result from the consummation of the offer and the subsequent merger.

      The unaudited pro forma financial information should be read in conjunction with Vector’s and New Valley’s historical Consolidated Financial Statements and Notes thereto contained in Vector’s and New Valley’s Annual Reports on Form 10-K for the year ended December 31, 2004, as amended, and their respective Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005.

VECTOR GROUP LTD. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

For the Six Months Ended June 30, 2005

VECTOR GROUP LTD. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

For the Year Ended December 31, 2004

VECTOR GROUP LTD. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS

June 30, 2005