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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - K/A No. 1

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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.)

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

Registrant's telephone number, including area code: (305) 374-7714

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") 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
--- ---

Explanatory Note: The Registrants are required to file all reports required by
Section 13 or 15 (d) of the Exchange Act in connection with Liggett Group Inc.'s
Senior Secured Notes due 1999.

Item 405 of Regulation S-K is inapplicable to the registrants because neither
has a class of equity securities registered pursuant to Section 12 of the
Exchange Act.

Aggregate market value of voting stock held by non-affiliates: (Not applicable;
all voting stock of Liggett Group Inc. is owned by its indirect parent Brooke
Group Ltd. and all voting stock of Eve Holdings Inc. is owned by its direct
parent Liggett Group Inc.)

As of March 31, 1998, 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.

Documents incorporated by reference: NONE

Liggett Group Inc. and Eve Holdings Inc. meet the conditions set forth in
General Instruction (J) (1) (a) and (b) of Form 10-K and are, therefore, filing
this Report on Form 10-K with the reduced disclosure format.

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INDEX

PAGE
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PART I

Item 1. Business ............................................................................... 3
Item 2. Properties ............................................................................. 10
Item 3. Legal Proceedings ...................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders .................................... 11

PART II

Item 5. Market for the Registrants' Common Stock and Related
Stockholder Matters .................................................................. 12
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................ 12
Item 8. Financial Statements and Supplementary Data ............................................ 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................................................. 12

PART III

Item 10. Directors and Executive Officers of the Registrants .................................... 13
Item 11. Executive Compensation ................................................................. 13
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 13
Item 13. Certain Relationships and Related Transactions ......................................... 13

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 14

SIGNATURES

PART I

ITEM 1. BUSINESS

GENERAL

Liggett Group Inc. ("Liggett" or the "Company"), a Delaware
corporation, 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. Liggett is headquartered in Miami,
Florida.

Liggett is an indirect wholly-owned subsidiary of Brooke Group Ltd.
("BGL"). BGL (then called Liggett Group Inc.) was acquired by L Holdings Inc., a
company controlled by Bennett S. LeBow, in October 1986. In June 1990, BGL
reorganized its operations by contributing its existing businesses to separate
subsidiaries. BGL formed Liggett & Myers Tobacco Company ("L&M") as an indirect
wholly-owned subsidiary to conduct its cigarette manufacturing business. In July
1990, L&M was renamed Liggett Group Inc. BGL is controlled by Mr. LeBow, who
owns directly or indirectly approximately 46% of its stock. BGL, a New York
Stock Exchange-listed company, and BGLS Inc. ("BGLS"), a wholly-owned subsidiary
of BGL and the direct parent of Liggett, file reports and other information with
the Securities and Exchange Commission.

Eve Holdings Inc. ("Eve"), a Delaware corporation, is a wholly-owned
subsidiary of Liggett. Eve is located in Miami, Florida. Eve's predecessor,
Chesterfield Assets Inc. ("Chesterfield"), was organized in March 1987. In June
1990, Eve was formed as a subsidiary of Liggett, which was a subsidiary of
Chesterfield. Chesterfield contributed its trademarks to Eve via Liggett. In
February 1992, Chesterfield was merged into 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.

Liggett is engaged in the manufacture and sale of cigarettes, primarily
in the United States. Management believes, based on published industry sources,
that Liggett's domestic shipments of approximately 6.45 billion cigarettes
during 1997 accounted for 1.3% of the total cigarettes shipped in the United
States during such year. This represents a market share decline of 0.5% from
1996 and 0.9% from 1995. Liggett produces both premium cigarettes as well as
discount cigarettes (which include among others, control label, branded discount
and generic cigarettes). Premium cigarettes are generally marketed under
well-recognized brand names at full retail prices to adult smokers with strong
preference for branded products, whereas discount cigarettes are marketed at
lower retail prices to adult smokers who are more cost conscious. Liggett's
cigarettes are produced in approximately 300 combinations of length, style and
packaging.

Liggett produces four premium cigarette brands: L&M, Chesterfield, Lark
and Eve. Liggett's premium cigarettes represented approximately 33%, 31% and 30%
of net sales (excluding federal excise taxes) in 1997, 1996 and 1995,
respectively. Management believes, based on published industry sources, that
Liggett's share of the premium market segment was approximately 0.5% for 1997,
compared to 0.7% and 0.8% for 1996 and 1995, respectively.

In 1980, Liggett was the first major domestic cigarette manufacturer to
successfully introduce discount cigarettes as an alternative to premium
cigarettes. In 1989, Liggett established a new price point within the discount
market segment by introducing Pyramid, a branded discount product which, at that
time, sold for less than most other discount cigarettes. Management believes,
based on published industry sources, that Liggett continues to produce discount
cigarettes with a share of approximately 3.5% of the discount market segment for
1997, compared to 4.9% and 5.5% for 1996 and 1995, respectively. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" for additional information concerning
Liggett's premium and discount product sales.

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At the present time, Liggett has no foreign operations. Liggett does
not own the international rights to its premium cigarette brands, which are
actively marketed by other companies in foreign markets, thereby adversely
affecting Liggett's ability to penetrate such markets. Liggett does, however,
export other cigarette brands primarily to Eastern Europe and the Middle East.
Export sales of approximately 85 million units accounted for approximately 1% of
Liggett's 1997 total unit sales volume. Revenues from export sales were $0.8
million for 1997, compared to $3.3 million and $5.4 million for 1996 and 1995,
respectively. Operating loss attributable to export sales in 1997 amounted to
approximately $0.1 million compared to operating losses of $1.8 million and $2.1
million in 1996 and 1995, respectively.

On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat Ltd. ("Liggett-Ducat") from Brooke (Overseas) Ltd. ("BOL"), an
indirect subsidiary of BGL, for $2.1 million. Liggett-Ducat is engaged in the
manufacture and sale of cigarettes in Russia. Liggett also acquired on that date
for $3.4 million a ten-year option to purchase from BOL at the same per share
price, up to 292,407 additional shares of Liggett-Ducat, thereby entitling
Liggett to increase its interest in Liggett-Ducat to approximately 62%. The
option fee would be credited against the purchase price. In addition, as part of
the same transaction, on March 13, 1997, Liggett acquired from BOL for $2.2
million another ten-year option on the same terms to purchase the remaining
shares of Liggett-Ducat (approximately an additional 33%) owned by BOL. On
December 31, 1997, the carrying value of Liggett-Ducat amounted to $1,208. On
February 2, 1998, in connection with the amendments to the Indenture governing
Liggett's Senior Secured Notes, BOL acquired the Liggett-Ducat shares and
options held by Liggett. See Note 10 to the Company's consolidated financial
statements included elsewhere in this report.

BUSINESS STRATEGY

Liggett's near-term business strategy is to further reduce certain
operating and selling costs in order to increase the profitability of both its
premium and discount products, and to reduce its investment in working capital.
As part of this strategy, the Company reorganized its sales force in early 1994,
reducing its field sales force by 150 permanent positions and adding
approximately 300 part-time positions. Liggett has also reduced costs in both
administrative and manufacturing functions by making additional modifications to
its manufacturing operations and significantly curtailing employee benefit
programs. During 1995 and 1996, Liggett continued its efforts towards reducing
costs by, among other things, offering voluntary retirement programs to eligible
employees and reduced headcount by an additional 120 positions in 1995 and
another 38 positions in 1996.

In January 1997, Liggett underwent a major restructuring from a
centralized organization to a decentralized enterprise with four Strategic
Business Units, each a profit center, and a corporate headquarters. This
restructuring is intended to more closely align sales and marketing strategies
with the unique requirements of regional markets as well as reduce working
capital by improved production planning and inventory control. As a result of
this reorganization, Liggett has reduced its salaried, hourly and part-time
headcount by a total of 108 positions (18%) over the succeeding twelve months.

Liggett's long-term business strategy in the premium segment of the
market is to maintain or improve its profit margins in the face of declining
unit sales and market share by improving operating efficiencies and implementing
further cost reduction programs. Liggett's long-term business strategy in the
discount segment of the market is to maintain or improve its profit margins by
consistently providing high-quality products and services at prices and on terms
comparable to those available elsewhere in the market.

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SALES, MARKETING AND DISTRIBUTION

Liggett's products are distributed from a central distribution center
in Durham, North Carolina to 26 public warehouses located throughout the United
States. These warehouses serve as local distribution centers for Liggett's
customers. Liggett's products are transported from the central distribution
center to the warehouses via third-party trucking companies to meet pre-existing
contractual obligations to its customers.

Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett offers
its customers discount payment terms, traditional rebates and promotional
incentives. Customers typically pay for purchased goods within two weeks
following delivery from Liggett. Liggett's largest single customer, Speedway
SuperAmerica LLC, accounted for approximately 19.4% of net sales in 1997,
approximately 13.9% of net sales in 1996, and approximately 11.6% of net sales
in 1995. Sales to this customer were primarily in the private label discount
segment and constituted approximately 29.1%, 20.3%, 16.8% of Liggett's discount
segment sales in 1997, 1996 and 1995, respectively. Liggett is currently
negotiating the renewal of its contract with this customer, which contract is
due to expire on June 30, 1998.

Following the January 1997 restructuring, Liggett's marketing and sales
functions were performed by approximately 110 direct sales representatives
calling on national and regional customer accounts, together with approximately
90 part-time retail sales consultants who service retail outlets. In addition,
Liggett employs food broker groups in certain geographic locations to perform
these marketing and sales functions.

TRADEMARKS

All of the major trademarks used by Liggett are federally registered or
are in the process of being registered in the United States and other markets
where the Company's products are sold. Trademarks registrations typically have a
duration of ten years and can be renewed at the Company's option prior to their
expiration date. In view of the significance of cigarette brand awareness among
consumers, management believes that the protection afforded by these trademarks
is material to the conduct of its business. All of Liggett's trademarks are
owned by its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve") and Cigarette
Exporting Company of America, Ltd. ("CECOA"). The Company does not own the
international rights to its premium cigarette brands.

MANUFACTURING

Liggett purchases and maintains leaf tobacco inventory to support its
cigarette manufacturing requirements. The Company believes that there is a
sufficient supply of tobacco within the worldwide tobacco market to satisfy its
current production requirements. Liggett stores its leaf tobacco inventory in
warehouses in North Carolina and Virginia. There are several different types of
tobacco, including flue-cured leaf, burley leaf, Maryland leaf, oriental leaf,
cut stems and reconstituted sheet. Leaf components of cigarettes are generally
the flue-cured and burley tobaccos. While premium and discount brands use many
of the same tobacco products, input ratios of tobacco products account for the
differences between premium and discount products. Domestically grown tobacco is
an agricultural commodity subject to United States government production
controls and price supports which can substantially affect its market price.
Foreign flue-cured and burley tobaccos, some of which are used in the
manufacture of Liggett's cigarettes, are generally 10% to 15% less expensive
than comparable domestic tobaccos. Liggett normally purchases all of its tobacco
requirements from domestic and foreign leaf tobacco dealers, much of it under
long-term purchase commitments. As of December 31, 1997, approximately 64% of
Liggett's commitments were for the purchase of foreign tobacco. Increasing
tobacco costs due to reduced worldwide supply of tobacco and a reduction in the
average discount available to Liggett from leaf tobacco

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dealers on tobacco purchased under prior years' purchase commitments will have
an unfavorable impact on Liggett's operations during 1998.

Liggett's cigarette manufacturing facilities are designed for the
execution of short production runs in a cost-effective manner, which enables
Liggett to manufacture and market a wide variety of cigarette brand styles.
Liggett's cigarettes are produced in approximately 300 different brand styles
under Eve's and CECOA's trademarks and brand names as well as private labels for
other companies, typically retail or wholesale distributors who supply
supermarkets and convenience stores. Liggett believes that its existing
facilities are sufficient to accommodate a substantial increase in production.

While Liggett pursues product development, its total expenditures for
research and development on new products have not been financially material over
the past three years.

COMPETITION

Liggett is the smallest of the five major manufacturers of cigarettes
in the United States. The four largest manufacturers of cigarettes are Philip
Morris, Inc. ("Philip Morris"), R.J. Reynolds Tobacco Company ("RJR"), Brown &
Williamson Tobacco Corporation ("B&W"); and Lorillard Tobacco Company, Inc.
("Lorillard").

There are substantial barriers to entry into the cigarette business,
including extensive distribution organizations, large capital outlays for
sophisticated production equipment, substantial inventory investment, costly
promotional spending, regulated advertising and strong brand loyalty. In this
industry, the major cigarette manufacturers compete among themselves for market
share on the basis of brand loyalty, advertising and promotional activities and
trade rebates and incentives. Liggett's four major competitors all have
substantially greater financial resources than Liggett, and most of these
competitors' brands have greater sales and consumer recognition than Liggett's
brands.

Management believes, based on published industry sources, that Philip
Morris' and RJR's sales together accounted for approximately 72.9% of the
domestic cigarette market in 1997. Liggett's domestic shipments of approximately
6.45 billion cigarettes during 1997 accounted for 1.3% of the approximately 483
billion cigarettes shipped in the United States during such year, compared to
8.95 billion cigarettes (1.9%) and 10.52 billion cigarettes (2.2%) during 1996
and 1995, respectively.

Industry-wide shipments of cigarettes in the United States have been
steadily declining for a number of years, although this trend reversed itself in
1996. Consistent with published industry sources estimating that domestic
industry-wide shipments declined by approximately 0.5% in 1997, Liggett's
management believes that industry-wide shipments of cigarettes in the United
States will continue to decline as a result of numerous factors, including
health considerations, diminishing social acceptance of smoking, legislative
limitations on smoking in public places and federal and state excise tax
increases which have augmented cigarette price increases.

Historically, because of their dominant market share, Philip Morris and
RJR have been able to determine cigarette prices for the various pricing tiers
within the industry, and the other cigarette manufacturers have brought their
prices into line with the levels established by the two industry leaders.
Off-list price discounting by manufacturers, however, has substantially affected
the average price differential at retail, which can be significantly greater
than the manufacturers' list price gap.

LEGISLATION, REGULATION AND LITIGATION

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

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

Since 1966, federal law has required that cigarettes manufactured,
packaged or imported for sale or distribution in the United States include
specific health warnings on their packaging. Since 1972, Liggett and the other
cigarette manufacturers have included the federally required warning statements
in print advertising, on billboards and on certain categories of point-of-sale
display materials relating to cigarettes.

The Comprehensive Smoking Education Act ("CSEA"), which became
effective in October, 1985, requires that packages of cigarettes distributed in
the United States and cigarette advertisements (other than billboard
advertisements) in the United States bear one of the following four warning
statements on a quarterly rotating basis: "SURGEON GENERAL'S WARNING: Smoking
Causes Lung Cancer, Heart Disease, Emphysema, and May Complicate Pregnancy";
"SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks
to Your Health"; "SURGEON GENERAL'S WARNING: Smoking by Pregnant Women May
Result in Fetal Injury, Premature Birth, and Low Birth Weight"; and "SURGEON
GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide". Shortened versions
of these statements are also required, on a rotating basis, on billboard
advertisements. By a limited eligibility amendment to the CSEA, for which
Liggett qualifies, Liggett is allowed to display all four required package
warnings for the majority of its brand packages on a simultaneous basis (such
that the packages at any time may carry any one of the four required warnings),
although it rotates the required warnings for advertising on a quarterly basis
in the same manner as do the other major cigarette manufacturers. The law also
requires that each person who manufactures, packages or imports cigarettes
annually provide to the Secretary of Health and Human Services a list of
ingredients added to tobacco in the manufacture of cigarettes. Annual reports to
the United States Congress are also required from the Secretary of Health and
Human Services as to current information on the health consequences of smoking
and from the Federal Trade Commission on the effectiveness of cigarette labeling
and current practices and methods of cigarette advertising and promotion. Both
federal agencies are also required annually to make such recommendations as they
deem appropriate with regard to further legislation. In addition, since 1997,
Liggett has included the warning: "SMOKING IS ADDICTIVE" on its packages.

In August 1996, the Food and Drug Administration ("FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of tobacco
products and imposing restrictions on the sale, advertising and promotion of
tobacco products. Litigation has been commenced in the United States District
Court for the Middle District of North Carolina challenging the legal authority
of the FDA to assert such jurisdiction, as well as challenging the
constitutionality of the rules. The court, after argument, granted plaintiffs'
motion for summary judgment prohibiting the FDA from regulating or restricting
the promotion and advertising of tobacco products and denied plaintiffs' motion
for summary judgment on the issue of whether the FDA has the authority to
regulate access to, and labeling of, tobacco products. The other four major
cigarette manufacturers and the FDA have filed notices of appeal. Liggett and
BGL support the FDA Rule and have begun to phase in compliance with certain of
the proposed interim FDA regulations. See discussions of the tobacco litigation
settlements in Note 12 to the Company's consolidated financial statements
included elsewhere in this report.

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enjoined this legislation from going into effect on the grounds that it is
preempted by federal law, however, on December 15, 1997, Liggett began complying
with this legislation by providing ingredient information to the Massachusetts
Department of Public Health. The enactment of this legislation has encouraged
efforts to enact similar legislation in other states.

In 1993, the United States Congress amended the Agricultural Adjustment
Act of 1938 to require 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
domestic marketing assessment ("DMA") 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. After an audit, the United States Department of
Agriculture ("USDA") informed Liggett that it did not satisfy the 75% domestic
tobacco usage requirement in 1994 and was subject to a DMA of approximately $5.5
million. Liggett agreed to pay this assessment in quarterly installments, with
interest, over a five-year period. Since the levels of domestic tobacco
inventories on hand at the tobacco stabilization organizations are below reserve
stock levels, Liggett was not obligated to make purchases of domestic tobacco
from the tobacco stabilization cooperatives.

In February, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("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
Liggett.

In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban smoking
in the workplace. Hearings were completed during 1995 and the period for
post-hearing submissions ended in February 1996. OSHA has not yet issued a final
rule or a proposed revised rule. While Liggett cannot predict the outcome, some
form of federal regulation of smoking in workplaces may result.

In January 1993, the United States Environmental Protection Agency
("EPA") released a report on the respiratory effect of environmental tobacco
smoke ("ETS") which concluded 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 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.

Liggett understands that a grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District of New York
(the "Eastern District Investigation") regarding possible fraud by the tobacco
industry relating to smoking and health research undertaken or administered by
The Council for Tobacco Research - USA, Inc. (the "CTR"). Liggett was a sponsor
of the CTR at one time. In May 1996, Liggett received a subpoena from a Federal
grand jury sitting in the Eastern District of New York, to which Liggett has
responded.

In March 1996, and in each of March, July, October and December 1997,
Liggett and/or BGL received subpoenas from a Federal grand jury in connection
with an investigation by the United States Department of Justice (the "DOJ
Investigation") involving the industry's knowledge of the health consequences of
smoking cigarettes; the targeting of children by the industry; and the addictive
nature of

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nicotine and the manipulation of nicotine by the industry. Liggett has
responded to the March 1996, March 1997 and July 1997 subpoenas and is in the
process of responding to the October and December 1997 subpoenas. Liggett
understands that the Eastern District Investigation and the DOJ Investigation
have, for all intents and purposes, been consolidated into one investigation
being conducted by the Department of Justice. Liggett and BGL are unable, at
this time, to predict the outcome of this investigation.

There are various other legislative efforts pending on the federal and
state level which seek, among other things, to restrict or prohibit smoking in
public buildings and other areas, increase excise taxes, require additional
warnings on cigarette packaging and advertising, ban vending machine sales,
curtail affirmative defenses of tobacco companies in product liability
litigation, place cigarettes under the regulatory jurisdiction of the FDA and
require that cigarettes meet certain fire safety standards. If adopted, at least
certain of the foregoing legislative proposals could have a material adverse
impact on Liggett's operations. In addition, the industry is facing increased
pressure from anti-smoking groups and an extraordinary increase in smoking and
health litigation, including private class action litigation, and health care
cost recovery actions brought by states, local governments and other third
parties.

While attitudes toward cigarette smoking vary around the world, a
number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. Due to Liggett's lack of foreign
operations, and minimal export sales to foreign countries, the risks of foreign
limitations or restrictions on the sale of cigarettes are limited to entry
barriers into additional foreign markets and the inability to grow the existing
markets.

As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. Since then,
several bills have been introduced in the Senate that purport to propose
legislation along these lines. Management is unable to predict the ultimate
content of any such legislation, however, adoption of any such legislation could
have a material adverse effect on the business of Liggett and BGL.

The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of December 31, 1997, there were approximately 250 individual
suits, 40 purported class actions or actions where class certification has been
sought and 75 state, municipality and other third-party payor health care
reimbursement actions pending in the United States in which Liggett is a named
defendant. The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practice laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. Defenses raised
by defendants in these cases include lack of proximate cause, assumption of the
risk, comparative fault and/or contributory negligence, lack of design defect,
statutes of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.

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undertaking or special duty, fraud, negligent misrepresentation, conspiracy,
public nuisance, claims under state and federal statutes governing consumer
fraud, antitrust, deceptive trade practices and false advertising, and claims
under RICO.

In March 1996, Liggett and BGL entered into an agreement to settle the
Castano class action tobacco litigation and an agreement with the Attorneys
General of West Virginia, Florida, Mississippi, Massachusetts and Louisiana to
settle certain actions brought against Liggett and BGL by such states. In March
1997, Liggett and BGL entered into a comprehensive settlement of tobacco
litigation through parallel agreements with the Attorneys General of 17 states
and with a nationwide class of individuals and entities that allege
smoking-related claims. Thereafter, during 1997, settlements were reached with
four more states through their respective Attorneys General. On March 12, 1998,
Liggett and BGL reached a settlement agreement resolving the tobacco-related
Medicaid reimbursement claims of 14 additional states, the District of Columbia
and U.S. Virgin Islands. On March 28, 1998 a settlement with Georgia's Attorney
General was reached. Liggett and BGL now have settlement agreements with the
Attorneys General of 43 states and territories accounting for more than 85% of
the nation's potential Medicaid claims. The settlements cover all
smoking-related claims, including both addiction-based and tobacco injury claims
against Liggett and BGL brought by the states and, upon court approval, the
nationwide class.

Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett'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.

Management believes that Liggett is in compliance in all material
respects with the laws regulating cigarette manufacturers.

See "Legal Proceedings", "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments in the
Cigarette Industry Legislation and Litigation" and Note 12 to the Company's
consolidated financial statements for a description of legislation, regulation
and litigation and of Liggett's and BGL's settlements.

EMPLOYEES

Liggett had 476 full-time employees at December 31, 1997 with 243
hourly employees represented by three unions and 233 non-union salaried
employees. The majority (199) of the union employees are represented by the
Bakery, Confectionery and Tobacco Workers International Union whose three-year
contract was extended through December 31, 1998. Liggett has not experienced any
work stoppages since 1977 and considers its relationship with its employees and
their unions to be good.

ITEM 2. PROPERTIES

Liggett's principal executive office is located in Miami, Florida and
its manufacturing plant is located in Durham, North Carolina. Eve's principal
executive office is located in Miami, Florida. As of December 31, 1997, the
principal properties owned or leased by Liggett were as follows:

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11

APPROXIMATE
OWNED OR TOTAL
TYPE LOCATION LEASED SQUARE FOOTAGE
---- -------- ------ --------------

Office and Manufacturing Complex Durham, NC Owned 932,000
Warehouse Durham, NC Owned 203,000
Storage Facilities Danville, VA Owned 578,000
Distribution Center Durham, NC Leased 260,000

Liggett's Durham, North Carolina complex consists of 10 major
structures over approximately 17 acres. Included are Liggett's manufacturing
plant, research facility and corporate offices. Liggett's management believes
its property, plant and equipment are well maintained and in good condition and
that its existing facilities are sufficient to accommodate a substantial
increase in production.

Liggett leases the Durham, North Carolina distribution center pursuant
to a lease which expires in May 1999. Liggett has an option to purchase the
leased property at any time during the term of the lease. Liggett utilizes
approximately 40% of the distribution center. Liggett leases excess space in its
research facility to third parties.

On March 11, 1997, Liggett sold to Blue Devil Ventures, a North
Carolina limited liability partnership, certain surplus realty in Durham, North
Carolina, for a sale price of $2.2 million. A gain of approximately $1.1 million
was recognized on the sale.

ITEM 3. LEGAL PROCEEDINGS

Reference is made to Note 12, incorporated herein by reference, to the
Company's consolidated financial statements, which contain a general description
of certain legal proceedings to which Liggett and/or BGLS or their subsidiaries
are a party and certain related matters. Reference is also made to Exhibit 99.1,
Material Legal Proceedings incorporated herein by reference, for additional
information regarding the pending material legal proceedings to which Liggett
and/or BGL are party. A copy of Exhibit 99.1 will be provided to security
holders of Liggett without charge upon written request to BGL at its principal
executive offices, 100 S.E. Second Street, Miami, Florida 33131, Attn. Investor
Relations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted due to the fact that registrants meet the conditions set forth
in General Instruction (J) (1) (a) and (b) of Form 10-K and are, therefore,
filing this Report on Form 10-K with the reduced disclosure format.

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12

PART II

ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS

All common stock of Liggett is held indirectly by BGL and all common
stock of Eve is held directly by Liggett.

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This information is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 17 of this Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This information is contained in the Financial Statements, Notes to
Financial Statements and Reports of Independent Accountants for both Liggett and
Eve beginning on page 27 of this Report on Form 10-K.

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

None.

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13

PART III

ITEMS 10, 11, 12 AND 13

13
14

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)
1. The financial statements listed in the accompanying Index to
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Financial Statements and Financial Statement
Schedules on page 15 are filed as part of this Report on Form 10-K.

2. The financial statement schedules listed in the accompanying Index to
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Financial Statements and Financial Statement
Schedules on page 15 are filed as part of this Report on Form 10-K.

3. The exhibits listed in the accompanying Index to Exhibits beginning on
page 65 are filed as part of this Report on Form 10-K.

(b) Reports on Form 8-K

No reports were filed on Form 8-K during the fourth quarter of the
year ended December 31, 1997.

See Index to Exhibits beginning on page 65.

(d) Financial Statement Schedules

The financial statement schedules listed in the accompanying Index to
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Financial Statements and Financial Statement
Schedules on page 15 are filed as part of this Report on Form 10-K.

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15

INDEX TO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

Page
----

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................................................... 17

FINANCIAL STATEMENTS - LIGGETT GROUP INC.:
Report of Independent Accountants ................................................................. 27
Consolidated Balance Sheets as of December 31, 1997 and 1996 ...................................... 28
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995 ........................................................................... 30
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995 ........................................................ 31
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 ........................................................................... 32
Notes to Consolidated Financial Statements ........................................................ 33

FINANCIAL STATEMENTS - EVE HOLDINGS INC.:
Report of Independent Accountants ................................................................. 56
Balance Sheets as of December 31, 1997 and 1996 ................................................... 57
Statements of Operations for the years ended December 31, 1997,
1996 and 1995 ................................................................................. 58
Statements of Stockholder's Equity (Deficit) for the years ended
December 31, 1997, 1996 and 1995 .............................................................. 59
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 .................................................................................. 60
Notes to Financial Statements ..................................................................... 61

FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts.................................................... 64

Schedules other than those listed above have been omitted
because the required information is contained in the notes
to financial statements or because such schedules are not
required or are not applicable.

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16

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 June 3, 1998.

LIGGETT GROUP INC.

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

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17

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 Company's consolidated financial
statements and notes thereto included elsewhere in this report. 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 $192,857 and a working capital deficiency of $17,542 as of
December 31, 1997, is highly leveraged and has substantial near-term debt
service requirements. Due to the many risks and uncertainties associated with
the cigarette industry and the impact of tobacco litigation, there can be no
assurance that the Company will be able to meet its future earnings or cash flow
goals. Consequently, the Company could be in violation of its debt covenants,
including covenants limiting the maximum permitted net worth and working capital
deficiencies, and if its lenders were to exercise acceleration rights under its
revolving credit facility (the "Facility") or the indenture for its Senior
Secured Notes (the "Liggett Notes") or refuse to lend under the Facility, the
Company would not be able to satisfy such demands or its working capital
requirements.

On January 30, 1998, the Company obtained the consents of the required
majority of the holders of the Liggett Notes to various amendments to the
Indenture governing the Liggett Notes. The amendments provide, among other
things, for a deferral of the February 1, 1998 mandatory redemption of $37,500
principal amount of the Liggett Notes to the date of final maturity, February 1,
1999. (Refer to Note 10.) At maturity, the Liggett Notes will require a
principal payment of $144,891. Based on Liggett's results of operations for
1997, the Company does not anticipate it will be able to generate sufficient
cash from operations to make such payments. In addition, the Company has the
$40,000 Facility expiring March 8, 1999 under which $23,427 was outstanding at
December 31, 1997. If the Company is unable to refinance or restructure the
terms of the Liggett Notes or otherwise make all payments thereon, substantially
all of the Company's long-term debt and the Facility would be in default and
holders of such debt could accelerate the maturity of such debt. In such event,
Liggett may be forced to seek protection from creditors under applicable laws.
These matters raise substantial doubt about the Company meeting its liquidity
needs and its ability to continue as a going concern.

RECENT DEVELOPMENTS

YEAR 2000 COSTS. The Company has evaluated the costs to implement
century date change complaint systems conversions and is in the process of
executing a planned conversion of its systems prior to the year 2000. Although
such costs may be a factor in describing changes in operating profit in any
given reporting period, the Company currently does not believe that the
anticipated costs of year 2000

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18

systems conversions will have a material impact on its future consolidated
results of operations. However, due to the interdependent nature of computer
systems, the Company may be adversely impacted in the year 2000 depending on
whether it or entities not affiliated with the Company have addressed this issue
successfully.

NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and display of comprehensive income. The purpose of
reporting comprehensive income is to present a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. SFAS No. 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company has not yet determined the impact of the
implementation of SFAS No. 130.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS No. 131 provides for a two-tier
test for determining those operating segments that would need to be disclosed
for external reporting purposes. In addition to providing the required
disclosures for reportable segments, SFAS No. 131 also requires disclosure of
certain "second level" information by geographic area and for products/services.
SFAS No. 131 also makes a number of changes to existing disclosure requirements.
Management believes that the adoption of this pronouncement will not have a
material effect on the Company's financial statement disclosures. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, with earlier
application encouraged.

In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" was issued which revises required disclosures
about pensions and postretirement benefit plans. SFAS No. 132 is effective for
the Company for the year ended 1998. The Company has not yet determined the
impact of its implementation.

RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY

PRICING ACTIVITY. On March 7, 1997, R. J. Reynolds Tobacco Company
("RJR") initiated a list price increase on all brands of $.40 per carton
(approximately 4%). Brown & Williamson Tobacco Corporation ("B&W"), Lorillard
Tobacco Company ("Lorillard") and Liggett matched this increase, and, on March
21, 1997, Philip Morris Incorporated ("Philip Morris") announced a price
increase of $.50 per carton. Subsequently, Liggett and the other manufacturers
matched Philip Morris' price increase. On August 29, 1997, Philip Morris
announced a second price increase of $.70 per carton. During the first week of
September, the other manufacturers, including Liggett, matched this increase.

On January 23, 1998, Philip Morris and RJR announced a list price
increase of $.25 per carton (approximately 2.5%). This action was matched by
Liggett and the other manufacturers during the following week. On April 3, 1998,
Philip Morris announced a second list price increase of $.50 per carton
(approximately 4.0%). This action, the fourth in 13 months, was matched by
Liggett and the other manufacturers.

LEGISLATION, REGULATION AND LITIGATION. The cigarette industry
continues to be challenged on numerous fronts. New cases continue to be
commenced against Liggett and BGL and other cigarette manufacturers. As of
December 31, 1997, there were approximately 250 individual suits, 40 purported
class actions and 75 state, municipality and other third-party payor health care
reimbursement actions pending in the United States in which Liggett is a named
defendant. As new cases are commenced, the costs

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19

associated with defending such cases and the risks attendant to the inherent
unpredictability of litigation continue to increase. Recently, there have been a
number of restrictive regulatory actions from various Federal administrative
bodies, including the United States Environmental Protection Agency ("EPA") and
the Food and Drug Administration ("FDA"), 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 Medicaid reimbursement suits by various states' Attorneys
General. These developments generally receive widespread media attention.
Liggett is not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation, but it
is possible that Liggett'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. See Item 3. "Legal Proceedings" and Note 12
to Liggett's consolidated financial statements for a description of legislation,
regulation and litigation.

The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, RICO and antitrust statutes. In
many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including disgorgement of profits and punitive damages.
Defenses raised by defendants in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence, lack
of design defect, statutes of limitations or repose, equitable defenses such as
"unclean hands" and lack of benefit, failure to state a claim and federal
preemption.

The claims asserted in the health care cost recovery actions vary. In
most of these cases, plaintiffs assert the equitable claim that the tobacco
industry was "unjustly enriched" by plaintiffs' payment of health care costs
allegedly attributable to smoking and seek reimbursement of those costs. Other
claims made by some but not all plaintiffs include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of express
and implied warranty, violation of a voluntary undertaking or special duty,
fraud, negligent misrepresentation, conspiracy, public nuisance, claims under
state and federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under the RICO.

SETTLEMENTS. In March 1996, Liggett and BGL entered into an agreement
to settle the Castano class action tobacco litigation and an agreement with the
Attorneys General of West Virginia, Florida, Mississippi, Massachusetts and
Louisiana to settle certain actions brought against Liggett and BGL by such
states (the "March 1996 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 FDA regulations and to phase in
compliance with certain of the proposed interim FDA regulations.

Under the Castano settlement agreement, upon final court approval of
the settlement, the Castano class would be entitled to 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, and a $5,000 payment from Liggett if
Liggett or BGL fail to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of the
settlement. Liggett and BGL have the right to terminate the Castano settlement
under certain circumstances. On May 11, 1996, the Castano Plaintiffs Legal
Committee filed a motion with the United States District Court for the Eastern
District of Louisiana seeking preliminary approval of the Castano settlement. On
May 23, 1996, the Court of Appeals for the Fifth Circuit reversed the February
17, 1995 order of the District Court certifying the Castano suit as a nationwide
class action and instructed the District Court to dismiss the class complaint.
For additional information concerning

19
20

the Fifth Circuit's decision, see Note 12 to the Company's consolidated
financial statements. On September 6, 1996, the Castano plaintiffs withdrew the
motion for approval of the Castano settlement.

On March 14, 1996, Liggett, 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 (if granted) of the Castano settlement or, if earlier, the
completion by Liggett or BGL of a combination with any defendant in Castano,
except Philip Morris, the Castano plaintiffs and their counsel agree not to
enter into any more favorable settlement agreement with any Castano defendant
which would reduce the terms of the Castano settlement agreement. If the Castano
plaintiffs or their counsel enter into any such settlement during this period,
they shall pay Liggett $250,000 within thirty days of the more favorable
agreement and offer Liggett and BGL 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 Liggett in
accordance with its terms, Liggett 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 Liggett 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.

Under the Attorneys General settlement, the five states would share an
initial payment by Liggett of $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 60 days after either a
default by Liggett in its payment obligations under the settlement or a merger
or other similar transaction by Liggett or BGL 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 is 2.5% of
Liggett's pretax income, subject to increase to 7.5% depending on the number of
additional states joining the settlement. No additional states have joined this
settlement to date. 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 Liggett or BGL fails to consummate a merger or other similar
transaction with another defendant in the lawsuits within three years of the
date of the settlement.

In March 1997, Liggett and BGL entered into a comprehensive settlement
of tobacco litigation through parallel agreements with the Attorneys General of
17 states and with a nationwide class of individuals and entities that allege
smoking-related claims. Thereafter, during 1997, settlements were reached with
four more states through their respective Attorneys General (collectively, the
"March 1997 Settlements"). The settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against Liggett and BGL
brought by the states and, upon court approval, the nationwide class. On March
12, 1998, Liggett and BGL entered into additional settlements with the Attorneys
General of 14 states, the District of Columbia and the U. S. Virgin Islands (the
"March 1998 Settlements") and, on March 26, 1998, Liggett and BGL settled with
the Attorney General of Georgia.

In the Fletcher action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a later
court hearing. Effectiveness of the mandatory settlement is conditioned on final
court approval of the settlement after a fairness hearing. There can be no
assurance

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21

as to whether or when court approval will be obtained. For additional
information concerning the Fletcher action, see Note 12 to the Company's
consolidated financial statements.

Under the March 1998 Settlements, Liggett is required to pay each of
the 14 settling states and territories their relative share (based on the
Medicaid population of each state over the total Medicaid population of the
United States) of between 27.5% and 30% of Liggett's pre-tax income each year
for 25 years, with a minimum payment guarantee of $1,000 per state over the
first 9 years of the agreement. The annual percentage is subject to increase pro
rata from 27.5% up to 30% depending on the number of additional states joining
the settlement. In accordance with the "most favored nation" provisions under
the March 1996 Settlements and the March 1997 Settlements, each of the states
settling under those settlements could benefit from the economic terms of the
March 1998 Settlements.

At December 31, 1995, the Company had accrued approximately $4,000 for
the present value of the fixed payments under the initial Attorneys General
settlement. At December 31, 1997, in connection with the March 1998 Settlements,
the Company accrued $16,421 for the present value of the fixed payments under
the March 1998 Settlements. No additional amounts have been accrued with respect
to the settlements discussed above. 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 based on the
occurrence of a business combination, will be expensed when considered probable.
See the discussions of the tobacco litigation settlements appearing in Note 12
to the Company's consolidated financial statements.

OTHER MATTERS. On June 20, 1997, Philip Morris, RJR, B&W, Lorillard and
the United States Tobacco Company, along with the Attorneys General for the
States of Arizona, Connecticut, Florida, Mississippi, New York and Washington
and the Castano Plaintiffs' Litigation Committee executed a Memorandum of
Understanding (the "Resolution") to support the adoption of federal legislation
and necessary ancillary undertakings, incorporating the features described in a
proposed resolution. The proposed Resolution mandates a total reformation and
restructuring of how tobacco products are manufactured, marketed and distributed
in the United States. For additional information concerning the proposed
Resolution, see Note 12 of the Company's consolidated financial statements. The
proposals are currently being reviewed by the White House, Congress and various
public interest groups. Separately, the other tobacco companies negotiated
settlements of the Attorneys General health care cost recovery actions in
Mississippi, Florida and Texas. Management is unable to predict the ultimate
effect, if any, of the enactment of legislation adopting the proposed
Resolution. Management is also unable to predict the ultimate content of any
such legislation. However, adoption of any such legislation could have a
material adverse effect on the business of Liggett.

As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. Since then,
several bills have been introduced in the Senate that purport to propose
legislation along these lines. Management is unable to predict the ultimate
content of any such legislation; however, adoption of any such legislation could
have a material adverse effect on the business of Liggett and BGL.

RESULTS OF OPERATIONS

1997 Compared to 1996

REVENUES. Net sales of Liggett decreased in total by 22.1% ($88,794)
due primarily to a 30.9% decline in unit sales volume of $124,029, partially
offset by price increases of $23,237 and improved product mix of $11,998 (see
"Recent Developments in the Cigarette Industry - Pricing

21
22

Activity"). The decline in Liggett's sales volume was due to certain
competitors' continuing leveraged rebate programs tied to their products and
increased promotional activity by certain other manufacturers. In the premium
segment, revenues declined in 1997 by 16.4% ($20,158) to $102,440 as a result of
a 21.4% decline in unit sales volume of $26,184 which was partially offset by
price increases of $6,026. In the discount segment, revenues declined in 1997 by
24.6% ($68,636) to $209,828 due to a 33.8% decline in unit sales volume of
$85,846 which was partially offset by price increases of $17,210. In 1997, fixed
manufacturing costs on a basis comparable to 1996 were $1,428 lower although
costs per thousand units increased $0.56 per thousand due to higher fixed costs
per unit.

GROSS PROFIT. Gross profit of $172,958 for the year ended December 31,
1997 decreased $40,305 from gross profit of $213,263 for the same period in
1996. The 1997 decline in gross profit was due primarily to the decline in unit
sales volume discussed above. In 1997, Liggett's premium and discount brands
contributed 36.6% and 63.4% respectively, to the Company's gross profit. In
1996, Liggett's premium and discount brands contributed 35.0% and 65.0%,
respectively, to the Company's gross profit. As a percent of revenues (excluding
federal excise taxes), gross profit at Liggett increased to 73.0% for 1997
compared to 72.0% for 1996 with gross profit for the premium segment at 77.1%
both in 1997 and 1996 and gross profit for the discount segment at 70.8% and
69.4% in 1997 and 1996, respectively. This increase is the result of the March
and September 1997 list price increases and improved production variances. These
increases were partially offset by increased tobacco costs at Liggett due to a
reduction in the average discount available to Liggett from leaf tobacco dealers
on tobacco purchased under prior years' purchase commitments. Gross profit
margin was further reduced by restructuring charges of $407 in cost of sales in
1997.

EXPENSES. Operating, selling, general and administrative expenses were
$169,270 for the year ended December 31, 1997 compared to $206,510 for the same
period for the prior year, a decrease of $37,240. The decrease was due primarily
to Liggett's decrease in unit sales volume with corresponding reductions in
spending on promotional programs and marketing programs of $43,657 as well as
reductions in corporate expenses of approximately $7,000 and restructuring
charges of $1,464 (see below) over the prior year. Such reductions were somewhat
offset by increases in legal expenses of $19,368 which includes the Attorneys
General legal settlement charges of $16,421 and also reflects, in part, the end
of joint defense arrangements. Refer to Note 12 of Company's consolidated
financial statements.

In January 1997, Liggett underwent a major restructuring from a
centralized organization to a decentralized enterprise with four Strategic
Business Units, each a profit center, and a corporate headquarters. This
restructuring was intended to more closely align sales and marketing strategies
with the unique requirements of regional markets as well as reduce working
capital by improved production planning and inventory control.

During 1997, the Company reduced its headcount by approximately 108
full-time positions and recorded a $1,964 restructuring charge to operations
($407 of which is included in cost of sales) for severance programs, primarily
salary continuation and related benefits for terminated employees. The
anticipated savings of the restructuring relate primarily to reduced payroll and
benefits expenses in future periods. Of the total restructuring recorded during
1997, $1,671 was funded during 1997, leaving $293 remaining to be funded in
1998.

OTHER INCOME (EXPENSE). Net interest expense was $23,695 for 1997
compared to $23,878 for 1996. This decrease in interest expense was due to the
redemption of the $7,500 Series B Notes in February 1997, partially offset by
higher average outstanding balances under the revolving credit facility.

OPERATING LOSS. Net loss amounted to $16,757 for 1997 compared to a net
loss of $18,372 for 1996. This reduction in net loss was primarily the result of
the factors discussed above, the absence of an income tax provision, a gain of
$1,017 on the sale of surplus realty and equipment in 1997, a gain of $2,963 on
the retirement of debt and a change in equity in income from an affiliate.

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23

1996 Compared to 1995

REVENUES. Net sales at Liggett decreased in 1996 by 12.0% ($54,604)
from the prior year, due primarily to a 17.9% decline in unit sales volume of
$81,644, partially offset by the effects of the April 1996 list price increase
of $16,975 and improved product mix of $10,065. 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. Liggett experienced a significant increase in
volume at the end of the fourth quarter of 1996, in part due to ongoing trade
programs based on quarterly volume targets for its customers and to consumer
promotional programs consisting of coupons and variable price reductions. In the
premium segment, revenues declined in 1996 by 10.8% ($14,925) to $122,598 as a
result of a 13.7% decline in unit sales volume ($18,893) which was partially
offset by price increases of $3,968. In the discount segment, revenues declined
in 1996 by 12.5% ($39,679) to $278,464 as a result of a 19.1% decline in unit
sales volume ($52,640) which was partially offset by price increases of $13,007.
In 1996, fixed manufacturing costs on a basis comparable to 1995 were $203 lower
although costs per thousand units increased $0.29 due to higher fixed costs per
unit.

GROSS PROFIT. Gross profit of $213,263 for the year ended December 31,
1996 decreased $30,089 from gross profit of $243,352 for the same period in
1995. The 1996 decline in gross profit was due primarily to the decline in unit
sales volume discussed above. In 1996, Liggett's premium and discount brands
contributed 35.0% and 65.0%, respectively, to the Company's gross profit. In
1995, Liggett's premium and discount brands contributed 34.5% and 65.5%,
respectively, to the Company's gross profit. As a percent of revenues (excluding
federal excise taxes), Liggett's gross profit decreased to 72.0% for 1996
compared to 73.2% for 1995 with gross profit for the premium segment at 77.1%
and 79.7% in 1996 and 1995, respectively, and gross profit for the discount
segment at 69.4% and 72.4% in 1996 and 1995, respectively. This decrease in
gross profit in 1996 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 the April 1996 list price increase.
Gross profit for 1995 was also reduced by an accrual of approximately $4,900 for
the United States Department of Agriculture ("USDA") domestic marketing
assessment. See Note 12 to the Company's consolidated financial statements.

EXPENSES. Operating, selling, general and administrative expenses were
$206,510 for the year ended December 31, 1996 compared to $218,733 for the same
period for the prior year, a decrease of $12,223. The decrease was due primarily
to Liggett's decrease in sales volume with corresponding reductions in spending
on promotional programs of $4,706 offset by charges for restructuring of $3,428
for severance programs ($132 of which is included in cost of sales). The
anticipated savings of the restructuring related primarily to reduced payroll
and benefits expenses in future periods. Of the total restructuring expense
recorded during 1996, $1,416 was funded during 1996 and $2,012 remained to be
funded in subsequent years. In addition, corporate expenses decreased by
approximately $4,000. In 1995, expenses increased due to increased spending on
trade and promotional programs and the accrual of approximately $4,000 for the
settlement of certain tobacco litigations with the Attorneys General of certain
states. See Note 12 to the Company's consolidated financial statements.

OTHER INCOME (EXPENSE). Net interest expense was $23,878 for 1996
compared to $23,446 for 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 Senior Secured Notes in December 1995.

OPERATING LOSS. Net loss amounted to $18,372 for 1996 compared to net
income of $555 for 1995. This decrease was primarily the result of the same
factors discussed above, along with Liggett's equity in the net loss of
Liggett-Ducat of $1,116 and recording of $3,800 tax expense to increase the
valuation allowance for deferred tax assets based on management's determination
that it is more likely

23
24

than not that such future tax benefits will not be realized. The decrease was
offset in part by a $3,669 gain on the sale of surplus realty in 1996.

CAPITAL RESOURCES AND LIQUIDITY

Cash provided by operations was $5,051 for 1997 compared to $6,167 for
1996 and $13,587 for 1995. The decline from 1996 to 1997 was due primarily to a
decrease in trade payables and a reduction in accrued promotional spending,
while the decline from 1995 to 1996 was due primarily to the decline in net
sales, partially offset by decreases in trade receivables and inventories and an
increase in accrued promotional spending.

Liggett had been receiving 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, which, for the most part, consisted
of the payment of counsel fees and costs, but this assistance terminated in
1997. In 1995 and 1996, approximately $1,500 and $6,500, respectively, in
counsel fees and costs were paid. In 1995 and 1996, Liggett incurred additional
fees and costs in connection with tobacco-related litigation in the amount of
approximately $4,500 and $3,500, respectively. In 1997, Liggett incurred fees
and costs in the amount of approximately $5,750. The future financial impact on
Liggett of the termination of this assistance and the effects of the tobacco
litigation settlements discussed below is not quantifiable at this time.

Cash used in investing activities amounted to $168 for 1997, primarily
due to investments in affiliates of approximately $2,200 and capital
expenditures totaling approximately $2,462, primarily for production facilities
and further equipment modernization. These expenditures were partially offset by
the proceeds from asset sales of approximately $4,494. This compares to cash
used in investing activities of $5,395 for 1996 resulting primarily from
investments in affiliates of approximately $5,500 and capital expenditures
totaling approximately $4,319, partially offset by proceeds from asset sales of
approximately $4,424. Cash used in investing activities of $1,334 for 1995
related primarily to capital expenditures totaling approximately $1,104.

Cash used in financing activities for 1997, 1996 and 1995 of $4,883,
$772 and $12,253, respectively, resulted primarily from net borrowings under the
Facility, somewhat offset in 1997 and 1995 by redemptions and repayments of
long-term debt.

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 $7,728 based upon
eligible collateral at December 31, 1997. The Facility is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility are
charged interest calculated at a rate equal to 1.5% above Philadelphia National
Bank's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate. Liggett's interest rate is currently 10.0%. The Facility contains
certain financial covenants similar to those contained in the Liggett Notes
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, as amended on April 8,
1998 in connection with the March 1998 Settlements, imposes requirements with
respect to the Company's adjusted net worth (not to fall below a deficit of
$195,000 as computed in accordance with the agreement) and working capital (not
to fall below a deficit of $17,000 as computed in accordance with the
agreement). At December 31, 1997, Liggett's adjusted net worth and net working
capital deficiencies, as computed in accordance with the agreement and giving
effect to the March 1998 Settlements, were $187,959 and $12,616, respectively.

During the first quarter of 1997, the Company violated the working
capital covenant contained in the Facility. This violation occurred during
February 1997 when $37,500 of the Liggett Notes were reclassified from long-term
to current as a result of the February 1, 1998 mandatory redemption requirement
of such Notes, which redemption has now been extended to the maturity date,
February 1,

24
25

1999. On March 19, 1997, the lead lender agreed to waive this covenant default,
and the Facility was amended as follows: (i) the working capital definition was
changed to exclude the current portion of the Liggett Notes; (ii) the maximum
permitted working capital deficit, as defined, was reduced to $12,000 (as
computed in accordance with the agreement); (iii) the maximum permitted adjusted
net worth deficit was increased to $180,000 (as computed in accordance with the
agreement); and (iv) the permitted advance rates under the Facility for eligible
inventory were reduced by five percent. On April 8, 1998, the Facility was
further amended to increase the maximum permitted adjusted net worth and net
working capital deficiencies to $195,000 and $17,000, respectively.

On August 29, 1997, the Facility was amended to permit the Company to
borrow an additional $6,000 which was used on that date in making the interest
payment of $9,700 due on August 1, 1997 to the Liggett note holders. BGLS
guaranteed the additional $6,000 advance under the Facility and collateralized
the guarantee with $6,000 in cash, deposited with Liggett's lenders.

In November 1997, the Facility was extended until March 8, 1999. At
December 31, 1997, the closing balance on the Facility stood at $23,427.

In 1992, Liggett issued $150,000 in Senior Secured Notes (the "Series B
Notes") and in 1994, the Company issued $32,850 of Variable Rate Series C Senior
Secured Notes (the "Series C Notes"). Interest on the Series B Notes and the
Senior C Notes is payable semiannually on February 1 and August 1 at an annual
rate of 11.5% and 19.75%, respectively. The Series B Notes and Series C Notes
(collectively, the "Liggett Notes") required 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 Liggett Notes due on February 1, 1999.
In February 1997, $7,500 of Liggett B Notes were purchased using the Facility
and credited against the mandatory redemption requirements. The Liggett Notes
are collateralized by substantially all of the assets of the Company, excluding
accounts receivable and inventory. Eve is a guarantor for the Liggett Notes. The
Liggett Notes may be redeemed, in whole or in part, at a price equal to 100% of
the principal amount at the option of the Company. The Liggett 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. BGLS or its affiliates may, from time to time, based on current
market conditions, purchase Liggett Notes in the open market or in privately
negotiated transactions.

During 1997, Liggett engaged in negotiations with its note holders to
restructure the terms of the Liggett Notes. During such negotiations, the
Company postponed making the interest payment of approximately $9,700 due on
August 1, 1997 on the Liggett Notes. As discussed above, on August 29, 1997, the
Facility was amended to permit Liggett to borrow an additional $6,000 which was
used on that date to make the August 1, 1997 interest payment. The indenture
governing the Liggett Notes provides for a 30-day grace period before the
failure to pay interest will be an event of default.

On January 30, 1998, with the consent of the required majority of the
holders of the Liggett Notes, Liggett entered into various amendments to the
Indenture governing the Liggett Notes, which provided, among other things, for a
deferral of the February 1, 1998 mandatory redemption payment of $37,500 to the
date of final maturity of the Liggett Notes on February 1, 1999. In connection
with the deferral, BGL agreed to issue 482,970 shares of BGL's common stock to
the holders of record on January 15, 1998 of the Liggett Notes. The Indenture
under which the Liggett Notes are outstanding was also amended to prohibit, with
limited exceptions, payments of dividends and incurrence of new debt by Liggett
and to tighten restrictions on the disposition of proceeds of asset sales. BGL
and BGLS also agreed to guarantee the payment by Liggett of the August 1, 1998
interest payment on the Liggett Notes. (Refer to Note 10 to the Company's
consolidated financial statements.)

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 $192,857 as of December 31, 1997, is highly leveraged and
has substantial near-term debt service requirements. Due to the many risks and
uncertainties associated with the cigarette industry and the impact of tobacco
litigation (see Note 12 to the Company's consolidated financial statements),
there can be no assurance that the Company will be able to meet its future
earnings or cash flow goals. Consequently, the Company could be in violation of
its debt covenants, including covenants limiting the maximum permitted net worth
and working capital deficiencies, and if its lenders were to exercise
acceleration rights under the Facility or the

25
26

indenture for the Liggett Notes or refuse to lend under the Facility, the
Company would not be able to satisfy such demands or its working capital
requirements.

As discussed above, the Liggett Notes require payments at maturity on
February 1, 1999 of $144,891. Based on Liggett's results of operations for 1997,
Liggett does not anticipate it will be able to generate sufficient cash from
operations to make such payments. If Liggett is unable to refinance or
restructure the terms of the Liggett Notes or otherwise make all payments
thereon, substantially all of its long-term debt and the Facility would be in
default and holders of such debt could accelerate the maturity of such debt. In
such event, the Company may be forced to seek protection from creditors under
applicable laws. The Company's independent accountants have issued a report
covering the Company's December 31, 1997 consolidated financial statements
containing an explanatory paragraph that states that these facts raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements of the Company do not include
any adjustments that might arise from the outcome of this uncertainty. See Note
2(a) of the Company's consolidated financial statements.

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 elsewhere in
this report and in 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, a payment at maturity of the Liggett Notes of $144,891 on February
1, 1999, as well as a significant net worth deficiency and working capital
deficiency and recent net losses, and is highly dependent upon its revolving
credit facility which currently expires in March 1999. See "Capital Resources
and Liquidity" for a discussion of certain matters which raise substantial doubt
about Liggett meeting its liquidity needs and its ability to continue as a going
concern. The Liggett Notes and the Facility 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, investors are cautioned not to place undue
reliance on such forward-looking statements, which 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.

26
27
REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholder
Liggett Group Inc.

We have audited the consolidated financial statements and the financial
statement schedule of Liggett Group Inc. listed in the index on page 15 of this
Form 10-K (as restated - see Note 2n). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Liggett Group
Inc. as of December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to
be included therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2a to the
financial statements, the Company suffered a loss of $16,757,000 for the year
ended December 31, 1997 and had net capital and working capital deficiencies of
$192,857,000 and $17,542,000, respectively, at December 31, 1997. The Company
also has a $144,891,000 principal payment due on its Senior Secured Notes on
February 1, 1999 and the Company's revolving credit facility (the "Facility"),
which had a balance of $23,427,000 at December 31, 1997, is due on March 8,
1999. The Company's financial resources are not sufficient to repay the Senior
Secured Notes when they become due, nor will the Company be able to repay the
Facility when it becomes due. In addition, as disclosed in Note 2a of the
financial statements, due to the many risks and uncertainties associated with
the cigarette industry and the impact of tobacco litigation, there can be no
assurance that the Company will be able to meet its future earnings or cash
flow goals. These facts raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2a. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

COOPERS & LYBRAND L.L.P.

Miami, Florida
April 8, 1998

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28

LIGGETT GROUP INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

December 31,
------------
1997 1996
---- ----
ASSETS

Current assets:
Accounts receivable:
Trade, less allowances of $1,062 and $1,280,respectively. $ 9,572 $19,316
Other ................................................... 743 744

Inventories ................................................. 35,057 50,122

Other current assets (Note 6) .............................. 738 1,205
------- -------

Total current assets ................................ 46,110 71,387

Property, plant and equipment, at cost, less accumulated
depreciation of $29,452 and $29,511, respectively ............ 17,756 18,705

Intangible assets, at cost, less accumulated amortization
of $19,111 and $17,388, respectively ......................... 1,609 3,327

Other assets and deferred charges, at cost, less accumulated
amortization of $9,000 and $7,410, respectively .............. 3,000 4,258
------- -------

Total assets ....................................... $68,475 $97,677
======= =======

(continued)

28
29

LIGGETT GROUP INC.

CONSOLIDATED BALANCE SHEETS (Continued)

(Dollars in thousands, except per share amounts)

December 31,
------------
1997 1996
---- ----

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Current liabilities:
Current maturities of long-term debt ...................................... $ 28 $ 31,807
Cash overdraft ............................................................ 891 6
Accounts payable, principally trade ....................................... 6,413 18,505
Accrued expenses:
Promotional ............................................................ 26,993 30,257
Taxes, principally excise taxes ........................................ 3,643 7,565
Estimated allowance for sales returns .................................. 4,750 5,000
Interest ............................................................... 8,070 8,435
Settlement accruals .................................................... 4,030 --
Other .................................................................. 8,834 10,506
--------- ---------

Total current liabilities ............................................ 63,652 112,081

Long-term debt, less current maturities ..................................... 168,112 144,698

Non-current employee benefits ............................................... 11,168 11,340

Other long-term liabilities ................................................. 18,400 6,036

Commitments and contingencies (Notes 5 and 12)

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 ................................................. 50,218 49,840
Accumulated deficit ....................................................... (243,075) (226,318)
--------- ---------

Total stockholder's deficit ....................................... (192,857) (176,478)
--------- ---------

Total liabilities and stockholder's equity (deficit) .............. $ 68,475 $ 97,677
========= =========

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

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30

LIGGETT GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Net sales* ........................................ $ 312,268 $ 401,062 $ 455,666
Cost of sales* .................................... 139,310 187,799 212,314
--------- --------- ---------

Gross profit ............................ 172,958 213,263 243,352

Selling, general and administrative expenses ...... 151,186 203,214 212,830
Settlement charges ................................ 16,527 -- 3,976
Restructuring ..................................... 1,557 3,296 1,927
--------- --------- ---------

Operating income ........................ 3,688 6,753 24,619

Other income (expense):
Interest income ............................... 60 23 3
Interest expense .............................. (23,755) (23,901) (23,449)
Equity in income (loss) of affiliates ......... 498 (1,116) --
Sale of assets ................................ 1,017 3,669 --
Miscellaneous, net ............................ 1,735 -- 1,133
--------- --------- ---------

(Loss) income before income taxes ....... (16,757) (14,572) 2,306

Income tax provision .............................. -- 3,800 1,751
--------- --------- ---------

Net (loss) income ....................... $ (16,757) $ (18,372) $ 555
========= ========= =========

*Net sales and cost of sales include federal excise taxes of $75,316, $104,518
and $123,420 respectively.

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

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31

LIGGETT GROUP INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

(Dollars in thousands)

Common Total
Stock and Stockholder's
Contributed Equity
Capital Deficit (Deficit)
------- ------- ---------

Balance at December 31, 1994 ...................... $ 53,240 $(207,703) $(154,463)

Net income ..................................... -- 555 555
Excess of investment over cost basis of
net assets acquired from indirect parent ... -- (798) (798)
-------- --------- ---------
Balance at December 31, 1995 ..................... 53,240 (207,946) (154,706)

Net loss ....................................... -- (18,372) (18,372)
Consideration for option to acquire affiliate
stock in excess of its net assets (Note 13). (3,400) -- (3,400)
-------- --------- ---------

Balance at December 31, 1996 ...................... 49,840 (226,318) (176,478)

Net loss ....................................... -- (16,757) (16,757)
Sale of equipment to affiliate.................. 2,578 -- 2,578
Excess of investment over cost basis of
net assets acquired from indirect parent ... (2,200) -- (2,200)
-------- --------- ---------

Balance at December 31, 1997 ..................... $ 50,218 $(243,075) $(192,857)
======== ========= =========

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

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32

LIGGETT GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Cash flows from operating activities:
Net income (loss) ...................................... $ (16,757) $ (18,372) $ 555
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ......................... 7,025 7,969 7,972
Deferred income taxes ................................. -- 3,800 1,259
Gain on sale of property, plant and equipment ......... (1,017) (3,669) (375)
Gain on retirement of notes ........................... (2,963) -- (1,273)
Deferred finance charges and debt discount
written off ........................................ 130 -- 160
Equity in (income) loss of affiliate .................. (498) 1,116 --
Changes in assets and liabilities:
Accounts receivable ................................ 9,745 4,691 7,060
Inventories ........................................ 15,065 4,220 (7,658)
Accounts payable ................................... (12,092) (330) 7,671
Accrued expenses ................................... (5,442) 8,479 (10,638)
Non-current employee benefits ...................... (172) (276) (225)
Other, net ......................................... 12,027 (1,461) 9,079
--------- --------- ---------
Net cash provided by operating activities ...... 5,051 6,167 13,587
--------- --------- ---------

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ..... 1,494 4,424 570
Proceeds from sale of equipment to an affiliate.......... 3,000 -- --
Capital expenditures .................................... (2,462) (4,319) (1,104)
Investment in affiliates ................................ (2,200) (5,500) (800)
--------- --------- ---------
Net cash used in investing activities ........... (168) (5,395) (1,334)
--------- --------- ---------

Cash flows from financing activities:
Repayments of long-term debt ............................ (4,775) (254) (8,208)
Borrowings under revolving credit facility .............. 278,442 351,428 397,873
Repayments under revolving credit facility .............. (279,286) (348,173) (401,703)
Deferred finance charges ................................ (149) (18) --
Increase (decrease) in cash overdraft ................... 885 (3,755) (215)
--------- --------- ---------
Net cash used in financing activities ........... (4,883) (772) (12,253)
--------- --------- ---------

Net change in cash and cash equivalents ..................... -- -- --
Cash and cash equivalents:
Beginning of period ..................................... -- -- --
--------- --------- ---------
End of period ........................................... $ -- $ -- $ --
========= ========= =========
Supplemental cash flow information:
Cash payments during the period for:
Interest ............................................ $ 23,491 $ 23,228 $ 23,196
Income taxes ........................................ $ 162 $ 189 $ 130

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

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33

LIGGETT GROUP INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

1. Basis of Presentation

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. Certain management and administrative
functions are performed by affiliates (see Note 13).

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income. The purpose of reporting comprehensive income
is to present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. SFAS No. 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company has not yet determined the impact of the implementation of SFAS No. 130.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 specifies revised
guidelines for determining an entity" operating segments and the type and level
of financial information to be disclosed. SFAS No. 131 provides for a two-tier
test for determining those operating segments that would need to be disclosed
for external reporting purposes. In addition to providing the required
disclosures for reportable segments, SFAS No. 131 also requires disclosure of
certain "second level" information by geographic area and for
products/services. SFAS No. 131 also makes a number of changes to existing
disclosure requirements. Management believes that the adoption of this
pronouncement will not have a material effect on the Company's financial
statement disclosures. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged.

2. Summary of Significant Accounting Policies

a. Going Concern

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 $192,857 as of December 31, 1997, is highly leveraged and
has substantial near-term debt service requirements. (See Note 10.) Due to the
many risks and uncertainties associated with the cigarette industry and the
impact of tobacco litigation (see Note 12), there can be no assurance that the
Company will be able to meet its future earnings or cash flow goals.
Consequently, the Company could be in violation of its debt covenants, including
covenants limiting the maximum permitted net worth and working capital
deficiencies, and if its lenders were to exercise acceleration rights under its
revolving credit facility (the

33
34

"Facility") or the indenture for the 11.50% Secured Notes due February 1, 1999
and the Variable Rate Series C Senior Secured Notes due February 1, 1999
(together, the "Liggett Notes") or refuse to lend under the Facility, the
Company would not be able to satisfy such demands or its working capital
requirements.

On January 30, 1998, the Company obtained the consents of the required
majority of the holders of the Liggett Notes to various amendments to the
Indenture governing the Liggett Notes. The amendments provide, among other
things, for a deferral of the February 1, 1998 mandatory redemption of $37,500
principal amount of the Liggett Notes to the date of final maturity, February 1,
1999. (Refer to Note 10.) At maturity, the Liggett Notes will require a
principal payment of $144,891. Based on Liggett's results of operations for
1997, the Company does not anticipate it will be able to generate sufficient
cash from operations to make such payments. In addition, the Company has a
$40,000 Facility expiring March 8, 1999 under which $23,427 was outstanding at
December 31, 1997. While management currently intends to refinance and/or
restructure with the Company's note holders the maturity requirements on the
Liggett Notes and to extend the Facility, there are no refinancing or
restructuring arrangements for the notes or commitments to extend the Facility
at this time, and no assurances can be given in this regard. If the Company is
unable to refinance or restructure the terms of the Liggett Notes or otherwise
make all payments thereon, substantially all of the Company's long-term debt and
the Facility would be in default and holders of such debt could accelerate the
maturity of such debt. In such event, Liggett may be forced to seek protection
from creditors under applicable laws. These matters raise substantial doubt
about the Company meeting its liquidity needs and its ability to continue as a
going concern.

The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

b. Principles of Consolidation

The consolidated financial statements include the accounts of Liggett
and its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve"), Cigarette
Exporting Company of America Ltd. ("CECOA") and Carolina Tobacco Express Company
("CTEC"). Intercompany accounts and transactions have been eliminated.

c. 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 and
disclosure of contingent assets and liabilities at December 31, 1997 and 1996
and the reported amounts of revenues and expenses during the three year period
ended December 31, 1997. Significant estimates subject to material changes in
the near term include deferred tax assets, allowance for doubtful accounts,
promotion accruals, sales returns and allowances, actuarial assumptions of
pension plans and litigation and defense costs. Actual results could differ from
those estimates.

d. 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.

e. Inventories

Inventories are valued at the lower of cost (LIFO) or market. Although
portions of leaf tobacco inventories may not be used or sold within one year
because of the time required for aging, they are included in current assets,
which is common practice in the industry. It is not practicable to determine the
amount that will not be used or sold within one year.

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35

f. Property, Plant and Equipment

Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets which are twenty
years for buildings and four to ten years for machinery and equipment.

Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. The cost
and related accumulated depreciation of property, plant and equipment are
removed from the accounts upon retirement or other disposition and any resulting
gain or loss is reflected in operations.

The Company is required to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Accordingly, when indicators of impairment are
present, the Company evaluates the carrying value of property, plant and
equipment and intangibles in relation to the operating performance and estimates
of future discounted cash flows of the underlying business.

g. Trademarks

Trademarks are amortized using the straight-line method over twelve
years. Amortization expense for the years ended December 31, 1997, 1996 and 1995
amounted to $1,723, $1,726 and $1,725, respectively. Management periodically
reviews the carrying value of trademarks to determine whether asset values are
impaired.

h. Sales and Sales Returns

Revenue from sales is recognized upon the shipment of finished goods to
customers. The Company provides for expected sales returns, net of related
inventory cost recoveries. As Liggett does not have any other lines of business,
the Company's financial position and its results of operations could be
materially adversely affected by significant unit sales volume declines,
litigation and defense costs, increased tobacco costs or reductions in the
selling price of cigarettes.

i. Advertising and Promotional Costs

Advertising and promotional costs are expensed as incurred. Advertising
expenses were $40,534, $74,238 and $75,713 for the years ended December 31,
1997, 1996 and 1995, respectively.

j. Employee Benefits

The Company sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such benefits
involves an estimate of unpaid claims as of December 31, 1997 and 1996 which are
subject to significant fluctuations in the near term.

BGLS maintains defined benefit retirement plans for substantially all
of the Company's employees. The Company records as an expense the portion of
BGLS' annual funding requirements applicable to the Company.

The Company sponsors a postretirement benefit plan and records an
actuarially determined liability and charges operations for the estimated cost
of postretirement benefits for current employees and retirees.

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36

k. Income Taxes

Deferred taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for tax purposes as well as tax credit carryforwards
and loss carryforwards. These deferred taxes are measured by applying currently
enacted tax rates. A valuation allowance reduces deferred tax assets when it is
deemed more likely than not that future taxable income will be insufficient to
realize some portion or all of the deferred tax assets.

l. Legal Costs

The Company's accounting policy is to accrue legal and other costs
related to contingencies as services are performed.

m. Fair Value of Financial Instruments

The fair values of the Company's Senior Secured Notes have been based
upon market quotations (see Note 10). The carrying amount of borrowings
outstanding under the revolving credit facility and other long-term debt is a
reasonable estimate of fair value, based upon estimated current borrowing rates
for loans with similar terms and maturities. The estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair values.

n. Reclassification

The Company has reclassified the excess of the proceeds received,
$2,578, over the carrying value of production equipment sold to Brooke
(Overseas) Ltd. ("BOL") as an element of contributed capital because the sale
was made between entities under common control of BGLS and BGL. This amount was
previously shown in other income as a portion of sale of assets in the
consolidated statements of operations. (See also Note 13).

3. Changes in Accounting Estimates

In September 1995, the Company adjusted an accrual estimate recorded in
prior years which had the effect of increasing operating income by approximately
$1,214 for the year ended December 31, 1995. Liggett increased its valuation
allowance for deferred tax assets by $443 in the fourth quarter of 1995.

Liggett increased its valuation allowance for deferred tax assets by
$3,800 in the third quarter of 1996. In December 1996, Liggett increased its
estimate of coupon promotions which resulted in a decrease in the Company's
operating income of $1,800 for the year ended December 31, 1996.

As a consequence of certain litigation settlements (see Note 12),
Liggett charged approximately $16,421 to operations in the fourth quarter of
1997. Possible future payments under the litigation settlements which are based
on a percentage of Liggett's pretax income, if any, will be charged to
operations in the period that the Company's operating results are known.

4. Concentrations of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.

Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett's largest
single customer accounted for approximately 19.4% in 1997, approximately 13.9%
of net sales in 1996 and approximately 11.6% of net sales in 1995. Sales to this
customer were primarily in the private label discount market segment.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the remainder of the Company's
customer base. Ongoing credit evaluations of customers' financial condition

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37

are performed and, generally, no collateral is required. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's estimates.

5. Inventories

Inventories consist of:

December 31,
------------
1997 1996
---- ----

Finished goods ................................................ $ 13,273 $ 15,304
Work-in-process ............................................... 1,926 4,382
Raw materials ................................................. 21,211 31,338
Replacement parts and supplies ................................ 3,545 3,554
-------- --------
Inventories at current cost ................................... 39,955 54,578
LIFO adjustment ............................................... (4,898) (4,456)
-------- --------

Inventories at LIFO cost ...................................... $ 35,057 $ 50,122
======== ========

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 $10,200 at December 31, 1997.

6. Sale of Assets

On May 14, 1996, Liggett sold to the County of Durham certain surplus
realty in Durham, North Carolina, for a sale price of $4,300 and recognized a
gain of approximately $3,600.

On April 29, 1996, Liggett executed a definitive agreement (as amended)
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,
North Carolina, for a sale price of $2,200. The net book value of those assets
($309) for which the agreement was signed was classified as current assets on
the Company's Consolidated Balance Sheet as of December 31, 1996. The
transaction closed on March 11, 1997. A gain of $1,147 was recognized, net of
costs required to prepare the properties for sale and selling costs. (See Note
13 for sales to affiliates.)

7. Property, Plant and Equipment

Property, plant and equipment consists of the following:

December 31,
------------
1997 1996
---- ----

Land and improvements ........................................... $ 411 $ 455
Buildings ....................................................... 6,228 5,848
Machinery and equipment ......................................... 40,569 41,913
-------- --------
Property, plant and equipment ................................... 47,208 48,216
Less accumulated depreciation ................................... (29,452) (29,511)
-------- --------

Property, plant and equipment, net .............................. $ 17,756 $ 18,705
======== ========

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8. Employee Benefits Plans

Defined Benefit Retirement Plans

Prior to 1994, substantially all of Liggett's employees participated in
two noncontributory defined benefit retirement plans sponsored by BGLS. The
Company records as an expense the portion of BGLS' annual funding requirements
applicable to the Company. There was no pension expense recorded in 1997, 1996
or 1995.

Future Pension Benefits to be Funded by BGLS

Actuarial estimates of the total future minimum pension benefits to be
funded by BGLS, prior to the effect of unamortized purchase accounting
adjustments, are as follows:

1998................................................. $ 350
1999................................................. 300
2000................................................. 300
2001................................................. 250
2002................................................. 200
Thereafter .......................................... 2,000
------

Total............................................. $3,400
======

Postretirement Medical and Life Insurance Plans

Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Effective January 1, 1995, retirees are required to fund 100% of
participant medical premiums.

The components of net periodic postretirement benefit expense are as
follows:

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Service cost, benefits attributed to employee
service during the year ......................... $ 24 $ 68 $ 68
Interest cost on accumulated postretirement
benefit obligation .............................. 703 829 970
Charge for special termination benefits ............. 47 137 489
Amortization of net gain ............................ (193) (92) (26)
----- ----- -------

Net periodic postretirement benefit expense ......... $ 581 $ 942 $ 1,501
===== ===== =======

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The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") applicable to each employee group for
benefits:

December 31,
------------
1997 1996
---- ----

Retired employees .................................. $ 6,870 $ 7,899
Active employees - fully eligible .................. 498 674
Active employees - not fully eligible .............. 810 515
-------- --------

8,178 9,088

APBO ............................................... 3,992 3,324
Purchase accounting valuation adjustment
related to income taxes ....................... (963) (1,072)
-------- --------

Postretirement liability ........................... $ 11,207 $ 11,340
======== ========

The APBO at December 31, 1997 and 1996 was determined using discount
rates of 7.5% and 8%, respectively, and a health care cost trend rate of 4% in
1997 and 1996. A 1% increase in the trend rate for health care costs would have
increased the APBO and net periodic postretirement benefit expense by $360 and
$26, respectively, for the year ended December 31, 1997. The Company does not
hold any assets reserved for use in the plan.

Profit Sharing Plans

Liggett's 401(k) plans originally called for Company contributions
matching up to a 3% employee contribution, plus additional Company contributions
of up to 6% of salary based on the achievement of Company profit objectives.
Effective January 1, 1994, the Company suspended the 3% match for the salaried
employees' 401(k) Plan, but reinstated it on April 1, 1996. The Company
contributed and expensed $497, $591 and $900 to the 401(k) plans for the years
ended December 31, 1997, 1996 and 1995, respectively.

9. Income Taxes

Liggett's operations are included in the consolidated federal income
tax return of its indirect parent, BGL. Pursuant to a tax allocation agreement,
the Company's federal income tax provision is calculated as if the Company filed
a separate federal income tax return except that the tax sharing agreement with
BGL effectively limits the ability of the Company to carry back losses for
refunds.

The amounts provided for income taxes are as follows:

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Current:
Federal ......................................... $ -- $ -- $ (233)
State ........................................... -- -- 216

Deferred:
Federal ......................................... -- 3,800 1,768
State ........................................... -- -- --
-------- ------ -------

Total tax provision ................................. $ -- $3,800 $ 1,751
======== ====== =======

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Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities are as follows:

1997 1996
---- ----
Deferred Tax Deferred Tax
Asset Liability Asset Liability
------ --------- ----- ---------

Sales and product allowances ............. $ 1,738 $ -- $ 2,504 $ --
Inventory ................................ 457 1,568 1,269 683
Coupon accruals .......................... 2,369 -- 4,492 --
Property, plant and equipment ............ -- 4,427 -- 4,890
Employee benefit plan accruals ........... 4,680 -- 5,303 --
USDA marketing assessment ................ 1,312 -- 1,681 --
Tobacco litigation settlements ........... 7,872 -- 1,229 --
Difference in basis in investment ........ 2,535 -- 1,864 --
Net operating loss carryforward .......... 11,506 -- 7,244 --
Valuation allowance ...................... (26,474) -- (20,013) --
Reclassifications ........................ (5,995) (5,995) (5,573) (5,573)
------- ------- ------- -------

Total deferred taxes...................... $ - $ - $ - $ -
======= ======= ======= =======

The $26,474 net valuation allowance at December 31, 1997 is composed of
$24,265 for net deferred assets arising from items which have been reflected in
book income or loss and $2,209 for deferred assets arising for basis differences
in the investments which were reflected as direct entries to equity.

Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rates are summarized as follows:

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

(Loss) income before income taxes ................... $(16,757) $(14,572) $2,306
======== ======== ======

Federal income tax at statutory rates ............... $ (5,865) $ (5,100) $ 807
Increases (decreases) resulting from:
State income tax expense (benefit) net of
federal income tax expense (benefit).......... -- (634) 216
Other, net ...................................... (596) (247) 285
Change in valuation allowance ................... 6,461 9,781 443
-------- -------- ------

Total tax provision ................................. $ -- $ 3,800 $1,751
======== ======== ======

As of December 31, 1997, the Company's net operating loss ("NOL")
carryforward pursuant to its tax sharing agreement with BGL is approximately
$29,000 which expires from 2008 to 2012. However, if the Company were
deconsolidated from BGL, its allocable share of NOL could be significantly
different. The liability method of accounting for deferred income taxes requires
a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company established a valuation allowance
against deferred tax assets of $26,474 and $20,013 at December 31, 1997 and
1996, respectively.

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10. Long-Term Debt

Long-term debt consists of the following:

December 31,
------------
1997 1996
------------------------ ---------
Estimated Carrying Carrying
Fair Value Value Value
---------- -------- ---------

11.5% Senior Secured Notes due February 1, 1999
net of unamortized discount of $206 and
$424, respectively ............................................ $ 75,312 $ 112,406 $ 119,688
Variable Rate Series C Senior Secured Notes due
February 1, 1999 .............................................. 23,564 32,279 32,279
Borrowings outstanding under revolving credit
facility ...................................................... 23,427 23,427 24,272
Other ............................................................ 28 28 266
--------- --------- ---------
122,331 168,140 176,505

Current portion .................................................. (28) (28) (31,807)
--------- --------- ---------

Amount Due After One Year ........................................ $ 122,303 $ 168,112 $ 144,698
========= ========= =========

Maturities of long-term debt, net of discount, at December 31, 1997 are
as follows:

1998............................................... $ 28
1999............................................... 168,112
--------

Total ..................................... $168,140
========

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 "Liggett Notes") required
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
Liggett Notes due on February 1, 1999. In February 1997, $7,500 of the Series B
Notes were purchased using revolver availability and credited against the
mandatory redemption requirements. The transaction resulted in a net gain of
$2,963. The Liggett Notes are collateralized by substantially all of the assets
of the Company, excluding inventories and receivables. Eve is a guarantor for
the Notes. The Liggett Notes may be redeemed, in whole or in part, at a price
equal to 100% of the principal amount at the option of the Company. The Liggett
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.

The Series C Notes, issued in 1994, have the same terms (other than
interest rate) and stated maturity as the Series B Notes. The Series C Notes
bore a 16.5% interest rate, which was reset on February 1, 1995 to 19.75%.

During 1997, Liggett engaged in negotiations with its note holders to
restructure the terms of the Liggett Notes. During such negotiations, the
Company postponed making the interest payment of approximately $9,700 due on
August 1, 1997 on the Liggett Notes. As discussed below, on August 29, 1997, the
Facility was amended to permit Liggett to borrow an additional $6,000 which was
used on that date to make the August 1, 1997 interest payment. The indenture
governing the Liggett Notes provides for a 30-day grace period before the
failure to pay interest will be an event of default.

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42

holders of record on January 15, 1998 of the Liggett Notes. As a result of this
transaction, the Company will record a deferred charge of approximately $4,100
during the first quarter of 1998 reflecting the fair value of the instruments
issued. This deferred charge is being amortized as an adjustment to interest
expense over a period of one year. The Indenture under which the Liggett Notes
are outstanding was also amended to prohibit, with limited exceptions, payments
of dividends and incurrence of new debt by Liggett and to tighten restrictions
on the disposition of proceeds of asset sales. BGL and BGLS also agreed to
guarantee the payment by Liggett of the August 1, 1998 interest payment on the
Liggett Notes and to subordinate, until repayment in full of all amounts
outstanding in respect of the Liggett Notes, their reimbursement rights with
respect to the guarantee of borrowings under the Facility made in connection
with the Company's August 1, 1997 interest installment and any future advances
in connection with the guarantee of the August 1, 1998 interest payment. In
consideration of the contribution of the BGL common stock, the waiver of certain
management and other fees, the guarantee of the interest payments and
subordination of certain reimbursement rights, the Company transferred its
ownership interest in, and options to acquire, additional shares of stock of
Liggett-Ducat Ltd. ("Liggett-Ducat") to BOL. The Company will account for the
transfer of its ownership interest in, and options to acquire, additional shares
of stock of Liggett-Ducat to BOL as a capital distribution to BGLS. Based on the
carrying value of the investment at December 31, 1997, the capital distribution
is expected to be approximately $1,167. In addition, the Liggett Noteholders
were granted additional collateral in the form of a security interest in 16% of
the stock of Liggett-Ducat or a successor entity held by BOL.

On February 1, 1999, all of the Liggett Notes, approximately $144,891,
will reach maturity. There are no refinancing or restructuring arrangements in
place at this time for the notes and no assurances can be given in this regard.
(Refer to Note 2 (a).)

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 $7,728 based upon
eligible collateral at December 31, 1997. The Facility is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility are
charged interest calculated at a rate equal to 1.5% above Philadelphia National
Bank's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate. Liggett's interest rate is currently 10.0%. The Facility contains
certain financial covenants similar to those contained in the Liggett Notes
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, as amended April 8,
1998 in connection with the March 1998 Settlements, imposes requirements with
respect to the Company's adjusted net worth (not to fall below a deficit of
$195,000 as computed in accordance with the agreement) and working capital (not
to fall below a deficit of $17,000 as computed in accordance with the
agreement). At December 31, 1997, Liggett's adjusted net worth and net working
capital deficiencies, as computed in accordance with the agreement and giving
effect to the March 1998 Settlements, were $187,959 and $12,616, respectively.
The Facility, as amended, also provides that a default by Liggett or its
subsidiaries under the March 1996 Settlements, March 1997 Settlements and March
1998 Settlements (all as defined below in Note 12) shall constitute an event of
default under the Facility.

During the first quarter of 1997, the Company violated the working
capital covenant contained in the Facility as a result of the 1998 mandatory
redemption payment on the Liggett Notes becoming due within one year. On March
19, 1997, the lead lender agreed to waive this covenant default, and the
Facility was amended as follows: (i) the working capital definition was changed
to exclude the current portion of the Liggett Notes; (ii) the maximum permitted
working capital deficit, as defined, was reduced to $12,000; (iii) the maximum
permitted adjusted net worth deficit was increased to $180,000; and (iv) the
permitted advance rates under the Facility for eligible inventory were reduced
by five percent. On April 8, 1998, the Facility was further amended to increase
the maximum permitted adjusted net worth and net working capital deficiencies to
$195,000 and $17,000, respectively.

In November 1997, the Facility was extended until March 8, 1999. For
information concerning Liggett's substantial near-term debt service requirements
and other related matters, see Note 2(a).

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11. Operating Leases

At December 31, 1997, the Company has operating leases for building
space and computer equipment. The future minimum lease payments are as follows:

1998 ........................................... $1,651
1999 ........................................... 653
2000 ........................................... 198
2001 ........................................... 185
2002 ........................................... 62
------

Total ..................................... $2,749
======

Rental expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $2,919, $3,121 and $3,112, respectively.

12. Commitments and Contingencies

TOBACCO-RELATED LITIGATION:

OVERVIEW. 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 cases were
actually commenced against Liggett or BGL). There has been a noteworthy increase
in the number of cases pending against both Liggett and the other tobacco
companies. The cases generally fall into three categories: (i) smoking and
health cases alleging personal injury brought on behalf of individual smokers
("Individual Actions"), (ii) smoking and health cases alleging personal injury
and purporting to be brought on behalf of a class of plaintiffs ("Class
Actions") and (iii) health care cost recovery actions brought by state and local
governments, although recently numerous health care cost recovery actions have
been commenced on behalf of other third-party payors including asbestos
manufacturers, unions and taxpayers ("Attorneys General Actions"). 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.
Liggett had been receiving 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, which, for the most part, consisted of the
payment of counsel fees and costs, but this assistance terminated in 1997. In
1995 and 1996, approximately $1,500 and $6,500, respectively, in counsel fees
and costs were paid. In 1995 and 1996, Liggett incurred additional fees and
costs in connection with tobacco-related litigation in the amount of
approximately $4,500 and $3,500, respectively. In 1997, Liggett incurred fees
and costs in the amount of approximately $5,750. The future financial impact on
Liggett of the termination of this assistance and the effects of the tobacco
litigation settlements discussed below is not quantifiable at this time.

On June 24, 1992, in an action entitled Cipollone v. Liggett Group
Inc., et al., the United States Supreme Court issued an opinion concluding that
The Federal Cigarette Labeling and Advertising Act did not preempt state common
law damage claims but that The Public Health Cigarette Smoking Act of 1969 (the
"1969 Act") did preempt certain, but not all, state common law damage claims.
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. Bills have been
introduced in Congress on

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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.

INDIVIDUAL ACTIONS. As of December 31, 1997, there were approximately
250 cases pending against Liggett, and in most cases the other tobacco
companies, where individual plaintiffs allege injury resulting from cigarette
smoking, addiction to cigarette smoking or exposure to ETS and seek compensatory
and, in some cases, punitive damages. Of these, 108 are pending in the State of
Florida, 82 are pending in the State of New York and 19 are pending in the State
of Texas. The balance of individual cases are pending in 16 states. There are
four individual cases pending where Liggett is the only named defendant.

The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. Defenses raised
by defendants in these cases include lack of proximate cause, assumption of the
risk, comparative fault and/or contributory negligence, lack of design defect,
statute of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.

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 alleging as injury lung cancer. On October 6, 1997, the parties
settled this matter.

CLASS ACTIONS. As of December 31, 1997, there were approximately 40
actions pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named defendant.
Two of these cases, Fletcher, et al. v. Brooke Group Ltd., et al. and Walker, et
al. v. Liggett Group Inc., et al. have been settled, subject to court approval.
These two settlements are more fully discussed below under the "Settlements"
section.

On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Incorporated, et al., Circuit Court of the Eleventh Judicial District in and for
Dade County, Florida, was filed against Liggett and others. This case 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 October 10, 1997, the other major tobacco
companies settled this matter which settlement provides for a release of Liggett
and BGL. In February 1998, the Circuit Court approved the settlement, however, a
Notice of Appeal was filed in the Third District Court of Appeal by an objector
to the settlement.

On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company Inc., et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged addiction
to nicotine. On February 17, 1995, the District Court granted plaintiffs' motion
for class certification (the "Class Certification Order").

On May 23, 1996, the Court of Appeals for the Fifth Circuit reversed
the Class Certification Order and instructed the District Court to dismiss the
class complaint. The Fifth Circuit ruled that the District Court erred in its
analysis of the class certification issues by failing to consider how variations
in state law affect predominance of common questions and the superiority of the
class action mechanism. The appeals panel also held that the District Court's
predominance inquiry did not include consideration

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of how a trial on the merits in Castano would be conducted. The Fifth Circuit
further ruled that the "addiction-as-injury" tort is immature and, accordingly,
the District Court could not know whether common issues would be a "significant"
portion of the individual trials. According to the Fifth Circuit, any savings in
judicial resources that class certification may bring about is speculative and
would likely be overwhelmed by the procedural problems certification brings.
Finally, the Fifth Circuit held that in order to make the class action
manageable, the District Court would be forced to bifurcate issues in violation
of the Seventh Amendment.

The extent of the impact of the Castano decision on tobacco-related
class action litigation is still uncertain, although the decertification of the
Castano class by the Fifth Circuit may preclude any federal court from
certifying a nationwide class action for trial purposes with respect to
tobacco-related claims. The Castano decision has had, however, only limited
effect with respect to courts' decisions regarding narrower tobacco-related
classes or class actions brought in state rather than federal court. For
example, since the Fifth Circuit's ruling, courts in New York, Louisiana and
Maryland have certified "addiction-as-injury" class actions that covered only
citizens in those states. Two class actions pending in state court in Florida
have also been certified and one of the actions, the Broin case, had begun trial
before settling in 1997. The Castano decision has had no measurable impact on
litigation brought by or on behalf of single individual claimants.

ATTORNEYS GENERAL ACTIONS. As of December 31, 1997, 39 Attorneys
General actions were filed against Liggett and BGL. In February 1998, one
additional action was commenced. As more fully discussed below, through March
1998, Liggett has settled 37 of these actions. In addition, Liggett has reached
settlements with 6 Attorneys General representing states or territories which
have not yet commenced litigation. As of December 31, 1997, there were
approximately 35 additional third-party payor actions pending. In certain of the
pending proceedings, state and local government entities and others seek
reimbursement for Medicaid and other health care expenditures allegedly caused
by use of tobacco products. The claims asserted in these health care cost
recovery actions vary. In most of these cases, plaintiffs assert the equitable
claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment
of health care costs allegedly attributable to smoking and seek reimbursement of
those costs. Other claims made by some but not all plaintiffs include the
equitable claim of indemnity, common law claims of negligence, strict liability,
breach of express and implied warranty, violation of a voluntary undertaking or
special duty, fraud, negligent misrepresentation, conspiracy, public nuisance,
claims under state and federal statutes governing consumer fraud, antitrust,
deceptive trade practices and false advertising, and claims under RICO.

SETTLEMENTS. In March 1996, Liggett and BGL entered into an agreement,
subject to court approval, to settle the Castano class action tobacco
litigation. Under the Castano settlement agreement, upon final court approval of
the settlement, the Castano class would be entitled to receive up to five
percent of Liggett's pretax income (income before income taxes) each year (up to
a maximum of $50,000 per year) for the next 25 years, subject to certain
reductions provided for in the agreement and a $5,000 payment from Liggett if
Liggett or BGL fail to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of
settlement. Liggett and BGL have the right to terminate the Castano settlement
under certain circumstances. On March 14, 1996, Liggett, 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 (as defined in the letter), if granted,
of the Castano settlement or, if earlier, the completion by Liggett or BGL of a
combination with any defendant in Castano, except Philip Morris, the Castano
plaintiffs and their counsel agree not to enter into any more favorable
settlement agreement with any Castano defendant which would reduce the terms of
the Castano settlement agreement. If the Castano plaintiffs or their counsel
enter into any such settlement during this period, they shall pay Liggett
$250,000 within 30 days of the more favorable agreement and offer Liggett and
BGL 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 Liggett in accordance with its terms, Liggett and
its affiliates will not enter into any business transaction with any third party
which would cause the termination of the Castano

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settlement agreement. If Liggett or its affiliates enter into any such
transaction, then the Castano plaintiffs will be entitled to receive $250,000
within 30 days from the transacting party. On May 11, 1996, the Castano
Plaintiffs Legal Committee filed a motion with the United States District Court
for the Eastern District of Louisiana seeking preliminary approval of the
Castano settlement. On September 6, 1996, shortly after the class was
decertified, the Castano plaintiffs withdrew the motion for approval of the
Castano settlement.

In March 1996, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia (the "March 1996 Settlements"). The
March 1996 Settlements release Liggett and BGL from all tobacco-related claims
including claims for health case cost reimbursement and claims concerning sales
of cigarettes to minors. Certain of the terms of the March 1996 Settlements are
summarized below.

Under the March 1996 Settlements, the five settling states would share
an initial payment by Liggett of $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 60 days after either a
default by Liggett in its payment obligations under the settlement or a merger
or other similar transaction by Liggett or BGL with another defendant in the
lawsuits. In addition, Liggett will be required to pay the settling 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 is 2-1/2%
of Liggett's pretax income, subject to increase to 7-1/2% depending on the
number of additional states joining the settlement. No additional states have
joined this settlement to date. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to the
settling states $5,000 if Liggett or BGL fails to consummate a merger or other
similar transaction with another defendant in the lawsuits within three years of
the date of the March 1996 Settlements.

Settlement funds received by the Attorneys General will be used to
reimburse the states for smoking-related health care costs. Liggett and BGL 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. Liggett and
BGL have the right to terminate the March 1996 Settlements with respect to any
settling state if any of the remaining defendants in the litigation succeed on
the merits in that state's respective Attorney General action. Liggett and BGL
may also terminate the March 1996 Settlements if they conclude that too many
states have filed Attorney General actions and have not settled such cases with
Liggett and BGL.

On March 20, 1997, Liggett, BGL and the five settling states executed
an addendum pursuant to which Liggett and BGL agreed to provide to the five
settling states, among other things, the additional cooperation and compliance
with advertising restrictions that is provided for in the March 1997 Settlements
(discussed below). Also, pursuant to the addendum, the initial settling states
agreed to use best efforts to ensure that in the event of a global tobacco
settlement enacted through federal legislation or otherwise, Liggett's and BGL's
financial obligations under such a global settlement would be no more onerous
than under this settlement.

At December 31, 1995, Liggett had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Settlements. At
December 31, 1997, in connection with the March 1998 Settlements, the Company
accrued $16,421 for the present value of the fixed payments under the March 1998
Settlements. No additional amounts have been accrued with respect to the recent
settlements discussed below. 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 based on the occurrence of a
business combination, will be expensed when considered probable.

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reached with four more states through their respective Attorneys General
(settlements with these 21 Attorneys General and with the nationwide class are
hereinafter referred to as the "March 1997 Settlements"). On March 12, 1998,
Liggett and BGL, announced settlements with the Attorneys General of 14 states,
the District of Columbia and the U.S. Virgin Islands (the "March 1998
Settlements"). On March 26, 1998, Liggett and BGL settled with the Attorney
General of Georgia. The foregoing settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against Liggett and
BGL, brought by the Attorneys General and, upon court approval, the nationwide
class.

The states and territories where settlements have been reached with
Attorneys General are: Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois,
Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, Texas, Utah, U.S. Virgin Islands, Washington, West
Virginia, Wisconsin and Wyoming. Other states have either recently filed health
care cost recovery actions or indicated intentions to do so. Both Liggett and
BGL will endeavor to resolve those actions on substantially the same terms and
conditions as the March 1998 Settlements, however, there can be no assurance
that any such settlements will be completed.

As mentioned above, in March 1997, Liggett, BGL and plaintiffs filed
the mandatory class settlement agreement in an action entitled Fletcher, et al.
v. Brooke Group Ltd., et al., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the class,
and on May 15, 1997, a similar mandatory class settlement agreement was filed in
an action entitled Walker, et al. v. Liggett Group Inc., et al., United States
District Court, Southern District of West Virginia. The Company anticipates that
should the court in Fletcher, after dissemination of notice to the class of the
pending limited fund class action settlement and a full fairness hearing with
respect thereto, issue a final order and judgment approving the settlement, such
an order would preclude further prosecution by class members of tobacco-related
claims against Liggett and BGL. Under the Full Faith and Credit Act, a final
judgment entered in a nationwide class action pending in a state court has a
preclusive effect against any class member with respect to the claims settled
and released in the nationwide class action. As the class definition in Fletcher
encompasses all persons in the United States who would claim injury as a result
of cigarette smoking or ETS and any third-party payor claimants, it is
anticipated that upon final order and judgment, all such persons and third-party
payor claimants would be barred from further prosecution of tobacco-related
claims against Liggett and BGL.

The Walker court also granted preliminary approval and preliminary
certification of the nationwide class; however, on August 5, 1997, the court
vacated its preliminary certification of the settlement class, which decision is
currently on appeal. The Walker court relied on the Supreme Court's decision in
Amchem Products Inc. v. Windsor in reaching its decision. In Amchem, the Supreme
Court affirmed a decision of the Third Circuit vacating the certification of a
settlement class that involved asbestos-exposure claims. The Supreme Court held
that the proposed settlement class did not meet the requirements for Rule 23 of
the Federal Rules of Civil Procedure for predominance of common issues and
adequacy of representation. The Third Circuit had held that, although classes
could be certified for settlement purposes only, Rule 23's requirements had to
be satisfied as if the case were going to be litigated. The Supreme Court agreed
that the fairness and adequacy of the settlement are not pertinent to the
predominance inquiry under Rule 23(b)(3), and thus, the proposed class must have
sufficient unity so that absent class members can fairly be bound by decisions
of class representatives.

After the Amchem opinion was issued by the Supreme Court on June 25,
1997, objectors to Liggett's settlement in Walker moved for decertification.
Although Liggett's settlements, particularly in

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the Walker action, are "limited fund" class action settlements proceeding under
Rule 23(b)(1), and Amchem was a Rule 23(b)(3) case, the court in the Walker
action, nonetheless, decertified the Walker class. Applying Amchem to the Walker
case, the District Court, in a decision issued on August 5, 1997, determined
that while plaintiffs in Walker have a common interest in "maximizing the
limited fund available from the defendants," there remained "substantial
conflicts among class members relating to distribution of the fund and other key
concerns" that made class certification inappropriate.

The Amchem decision's ultimate effect on the viability of the Walker
and Fletcher settlements remains uncertain given the Fifth Circuit's recent
ruling reaffirming the limited fund class action settlement in In re Asbestos
Litigation ("Ahearn"). In June 1997, the Supreme Court remanded Ahearn to the
Fifth Circuit for consideration in light of Amchem. On remand, the Fifth Circuit
made two decisive distinctions between Amchem and Ahearn. First, the Ahearn
class action proceeded under Rule 23(b)(1) while Amchem was a Rule 23(b)(3) case
and second, in Ahearn, there was no allocation or difference in award, according
to nature or severity of injury, as there was in Amchem. The Fifth Circuit
concluded that all members of the class and all class representatives share
common interests and none of the uncommon questions, abounding in Amchem, exist.

The remaining material terms of the March 1996 Settlements, the March
1997 Settlements and the March 1998 Settlements are described below.

Pursuant to each of the settlements, both Liggett and BGL agreed to
cooperate fully with the Attorneys General and the nationwide class in their
respective lawsuits against the tobacco industry. Liggett and BGL agreed to
provide to these parties all relevant tobacco documents in their possession,
other than those subject to claims of joint defense privilege, and to waive,
subject to court order, certain attorney-client privileges and work product
protections regarding Liggett's smoking-related documents to the extent Liggett
and BGL can so waive these privileges and protections. The Attorneys General and
the nationwide class agreed to keep Liggett's documents under protective order
and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may be
subject to a joint defense privilege with other tobacco companies will not be
produced to the Attorneys General or the nationwide class, but will be, pursuant
to court order, submitted to the appropriate court and placed under seal for
possible in camera review. Additionally, under similar protective conditions,
Liggett and BGL agreed to offer their employees for witness interviews and
testimony at deposition and trial. Pursuant to both settlement agreements,
Liggett also agreed to place an additional warning on its cigarette packaging
stating that "Smoking is Addictive" and to issue a public statement, as
requested by the Attorneys General. Liggett has commenced distribution of
cigarette packaging which displays the new warning label.

Pursuant to the March 1996 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or BGL, prior
to the third anniversary of the settlement, would receive certain settlement
benefits, including limitations on potential liability. Pursuant to the
agreement, any such combining tobacco company would be released from the
lawsuits brought by the five initial settling states. Such combining tobacco
company would be obligated to pay into the settlement fund within sixty days of
becoming bound to the agreement $135,000, and make annual payments of 2.5% of
the combining company's pre-tax income (but not less than $30,000 per year).
Such combining tobacco company would also have to comply with the advertising
and access restrictions provided for in the agreement, and would have to
withdraw their objections to the FDA rule.

Pursuant to the March 1997 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or BGL, prior
to the fourth anniversary of the settlements, would receive certain settlement
benefits, including limitations on potential liability for affiliates not
engaged in domestic tobacco operations and a waiver of any obligation to post a
bond to appeal any future adverse judgment. In addition, within 120 days
following any such combination, Liggett would be required to pay the settlement
fund $25,000. Under all settlements, the plaintiffs have agreed not to seek

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an injunction preventing a defendant tobacco company combining with Liggett or
BGL from spinning off any affiliate which is not engaged in the domestic tobacco
business.

Pursuant to the March 1998 Settlements, Liggett is required to pay each
of settling states and territories their relative share (based on the Medicaid
population of each state over the total Medicaid population of the United
States) of between 27.5% and 30% of Liggett's pre-tax income each year for 25
years, with a minimum payment guarantee of $1,000 per state over the first nine
years of the agreement. The liability was computed using a discount rate of 18%.
The aggregate liability under the March 1996 Settlements, the March 1997
Settlements, and the March 1998 Settlements is $39,556, the present value of
which, when discounted at the rate of 18% per annum, is $19,365 at December 31,
1997. Minimum payments to be made for these settlements over the next five years
and thereafter are: 1998: $4,044; 1999: $4,406; 2000: $4,406; 2001: $4,465:
2002: $4,518; thereafter: $17,717. The annual percentage is subject to increase,
pro rata from 27.5% up to 30%, depending on the number of additional states
joining the settlement. Pursuant to the "most favored nation" provisions under
the March 1996 Settlements and the March 1997 Settlements, each of the states
settling under those settlements could benefit from the economic terms of the
March 1998 Settlements. In the case of the March 1997 Settlements, in the event
that the Fletcher class is approved, monies collected in the settlement fund
will be overseen by a court-appointed committee and utilized to compensate state
health care programs and settlement class members and to provide counter-market
advertising. In all settlements, Liggett agreed to phase-in compliance with
certain proposed 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. The March 1998 Settlements provide for
additional restrictions and regulations on Liggett's advertising, including a
prohibition on outdoor advertising and product advertising on the Internet and
on payments for product placement in movies and television.

Under all settlements, Liggett and BGL are also entitled to most
favored nation treatment in the event any settling Attorney General reaches a
settlement with any other defendant tobacco company. Under the March 1996
Settlements and March 1997 Settlements, in the event of a global settlement
involving federal legislation with any other defendant tobacco company, the
settling Attorneys General agreed to use their "best efforts" to ensure that the
Liggett and BGL's liability under such legislation should be no more onerous
than under these settlements. Under the March 1998 Settlements, the settling
Attorneys General agreed to write letters to Congress and the President of the
United States to ensure that Liggett and BGL's liability under any such
legislation should be more onerous than under these settlements.

Copies of the various settlement agreements are filed as exhibits to
the Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.

TRIALS. Liggett is a defendant in trials currently proceeding in the
State of Minnesota by Hubert H. Humphrey, III, its Attorney General and Blue
Cross and Blue Shield of Minnesota v. Philip Morris Incorporated, et al.,
District Court of the Second Judicial District, Ramsey County, Minnesota, which
commenced on January 20, 1998. Liggett settled the claims of the State of
Minnesota on March 20, 1997, but still remains a defendant in the case with
respect to the State's co-plaintiff, Blue Cross and Blue Shield of Minnesota.
Liggett is also a defendant in Dunn and Wiley v. RJR Nabisco Holdings Corp., et
al., Superior Court, Delaware County, Indiana, which trial commenced on February
9, 1998. There are several other trial dates scheduled during 1998 for
individual cases; however, trial dates are subject to change.

PROPOSED RESOLUTION. In June 1997, Philip Morris Incorporated ("Philip
Morris"), R. J. Reynolds Tobacco Company ("RJR"), B&W, Lorillard Tobacco Company
("Lorillard") and the United States Tobacco Company, along with the Attorneys
General for the States of Arizona, Connecticut, Florida, Mississippi, New York
and Washington and the Castano Plaintiffs' Litigation Committee executed a
Memorandum of Understanding to support the adoption of federal legislation and
necessary

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ancillary undertakings, incorporating the features described in a proposed
resolution (the "Resolution"). The proposed Resolution mandates a total
reformation and restructuring of how tobacco products are manufactured, marketed
and distributed in the United States.

The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access restrictions,
licensing of tobacco retailers, the adoption and enforcement of "no sales to
minors" laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals, regulation of tobacco products by the FDA,
public disclosure of industry documents and research, smoking cessation
programs, compliance programs by the industry, public smoking and smoking in the
workplace, enforcement of the proposed Resolution, industry payments and
litigation.

The proposed Resolution would require the FDA to impose annual
surcharges on the industry if targeted reductions in underage smoking incidence
are not achieved in accordance with a legislative timetable. The surcharge would
be based upon an approximation of the present value of the profit the companies
would earn over the lives of all underage consumers in excess of the target, and
would be allocated among participating manufacturers based on their market share
of the United States cigarette industry.

The proposed Resolution would require participating manufacturers to
make substantial payments in the year of implementation and thereafter
("Industry Payments"). Participating manufacturers would be required to make an
aggregate $10 billion initial Industry Payment on the date that federal
legislation implementing the terms of the proposed Resolution is signed. This
Industry Payment would be based on relative market capitalization. Thereafter,
the participating companies would be required to make specified annual Industry
Payments determined and allocated among the companies based on volume of
domestic sales as long as the companies continue to sell tobacco products in the
United States. These Industry Payments, which would begin on December 31 of the
first full year after implementing federal legislation is signed, would be in
the following amounts (at 1996 volume levels) -- year 1: $8.5 billion; year 2:
$9.5 billion; year 3: $11.5 billion; year 4: $14 billion; and each year
thereafter: $15 billion. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate, and would be adjusted to
reflect changes from 1996 domestic sales volume levels.

The Industry Payments would be separate from any surcharges. The
Industry Payments would receive priority and would not be dischargeable in any
bankruptcy or reorganization proceeding and would be the obligation only of
entities selling tobacco products in the United States (and not their affiliated
companies). The proposed Resolution provides that all payments by the industry
would be ordinary and necessary business expenses in the year of payment, and no
part thereof would be either in settlement of an actual or potential liability
for a fine or penalty (civil or criminal) or the cost of a tangible or
intangible asset. The proposed Resolution would provide for the pass-through to
consumers of the annual Industry Payments in order to promote the maximum
reduction in underage use.

If enacted, the federal legislation provided for in the proposed
Resolution would settle present attorney general health care cost recovery
actions (or similar actions brought by or on behalf of any governmental entity
other than the federal government), parens patriae and smoking and health class
actions and all "addiction"/dependence claims, and would bar similar actions
from being maintained in the future. However, the proposed Resolution provides
that no stay applications will be made in pending governmental actions without
the mutual consent of the parties. The proposed Resolution would not affect any
smoking and health class action or any health care cost recovery action that is
reduced to final judgment before implementing federal legislation is effective.

Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, except as expressly changed by implementing
federal legislation. Claims, however, could not be maintained on a class or
other aggregated basis, and could be maintained only against tobacco
manufacturing companies (and not their retailers, distributors or affiliated
companies). In addition, all

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punitive damage claims based on past conduct would be resolved as part of the
proposed Resolution, and future claimants could seek punitive damages only with
respect to claims predicated upon conduct taking place after the effective date
of implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could be
maintained only if based on subrogation of individual claims. Under subrogation
principles, a payor of medical costs can seek recovery from a third party only
by "standing in the shoes" of the injured party and being subject to all
defenses available against the injured party.

The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil liabilities
relating to past conduct. Judgments and settlements arising from tort actions
would be paid as follows: The proposed Resolution would set an annual aggregate
cap of up to 33% of the annual base Industry Payment (including any reductions
for volume declines). Any judgments or settlements exceeding the cap in a
particular year would roll over into the next year. While judgments and
settlements would run against the defendant, they would give rise to an
80-cents-on-the-dollar credit against the annual Industry Payment. Finally, any
individual judgments in excess of $1 million would be paid at the rate of $1
million per year unless every other judgment and settlement could first be
satisfied within the annual aggregate cap. In all circumstances, however, the
companies would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in the
litigation settled by the proposed Resolution.

Under the proposed Resolution, Liggett and BGL would be deemed to be a
"non-participating manufacturer". The proposed Resolution provides, among other
things, that a non-participating manufacturer would be required to place into
escrow, each year, an amount equal to 150% of its share of the payment required
of participating manufacturers (other than the portion allocated to public
health programs and federal and state enforcement). These funds would be
earmarked for potential liability payments and could be reclaimed, with
interest, after 35 years, to the extent they had not been paid out in liability.

The proposals are currently being reviewed by the White House, Congress
and various public interest groups. Separately, the other tobacco companies
negotiated settlements of the Attorneys General health care cost recovery
actions in Mississippi, Florida and Texas. Management is unable to predict the
ultimate effect, if any, of the enactment of legislation adopting the proposed
resolution. Management is also unable to predict the ultimate content of any
such legislation; however, adoption of any such legislation could have a
material adverse effect on the business of Liggett and BGL.

OTHER RELATED MATTERS. On March 20, 1997, RJR, Philip Morris, B&W and
Lorillard obtained a temporary restraining order from a North Carolina state
court preventing Liggett and BGL and their agents, employees, directors,
officers and lawyers from turning over documents allegedly subject to the joint
defense privilege in connection with the settlements, which restraining order
was converted to a preliminary injunction by the court on April 9, 1997. This
ruling is currently on appeal by Liggett and BGL. On June 5, 1997, the North
Carolina Supreme Court denied Liggett's Motion to Stay the case pending appeal.
On March 24, 1997, the United States District Court for the Eastern District of
Texas and state courts in Mississippi and Illinois each issued orders enjoining
the other tobacco companies from interfering with Liggett's filing with the
courts, under seal, those documents.

In March 1996, and in each of March, July, October and December 1997,
Liggett and/or BGL received subpoenas from a Federal grand jury in connection
with an investigation by the United States

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Department of Justice (the "DOJ Investigation") involving the industry's
knowledge of the health consequences of smoking cigarettes; the targeting of
children by the industry and the addictive nature of nicotine and the
manipulation of nicotine by the industry. Liggett has responded to the March
1996, March 1997 and July 1997 subpoenas and is in the process of responding to
the October and December 1997 subpoenas. Liggett understands that the Eastern
District Investigation and the DOJ Investigation have, for all intents and
purposes, been consolidated into one investigation being conducted by the
Department of Justice. Liggett and BGL are unable, at this time, to predict the
outcome of this investigation.

Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against Liggett
or BGL. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Liggett is unable
to evaluate the effect of these developing matters on pending litigation or the
possible commencement of additional litigation.

Liggett is unable to make a meaningful estimate with respect to the
amount of loss that could result from an unfavorable outcome of the cases
pending against the Company, because the complaints filed in these cases rarely
detail alleged damages. Typically, the claims set forth in an individual's
complaint against the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage claims are
usually stated as being for at least the minimum necessary to invoke the
jurisdiction of the court.

Third-party payor claimants and others have set forth several
additional variations on relief sought: funding of corrective public education
campaigns relating to issues of smoking and health; funding for clinical smoking
cessation programs; disgorgement of profits from sales of cigarettes;
restitution; treble damages; and attorneys' fees. Nevertheless, no specific
amounts are provided. It is, however, understood that requested damages against
the tobacco company defendants in these cases may be in the billions of dollars.

It is possible that Liggett's consolidated financial position, results
of operation and cash flow could be materially adversely affected by an
unfavorable outcome in any of such pending tobacco-related litigation.

Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett's current operations are conducted in material compliance
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, has not had a material effect on the capital expenditures, earnings
or competitive position of Liggett.

There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to smoking or tobacco 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.

LEGISLATION AND REGULATION:

On August 28, 1996, the FDA filed in the Federal Register a Final Rule
(the "FDA Rule") classifying tobacco as a drug, asserting jurisdiction by the
FDA over the manufacture and marketing of tobacco products and imposing
restrictions on the sale, advertising and promotion of tobacco products.
Litigation was commenced in the United States District Court for the Middle
District of North Carolina challenging the legal authority of the FDA to assert
such jurisdiction, as well as challenging the

52
53

constitutionality of the rules. The court, after argument, granted plaintiffs'
motion for summary judgment prohibiting the FDA from regulating or restricting
the promotion and advertising of tobacco products and denied plaintiffs' motion
for summary judgment on the issue of whether the FDA has the authority to
regulate access to, and labeling of, tobacco products. The four major cigarette
manufacturers and the FDA have filed notices of appeal. Liggett and BGL support
the FDA Rule and have begun to phase in compliance with certain of the proposed
interim FDA regulations. See discussions of the Castano and Attorneys General
settlements above.

In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. In December 1997, the
United States District Court for the District of Massachusetts enjoined this
legislation from going into effect, however, on December 15, 1997, Liggett began
complying with this legislation by providing ingredient information to the
Massachusetts Department of Public Health.

On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("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
Liggett and BGL.

In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban smoking
in the workplace. Hearings were completed during 1995. OSHA has not yet issued a
final rule or a proposed revised rule. While Liggett cannot predict the outcome,
some form of federal regulation of smoking in workplaces may result.

In January 1993, the United States Environmental Protection Agency
("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.

As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. Since then,
several bills have been introduced in the Senate that purport to propose
legislation along these lines. Management is unable to predict the ultimate
content of any such legislation; however, adoption of any such legislation could
have a material adverse effect on the business of Liggett and BGL.

In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
the effects of which, at this time, Liggett is not able to evaluate.

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54

13. Related Party Transactions

On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat's tobacco operations from BOL, for $2,100. Liggett-Ducat produces
and markets cigarettes in Russia. Liggett also acquired on that date for $3,400
a ten-year option to purchase from BOL at the same per share price up to 292,407
additional shares of Liggett-Ducat, thereby entitling Liggett to increase its
interest in Liggett-Ducat to approximately 62%. On March 13, 1997, Liggett
acquired a second ten-year option to purchase BOL's remaining shares in
Liggett-Ducat (an additional 33%) for $2,200 of which $2,049 was paid in cash,
with the balance settled through intercompany accounts. Such amounts are
accounted for as an element of cash flows from investing activities in the
Company's consolidated statements of cash flows. Liggett accounted for its
investment in Liggett-Ducat under the equity method of accounting. Liggett's
equity in the net income of Liggett-Ducat amounted to $498 for the year ended
December 31, 1997. The Company's equity in the loss of Liggett-Ducat amounted to
$1,116 for the year ended December 31, 1996. On December 31, 1997, the carrying
value of Liggett-Ducat amounted to $1,208. The excess of the cost of the option
over the carrying amount of net assets to be acquired under the option has been
charged to stockholder's deficit. On January 30, 1998, in connection with the
restructuring of the Liggett Notes, BOL acquired the Liggett-Ducat shares and
options held by Liggett. (Refer to Note 10.)

On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000. The difference of $2,578 between the sale price and the
carrying value is accounted for as a credit to contributed capital.

During 1995 and 1996, Liggett provided certain administrative and
technical support to Liggett-Ducat in exchange for which Liggett-Ducat provided
assistance to Liggett in its pursuit of selling cigarettes in the Russian
Republic. The expenses associated with Liggett's activities amounted to $76 and
$229 for the years ended December 31, 1996 and 1995, respectively.

Liggett is 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.

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.

Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide 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
$3,318 in 1997, $3,160 in 1996 and $3,010 in 1995. This fee is in addition to
the management fee and overhead reimbursements described above. In connection
with the January 30, 1998 amendment to the Liggett Notes Indenture, BGL and BGLS
agreed to waive corporate services and management fees above $3,600 per year,
effective January 1, 1998.

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

The Company acquired CTEC from its indirect parent during 1995 for
$800. The excess of cost over the carrying amount of the 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. Accounts
receivable from affiliates relate principally to advances for expenses paid by
the Company on behalf of its affiliates.

54
55

During 1997, the Company reduced its headcount by 108 full-time
positions and recorded a $1,964 restructuring charge to operations ($407 of
which was included in cost of sales) for severance programs, primarily salary
continuation and related benefits for terminated employees. The Company expects
to continue its cost reduction programs. Of the total restructuring recorded
during 1997, $1,671 was funded during 1997, leaving $293 remaining to be funded
in 1998.

During 1996, the Company reduced its headcount by 38 positions and
recorded a $3,428 restructuring charge to operations ($132 of which was included
in cost of sales) for severance programs, primarily salary continuation and
related benefits for terminated employees. Of the total restructuring recorded
during 1996, $1,416 was funded during 1996, leaving $2,012 remaining to be
funded in subsequent years.

During 1995, Liggett continued its efforts towards reducing costs by,
among other things, offering voluntary retirement programs to eligible
employees. The Company's 1995 cost reduction programs reduced the Company's
headcount by approximately 120 positions. In connection therewith, the Company
recorded charges totaling $2,548 to operating income including $621 relating to
manufacturing operations which has been charged to cost of sales.

55
56
REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholder
Eve Holdings Inc.

We have audited the accompanying balance sheets of Eve Holdings Inc. (the
"Company") as of December 31, 1997 and 1996 and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eve Holdings Inc. at December
31, 1997 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2a to the
financial statements, the Company's revenues are comprised solely of royalties
and interest from Liggett Group Inc. ("Liggett"). Liggett suffered a lost of
$14,179,000 for the year ended December 31, 1997 and had net capital and
working capital deficiencies of $192,857,000 and $17,542,000, respectively, at
December 31, 1997. Liggett also has a $144,891,000 principal payment due on its
Senior Secured Notes on February 1, 1999 and Liggett's revolving credit
facility (the "Facility"), which has a balance of $23,427,000 at December 31,
1997, is due on March 8, 1999. Liggett's financial resources are not sufficient
to repay the Senior Secured Notes when they become due, nor will Liggett be
able to repay the Facility when it becomes due. In addition, due to the many
risk and uncertainties associated with the cigarette industry and the impact of
tobacco litigation, there can be no assurance that Liggett will be able to meet
its future earnings or cash flow goals. These facts raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.

COOPERS & LYBRAND L.L.P.

Miami, Florida
April 8, 1998

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57

EVE HOLDINGS INC.

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

December 31,
------------
1997 1996
---- ----

ASSETS

Cash ...................................................................... $ 1 $ --

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

Trademarks, at cost, less accumulated amortization of
$18,995 and $17,294, respectively .................................... 1,418 3,119
-------- --------

Total assets ............................................... $ 1,421 $ 3,121
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Federal income taxes currently payable to parent .......................... $ 91 $ --

Dividends payable ......................................................... 1,273 4,623

Cash overdraft ............................................................ -- 92

Other current liabilities ................................................. 3 19

Deferred income taxes ..................................................... 496 1,092
-------- --------

Total liabilities .......................................... 1,863 5,826
-------- --------

Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital ........................................................... 45,442 46,548

Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 ...................................... (44,520) (44,520)
Other ........................................................... (1,364) (4,733)
-------- --------

Total stockholder's equity (deficit) ...................... (442) (2,705)
-------- --------

Total liabilities and stockholder's equity (deficit) ....... $ 1,421 $ 3,121
======== ========

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

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58

EVE HOLDINGS INC.

STATEMENTS OF OPERATIONS

(Dollars in thousands)

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Revenues:
Royalties - parent ........................... $ 7,122 $ 8,608 $ 10,452
Interest - parent ............................ 6,306 6,306 6,306
------- ------- --------
13,428 14,914 16,758

Expenses:
Amortization of trademarks ................... 1,701 1,701 1,702
Miscellaneous ................................ 83 129 93
------- ------- --------
Operating income ............................. 11,644 13,084 14,963

Interest expense ................................. -- 49 --
------- ------- --------

Income before income taxes ................... 11,644 13,035 14,963

Income tax provision ............................. 1,886 2,480 5,237
------- ------- --------

Net income ................................... $ 9,758 $10,555 $ 9,726
======= ======= ========

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

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59

EVE HOLDINGS INC.

STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

(Dollars in thousands)

Common
Stock and Receivables Total
Capital in Retained From Stockholder's
Excess of Par Earnings Parent Equity
------------- -------- ----------- -------------

Balance at December 31, 1994 ..................... $ 48,759 $ -- $(47,272) $ 1,487

Net income ..................................... -- 9,726 -- 9,726
Dividends/capital distributions ................ (1,106) (9,726) -- (10,832)
Net change in receivables from parent ........... -- -- 62 62
-------- -------- -------- --------

Balance at December 31, 1995 ...................... 47,653 -- (47,210) 443

Net income ..................................... -- 10,555 -- 10,555
Dividends/capital distributions ................ (1,105) (10,555) -- (11,660)
Net change in receivables from parent........... -- -- (2,043) (2,043)
-------- -------- -------- --------

Balance at December 31, 1996 ...................... 46,548 -- (49,253) (2,705)

Net income ..................................... -- 9,758 -- 9,758
Dividends/capital distributions ................ (1,106) (9,758) -- (10,864)
Net change in receivables from parent........... -- -- 3,369 3,369
-------- -------- -------- --------

Balance at December 31, 1997 ...................... $ 45,442 $ -- $(45,884) $ (442)
======== ======== ======== ========

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

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60

EVE HOLDINGS INC.

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Cash flows from operating activities:
Net income ............................................................ $ 9,758 $ 10,555 $ 9,726
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 1,701 1,701 1,703
Deferred income taxes ............................................. (596) (595) (596)
Changes in assets and liabilities:
Federal income taxes currently payable to parent................... 91 (164) 157
Other current liabilities ......................................... (16) 19 --
-------- -------- --------

Net cash provided by operating activities ..................... 10,938 11,516 10,990
-------- -------- --------

Cash flows from investing activities:
Capital expenditures .................................................. -- -- --
-------- -------- --------

Net cash used in investing activities .......................... -- -- --
-------- -------- --------

Cash flows from financing activities:
(Decrease) increase in cash overdraft ................................. (92) 92 --
Dividends/capital distributions ....................................... (14,214) (9,573) (11,046)
Decrease (increase) in receivable from parent ......................... 3,369 (2,043) 62
-------- -------- --------

Net cash used in financing activities .......................... (10,937) (11,524) (10,984)
-------- -------- --------

Net increase (decrease) in cash ........................................... 1 (8) 6

Cash:
Beginning of period ................................................... -- 8 2
-------- -------- --------
End of period ......................................................... $ 1 $ -- $ 8
======== ======== ========
Supplemental cash flow information:
Payments of income taxes through receivable from parent ............... $ 2,424 $ 5,159 $ 5,676
======== ======== ========
Dividends/capital distributions declared but not paid ................. $ 1,273 $ 4,623 $ 2,536
======== ======== ========

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

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61

EVE HOLDINGS INC.

Notes to Financial Statements

(Dollars in thousands, except per share amounts)

1. The Company

Eve Holdings Inc. ("Eve" or the "Company") is a wholly-owned subsidiary
of Liggett Group Inc. ("Liggett"). Eve's predecessor, Chesterfield Assets Inc.,
was organized in March 1987. 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 of $236,952, $296,544 and $332,246 for the years
ended December 31, 1997, 1996 and 1995, respectively. Generally, royalties are
earned based on a rate of either 2% of sales for generic product trademarks and
5% of sales for branded product trademarks. In recent fiscal years, Liggett has
experienced greater growth in the sales of generic rather than branded products
resulting in a lower overall royalty rate. The Trademarks are pledged as
collateral for borrowings under the Liggett Notes (see Note 3).

2. Summary of Significant Accounting Policies

a. Going Concern

The accompanying financial statements have been prepared assuming that
Eve will continue as a going concern. Eve's revenues are comprised solely of
royalties and interest income from Liggett. In addition, Eve holds a note
receivable from Liggett for $44,520 due no sooner than February 1, 1999. Liggett
had a working capital deficiency of $17,542 and a net capital deficiency of
$192,857 as of December 31, 1997, is highly leveraged and has substantial
near-term debt service requirements. These matters raise substantial doubt about
Eve and Liggett meeting their liquidity needs and their ability to continue as
going concerns.

The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

b. Basis of Presentation

On February 11, 1992, Eve consummated an Agreement and Plan of Merger
(the "Merger Agreement") with LGC Corp. (a wholly-owned subsidiary of Liggett)
whereby the operations of LGC Corp., consisting primarily of holding an
unsecured $44,250 note receivable (bearing interest at 14%, due November 2,
1996) from Liggett and related interest thereon, were merged into those of Eve.
The merger was accounted for at historical cost similar to that in pooling of
interests accounting. On March 7, 1994, Liggett and Eve agreed to extend the due
date of the note to no sooner than February 1, 1999 from November 2, 1996. All
other terms of the note remained the same.

c. 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.

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62

d. Trademarks

Trademarks are amortized using the straight-line method over 12 years.
Management periodically reviews the carrying value of trademarks to determine
whether asset values are impaired.

e. Estimates and Assumptions

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.

4. Income Taxes

Eve's operations are included in the consolidated federal income tax
return of its indirect parent, Brooke Group Ltd. ("Brooke"). Eve's federal
income tax provisions are calculated as if it filed a separate federal income
tax return. SFAS No. 109 "Accounting for Income Taxes" requires that deferred
taxes be recorded under the liability method.

The amounts provided for income taxes are as follows:

Year Ended December 31,
-----------------------
1997 1996 1995
------- ------- -------

Current:
Federal.......................................... $ 2,455 $ 2,883 $ 5,832
State ........................................... 27 192 --

Deferred:
Federal.......................................... (596) (595) (595)
State ........................................... -- -- --
------- ------- -------

Total tax provision ................................. $ 1,886 $ 2,480 $ 5,237
======= ======= =======

Eve's deferred tax liability relates entirely to the difference in
the basis of the Trademarks for book and tax purposes. As permitted in SFAS No.
109, Eve has not adjusted the basis of the Trademarks that were previously
adjusted to net of tax amounts to be consistent with the accounting treatment
adopted by Liggett.

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63

Differences between the amounts provided for income taxes and amounts
computed at the federal statutory rate are summarized as follows:

Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----

Income before income taxes.......................... $ 11,644 $ 13,035 $14,963
======== ======== =======

Federal income tax at statutory rates............... 4,075 4,563 5,237

(Decreases) increases resulting from:
Exclusion of interest income between
related parties............................ (2,207) (2,207) --
State income taxes, net of federal.............. 18 124 --
-------- -------- -------

Total tax provision................................. $ 1,886 $ 2,480 $ 5,237
======== ======== =======

Eve qualifies as a company conducting operations exempt from income
taxation under Delaware General Statute Section 1903(b). In recent years, some
states have been aggressively pursuing companies exempt under this statute.
Eve's management believes that certain state income tax rulings supporting these
states' arguments will be ultimately reversed and that Eve's status as a company
not conducting business in these states will be respected. Consequently,
management has not provided a reserve for additional state income taxes. No
assurance can be given with regard to future state income tax rulings and audit
activity with respect to Eve.

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64

LIGGETT GROUP INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(Dollars in thousands)

Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Net at End
of Period Expenses Sales Deductions of Period
--------- -------- ----- ---------- ---------

Year ended December 31, 1997

Allowances for:
Doubtful accounts ...................... $ 750 $ 226 $ -- $ 156(a) $ 820
Cash discounts ......................... 530 10,998 -- 11,286(b) 242
------ ------- --------- ------- ------
Total .............................. $1,280 $11,224 $ -- $11,442 $1,062
====== ======= ========= ======= ======
Sales returns allowance ................... $5,000 $ -- $ -- $ 250(c) $4,750
====== ======= ========= ======= ======
Provision for inventory obsolescence ...... $3,218 $ 221 $ -- $ 2,282(d) $1,157
====== ======= ========= ======= ======

Year ended December 31, 1996

Allowances for:
Doubtful accounts ...................... $ 200 $ 903 $ -- $ 353(a) $ 750
Cash discounts ......................... 615 13,929 -- 14,014(b) 530
------ ------- --------- ------- ------
Total .............................. $ 815 $14,832 $ -- $14,367 $1,280
====== ======= ========= ======= ======
Sales returns allowance ................... $5,000 $ -- $ -- $ --(c) $5,000
====== ======= ========= ======= ======
Provision for inventory obsolescence ...... $2,069 $ 1,341 $ -- $ 192(d) $3,218
====== ======= ========= ======= ======

Year ended December 31, 1995

Allowances for:
Doubtful accounts ...................... $ 249 $ 231 $ -- $ 280(a) $ 200
Cash discounts ......................... 720 14,579 -- 14,684(b) 615
------ ------- --------- ------- ------
Total .............................. $ 969 $14,810 $ -- $14,964 $ 815
====== ======= ========= ======= ======
Sales returns allowance ................... $5,800 $ 1,030 $ (800) $ 1,030(c) $5,000
====== ======= ========= ======= ======
Provision for inventory obsolescence ...... $1,369 $ 911 $ -- $ 211(d) $2,069
====== ======= ========= ======= ======

(a) Represents uncollectible accounts written off.
(b) Represents cash discounts taken.
(c) Represents adjustments to lower the allowance based on revised
estimates of sales returns by management.
(d) Represents inventory written off, disposed of, or written down to lower of
cost or market value.

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65

INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION
- ----------- -----------

* 3(i).1 Restated Certificate of Incorporation of Liggett (incorporated
by reference to Exhibit 3 in Liggett's Form 10-Q for the quarter
ended June 30, 1992, Commission File No. 33-47482).

* 3(i).2 Certificate of Amendment to Restated Certificate of Incorporation
of Liggett, as amended, dated September 28, 1993 (incorporated
by reference to Exhibit 3(i).2 in Liggett's Registration Statement
on Form S-1, Amendment No. 4, Commission File No. 33-75224).

* 3(i).3 Certificate of Incorporation of Eve (incorporated by reference to
exhibit 3.3 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-47482).

*3(ii).1 Bylaws of Liggett (incorporated by reference to Exhibit 3.2 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-47482).

*3(ii).2 Bylaws of Eve (incorporated by reference to Exhibit 3.4 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-47482).

* 4.1 Indenture, dated February 14, 1992 among Liggett, Eve and
Bankers Trust Company as Trustee including the Forms of Series
A Notes and Series B Notes and the Guaranty thereon (the
"Indenture") (incorporated by reference to Exhibit 4 (m) in BGL's
Form 10-K for the year ended December 31, 1991, Commission
File No. 1-5759).

* 4.2 First Supplemental Indenture, dated January 26, 1994, including
the Form of Series C Variable Rate Senior Secured Note and the
Guaranty thereon (incorporated by reference to Exhibit 4.2 in
Liggett's Registration Statement on Form S-1, Amendment No. 4,
Commission File No. 33-75224).

* 4.3 Second Supplemental Indenture and Amendment to Series B and
Series C Senior Secured Notes, dated as of January 30, 1998, between
Liggett, Eve and Bankers Trust Company, as Trustee, (incorporated
by reference to Exhibit 99.2 in BGL's Form 8-K dated February 2, 1998,
Commission File No. 1-5759).

* 4.4 Security Agreement, dated February 14, 1992 among Liggett,
Eve and Bankers Trust Company (the "Security Agreement")
(incorporated by reference to Exhibit 4 (n) in BGL's Form 10-K
for the year ended December 31, 1991, Commission File No. 1-5759).

* 4.5 Amendment No. 1 to the Security Agreement, dated January 26,
1994 (incorporated by reference to Exhibit 4.4 in Liggett's Regi-
stration Statement on Form S-1, Amendment No. 4, Commission
File No. 33-75224).

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66

EXHIBIT NO. DESCRIPTION
- ----------- -----------

* 4.6 Amendment No. 2 to Security Agreement, dated as of January 30,
1998, among Liggett, Eve and Bankers Trust Company, as
Collateral Agent, (incorporated by reference to Exhibit 99.3 in BGL's
Form 8-K dated February 2, 1998, Commission File No. 1-5759).

* 4.7 Deed of Trust and Assignment of Rents, Leases and Leasehold
Interests dated February 14, 1992 by Liggett to Bankers Trust
company relating to each of the Virginia and North Carolina
properties, (the "Deed of Trust") (incorporated by reference
to Exhibit 4 (o) in BGL's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).

* 4.8 Amendment No. 1 to the Deed of Trust (North Carolina), dated
January 26, 1994 (incorporated by reference to Exhibit 4.6 in
Liggett's Registration Statement on Form S-1, Amendment No. 4,
Commission File No. 33-75224).

* 4.9 Amendment No. 1 to the Deed of Trust (Virginia), dated
January 26, 1994 (incorporated by reference to Exhibit 4.7 in
Liggett's Registration Statement on Form S-1, Amendment No. 4,
Commission File No. 33-75224).

* 4.10 Pledge Agreement, dated as of January 30, 1998, among Brooke
(Overseas) Ltd. ("BOL") and Bankers Trust Company, as Collateral
Agent, (incorporated by reference to Exhibit 99.6 in BGL's Form 8-K dated
February 2, 1998, Commission File No. 1-5759).

* 4.11 Loan and Security Agreement, dated March 8, 1994 in the
amount of $40,000,000 between Liggett and Congress Financial
Corporation (incorporated by reference to Exhibit 10 (xx) in
BGL's Form 10-K for the year ended December 31, 1993,
Commission File No. 1-5759).

* 10.1 Retirement Plan of BGLS for Salaried Non-Bargaining Unit
Employees (incorporated by reference to Exhibit 10 (s) in
BGL's Registration Statement on Form S-1, Commission File
No. 33-16499).

* 10.2 Profit Sharing Plan for Salaried Non-Bargaining Unit
Employees of Liggett (incorporated by reference to Exhibit
10 (t) in BGL's Registration Statement on Form S-1,
Commission File No. 33-16499).

* 10.3 Resolution of the Board of Directors of Liggett, dated January
7, 1992, relating to Profit Sharing Plan for Salaried
Non-Bargaining Unit Employees of Liggett (incorporated by
reference to Exhibit 10.4 in Liggett's Registration Statement
on Form S-1, Amendment No. 4, Commission File No.
33-75224).

66
67

EXHIBIT NO. DESCRIPTION
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* 10.4 Resolution of the Board of Directors of Liggett, dated
December 21, 1993, amending the Company's Profit Sharing Plan
for Salaried Non-Bargaining Unit Employees (incorporated by
reference to Exhibit 10.5 in Liggett's Registration Statement
on Form S-1, Amendment No. 4, Commission File No. 33-75224).

* 10.5 Services Agreement, dated February 26, 1991 between Liggett
and BMI (incorporated by reference to Exhibit 10.8 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-47482).

* 10.6 First Amendment to Services Agreement dated as of November 30,
1993 between Liggett and BMI (incorporated by reference to
exhibit 10.6 in BGLS's Registration Statement on Form S-1,
Commission File No. 33-93576).

* 10.7 Second Amendment to Services Agreement, dated October 1, 1995,
by and between BMI, BGL and Liggett (incorporated by reference
to Exhibit 10 in Liggett's Form 10-Q for the quarter ended
September 30, 1995, Commission File No. 33-75224).

* 10.8 Corporate Services Agreement, dated June 29, 1990 between
Liggett and BGL (incorporated by reference to Exhibit 10.10 in
Liggett's Registration Statement on Form S-1, Commission
File No. 33-47482).

* 10.9 Corporate Services Agreement, dated June 29, 1990 between BGL
and Liggett (incorporated by reference to Exhibit 10.11 in
Liggett's Registration Statement on Form S-1, Commission
File No. 33-47482).

*10.10 Corporate Services Agreement, dated January 1, 1992, between
Liggett and BGLS (incorporated by reference to Exhibit 10.13
in Liggett's Registration Statement on Form S-1, Commission
File No. 33-47482).

*10.11 Tax-Sharing Agreement, dated June 29, 1990, among BGL, Liggett
and certain other entities (incorporated by reference to
Exhibit 10.12 in Liggett's Registration Statement on Form
S-1, Commission File No. 33-47482).

*10.12 Lease with respect to Liggett's distribution center in Durham,
North Carolina, including letter agreement extending term of
Lease (incorporated by reference to Exhibit 10.15 in Liggett's
Registration Statement on Form S-1, Commission File No.
33-47482).

*10.13 License Agreement, dated June 1993, between Liggett and Eve
(incorporated by reference to Exhibit 10.16 in Liggett's
Registration Statement on Form S-1, Commission File No.
33-47482).

67
68

EXHIBIT NO. DESCRIPTION
- ---------- -----------

*10.14 Tax Indemnity Agreement, dated October 6, 1993, among BGL,
Liggett and certain other entities (incorporated by reference
to exhibit 10.2 in SkyBox's Form 10-Q for the quarter ended
September 30, 1993, Commission File No. 0-22126).

*10.15 General Policies and Practices of Liggett. Executive Termination
Policy No. 2503, effective February 1, 1996 (incorporated by reference
to Exhibit 10.27 in Liggett's Form 10-K for the year ended December 31,
1995, Commission File No. 33-75224).

*10.16 Letter Agreement, dated September 5, 1996, between Liggett and
Ronald S. Fulford (incorporated by reference to Exhibit 10.23
in Liggett's Form 10-K for the year ended December 31, 1996,
Commission File No. 33-75224).

*10.17 Settlement Agreement, dated March 12, 1996, by and between
Dianne Castano and Ernest Perry, the putative representative
plaintiffs in Dianne Castano, et al. v. The American Tobacco
Company, Inc. et al., Civil No. 94-1044, United States District
Court for the Eastern District of Louisiana, for themselves
and on behalf of the plaintiff settlement class, and BGL and
Liggett, as supplemented by the letter agreement dated March
14, 1996 (the "Settlement Agreement") (incorporated by
reference to exhibit 13 to the Schedule 13D filed by, among
others, the Company with the SEC on March 11, 1996, as
amended, with respect to the common stock of RJR Nabisco
Holdings Corp. (the "Schedule 13D").

*10.18 Addendum to the Settlement Agreement (incorporated by reference
to Exhibit 10.30 to BGL's Form 10-K/A No. 1 for the year ended
December 31, 1996, Commission File No. 1-5759).

*10.19 Settlement Agreement, dated March 15, 1996, by and among the
State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana and BGL and Liggett (the "Initial States Settlement
Agreement") (incorporated by reference to Exhibit 15 in the
Schedule 13D).

*10.20 Addendum to Initial States Settlement Agreement (incorporated
by reference to Exhibit 10.43 in BGL's Form 10-Q for the
quarterly period ended March 31, 1997, Commission File No.
1-5759).

*10.21 Settlement Agreement, dated April 14, 1997, by and among the
State of California, BGL and Liggett (incorporated by
reference to Exhibit 10.44 in BGL's Form 10-Q for the
quarterly period ended March 31, 1997, Commission File No.
1-5759).

*10.22 Settlement Agreement, dated May 6, 1997, by and among the
State of Alaska, BGL and Liggett (incorporated by reference to
Exhibit 10.45 in BGL's Form 10-Q for the quarterly period
ended March 31, 1997, Commission File No. 1-5759).

68
69

EXHIBIT NO. DESCRIPTION
- ----------- -----------

*10.23 Class Settlement Agreement, dated May 15, 1997, by and between
the named and representative plaintiff in Earl William Walker, et al.
v. Liggett Group Inc. et. al., for himself and on behalf of the plaintiff
settlement class, and BGL and Liggett (incorporated by reference to
Exhibit 10.1 in BGL's Form 10-Q for the quarterly period ended
June 30, 1997, Commission File No. 1-5759).

*10.24 Settlement Agreement, dated September 5, 1997, by and among
the State of Nevada and BGL and Liggett (incorporated by
reference to Exhibit 10.1 in BGL's Form 10-Q for the quarterly
period ended September 30, 1997, Commission File No. 1-5759).

*10.25 Settlement Agreement, dated June 9, 1997, by and among the
State of Oregon and BGL and Liggett (incorporated by reference
to Exhibit 10.2 in BGL's Form 10-Q for the quarterly period
ended September 30, 1997, Commission File No. 1-5759).

*10.26 Settlement Agreement, dated March 20, 1997, by and among the States
listed in Appendix A thereto, BGL and Liggett (incorporated by
reference to Exhibit 10.40 in BGL's Form 10-K for the year ended
December 31, 1996, Commission File No. 1-5759).

*10.27 Settlement Agreement, dated March 20, 1997, by and between the
named and representative plaintiffs in Fletcher, et al. v.
Brooke Group Ltd., et al, for themselves and on behalf of the
plaintiff settlement class, and BGL and Liggett (incorporated
by reference to Exhibit 10.41 in BGL's Form 10-K for the year
ended December 31, 1996, Commission File No. 1-5759).

*10.28 Commitment, Contribution and Subordination Agreement, dated as
of January 30, 1998, by Liggett, BGL, BGLS Inc., BOL and
Bankers Trust Company, as Trustee, (incorporated by reference
to Exhibit 99.4 in BGL's Form 8-K dated February 2, 1998,
Commission File No. 1-5759).

*10.29 Registration Rights Agreement, dated as of January 30, 1998,
among BGL and the holders of record of the shares of BGL's
common stock referred to therein, (incorporated by reference
to Exhibit 99.5 in BGL's Form 8-K dated February 2, 1998,
Commission File No. 1-5759).

*10.30 Settlement Agreement, dated March 12, 1998 by and among the
States listed in Appendix A thereto, Liggett and BGL
(incorporated by reference to Exhibit 10.35 in BGL's Form
10-K for the year ended December 31, 1997, Commission File
No. 1-5759).

* 21.1 Subsidiaries of Liggett (incorporated by reference to Exhibit
21.1 to Liggett's Form 10-K for the year ended December 31,
1997).

* 21.2 Subsidiaries of Eve (incorporated by reference to Exhibit
21.2 to Liggett's Form 10-K for the year ended December 31,
1997).

27.1 Financial Data Schedule of Liggett (restated).

27.2 Financial Data Schedule of Eve (previously filed).

69
70

*99.1 Material legal proceedings (incorporated by reference to
Exhibit 99.1 in BGL's Form 10-K/A No. 2 for the year ended
December 31, 1997, Commission File No. 1-5759).

- ------------
* Incorporated by reference