<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                   FORM 10-Q


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

         FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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


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 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.  Yes    X   No 
                                                     -----    -----

As of  August 14, 1997 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.
<PAGE>   2

                                     INDEX



<TABLE>
<CAPTION>
                                                                                                                    PAGE
                                                                                                                    ----
<S>                                                                                                                 <C>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

              Liggett Group Inc.:

                  Consolidated Balance Sheets as of June 30, 1997 and
                      December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      3
                  Consolidated Statements of Operations for the three and six months
                      ended June 30, 1997 and 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      5
                  Consolidated Statement of Stockholder's Equity (Deficit) for
                      the six months ended June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . .      6
                  Consolidated Statements of Cash Flows for the six months
                      ended June 30, 1997 and 1996  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      7
                  Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . .      8

              Eve Holdings Inc.:

                  Balance Sheets as of June 30, 1997 and December 31, 1996. . . . . . . . . . . . . . . . . . .     21
                  Statements of Operations for the three and six months ended June 30,
                      1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     22
                  Statements of Cash Flows for the six months ended June 30,
                      1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     23
                  Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     24


ITEM 2     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     26



PART II    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     35


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     35



SIGNATURES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     36
</TABLE>





                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

                               LIGGETT GROUP INC.

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

<TABLE>
<CAPTION>
                                                                       June 30,         December 31,
                                                                         1997              1996
                                                                      ---------         ------------
<S>                                                                   <C>               <C>
                                     ASSETS

Current assets:
     Cash . . . . . . . . . . . . . . . . . . . . . . . . . . .       $     506         $        -
     Accounts receivable:
         Trade, less allowances of $1,102 and  $1,280,                   11,838             19,316
           respectively   . . . . . . . . . . . . . . . . . . .
         Other  . . . . . . . . . . . . . . . . . . . . . . . .             792                744

     Inventories  . . . . . . . . . . . . . . . . . . . . . . .          42,925             50,122

     Other current assets . . . . . . . . . . . . . . . . . . .             912              1,205
                                                                      ---------         ----------

             Total current assets . . . . . . . . . . . . . . .          56,973             71,387

Property, plant and equipment, at cost, less accumulated
     depreciation of $29,058 and $29,511, respectively  . . . .          17,943             18,705

Intangible assets, at cost, less accumulated amortization
     of $18,247 and $17,388, respectively . . . . . . . . . . .           2,468              3,327

Other assets and deferred charges, at cost, less accumulated
     amortization of $8,241 and $7,410, respectively  . . . . .           3,402              4,258
                                                                      ---------         ----------

             Total assets . . . . . . . . . . . . . . . . . . .       $  80,786         $   97,677
                                                                      =========         ==========
</TABLE>





                                  (continued)





                                       3
<PAGE>   4

                               LIGGETT GROUP INC.

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



<TABLE>
<CAPTION>
                                                                     June 30,          December 31,
                                                                      1997                1996
                                                                    ---------          ------------ 
<S>                                                                 <C>                <C>
                 LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Current liabilities:
     Current maturities of long-term debt . . . . . . . . . .       $  66,474          $   31,807
     Cash overdraft . . . . . . . . . . . . . . . . . . . . .               -                   6
     Accounts payable:
          Trade . . . . . . . . . . . . . . . . . . . . . . .          11,537              14,979
          Affiliates  . . . . . . . . . . . . . . . . . . . .           1,323                 216
     Accrued expenses:
         Promotional  . . . . . . . . . . . . . . . . . . . .          30,390              33,666
         Compensation and related items . . . . . . . . . . .             734                 682
         Taxes, principally excise taxes  . . . . . . . . . .           3,319               7,565
         Estimated allowance for sales returns  . . . . . . .           5,000               5,000
         Interest . . . . . . . . . . . . . . . . . . . . . .           8,072               8,435
         Other  . . . . . . . . . . . . . . . . . . . . . . .           8,605               9,380
                                                                    ---------          ---------- 

             Total current liabilities  . . . . . . . . . . .         135,454             111,736
                                                                                                 
                                                                                                 
                                                                                                 
Long-term debt, less current maturities . . . . . . . . . . .         107,280             144,698
                                                                                                 

Non-current employee benefits and other liabilities . . . . .          16,712              17,721

Commitments and contingencies (Notes 5 and 8)

Stockholder's equity (deficit):
     Redeemable preferred stock (par value $1.00 per share;
       authorized 1,000 shares; no shares issued and out-
       standing)
     Common stock (par value $0.10 per share; authorized
       2,000 shares; issued and outstanding 1,000 shares)
       and contributed capital  . . . . . . . . . . . . . . .          47,640              49,840
     Accumulated deficit  . . . . . . . . . . . . . . . . . .        (226,300)           (226,318)
                                                                    ---------          ---------- 

             Total stockholder's deficit  . . . . . . . . . .        (178,660)           (176,478)
                                                                    ---------          ---------- 

             Total liabilities and stockholder's equity             
               (deficit)  . . . . . . . . . . . . . . . . . .       $  80,786          $   97,677                             
                                                                    =========          ==========
</TABLE>



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





                                       4
<PAGE>   5


                               LIGGETT GROUP INC.

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





<TABLE>
<CAPTION>
                                                           Three Months Ended               Six Months Ended
                                                                June 30,                        June 30,
                                                         -----------------------        ------------------------
                                                          1997            1996            1997            1996
                                                         -------        --------        --------        --------
<S>                                                      <C>            <C>             <C>             <C>
Net sales*  . . . . . . . . . . . . . . . . . . . .      $78,142        $113,286        $144,443        $191,774

Cost of sales*  . . . . . . . . . . . . . . . . . .       36,214          52,533          66,473          88,825
                                                         -------        --------        --------        --------

          Gross profit  . . . . . . . . . . . . . .       41,928          60,753          77,970         102,949

Selling, general and administrative expenses  . . .       37,430          54,552          71,353          96,249

Restructuring . . . . . . . . . . . . . . . . . . .           70             733           1,831           1,154
                                                         -------        --------        --------        --------

          Operating income  . . . . . . . . . . . .        4,428           5,468           4,786           5,546

Other income (expense):
     Interest income  . . . . . . . . . . . . . . .            3               -              60               -
     Interest expense . . . . . . . . . . . . . . .       (5,930)         (5,993)        (11,970)        (11,849)
     Equity in income of affiliate  . . . . . . . .          218               -             185               -
     Sale of assets . . . . . . . . . . . . . . . .        2,402           3,714           3,994           3,698
     Retirement of debt . . . . . . . . . . . . . .            -               -           2,963               -
     Miscellaneous, net . . . . . . . . . . . . . .            1              (4)              -               -
                                                         -------        --------        --------        --------

          Net income (loss) . . . . . . . . . . . .      $ 1,122        $  3,185        $     18        $ (2,605)
                                                         =======        ========        ========        ========
</TABLE>





*Net sales and cost of sales include federal excise taxes of $19,153, $29,487,
$36,013, and $50,684,  respectively.





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





                                       5
<PAGE>   6



                               LIGGETT GROUP INC.

            CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
                                  (Unaudited)
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                           Common
                                                         Stock and                                  Total
                                                        Contributed          Accumulated        Stockholder's
                                                          Capital              Deficit             Deficit
                                                        -----------          -----------        -------------
<S>                                                       <C>                 <C>                 <C>
Balance at December 31, 1996  . . . . . . . . .           $49,840             $(226,318)          $(176,478)
                                                                     
   Net income . . . . . . . . . . . . . . . . .                 -                    18                  18
   Consideration for option to acquire affiliate                     
       stock in excess of its net assets                                                                    
       (Note 9) . . . . . . . . . . . . . . . .            (2,200)                    -              (2,200)
                                                          -------             ---------           --------- 
                                                                     
Balance at June 30, 1997  . . . . . . . . . . .           $47,640             $(226,300)          $(178,660)
                                                          =======             =========           ========= 
</TABLE>





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





                                       6
<PAGE>   7


                               LIGGETT GROUP INC.

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


<TABLE>
<CAPTION>
                                                                              Six Months Ended
                                                                                  June 30,
                                                                      --------------------------------
                                                                         1997                   1996
                                                                      ----------              --------
<S>                                                                   <C>                     <C>
Cash flows from operating activities:
    Net income (loss) . . . . . . . . . . . . . . . . . . . . . .     $       18              $ (2,605)
    Adjustments to reconcile net income (loss) to net
         cash used in operating activities:
       Depreciation and amortization  . . . . . . . . . . . . . .          3,482                 4,013
       Deferred income taxes  . . . . . . . . . . . . . . . . . .              -                     -
       Gain on sale of property, plant and equipment  . . . . . .         (3,994)               (3,698)
       Gain on retirement of notes  . . . . . . . . . . . . . . .         (2,963)                    -
       Deferred finance charges and debt discount written off . .            130                     -
       Equity in income of affiliate  . . . . . . . . . . . . . .           (185)                    -
    Changes in assets and liabilities:
       Accounts receivable  . . . . . . . . . . . . . . . . . . .          7,430                 2,250
       Inventories  . . . . . . . . . . . . . . . . . . . . . . .          7,197                 5,399
       Accounts payable   . . . . . . . . . . . . . . . . . . . .         (2,364)               (5,043)
       Accrued expenses   . . . . . . . . . . . . . . . . . . . .         (8,607)                  177
       Non-current employee benefits  . . . . . . . . . . . . . .           (205)                 (371)
       Other, net   . . . . . . . . . . . . . . . . . . . . . . .           (974)                 (882)
                                                                      ----------              --------
             Net cash used in operating activities  . . . . . . .         (1,035)                 (760)

Cash flows from investing activities:
    Proceeds from sale of property, plant and equipment . . . . .          4,743                 4,415
    Capital expenditures  . . . . . . . . . . . . . . . . . . . .         (1,086)               (2,484)
    Purchase of an option in affiliate  . . . . . . . . . . . . .         (2,200)                    -        
                                                                      ----------              --------
            Net cash provided by investing activities . . . . . .          1,457                 1,931

Cash flows from financing activities:
    Repayments of long-term debt  . . . . . . . . . . . . . . . .         (4,664)                 (127)
    Borrowings under revolving credit facility  . . . . . . . . .        137,062               170,217
    Repayments under revolving credit facility  . . . . . . . . .       (132,308)             (165,848)
    Decrease in cash overdraft  . . . . . . . . . . . . . . . . .             (6)               (3,761)
                                                                      ----------              --------
            Net cash provided by financing activities . . . . . .             84                   481

Net increase  in cash and cash equivalents  . . . . . . . . . . .            506                 1,652
Cash and cash equivalents:
    Beginning of period . . . . . . . . . . . . . . . . . . . . .              -                     -
                                                                      ----------              --------
    End of period . . . . . . . . . . . . . . . . . . . . . . . .     $      506              $  1,652
                                                                      ==========              ========

Supplemental cash flow information:
    Cash payments during the period for:
        Interest  . . . . . . . . . . . . . . . . . . . . . . . .     $   11,984              $ 11,584
        Income taxes  . . . . . . . . . . . . . . . . . . . . . .     $      108              $     75
</TABLE>



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





                                       7
<PAGE>   8

                               LIGGETT GROUP INC.

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

1.       The Company

         Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL").   Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States.  Certain management and
administrative functions are performed by affiliates (see Note 9).

         The consolidated financial statements included herein are unaudited
and, in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows.  The December 31, 1996 balance
sheet has been derived from audited financial statements.  These consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission. The results of operations for interim periods should not
be regarded as necessarily indicative of the results that may be expected for
the entire year.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $178,660 as of June 30, 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 8), 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 certain debt covenants, 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.

         Further, the Liggett Notes require a mandatory principal redemption of
$37,500 on February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400 and the Facility expires on March 8, 1998 unless extended by its
lenders.  Current maturities of both the Liggett Notes and the Facility of
approximately $66,474 contribute substantially to the working capital deficit
of approximately $78,481 as of June 30, 1997.

         While the Company is currently in negotiations with its note holders
to restructure the terms of the Liggett Notes and, with its lenders, to extend
the Facility, there are no commitments to restructure the Liggett Notes or to
extend the Facility at this time, and no assurances can be given in this
regard.  Based on the Company's net loss for 1996 and anticipated 1997
operating results, the Company does not anticipate it will be able to generate
sufficient cash from operations to make such payments.   Pending completion of
the negotiations, the Company postponed making the interest payment of
approximately $9,700 due on August 1, 1997 on the Liggett Notes.  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.

         The failure to pay interest on the Liggett Notes would permit the
lenders under the Facility to cease making further advances.  While the lenders
have continued to make such advances, and management currently anticipates that
they will continue to do so, no assurances can be given in this regard.  If the
Company is unable to restructure the terms of the Liggett Notes, extend the
Facility, or otherwise make all payments thereon within the applicable grace
periods, 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.





                                       8
<PAGE>   9

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.


2.       Estimates and Assumptions

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses.  Significant estimates subject to material changes in
the near term include deferred tax assets, allowance for doubtful accounts,
sales returns and allowances, actuarial assumptions of pension plans and
litigation and defense costs.  Actual results could differ from those
estimates.


3.       Per Share Data

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


4.       Sale of Assets 

         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 transaction
closed on March 11, 1997.  A gain of $1,531 was recognized, net of costs
required to prepare the properties for sale and selling costs.

         On April 28, 1997, Liggett sold excess production equipment to Brooke
(Overseas) Ltd. ("BOL") for $3,000.  See Note 9.


5.       Inventories

         Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                      June 30,         Deecember 31,
                                                                        1997               1996
                                                                       -------         -------------
         <S>                                                           <C>                <C>
         Finished goods  . . . . . . . . . . . . . . . . . .           $13,873            $15,304
         Work-in-process . . . . . . . . . . . . . . . . . .             4,208              4,382
         Raw materials . . . . . . . . . . . . . . . . . . .            27,677             31,338
         Replacement parts and supplies  . . . . . . . . . .             3,624              3,554
                                                                       -------            -------
         
         Inventories at current cost . . . . . . . . . . . .            49,382             54,578
         
         LIFO adjustment . . . . . . . . . . . . . . . . . .            (6,457)            (4,456)
                                                                       -------            -------
         
         Inventories at LIFO cost  . . . . . . . . . . . . .           $42,925            $50,122
                                                                       =======            =======
</TABLE>


         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





                                       9
<PAGE>   10

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 $13,828 at June 30, 1997.


6.       Property, Plant and Equipment

         Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                      June 30,        December 31,
                                                                        1997              1996
                                                                     ---------         ----------
         <S>                                                         <C>               <C>
         Land and improvements . . . . . . . . . . . . . . .         $     455         $      455
         Buildings . . . . . . . . . . . . . . . . . . . . .             6,150              5,848
         Machinery and equipment . . . . . . . . . . . . . .            40,396             41,913
                                                                     ---------         ----------
         
         Property, plant and equipment . . . . . . . . . . .            47,001             48,216
         
         Less accumulated depreciation . . . . . . . . . . .           (29,058)           (29,511)
                                                                     ---------         ----------
         
         Property, plant and equipment, net. . . . . . . . .         $  17,943         $   18,705
                                                                     =========         ==========
</TABLE>


7.       Long-Term Debt

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                        June 30,     December 31,
                                                                          1997          1996
                                                                        --------      ---------
         <S>                                                            <C>           <C>
         11.5% Senior Secured Notes due February 1, 1999,
            net of unamortized discount of  $302 and $424,
            respectively . . . . . . . . . . . . . . . . . .            $112,310      $119,688
         Variable Rate Series C Senior Secured Notes due
            February 1, 1999 . . . . . . . . . . . . . . . .              32,279        32,279
         Borrowings outstanding under revolving credit
            facility . . . . . . . . . . . . . . . . . . . .              29,026        24,272
         Other . . . . . . . . . . . . . . . . . . . . . . .                 139           266
                                                                        --------      --------
                                                                         173,754       176,505

         Current portion . . . . . . . . . . . . . . . . . .             (66,474)      (31,807)
                                                                        --------      --------
         
         Amount due after one year . . . . . . . . . . . . .            $107,280      $144,698
                                                                        ========      ========
</TABLE>

         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") require
mandatory principal redemptions of $7,500 on February 1 in each of the years
1993 through 1997 and $37,500 on February 1, 1998 with the balance of the
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





                                       10
<PAGE>   11

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  102% and 100% of the
principal amount in the years 1997 and 1998, respectively, 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.

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

         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 $209 based upon
eligible collateral at June 30, 1997.  The Facility is collateralized by all
inventories and receivables of the Company.   Borrowings under the Facility,
whose interest is 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 of 8.25%, bore a rate of 9.75% on March 31, 1997. On
April 1, 1997, Philadelphia National Bank raised its prime rate to 8.5%,
thereby increasing Liggett's interest rate to 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 currently imposes
requirements with respect to the Company's adjusted net worth (not to fall
below a deficit of $180,000 as computed in accordance with the agreement) and
working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement).  The Facility is classified as short-term debt
as of March 31, 1997, as it becomes due on March 8, 1998, unless extended by
the lenders.

         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.

         The Company is currently in negotiations with a committee composed of
a majority of its note holders to restructure the terms of the Liggett Notes
and, with it lenders, to extend the Facility.   Pending completion of the
negotiations, the Company postponed making the interest payment of
approximately $9,700 due on August 1, 1997 on the Liggett Notes.  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.  The failure to pay
interest on the Liggett Notes would permit the lenders under the Facility to
cease making further advances.  While the lenders have continued to make such
advances, and management currently anticipates that they will continue to do
so, no assurances can be given in this regard.  For information concerning
Liggett's  substantial  near-term debt  service requirements and other related
matters, see Note 1.





                                       11
<PAGE>   12


8.       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:
Individual Actions, Class Actions and Attorneys General Actions, although
recently several actions have been commenced on behalf of other interest
groups.  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 certain financial and other
assistance from others in the industry in defraying the costs and other burdens
incurred in the defense of smoking and health litigation and related
proceedings, but these benefits have ended.  Certain joint defense
arrangements, and the financial benefits incident thereto, have also ended.
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.

         INDIVIDUAL CASES.    As of June 30, 1997, there were 145 cases
pending against Liggett 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, 57 are
pending in the State of Florida, 43 are pending in the State of New York and 17
are pending in the State of Texas.  The balance of individual cases are pending
in 14 states.

         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.  Plaintiffs also
seek punitive damages in many of these cases.  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.  Several
representative cases are described below.

         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 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.

         On March 27, 1987, an action entitled Rogers v. Liggett Group Inc. et
al., Superior Court, Marion County, Indiana, was filed against Liggett and
others.  The plaintiff sought compensatory and punitive damages for cancer
alleged to have been caused by cigarette smoking.  Trial commenced on January
31, 1995.  The trial ended on February 22, 1995 when the trial court declared a
mistrial due to the





                                       12
<PAGE>   13

jury's inability to reach a verdict.  The court directed a verdict in favor of
the defendants as to the issue of punitive damages during the trial of this
action.  A second trial commenced on August 5, 1996 and, on August 23, 1996,
the jury returned a verdict in favor of the defendants.  This verdict is
currently on appeal.

         On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et
al., Superior Court of the State of California, City of San Diego, was filed
against Liggett and others.  In her complaint, plaintiff, purportedly on behalf
of the general public, alleges that defendants have been engaged in unlawful,
unfair and fraudulent business practices by allegedly misrepresenting and
concealing from the public scientific studies pertaining to smoking and health
funded by, and misrepresenting the independence of, the Council on Tobacco
Research ("CTR") and its predecessor.  The complaint seeks equitable relief
against the defendants, including the imposition of a corrective advertising
campaign, restitution of funds, disgorgement of revenues and profits and the
imposition of a constructive trust.  On June 5, 1997, Liggett settled this
matter.

         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 May 25, 1996, the District
Court granted Liggett summary judgment on plaintiff's fraud and breach of
warranty claims, but, on June 9, 1997 denied Liggett's Motion for Summary
Judgment on plaintiffs' conspiracy claim.  On June 27, 1997, the magistrate
issued an order compelling Liggett to produce certain CTR documents with
respect to which Liggett had asserted various privilege claims.  The other
cigarette manufacturers and the CTR are appealing the order.

         In February 1995, an action entitled Carter, et al. v. The American
Tobacco Company, et al., Superior Court for the State of Florida, Duval County,
was filed against Liggett and others.  Plaintiff sought compensatory damages,
including, but not limited to, reimbursement for medical costs.  Both American
Tobacco and Liggett were subsequently dismissed from this action.  On August 9,
1996, a jury returned a verdict against the remaining defendant, Brown &
Williamson Tobacco Corporation ("B&W"), in the amount of $750.  The court also
awarded plaintiff's attorney's fees in the amount of $1,785.  B&W has appealed
this verdict.

         CLASS ACTIONS.    As of June 30, 1997, there were 29 actions pending,
which have either been certified as a class or 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 "Attorneys General
Actions" 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 was
the first class action commenced against the industry and has been brought by
plaintiffs on behalf of all flight attendants that have worked or are presently
working for airlines based in the United States and who have never regularly
smoked cigarettes but allege that they have been damaged by involuntary
exposure to ETS.  The trial in this action commenced on June 2, 1997 and is
currently in progress.

         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.  The District Court granted plaintiffs' motion for class
certification.

         On March 12, 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)





                                       13
<PAGE>   14

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 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.  On
September 6, 1996, the Castano plaintiffs withdrew the motion for approval of
the Castano settlement.

         On March 14, 1996, BGL, 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 BGL $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 BGL in accordance with its terms, BGL and its affiliates will not enter into
any business transaction with any third party which would cause the termination
of the Castano settlement agreement.  If BGL or its affiliates enter into any
such transaction, then the Castano plaintiffs will be entitled to receive
$250,000 within 30 days from the transacting party.

         ATTORNEYS GENERAL ACTIONS.    As of June 30, 1997, 32 Attorneys
General actions were filed and served on Liggett and BGL.   As more fully
discussed below, Liggett has reached settlements in 25 of these actions.  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 tobacco products.  The claims asserted in these Medicaid
recovery actions vary.  All 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.

          On May 23, 1994, an action entitled Moore, Attorney General, ex rel
State of Mississippi v. The American Tobacco Company, et al., Chancery Court of
Jackson County, Mississippi, was commenced against Liggett and others seeking
restitution and indemnity for medical payments and expenses allegedly made or
incurred for tobacco related illnesses.  In May 1994, the State of Florida
enacted legislation, effective July 1, 1994, allowing certain state authorities
or entities to commence litigation seeking recovery of certain Medicaid
payments made on behalf of Medicaid recipients as a result of diseases
(including, but not limited to, diseases allegedly caused by cigarette smoking)
allegedly caused by liable third parties (including, but not limited to, the
tobacco industry).  On February 21, 1995, the State of Florida commenced an
action pursuant to this statutory scheme.  The  Florida Medicaid trial has
recently commenced.  See "Settlements", below.  Legislation similar to that
enacted in Florida has been introduced in the Massachusetts and New Jersey
legislatures.

         SETTLEMENTS.   On March 15, 1996, in addition to the Castano
settlement discussed above, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of





                                       14
<PAGE>   15

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

         Under the Attorneys General settlement, the 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 2-1/2% 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 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.

         Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare 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 settlement with
respect to any state participating in the settlement if any of the remaining
defendants in the litigation succeed on the merits in that state's Attorney
General action.   Liggett and BGL may also terminate the settlement if they
conclude that too many states have filed Attorney General actions and have not
resolved such cases as to the settling defendants by joining in the settlement.

         At December 31, 1995, Liggett had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Attorneys General
settlement, and no additional amounts have been accrued with respect to the
recent settlements discussed below.  BGL 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.

         On March 20, 1997, Liggett, together with BGL, entered into a
comprehensive settlement of tobacco litigation through parallel agreements with
the Attorneys General of 17 additional states and with a nationwide class of
individuals and entities that allege smoking-related claims.  Thereafter,
settlements were entered into with several other Attorneys General.  The
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.

         As of June 30, 1997, a total of 25 Attorneys General settlements,
were reached, including the Attorneys General of Alaska, Arizona, California,
Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington and
Wisconsin.   Liggett's and BGL's previous settlements on March 15, 1996 with
the Attorneys General of Florida, Louisiana, Massachusetts, Mississippi and
West Virginia remain in full force and effect.  Other states have either
recently filed Medicaid recovery actions or indicated intentions to do so.
Both Liggett and BGL will endeavor to resolve those matters on substantially
the same terms and conditions as the prior settlements;  however, there can be
no assurance that any such settlements will be completed.





                                       15
<PAGE>   16


         The settlement with the nationwide class covers all smoking-related
claims.  On March 20, 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 West Virginia 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.

         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 as to whether, or when, such court approval will be obtained.
There are no opt out provisions in this settlement, except for Medicaid claims
by states that are not party to the Attorneys General settlements.

         Pursuant to the settlements, 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.

         Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after the
date of the agreements.  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.  Liggett also 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.

         Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or BGL, prior to the
fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not
having to post a bond to appeal any future adverse judgment.  In addition,
within 120 days following such a combination, Liggett would be required to pay
the settlement fund $25,000.  Both the Attorneys General and the nationwide
class have agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or BGL from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.

         Liggett and BGL are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies.  In addition,
in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs agreed
to use their





                                       16
<PAGE>   17

"best efforts" to ensure that Liggett's and BGL's liability under such a plan
should be no more onerous than under these new settlements.  See "Other
Matters", below.

         IMMINENT TRIALS.    Although trial schedules are subject to change,
the next individual cases scheduled for trial, where Liggett is a defendant,
are Westmoreland v. Liggett Group Inc., et al., United States District Court,
Middle District of Florida, Tampa Division, and Sackman, both of which are
scheduled for trial in October, 1997.  There are two other individual cases
scheduled for trial in 1997.  In addition to the Broin trial currently in
progress, there is one other class action scheduled for trial in 1997, Engle,
et al. v. R. J. Reynolds Tobacco Company, et al.

         OTHER MATTERS.   On June 20, 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 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.  The proposals are currently
being reviewed by the White House, Congress and various public interest groups. 
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.

         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.

         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 regarding possible violations of criminal law relating to the activities
of The Council for Tobacco Research - USA, Inc.  Liggett was a sponsor of The
Council for Tobacco Research - USA, Inc.  at one time.  Liggett is unable, at
this time, to predict the outcome of this investigation.

         In March 1996, Liggett received a subpoena from a Federal grand jury
sitting in the Southern District of New York.  Documents have been produced in
response to the subpoena.  Liggett understands that this investigation has been
transferred to the main office of the United States Department of Justice.  In
addition, in May 1996, Liggett was served with a subpoena by a grand jury
sitting in the District of Columbia,  to which Liggett has responded by
producing documents.  Liggett was also served with a subpoena from the District
of Columbia grand jury in July, 1997.    Liggett is in the process of
responding to that subpoena.   Liggett is unable, at this time, to predict the
outcome of these investigations.

         The Antitrust Division of the United States Department of Justice
investigation into the United States tobacco industry activities in connection
with product development efforts regarding "fire-safe" or self-extinguishing
cigarettes has been concluded.  No action by the Department of Justice was
taken.

         On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Group
Inc. was filed in the United States District Court for the Southern District of
New York, Case No. 96-CIV-1921, wherein the





                                       17
<PAGE>   18

plaintiff, who was formerly employed as Liggett's President and Chief Executive
Officer, seeks recovery of certain monies allegedly owing by Liggett to him for
long-term incentive compensation.  At a September 19, 1996 hearing, the court
dismissed the plaintiff's alternate claim for recovery under a fraud theory and
by order dated March 10, 1997, the court dismissed the balance of plaintiff's
claims.  Plaintiff has appealed the verdict.

         Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against
Liggett.  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.

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

         Liggett is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against Liggett.   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.

         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.  The
FDA's stated objective and focus for its initiative is to limit access to
cigarettes by minors by measures beyond the restrictions either mandated by
existing federal, state and local laws or voluntarily implemented by major
manufacturers in the industry.  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
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.  On February 7, 1997,
the United States District Court for the District of Massachusetts denied an
attempt to block the new legislation on the ground that it is preempted by
federal law.  Liggett and BGL support this proposed legislation.

         On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota ("TRQ")
on certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain levels which vary from
country to country.  Oriental tobacco is exempt from the quota as well as all
tobacco originating from Canada, Mexico or Israel.  Management believes that
the TRQ levels are sufficiently high to allow Liggett to operate without
material disruption to its business.

         On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under the TRQ
should be allocated.  Currently, tobacco





                                       18
<PAGE>   19

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.  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.

         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.

         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.


9.       Related Party Transactions

         On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat Ltd.'s ("Liggett-Ducat") tobacco operations from BOL, an indirect
subsidiary of BGL, for $2,100. Liggett-Ducat, which produces cigarettes in
Russia, manufactured and marketed 11.4 billion cigarettes in 1996.  Liggett
also acquired on that date for $3,400 a ten-year option, exercisable by Liggett
in whole or in part, to purchase from BOL at the same per share price up to
292,407 additional shares of Liggett-Ducat, thereby entitling Liggett to
increase its interest in Liggett-Ducat to approximately 62%.  The option fee is
to be credited against the purchase price.   In addition, as part of the same
transaction, Liggett had the right on or before June 30, 1997 to acquire from
BOL for $2,200 another ten-year option on the same terms to purchase the
remaining shares of Liggett-Ducat (an additional 33%).  On March 13, 1997,
Liggett acquired this option and paid BOL $2,000, and recorded a payable to BOL
for the remaining $0.2 million.  Liggett accounts for its investment in
Liggett-Ducat under the equity method of accounting.  Liggett's equity in the
net income of Liggett-Ducat amounted to $185 for the six months ended June 30,
1997.  The excess of the cost of the option over carrying amount of net assets
to be acquired under the option has been charged to stockholder's deficit.





                                       19
<PAGE>   20


         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 $830
in 1997 and $790 in 1996.  This fee is in addition to the management fee and
overhead reimbursements described above.

         Since April 1994, the Company has leased equipment from BGLS for $50
per month.  On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000, for a gain of $2,578.


10.      Restructuring Charges

         In the first half of 1997,  the Company reduced its headcount by 114
full-time positions and recorded a $1,831 restructuring charge to operations
for severance programs, primarily salary continuation and related benefits for
terminated employees.  Approximately $285 in restructuring charges will be
funded in subsequent years.  The Company expects to continue its cost reduction
programs.





                                       20
<PAGE>   21

                               EVE HOLDINGS INC.

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

<TABLE>
<CAPTION>
                                                                     June 30,              December 31,
                                                                       1997                    1996
                                                                       ----                    ----    
<S>                                                                  <C>                     <C>
                                     ASSETS

Cash  . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $     10                $      -

Office equipment  . . . . . . . . . . . . . . . . . . . . . .               1                       2

Trademarks, at cost, less accumulated amortization of
    $18,144 and $17,294, respectively . . . . . . . . . . . .           2,269                   3,119
                                                                     --------                --------

              Total assets  . . . . . . . . . . . . . . . . .        $  2,280                $  3,121
                                                                     ========                ========

                 LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Federal income taxes currently payable to parent  . . . . . .        $     74                $      -

Dividends payable . . . . . . . . . . . . . . . . . . . . . .           1,127                   4,623

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

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

Deferred income taxes . . . . . . . . . . . . . . . . . . . .             794                   1,092
                                                                     --------                --------

              Total liabilities . . . . . . . . . . . . . . .           1,998                   5,826
                                                                     --------                --------

Stockholder's equity (deficit):
   Common stock (par value $1.00 per share; authorized,
        issued and outstanding 100 shares) and contributed
        capital . . . . . . . . . . . . . . . . . . . . . . .          49,148                  46,548

   Receivables from parent:
        Note receivable - interest at 14%, due no sooner
           than February 1, 1999  . . . . . . . . . . . . . .         (44,520)                (44,520)
        Other . . . . . . . . . . . . . . . . . . . . . . . .          (4,346)                 (4,733)
                                                                     --------                -------- 

              Total stockholder's equity (deficit)  . . . . .             282                  (2,705)
                                                                     --------                -------- 

              Total liabilities and stockholder's equity                                             
                (deficit) . . . . . . . . . . . . . . . . . .        $  2,280                $  3,121
                                                                     ========                ========
</TABLE>


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





                                       21
<PAGE>   22


                               EVE HOLDINGS INC.

                            STATEMENTS OF OPERATIONS
                                  (Unaudited)
                             (Dollars in thousands)



<TABLE>
<CAPTION>
                                                            Three Months Ended             Six Months Ended
                                                                 June 30,                      June 30,
                                                           ---------------------         ---------------------
                                                            1997           1996           1997           1996
                                                           ------         ------         ------         ------
<S>                                                        <C>            <C>            <C>            <C>
Revenues:
     Royalties - parent . . . . . . . . . . . .            $1,761         $2,437         $3,306         $4,150
     Interest - parent  . . . . . . . . . . . .             1,576          1,577          3,153          3,153
                                                           ------         ------         ------         ------
                                                            3,337          4,014          6,459          7,303

Expenses:
     Amortization of trademarks . . . . . . . .               425            425            851            851
     Miscellaneous, net . . . . . . . . . . . .                27             35             64             58
                                                           ------         ------         ------         ------

          Income before income taxes  . . . . .             2,885          3,554          5,544          6,394

Income tax provision  . . . . . . . . . . . . .               458          1,244            837          2,238
                                                           ------         ------         ------         ------

          Net income  . . . . . . . . . . . . .            $2,427         $2,310         $4,707         $4,156
                                                           ======         ======         ======         ======
</TABLE>





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





                                       22
<PAGE>   23


                               EVE HOLDINGS INC.
                            STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    Six Months Ended
                                                                                        June 30,
                                                                                 -----------------------
                                                                                   1997            1996
                                                                                 ------           ------
<S>                                                                              <C>              <C>
Cash flows from operating activities:
    Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $4,707           $4,156
    Adjustments to reconcile net income to net cash provided by
          operating activities:
        Depreciation and amortization . . . . . . . . . . . . . . . . .             851              851
        Deferred income taxes . . . . . . . . . . . . . . . . . . . . .            (298)            (298)
    Changes in assets and liabilities:
        Federal income taxes currently payable to parent  . . . . . . .              74              (29)
        Other current liabilities . . . . . . . . . . . . . . . . . . .             (16)               -
                                                                                 ------           ------

           Net cash provided by operating activities .. . . . . . . . .           5,318            4,680
                                                                                 ------           ------

Cash flows from financing activities:
    Dividends/capital distributions . . . . . . . . . . . . . . . . . .          (5,603)          (4,658)
    Decrease (increase) in due from parent  . . . . . . . . . . . . . .             387              (22)
    Decrease in cash overdraft  . . . . . . . . . . . . . . . . . . . .             (92)               -
                                                                                 ------           ------

           Net cash used in financing activities  . . . . . . . . . . .          (5,308)          (4,680)
                                                                                 ------           ------

Net increase in cash  . . . . . . . . . . . . . . . . . . . . . . . . .              10                -

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

    End of period . . . . . . . . . . . . . . . . . . . . . . . . . . .          $   10           $    8
                                                                                 ======           ======
Supplemental cash flow information:
    Payments of income taxes through receivable from parent . . . . . .          $1,060           $2,314
    Income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . .              32                -
    Dividends/capital distributions declared but not paid . . . . . . .           1,127            2,176
</TABLE>





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





                                       23
<PAGE>   24


                               EVE HOLDINGS INC.

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

1.       The Company

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


2.       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 $78,481 and a net capital
deficiency of $178,660 as of June 30, 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.       Per Share Data

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


3.       Guarantee of Liggett Notes

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

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





                                       24
<PAGE>   25


4.       Income Taxes


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.





                                       25
<PAGE>   26

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

                 (DOLLARS IN THOUSANDS, EXCEPT SELLING PRICES)


INTRODUCTION

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

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

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

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $178,660 and a working capital deficiency of $78,481 as
of June 30, 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 certain debt
covenants,  and if the 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.

         Further, the Liggett Notes require a mandatory principal redemption of
$37,500 on February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400, and the Facility expires on March 8, 1998 unless extended by its
lenders.   Based on Liggett's net loss for 1996 and anticipated 1997 operating
results, Liggett does not anticipate it will be able to generate sufficient
cash from operations to make such payments.  While Liggett is currently in
negotiations with its note holders to restructure the terms of the Liggett
Notes and, with its lenders, to extend the Facility, there are no commitments
to restructure the Liggett Notes or to extend the Facility at this time, and no
assurances can be given in this regard.  Pending completion of the
negotiations, Liggett has postponed making the interest payment of
approximately $9,700 for the Liggett Notes due on August 1, 1997.  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.  The failure to pay
interest on the Liggett Notes would permit the lenders under the Facility to
cease making further advances.  While the lenders have continued to make such
advances, and management currently anticipates that they will continue to do
so, no assurances can be given in this regard.  If Liggett is unable to
restructure the terms of the Liggett Notes, extend the Facility, or otherwise
make all payments thereon within the applicable grace periods, 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, Liggett
may be forced to seek protection from creditors under applicable laws.  These
matters raise substantial doubt about Liggett meeting its liquidity needs and
its ability to continue as a going concern.  (See "Capital Resources and
Liquidity" below).





                                       26
<PAGE>   27


RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY

         PRICING ACTIVITY.  On March 7, 1997, R. J. Reynolds Tobacco Company
("RJR") initiated another list price increase on all brands of $.40 per carton
(approximately 4%).  Brown & Williamson Tobacco Corporation ("B&W"), Lorillard
Tobacco Company ("Lorillard") and Liggett have 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.

         LEGISLATION, REGULATION AND LITIGATION.  The cigarette industry
continues to be challenged on numerous fronts.  New cases continue to be
commenced against Liggett and other cigarette manufacturers.  As of June 30,
1997, there were 145 individual suits, 29 class actions or actions where class
certification has been sought and 32 state (and several municipality) Medicaid
reimbursement actions pending in the United States in which Liggett is a named
defendant and has been served.  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.  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 and legal 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 Note 8 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, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes.  Plaintiffs also
seek punitive damages in many of these cases.  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.

         The claims asserted in the Medicaid recovery actions vary.  All
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.  On March 12, 1996, Liggett, together with BGL, entered
into an agreement to settle the Castano class action tobacco litigation, and on
March 15, 1996, Liggett, together with BGL, entered into an agreement with the
Attorneys General of West Virginia, Florida, Mississippi, Massachusetts and
Louisiana to settle certain actions brought against Liggett and BGL by such
states.  Liggett and BGL, while neither consenting to FDA jurisdiction nor
waiving their objections thereto,





                                       27
<PAGE>   28

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 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
BGL or Liggett fail to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of the
settlement.  BGL and Liggett 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.  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 BGL or Liggett 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 BGL and Liggett the option to enter into a settlement on
terms at least as favorable as those included in such other settlement.  The
letter agreement further provides that during the same time period, and if the
Castano settlement agreement has not been earlier terminated by 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 30 days from the transacting party.

         Under the Attorneys General settlement, the 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 sixty 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
2-1/2% 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 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.

         On March 20, 1997, Liggett, together with 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, settlements were
entered into with several other Attorneys General.  The settlements cover all
smoking-related claims, including both addiction-based and tobacco injury
claims against Liggett and BGL, and upon court approval, the nationwide class.

         As of June 30, 1997, settlements with 25 Attorneys General were
reached, including the Attorneys General of Alaska, Arizona, California,
Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington





                                       28
<PAGE>   29

and Wisconsin.  BGL's and Liggett's previous settlements on March 15, 1996 with
the Attorneys General of Florida, Louisiana, Massachusetts, Mississippi and
West Virginia remain in full force and effect.

         The settlement with the nationwide class covers all smoking-related
claims.  On March 20, 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 West Virginia 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.

         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 as to whether, or when, court approval will be obtained.  There
are no opt out provisions in this settlement, except for Medicaid claims by
states that are not party to the Attorneys General settlements.

         Pursuant to the settlements, 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 have 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.

         Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after the
date of the agreements.  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.  Liggett also 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.

         Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or BGL, prior to the
fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not
having to post a bond to appeal any future adverse judgment.  In addition,
within 120 days following such a combination, Liggett would be required to pay
the settlement fund $25,000.  Both the Attorneys General and the nationwide
class have  agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or BGL from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.





                                       29
<PAGE>   30



         Liggett and BGL are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies.  In addition,
in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs agreed
to use their "best efforts" to ensure that Liggett's and BGL's liability under
such a plan should be no more onerous than under these new settlements.  See
"Other Matters" below.

         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 and no additional amounts have been accrued with respect to the
recent 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 8 to Liggett'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 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.  The proposals are currently being reviewed
by the White House, congress and various public interest groups.  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.


RESULTS OF OPERATIONS

1997 Restructuring

         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 will further reduce its salaried, hourly and
part-time headcount by a total of 273 positions (35%) over an eight-month
transition period.

         During the first half of 1997,  the Company reduced its headcount by
approximately 114 full-time positions and recorded a $1,831 restructuring
charge to operations 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.

Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996

         Net sales were $78,142 for the three months ended June 30, 1997
compared to $113,286 for the same period in 1996.  This 31.0% decrease in
revenues was due primarily to a 38.3% decrease in overall unit sales volume,
partially offset by the effects of the March 7, 1997 list price increase (see
"Recent Developments in the Cigarette Industry - Pricing Activity").  The
decline in unit sales volume was comprised of declines within the premium
segment of 32.9% and discount segment (which includes generic, control label
and branded discount products) of 36.2%.  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.





                                       30
<PAGE>   31


         Gross profit was $41,928 for the three months ended June 30, 1997, a
decrease of $18,825 from $60,753 for the same period in 1996 due primarily to
the decline in unit sales volume discussed above.   As a percent of revenues
(excluding federal excise taxes), gross profit decreased to 71.1% for the three
months ended June 30, 1997 compared to 72.5%  for the same period in 1996.
This decrease is the result of increased tobacco costs due to 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
March 1997 list price increase.

         Operating income decreased to $4,428 for the three months ended June
30, 1997  from $5,468 for the same period in 1996 due primarily to the decline
in unit sales volume discussed above,  partially offset by lower promotion and
marketing expenses,  and reduced administrative charges resulting from the 1997
restructuring discussed above.

         Net interest expense was $5,927 for the three months ended June 30,
1997 compared to $5,993 for the same period in 1996.

         Net income amounted to $1,122 for the three months ended June 30, 1997
compared to $3,185 for the same period in 1996.  This decline in net income was
primarily the result of the timing of income gained from the sale of assets,
offset by an increase in equity in income from an affiliate.

Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

         Net sales were $144,443 for the six months ended June 30, 1997
compared to $191,774 for the same period in 1996.  This 24.7% decrease in
revenues was due primarily to a 31.5% decrease in overall unit sales volume,
partially offset by the effects of the March 7, 1997 list price increase (see
"- Recent Developments in the Cigarette Industry - Pricing Activity").  The
decline in unit sales volume was comprised of declines within the premium
segment of 24.8% and discount segment (which includes generic, control label
and branded discount products) of 30.6%.  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.

         Gross profit was $77,970 for the six months ended June 30, 1997, a
decrease of $24,979 from $102,949 for the same period in 1996 due primarily to
the decline in unit sales volume discussed above.   As a percent of revenues
(excluding federal excise taxes), gross profit decreased to 71.9% for the six
months ended June 30, 1997 compared to 73.0%  for the same period in 1996.
This decrease is the result of increased tobacco costs due to 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
March 1997 list price increase.

         Operating income decreased to $4,786 for the six months ended June 30,
1997  from $5,546 for the same period in 1996 due primarily to the decline in
unit sales volume discussed above, restructuring charges, as well as higher
legal expenses, partially offset by lower promotion and marketing expenses,
and administrative charges resulting from the 1997 restructuring discussed
above.

         Net interest expense was $11,910 for the six months ended June 30,
1997 compared to $11,849 for the same period in 1996. This increase in interest
expense was due to higher average outstanding balances under the revolving
credit facility,  partially offset by the redemption of $7,500 Series B Notes
in February 1997.

         Net income amounted to $18 for the six months ended June 30, 1997
compared to a net loss of $2,605 for the same period in 1996.  This reduction
in net loss was primarily the result of a gain of $3,994 on the sale of assets
and a gain of $2,963 on the retirement of debt.





                                       31
<PAGE>   32



CAPITAL RESOURCES AND LIQUIDITY

         Cash used in operations was $1,035 for the six months ended June 30,
1997 compared to $760 for the same period in 1996 due primarily to a decrease
in accrued expenses.

         The Company had been receiving certain financial and other assistance
from others in the industry in defraying the costs and other burdens incurred
in the defense of smoking and health litigation and related proceedings, but
these benefits have recently ended.  Certain joint defense arrangements, and
the financial benefits incident thereto, have ended.  The future financial
impact on the Company of the termination of this assistance and the effects of
the tobacco litigation settlements discussed above is not quantifiable at this
time.

         Cash used in investing activities for the six months ended June 30,
1997 related primarily to investments in the purchase of an option in affiliate
of approximately $2,200 in 1997 and to capital expenditures of approximately
$2,484 in 1996.  For the first six months of 1997, capital expenditures totaled
approximately $1,086, primarily for production facilities and further equipment
modernization, and anticipated spending for the remainder of the year is
projected at $1,250.  These expenditures are expected to be funded with cash
flow from operations, borrowings under the Facility and proceeds from the
sale of certain surplus production equipment to Brooke (Overseas) Ltd. and
surplus realty to Blue Devil Ventures.

         Cash provided by financing activities for the six months ended June
30, 1997 and 1996 of $84 and $481, respectively, resulted primarily from net
borrowings under the Facility, offset in 1997 by repayment 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 $209 based upon
eligible collateral at June 30, 1997.  The Facility is collateralized by all
inventories and receivables of the Company.   Borrowings under the Facility,
whose interest is 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 of 8.25%, bore a rate of 9.75% on March 31, 1997. On
April 1, 1997, Philadelphia National Bank raised its prime rate to 8.5%,
thereby increasing Liggett's interest rate to 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 currently imposes
requirements with respect to the Company's adjusted net worth (not to fall
below a deficit of $180,000 as computed in accordance with the agreement) and
working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement).  The Facility is classified as short-term debt
as of March 31, 1997, as it becomes due on March 8, 1998, unless extended by
the lender.  As discussed below, Liggett is currently in negotiations to extend
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.





                                       32
<PAGE>   33


         On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes").  From the proceeds of $148,244, net of an original
issue discount, $144,054 was dividended to BGLS (which reduced stockholder's
equity) and $4,190 was paid as financing fees.  Interest on the Series B Notes
is payable semiannually on February 1 and August 1 at an annual rate of 11.5%.
The Series B Notes and Series C Notes referred to below (collectively, the
"Liggett Notes") require mandatory principal redemptions of $7,500 on February
1 in each of the years 1993 through 1997 and $37,500 on February 1, 1998 with
the balance of the Liggett Notes due on February 1, 1999.  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
102% and 100% of the principal amount in the years  1997 and 1998,
respectively, 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.  At June 30, 1997, the Company was in compliance with all
covenants under the Liggett Notes indenture.

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

         As discussed above, the Liggett Notes require a mandatory principal
redemption of $37,500 on February 1, 1998 and a payment at maturity on February
1, 1999 of $107,400, and the Facility expires on March 8, 1998 unless extended
by the lenders.   Based on Liggett's net loss for 1996 and anticipated 1997
operating results, Liggett does not anticipate it will be able to generate
sufficient cash from operations to make such payments.  While Liggett is
currently in negotiations with its note holders to restructure the terms of the
Liggett Notes and, with its lenders, to extend the Facility, there are no
commitments to restructure the Liggett Notes or to extend the Facility at this
time, and no assurances can be given in this regard.  Pending completion of the
negotiations, Liggett has postponed making the interest payment of
approximately $9,700 for the Liggett Notes due on August 1, 1997.  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.

         The failure to pay interest on the Liggett Notes would permit the
lenders under the Facility to cease making further advances.  While the lenders
have continued to make such advances, and management currently anticipates that
they will continue to do so, no assurances can be given in this regard.  If
Liggett is unable to restructure the terms of the Liggett Notes, extend the
Facility, or otherwise make all payments thereon within the applicable grace
periods, 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, 1996 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 1 of the Company's consolidated financial statements.

         BGLS Inc. 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.



                                       33
<PAGE>   34




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 mandatory principal redemption of $37,500 on the
Liggett Notes due February 1, 1998 and a payment at maturity of the Liggett
Notes of $107,400 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 expires in March 1998,
unless extended by its lenders.  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.





                                       34
<PAGE>   35

                          PART II  - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

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


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a).     Exhibits

<TABLE>
    <S>  <C>      <C>
    *    10.30    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 Brooke Group Ltd. and Liggett Group Inc.
                  (incorporated by reference to exhibit 10.1 in BGL's Form 10-Q for the quarterly period ended
                  June 30, 1997).

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

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


(b).     Reports on Form 8-K

         During the second quarter of 1997, the Company filed a Current Report
on Form 8-K, dated June 11, 1997, concerning items 5 and 7 (no financial
statements were included therewith).



------------

* Incorporated by reference





                                       35
<PAGE>   36

                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized on August 19, 1997.



                                   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, Treasurer and Assistant
                                         Secretary (Principal Financial and 
                                         Principal Accounting Officer)
                                   




                                     Page 36