SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
---------------- ------------------

Commission File Number 33-75224

LIGGETT GROUP INC.
(Exact name of registrant as specified in its charter)

DELAWARE 56-1702115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

700 WEST MAIN STREET, DURHAM, NORTH CAROLINA 27702
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (919) 683-9000

EVE HOLDINGS INC.
(Exact name of registrant as specified in its charter)

DELAWARE 56-1703877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 SOUTHEAST SECOND STREET, MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:(305) 539-9460

Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
---- ----

As of August 13, 1996 there were outstanding 1,000 shares of common stock, par
value $0.10 per share, of Liggett Group Inc. and 100 shares of common stock,
par value $1.00 per share, of Eve Holdings Inc.

INDEX

PAGE
----

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Liggett Group Inc.:
-------------------

Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . 3
Consolidated Statements of Operations for the three and six months ended June 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the six months ended June 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 7

Eve Holdings Inc.:
------------------

Balance Sheets as of June 30, 1996 and December 31, 1995 . . . . . . . . . . . . 19
Statements of Operations for the three and six months ended June 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Statements of Cash Flows for the six months ended June 30, 1996 and 1995 . . . . 21
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 22

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 30

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

2
3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIGGETT GROUP INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

June 30, December 31,
1996 1995
-------- ------------

ASSETS

Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,652 $ -

Accounts Receivable:
Trade less allowances of $767 and $815, respectively . 20,364 22,279
Other . . . . . . . . . . . . . . . . . . . . . . . . . 837 1,367
Affiliates . . . . . . . . . . . . . . . . . . . . . . 1,300 1,105

Inventories . . . . . . . . . . . . . . . . . . . . . . 48,943 54,342

Deferred income taxes . . . . . . . . . . . . . . . . . . 3,800 3,800

Other current assets (Note 4). . . . . . . . . . . . . . 1,050 1,703
-------- -------

Total current assets . . . . . . . . . . . . 77,946 84,596

Property, plant and equipment, at cost, less accumulated
depreciation of $27,964 and $26,545, respectively . . . . 18,601 18,352

Intangible assets, at cost, less accumulated amortization
of $16,524 and $15,661, respectively . . . . . . . . . . 4,180 5,036

Other assets and deferred charges, at cost, less accumulated
amortization of $6,425 and $5,440, respectively . . . . 4,346 5,330
-------- --------

Total assets . . . . . . . . . . . . . . . . $105,073 $113,314
======== ========

(continued)

3
4

LIGGETT GROUP INC.

CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)

June 30, December 31,
1996 1995
-------- ------------

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Current liabilities:
Current maturities of long-term debt . . . . . . . . . . $ 32,937 $ 50
Cash overdraft . . . . . . . . . . . . . . . . . . . . - 3,761
Accounts payable:
Principally trade. . . . . . . . . . . . . . . . . 13,123 18,921
Affiliates . . . . . . . . . . . . . . . . . . . . 740 -
Accrued expenses:
Promotional . . . . . . . . . . . . . . . . . . . . 25,167 25,519
Compensation and related items . . . . . . . . . . 86 1,175
Taxes, principally excise taxes . . . . . . . . . . 7,904 7,006
Estimated allowance for sales returns . . . . . . . 5,000 5,000
Interest . . . . . . . . . . . . . . . . . . . . . 8,420 8,412
Other . . . . . . . . . . . . . . . . . . . . . . . 6,289 5,728
-------- --------

Total current liabilities . . . . . . . . . . 99,666 75,572

Long-term debt, less current maturities . . . . . . . . . . . 144,708 173,251

Non-current employee benefits and other liabilities . . . . . 18,010 19,197

Commitments and contingencies (Notes 5 and 8)

Stockholder's equity (deficit):
Redeemable preferred stock (par value $1.00 per share;
authorized 1,000 shares; no shares issued and out-
standing)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital . . . . . . . . . . . . . . 53,240 53,240
Accumulated deficit. . . . . . . . . . . . . . . . . . . (210,551) (207,946)
-------- --------

Total stockholder's equity (deficit) . . . . . (157,311) (154,706)
-------- --------

Total liabilities and stockholder's equity
(deficit) . . . . . . . . . . . . . . . . $105,073 $113,314
======== ========

The accompanying notes are an integral part
of these financial statements.

LIGGETT GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)

Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------

Net sales*. . . . . . . . . . . . . . . . . . . . . $113,286 $120,809 $191,774 $214,569

Cost of sales* . . . . . . . . . . . . . . . . . . . 52,533 56,729 88,825 102,083
-------- -------- -------- --------

Gross profit . . . . . . . . . . . . . . . 60,753 64,080 102,949 112,486

Selling, general and administrative expenses. . . . 55,285 57,446 97,403 100,639
Restructuring expense . . . . . . . . . . . . . . . - 1,041 - 1,041
-------- -------- -------- --------

Operating income . . . . . . . . . . . . . 5,468 5,593 5,546 10,806

Other income (expense):
Interest expense. . . . . . . . . . . . . . . . (5,993) (5,951) (11,849) (11,802)
Miscellaneous, net. . . . . . . . . . . . . . 3,710 291 3,698 (42)
-------- -------- -------- --------

Income (loss) before income taxes . . . . 3,185 (67) (2,605) (1,038)

Income tax provision (benefit) . . . . . . . . . . - 60 - (279)
-------- -------- -------- --------

Net income (loss) . . . . . . . . . . . . $ 3,185 $ (127) $ (2,605) $ (759)
======== ========= ======== ========

*Net sales and cost of sales include federal excise taxes of $29,487, $33,203,
$50,684 and $59,595, respectively.

The accompanying notes are an integral part
of these financial statements.

5
6

LIGGETT GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------

Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,605) $ (759)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 4,013 4,033
Gain on sale of property, plant and equipment . . . . . . . . . . . . . . (3,698) (285)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250 13,735
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,399 (225)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,043) 42
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 (11,553)
Non-current employee benefits . . . . . . . . . . . . . . . . . . . . . (371) (97)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (882) (415)
-------- ---------

Net cash provided by (used in) operating activities . . . . . . . . (760) 4,476
-------- ---------

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . 4,415 417
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,484) (528)
Acquisition of business from indirect parent . . . . . . . . . . . . . . . . . - (800)
-------- ---------

Net cash provided by (used in) investing activities . . . . . . . . 1,931 (911)
-------- ---------
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (127) (458)
Net borrowings (repayments) under revolving credit facility . . . . . . . . . 4,369 (2,318)
Decrease in cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . (3,761) (789)
-------- ---------

Net cash provided by (used in) financing activities . . . . . . . . 481 (3,565)
-------- ---------

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . 1,652 -

Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- ---------

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,652 $ -
======== =========
Supplemental cash flow information:
Cash payments (refunds) during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,584 $ 11,334
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ (8)

The accompanying notes are an integral part
of these financial statements.

6
7

LIGGETT GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

1. The Company

Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL"). Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States.

The consolidated financial statements included herein are unaudited
and, in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1995 balance
sheet has been derived from audited financial statements. Certain amounts in
the 1995 financial statements have been reclassified to conform with the 1996
presentation with no effect on previously reported net income (loss) or
stockholder's equity (deficit). These consolidated financial statements should
be read in conjunction with the consolidated financial statements included in
the Company's Annual Report on Form 10-K (Commission File No. 33-75224) as
filed with the Securities and Exchange Commission on April 16, 1996. The
results of operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $157,311 as of June 30, 1996 and is highly leveraged.
Due to the many risks and uncertainties associated with the cigarette industry,
impact of recent tobacco litigation settlements and increased tobacco costs,
there can be no assurance that the Company will be able to meet its future
earnings goals. Consequently, the Company could be in violation of certain debt
covenants and if the lenders were to exercise acceleration rights under the
revolving credit facility or senior secured notes indentures or refuse to lend
under the revolving credit facility, the Company would not be able to satisfy
such demands or its working capital requirements.

2. Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.

3. Per Share Data

All of the Company's common shares (1,000 shares, issued and
outstanding for all periods presented herein) are owned by BGLS. Accordingly,
earnings and dividends per share data are not presented in these consolidated
financial statements.

4. Assets Under Agreements for Sale

7
8

before September 30, 1996, Blue Devil Ventures has the option, if it determines
that its development project is not feasible, to forfeit its deposit of $22
and not close. The net book value of those assets ($322) for which the
agreement was signed have been classified as current assets on the Company's
Consolidated Balance Sheet as of June 30, 1996.

On April 9, 1996, Liggett executed a definitive agreement with the
County of Durham for the sale by Liggett to the County of Durham of certain
surplus realty in Durham, NC, for a sale price of $4,300. The net book value
of those assets ($713) for which the agreement was signed have been classified
as current assets on the Company's Consolidated Balance Sheet as of December
31, 1995. The transaction closed on May 14, 1996, at which time a gain of
approximately $3,600 was recognized.

5. Inventories

Inventories consist of the following:

June 30, December 31,
1996 1995
-------- ------------

Finished goods ...................................... $18,987 $18,240
Work-in-process...................................... 3,320 3,331
Raw materials........................................ 21,218 24,946
Replacement parts and supplies....................... 3,871 3,926
------- -------

Inventories at current cost.......................... 47,396 50,443

LIFO adjustment...................................... 1,547 3,899
------- -------

Inventories at LIFO cost............................. $48,943 $54,342
======= =======

The Company has a leaf inventory management program whereby, among
other things, it is committed to purchase certain quantities of leaf tobacco.
The purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at the
date of the commitment. Liggett had leaf tobacco purchase commitments of
approximately $31,200 at June 30, 1996.

6. Property, Plant and Equipment

Property, plant and equipment consist of the following:

June 30, December 31,
1996 1995
---------- -------------

Land and improvements .............................. $ 455 $ 542
Buildings........................................... 5,848 6,011
Machinery and equipment ............................ 40,262 38,344
------- -------

Property, plant and equipment....................... 46,565 44,897

Less accumulated depreciation....................... (27,964) (26,545)
------- -------

Property, plant and equipment, net.................. $18,601 $18,352
======= =======

8
9
7. Long-Term Debt

Long-term debt consists of the following:

June 30, December 31,
1996 1995
-------- ------------

11.5% Senior Secured Notes due February 1, 1999, net
of unamortized discount of $525 and $627,
respectively . . . . . . . . . . . . . . . . . . $119,587 $119,485
Variable Rate Series C Senior Secured Notes due
February 1, 1999 . . . . . . . . . . . . . . . . 32,279 32,279
Borrowings outstanding under revolving credit
facility . . . . . . . . . . . . . . . . . . . . 25,386 21,017
Other . . . . . . . . . . . . . . . . . . . . . . . . 393 520
-------- --------

177,645 173,301

Current portion . . . . . . . . . . . . . . . . . . . (32,937) (50)
-------- --------

Amount due after one year . . . . . . . . . . . . . $144,708 $173,251
======== ========

Senior Secured Notes

On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes"). Interest on the Series B Notes is payable semiannually
on February 1 and August 1 at an annual rate of 11.5%. The Series B Notes and
Series C Notes referred to below (collectively, the "Notes") require mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Notes due on
February 1, 1999. The Notes are collateralized by substantially all of the
assets of the Company, excluding accounts receivable and inventory. Eve is a
guarantor for the Notes. The Notes may be redeemed, in whole or in part, at a
price equal to 104%, 102% and 100% of the principal amount in the years 1996,
1997 and 1998, respectively, at the option of the Company at any time on or
after February 1, 1996. The Notes contain restrictions on Liggett's ability to
declare or pay cash dividends, incur additional debt, grant liens and enter
into any new agreements with affiliates, among others.

On January 31, 1994, the Company issued $22,500 of Variable Rate
Series C Senior Secured Notes (the "Series C Notes"). The Series C Notes have
the same terms (other than interest rate) and stated maturity as the Series B
Notes. The Series C Notes initially bore a 16.5% interest rate, which was
reset on February 1, 1995 to 19.75%. The Company had received the necessary
consents from the required percentage of holders of its Series B Notes allowing
for an aggregate principal amount up to but not exceeding $32,850 of Series C
Notes to be issued under the Series C Note indenture. In connection with the
consents, holders of Series B Notes received Series C Notes totaling two
percent of their current Series B Notes holdings. The total principal amount
of such Series C Notes issued was $2,842. On November 20, 1994, the Company
issued the remaining $7,508 of Series C Notes in exchange for an equal amount
of Series B Notes and cash of $375. The Series B Notes so exchanged were
credited against the mandatory redemption requirements for February 1, 1995.

BGLS purchased $4,500 of the Series C Notes which were subsequently
sold.

Revolving Credit Facility

On March 8, 1994, Liggett entered into a revolving credit facility
("the Facility") under which it can borrow up to $40,000 (depending on the
amount of eligible inventory and receivables as determined

by the lenders) from a syndicate of commercial lenders. Availability under the
Facility was approximately $15,040 based upon eligible collateral at June 30,
1996. The Facility expires on March 8, 1997 and is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility bear
interest at a rate equal to 1.5% above Philadelphia National Bank's (the
indirect parent of Congress Financial Corporation, the lead lender) prime rate,
which was 8.25% at June 30, 1996. The Facility contains certain financial
covenants similar to those contained in the Indenture, including restrictions
on Liggett's ability to declare or pay cash dividends, incur additional debt,
grant liens and enter into any new agreements with affiliates, among others.
In addition, the Facility imposes requirements with respect to the Company's
adjusted net worth (not to fall below a deficit of $175,000) and working
capital (not to fall below a deficit of $35,000).

8. Commitments and Contingencies

Since 1954, Liggett and other United States cigarette manufacturers
have been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from cancer and
other adverse health effects alleged to have been caused by cigarette smoking
or by exposure to secondary smoke (environmental tobacco smoke, "ETS") from
cigarettes. These cases are reported hereinafter as though having been
commenced against Liggett (without regard to whether such actually were
commenced against BGL in its former name or in its present name or against
Liggett), since all involve the tobacco manufacturing and marketing activities
currently performed by Liggett. New cases continue to be commenced against
Liggett and other cigarette manufacturers. As new cases are commenced, the
costs associated with defending such cases and the risks attendant to the
inherent unpredictability of litigation continue to increase. The Company has
been receiving certain financial and other assistance from others in the
industry in defraying the costs and other burdens incurred in the defense of
smoking and health litigation and related proceedings. The future financial
benefit to the Company is not quantifiable at this time since the arrangements
for assistance can be terminated on limited notice, or under certain
circumstances, certain of which have occurred, without notice, and the amount
of assistance received, if any, would be a function of the level of costs
incurred. Certain joint defense arrangements, and the financial benefits
incident thereto, have ended. No assurances can be made that other
arrangements will continue. Liggett expects that the level of financial and
other assistance which it may receive, if any, will be clarified over the
ensuing months. To date a number of such actions, including several against
Liggett, have been disposed of favorably to the defendants, and no plaintiff
has ultimately prevailed in trial for recovery of damages in any such action.

In the action entitled Cipollone v. Liggett Group Inc., et al., the
United States Supreme Court, on June 24, 1992, issued an opinion regarding
federal preemption of state law damage actions. The Supreme Court in Cipollone
concluded that The Federal Cigarette Labeling and Advertising Act (the "1965
Act") did not preempt any state common law damage claims. Relying on The
Public Health Cigarette Smoking Act of 1969 (the "1969 Act"), however, the
Supreme Court concluded that the 1969 Act preempted certain, but not all,
common law damage claims. Accordingly, the decision bars plaintiffs from
asserting claims that, after the effective date of the 1969 Act, the tobacco
companies either failed to warn adequately of the claimed health risks of
cigarette smoking or sought to neutralize those claimed risks in their
advertising or promotion of cigarettes. It does permit, however, claims for
fraudulent misrepresentation (other than a claim of fraudulently neutralizing
the warning), concealment (other than in advertising and promotion of
cigarettes), conspiracy and breach of express warranty after 1969. The Court
expressed no opinion as to whether any of these claims are viable under state
law but assumed arguendo that they are viable.

In addition, bills have been introduced in Congress on occasion to
eliminate the federal preemption defense. Enactment of any federal legislation
with such an effect could result in a significant increase in claims,
liabilities and litigation costs.

10
11

On September 10, 1993, an action entitled Sackman v. Liggett Group
Inc., United States District Court, Eastern District of New York, was filed
against Liggett alone alleging as injury lung cancer. Fact discovery closed on
August 31, 1995; expert discovery continues. On May 25, 1996, the District
Court granted Liggett summary judgment on plaintiffs' fraud and breach of
warranty claims on statute of limitations grounds, but allowed plaintiffs'
personal injury claims to survive. In the same order, the District Court
vacated the Magistrate's March 19, 1996 order compelling Liggett to produce
certain Council for Tobacco Research ("CTR") documents with respect to which
Liggett had asserted various privilege claims, and allowed the other cigarette
manufacturers and the CTR to intervene in order to assert their interests and
privileges with respect to the same documents. The Court also ordered the
Magistrate to reconsider his March 19, 1996 order and the effect of the
District Court's summary judgment order. Oral argument concerning the
relevancy of the CTR documents in light of the District Court's summary
judgment order was conducted on August 8, 1996. The Magistrate's ruling on
this matter is pending.

On May 11, 1993, in the case entitled Wilks v. The American Tobacco
Company, No. 91-12, 355, Circuit Court of Washington County, State of
Mississippi (a case in which Liggett was not a defendant), the trial court
granted plaintiffs' motion to impose absolute liability on defendants for the
manufacture and sale of cigarettes and struck defendants' affirmative defenses
of assumption of risk and comparative fault/contributory negligence. The trial
court ruled that the only issues to be tried in the case were causation and
damages. No other court has ever imposed absolute liability on a manufacturer
of cigarettes. After trial, the jury returned a verdict for defendants,
finding no liability. The Company is or has been a defendant in other cases in
Mississippi and it cannot be stated that other courts will not apply the Wilks
ruling as to absolute liability.

On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et
al., Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on behalf
of the general public, alleges that defendants have been engaged in unlawful,
unfair and fraudulent business practices by allegedly misrepresenting and
concealing from the public scientific studies pertaining to smoking and health
funded by, and misrepresenting the independence of, the Council for Tobacco
Research and its predecessor. The Complaint seeks equitable relief against the
defendants, including the imposition of a corrective advertising campaign,
restitution of funds, disgorgement of revenues and profits and the imposition of
a constructive trust. The case is presently in the discovery phase.

On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Companies, Inc., et al., Circuit Court of the 11th Judicial District in and for
Dade County, Florida, was filed against Liggett and others. This case was the
first class action commenced against the industry, and has been brought by
plaintiffs on behalf of all flight attendants that have worked or are presently
working for airlines based in the United States and who have never regularly
smoked cigarettes but allege that they have been damaged by involuntary exposure
to ETS. On December 12, 1994, plaintiffs' motion to certify the action as a
class action was granted. Defendants appealed this ruling and on January 3,
1996, the Third District Court of Appeal in Florida ("Third DCA") affirmed the
class certification order. On May 8, 1996, the Third DCA denied defendants'
rehearing request. On June 5, 1996, the Third DCA denied defendants' petition
for a stay of its order upholding class certification, but granted defendants'
motion for a stay of class notice.

On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint was
brought on behalf of plaintiffs and residents of the United States who claim to
be addicted to tobacco products and survivors who claim their decedents were
addicted. The complaint is based upon the claim that defendants manipulated the
nicotine levels in their tobacco products with the intent to addict plaintiffs
and the class members. The complaint also alleges causes of action sounding in
fraud, deceit, negligent misrepresentation, breach of express and implied
warranty, strict liability and violation of consumer protection statutes.
Plaintiffs seek compensatory and punitive damages and equitable relief,
including disgorgement of profits from the sale of cigarettes and creation of a
fund to monitor the health of class members and to pay for medical expenses
allegedly caused by defendants,

11
12

attorneys' fees and costs. On February 17, 1995, the District Court issued an
Order that granted in part plaintiffs' motion for class certification. On May
23, 1996, the Court of Appeals for the Fifth Circuit reversed the District
Court's order certifying the nationwide class action, and instructed the
District Court to dismiss the class complaint.

On May 5, 1994, an action entitled Engle, et al. v. R. J. Reynolds
Tobacco Company, et al., Circuit Court of the 11th Judicial District in and for
Dade County, Florida, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and all persons in the United
States who allegedly have become addicted to cigarette products and allegedly
have suffered personal injury as a result thereof. Plaintiffs seek
compensatory and punitive damages, together with equitable relief including but
not limited to a medical fund for future health care costs, attorney's fees and
costs. On October 31, 1994, plaintiffs' motion to certify the action as a class
action was granted. Defendants appealed this ruling. On January 31, 1996, the
Third DCA affirmed the ruling of the trial court certifying the action as a
class action, but modified the trial court ruling to limit the class to Florida
citizens and residents. On May 8, 1996, the Third DCA denied defendants'
rehearing request. On June 5, 1996, the Third DCA denied defendants' petition
for a stay of its order upholding class certification, but granted defendants'
motion for a stay of class notice.

On May 6, 1996 an action entitled Norton, et al. v. RJR Nabisco
Holdings Corp., et al., Madison County, Indiana Superior Court, was filed
against Liggett and others. The class action complaint was brought on behalf
of plaintiffs and all persons in the State of Indiana who allegedly have become
addicted to cigarette products and allegedly have suffered personal injury as a
result thereof. Plaintiffs seek compensatory and punitive damages, together
with equitable relief including but not limited to a medical fund for future
health care costs, attorney's fees and costs. On June 3, 1996, the defendant
tobacco companies filed a notice of removal in the United States District Court
for the Southern District of Indiana.

On May 29, 1996 an action entitled Richardson, et al. v. Philip Morris
Inc., et al., Circuit Court for Baltimore City, was filed against Liggett and
others. The class action complaint was brought on behalf of plaintiffs and all
persons in the State of Maryland who allegedly have become addicted to cigarette
products and allegedly have suffered personal injury as a result thereof.
Plaintiffs seek compensatory and punitive damages, together with equitable
relief including but not limited to a medical fund for future health care costs,
attorney's fees and costs. On June 27, 1996, the defendant tobacco companies
filed a notice of removal in the United States District Court for the District
of Maryland.

On March 12, 1996, BGL and Liggett entered into an agreement to settle
the Castano class action tobacco litigation. The settlement undertakes to
release BGL and Liggett from all current and future addiction-based claims,
including claims by a nationwide class of smokers in the Castano class action
pending in Louisiana federal court as well as claims by a narrower statewide
class in the Engle class action pending in Florida state court. The settlement
is subject to and conditioned upon the approval of United States District Court
for the Eastern District of Louisiana. The Company is unable to determine at
this time when the Court will review the settlement, and no assurance can be
given that the settlement will be approved by the Court. Certain of the terms
of the settlement are summarized below.

Under the settlement, the Castano class would receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee. Settlement funds received
by the class would be used to pay half the cost of smoking-cessation programs
for eligible class members. While neither consenting to Food and Drug
Administration (the "FDA") jurisdiction nor waiving their objections thereto,
BGL and Liggett also have agreed to phase in compliance with certain of the
proposed interim FDA regulations regarding smoking by children and adolescents,
including a prohibition on the use of cartoon characters in tobacco advertising
and limitations on the use of promotional materials and distribution of sample
packages where minors are present.

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13

BGL and Liggett have the right to terminate the Castano settlement if
the remaining defendants succeed on the merits or in the event of a full and
final denial of class action certification. The terms of the settlement would
still apply if the Castano plaintiffs or their lawyers were to institute a
substantially similar new class action against the tobacco industry. BGL and
Liggett may also terminate the settlement if they conclude that too many class
members have chosen to opt out of the settlement. In the event of any such
termination by BGL and Liggett, the named plaintiffs would be at liberty to
renew the prosecution of such civil action against BGL and Liggett.

On May 11, 1996, the Castano Plaintiffs Legal Committee filed a motion
seeking preliminary approval of the Castano settlement. Non-settling defendants
filed a motion to stay consideration of the Castano settlement pending the
outcome of the appeal of the District Court's trial class certification order.
Non-settling defendants' motion is scheduled to be heard on September 11, 1996.
The motion for preliminary approval of the Castano settlement is scheduled to be
heard on September 25, 1996.

On March 14, 1996, BGL and the Castano Plaintiffs Legal Committee and
the Castano plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending nine months from the date
of Final Approval of the Castano settlement or, if earlier, the completion of a
combination by BGL or Liggett with certain defendants or an affiliate thereof in
Castano, the Castano plaintiffs agree not to enter into any settlement agreement
with any Castano defendant which would reduce the terms of the Castano
settlement agreement. If the Castano plaintiffs enter into any such settlement
during this period, they shall pay BGL $250,000 within thirty days of the more
favorable agreement and offer BGL and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the Castano settlement agreement has not been earlier terminated
by BGL in accordance with its terms, BGL and its affiliates will not enter into
any business transaction with any third party which would cause the termination
of the Castano settlement agreement. If BGL or its affiliates enter into any
such transaction, then the Castano plaintiffs will be entitled to receive
$250,000 within thirty days from the transacting party.

An action entitled Yvonne Rogers v. Liggett Group Inc., et al., Superior
Court, Marion County, Indiana, was filed by the plaintiff on March 27, 1987
against Liggett and others. The plaintiff seeks compensatory and punitive
damages for cancer alleged to have been caused by cigarette smoking. Trial
commenced on January 31, 1995. The trial ended on February 22, 1995 when the
trial court declared a mistrial due to the jury's inability to reach a verdict.
The Court directed a verdict in favor of the defendants as to the issue of
punitive damages during the trial of this action. A second trial commenced on
August 5, 1996.

On May 23, 1994, an action entitled Mike Moore, Attorney General, ex
rel. State of Mississippi v. The American Tobacco Company, et al., Chancery
Court for the County of Jackson, State of Mississippi, was filed against Liggett
and others. The State of Mississippi seeks restitution and indemnity for
medical payments and expenses made or incurred by it on behalf of welfare
patients for tobacco related illnesses. Similar actions (although not
identical) have been filed by the State of Minnesota (together with Minnesota
Blue Cross-Blue Shield), the State of West Virginia, the Commonwealth of
Massachusetts, the State of Louisiana, the State of Texas, the State of
Washington, the State of Maryland, the State of Connecticut and the City and
County of San Francisco. In West Virginia, the trial court, in a ruling issued
on May 3, 1995, dismissed eight of the ten counts of the complaint filed
therein, leaving only two counts of an alleged conspiracy to control the market
and market price of tobacco products and an alleged consumer protection claim.
In a subsequent ruling, the trial court adjudged the contingent fee agreement
entered into by the State of West Virginia and its counsel to be
unconstitutional under the Constitution of the State of West Virginia. In
Mississippi, the Governor has recently commenced an action in the Mississippi
Supreme Court against the Attorney General of the state, making application
for a writ of prohibition to bar further prosecution and to seek dismissal of
the suit brought by the Attorney General of the state for such restitution and
indemnity, alleging that the commencement and prosecution

13
14

of such a civil action by the Attorney General of the state was and is outside
the authority of the Attorney General.

On November 28, 1995, each of the major manufacturers in the industry,
including Liggett, filed suit in both the Commonwealth of Massachusetts and in
the State of Texas seeking declaratory relief to the effect that the
commencement of any such litigation (as had been filed by Mississippi, West
Virginia and Minnesota and now by Massachusetts, Louisiana and Texas) seeking
to recover Medicaid expenses against the manufacturers by either the
Commonwealth of Massachusetts or the State of Texas would be unlawful. On
January 22, 1996, a suit seeking substantially similar declaratory relief was
filed in the State of Maryland.

The State of Florida enacted legislation effective July 1, 1994
allowing certain state authorities or entities to commence litigation seeking
recovery of certain Medicaid payments made on behalf of Medicaid recipients as
a result of diseases (including, but no limited to, diseases allegedly caused
by cigarette smoking) allegedly caused by liable third parties (including, but
not limited to, the tobacco industry). Liggett, after initial litigation,
entered into a settlement of this controversy with the State of Florida, the
terms of which are described below.

The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the States of Mississippi, Minnesota,
West Virginia, Louisiana and Texas. Aside from the Florida and Massachusetts
statutes, legislation authorizing the state to sue a company or individual to
recover the costs incurred by the state to provide health care to persons
allegedly injured by the company or individual also has been introduced in a
number of other states. These bills contain some or all of the following
provisions: eliminating certain affirmative defenses, permitting the use of
statistical evidence to prove causation and damages, adopting market share
liability and allowing class action suits without notification to class
members.

On March 15, 1996, BGL and Liggett entered into a settlement of
tobacco litigation with the Attorneys General of the states of Florida,
Louisiana, Massachusetts, Mississippi and West Virginia. The settlement with
the Attorneys General releases BGL and Liggett from all tobacco-related claims
by these states including claims for Medicaid reimbursement and concerning
sales of cigarettes to minors. The settlement provides that additional states
which commence similar Attorney General actions may agree to be bound by the
settlement prior to six months from the date thereof (subject to extension of
such period by the settling defendants). Certain of the terms of the
settlement are summarized below.

Under the settlement, the states share an initial $5,000 ($1,000 of
which was paid on March 22, 1996, with the balance payable over nine years and
indexed and adjusted for inflation), provided that any unpaid amount will be
due sixty days after either a default by Liggett in its payment obligations
under the settlement or a merger or other similar transaction by BGL or Liggett
with another defendant in the lawsuits. In addition, Liggett will be required
to pay the states a percentage of Liggett's pretax income (income before income
taxes) each year from the second through the twenty-fifth year. This annual
percentage would range from 2-1/2% to 7-1/2% of Liggett's pretax income,
depending on the number of additional states joining the settlement. All of
Liggett's payments are subject to certain reductions provided for in the
agreement. Liggett has also agreed to pay to the states $5,000 if BGL or
Liggett fails to consummate a merger or other similar transaction with another
defendant in the lawsuits within three years of the date of the settlement. At
December 31, 1995, the Company accrued approximately $4,000 for the present
value of the fixed payments under the Attorneys General settlement.

Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. While neither
consenting to FDA jurisdiction nor waiving their objections thereto, BGL and
Liggett also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same basis as provided in the Castano
settlement.

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15

BGL and Liggett have the right to terminate the settlement with
respect to any state participating in the settlement if any of the remaining
defendants in the litigation succeed on the merits in that state's Attorney
General action. BGL and Liggett may also terminate the settlement if they
conclude that too many states have filed Attorney General actions and have not
resolved such cases as to the settling defendants by joining in the settlement.

Currently in addition to the above, approximately 125 product
liability lawsuits, which have been filed in various jurisdictions, are pending
and active in which Liggett is a defendant. Of these, approximately 90 are
pending in the State of Florida. In most of these lawsuits, plaintiffs seek
punitive as well as compensatory damages. Of the pending product liability
lawsuits, the next case scheduled for trial against Liggett is James T. Clark v.
Liggett Group, Inc. This matter is scheduled for trial in October 1996.

As to each of the cases referred to above which is pending against the
Company, the Company believes, and has been so advised by counsel handling the
respective cases, that the Company has a number of valid defenses to the claim
or claims asserted against the Company. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case
could encourage the commencement of additional similar litigation. Recently,
there have been a number of restrictive regulatory actions, adverse political
decisions and other unfavorable developments concerning cigarette smoking and
the tobacco industry, including the commencement of the purported class actions
referred to above. These developments generally receive widespread media
attention. The Company is not able to evaluate the effect of these developing
matters on pending litigation or the possible commencement of additional
litigation.

The Company is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases
pending against the Company. It is possible that the Company's financial
position, results of operations and cash flows could be materially adversely
affected by an ultimate unfavorable outcome in any of such pending litigation.

A grand jury investigation presently is being conducted by the office
of the United States Attorney for the Eastern District of New York regarding
possible violations of criminal law relating to the activities of The Council
for Tobacco Research - USA, Inc. The Company was a sponsor of The Council for
Tobacco Research - USA, Inc. at one time. The Company is unable at this time
to predict the outcome of this investigation.

Liggett has been responding to a civil investigative demand from the
Antitrust Division of the United States Department of Justice which requests
certain information from Liggett. The request appears to focus on United
States tobacco industry activities in connection with product development
efforts regarding, in particular, "fire-safe" or self-extinguishing
cigarettes. It also requests certain general information addressing Liggett's
involvement with and relationship to its competitors. Liggett is unable at this
time to predict the outcome of this investigation.

In March and April 1994, the Health and the Environmental Subcommittee
of the Energy and Commerce Committee of the House of Representatives held
hearings regarding nicotine in cigarettes. On March 25, 1994, Commissioner
David A. Kessler of the FDA gave testimony as to the potential regulation of
nicotine under the Food, Drug and Cosmetic Act, and the potential for
jurisdiction over the regulation of cigarettes to be accorded to the FDA. In
response to Commissioner Kessler's allegations about manipulation of nicotine
by cigarette manufacturers, the chief executive of each of the major cigarette
manufacturers, including Liggett, testified before the subcommittee on April
14, 1994, denying Commissioner Kessler's claims. An FDA advisory panel has
stated that it believes nicotine is addictive. On August 10, 1995, the FDA
filed in the Federal Register a Notice of Proposed Rule-Making (the "Proposed
Rule-Making") which would classify tobacco as a drug, assert jurisdiction by
the FDA over the manufacture and marketing of tobacco products and impose
restrictions on the sale, advertising and

15
16

promotion of tobacco products. The FDA's stated objective and focus for its
initiative is to limit access to cigarettes by minors by measures beyond the
restrictions either mandated by existing federal, state and local laws or
voluntarily implemented by major manufacturers in the industry. Liggett and
the other major manufacturers in the industry responded by filing a civil
action in the United States District Court for the Middle District of North
Carolina challenging the legal authority of the FDA to assert such
jurisdiction. In addition thereto, Liggett and the other four major cigarette
manufacturers, as well as others, have filed comments in opposition to the
Proposed Rule-Making. Management is unable to predict whether such a
classification will be made. Management is also unable to predict the effects
of such a classification, were it to occur, or of such regulations, if
implemented, on Liggett's operations, but such actions could have an
unfavorable impact thereon.

On March 12, 1996, Liggett, together with BGL, entered into an agreement
to settle the Castano class action tobacco litigation, and on March 15, 1996,
Liggett, together with BGL, entered into an agreement with the Attorneys General
of the State of West Virginia, State of Florida, State of Mississippi,
Commonwealth of Massachusetts and the State of Louisiana to settle certain
actions brought against Liggett by such states. In these two settlements,
Liggett and BGL, while neither consenting to FDA jurisdiction nor waiving their
objections thereto, agreed to withdraw their objections and opposition to the
Proposed Rule-Making and to phase in compliance with certain of the proposed
interim FDA regulations. See discussions of the Castano and Attorneys General
settlements above.

The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required each
United States cigarette manufacturer to use at least 75% domestic tobacco in
the aggregate of the cigarettes manufactured by it in the United States,
effective January 1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials between foreign and domestic tobacco
and, under certain circumstances, make purchases of domestic tobacco from the
tobacco stabilization cooperatives organized by the United States government.
OBRA was repealed retroactively (as of December 31, 1994), coincident in time
with the issuance of a Presidential proclamation, effective September 13, 1995,
imposing tariffs on imported tobacco in excess of certain quotas.

The USDA has informed Liggett that it did not satisfy the 75% domestic
tobacco usage requirement for 1994 and therefore is subject to a marketing
assessment of approximately $5,500. At December 31, 1995, the Company accrued
approximately $4,900 representing the present value of its obligation for the
USDA marketing assessment. The charge was included as a component of cost of
sales in 1995. Liggett has agreed to pay this assessment in quarterly
installments with interest over a five year period. Under certain
circumstances, payment can be accelerated. Since the levels of domestic
tobacco inventories on hand at the tobacco stabilization organizations are
below reserve stock levels, the Company was not obligated to make purchases of
domestic tobacco from the tobacco stabilization cooperatives.

On September 13, 1995, the President of the United States, after
negotiations with the affected countries, declared a tariff rate quota ("TRQ")
on certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain levels which vary from
country to country. Oriental tobacco is exempt from the quota as well as all
tobacco originating from Canada, Mexico or Israel. Management believes that
the TRQ levels are sufficiently high to allow Liggett to operate without
material disruption to its business.

On February 20, 1996, the United States Trade Representative issued an
"advance notice of rule making" concerning how tobaccos imported under the TRQ
should be allocated. Currently, tobacco imported under the TRQ is allocated on
a "first-come, first-served" basis, meaning that entry is allowed on an open
basis to those first requesting entry in the quota year. Others in the
cigarette industry have suggested an "end-user licensing" system under which
the right to import tobacco under the quota would be initially assigned on the
basis of domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company. The Company believes it is unlikely
that an end-user licensing system will be adopted, although no assurances can
be given that an end-user licensing system will not be adopted.

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17

In September 1991, the Occupational Safety and Health Administration
("OSHA") issued a Request for Information relating to indoor air quality,
including environmental tobacco smoke ("ETS"), in occupational settings. OSHA
announced in March 1994 that it would commence formal rulemaking during the
year. Hearings were completed during 1995 but it is not anticipated that any
regulation will issue prior to the end of 1996. While the Company cannot
predict the outcome, some form of federal regulation of smoking in workplaces
may result.

In January 1993, the United States Environmental Protection Agency
(the "EPA") released a report on the respiratory effect of ETS which concludes
that ETS is a known human lung carcinogen in adults, and in children causes
increased respiratory tract disease and middle ear disorders and increases the
severity and frequency of asthma. In June 1993, the two largest of the major
domestic cigarette manufacturers, together with other segments of the tobacco
and distribution industries, commenced a lawsuit against the EPA seeking a
determination that the EPA did not have the statutory authority to regulate
ETS, and that given the current body of scientific evidence and the EPA's
failure to follow its own guidelines in making the determination, the EPA's
classification of ETS was arbitrary and capricious. Whatever the outcome of
this litigation, issuance of the report may encourage efforts to limit smoking
in public areas.

The Company has been involved in certain environmental proceedings,
none of which, either individually or in the aggregate, rise to the level of
materiality. The Company's current operations are conducted in accordance with
all environmental laws and regulations. Management is unaware of any material
environmental conditions affecting its existing facilities. Compliance with
federal, state and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
have not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.

On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Group
Inc. was filed in the United States District Court for the Southern District of
New York, Case No. 96-CIV-1921, wherein the plaintiff, who was formerly employed
as Liggett's President and Chief Executive officer, seeks recovery of certain
monies allegedly owing by Liggett to him for long-term incentive compensation.
Liggett's motion to dismiss the complaint is currently pending, and the Court
has stayed discovery until a hearing on Liggett's motion.

There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect Liggett's financial position,
results of operations or cash flows.

9. Related Party Transactions

Since October 1990, Liggett has provided certain administrative and
technical support to Liggett-Ducat Ltd. ("LDL"), a Russian cigarette producer
which is majority owned by an affiliate and of which Rouben Chakalian, a
director of Liggett, serves as a director, in exchange for which LDL provides
assistance to Liggett in its pursuit of selling cigarettes in the Russian
Republic. The expenses associated with Liggett's activities amounted to $2,
$82, $4 and $108 for the three and six months ended June 30, 1996 and 1995,
respectively. (See Note 11.)

Liggett is a party to a Tax-Sharing Agreement, dated June 29, 1990
with BGL and certain other entities, pursuant to which Liggett has paid taxes
to BGL as if it were filing a separate company tax return, except that the
agreement effectively limits the ability of Liggett to carry back losses for
refunds. Liggett is entitled to recoup overpayments in a given year out of
future payments due under the agreement.

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18

Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL, to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments. The expenses associated with Liggett's activities
amounted to $441, $441, $882 and $882 for the three and six months ended June,
1996 and 1995, respectively.

Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS provides corporate services to the Company at
an annual fee paid in monthly installments. Corporate services provided by
BGLS under this agreement include the provision of administrative services
related to Liggett's participation in its parent company's multi-employer
benefit plan, external publication of financial results, preparation of
consolidated financial statements and tax returns and such other administrative
and managerial services as may be reasonably requested by Liggett. The charges
for services rendered under the agreement amounted to $790, $752, $1,580 and
$1,505 for the three and six months ended June 30, 1996 and 1995, respectively.
This fee is in addition to the management fee and overhead reimbursements
described above.

Since April 1994, the Company has leased equipment from BGLS for $50
per month.

Accounts receivable from affiliates relate principally to advances for
expenses paid by Liggett on behalf of its affiliates. The Company received
payment of $1,200 in July 1996.

Accounts payable to affiliates relate principally to payments for
expenses paid by affiliates on behalf of Liggett and overhead reimbursements
due BGL. Liggett expects to pay these in the near term.

The Company acquired Carolina Tobacco Express Company ("CTEC") from
its indirect parent during 1995 for $800. The excess of cost over carrying
amount of net assets acquired has been charged to stockholder's equity
(deficit). The effect of the accounting treatment presents the investment in
CTEC at carryover basis.

10. Restructuring Charges

During the first half of 1995, Liggett, in an effort to reduce costs,
offered voluntary retirement programs to eligible employees, among other
things, and reduced the Company's headcount by approximately 111 positions. In
connection therewith, the Company recorded a $1,662 restructuring charge to
operations ($621 of which was included in cost of sales) for severance
programs, primarily salary continuation and related benefits for terminated
employees.

11. Subsequent Events

On July 5, 1996, Liggett purchased from Brooke (Overseas) Ltd.
("BOL"), an indirect subsidiary of BGL, 140,000 shares (approximately 20%) of
LDL for $2,100. LDL, one of Russia's leading cigarette producers since 1892,
manufactured and marketed 10.4 billion cigarettes in 1995. Liggett also
acquired on that date for $3,400 a ten-year option, exercisable by Liggett in
whole or in part, to purchase from BOL at the same per share price, up to
292,407 additional shares of LDL, thereby entitling Liggett to increase its
interest in LDL to approximately 62%. The option fee would be credited against
the purchase price. In addition, Liggett has the right on or before June 30,
1997 to acquire from BOL for $2,200 another ten-year option on the same terms
to purchase the remaining 27% of the shares of LDL owned by BOL.

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19

EVE HOLDINGS INC.

BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

June 30, December 31,
1996 1995
------------ ------------

ASSETS

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 8

Office equipment . . . . . . . . . . . . . . . . . . . . . . 2 2

Trademarks, at cost, less accumulated amortization of
$16,443 and $15,593, respectively . . . . . . . . . . . 3,970 4,820
------------ -----------

Total assets . . . . . . . . . . . . . . . . $ 3,980 $ 4,830
============ ===========

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Federal income taxes currently payable to parent . . . . . . $ 136 $ 164

Dividends payable . . . . . . . . . . . . . . . . . . . . . 2,863 2,536

Deferred income taxes . . . . . . . . . . . . . . . . . . . 1,389 1,687
------------ -----------

Total liabilities. . . . . . . . . . . . . . . 4,388 4,387
------------ -----------

Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital . . . . . . . . . . . . . . . . . . . . . 46,824 47,653

Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 . . . . . . . . . . . . (44,520) (44,520)

Other . . . . . . . . . . . . . . . . . . . . . . (2,712) (2,690)
------------ -----------

Total stockholder's equity (deficit) . . . . . (408) 443
------------ -----------

Total liabilities and stockholder's equity
(deficit) . . . . . . . . . . . . . . . . $ 3,980 $ 4,830
============ ===========

The accompanying notes are an integral part
of these financial statements.

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EVE HOLDINGS INC.

STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)

Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1996 1995 1996 1995
------- ------ ------ ------

Revenues:
Royalties - parent . . . . . . . . . . . . $2,437 $2,753 $4,150 $4,939
Interest - parent . . . . . . . . . . . . 1,577 1,577 3,153 3,153
------ ------ ------ ------
4,014 4,330 7,303 8,092
Expenses:
Amortization of trademarks . . . . . . . . 425 425 851 851
Miscellaneous, net . . . . . . . . . . . . 35 38 58 58
------ ------ ------ ------

Income before income taxes . . . . . 3,554 3,867 6,394 7,183

Income tax provision . . . . . . . . . . . . . 1,244 1,353 2,238 2,514
------ ------ ------ ------

Net income . . . . . . . . . . . . . $2,310 $2,514 $4,156 $4,669
====== ====== ====== ======

The accompanying notes are an integral part
of these financial statements.

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21

EVE HOLDINGS INC.

STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

Six Months Ended
June 30,
1996 1995
------ ------

Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,156 $4,669
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 851 851
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (298) (298)
Changes in assets and liabilities:
Federal income taxes currently payable . . . . . . . . . . . . . . . . . . (29) 187
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 40
------ ------

Net cash provided by operating activities . . . . . . . . . . . . . . 4,680 5,449
------ ------

Cash flows from financing activities:
Dividends/capital distributions . . . . . . . . . . . . . . . . . . . . . . . . (4,658) (5,222)
Increase in due from parent . . . . . . . . . . . . . . . . . . . . . . . . . . (22) 1,352
------ ------

Net cash used in financing activities . . . . . . . . . . . . . . . . (4,680) (3,870)
------ ------

Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,579

Cash:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2
------ ------

End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $1,581
====== ======
Supplemental cash flow information:
Payments of income taxes through receivable from parent . . . . . . . . . . . . $2,314 $2,625
Dividends/capital distributions declared but not paid . . . . . . . . . . . . . $2,176 -

The accompanying notes are an integral part
of these financial statements.

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EVE HOLDINGS INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

1. The Company

Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett
Group Inc. ("Liggett"). Eve, formed in June 1990, is the proprietor of, and has
all right, title and interest in, certain federal trademark registrations (the
"Trademarks"). Eve has entered into an exclusive licensing agreement with
Liggett (effective until 2010) whereby Eve grants the use of the Trademarks to
Liggett in exchange for royalties, computed based upon Liggett's annual net
sales, excluding excise taxes. The Trademarks are pledged as collateral for
Liggett's borrowings under the notes indentures (see Note 3).

2. Per Share Data

All of Eve's common shares (100 shares authorized, issued and
outstanding for all periods presented herein) are owned by Liggett.
Accordingly, earnings and dividends per share data are not presented in these
financial statements.

3. Guarantee of Liggett Notes

On February 14, 1992, Liggett issued $150,000 of Senior Secured Notes
(the "Series B Notes"). In connection with the issuance of the Series B Notes,
the Trademarks were pledged as collateral. In addition, Eve is a guarantor
for the Series B Notes.

During 1994, Liggett issued $32,850 of Series C Senior Secured Notes
(the "Series C Notes"). Eve is a guarantor for the Series C Notes.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT SELLING PRICES)

INTRODUCTION

Liggett Group Inc. ("Liggett" or the "Company") is the operating
successor to the Liggett & Myers Tobacco Company formed in 1873. Liggett is
the fifth largest manufacturer of cigarettes in the United States in terms of
unit sales.

The following discussion provides an assessment of Liggett's
consolidated results of operations and capital resources and liquidity and
should be read in conjunction with the consolidated financial statements of
Liggett and notes thereto included elsewhere in this Report on Form 10-Q. The
operating results of the periods presented were not significantly affected by
inflation.

Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett.
Eve's sole business is to hold certain federal trademark registrations used by,
and to license them on an exclusive basis to, Liggett and to hold a certain
note receivable from Liggett. Accordingly, Management's Discussion and
Analysis of Financial Condition and Results of Operations of Eve are not
presented herein because they are not material to Liggett's operations.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $157,311 as of June 30, 1996 and is highly leveraged.
Due to the many risks and uncertainties associated with the cigarette industry,
impact of recent tobacco litigation settlements and anticipated increased
tobacco costs, there can be no assurance that the Company will be able to meet
its future earnings goals. Consequently, the Company could be in violation of
certain debt covenants and if the lenders were to exercise acceleration rights
under the revolving credit facility or senior secured notes indentures or
refuse to lend under the revolving credit facility, the Company would not be
able to satisfy such demands or its working capital requirements.

RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY

Pricing Activity

On April 8, 1996, Philip Morris announced a list price increase on all
brands of 40 cents per carton. The other manufacturers, including Liggett,
matched the price increase.

On May 5, 1995, R.J. Reynolds Tobacco Company ("RJR") initiated a list
price increase on all brands of 30 cents per carton. Philip Morris, Inc.
("Philip Morris") and Brown & Williamson Tobacco Corporation ("B&W"), which
together with RJR comprise approximately 90% of the market, matched the price
increase on the same day. Liggett followed on May 9, 1995.

Legislation and Litigation

The cigarette industry continues to be challenged on numerous fronts.
Several federal administrative bodies, including the United States
Environmental Protection Agency and the Food and Drug Administration, have
issued reports or commenced regulatory proceedings which have had or could have
an adverse effect on Liggett and the cigarette industry as a whole. The rate
of filings of individual product liability cases has increased, and the
Company's risk attendant thereto has correspondingly increased. Several
purported class actions have been commenced against Liggett and other companies
in the industry, one of which actions Liggett has settled. A number of states'
Attorneys General have

commenced litigation against the industry asserting numerous different theories
of liability, five of which actions Liggett has settled. The various companies
in the industry are actively engaged in defending against and responding to
these initiatives. The Company is not able to evaluate the effect of these
developing matters, but it is possible that the Company's financial position,
results of operations and cash flows could be materially adversely affected by
an ultimate unfavorable outcome in any of such pending litigation and
regulatory proceedings. For a description of pending litigation and regulatory
proceedings, see Note 8 to the Company's consolidated financial statements.

Under the Castano settlement, the Castano class would receive up to 5%
of Liggett's pretax income (income before income taxes) each year (up to a
maximum of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee.

Under the Attorneys General settlement, the states share an initial
$5,000 ($1,000 of which was paid on March 22, 1996, with the balance payable
over nine years and indexed and adjusted for inflation). In addition, Liggett
will be required to pay the states a percentage of Liggett's pretax income
(income before income taxes) each year from the second through the twenty-fifth
year. This annual percentage would range from 2-1/2% to 7-1/2% of Liggett's
pretax income, depending on the number of additional states joining the
settlement. All of Liggett's payments are subject to certain reductions
provided for in the agreement. Liggett has also agreed to pay to the states
$5,000 if BGL or Liggett fails to consummate a merger or other similar
transaction with another defendant in the lawsuits within three years of the
date of the settlement.

At December 31, 1995, the Company accrued approximately $4,000 for the
present value of the fixed payments under the Attorneys General settlement.
The Company cannot quantify the future costs of the settlements at this time as
the amount Liggett must pay is based, in part, on future operating results.
Possible future payments based on a percentage of pretax income, and other
contingent payments, will be expensed when known.

The Company has been receiving certain financial and other assistance
from others in the industry in defraying the costs and other burdens incurred
in the defense of smoking and health litigation and related proceedings. The
future financial benefit to the Company is not quantifiable at this time since
the arrangements for assistance can be terminated on limited notice, or under
certain circumstances, certain of which have occurred, without notice, and the
amount of assistance received, if any, would be a function of the level of
costs incurred. Certain joint defense arrangements, and the financial benefits
incident thereto, have ended. No assurances can be made that other
arrangements will continue. Liggett expects that the level of financial and
other assistance which it may receive, if any, will be clarified over the
ensuing months.

RESULTS OF OPERATIONS

1995 Restructuring

During the first half of 1995, the Company reduced its headcount by
approximately 111 positions and recorded a $1,662 restructuring charge to
operations ($621 of which was included in cost of sales) for severance
programs, primarily salary continuation and related benefits for terminated
employees. The anticipated savings of the 1995 restructuring ($2,548 for the
year ended December 31,

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25

1995) relate primarily to reduced payroll and benefits expenses in future
periods which Management currently estimates at approximately $6,700 on an
annualized basis, although there can be no assurance such savings can be
realized. All of the restructuring recorded in 1995 was fully funded by June
30, 1996.

Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995

Net sales were $113,286 for the three months ended June 30, 1996
compared to $120,809 for the same period in 1995. This 6.2% decrease in
revenues was due primarily to a 11.6% decline in unit sales volume, partially
offset by the effects of recent list price increases (see "- Recent
Developments in the Cigarette Industry - Pricing Activity"). The decline in
unit sales volume was comprised of declines within the premium segment of 4.4%
and discount segment (which includes generic, control label and branded
discount products) of 13.9%. The decline in premium and discount unit sales
volume was due to certain competitors continuing leveraging rebate programs
tied to their products and increased promotional activity by certain other
manufacturers. Further, the Company experienced a significant increase in
volume at the end of the quarter, in part due to ongoing trade programs based
on quarterly volume targets and in part due to consumer promotional programs
consisting of coupons and variable price reductions.

Gross profit was $60,753 for the three months ended June 30, 1996, a
decrease of $3,327 from $64,080 for the same period in 1995, due primarily to
the decline in unit sales volume discussed above. As a percent of revenues
(excluding federal excise taxes), gross profit decreased to 72.5% for the three
months ended June 30, 1996 compared to 73.1% for the same period in 1995. This
decrease is the result of increased tobacco costs due to reduced worldwide
supply of tobacco and a reduction in the average discount available to Liggett
from leaf tobacco dealers on tobacco purchased under prior years' purchase
commitments, partially offset by recent list price increases.

Operating income decreased to $5,468 for the three months ended June
30, 1996 from $5,593 for the same period in 1995, due primarily to the
decrease in gross profit discussed above. The negative effects on operating
income were partially offset by reduced spending on promotional programs and
reduced administrative expenses resulting from the 1995 restructuring discussed
above.

Net interest expense was $5,993 for the three months ended June 30,
1996 compared to $5,951 for the same period in 1995. This increase was due to
interest accrued on the USDA marketing assessment and Attorneys General
settlement, partially offset by the redemption of $7,000 Series B Notes in
December 1995.

Net income amounted to $3,185 for the three months ended June 30, 1996
compared to a net loss of $127 for the same period in 1995. This increase was
primarily the result of the gain on the sale of surplus realty to the County of
Durham (see "- Capital Resources and Liquidity").

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net sales were $191,774 for the six months ended June 30, 1996
compared to $214,569 for the same period in 1995. This 10.6% decrease in
revenues was due primarily to a 15.4% decline in unit sales volume, partially
offset by effects of recent list price increases. The decline in unit sales
volume was comprised of declines within the premium segment of 9.9% and
discount segment of 17.0%. The decline in premium and discount unit sales
volume was due to aggressive trade programs offered by the Company at the end
of the fourth quarter of 1995 and certain competitors continuing leveraging
rebate programs tied to their products and increased promotional activity by
certain other manufacturers.

Gross profit was $102,949 for the six months ended June 30, 1996, a
decrease of $9,537 from $112,486 for the same period in 1995, due primarily to
the decline in unit sales volume discussed above. As a percent of revenues
(excluding federal excise taxes), gross profit increased to 73.0% for the six
months ended June 30, 1996 compared to 72.6% for the same period in 1995. This
increase is a result of recent list price increases and restructuring charges
incurred in 1995 with no similar charges in 1996, partially offset by the
increased tobacco costs discussed above.

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26

Operating income decreased to $5,546 for the six months ended June 30,
1996 from $10,806 for the same period in 1995, due primarily to the decrease in
gross profit discussed above. The negative effects on operating income were
partially offset by reduced administrative expenses resulting from the 1995
restructuring discussed above and reduced legal expenses due to the financial
assistance Liggett has been receiving from others in the industry in defraying
the costs incurred in the defense of smoking and health litigation (see "-
Capital Resources and Liquidity").

Net interest expense was $11,849 for the six months ended June 30,
1996 compared to $11,802 for the same period in 1995. This increase was due to
interest accrued on the USDA marketing assessment and Attorneys General
settlement, along with the higher reset interest rate on the Series C Notes
which was reset from 16.5% to 19.75% on February 1, 1995, partially offset by
the redemption of $7,000 Series B Notes in December 1995.

Net loss amounted to $2,605 for the six months ended June 30, 1996
compared to $759 for the same period in 1995. This decrease was primarily the
result of the same factors affecting operating income discussed above,
partially offset by the gain of approximately $3,600 on the sale of surplus
realty to the County of Durham.

CAPITAL RESOURCES AND LIQUIDITY

Cash used in operations was $760 for the six months ended June 30,
1996 compared to cash provided by operations of $4,476 for the same period in
1995. This decrease was due primarily to the decline in net sales (see "-
Results of Operations"), along with decreased promotional accruals and
trade payables. The negative effects on cash flows from operations were
partially offset by decreased inventories, savings resulting from the 1995
restructuring discussed above and reduced legal fees.

Management believes that cash flows from operations and the Company's
revolving credit facility ("the Facility") will continue to meet its liquidity
requirements for the twelve months ending June 30, 1997. Management believes
that the positive effects on cash flow from operations resulting from the April
1996 price increase, estimated at approximately $7,100 on an annual basis, and
the estimated savings resulting from the Company's 1995 restructuring,
estimated at approximately $6,700 on an annual basis, will enable the Company
to meet its estimated interest expense of approximately $23,700 annually, the
sinking fund payment of $7,500 on the Notes due February 1, 1997, budgeted
capital expenditures of approximately $2,500 and payments of $1,400 on the USDA
marketing assessment. However, there can be no assurance that such anticipated
increases in cash flow will materialize as there are a number of factors
including increased tobacco costs, litigation expenses and payments based on
future income to which the Company is committed under the Castano and Attorneys
General settlement agreements, the amounts of which are unknown. Further, the
Facility was reclassified to short-term debt because the Facility becomes due
in March of 1997 thereby creating a working capital deficiency of approximately
$22,000 at June 30, 1996. Management anticipates the Facility will be
refinanced on substantially similar terms in March 1997, although there can be
no assurance that this will be accomplished.

26
27

Cash provided by investing activities was $1,931 for the six months
ended June 30, 1996 compared to cash used in investing activities of $911 for
the same period in 1995. On May 14, 1996 Liggett sold certain surplus realty
in Durham, NC to the County of Durham for a sale price of $4,300. A gain of
approximately $3,600 was recognized on this sale. Capital expenditures were
approximately $2,484 for the six months ended June 30, 1996 compared to
expenditures for the acquisition of Carolina Tobacco Express for $800 and
capital expenditures of approximately $528 for the same period in 1995. The
capital expenditures of both periods were principally to maintain production
facilities and for operational efficiencies. Capital expenditures of
approximately $1,100, primarily for equipment modernization, are forecasted for
remainder of the year ending December 31, 1996. These expenditures are
expected to be funded with cash flow from operations and borrowings under the
revolving credit facility.

On April 29, 1996, Liggett executed a definitive agreement with Blue
Devil Ventures, a North Carolina limited liability partnership, for the sale by
Liggett to Blue Devil Ventures of certain surplus realty in Durham, NC, for a
sale price of $2,200. While the agreement provides for the closing to occur
on or before September 30, 1996, Blue Devil Ventures has the option, if it
determines that its development project is not feasible, to forfeit its
deposit of $22 and not close.

On July 5, 1996, Liggett purchased from Brooke (Overseas) Ltd.
("BOL"), an indirect subsidiary of BGL, 140,000 shares (approximately 20%) of
Liggett-Ducat Ltd. ("LDL") for $2,100. LDL, one of Russia's leading cigarette
producers since 1892, manufactured and marketed 10.4 billion cigarettes in
1995. Liggett also acquired on that date for $3,400 a ten-year option,
exercisable by Liggett in whole or in part, to purchase from BOL at the same
per share price, up to 292,407 additional shares of LDL, thereby entitling
Liggett to increase its interest in LDL to approximately 62%. The option fee
would be credited against the purchase price. The transactions are not
expected to impact Liggett's cash flows from operations as the Company used the
proceeds from the May 1996 sale of surplus realty to the County of Durham for
approximately $4,300 and the payment of a receivable from New Valley
Corporation, also an affiliate, of approximately $1,200, to fund the
transactions. In addition, Liggett has the right on or before June 30, 1997 to
acquire from BOL for $2,200 another ten-year option on the same terms to
purchase the remaining 27% of the shares of LDL owned by BOL.

Cash provided by financing activities for the six months ended June
30, 1996 was $481 compared to cash used in financing activities of $3,565 for
the same period in 1995. This increase resulted primarily from increased
borrowings under the revolving credit facility.

On March 8, 1994, Liggett entered into the Facility under which it can
borrow up to $40,000 (depending on the amount of eligible inventory and
receivables as determined by the lenders) from a syndicate of commercial
lenders. Availability under the Facility was approximately $15,040 based upon
eligible collateral at June 30, 1996. The Facility expires on March 8, 1997 and
is collateralized by all inventories and receivables of the Company.
Borrowings under the Facility bear interest at a rate equal to 1.5% above
Philadelphia National Bank's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate, which was 8.25% at June 30, 1996. The
Facility contains certain financial covenants similar to those contained in the
Indenture, including restrictions on Liggett's ability to declare or pay cash
dividends, incur additional debt, grant liens and enter into any new agreements
with affiliates, among others. In addition, the Facility imposes requirements
with respect to the Company's adjusted net worth (not to fall below a deficit
of $175,000) and working capital (not to fall below a deficit of $35,000). At
June 30, 1996, the Company was in compliance with all covenants under the
Facility. Management anticipates the Facility will be refinanced with
substantially similar terms in March 1997 although there can be no assurance
that this will be accomplished.

On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes"). From the proceeds of $148,244, net of an original
issue discount, $144,054 was dividended to BGLS (which reduced stockholder's
equity) and $4,190 was paid as financing fees. Interest on the Series B Notes
is payable semiannually on February 1 and August 1 at an annual rate of 11.5%.
The Series B

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Notes and Series C Notes referred to below (collectively, the "Notes") require
mandatory principal redemptions of $7,500 on February 1 in each of the years
1993 through 1997 and $37,500 on February 1, 1998 with the balance of the Notes
due on February 1, 1999. The Notes are collateralized by substantially all of
the assets of the Company, excluding accounts receivable and inventory. Eve is
a guarantor for the Notes. The Notes may be redeemed, in whole or in part, at
a price equal to 104%, 102% and 100% of the principal amount in the years 1996,
1997 and 1998, respectively, at the option of the Company at any time on or
after February 1, 1996. The Notes contain restrictions on Liggett's ability to
declare or pay cash dividends, incur additional debt, grant liens and enter
into any new agreements with affiliates, among others. At June 30, 1996, the
Company was in compliance with all covenants under the Notes indentures.

On January 31, 1994, the Company issued $22,500 of Variable Rate
Series C Senior Secured Notes (the "Series C Notes"). Liggett received
$15,000 from the issuance in cash and received $7,500 in Series B Notes which
were credited against the mandatory redemption requirements for February 1,
1994. The Series C Notes have the same terms (other than interest rate) and
stated maturity as the Series B Notes. The Series C Notes initially bore a
16.5% interest rate, which was reset on February 1, 1995 to 19.75%. The
Company had received the necessary consents from the required percentage of
holders of its Series B Notes allowing for an aggregate principal amount up to
but not exceeding $32,850 of Series C Notes to be issued under the Series C
Note indenture. In connection with the consents, holders of Series B Notes
received Series C Notes totaling two percent of their current Series B Notes
holdings. The total principal amount of such Series C Notes issued was $2,842.
On November 20, 1994, the Company issued the remaining $7,508 of Series C Notes
in exchange for an equal amount of Series B Notes and cash of $375. The
Series B Notes so exchanged were credited against the mandatory redemption
requirements for February 1, 1995.

In December 1995, $7,000 of Series B Notes were purchased using
revolver availability and credited against the mandatory redemption requirements
for February 1, 1996. The transaction resulted in a net gain of $1,114. The
remaining $500 mandatory redemption requirement for February 1, 1996 was met by
retiring the $500 Series C Notes held in treasury. Management anticipates that
the 1997 mandatory redemption will be funded by cash flows from operations and
borrowings under the Facility. There are no definite plans as yet for funding
the 1998 mandatory redemption requirement.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and in this report
and other filings with the Securities and Exchange Commission and in its
reports to securityholders which reflect management's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties and, in connection
with the "safe-harbor" provisions of the Reform Act, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. The Company continues to be subject to risk factors
endemic to the domestic tobacco industry including, without limitation, health
concerns relating to the use of tobacco products and exposure to environmental
tobacco smoke, legislation, including tax increases, governmental regulation,
privately imposed smoking restrictions, decline in consumption, governmental
and grand jury investigations and litigation. Furthermore, the Company is
subject to intense competition, changes in consumer preferences, the effects of
changing prices for its raw materials and local economic conditions. In
addition, the Company has a high degree of leverage and substantial near term
debt service requirements, as well as a net worth and a working capital
deficiency, recent net losses, and is highly dependent upon the Facility. The
Notes contain restrictions on the Company's ability to incur additional debt,
grant liens, enter into any new agreements with affiliates and declare or pay
cash dividends, among others. Due to such uncertainties and risks, readers are
cautioned not to place undue reliance on such forward-looking statements, which

28
29

speak only as of the date such statements are made. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by or on behalf of the Company.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to information entitled "Commitments and
Contingencies" in Note 8 to the Company's consolidated financial statements
included elsewhere in this Report on Form 10-Q.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a). Exhibits

27.1 Liggett Group Inc.'s Financial Data Schedule (for SEC use
only)

27.2 Eve Holdings Inc.'s Financial Data Schedule (for SEC use only)

(b). Reports on Form 8-K

The Company filed no reports on Form 8-K for the three months ended
June 30, 1996.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized on August 13, 1996.

LIGGETT GROUP INC.

By: /s/ Samuel M. Veasey
------------------------------
Samuel M. Veasey
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)

EVE HOLDINGS INC.

By: /s/ Joselynn D. Van Siclen
------------------------------
Joselynn D. Van Siclen
Director, Vice President and Treasurer
(Principal Financial and Principal
Accounting Officer)