<PAGE>   1
                                                                Exhibit 99.2








                               LIGGETT GROUP INC.


                       CONSOLIDATED FINANCIAL STATEMENTS


                               DECEMBER 31, 1996
<PAGE>   2
                               LIGGET GROUP, INC.
                                    INDEX TO
             FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES



<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                       -------
         <S>                                                                                            <C>
         FINANCIAL STATEMENTS - LIGGETT GROUP INC.:
             Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . .               2
             Consolidated Balance Sheets as of December 31, 1996 and 1995  . . . . . . . .               3
             Consolidated Statements of Operations for the years ended December 31,
                1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . .               5
             Consolidated Statements of Stockholder's Equity (Deficit) for the years
                ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . .               6
             Consolidated Statements of Cash Flows for the years ended December 31,
                1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . .               7
             Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . .               8

         FINANCIAL STATEMENTS - EVE HOLDINGS INC.:
            Report of Independent Accountants  . . . . . . . . . . . . . . . . . . . . . .              26
            Balance Sheets as of December 31, 1996 and 1995  . . . . . . . . . . . . . . .              27
            Statements of Operations for the years ended December 31, 1996,
                1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              28
            Statements of Stockholder's Equity (Deficit) for the years ended
                December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . .              29
            Statements of Cash Flows for the years ended December 31, 1996,
                1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              30
            Notes to Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . .              31

          FINANCIAL STATEMENT SCHEDULES:
            Schedule II - Valuation and Qualifying Accounts  . . . . . . . . . . . . . . .              33
</TABLE>




                                      1
<PAGE>   3


REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Liggett Group, Inc.

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

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Liggett Group,
Inc. as of December 31, 1996 and 1995 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2a to the
financial statements, the Company suffered a loss of $18,372,000 for the year
ended December 31, 1996 and had net capital and working capital deficiencies of
$176,478,000 and $40,694,000, respectively, at December 31, 1996.  The Company
also has a $37,500,000 principal payment due on its Senior Secured Notes on
February 1, 1998 and payment due at maturity of the Senior Secured Notes on
February 1, 1999 of $107,400,000 and the Company's revolving credit facility
(the "Facility"), which had a balance of $24,272,000 at December 31, 1996, is
due on March 8, 1998.  The Company's financial resources are not sufficient to
repay the Senior Secured Notes when they become due, nor will the Company be
able to repay the Facility when it becomes due.  These facts raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2a.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.



COOPERS & LYBRAND L.L.P.
Miami, Florida
March 20, 1997











                                       2


<PAGE>   4


                               LIGGETT GROUP INC.

                          CONSOLIDATED BALANCE SHEETS

                (Dollars in thousands, except per share amounts)



                                     ASSETS



<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                             ---------------------------
                                                                               1996               1995
                                                                             -------            --------
<S>                                                                          <C>                <C>
Current assets:
   Accounts receivable:
      Trade, less allowances of $1,280 and $815, respectively. . .           $19,316            $ 22,279
      Other  . . . . . . . . . . . . . . . . . . . . . . . . . . .               644               1,367
      Affiliates   . . . . . . . . . . . . . . . . . . . . . . . .               100               1,105

   Inventories   . . . . . . . . . . . . . . . . . . . . . . . . .            50,122              54,342

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

   Other current assets (Note 6)   . . . . . . . . . . . . . . . .             1,205               1,703
                                                                             -------            --------
          Total current assets . . . . . . . . . . . . . . . . . .            71,387              84,596

Property, plant and equipment, at cost, less accumulated
   depreciation of $29,511 and $26,545, respectively . . . . . . .            18,705              18,352

Intangible assets, at cost, less accumulated amortization
   of $17,388 and $15,661, respectively  . . . . . . . . . . . . .             3,327               5,036

Other assets and deferred charges, at cost, less accumulated
   amortization of $7,410 and $5,440, respectively   . . . . . . .             4,258               5,330
                                                                             -------            --------

          Total assets   . . . . . . . . . . . . . . . . . . . . .           $97,677            $113,314
                                                                             =======            ========
</TABLE>





                                  (continued)


                                        3


<PAGE>   5


                               LIGGETT GROUP INC.

                    CONSOLIDATED BALANCE SHEETS (Continued)

                (Dollars in thousands, except per share amounts)





                 LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                               -----------------------
                                                                                                  1996         1995
                                                                                               ---------     ---------
<S>                                                                                             <C>          <C>
Current liabilities:
  Current maturities of long-term debt  . . . . . . . . . . . . . . . . . . . . . . . . .       $ 31,807     $      50
  Cash overdraft  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              6         3,761
  Accounts payable, principally trade . . . . . . . . . . . . . . . . . . . . . . . . . .         18,949        18,921
  Accrued expenses:
    Promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         30,257        25,519
    Compensation and related items  . . . . . . . . . . . . . . . . . . . . . . . . . . .            682         1,175
    Taxes, principally excise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .          7,565         7,006
    Estimated allowance for sales returns . . . . . . . . . . . . . . . . . . . . . . . .          5,000         5,000
    Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          8,435         8,412
    Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          9,380         5,728
                                                                                               ---------   -----------
         Total current liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . . .        112,081        75,572

Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . . . . . . . .        144,698       173,251

Non-current employee benefits and other long-term liabilities . . . . . . . . . . . . . .         17,376        19,197

Commitments and contingencies (Notes 5 and 12)

Stockholder's equity (deficit):
  Redeemable preferred stock (par value $1.00 per share;
   authorized 1,000 shares; no shares issued and out-
   standing)(Note 14)
Common stock (par value $0.10 per share; authorized
   2,000 shares; issued and outstanding 1,000 shares)
   and contributed capital  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         49,840        53,240
  Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (226,318)     (207,946)
                                                                                               ---------   -----------
            Total stockholder's deficit . . . . . . . . . . . . . . . . . . . . . . . . .       (176,478)     (154,706)
                                                                                               ---------   -----------
            Total liabilities and stockholder's equity (deficit)  . . . . . . . . . . . .      $  97,677   $   113,314
                                                                                               =========   ===========
</TABLE>
                  The accompanying notes are an integral part
                         of these financial statements.

                                        4
<PAGE>   6


                               LIGGETT GROUP INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                             (Dollars in thousands)


<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                       -------------------------------
                                                                         1996        1995      1994
                                                                       --------    --------   --------


<S>                                                                     <C>        <C>        <C>
Net sales* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $401,062   $455,666   $465,676
Cost of sales* . . . . . . . . . . . . . . . . . . . . . . . . . . .     187,799    212,314    222,774
                                                                        --------   --------   --------
      Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .     213,263    243,352    242,902
Selling, general and administrative expenses . . . . . . . . . . . .     203,214    216,806    209,306
Restructuring  . . . . . . . . . . . . . . . . . . . . . . . . . . .       3,296      1,927          -
                                                                        --------   --------   --------
       Operating income  . . . . . . . . . . . . . . . . . . . . . .       6,753     24,619     33,596
Other income (expense):
  Interest income  . . . . . . . . . . . . . . . . . . . . . . . . .          23          3          -
  Interest expense   . . . . . . . . . . . . . . . . . . . . . . . .     (23,901)   (23,449)   (21,704)
  Equity in loss of affiliate  . . . . . . . . . . . . . . . . . . .      (1,116)         -          -
  Sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . .       3,669          -          -
  Miscellaneous, net   . . . . . . . . . . . . . . . . . . . . . . .           -      1,133       (458)
                                                                        --------   --------   --------
       Income (loss) before income taxes and extra-
         ordinary item . . . . . . . . . . . . . . . . . . . . . . .     (14,572)     2,306     11,434
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . .       3,800      1,751     (5,000)
                                                                        --------   --------   --------
       Income (loss) before extraordinary item . . . . . . . . . . .     (18,372)       555     16,434

Extraordinary loss from the early
  extinguishment of debt  . . . . . . . . . . . . . . . . . . . . . .          -          -     (1,028)
                                                                        --------   --------   --------
       Net income (loss)    . . . . . . . . . . . . . . . . . . . . .   $(18,372)  $    555   $ 15,406
                                                                        ========   ========   ========
</TABLE>

*Net sales and cost of sales include federal excise taxes of $104,518, $123,420
and $131,877 respectively.










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

                                        5
<PAGE>   7



                               LIGGETT GROUP INC.

                  STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

                             (Dollars in thousands)



<TABLE>
<CAPTION>
                                                                      Common            Retained                        Total
                                                                    Stock and           Earnings                     Stockholder's
                                                                    Contributed      (Accumulated     Translation       Equity
                                                                      Capital           Deficit)      Adjustments      (Deficit)
                                                                    -----------       ------------    -----------     -----------
<S>                                                                    <C>             <C>              <C>            <C>
Balance at December 31, 1993 . . . . . . . . . . . . . . . . . . .     $53,240         $(223,109)       $      (3)     $(169,872)
  Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .           -            15,406                -         15,406
  Translation adjustments .  . . . . . . . . . . . . . . . . . . .           -                 -                3              3
                                                                       -------         ---------        ---------      ---------
Balance at December 31, 1994 . . . . . . . . . . . . . . . . . . .      53,240          (207,703)               -       (154,463)
  Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .           -               555                -            555
  Excess of investment over cost basis of
   net assets acquired from indirect parent  . . . . . . . . . . .           -              (798)               -           (798)
                                                                       -------         ---------        ---------      ---------
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . .      53,240          (207,946)               -       (154,706)
  Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .           -           (18,372)               -        (18,372)
  Consideration for option to acquire affiliate
   stock in excess of its net assets (Note 13) . . . . . . . . . .      (3,400)                -                -         (3,400)
                                                                       -------         ---------        ---------      ---------
Balance at December 31, 1996 . . . . . . . . . . . . . . . . . . .     $49,840         $(226,318)       $       -      $(176,478)
                                                                       =======         =========        =========      =========
</TABLE>

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

                                        6
<PAGE>   8


                               LIGGETT GROUP INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                                                                Year Ended December 31,
                                                                                     ---------------------------------------------
                                                                                        1996              1995           1994
                                                                                     ---------------------------------------------
<S>                                                                                  <C>               <C>          <C>
Cash flows from operating activities:
  Net income  (loss)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $ (18,372)        $     555    $  15,406
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
   Depreciation and amortization  . . . . . . . . . . . . . . . . . . . . . . . .        7,969             7,972        8,310
   Deferred income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3,800             1,259       (5,781)
   (Gain) loss on sale of property, plant and equipment . . . . . . . . . . . . .       (3,669)             (375)         114
   (Gain) on retirement of notes  . . . . . . . . . . . . . . . . . . . . . . . .            -            (1,273)        (375)
   Deferred finance charges and debt discount written off   . . . . . . . . . . .            -               160        1,404
   Equity in loss of affiliate  . . . . . . . . . . . . . . . . . . . . . . . . .        1,116                 -           -
 Changes in assets and liabilities:
   Accounts receivable . . . . . . . . . . . . . . . . .  . . . . . . . . . . . .        4,691             7,060       (3,381)
   Inventories . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . .        4,220            (7,658)      (9,712)
   Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (330)            7,671         (480)
   Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        8,479           (10,638)     (10,474)
   Non-current employee benefits  . . . . . . . . . . . . . . . . . . . . . . . .         (276)             (225)        (290)
   Other, net  . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . .       (1,461)            9,079        1,492
                                                                                     ---------         ---------    ---------
     Net cash provided by (used in) operating activities  . . . . . . . . . . . .        6,167            13,587       (3,767)
                                                                                     ---------         ---------    ---------
Cash flows from investing activities:
  Proceeds from sale of property, plant and equipment . . . . . . . . . . . . . .        4,424               570           78
  Capital expenditures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (4,319)           (1,104)      (1,036)
  Investment in affiliates  . . . . . . . . . . . . . . . . . . . . . . . . . . .       (5,500)             (800)           -
                                                                                     ---------         ---------    ---------
      Net cash used in investing activities . . . . . . . . . . . . . . . . . . .       (5,395)           (1,334)        (958)
                                                                                     ---------         ---------    ---------
Cash flows from financing activities:
  Repayments of long-term debt  . . . . . . . . . . . . . . . . . . . . . . . . .         (254)           (8,208)      (1,690)
  Issuance of Senior Secured Notes  . . . . . . . . . . . . . . . . . . . . . . .            -                 -       15,000
  Borrowings under revolving credit facility  . . . . . . . . . . . . . . . . . .      351,428           397,873      362,955
  Repayments under revolving credit facility. . . . . . . . . . . . . . . . . . .     (348,173)         (401,703)    (366,544)
  Proceeds from retirement of notes   . . . . . . . . . . . . . . . . . . . . . .            -                 -          375
  Deferred finance charges  . . . . . . . . . . . . . . . . . . . . . . . . . . .          (18)                -       (2,705)
  Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . .            -                 -            3
  Changes in advances to affiliate  . . . . . . . . . . . . . . . . . . . . . . .            -                 -       (4,000)
  Increase (decrease) in cash overdraft . . . . . . . . . . . . . . . . . . . . .       (3,755)             (215)       1,331
                                                                                     ---------         ---------    ---------
    Net cash provided by (used in) financing activities   . . . . . . . . . . . .         (772)          (12,253)       4,725
                                                                                     ---------         ---------    ---------
Net change in cash and cash equivalents   . . . . . . . . . . . . . . . . . . . .            -                 -            -
Cash and cash equivalents:
  Beginning of period   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            -                 -            -
                                                                                     ---------         ---------    ---------
  End of period   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $       -         $       -    $       -
                                                                                     =========         =========    =========
Supplemental cash flow information:
  Cash payments during the period for:

    Interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  23,228         $  23,196    $  20,287
    Income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $     189         $     130    $     123
</TABLE>

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

                                        7
<PAGE>   9


                               LIGGETT GROUP INC.

                   Notes to Consolidated Financial Statements

                (Dollars in thousands, except per share amounts)


1. Basis of Presentation

     Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL").  Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States.  Certain management and
administrative functions are performed by affiliates  (see Note 13).


2. Summary of Significant Accounting Policies

a. Going Concern

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.  Liggett had a net
capital deficiency of $176,478 as of December 31, 1996, is highly leveraged and
has substantial near-term debt service requirements.  Due to the many risks and
uncertainties associated with the cigarette industry, the impact of recent
tobacco litigation settlements (see Note 12) and the anticipated increased
tobacco costs, there can be no assurance that the Company will be able to meet
its future earnings goals.  Consequently, the Company could be in violation of
certain debt covenants, and if its lenders were to exercise acceleration rights
under the revolving credit facility or senior secured notes indentures or
refuse to lend under the revolving credit facility, the Company would not be
able to satisfy such demands or its working capital requirements.

     Further, the Company's senior secured 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 its revolving credit facility expires on March 8,
1998 unless extended by its lenders.  The revolving credit facility is
classified as a short-term debt thereby creating a working capital deficit of
approximately $40,694 at December 31, 1996.

     While management currently intends to seek to refinance and/or restructure
with the Company's note holders the redemption and maturity requirements on the
Senior Secured Notes and to extend the revolving credit facility, there are no
refinancing or restructuring arrangements for the notes or commitments to extend
the facility at this time, and no assurances can be given in this regard. 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.  If the Company is unable to refinance or
restructure such obligations, renegotiate the payment terms of the senior
secured notes, extend the revolving credit facility or otherwise make such
payments, substantially all of its long-term debt and revolving credit 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.  These matters raise substantial doubt about
the Company meeting its liquidity needs and its ability to continue as a going
concern.

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

b. Principles of Consolidation


                                        8
<PAGE>   10


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

c. Estimates and Assumptions

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1996 and 1995
and the reported amounts of revenues and expenses during the three year period
ended December 31, 1996. 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.

d. Per Share Data

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

e. Inventories

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

f. Property, Plant and Equipment

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

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

     The Company is required to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable, in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121").  Accordingly, when indicators of impairment are present, the
Company evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and estimates of future
discounted cash flows of the underlying business.

g. Trademarks

     Trademarks are amortized using the straight-line method over twelve years.
Amortization expense for the years ended December 31, 1996, 1995 and 1994
amounted to $1,727, $1,725 and $1,722, respectively.  Management periodically
reviews the carrying value of trademarks to determine whether asset values are
impaired.





                                        9
<PAGE>   11


h. Sales and Sales Returns

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

i. Employee Benefits

     The Company sponsors self-insured health and dental insurance plans for
all eligible employees.  As a result, the expense recorded for such benefits
involves an estimate of unpaid claims as of December 31, 1996 and 1995 which
are subject to significant fluctuations in the near term.

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

     The Company sponsors a postretirement benefit plan and, in accordance with
Statement of Financial Accounting  Standards No. 106, "Employers Accounting for
Postretirement Benefits Other than Pensions" ("SFAS 106"), records an
actuarially determined liability and charges operations for the estimated cost
of postretirement benefits for current employees and retirees.

j. Income Taxes

     Under SFAS No. 109, "Accounting for Income Taxes", deferred taxes reflect
the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the amounts
recognized for tax purposes as well as tax credit carryforwards and loss
carryforwards.  These deferred taxes are measured by applying currently enacted
tax rates.  A valuation allowance reduces deferred tax assets when it is deemed
more likely than not that future taxable income will be insufficient to realize
some portion or all of the deferred tax assets.

k. Legal Costs

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

l. Fair Value of Financial Instruments

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


3. Changes in Accounting Estimates

     In September 1995, the Company adjusted an accrual estimate recorded in
prior years which had the effect of increasing operating income by
approximately $1,214 for the year ended December 31, 1995.

     As a consequence of certain litigation settlements and marketing
assessment contingencies (see Note 12), Liggett charged approximately $8,846
to operations in the fourth quarter of 1995.  Possible

                                       10
<PAGE>   12

future payments under the litigation settlements which are based on a
percentage of Liggett's  pretax income, if any, will be charged to operations
in the period that the Company's operating results are known. Liggett increased
its valuation allowance for deferred tax assets by $443 in the fourth quarter
of 1995.

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


4. Concentrations of Credit Risk

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

     Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett's
largest single customer accounted for approximately 13.7% of net sales in 1996,
and approximately 11.6% of net sales in 1995, the majority of which were in the
private label discount market segment.  No single customer accounted for more
than 10% of the Company's net sales in 1994. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the remainder of the Company's customer base.  Ongoing credit
evaluations of customers' financial condition are performed and, generally, no
collateral is required.  The Company maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded management's
estimates.


5. Inventories


Inventories consist of:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                  ------------------
                                                                   1996        1995
                                                                  ------     -------
<S>                                                               <C>        <C>

 Finished goods  . . . . . . . . . . . . . . . . . . . . . .      $15,304    $18,240
 Work-in-process . . . . . . . . . . . . . . . . . . . . . .        4,382      3,331
 Raw materials . . . . . . . . . . . . . . . . . . . . . . .       31,338     24,946
 Replacement parts and supplies  . . . . . . . . . . . . . .        3,554      3,926
                                                                  -------    -------
  Inventories at current cost  . . . . . . . . . . . . . . .       54,578     50,443

  LIFO adjustment  . . . . . . . . . . . . . . . . . . . . .       (4,456)     3,899
                                                                  -------    -------
  Inventories at LIFO cost   . . . . . . . . . . . . . . . .      $50,122    $54,342
                                                                  =======    =======
 </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 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 $20,116 at December 31, 1996.






                                       11
<PAGE>   13


6. Assets Under Agreement for Sale

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

     On April 29, 1996, Liggett executed a definitive agreement (as amended)
with Blue Devil Ventures, a North Carolina limited liability partnership, for
the sale by Liggett to Blue Devil Ventures of certain surplus realty in Durham,
North Carolina, for a sale price of $2,200. The net book value of those assets
($309) for which the agreement was signed is classified as current assets on
the Company's Consolidated Balance Sheet as of December 31, 1996.  The
transaction closed on March 11, 1997. A gain of approximately $1,600 is
expected to be recognized in 1997.

7. Property, Plant and Equipment


Property, plant and equipment consists of the following:


<TABLE>
<CAPTION>
                                                                     December 31,
                                                                  ------------------
                                                                    1996      1995
                                                                  -------    -------
<S>                                                               <C>        <C>
 Land and improvements .......................................    $   455    $   542
 Buildings ...................................................      5,848      6,011
 Machinery and equipment .....................................     41,913     38,344
                                                                  -------    -------

 Property, plant and equipment ...............................     48,216     44,897

 Less accumulated depreciation ...............................    (29,511)   (26,545)
                                                                  -------    -------

 Property, plant and equipment, net ..........................    $18,705    $18,352
                                                                  =======    =======
 </TABLE>



8. Employee Benefits Plans

     Defined Benefit Retirement Plans

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




                                       12
<PAGE>   14


     Future Pension Benefits to be Funded by BGLS

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



<TABLE>
            <S>                            <C>
            1997  ......................   $  350
            1998  ......................      350
            1999  ......................      350
            2000  ......................      250
            2001  ......................      150
            Thereafter .................    1,500
                                           ------

               Total ...................   $2,950
                                           ======
 </TABLE>


     Postretirement Medical and Life Insurance Plans

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

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                         -----------------------
                                                      1996        1995       1994
                                                      ----        ----       ----
<S>                                                   <C>       <C>         <C>
Service cost, benefits attributed to employee
   service during the year ....................       $  68     $    68     $   63
 Interest cost on accumulated postretirement
   benefit obligation .........................         829         970      1,037
 Charge for special termination benefits ......        --           489       --
 Amortization of net (gain) loss ..............         (92)        (26)        33
                                                      -----     -------     ------
 Net periodic postretirement benefit expense ..       $ 805     $ 1,501     $1,133
                                                      =====     =======     ======
 </TABLE>

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


<TABLE>
<CAPTION>
                                                                    December 31,
                                                                    --------------
                                                                    1996       1995
                                                                    ----       ----
<S>                                                               <C>        <C>
 Retired employees ...........................................    $ 7,899    $ 8,673
 Active employees - fully eligible ...........................        674      1,707
 Active employees - not fully eligible .......................        515      1,078
                                                                  -------    -------
 APBO ........................................................      9,088     11,458
 Unrecognized net gain .......................................      3,324      1,339
 Purchase accounting valuation adjustment
 related to income taxes .....................................     (1,072)    (1,181)
                                                                  -------    -------
 Postretirement liability ....................................    $11,340    $11,616
                                                                  =======    =======
 </TABLE>




                                       13
<PAGE>   15


     The APBO at December 31, 1996 was determined using a discount rate of 8%
and health care cost trend rates of 4%. A 1% increase in the trend rate for
health care costs would have increased the APBO and net periodic postretirement
benefit cost by $419 and $32, respectively, for the year ended December 31,
1996.  The Company does not hold any assets reserved for use in the plan.

     Profit Sharing Plans

     Liggett's 401(k) plans originally called for Company contributions
matching up to a 3% employee contribution, plus additional Company
contributions of up to 6% of salary based on the achievement of Company profit
objectives.  Effective January 1, 1994, the Company suspended the 3% match for
the salaried employees' 401(k) Plan, but reinstated it on April 1, 1996.  The
Company contributed and expensed $2,712, $900 and $420 to the 401(k) plans for
the years ended December 31, 1996, 1995 and 1994, respectively.


9. Income Taxes

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

    The amounts provided for income taxes are as follows:

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                      -------------------------------
                                                        1996        1995       1994
                                                      -------     -------     -------
<S>                                                   <C>         <C>         <C>
Current:
 Federal ......................................       $    --     $  (233)    $   341
 State ........................................            --         216         227

Deferred:
 Federal ......................................         3,800       1,768      (5,568)
 State ........................................            --          --          --
                                                      -------      ------     -------
 Total tax provision (benefit) ................       $ 3,800     $ 1,751     $(5,000)
                                                      =======     =======     =======
 </TABLE>

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

<TABLE>
<CAPTION>
                                                      1996                     1995
                                            ----------------------   ----------------------
                                                Deferred Tax             Deferred Tax
                                             Asset       Liability    Asset       Liability
                                            --------     ---------   -------      ---------
<S>                                         <C>          <C>         <C>          <C>
 Sales and product allowances ........      $  2,504     $    --     $ 2,293      $      --
 Inventory ...........................         1,269         683         816          1,256
 Coupon accruals .....................         4,492          --       3,138             --
 Property, plant and equipment .......          --         4,890          --          5,778
 Employee benefit plan accruals ......         5,303          --       4,886             --
 USDA marketing assessment ...........         1,681          --       1,920             --
 Tobacco litigation settlements ......         1,229          --       1,568             --
 Difference in basis in investment ...         1,864          --          --             --
 Net operating loss carryforward .....         7,244          --       5,022             --
 Valuation allowance .................       (20,013)         --      (8,809)            --
 Reclassifications ...................        (5,573)     (5,573)     (7,034)        (7,034)
                                            --------     -------     -------      ---------
 Total deferred taxes.................      $     --     $    --     $ 3,800      $    ----
                                            ========     =======     =======      =========
</TABLE>


                                       14
<PAGE>   16

     The $20,013 net valuation allowance at December 31, 1996 is composed of
$18,590 for net deferred assets arising from items which have been reflected in
book income or loss and $1,423 for deferred assets arising for basis
differences in the investments which were reflected as direct entries to
equity.

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              -----------------------
                                                         1996          1995          1994
                                                         ----          ----          ----
<S>                                                   <C>           <C>           <C>
 Income before taxes ..........................       $ (14,572)    $   2,306     $  11,434
                                                      =========     =========     =========
 Federal income tax at statutory rates ........       $  (5,100)    $     807     $   4,002
 Increases (decreases) resulting from:
   State income tax expense (benefit) net of
     federal income tax benefit (expense) .....            (634)          216           743
   Other, net .................................            (247)          285           516
   Change in valuation allowance ..............           9,781           443       (10,261)
                                                      ---------     ---------     ---------

 Total tax provision (benefit) ................       $   3,800     $   1,751     $  (5,000)
                                                      =========     =========     =========
</TABLE>

     As of December 31, 1996, the Company's net operating loss ("NOL")
carryforward pursuant to its tax sharing agreement with BGL is approximately
$18,250 which expires from 2008 to 2011.  However, if the Company were
deconsolidated from BGL, its allocable share of NOL could be significantly
different.  In 1993 a valuation allowance was established for the net deferred
tax assets because of the lack of recoverability of NOLs against prior years'
taxable income and the Company's 1993 loss.  The Company has adjusted its
valuation allowance in subsequent years based upon its assessment of whether it
is more likely than not that taxable income will be sufficient to realize the
deferred tax assets.


10. Long-Term Debt

    Long-term debt consists of the following:


<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   ------------
                                                                 1996                 1995
                                                       -----------------------       ------
                                                       Estimated      Carrying      Carrying
                                                       Fair Value      Value         Value
                                                       ----------     --------      --------
<S>                                                   <C>            <C>            <C>
11.5% Senior Secured Notes due February 1, 1999
 net of unamortized discount of $0, $424 and $627,
 respectively ....................................    $  74,805      $ 119,688      $ 119,485
Variable Rate Series C Senior Secured Notes due
 February 1, 1999 ................................       23,402         32,279         32,279
Borrowings outstanding under revolving credit
 facility ........................................       24,272         24,272         21,017
Other ............................................          266            266            520
                                                      ---------      ---------      ---------
                                                        122,745        176,505        173,301
Current portion ..................................      (31,807)       (31,807)           (50)
                                                      ---------      ---------      ---------
</TABLE>


                                       15
<PAGE>   17

<TABLE>
<S>                                                   <C>            <C>            <C>
 Amount due after one year .......................    $  90,938      $ 144,698      $ 173,251
                                                      =========      =========      =========
 </TABLE>

     Maturities of long-term debt, net of discount, at December 31, 1996 are as
follows:


<TABLE>
  <S>                                      <C>
  1997 .................................   $ 31,807
  1998 .................................     37,324
  1999 .................................    107,374
                                           --------
    Total ..............................   $176,505
                                           ========
</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 "Notes") require mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Notes due on
February 1, 1999. In February 1997, $7,500 of 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 Notes are
collateralized by substantially all of the assets of the Company, excluding
inventories and receivables.  Eve is a guarantor for the Notes. The 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 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.

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

     Revolving Credit Facility

     On March 8, 1994, Liggett entered into a revolving credit facility (the
"Facility") under which it can borrow up to $40,000 (depending on the amount of
eligible inventory and receivables as determined by the lenders) from a
syndicate of commercial lenders.  Availability under the Facility was
approximately $13,098 based upon eligible collateral at December 31, 1996.  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 December 31, 1996. The Facility contains certain financial covenants
similar to those contained in the Note indenture, including restrictions on
Liggett's ability to declare or pay cash dividends, incur additional debt,
grant liens and enter into any new agreements with affiliates, among others.
In addition, the Facility imposes



                                       16
<PAGE>   18

requirements with respect to the Company's adjusted net worth (not to fall
below a deficit of $175,000 as computed in accordance with the agreement) and
working capital (not to fall below a deficit of $35,000 as computed in
accordance with the agreement). The Facility is classified as short-term debt
as of December 31, 1996, as it was due on March 8, 1997.  On January 7, 1997,
the Facility was extended for a one-year period ending March 8, 1998.

     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 Senior Secured 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 Senior Secured Notes; (ii) the maximum permitted working capital
deficit 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. (See Note
2a).

11.  Operating Leases

     At December 31, 1996, the Company has operating leases for building space
and computer equipment.  The future minimum lease payments are as follows:



<TABLE>
         <S>                               <C>
         1997 ..........................   $  1,672
         1998 ..........................      1,118
         1999 ..........................        361
         2000 ..........................          6
                                           --------
           Total .......................   $  3,157
                                           ========
</TABLE>

     Rental expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $3,121, $3,112 and $2,854, respectively.


12.  Commitments and Contingencies

     Litigation

     Since 1954, Liggett and other United States cigarette manufacturers have
been named as defendants smoking or by exposure to secondary smoke
(environmental tobacco smoke, "ETS") from cigarettes.  These cases are reported
hereinafter as though having been commenced against Liggett (without regard to
whether such actually were commenced against Brooke Group Ltd. in its former
name or in its present name or against Liggett).  New cases continue to be
commenced against Liggett and other cigarette manufacturers.  As new cases are
commenced, the costs associated with defending such cases and the risks
attendant to the inherent unpredictability of litigation continue to increase.
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 recently ended.  Certain joint defense arrangements, and the
financial benefits incident thereto, have also ended.  The future financial
impact on the Company of the termination of this assistance and the effects of
the tobacco litigation settlements discussed below is not quantifiable at this
time.

     As of March 14, 1997, there were 108 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, 58 are pending in the State of Florida and
19 are pending in the State of New York.  The balance of individual cases are
pending in 13 different states.  The next individual case scheduled for trial
where Liggett is a defendant is Chutz-Reymers v. Liggett Group Inc., et al.
United States District Court, Middle District of Florida, Tampa Division, which
is scheduled for trial in June 1997. In light of the settlements discussed
below, this case will not proceed against Liggett on that date. In addition to
the foregoing, there are four individual cases scheduled for trial in 1997
where Liggett is a defendant, although trial dates are subject to change.

     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, strict liability, fraud, misrepresentation, design defect, failure
to



                                       17
<PAGE>   19

warn, breach of express and implied warranties, conspiracy, concert of action,
unjust enrichment, common law public nuisance, indemnity, market share
liability, and violations of deceptive trade practices laws 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 preemption by the
Federal Cigarette Labeling and Advertising Act, as amended (the "Act").
Several representative cases are described below.

     On June 24, 1992, in the 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 Yvonne 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 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.  A
Notice of Appeal has been filed by the plaintiff.

     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.  Plaintiffs' motion to certify the action as a class action
was granted.  The suit is scheduled to go to trial on June 2, 1997.  In
addition to Broin, as of March 25, 1997 there were 12 other actions which have
either been certified as a class or are seeking class certification.  One of
these  actions, Engle, et al. v. R. J. Reynolds Tobacco Company, et al.,
Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida,
involving a certified class of smokers in the State of Florida, is scheduled to
commence trial on September 8, 1997.

     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.  The case is presently in the discovery phase.  This
action is scheduled for trial on December 12, 1997.  A similar action has been
filed in the Superior Court for the State of California, City of San Francisco.

     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 plaintiffs' fraud and breach of warranty



                                       18
<PAGE>   20

claims.  In addition, the District Court vacated the Magistrate's March 19,
1996 order compelling Liggett to produce certain CTR documents with respect to
which Liggett had asserted various privilege claims, and allowed the other
cigarette manufacturers and the CTR to intervene in order to assert their
interests and privileges with respect to those same documents.  The Magistrate
Judge is presently reconsidering plaintiffs' motion to compel production of
documents.  No trial date has been set.

     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 May 23, 1996, the Fifth Circuit Court of Appeals decertified
the class and instructed the District Court to dismiss the class complaint.
On March 12, 1996, Liggett and BGL entered into an agreement, subject to court
approval, to settle the Castano class action tobacco litigation, however, this
settlement is no longer in effect.  See "Subsequent Events" below.

     In February 1995, an action entitled Grady 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 Corp., in the amount of $750.  Brown & Williamson has filed
a Notice of Appeal.

     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.  In addition to the foregoing,
similar actions have been filed on behalf of 20 states and several
municipalities.  The Mississippi, Florida and Texas Medicaid recovery actions
are scheduled for trial in 1997. Legislation similar to that enacted in Florida
has been introduced in the Massachusetts and New Jersey legislatures.

     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 the Federal Racketeer
Influenced and Corrupt Organization Act.

     On March 15, 1996, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of 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.


                                       19
<PAGE>   21
     Under the 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 with in 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.  While neither
consenting to FDA jurisdiction nor waiving their objections thereto, 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, the Company 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 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 occurrence
of a business combination, will be expensed when considered probable.

     The Company 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.  The Company was a
sponsor of The Council for Tobacco Research - USA, Inc. at one time.  The
Company is unable at this time to predict the outcome of this investigation.

     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.  The Company 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. Liggett is in the process of responding
to that subpoena.  Liggett and BGL are 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 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. A
notice of appeal has been filed by the plaintiff.

     Litigation is subject to many uncertainties, and it is possible that some
of aforementioned actions could be decided unfavorably against the Company.
An unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. The Company is not able 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



                                       20
<PAGE>   22

other proceedings, lawsuits and claims should not materially affect Liggett's
financial position, results of operations or cash flows.

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

     Subsequent Events:

        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.  Liggett and BGL have now
obtained settlements with each of the 22 states have commenced suit against
them.  The settlements cover all smoking-related claims, including both
addiction-based and tobacco injury claims against Liggett and BGL, brought by
the 22 states, and upon court approval, the nationwide class.

        The settlement with the Attorneys General, which does not require court
approval, includes the states of Arizona, Connecticut, Hawaii, Illinois,
Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, New Jersey, New York,
Oklahoma, Texas, Utah, Washington and Wisconsin.  Liggett 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.

        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.  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.  In light of this, the March 1996 Castano settlement is no longer
in effect.

        Pursuant to the settlements, Liggett and BGL have agreed to cooperate
fully with the Attorneys General and the nationwide class in their lawsuits
against the tobacco industry.  Liggett and BGL have 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 have
agreed to offer their employees for witness interviews and testimony at
deposition and trial.  Pursuant to both settlement agreements, Liggett has 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.

        Under the terms of the new settlement agreements, Liggett will pay on a
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
has 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 further adverse judgment.  In addition,
within 120 days following such a combination, Liggett would be required to pay
the settlement fund of $25 million.  Both the Attorneys General and the
nationwide class have also 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 have
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.

        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.  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 these four companies from interfering
with Liggett's filing with the courts, under seal, those documents.



                                       21
<PAGE>   23
         Legislation and Regulation

         On August 28, 1996, the Food and Drug Administration ("FDA") filed in
the Federal Register a Final 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 has been commenced in the United
States District Court for the Middle District of North Carolina challenging the
legal authority of the FDA to assert such jurisdiction, as well as challenging
the constitutionality of the rules. A hearing on the tobacco industry's motion
for summary judgment in that case was held on February 10, 1997 and a decision
by the Court is expected soon. The FDA's proposed restrictions, some of which
became effective as early as February 28, 1997, purport to: (i) limit access to
tobacco products and (ii) limit advertising and marketing. Management is unable
to predict whether the Final Rule will be upheld as enforceable against the
industry. Management is also unable to predict the effects of the proposed
restrictions, if implemented, on Liggett's operations, but such actions could
have an unfavorable impact thereon.

         Liggett and BGL, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed rule making and to phase in compliance with certain
of the proposed interim FDA regulations. See discussions of the Castano and
Attorneys General settlements above.

         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. Regulations adopted
pursuant to this legislation are scheduled to become effective on July 1, 1997.
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.

         In 1993, the United States Congress amended the Agricultural Adjustment
Act of 1938 to require each United States cigarette manufacturer to use at least
75% domestic tobacco in the aggregate of the

                                      22
<PAGE>   24

cigarettes manufactured by it in the United States, effective January 1, 1994,
on an annualized basis or pay a domestic marketing assessment ("DMA") based
upon price differentials between foreign and domestic tobacco and, under
certain circumstances, make purchases of domestic tobacco from the tobacco
stabilization cooperatives organized by the United States government.

     After an audit, the United States Department of Agriculture ("USDA")
informed Liggett that it did not satisfy the 75% domestic tobacco usage
requirement for 1994 and was subject to a DMA (the "USDA marketing assessment")
of approximately $5,500.  Liggett has agreed to pay this assessment in
quarterly installments, with interest, over a five-year period, and $4,900 was
accrued for the assessment in 1995.  Since the levels of domestic tobacco
inventories on hand at the tobacco stabilization organizations are below
reserve stock levels, the Company was not obligated to make purchases of
domestic tobacco from the tobacco stabilization cooperatives.

     On September 13, 1995, the President of the United States 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.  In addition, the Presidential
Proclamation served to limit the application of the legislation establishing
the DMA to only those activities occurring in calendar year 1994.

     On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under the TRQ
should be allocated.  Currently, tobacco imported under the TRQ is allocated on
a "first-come, first-served" basis, meaning that entry is allowed on an open
basis to those first requesting entry in the quota year.  Others in the
cigarette industry have suggested an "end-user licensing" system under which
the right to import tobacco under the quota would be initially assigned on the
basis of domestic market share.  Such an approach, if adopted, could have a
material adverse effect on the Company.

     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 the Company cannot
predict the outcome, some form of federal regulation of smoking in workplaces
may result.

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

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



                                       23
<PAGE>   25


     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, the Company is not able to evaluate.


13. Related Party Transactions

     On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat Ltd.'s ("Liggett-Ducat") tobacco operations from Brooke
(Overseas) Ltd. ("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 loss of Liggett-Ducat
amounted to $1,116 for the year ended December 31, 1996.  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.

     Since October 1990, Liggett has provided certain administrative and
technical support to Liggett-Ducat in exchange for which Liggett-Ducat provides
assistance to Liggett in its pursuit of selling cigarettes in the Russian
Republic.  The expenses associated with Liggett's activities amounted to $76,
$229 and $230 for the years ended December 31, 1996, 1995 and 1994,
respectively.

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

     Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments.

     Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee paid in monthly installments.  Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to
$3,160 in 1996, $3,010 in 1995 and $2,866 in 1994.  This fee is in addition to
the management fee and overhead reimbursements described above.

     In prior years, BGLS assumed specified Liggett liabilities from time to
time and Liggett repaid these amounts from time to time.  During 1994, Liggett
satisfied all amounts due ($8,000) in full.

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

     The Company acquired  CTEC  from its indirect parent during 1995 for $800.
The excess of cost over the carrying amount of the net assets acquired has
been charged to stockholder's equity (deficit).  The



                                       24
<PAGE>   26

effect of the accounting treatment presents the investment in CTEC at
carryover basis.  Accounts receivable from affiliates relate principally to
advances for expenses paid by the Company on behalf of its affiliates.


14. Supplemental Disclosure of Non-Cash Financing and Investing Activities

     During 1994, the Company issued $17,850 in Series C Notes in exchange for
Series B Notes and in connection with indenture consent of which $15,008 were
credited against the mandatory redemption of Series B Notes for February 1,
1994 and 1995, and $2,842 were recorded as deferred finance charges.

     During 1994, the Company transferred equipment with a net book value of
$2,161 to BGLS in return for assumption of Liggett's note payable of $1,988.


15. Restructuring Charges

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

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



                                       25
<PAGE>   27


                      REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholder
of Eve Holdings Inc.

We have audited the accompanying balance sheets of Eve Holdings Inc. (the
"Company") as of December 31, 1996 and 1995 and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996.  These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eve Holdings Inc. at December
31, 1996 and 1995 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2a to the
financial statements, the Company's revenues are comprised solely of royalties
and interest income from Liggett Group Inc. ("Liggett").  Liggett had a working
capital deficit of $40,694 and a net capital deficiency of $176,478 as of
December 31, 1996, is highly leveraged and has substantial near-term debt
service requirements.  These matters raise substantial doubt about the
Company's ability to continue as a going concern.  The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.



COOPERS & LYBRAND L.L.P.

Miami, Florida
March 27, 1997




                                       26
<PAGE>   28


                               EVE HOLDINGS INC.

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


<TABLE>
                                                                                 December 31,
                                                                             1996          1995
                                                                             ----          ----
                                    ASSETS
<S>                                                                       <C>            <C>
 Cash ............................................................        $    --        $       8
 Office equipment ................................................                2              2
 Trademarks, at cost, less accumulated amortization of
    $17,294 and $15,593, respectively ............................            3,119          4,820
                                                                          ---------      ---------
           Total assets ..........................................        $   3,121      $   4,830
                                                                          =========      =========

                LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

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

 Dividends payable ...............................................            4,623          2,536

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

 Other current liabilities .......................................               19           --

 Deferred income taxes ...........................................            1,092          1,687
                                                                          ---------      ---------
           Total liabilities .....................................            5,826          4,387
                                                                          ---------      ---------
 Stockholder's equity (deficit):
    Common stock (par value $1 00 per share; authorized,
      issued and outstanding 100 shares) and contributed
      capital ....................................................           46,548         47,653
    Receivables from parent:
      Note receivable - interest at 14%, due no sooner
        than February 1, 1999 ....................................          (44,520)       (44,520)
      Other ......................................................           (4,733)        (2,690)
                                                                          ---------      ---------
        Total stockholder's equity (deficit) .....................           (2,705)           443
                                                                          ---------      ---------
        Total liabilities and stockholder's equity (deficit) .....        $   3,121      $   4,830
                                                                          =========      =========
 </TABLE>



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



                                       27
<PAGE>   29


                               EVE HOLDINGS INC.

                            STATEMENTS OF OPERATIONS

                             (Dollars in thousands)



<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                        ------------------------------------
                                                         1996           1995            1994
                                                         ----           ----            ----
<S>                                                   <C>            <C>            <C>
Revenues:
   Royalties - parent ............................    $   8,608      $  10,452      $  10,647
   Interest - parent .............................        6,306          6,306          6,306
                                                      ---------      ---------      ---------
                                                         14,914         16,758         16,953
 Expenses:
   Amortization of trademarks ....................        1,701          1,702          1,701
   Miscellaneous .................................          129             93             70
                                                      ---------      ---------      ---------
   Operating income ..............................       13,084         14,963         15,182
 Interest expense ................................           49           --             --
                                                      ---------      ---------      ---------
   Income before income taxes ....................       13,035         14,963         15,182
 Income tax provision ............................        2,480          5,237          5,314
                                                      ---------      ---------      ---------
   Net income ....................................    $  10,555      $   9,726      $   9,868
                                                      =========      =========      =========
 </TABLE>



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

                                       28
<PAGE>   30


                               EVE HOLDINGS INC.

                  STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

                             (Dollars in thousands)



<TABLE>
<CAPTION>
                                              Common
                                             Stock and                  Receivables      Total
                                             Capital in      Retained      From      Stockholder's
                                            Excess of Par    Earnings     Parent         Equity
                                            -------------    --------     ------      ------------
<S>                                         <C>             <C>         <C>            <C>
 Balance at December 31, 1993 ............  $  49,866       $    --     $ (45,219)     $   4,647

   Net income ............................       --             9,868        --            9,868
   Dividends/capital distributions .......     (1,107)         (9,868)       --          (10,975)
   Net change in receivable from Parent ..       --              --        (2,053)        (2,053)
                                            ---------       ---------   ---------      ---------
 Balance at December 31, 1994 ............     48,759            --       (47,272)         1,487
   Net income ............................       --             9,726        --            9,726
   Dividends/capital distributions .......     (1,106)         (9,726)       --          (10,832)
   Net change in receivable from Parent ..       --              --            62             62
                                            ---------       ---------   ---------      ---------
 Balance at December 31, 1995 ............     47,653            --       (47,210)           443
   Net income ............................       --            10,555        --           10,555
   Dividends/capital distributions .......     (1,105)        (10,555)       --          (11,660)
   Net change in receivable from Parent ..       --              --        (2 043)        (2,043)
                                            ---------       ---------   ---------      ---------
 Balance at December 31, 1996 ............  $  46,548       $    --     $ (49,253)     $  (2,705)
                                            =========       =========   =========      =========
 </TABLE>



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


                                       29
<PAGE>   31


                               EVE HOLDINGS INC.

                            STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                           -----------------------
                                                                      1996            1995          1994
                                                                      ----            ----          ----
<S>                                                                <C>             <C>           <C>
Cash flows from operating activities:
   Net income ..................................................   $  10,555       $   9,726     $   9,868
   Adjustments to reconcile net income to net cash provided by
     operating activities:
     Depreciation and amortization .............................       1,701           1,703         1,701
     Deferred income taxes .....................................        (595)           (596)         (595)
   Changes in assets and liabilities:
     Federal income taxes currently payable  to parent .........        (164)            157          (691)
     Other current liabilities .................................          19            --            --
                                                                   ---------       ---------     ---------
       Net cash provided by operating activities ...............      11,516          10,990        10,283
                                                                   ---------       ---------     ---------
 Cash flows from investing activities:
   Capital expenditures ........................................        --              --              (3)
                                                                   ---------       ---------     ---------
       Net cash used in investing activities ...................        --              --              (3)
                                                                   ---------       ---------     ---------
 Cash flows from financing activities:
   Increase in cash overdraft ..................................          92            --            --
   Dividends/capital distributions .............................      (9,573)        (11,046)       (8,225)
   Increase (decrease) in due from parent ......................      (2,043)             62        (2,053)
                                                                   ---------       ---------     ---------
       Net cash used in financing activities ...................     (11,524)        (10,984)      (10,278)
                                                                   ---------       ---------     ---------
 Net (decrease) increase in cash ...............................          (8)              6             2

 Cash:
   Beginning of period .........................................           8               2          --
                                                                   ---------       ---------     ---------
   End of period ...............................................   $       0       $       8     $       2
                                                                   =========       =========     =========
 Supplemental cash flow information:
   Payments of income taxes through receivable from parent .....   $   5,159       $   5,676     $   6,600
                                                                   =========       =========     =========
   Dividends/capital distributions declared but not paid .......   $   4,623       $   2,536     $   2,750
                                                                   =========       =========     =========
</TABLE>
                  The accompanying notes are an integral part
                         of these financial statements.




                                       30
<PAGE>   32


                               EVE HOLDINGS INC.

                         Notes to Financial Statements

                (Dollars in thousands, except per share amounts)

1.   The Company
     Eve Holdings Inc. ("Eve" or the "Company") is a wholly-owned subsidiary of
Liggett Group Inc. ("Liggett").  Eve's predecessor, Chesterfield Assets Inc.,
was organized in March 1987.  Eve, formed in June 1990, is the proprietor of,
and has all right, title and interest in, certain federal trademark
registrations (the "Trademarks").  Eve has entered into an exclusive licensing
agreement with Liggett (effective until 2010) whereby Eve grants the use of the
Trademarks to Liggett in exchange for royalties, computed based upon Liggett's
annual net sales, excluding excise taxes of $296, 544, $332,246 and $333,799
for the years ended December 31, 1996, 1995 and 1994, respectively.  Generally,
royalties are earned based on a rate of either 2% of sales for generic product
trademarks and 5% of sales for branded product trademarks.  In recent fiscal
years, Liggett has experienced greater growth in the sales of generic rather
than branded products resulting in a lower overall royalty rate.  The
Trademarks are pledged as collateral for borrowings under the Liggett notes
(see Note 3).

2.   Summary of Significant Accounting Policies

 a.  Going Concern

     The accompanying financial statements have been prepared assuming that
Eve will continue as a going concern.  Eve's revenues are comprised solely of
royalties and interest income from Liggett.  In addition, Eve holds a note
receivable from Liggett for $44,520 due no sooner than February 1, 1999.
Liggett had a working capital deficiency of $40,694 and a net capital
deficiency of $176,478 as of December 31, 1996, is highly leveraged and has
substantial near-term debt service requirements.  These matters raise
substantial doubt about Eve and Liggett meeting their liquidity needs and their
ability to continue as going concerns.

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

 b.  Basis of Presentation

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

 c.  Per Share Data

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

 d.  Trademarks

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

 e.  Estimates and Assumptions

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





                                       31
<PAGE>   33

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.


4.       Income Taxes

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

         The amounts provided for income taxes are as follows:

<TABLE>
<CAPTION>
                                                            1996        1995        1994
                                                            ----        ----        ----
           <S>                                            <C>         <C>         <C>
           Current:
                U.S. Federal ........................      $2,883      $5,832      $5,909
                State ...............................         192          --          --
                                                           ------      ------      ------
           Deferred:
                U.S. Federal.........................        (595)       (595)       (595)
                State................................           -           -           -
                                                           ------      ------      ------
            Total provision for continuing operations      $2,480      $5,237      $5,314
                                                           ======      ======      ======
</TABLE>

            Eve's deferred tax liability relates entirely to the difference in
the basis of the Trademarks for book and tax purposes. As permitted in SFAS 109,
Eve has not adjusted the basis of the Trademarks that were previously adjusted
to net of tax amounts to be consistent with the accounting treatment adopted by
Liggett.

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

<TABLE>
<CAPTION>
                                                                  1996            1995         1994
                                                                  ----            ----         ----
           <S>                                                  <C>            <C>           <C>
           Income from continuing operations
                before income taxes ......................      $ 13,035       $ 14,963      $ 15,182
                                                                --------       --------      --------

            Federal income tax (benefit) at statutory rate         4,563          5,237         5,314

            Decreases resulting from:
                Exclusion of interest income
                  between related parties.................        (2,207)          --            --
                State income taxes, net of federal .......           124          --            --
                                                                --------       --------      --------
            Total ........................................      $  2,480       $  5,237      $  5,314
                                                                ========       ========      ========
</TABLE>


          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.


                                      32
<PAGE>   34


                               LIGGETT GROUP INC.

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                          Additions
                                                          ---------
                                        Balance at  Charged to Charged to                         Balance
                                        Beginning    Costs and    Net                             at End
                                        of Period    Expenses    Sales     Deductions            of Period
                                        ---------    --------    -----     ----------            ---------
<S>                                      <C>         <C>        <C>          <C>                 <C>
Year ended December 31, 1996
Allowances for:
  Doubtful accounts .................    $    200    $    903   $   --       $    353   (a)      $    750
  Cash discounts ....................         615      13,929       --         14,014   (b)           530
                                         --------    --------   --------     --------            --------
    Total ...........................    $    815    $ 14,832       --       $ 14,367            $  1,280
                                         ========    ========   ========     ========            ========
 Sales returns allowance ............    $  5,000    $   --     $   --       $   --     (c)      $  5,000
                                         ========    ========   ========     ========            ========
 Provision for inventory obsolescence    $  2,069    $  1,341   $   --       $    192   (d)      $  3,218
                                         ========    ========   ========     ========            ========
 Year ended December 31, 1995

 Allowances for:
  Doubtful accounts .................    $    249    $    231   $   --       $    280   (a)      $    200
  Cash discounts ....................         720      14,579       --         14,684   (b)           615
                                         --------    --------   --------     --------            --------
    Total ...........................    $    969    $ 14,810       --       $ 14,964            $    815
                                         ========    ========   ========     ========            ========
 Sales returns allowance ............    $  5,800    $  1,030   $   (800)    $  1,030   (c)      $  5,000
                                         ========    ========   ========     ========            ========
 Provision for inventory obsolescence    $  1,369    $    911   $   --       $    211   (d)      $  2,069
                                         ========    ========   ========     ========            ========
 Year ended December 31, 1994

 Allowances for:
  Doubtful accounts .................    $    235    $     21   $   --       $      7   (a)      $    249
  Cash discounts ....................         745      12,337       --         12,362   (b)           720
                                         --------    --------   --------     --------            --------
    Total ...........................    $    980    $ 12,358                $ 12,369            $    969
                                         ========    ========   ========     ========            ========
 Sales returns allowance ............    $  6,300    $   --     $  2,800     $  3,300   (c)      $  5,800
                                         ========    ========   ========     ========            ========
 Provision for inventory obsolescence    $  1,418    $    520   $   --       $    569   (d)      $  1,369
                                         ========    ========   ========     ========            ========
</TABLE>

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



                                       33