
===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q


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


For the quarterly period ended June 30, 1998
                               -------------

                                       OR

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

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

Commission file number 1-6541
                       ------

                                LOEWS CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


           Delaware                                              13-2646102
-------------------------------                             -------------------
(State or other jurisdiction of                              (I.R.S. employer
incorporation or organization)                              identification no.)


                  667 MADISON AVENUE, NEW YORK, N.Y. 10021-8087
              ----------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                  (212) 521-2000
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                                  NOT APPLICABLE
              ----------------------------------------------------
              (Former name, former address and former fiscal year, 
              if changed since last report)


  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                      Yes     X               No
                          ---------              ---------


          Class                                   Outstanding at August 7, 1998
--------------------------                       ------------------------------
Common stock, $1 par value                              114,711,400 shares

===============================================================================

                                     Page 1

                                      INDEX


Part I. Financial Information                                          Page No.
                                                                       --------
  Item 1. Financial Statements

    Consolidated Condensed Balance Sheets--
      June 30, 1998 and December 31, 1997 ...........................       3

    Consolidated Condensed Statements of Income--
      Three and six months ended June 30, 1998 and 1997 .............       4

    Consolidated Condensed Statements of Cash Flows--
      Six months ended June 30, 1998 and 1997 .......................       5

    Notes to Consolidated Condensed Financial Statements ............       6

  Item 2. Management's Discussion and Analysis of Financial Condition
   and Results of Operations ........................................      37

  Item 3. Quantitative and Qualitative Disclosures about Market Risk       53

Part II. Other Information

  Item 1. Legal Proceedings .........................................      57

  Item 4. Submission of Matters to a Vote of Security Holders .......      57

  Item 6. Exhibits and Reports on Form 8-K ..........................      59

                                     Page 2

                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.
        --------------------

<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
-------------------------------------------------------------------------------
(Amounts in millions)                               June 30,       December 31,
                                                      1998               1997
                                                  -----------------------------
<S>                                                <C>                 <C>
Assets: 

Investments:
  Fixed maturities, amortized cost of $30,467.5
   and $30,201.6 ................................  $31,010.1          $30,723.2
  Equity securities, cost of $1,480.7 and
   $1,102.6 .....................................    1,600.4            1,163.3
  Other investments .............................    1,206.9              978.4
  Short-term investments ........................    7,609.5            8,754.2
                                                   ----------------------------
     Total investments ..........................   41,426.9           41,619.1
Cash ............................................      186.3              497.8
Receivables-net .................................   15,686.5           13,325.9
Property, plant and equipment-net ...............    2,620.0            2,590.2
Deferred income taxes ...........................      882.6              944.3
Goodwill and other intangible assets-net ........      756.7              751.4
Other assets ....................................    1,825.3            1,895.1
Deferred policy acquisition costs of insurance   
 subsidiaries ...................................    2,379.4            2,141.7
Separate Account business .......................    5,582.0            5,811.6
                                                   ----------------------------
     Total assets ...............................  $71,345.7          $69,577.1
                                                   ============================

Liabilities and Shareholders' Equity:

Insurance reserves and claims ...................  $40,621.1          $39,497.4
Payable to brokers ..............................    2,151.4            1,559.2
Securities sold under repurchase agreements .....      302.7              152.7
Long-term debt, less unamortized discount .......    5,696.3            5,752.6
Other liabilities ...............................    4,636.1            4,749.1
Separate Account business .......................    5,582.0            5,811.6
                                                   ----------------------------
     Total liabilities ..........................   58,989.6           57,522.6
Minority interest ...............................    2,553.1            2,389.4
Shareholders' equity ............................    9,803.0            9,665.1
                                                   ----------------------------
     Total liabilities and shareholders' equity .  $71,345.7          $69,577.1
                                                   ============================

See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>

                                     Page 3

<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Income
-------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data)     Three Months Ended          Six Months Ended
                                                      June 30,                   June 30,
                                                1998          1997          1998        1997
                                              ---------------------------------------------------

<S>                                           <C>           <C>          <C>           <C>
Revenues:

  Insurance premiums:
    Property and casualty .................   $2,665.9      $2,529.4     $ 5,192.9      $4,999.9
    Life ..................................      800.1         817.5       1,640.1       1,692.5
  Investment income, net of expenses ......      621.9         604.3       1,252.5       1,219.8
  Investment gains (losses) ...............       25.6        (295.4)       (325.0)       (266.6)
  Manufactured products (including excise 
   taxes of $127.7, $124.3, $236.7 and
   $234.4) ................................      724.3         625.5       1,321.0       1,166.6
  Other ...................................      567.0         467.8       1,118.4         876.0
                                              --------------------------------------------------
     Total ................................    5,404.8       4,749.1      10,199.9       9,688.2
                                              --------------------------------------------------

Expenses:

  Insurance claims and policyholders' 
   benefits ...............................    2,937.4       2,860.1       5,787.2       5,752.5
  Amortization of deferred policy 
   acquisition costs ......................      670.5         595.9       1,258.8       1,116.2
  Cost of manufactured products sold ......      262.0         260.9         496.6         498.1
  Selling, operating, advertising and 
   administrative expenses ................      917.8         750.8       1,973.8       1,542.1
  Interest ................................       99.2          76.3         193.0         151.1
                                              --------------------------------------------------
     Total ................................    4,886.9       4,544.0       9,709.4       9,060.0
                                              --------------------------------------------------
                                                 517.9         205.1         490.5         628.2
                                              --------------------------------------------------
  Income tax expense ......................      168.8          69.7         147.1         196.1
  Minority interest .......................      101.9          71.6         179.9         129.0
                                              --------------------------------------------------
     Total ................................      270.7         141.3         327.0         325.1
                                              --------------------------------------------------
Net income ................................   $  247.2      $   63.8     $   163.5      $  303.1
                                              ==================================================

Net income per share ......................   $   2.15      $    .55     $    1.42      $   2.63
                                              ==================================================

Cash dividends per share ..................   $    .25      $    .25     $     .50      $    .50
                                              ==================================================

Weighted average number of shares 
 outstanding ..............................      115.0         115.0         115.0         115.0
                                              ==================================================

See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>

                                     Page 4

<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
-------------------------------------------------------------------------------
(Amounts in millions)                                 Six Months Ended June 30,
                                                        1998             1997
                                                   ----------------------------
<S>                                                 <C>              <C>
Operating Activities: 
  Net income ....................................   $    163.5      $    303.1
  Adjustments to reconcile net income to net
   cash used by operating activities-net ........        610.8           518.4
  Changes in assets and liabilities-net:
    Reinsurance receivable ......................       (306.9)          366.2
    Other receivables ...........................     (1,438.0)         (475.8)
    Deferred policy acquisition costs ...........       (237.7)         (268.7)
    Insurance reserves and claims ...............      1,133.3           563.7
    Other liabilities ...........................         99.3        (1,099.9)
    Trading securities ..........................       (822.5)         (364.5)
    Other-net ...................................        108.2           (75.7)
                                                    --------------------------
                                                        (690.0)         (533.2)
                                                    --------------------------
Investing Activities:
  Purchases of fixed maturities .................    (26,622.9)      (19,476.5)
  Proceeds from sales of fixed maturities .......     25,623.2        20,419.1
  Proceeds from maturities of fixed maturities ..      1,042.8         1,105.4
  Change in securities sold under repurchase   
   agreements ...................................        150.0         1,070.3
  Purchases of equity securities ................       (457.5)         (563.9)
  Proceeds from sales of equity securities ......        342.8           781.5
  Change in short-term investments ..............        896.6        (2,330.2)
  Purchases of property, plant and equipment ....       (211.8)         (399.8)
  Change in other investments ...................       (259.4)           46.3
                                                     --------------------------
                                                         503.8           652.2
                                                     --------------------------
Financing Activities:
  Dividends paid to shareholders ................        (57.5)          (57.5)
  Issuance of long-term debt ....................      1,005.1           395.3
  Principal payments on long-term debt ..........     (1,063.3)         (204.1)
  Net change in revolving line of credit ........                        (63.0)
  Net change in short-term debt .................                        (10.0)
  Receipts credited to policyholders ............          6.9             4.3
  Withdrawals of policyholder account balances ..        (16.5)          (11.5)
                                                    ---------------------------
                                                        (125.3)           53.5
                                                    ---------------------------
Net change in cash ..............................       (311.5)          172.5
Cash, beginning of period .......................        497.8           305.7
                                                    ---------------------------
Cash, end of period .............................   $    186.3      $    478.2
                                                    ===========================

See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>

                                     Page 5

Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
-------------------------------------------------------------------------------
(Dollars in millions, except per share data)

1.  General:

    Reference is made to Notes to Consolidated Financial Statements in the 1997
    Annual Report to Shareholders which should be read in conjunction with
    these consolidated condensed financial statements.

    Comprehensive income

    Comprehensive income includes all changes to shareholders' equity,
    including net income (loss), except those resulting from investments by,
    and distributions to, owners. For the three and six months ended June 30,
    1998 and 1997, comprehensive income totaled $302.3, $281.5, $195.4 and
    $194.1 respectively. Comprehensive income includes net income, unrealized
    appreciation (depreciation) and foreign currency translation gains or
    losses.

    Net income per share

    The Company adopted SFAS No. 128, "Earnings Per Share," which requires
    presentation of basic and diluted earnings per share for entities with
    complex capital structures. Basic earnings per share excludes dilution and
    is computed by dividing net income by the weighted average number of common
    shares outstanding for the period. Diluted earnings per share reflects the
    potential dilution that could occur if securities or other contracts to
    issue common stock were exercised or converted into common stock. The
    Company does not have any dilutive instruments related to its common
    shares. Accordingly, basic and diluted earnings per share are the same.

    Reclassifications

    Certain amounts applicable to prior periods have been reclassified to
    conform to the classifications followed in 1998.

2.  Reinsurance:

    CNA assumes and cedes insurance with other insurers and reinsurers and
    members of various reinsurance pools and associations. CNA utilizes
    reinsurance arrangements to limit its maximum loss, provide greater
    diversification of risk and minimize exposures on larger risks. The
    reinsurance coverages are tailored to the specific risk characteristics of
    each product line with CNA's retained amount varying by type of coverage.
    Generally, reinsurance coverage for property risks is on an excess of loss,
    per risk basis. Liability coverages are generally reinsured on a quota
    share basis in excess of CNA's retained risk.

    The ceding of insurance does not discharge the primary liability of the
    original insurer. CNA places reinsurance with other carriers only after
    careful review of the nature of the contract and a thorough assessment of
    the reinsurers' credit quality and claim settlement performance. Further,
    for carriers that are not authorized reinsurers in CNA's states of
    domicile, CNA receives collateral, primarily in the form of bank letters of
    credit, securing a large portion of the recoverables.

                                     Page 6

    The effects of reinsurance on earned premiums are as follows:

   <TABLE>
   <CAPTION>

                                                       %                                            %
                  Direct   Assumed   Ceded    Net   Assumed     Direct   Assumed   Ceded   Net   Assumed
                  --------------------------------------------------------------------------------------

                                               Six Months Ended June 30,
                  --------------------------------------------------------------------------------------
                  ---------------- 1998 --------------------   ---------------- 1997 -------------------

    <S>           <C>      <C>       <C>     <C>       <C>     <C>       <C>     <C>     <C>       <C>
    Property and
     casualty ..  $3,938.0 $  976.0  $262.0  $4,652.0  21.0%   $4,304.0  $560.0  $459.0  $4,405.0  12.7%
    Accident and
     health ....   1,730.0    115.0   144.0   1,701.0   6.8%    1,856.0    57.0    65.0   1,848.0   3.1
    Life .......     526.0     72.0   118.0     480.0  15.0%      435.0    61.0    57.0     439.0  13.8
                  --------------------------------------------------------------------------------------
      Total ....  $6,194.0 $1,163.0  $524.0  $6,833.0  17.0%   $6,595.0  $678.0  $581.0  $6,692.0  10.1%
                  ======================================================================================
    </TABLE>

    In the above table, life premium revenue is principally from long duration
    contracts and the property and casualty earned premium is from short
    duration contracts. Approximately three quarters of accident and health
    earned premiums are from short duration contracts.

    Insurance claims and policyholders' benefits are net of reinsurance
    recoveries of $501.0 and $394.0 for the six months ended June 30, 1998 and
    1997, respectively. 

3.  The Company's receivables are comprised of the following:
<TABLE>
<CAPTION>
                                                     June 30,      December 31,
                                                        1998            1997
                                                     --------------------------

    <S>                                              <C>               <C>
    Reinsurance ..................................   $ 6,032.9        $ 5,726.0
    Other insurance ..............................     7,548.8          6,333.9
    Security sales ...............................     1,440.5            755.8
    Accrued investment income ....................       414.1            422.8
    Other ....................... ................       571.8            405.4
                                                     --------------------------
           Total .................................    16,008.1         13,643.9
    Less allowance for doubtful accounts and
     cash discounts ..............................       321.6            318.0
                                                    --------------------------
           Receivables-net .......................   $15,686.5        $13,325.9
                                                    ===========================
</TABLE>

                                     Page 7

4.  Shareholders' equity:
<TABLE>
<CAPTION>
                                                     June 30,      December 31,
                                                       1998            1997
                                                    ---------------------------
                                                     
    <S>                                              <C>                <C>
   Preferred stock, $.10 par value,
     Authorized--100,000,000 shares
   Common stock, $1 par value:
     Authorized--400,000,000 shares
     Issued and outstanding--115,000,000 shares .    $  115.0          $  115.0
   Additional paid-in capital ...................       165.8             165.8
   Earnings retained in the business ............     9,001.4           8,895.4
   Accumulated other comprehensive income .......       520.8             488.9
                                                     --------------------------
          Total .................................    $9,803.0          $9,665.1
                                                     ==========================
</TABLE>

5.  Legal Proceedings and Contingent Liabilities-

    INSURANCE RELATED

    Fibreboard Litigation
   ---------------------

    CNA's primary property and casualty subsidiary, Continental Casualty
    Company ("Casualty"), has been party to litigation with Fibreboard
    Corporation ("Fibreboard") involving coverage for certain asbestos-related
    claims and defense costs (San Francisco Superior Court, Judicial Council
    Coordination Proceeding 1072). As described below, Casualty, Fibreboard,
    another insurer (Pacific Indemnity, a subsidiary of the Chubb Corporation),
    and a negotiating committee of asbestos claimant attorneys (collectively
    referred to as "Settling Parties") have reached a Global Settlement (the
    "Global Settlement") to resolve all future asbestos-related bodily injury
    claims involving Fibreboard, which is subject to court approval.

    Casualty, Fibreboard and Pacific Indemnity have also reached an agreement
    (the "Trilateral Agreement") on a settlement to resolve the coverage
    litigation in the event the Global Settlement does not obtain final court
    approval.

    On July 27, 1995, the United States District Court for the Eastern District
    of Texas entered judgment approving the Global Settlement Agreement and the
    Trilateral Agreement. As expected, appeals were filed as respects to both
    of these decisions. On July 25, 1996, a panel of the United States Fifth
    Circuit Court of Appeals in New Orleans affirmed the judgment approving the
    Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment
    approving the Trilateral Agreement by a 3 to 0 vote. Petitions for
    rehearing by the panel and Suggestions for Rehearing by the entire Fifth
    Circuit Court of Appeals as respects to the decision on the Global
    Settlement Agreement were denied. Two petitions for certiorari were filed
    in the Supreme Court as respects the Global Settlement Agreement. On June
    27, 1997, the Supreme Court granted these petitions, vacated the Fifth
    Circuit's judgment as respects to the Global Settlement Agreement, and
    remanded the matter to the Fifth Circuit for reconsideration in light of
    the Supreme Court's decision in Amchem Products Co. v. Windsor.

    On January 27, 1998, a panel of the United States Fifth Circuit Court of

                                     Page 8

    Appeals again approved the Global Settlement Agreement by a 2 to 1 vote.
    Two sets of objectors filed petitions for certiorari which were docketed on
    April 16 and 17, 1998, by the United States Supreme Court. On June 22,
    1998, the Supreme Court granted the petition for certiorari filed by one of
    the sets of objectors. The parties will file briefs on the merits during
    the next several months. The Supreme Court will most likely set oral
    argument for late 1998 or early 1999.

    No further appeal was filed with respect to the Trilateral Agreement;
    therefore, court approval of the Trilateral Agreement has become final.

    Global Settlement Agreement - On April 9, 1993, Casualty and Fibreboard
    entered into an agreement pursuant to which, among other things, the
    parties agreed to use their best efforts to negotiate and finalize a global
    class action settlement with asbestos-related bodily injury and death
    claimants.

    On August 27, 1993, the Settling Parties reached an agreement in principle
    for an omnibus settlement to resolve all future asbestos-related bodily
    injury claims involving Fibreboard. The Global Settlement Agreement was
    executed on December 23, 1993. The agreement calls for contribution by
    Casualty and Pacific Indemnity of an aggregate of $1,525.0 to a trust fund
    for a class of all future asbestos claimants, defined generally as those
    persons whose claims against Fibreboard were neither filed nor settled
    before August 27, 1993. An additional $10.0 is to be contributed to the
    fund by Fibreboard. As indicated above, the Global Settlement approval has
    been approved by the Fifth Circuit a second time, but the Supreme Court has
    granted a petition for certiorari filed by one of the sets of objectors to
    the settlement.

    Trilateral Agreement - On October 12, 1993, Casualty, Pacific Indemnity and
    Fibreboard entered into an agreement to settle the coverage litigation to
    operate in the event that the Global Settlement Agreement is disapproved.
    The Trilateral Agreement calls for payment by Casualty and Pacific
    Indemnity of an aggregate of $2,000.0, of which Casualty's portion is
    approximately $1,460.0, to Fibreboard to resolve all claims by Fibreboard
    and all future and unsettled present asbestos claimants arising under the
    policy issued to Fibreboard by Casualty.

    Under either the Global Settlement Agreement or the Trilateral Agreement,
    Casualty is also obligated to pay under prior settlements of present
    asbestos claims. As a result of the final approval of the Trilateral
    Agreement, such obligation has become final as well. Through June 30, 1998,
    Casualty, Fibreboard and plaintiff attorneys had reached settlements with
    respect to approximately 135,500 present claims, for an estimated
    settlement amount of approximately $1,630.0 plus any applicable interest.
    Approximately $1,660.0 (including interest of $184.0) was paid through June
    30, 1998. Such payments have been partially recovered from Pacific
    Indemnity. Casualty may negotiate other agreements for unsettled claims.

    Final court approval of the Trilateral Agreement and its implementation 
    resolved Casualty's exposure with respect to the Fibreboard asbestos
    claims. Casualty's  management does not anticipate further material
    exposure with respect to the Fibreboard matter, and subsequent adverse
    reserve adjustments, if any, are not expected to materially affect the
    results of operations or equity of the Company.

                                     Page 9

    Tobacco Litigation
    ------------------

    Several of CNA's property/casualty subsidiaries have been named as
    defendants as part of a "direct action" lawsuit, Richard P. Ieyoub v. The
    American Tobacco Company, et al., filed by the Attorney General for the
    State of Louisiana, in state court, Calcasieu Parish, Louisiana. In that
    suit, filed against certain tobacco manufacturers and distributors (the
    "Tobacco Defendants") and over 100 insurance companies, the State of
    Louisiana seeks to recover medical expenses allegedly incurred by the State
    as a result of tobacco-related illnesses.

    The original suit was filed on March 13, 1996, against the Tobacco
    Defendants only. The insurance companies were added to the suit in March
    1997 under a "direct action" procedure in Louisiana. Under the direct
    action statute, the Louisiana Attorney General is pursuing liability claims
    against the Tobacco Defendants and their insurers in the same suit, even
    though none of the Tobacco Defendants has made a claim for insurance
    coverage.

    In June of 1997, the United States District Court for the Western District
    of Louisiana, Lake Charles Division, granted a petition to remove this
    litigation to the federal district court. The district court's decision is
    currently on appeal to the United States Fifth Circuit Court of Appeals.
    During the pending appeal, all proceedings in state court and in the
    federal district court are stayed. Because of the uncertainties inherent in
    assessing the risk of liability at this very early stage of the litigation,
    management is unable to make a meaningful estimate of the amount or range
    of any loss that could result from an unfavorable outcome of the pending
    litigation. However, management believes that the ultimate outcome of the
    pending litigation should not materially affect the results of operations
    or equity of CNA.
    
    Environmental Pollution and Asbestos
    ------------------------------------

    The CNA property and casualty insurance companies have potential exposures
    related to environmental pollution and asbestos claims.

    Environmental pollution clean-up is the subject of both federal and state
    regulation. By some estimates, there are thousands of potential waste sites
    subject to clean-up. The insurance industry is involved in extensive
    litigation regarding coverage issues. Judicial interpretations in many
    cases have expanded the scope of coverage and liability beyond the original
    intent of the policies.

    The Comprehensive Environmental Response Compensation and Liability Act of
    1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern
    the clean-up and restoration of abandoned toxic waste sites and formalize
    the concept of legal liability for clean-up and restoration by potentially
    responsible parties ("PRP's"). Superfund and the mini-Superfunds
    (Environmental Clean-up Laws or "ECLs") establish mechanisms to pay for
    clean-up of waste sites if PRPs fail to do so, and to assign liability to
    PRPs. The extent of liability to be allocated to a PRP is dependent on a
    variety of factors. Further, the number of waste sites subject to clean-up
    is unknown. To date, approximately 1,300 clean-up sites have been
    identified by the Environmental Protection Agency on its National
    Priorities List ("NPL"). The addition of new clean-up sites to the NPL has
    slowed in recent years. Many clean-up sites have been designated by state
    authorities as well.

    Many policyholders have made claims against various CNA insurance

                                     Page 10

    subsidiaries for defense costs and indemnification in connection with
    environmental pollution matters. CNA and the insurance industry are
    disputing coverage for many such claims. Key coverage issues include
    whether clean-up costs are considered damages under the policies, trigger
    of coverage, applicability of pollution exclusions and owned property
    exclusions, the potential for joint and several liability and definition of
    an occurrence. To date, courts have been inconsistent in their rulings on
    these issues.

    A number of proposals to reform Superfund have been made by various
    parties. However, no reforms were enacted by Congress in 1997 and it is
    unclear as to what positions Congress or the Clinton Administration will
    take and what legislation, if any, will result. If there is legislation,
    and in some circumstances even if there is no legislation, the federal role
    in environmental clean-up may be significantly reduced in favor of state
    action. Substantial changes in the federal statute or the activity of the
    EPA may cause states to reconsider their environmental clean-up statutes
    and regulations. There can be no meaningful prediction of the pattern of
    regulation that would result.

    Due to the inherent uncertainties described above, including the
    inconsistency of court decisions, the number of waste sites subject to
    clean-up, and the standards for clean-up and liability, CNA's ultimate
    liability for environmental pollution claims may vary substantially from
    the amount currently recorded.

    As of June 30, 1998 and December 31, 1997, CNA carried approximately $681.0
    and $768.0, respectively, of claim and claim expense reserves, net of
    reinsurance recoverables, for reported and unreported environmental
    pollution claims. The reserves relate to claims for accident years 1988 and
    prior, after which CNA adopted the Simplified Commercial General Liability
    coverage form which included an absolute pollution exclusion. There was no
    environmental pollution reserve development for the six months ended June
    30, 1998 and 1997.

    CNA's property and casualty insurance subsidiaries have exposure to
    asbestos claims, including those attributable to CNA's litigation with
    Fibreboard Corporation (see above). Estimation of asbestos claim reserves
    involves many of the same limitations discussed above for environmental
    pollution claims such as inconsistency of court decisions, specific policy
    provisions, allocation of liability among insurers, missing policies and
    proof of coverage. As of June 30, 1998 and December 31, 1997, CNA carried
    approximately $1,382.0 and $1,445.0, respectively, of claim and claim
    expense reserves, net of reinsurance recoverables, for reported and
    unreported asbestos-related claims. Unfavorable asbestos claim reserve
    development for the six months ended June 30, 1998 and 1997 totaled $29.0
    and $25.0, respectively.

                                     Page 11

    The following tables provide additional data related to CNA's environmental
    pollution and asbestos-related claims activity.

                                  <TABLE>
    <CAPTION>
                                                   June 30, 1998           December 31, 1997
                                             ----------------------------------------------------
                                             Environmental               Environmental   
                                               Pollution    Asbestos       Pollution     Asbestos
                                             ----------------------------------------------------
    
    <S>                                         <C>          <C>            <C>         <C>
    Reported Claims:
      Gross reserves ....................       $263.0       $1,439.0       $276.0      $1,430.0
      Less reinsurance recoverable ......        (39.0)         (91.0)       (38.0)       (118.0)
                                                ------------------------------------------------
      Net reported claims ...............        224.0        1,348.0        238.0       1,312.0
    Net unreported claims ...............        457.0           34.0        530.0         133.0 
                                                ------------------------------------------------
    Net reserves ........................       $681.0       $1,382.0       $768.0      $1,445.0
                                                ================================================
    </TABLE>

    The results of operations in future years may continue to be adversely
    affected by environmental pollution and asbestos claims and claim expenses.
    Management will continue to monitor these liabilities and make further
    adjustments as warranted.

    NON-INSURANCE

    Tobacco Litigation -- Lawsuits continue to be filed with increasing
    frequency against Lorillard and other manufacturers of tobacco products
    seeking damages for cancer and other health effects claimed to have
    resulted from an individual's use of cigarettes, addiction to smoking, or
    exposure to environmental tobacco smoke. Tobacco litigation includes claims
    brought by individual plaintiffs ("Conventional Product Liability Cases");
    claims brought as class actions on behalf of a large number of individuals
    for damages allegedly caused by smoking ("Class Actions"); claims brought
    on behalf of governmental entities and others, including private citizens
    suing on behalf of taxpayers, labor unions, Indian Tribes and private
    companies, seeking, among other alleged damages, reimbursement of health
    care costs allegedly incurred as a result of smoking ("Reimbursement
    Cases"); and claims for contribution and/or indemnity of asbestos claims by
    asbestos manufacturers ("Claims for Contribution"). In addition, claims
    have been brought against Lorillard seeking damages resulting from exposure
    to asbestos fibers which had been incorporated, for a limited period of
    time, ending more than forty years ago, into filter material used in one
    brand of cigarettes manufactured by Lorillard ("Filter Cases").

    In these actions, plaintiffs claim substantial compensatory, statutory and
    punitive damages in amounts ranging into the billions of dollars. These
    claims are based on a number of legal theories including, among other
    things, theories of negligence, fraud, misrepresentation, strict liability,
    breach of warranty, enterprise liability, civil conspiracy, intentional
    infliction of harm, violation of anti-trust laws and state consumer
    protection statutes, and failure to warn of the allegedly harmful and/or
    addictive nature of tobacco products.

    On June 20, 1997, together with other companies in the United States
    tobacco industry, Lorillard entered into a Memorandum of Understanding to
    support the adoption of federal legislation and any necessary ancillary
    undertakings incorporating the features described in the proposed
    resolution attached to the Memorandum of Understanding (together, the
    "Proposed Resolution"). The Proposed Resolution can be implemented only by
    federal legislation. If

                                     Page 12

    enacted into law, the legislation implementing the Proposed Resolution
    would resolve many of the regulatory and litigation issues affecting the
    United States tobacco industry thereby reducing uncertainties facing the
    industry. Certain legislation has been introduced in Congress that would
    significantly modify the Proposed Resolution including provisions more
    stringent than those included in the Proposed Resolution. On April 18,
    1998, Lorillard and other companies announced a withdrawal from the
    legislative process to enact a comprehensive tobacco settlement. (See Item
    1 - Lorillard, Inc. - "Proposed Resolution of Certain Regulatory and
    Litigation Issues" in the Company's annual report on Form 10-K for the year
    ended December 31, 1997.)

    CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 600 cases
    filed by individual plaintiffs against manufacturers of tobacco products
    pending in the United States federal and state courts in which individuals
    allege they or their decedents have been injured due to smoking cigarettes,
    due to exposure to environmental tobacco smoke, or due to nicotine
    dependence. Lorillard is a defendant in approximately 300 of these cases.
    The Company is a defendant in 17 of the cases, although four have not been
    served.

    Plaintiffs in these cases seek unspecified amounts in compensatory and
    punitive damages in many cases, and in other cases damages are stated to
    amount to as much as $100.0 in compensatory damages and $600.0 in punitive
    damages.

    On March 19, 1998, the jury in Dunn v. RJR Nabisco Holdings Corporation, et
    al. (Superior Court, Delaware County, Indiana, filed May 28, 1993) returned
    a unanimous verdict in favor of the defendant cigarette manufacturers and
    their parent entities, including the Company, in the trial of a suit
    brought by the family of a woman who died of cancer, allegedly caused by
    exposure to environmental tobacco smoke. The court denied plaintiffs'
    motion for new trial. Plaintiffs did not notice an appeal.

    On September 26, 1997, a jury in the case of Gordon v. R.J. Reynolds
    Tobacco Company, et al. (Superior Court, Middlesex County, Massachusetts),
    returned a special verdict favorable to the defendants, which included
    Lorillard. The court entered judgment in favor of the defendants. Trial was
    held on the limited issue of the cigarettes smoked by the decedent and the
    time period in which she smoked them. Plaintiff has filed a motion for new
    trial, which is pending.

    During 1998, a jury in the Circuit Court of Duval County, Florida, returned
    a verdict in favor of plaintiffs in a smoking and health case in which
    Lorillard was not a party, Widdick v. Brown & Williamson Tobacco
    Corporation (verdict returned June 10, 1998). The jury awarded plaintiffs
    $1.0 in actual damages and punitive damages. The First District of the
    Florida Court of Appeal reversed the trial court's order denying Brown &
    Williamson Tobacco Corporation's motion to transfer venue. The Circuit
    Court of Duval County, Florida, must decide whether to grant a new trial
    due to the ruling.

    During 1997, juries returned verdicts in favor of the defendants in trials
    in two smoking and health cases in which Lorillard was not a party, Connor
    v. R.J. Reynolds Tobacco Company (verdict returned May 5, 1997) and
    Karbiwnyk v. R.J. Reynolds Tobacco Company (verdict returned October 31,
    1997) (both cases were tried in the Circuit Court of Duval County,
    Florida). Appeals are not pending in either case. 

    The Florida Court of Appeals issued a ruling in the case of Carter v. Brown
    & Williamson Tobacco Corporation, filed in the Circuit Court of Duval
    County, Florida, that reversed a 1996 verdict entered in favor of
    plaintiffs in which they were awarded a total of seven hundred fifty
    thousand dollars

                                     Page 13

    in actual damages. The Court of Appeals directed that judgment be entered
    in favor of Brown & Williamson Tobacco Corporation by the trial court.
    Plaintiffs have asked the Court of Appeals to reconsider its decision.
    Lorillard was not a party to Carter v. Brown & Williamson Tobacco
    Corporation.

    CLASS ACTIONS - There are 70 purported class actions pending against
    cigarette manufacturers and other defendants, including the Company. Two
    cases have not been served. Most of the suits seek class certification on
    behalf of residents of the states in which the cases have been filed,
    although some suits seek class certification on behalf of residents of
    multiple states. All but two of the purported class actions seek class
    certification on behalf of individuals who smoked cigarettes or were
    exposed to environmental tobacco smoke. Two of the cases seek class
    certification on behalf of individuals who have paid insurance premiums to
    Blue Cross and Blue Shield organizations. Plaintiffs in a number of
    Reimbursement cases also seek certification as class actions (see
    Reimbursement Cases, below).

    Theories of liability asserted in the purported class actions include a
    broad range of product liability theories, including those based on
    consumer protection statutes and fraud and misrepresentation. Plaintiffs
    seek damages in each case that range from unspecified amounts to the
    billions of dollars. Most plaintiffs seek punitive damages and some seek
    treble damages. Plaintiffs in many of the cases seek medical monitoring.
    Plaintiffs in several of the purported class actions are represented by a
    well-funded and coordinated consortium of over 60 law firms from throughout
    the United States. Lorillard is a defendant in 62 of the 70 cases seeking
    class certification. The Company is a defendant in 27 of the purported
    class actions, four of which have not been served. Many of the purported
    class actions are in the pre-trial, discovery stage.

    Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County,
    Florida, October 31, 1991). On October 10, 1997, the parties to this class
    action brought on behalf of flight attendants claiming injury as a result
    of exposure to environmental tobacco smoke executed a settlement agreement
    which was approved by the trial court on February 3, 1998. The settlement
    agreement requires Lorillard and three other cigarette manufacturers
    jointly to pay $300.0 in three annual installments to create and endow a
    research institute to study diseases associated with cigarette smoke. None
    of these payments are to be made until all appeals have been exhausted and
    judgment becomes final. The amount to be paid by Lorillard is to be based
    upon each of the four settling defendants' share of the United States
    market for the sale of cigarettes. Lorillard presently has approximately
    8.8% of the cigarette market in the United States. Based on this
    calculation, Lorillard is expected to pay approximately $26.0 of the
    proposed settlement amount. The plaintiff class members are permitted to
    file individual suits, but these individuals may not seek punitive damages
    for injuries that arose prior to January 15, 1997 which enabled them to be
    members of the class. The defendants that executed the settlement agreement
    will pay a total of $49.0 as fees and expenses of the attorneys who
    represented plaintiffs. Certain of the absent class members objected to the
    settlement agreement and have noticed an appeal from the February 3, 1998
    order. 

    Castano, et al. v. The American Tobacco Company, Inc. et al. (U.S. District
    Court, Eastern District, Louisiana, March 29, 1994). This case was
    initiated as a class action on behalf of nicotine dependent smokers in the
    United States. During 1998, Lorillard Tobacco Company and certain other
    cigarette manufacturer defendants agreed with the plaintiffs to dismiss
    this action without prejudice and to toll the statute of limitations as to
    plaintiffs' claims. Lorillard Tobacco Company paid $1.0 to reimburse the
    costs and expenses of plaintiffs' counsel. This amount will be credited
    against any

                                     Page 14

    award of costs and expenses incurred in connection with this suit that
    plaintiffs' counsel may obtain in the future as a result of the federal
    legislation implementing the Proposed Resolution, or against any judgment
    or settlements that such counsel may obtain in the future in similar
    actions.

    Granier v. The American Tobacco Company, et al. (U.S. District Court,
    Eastern District, Louisiana, filed September 26, 1994).  

    Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
    Florida, filed May 5, 1994). Class certification has been granted as to
    Florida citizens who allege they, or their survivors, have, have had or
    have died from diseases and medical conditions caused by smoking
    cigarettes. The Florida Supreme Court has denied defendants' appeal. Trial
    is underway and jury selection is proceeding.

    Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Madison
    County, Indiana, filed May 3, 1996). The Company is a defendant in the
    case.

    Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore
    City, Maryland, filed May 24, 1996). During January of 1998, the court
    granted plaintiffs' motion for class certification on behalf of Maryland
    residents who had, presently have, or died from diseases, medical
    conditions or injuries caused by smoking cigarettes or using smokeless
    tobacco products; nicotine dependent persons in Maryland who have purchased
    and used cigarettes and smokeless tobacco products manufactured by the
    defendants; and Maryland residents who require medical monitoring.
    Defendants have filed a petition for writ of mandamus or prohibition from
    the class certification order with the Maryland Court of Special Appeals.

    Scott v. The American Tobacco Company, et al. (U.S. District Court, Eastern
    District, Louisiana, filed May 24, 1996). The Company is a defendant in the
    case. Class certification has been granted on behalf of Louisiana citizens
    who require medical monitoring. Defendants have noticed an appeal from the
    class certification order with the Louisiana Court of Appeals.

    Small v. Lorillard Tobacco Company, Inc., et al., Hoskins v. R.J. Reynolds
    Tobacco Company, et al., Frosina v. Philip Morris Incorporated, et al.,
    Hoberman v. Brown & Williamson Tobacco Corporation, et al., and Zito v.
    American Tobacco Company, et al. (Supreme Court, New York County, New York,
    filed June 19, 1996). Small is the only one of these cases to name
    Lorillard as a defendant. Small formerly was known as Mroczowski.
    Plaintiffs' motions for class certification on behalf of New York residents
    who are nicotine dependent was granted. On appeal, the Appellate Division
    of the New York Supreme Court reversed the trial court's class
    certification order and directed the trial court to enter judgment in favor
    of the defendants.

    Reed v. Philip Morris Incorporated, et al. (Superior Court, District of
    Columbia, filed June 21, 1996). The court has denied plaintiff's motion for
    class certification.

    Barnes v. The American Tobacco Company, et al. (U.S. District, Eastern
    District, Pennsylvania, filed August 8, 1996). The District Court has
    vacated its prior order that granted class certification on behalf of
    Pennsylvania smokers who require medical monitoring. The court also granted
    defendants' motion for summary judgment. Plaintiffs have noticed an appeal
    from both orders to the U.S. Court of Appeals for the Third Circuit.

    Holmes v. The American Tobacco Company, et al. (Circuit Court, Montgomery
    County, Alabama, filed August 8, 1996). The Company is a defendant in the
    case.

                                     Page 15
  
    Lyons v. The American Tobacco Company, et al. (U.S. District Court,
    Southern District, Alabama, filed August 8, 1996).  

    Chamberlain v. The American Tobacco Company, et al. (U.S. District Court,
    Northern District, Ohio, filed August 14, 1996). The Company is a defendant
    in the case.

    Thompson v. American Tobacco Company, Inc., et al. (U.S. District Court,
    Minnesota, filed September 4, 1996). The Company is a defendant in the
    case. 

    Perry v. The American Tobacco Company, et al. (Circuit Court, Coffee
    County, Tennessee, filed September 30, 1996). Plaintiffs seek class
    certification on behalf of individuals who have paid medical insurance
    premiums to a Blue Cross and Blue Shield organization.

    Connor v. The American Tobacco Company, et al. (Second Judicial District
    Court, Bernalillo County, New Mexico, filed October 10, 1996).

    Ruiz v. The American Tobacco Company, et al. (U.S. District Court, Puerto
    Rico, filed October 23, 1996). The court denied plaintiffs' motion for
    class certification.

    Hansen v. The American Tobacco Company, et al. (U.S. District Court,
    Eastern District, Arkansas, filed November 4, 1996). The Company is a
    defendant in the case. Parties have completed briefing of plaintiffs'
    motion for class certification. The court has indicated to the parties that
    it will rule on the class certification motion without hearing argument.

    McCune v. American Tobacco Company, et al. (Circuit Court, Kanawha County,
    West Virginia, filed January 31, 1997). The Company is a defendant in the
    case.

    Baker v. American Tobacco Company, et al. (Circuit Court, Wayne County,
    Michigan, filed February 4, 1997).  

    Woods v. Philip Morris Incorporated, et al. (Circuit Court, McDowell
    County, West Virginia, filed February 4, 1997).

    Green v. American Tobacco Company, et al. (U.S. District Court, Kansas,
    filed February 6, 1997). The Company is a defendant in the case.

    Peterson v. American Tobacco Company, et al. (U.S. District Court, Hawaii,
    filed February 6, 1997). The Company is a defendant in the case.

    Walls v. The American Tobacco Company, et al. (U.S. District Court,
    Northern District, Oklahoma, filed February 6, 1997). The court has heard
    argument on plaintiffs' motion for class certification.

    Selcer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
    Nevada, filed March 3, 1997). The Company is a defendant in the case.

    White v. Philip Morris, Inc. et al. (Chancery Court, Jefferson County,
    Mississippi, filed April 18, 1997). The Company is a defendant in the case. 

    Insolia v. Philip Morris Incorporated, et al. (U.S. District Court, Western
    District, Wisconsin, filed April 21, 1997).

    Geiger v. The American Tobacco Company, et al. (Supreme Court, Queens
    County, New York, filed April 30, 1997). The trial court granted on an
    interim basis plaintiffs' motion for class certification on behalf of New
    York residents who allege lung cancer or throat cancer as a result of

                                     Page 16

    smoking cigarettes. The Appellate Division of the New York Supreme Court
    reversed the class certification order and directed the trial court to
    allow the parties to conduct additional discovery on the class
    certification motion.

    Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
    District, Texas, Texarkana Division, filed May 5, 1997). 

    Clay v. The American Tobacco Company, Inc., et al. (U.S. District Court,
    Southern District, Illinois, Benton Division, filed May 22, 1997). 

    Anderson v. The American Tobacco Company, Inc., et al. (U.S. District
    Court, Eastern District, Tennessee, filed May 23, 1997). The Company is a
    defendant in the case. 

    Taylor v. The American Tobacco Company, Inc., et al. (Circuit Court, Wayne
    County, Michigan, filed May 23, 1997).

    Lyons v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
    Court, Northern District, Georgia, filed May 27, 1997). The Company is a
    defendant in the case. 

    Cosentino v. Philip Morris Incorporated, et al. (Superior Court, Middlesex
    County, New Jersey, filed May 28, 1997). The court has heard argument on
    plaintiffs' motion for class certification.

    Kirstein v. American Tobacco Company, Inc., et al. (Superior Court, Camden
    County, New Jersey, filed May 28, 1997).

    Tepper v. Philip Morris Incorporated, et al. (Superior Court, Bergen
    County, New Jersey, filed May 28, 1997).

    Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
    Diego County, California, filed June 10, 1997).

    Lippincott v. American Tobacco Company, Inc., et al. (Superior Court,
    Camden County, New Jersey, filed June 13, 1997).

    Brammer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
    Southern District, Iowa, filed June 20, 1997). The Company is a defendant
    in the case. 

    Knowles v. The American Tobacco Company, et al. (U.S. District Court,
    Eastern District, Louisiana, filed June 30, 1997). The Company is a
    defendant in the case. 

    Daley v. American Brands, Inc., et al. (U.S. District Court, Northern
    District, Illinois, filed July 7, 1997). 

    Piscitello v. Philip Morris, Incorporated, et al. (Superior Court,
    Middlesex County, New Jersey, filed July 28, 1997). The Company is a
    defendant in the case.

    Azorsky v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
    Western District, Pennsylvania, filed August 15, 1997). The court granted
    defendants' motion to dismiss. Plaintiffs have attempted to notice appeals
    to the United States Court of Appeals for the Third Circuit.

    McCauley v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
    Court, Northern District, Georgia, filed August 15, 1997). The court
    entered an order sua sponte that dismissed plaintiffs' class action
    allegations.

                                     Page 17

    Bush v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
    District, Texas, filed September 10, 1997).

    Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
    Southern District, New York, filed September 29, 1997). The Company is a
    defendant in the case.

    Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
    filed October 8, 1997). The Company is a defendant in the case.

    Newborn v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
    Court, Western District, Tennessee, filed October 9, 1997).

    Young v. The American Tobacco Company, et al. (Civil District Court,
    Orleans Parish, Louisiana, filed November 12, 1997). The Company is a
    defendant in the case.

    Aksamit v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
    Court, South Carolina, filed November 20, 1997). The Company is a defendant
    in the case. 

    DiEnno v. Liggett Group, Inc., et al. (U.S. District Court, Nevada, filed
    December 22, 1997).

    McCauley v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
    Court, Northern District, Georgia, filed December 31, 1997). To date, none
    of the defendants have received service of process.

    Herrera v. The American Tobacco Company, et al. (U.S. District Court,
    Central District, Utah, filed January 28, 1998). The Company is a defendant
    in                            the case.

    Jackson v. Philip Morris Incorporated, et al. (U.S. District Court, Central
    District, Utah, filed on or about February 13, 1998). The Company is a
    defendant in the case.

    Parsons v. AC&S, et al. (Circuit Court, Kanawha County, West Virginia,
    filed February 27, 1998). The Company is a defendant in the case. 

    Basik v. Lorillard Tobacco Company, et al. (Circuit Court, Cook County,
    Illinois, filed March 17, 1998).

    Daniels v. Philip Morris Companies, Inc., et al. (U.S. District Court,
    Southern District, California, filed April 2, 1998).  The Company is a
    defendant in the case.  To date, none of the defendants have received
    service of process.

    Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
    Nevada, filed April 3, 1998). The Company is a defendant in the case.  To
    date, none of the defendants have received service of process.

    Avallone v. The American Tobacco Company, Inc., et al. (Superior Court,
    Atlantic County, New Jersey, filed April 23, 1998). The Company is a
    defendant in the case.

    Landry v. Louisiana Health Service and Indemnity Co., Inc., et al. (U.S.
    District Court, Middle District, Louisiana, filed May 18, 1998). The
    Company is a defendant in the case.

    Collier v. Philip Morris Incorporated, et al. (U.S. District Court,
    Southern District, Mississippi, filed May 27, 1998).

                                     Page 18

    Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County,
    Illinois, filed June 5, 1998).

    REIMBURSEMENT CASES - Approximately 135 actions are pending in which
    governmental entities, private citizens, or other organizations, including
    labor unions, insurers and Indian Tribes, seek recovery of funds expended
    by them to provide health care to individuals with injuries or other health
    effects allegedly caused by use of tobacco products or exposure to
    cigarette smoke. These cases are based on, among other things, equitable
    claims, including indemnity, restitution, unjust enrichment and public
    nuisance, and claims based on antitrust laws and state consumer protection
    acts. Plaintiffs in a number of these actions seek certification as class
    actions. Plaintiffs seek damages in each case that range from unspecified
    amounts to the billions of dollars. Most plaintiffs seek punitive damages
    and some seek treble damages. Plaintiffs in many of the cases seek medical
    monitoring. Lorillard is named as a defendant in all such actions except
    for one filed in a U.S. court by a nation in which Lorillard does not
    conduct business (The Republic of Guatemala). The Company is named as a
    defendant in 18 of them.  

    State Or Local Governmental Reimbursement Cases - To date, suits filed by
    41 states, the Commonwealth of Puerto Rico, and the Republic of The
    Marshall Islands are pending. In addition, cities, counties or other local
    governmental entities have filed eight such suits. The Company is a
    defendant in 14 cases filed by state or local governmental entities. Since
    January 1, 1997, cases brought by Florida, Minnesota, Mississippi, Texas
    and Blue Cross and Blue Shield of Minnesota have been settled (see
    "Settlements of Reimbursement Cases"). Many of the pending Reimbursement
    Cases are in the pre-trial, discovery stage.

    Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson
    County, Mississippi, filed May 23, 1994). On July 2, 1997, Lorillard and
    other defendants entered into a Memorandum of Understanding with the State
    of Mississippi which settled the State's claims for monetary damages. See
    "Settlements of Reimbursement Cases" below.

    State of Minnesota, et al. v. Philip Morris Incorporated, et al., (District
    Court, Ramsey County, Minnesota, filed August 17, 1994). Blue Cross and
    Blue Shield of Minnesota ("Blue Cross") also is plaintiff in the case. On
    May 8, 1998, the parties reached an agreement to settle the matter. See
    "Settlements of Reimbursement Cases" below.

    McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha
    County, West Virginia, filed September 20, 1994 by the West Virginia
    Attorney General and state agencies). The Company is a defendant in the
    case.

    The State of Florida, et al. v. The American Tobacco Company, et al.
    (Circuit Court, Palm Beach County, Florida, filed February 21, 1995). The
    trial court granted the Company's motion to dismiss. The Florida Court of
    Appeal affirmed the order dismissing the Company. On August 25, 1997,
    Lorillard Tobacco Company and other defendants entered into a Memorandum of
    Understanding with the State of Florida which settled the State's claims
    for monetary damages. See "Settlements of Reimbursement Cases" below. The
    remaining claims have now been dismissed.

    Commonwealth of Massachusetts v. Philip Morris Inc., et al. (Superior
    Court, Middlesex County, Massachusetts, filed December 19, 1995). The court
    has scheduled trial in this matter to begin on February 1, 1999.

    Ieyoub v. The American Tobacco Company, et al. (U.S. District Court,
    Western

                                     Page 19

    District, Louisiana, filed March 13, 1996 by the Louisiana Attorney
    General). The Company is a defendant in the case.

    The State of Texas v. The American Tobacco Company, et al. (U.S. District
    Court, Eastern District, Texas, filed March 28, 1996). On January 16, 1998,
    Lorillard Tobacco Company and other defendants entered into a Memorandum of
    Understanding with the State of Texas which settled the State's claims for
    monetary damages. See "Settlements of Reimbursement Cases" below. Certain
    Texas counties and some Texas hospital districts have filed motions to
    intervene and for declaratory judgment in order to contest the settlement.
    The court has not ruled on the motions to date.

    State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court,
    Baltimore City, Maryland, filed May 1, 1996).

    State of Washington v. The American Tobacco Company, et al. (Superior
    Court, King County, Washington, filed June 5, 1996). The court has
    scheduled the case for trial on September 21, 1998.

    City and County of San Francisco, et al. v. Philip Morris Incorporated, et
    al. (U.S. District Court, Northern District, California, filed June 6, 1996
    by various California cities and counties). 

    State of Connecticut v. Philip Morris Incorporated, et al. (Superior Court,
    Litchfield District, Connecticut, filed July 18, 1996).

    County of Los Angeles v. R.J. Reynolds Tobacco Company, et al. (Superior
    Court, San Diego County, filed August 5, 1996). The court has scheduled a
    bench trial to begin on February 5, 1999 in this matter and in two other
    cases that assert allegations that defendants violated certain provisions
    of the California Business and Professions Code. Immediately after the
    completion of the bench trial, the court will convene a jury as to the
    remainder of the plaintiff's claims in County of Los Angeles.

    State of Arizona v. The American Tobacco Company, et al. (Superior Court,
    Maricopa County, Arizona, filed August 20, 1996). The court has scheduled
    the case for trial on March 4, 1999.

    State of Kansas v. R.J. Reynolds Tobacco Company, et al. (District Court,
    Shawnee County, Kansas, filed August 20, 1996). 

    Kelley v. Philip Morris Incorporated, et al. (Circuit Court, Ingham County,
    Michigan, filed August 21, 1996 by the Attorney General of Michigan).

    State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al.
    (District Court, Cleveland County, Oklahoma, filed August 22, 1996). The
    Company is a defendant in the case. The court has scheduled the case for
    trial on January 25, 1999.

    People of the State of California v. Philip Morris Incorporated, et al.
    (Superior Court, San Francisco County, California, filed September 5, 1996
    by various California counties and cities and local chapters of various
    medical societies and associations). The court has scheduled the case for
    trial on March 1, 1999.

    State of New Jersey v. R.J. Reynolds Tobacco Company, et al. (Superior
    Court, Middlesex County, New Jersey, filed September 10, 1996).

    State of Utah v. R.J. Reynolds Tobacco Company, et al. (U.S. District
    Court, Central Division, Utah, filed September 30, 1996). The Company is a
    defendant in the case.

                                     Page 20

    City of New York, et al. v. The Tobacco Institute, et al. (Supreme Court,
    New York County, filed October 17, 1996).  

    People of the State of Illinois v. Philip Morris, Inc., et al. (Circuit
    Court, Cook County, Illinois, filed November 12, 1996).

    State of Iowa v. R.J. Reynolds Tobacco Company, et al. (District Court,
    Fifth Judicial District, Polk County, Iowa, filed November 27, 1996). The
    Company is a defendant in the case. The Supreme Court of Iowa has affirmed
    the trial court's order dismissing plaintiff's claims of deception,
    voluntary assumption of a special duty and indemnity. Plaintiff did not
    attempt to appeal the dismissal of its claim of unjust
    enrichment/restitution.

    County of Erie v. The Tobacco Institute, Inc., et al. (Supreme Court, Erie
    County, New York, filed January 14, 1997).

    State of New York v. The American Tobacco Company, et al. (Supreme Court,
    New York County, New York, filed January 21, 1997). The Company is a
    defendant in the case.

    State of Hawaii v. Brown & Williamson Tobacco Corporation, et al. (Circuit
    Court, First Circuit, Hawaii, filed January 31, 1997). The Company is a
    defendant in the case.

    State of Wisconsin v. Philip Morris Incorporated, et al. (Circuit Court,
    Dane County, Wisconsin, filed February 5, 1997). 

    State of Indiana v. Philip Morris Incorporated, et al. (Superior Court,
    Marion County, Indiana, filed February 19, 1997). The court has granted
    defendants' motion to dismiss all counts of the complaint. The time for
    plaintiffs to notice an appeal has not expired.

    State of Alaska v. Philip Morris, Incorporated, et al. (Superior Court,
    First Judicial District, Alaska, filed April 14, 1997).

    County of Cook v. Philip Morris, Incorporated, et al. (Circuit Court, Cook
    County, Illinois, filed April 18, 1997).

    Commonwealth of Pennsylvania v. Philip Morris, Inc., et al. (Court of
    Common Pleas, Philadelphia County, Pennsylvania, filed April 23, 1997).

    State of Arkansas v. The American Tobacco Company, et al. (Sixth Division,
    Chancery Court, Pulaski County, Arkansas, filed May 5, 1997).

    State of Montana v. Philip Morris, Incorporated, et al. (First Judicial
    Court, Lewis and Clark County, Montana, filed May 5, 1997).

    State of Ohio v. Philip Morris, Incorporated, et al. (Court of Common
    Pleas, Franklin County, Ohio, filed on May 8, 1997).

    State of Missouri v. American Tobacco Company, Inc., et al. (Circuit Court,
    City of St. Louis, Missouri, filed May 12, 1997). The Company is a
    defendant in the case.

    State of South Carolina v. Brown & Williamson Tobacco Corporation, et al.
    (Court of Common Pleas, Richland County, South Carolina, filed May 12,
    1997). The Company is a defendant in the case. 

    State of Nevada v. Philip Morris, Incorporated, et al. (Second Judicial
    District, Washoe County, Nevada, filed May 21, 1997).

                                     Page 21

    University of South Alabama v. The American Tobacco Company, et al. (U.S.
    District Court, Southern District, Alabama, filed May 23, 1997). The
    Company is a defendant in the case. Plaintiff noticed an appeal to the U.S.
    Court of Appeals for the Fifth Circuit from the trial court's order that
    dismissed the action.

    State of New Mexico v. The American Tobacco Company, et al. (First Judicial
    District Court, Santa Fe County, New Mexico, filed May 27, 1997).

    City of Birmingham, Alabama, and The Greene County Racing Commission v. The
    American Tobacco Company, et al. (U.S. District Court, Northern District,
    Alabama, filed May 28, 1997). The Company is a defendant in the case.

    State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
    Chittenden County, Vermont, filed May 29, 1997). 

    State of New Hampshire v. R.J. Reynolds Tobacco Company, et al. (Superior
    Court, Merrimack County, New Hampshire, filed June 4, 1997). 

    State of Colorado v. R.J. Reynolds Tobacco Co., et al. (District Court,
    City and County of Denver, Colorado, filed June 5, 1997). 

    State of Idaho v. Philip Morris, Inc., et al. (District Court, Fourth
    Judicial District, Ada County, Idaho, filed June 9, 1997). 

    State of Oregon v. The American Tobacco Company, et al. (Circuit Court,
    Multnomah County, Oregon, filed June 9, 1997). 

    People of the State of California v. Philip Morris, Inc., et al. (Superior
    Court, Sacramento County, California, filed June 12, 1997). 

    State of Maine v. Philip Morris, Incorporated, et al. (Superior Court,
    Kennebec County, Maine, filed June 17, 1997).

    Rossello, et al. v. Brown & Williamson Tobacco Corporation, et al. (U.S.
    District Court, Puerto Rico, filed June 17, 1997). The Company is a
    defendant in the case.

    State of Rhode Island v. American Tobacco Company, Inc., et al. (Superior
    Court, Providence, Rhode Island, filed June 17, 1997). The Company is a
    defendant in the case.

    State of Georgia v. Philip Morris, Inc., et al. (Superior Court, Fulton
    County, Georgia, filed August 29, 1997). 

    Republic of the Marshall Islands v. The American Tobacco Company, et al.
    (High Court, Republic of the Marshall Islands, filed October 20, 1997). The
    Company is a defendant in the case.

    State of South Dakota and South Dakota Department of Social Services v.
    Philip Morris, Inc., et al. (Circuit Court, Sixth Judicial Circuit, Hughes
    County, South Dakota filed February 23, 1998). 

    The Republic of Guatemala v. The Tobacco Institute, Inc., et al. (U.S.
    District Court, District of Columbia, filed May 11, 1998). Neither
    Lorillard nor the Company are named as defendants in the matter.

    State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
    Chittenden County, Vermont, filed July 7, 1998). Plaintiff asserts
    different claims in this suit than in the one filed on May 29, 1997, that
    is listed above.

                                     Page 22

    Private Citizens' Reimbursement Cases - There are five suits pending in
    which plaintiffs are private citizens. Four of the suits have been filed by
    private citizens on behalf of taxpayers of their respective states,
    although governmental entities have filed a reimbursement suit in one of
    the four states. The Company is a defendant in two of the five pending
    private citizen Reimbursement Cases. Lorillard is a defendant in each of
    the cases. Each of these cases is in the pre-trial discovery stage.

    Coyne v. The American Tobacco Company, et al. (U.S. District Court,
    Northern District, Ohio, filed September 17, 1996). The Company is a
    defendant in the case. The suit is on behalf of taxpayers of Ohio. The
    court has granted defendants' motion to dismiss. The plaintiffs have
    noticed an appeal from the court's order granting a motion to dismiss.

    Beckom v. The American Tobacco Company, et al. (U.S. District Court,
    Eastern District, Tennessee, filed May 8, 1997). The Company is a defendant
    in the case. The suit is on behalf of taxpayers of Tennessee.

    Mason v. The American Tobacco Company, et al. (U.S. District Court,
    Northern District, Texas, filed December 23, 1997). The suit is on behalf
    of taxpayers of the U.S. as to funds expended by the Medicaid program.

    The State of North Carolina, et al. v. The American Tobacco Company, et al.
    (U.S. District Court, Middle District, North Carolina, filed February 13,
    1998).

    Wynn v. Philip Morris, Inc., et al. (U.S. District Court, Northern
    District, Alabama, filed May 27, 1998). The suit is on behalf of taxpayers
    of Alabama.

    Reimbursement Cases By Indian Tribes - Indian Tribes have filed seven
    reimbursement suits in their tribal courts, two of which have been
    dismissed. Lorillard is a defendant in each of the cases. The Company is
    not named as a defendant in any of the seven tribal suits filed to date.
    Each of the pending cases is in the pre-trial, discovery stage.

    The Lower Brule Sioux Tribe v. The American Tobacco Company, et al. (Tribal
    Court, Lower Brule Sioux Tribe, filed on an unknown date, first amended
    complaint filed May 28, 1997).

    Muscogee Creek Nation v. The American Tobacco Company, et al. (District
    Court, Muscogee Creek Nation, Okmulgee District, filed June 20, 1997). 

    Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
    Court, Crow Creek Sioux Tribe, filed September 14, 1997).

    The Standing Rock Sioux Tribe v. The American Tobacco Company, et al.
    (Tribal Court, Standing Rock Sioux Tribe, filed May 8, 1998).

    The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et al.
    (Tribal Court, Sisseton-Wahpeton Sioux Tribe, filed May 12, 1998).

    Reimbursement Cases By Labor Unions - Labor unions have filed approximately
    65 reimbursement suits in various states in federal or state courts.
    Lorillard is named as a defendant in each of the suits filed to date by
    unions. The Company is a defendant in two of the pending suits. Each of
    these cases is in the pre-trial, discovery stage.

    Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip
    Morris, Inc., et al. (U.S. District Court, Northern District, California,
    filed April 25, 1997).

                                     Page 23

    Iron Workers Local Union No. 17 Insurance Fund, et al. v. Philip Morris,
    Inc., et al. (U.S. District Court, Northern District, Ohio, Eastern
    Division, filed May 20, 1997). The court has scheduled trial in this matter
    to begin on February 22, 1999.

    Northwest Laborers-Employers Health and Security Trust Fund, et al. v.
    Philip Morris, Inc., et al. (U.S. District Court, Western District,
    Washington, filed May 21, 1997). The court has granted plaintiffs' motion
    for class certification on behalf of "all existing jointly-administered and
    collectively bargained-for health and welfare trusts in [the State of]
    Washington, and/or the trustees of such entities, that have provided or
    paid for health care and/or addiction treatment costs or services for
    employees or other beneficiaries." The United States Court of Appeals for
    the Ninth Circuit has declined to review the ruling at this time.

    Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et
    al. (U.S. District Court, Massachusetts, filed June 2, 1997). 

    Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al. (U.S.
    District Court, Southern District, Illinois, filed on or about June 9,
    1997).

    Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip
    Morris, Inc., et al. (U.S. District Court, Hawaii, filed June 13, 1997). 

    Laborers Local 17 Health and Benefit Fund and The Transport Workers Union
    New York City Private Bus Lines Health Benefit Trust v. Philip Morris,
    Inc., et al. (U.S. District Court, Southern District, New York, filed June
    19, 1997). 

    Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., et al. (U.S.
    District Court, Eastern District, Louisiana, filed June 20, 1997).

    Kentucky Laborers District Council Health and Welfare Trust Fund v. Hill &
    Knowlton, Inc., et al. (U.S. District Court, Western District, Kentucky,
    Louisville Division, filed June 20, 1997). 

    Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v.
    Philip Morris, Inc., et al. (U.S. District Court, Oregon, filed June 20,
    1997). The court granted defendants' motion for judgment on the pleadings,
    which dismissed the case. The time for plaintiffs to notice an appeal has
    not expired.

    United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc.,
    et al. (U.S. District Court, Southern District, New York, filed June 25,
    1997). 

    Connecticut Pipe Trades Health Fund and International Brotherhood of
    Electrical Workers Local 90 Benefit Plan v. Philip Morris, Inc., et al.
    (U.S. District Court, Connecticut, filed July 1, 1997). 

    Seafarers Welfare Plan and United Industrial Workers Welfare Plan v. Philip
    Morris, Inc., et al. (U.S. District Court, Maryland, Southern Division,
    filed July 2, 1997). The court has granted defendants' motion to dismiss
    the case. The time for plaintiffs to notice an appeal has not expired.

    Laborers and Operating Engineers Utility Agreement Health and Welfare Trust
    Fund for Arizona v. Philip Morris Incorporated, et al. (U.S. District
    Court, Arizona, filed July 7, 1997). 

    West Virginia Laborers Pension Fund v. Philip Morris, Inc., et al. (U.S.

                                     Page 24

    District Court, Southern District, West Virginia, Huntington Division,
    filed July 11, 1997). 

    Rhode Island Laborers Health and Welfare Fund v. Philip Morris
    Incorporated, et al. (U.S. District Court, Rhode Island, filed July 20,
    1997).
    
    Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et
    al. (Supreme Court, New York County, New York, filed July 28, 1997).

    Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris,
    Inc., et al. (U.S. District Court, Eastern District, Louisiana, filed
    August 15, 1997). This action has been consolidated with the case of Ark-La-
    Miss Laborers Welfare Fund.

    Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris,
    Inc., et al. (U.S. District Court, Eastern District, Pennsylvania, filed
    August 21, 1997). The court granted defendants' motion to dismiss the case.
    Plaintiffs have noticed an appeal to the United States Court of Appeals for
    the Third Circuit.

    Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
    Morris, Inc., et al. (U.S. District Court, Eastern District, Missouri,
    filed September 2, 1997).

    Arkansas Carpenters Health & Welfare Fund v. Philip Morris, Inc., et al.
    (U.S. District Court, Eastern District, Arkansas, filed September 4, 1997).

    Southeast Florida Laborers District Council Health and Welfare Trust Fund
    v. Philip Morris, Inc., et al. (U.S. District Court, Southern District,
    Florida, filed September 11, 1997). The court granted defendants' motion to
    dismiss the case. Plaintiff has noticed an appeal from the judgment to the
    United States Court of Appeals for the Eleventh Circuit.

    West Virginia--Ohio Valley Area International Brotherhood of Electrical
    Workers Welfare Fund v. The American Tobacco Company, et al. (U.S. District
    Court, West Virginia, filed September 11, 1997).

    Teamsters Union No. 142, Health and Welfare Trust Fund and Sheet Metal
    Workers Local Union No. 20 Welfare and Benefit Fund v. Philip Morris
    Incorporated, et al. (Circuit Court, St. Joseph County, Indiana, filed
    September 12, 1997).

    Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
    Company, et al. (Superior Court, Los Angeles County, California, filed
    September 16, 1997).

    Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris Inc., et al.
    (Supreme Court, New York County, New York, filed September 17, 1997).

    New Jersey Carpenters Health Fund, et al. v. Philip Morris, Inc., et al.
    (U.S. District Court, New Jersey, filed September 25, 1997).

    New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et al.
    v. Philip Morris, Inc., et al. (Second Judicial District Court, Bernalillo
    County, New Mexico, filed October 10, 1997).

    Central States Joint Board v. Philip Morris, Inc., et al. (U.S. District
    Court, Northern District, Illinois, filed October 20, 1997).

    International Brotherhood of Teamsters Local 734 v. Philip Morris, Inc., et
    al. (U.S. District Court, Northern District, Illinois, filed October 20,

                                     Page 25

    1997).

    Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al.
    (U.S. District Court, Eastern District, Texas, Beaumont Division, filed
    October 31, 1997).

    United Food and Commercial Workers Unions and Employers Health and Welfare
    Fund, et al. v. Philip Morris, Inc., et al. (U.S. District Court, Northern
    District, Alabama, filed November 13, 1997).

    B.A.C. Local 32 Insurance Trust Fund, et al. v. Philip Morris,
    Incorporated, et al. (U.S. District Court, Eastern District, Michigan,
    filed November 14, 1997).

    Screen Actors Guild-Producers Health Plan, et al. v. Philip Morris, Inc.,
    et al. (Superior Court, Los Angeles County, California, filed November 20,
    1997).

    IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc. et al.
    (Supreme Court, New York County, New York, filed November 25, 1997).

    IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al. (Supreme Court,
    New York County, New York, filed November 25, 1997).

    Local 138, 138A and 138B International Union of Operating Engineers Welfare
    Fund v. Philip Morris, Inc., et al. (Supreme Court, New York County, New
    York, filed November 25, 1997).

    Local 840, International Brotherhood of Teamsters Health and Insurance Fund
    v. Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
    filed November 25, 1997).

    Long Island Council of Regional Carpenters Welfare Fund v. Philip Morris,
    Inc., et al. (Supreme Court, New York County, New York, filed November 25,
    1997).

    Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris, Inc.,
    et al. (Supreme Court, New York County, New York, filed December 8, 1997).

    Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al.
    (Supreme Court, New York County, New York, filed December 8, 1997).

    Local 1199 National Benefit Fund for Health and Human Services Employees v.
    Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
    filed December 8, 1997).

    Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris,
    Inc., et al. (U.S. District Court, Michigan, filed December 30, 1997). 

    Carpenters & Joiners Welfare Fund, et al. v. Philip Morris Incorporated, et
    al. (U.S. District Court, Minnesota, filed December 31, 1997).

    Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip
    Morris, Inc., et al. (Circuit Court, Thirteenth Judicial District,
    Tennessee, filed January 7, 1998).

    Belk, et al., Trustees of IBEW-NECA Local 505 Health and Welfare Fund v.
    Philip Morris, Inc., et al. (U.S. District Court, Southern District,
    Alabama, filed February 19, 1998). The court granted plaintiffs' motion to
    dismiss the case without prejudice.

                                     Page 26

    National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
    (U.S. District Court, Eastern District, New York, filed February 27, 1998).
    The Company is a defendant in the case.

    Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (U.S.
    District Court, Eastern District, Wisconsin, filed March 4, 1998).  To
    date, none of the defendants have received service of process.

    Service Employees International Union Health & Welfare Fund, et al. v.
    Philip Morris, Inc., et al. (U.S. District Court, District of Columbia,
    filed March 19, 1998).

    Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (U.S.
    District Court, Eastern District, Wisconsin, filed March 30, 1998).

    United Association of Plumbing and Pipefitters Industry Local 467, et al.
    v. Philip Morris Incorporated, et al. (Superior Court, San Mateo County,
    California, filed March 31, 1998).

    Newspaper Periodical Drivers Local 921 San Francisco Newspaper Agency
    Health & Welfare Fund v. Philip Morris, Inc., et al. (Superior Court, San
    Mateo County, California, filed April 15, 1998).

    Teamsters Benefit Trust v. Philip Morris, Inc., et al. (Superior Court,
    Alameda County, California, filed April 15, 1998).

    United Association Local 159 Health and Welfare Trust Fund v. Philip
    Morris, Inc., et al. (Superior Court, Alameda County, California, filed
    April 15, 1998).

    Bay Area Automotive Group Welfare Fund v. Philip Morris, Inc., et al.
    (Superior Court, San Francisco County, California, filed April 16, 1998).

    Bay Area Delivery Drivers Security Fund v. Philip Morris, Inc., et al.
    (Superior Court, Alameda County, California, filed April 16, 1998).

    Pipe Trades District Council No. 36 Health & Welfare Trust Fund v. Philip
    Morris, Inc., et al. (Superior Court, Alameda County, California, filed
    April 16, 1998).

    Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris, Inc.,
    et al. (Superior Court, San Francisco County, California, filed April 16,
    1998).

    United Association Local No. 343 Health and Welfare Trust Fund v. Philip
    Morris, Inc., et al. (Superior Court, Alameda County, California, filed
    April 16, 1998).

    San Francisco Newspaper Publishers and Northern California Newspaper Guild
    Health & Welfare Trust v. Philip Morris, Inc., et al. (Superior Court, San
    Francisco County, California, filed April 17, 1998).

    North Coast Trust Fund v. Philip Morris, Inc., et al. (Superior Court, San
    Francisco County, California, filed April 24, 1998).

    Northern California Bakery Drivers Security Fund v. Philip Morris, Inc., et
    al. (Superior Court, Alameda County, California, filed April 24, 1998).

    Northern California Plasterers Health & Welfare Trust Fund v. Philip
    Morris, Inc., et al. (Superior Court, San Francisco County, California,
    filed May 21, 1998).

                                     Page 27

    U.A. Local No. 393 Health and Welfare Trust Fund v. Philip Morris, Inc., et
    al. (Superior Court, Alameda County, California, filed May 21, 1998).

    Northern California General Teamsters Security Fund v. Philip Morris, Inc.,
    et al. (Superior Court, Alameda County, California, filed May 22, 1998).

    Utah Laborers Health & Welfare Trust Fund, et al. v. Philip Morris
    Incorporated, et al. (U.S. District Court, Utah, Central Division, filed
    June 4, 1998). The Company is a defendant in the case.

    Joint Benefit Trust v. Philip Morris, Inc., et al. (Superior Court, Alameda
    County, California, filed June 15, 1998).

    Northern California Pipe Trades Health and Welfare Trust v. Philip Morris,
    Inc., et al. (Superior Court, Alameda County, California, filed June 18,
    1998).

    S.E.I.U. v. Philip Morris, Inc., et al. (U.S. District Court, District of
    Columbia, filed June 22, 1998). To date, none of the defendants have
    received service of process.

    Holland, et al., Trustees of United Mine Workers v. Philip Morris
    Incorporated, et al. (U.S. District Court, District of Columbia, filed July
    9, 1998).

    Reimbursement Cases By Private Companies - Private companies have filed six
    Reimbursement Cases to date. Lorillard is named as a defendant in each of
    the cases filed by private companies. The Company is not a defendant in the
    cases filed by private companies.

    Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al. (U.S.
    District Court, Minnesota, filed March 11, 1998). 

    Williams and Drake Company v. The American Tobacco Company, et al. (U.S.
    District Court, Western District, Pennsylvania, filed March 23, 1998).

    Conwed Corporation, et al. v. R.J. Reynolds Tobacco Company, et al.
    (District Court, Second Judicial District, Ramsey County, Minnesota, filed
    April 10, 1998).

    Arkansas Blue Cross and Blue Shield, et al. v. Philip Morris, Incorporated,
    et al. (U.S. District Court, Northern District, Illinois, filed April 29,
    1998).

    Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris,
    Incorporated, et al. (U.S. District Court, Eastern District, New York,
    filed April 29, 1998).

    Regence Blueshield, et al. v. Philip Morris, Incorporated, et al. (U.S.
    District Court, Western District, Washington, filed April 29, 1998).

    CONTRIBUTION CLAIMS - In addition to the foregoing cases, eight cases are
    pending in which private companies seek recovery of funds expended by them
    to individuals whose asbestos disease or illness was alleged to have been
    caused in whole or in part by smoking-related illnesses. One of the cases
    has not been served. Lorillard is named as a defendant in each action. The
    Company is named as a defendant in three of the cases but has not received
    service of process in one of them. Each of these cases is in the pre-trial,
    discovery stage.

    Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (Circuit Court,

                                     Page 28

    Duval County, Florida, filed September 15, 1997). The Company is a
    defendant in the case but has not received service of process to date.

    Raymark Industries v. Brown & Williamson Tobacco Corporation, et al. (U.S.
    District Court, Northern District, Georgia, filed September 15, 1997). The
    Company is a defendant in the case.

    Fibreboard Corporation and Owens-Corning v. The American Tobacco Company,
    et al. (Superior Court, Alameda County, California, filed December 11,
    1997).

    Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
    (Supreme Court, New York County, New York, filed December 19, 1997). The
    Company is a defendant in the case.

    Falise, et al., as Trustees of the Manville Personal Injury Settlement
    Trust v. The American Tobacco Company, et al. (U.S. District Court, Eastern
    District, New York, filed December 31, 1997).

    H.K. Porter Company v. B.A.T. Industries, PLC, et al. (U.S. District Court,
    Southern District, New York, filed December 31, 1997). 

    Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
    Duval County, Florida, filed December 31, 1997). To date, none of the
    defendants have received service of process.

    Raymark Industries v. The American Tobacco Company, et al. (U.S. District
    Court, Eastern District, New York, filed January 30, 1998).

    FILTER CASES - A number of cases have been filed against Lorillard seeking
    damages for cancer and other health effects claimed to have resulted from
    exposure to asbestos fibers which were incorporated, for a limited period
    of time, ending more than forty years ago, into the filter material used in
    one of the brands of cigarettes manufactured by Lorillard. Eighteen such
    cases, including one that also includes allegations that plaintiff also was
    injured as a result of smoking cigarettes, are pending in federal and state
    courts. Allegations of liability include negligence, strict liability,
    fraud, misrepresentation and breach of warranty. Plaintiffs seek
    unspecified amounts in compensatory and punitive damages in many cases, and
    in other cases damages are stated to amount to as much as $15.0 in
    compensatory damages and $100.0 in punitive damages. In the one case of
    this type that has been tried during 1997, the jury returned a verdict in
    favor of Lorillard. Trials were held in three cases of this type during
    1996. In two of the cases, the juries returned verdicts in favor of
    Lorillard. In the third case, the jury returned a verdict in favor of
    plaintiffs. The verdict, which Lorillard has appealed, requires Lorillard
    to pay the amount of one hundred forty thousand dollars, although the award
    subsequently was reduced to seventy thousand dollars.

    Trials were held in three cases of this type during 1995. In two of the
    cases, the juries returned verdicts in favor of Lorillard. In the third
    case, the jury returned a verdict in favor of plaintiffs, which was upheld
    on appeal. The Company has paid the compensatory judgment award, trial
    costs and interest thereon in the amount of $1.6 on December 30, 1997. The
    United States Supreme Court denied the Company's petition for writ of
    certiorari as to the punitive damages award.

    In addition to the foregoing litigation, one pending case, Cordova v.
    Liggett Group, Inc., et al. (Superior Court, San Diego County, California,
    filed May 12, 1992), alleges that Lorillard and other named defendants,
    including other manufacturers of tobacco products, engaged in unfair and
    fraudulent business practices in connection with activities relating to the

                                     Page 29

    Council for Tobacco Research-USA, Inc., of which Lorillard is a sponsor, in
    violation of a California state consumer protection law by misrepresenting
    to or concealing from the public information concerning the health aspects
    of smoking. The court has scheduled a bench trial to begin on February 5,
    1999 in this matter and in two other cases that assert allegations that
    defendants violated certain provisions of the California Business and
    Professions Code.

    In addition, two California cities, Los Angeles and San Jose, suing on
    behalf of The People of the State of California, have filed suits alleging
    cigarette manufacturers, including Lorillard, have violated a California
    statute, commonly known as "Proposition 65," that requires California
    residents to be informed if they are exposed to substances that are alleged
    to cause cancer or birth defects. Plaintiffs in both suits allege that non-
    smokers have not been warned by cigarette manufacturers that exposure to
    environmental tobacco smoke may cause illness. Plaintiffs in both suits
    further allege defendants violated certain provisions of the California
    Business and Professions Code (The People of the State of California, and
    American Environmental Safety Institute v. Philip Morris Incorporated, et
    al. (Superior Court, Los Angeles County, California, filed July 14, 1998)
    and The People of the State of California, the City of San Jose and Paul
    Dowhall v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
    San Francisco County, California, filed July 28, 1998)).

    DOCUMENT DISCOVERY ISSUES - Plaintiffs in a number of the cases pending
    against the tobacco industry, including cases against Lorillard and the
    Company, have challenged the claims made by Lorillard and other companies
    in the tobacco industry that certain documents sought by plaintiffs are
    protected from disclosure by the attorney-client privilege, joint defense
    privilege and work product doctrine. These challenges include, among other
    things, allegations that such documents do not contain legal advice or were
    not prepared for litigation purposes and, thus, are not privileged or
    protected as attorney work product. Certain plaintiffs in these cases have
    also alleged that defendants' privileged documents should be discoverable
    pursuant to the so-called crime/fraud exception which negates the privilege
    as to documents found to have been related to and prepared in furtherance
    of an alleged crime or fraud. In addition, several plaintiffs have argued,
    and certain courts have found, that defendants have "waived" their
    privilege as to a number of documents. Such arguments by plaintiffs
    generally pertain to certain industry documents which were subpoenaed by
    the House Commerce Committee (see discussion below).

    Various courts have addressed these issues and have arrived at differing
    conclusions as to whether the privilege for some of defendants' documents
    should be maintained. Some of these rulings are final and, as a result,
    certain documents as to which defendants have claimed a privilege have been
    released to plaintiffs.
    
    On December 5, 1997, certain documents as to which defendants had claimed
    privilege were provided to the Chairman of the House Commerce Committee in
    response to a subpoena. These documents were subsequently made available on
    the Internet. As of June 30, 1998, Lorillard had posted more than 250,000
    documents on the Internet.

    On February 19, 1998, the Committee subpoenaed approximately 39,000
    additional documents which Lorillard and other companies in the tobacco
    industry have asserted to be privileged. These documents were the subject
    of a March 7, 1998 ruling in the Reimbursement Case brought by the State of
    Minnesota, in which the judge ordered that the documents should be released
    on the basis of the crime/fraud exception. Defendants exhausted their
    remedies through the state's judicial system as well as the U.S. Supreme

                                     Page 30

    Court. On April 6, 1998, the U.S. Supreme Court denied defendants'
    application for a Stay and, in accordance with the March 7, 1998 ruling of
    the district court, such documents were released to plaintiffs in
    Minnesota. Also on April 6, 1998 and pursuant to the February 19, 1998
    subpoena, documents were submitted to the Committee. The Committee
    subsequently made available on the Internet the vast majority, and perhaps
    all, of those documents.

    Under the Proposed Resolution, Lorillard and the other companies in the
    tobacco industry agreed to establish an industry-funded document depository
    to allow public viewing of certain industry documents. In recent
    Congressional testimony, representatives of the tobacco companies offered
    to make tens of millions of pages of documents public prior to the
    enactment of any comprehensive legislation to demonstrate their commitment
    to the principles set forth in the Proposed Resolution. On February 27,
    1998, Lorillard and other companies in the tobacco industry posted on the
    Internet the first installment of these documents for public access. In
    addition, the court in the Reimbursement Case brought by the State of
    Minnesota has granted defendants' request to allow public access to the
    document depository established in that case. The publicly available
    materials will not include documents containing trade secret information,
    certain personnel and third party information, or documents for which
    attorney-client privilege or work product doctrine claims have been
    asserted.

    Tobacco industry documents have generated extensive media coverage recently
    and have become a focal point in the litigation. The Company cannot predict
    the effect disclosure of these documents may have on pending litigation or
    Congressional consideration of the Proposed Resolution.

    SETTLEMENTS OF REIMBURSEMENT CASES - During 1997 and 1998, Lorillard and
    other companies in the United States tobacco industry (the "settling
    defendants") settled health care cost recovery actions brought by the
    States of Mississippi, Florida, Texas and Minnesota. Claims of Blue Cross
    and Blue Shield of Minnesota asserted against the settling defendants
    together with Minnesota's claims were separately settled as well. These
    settlements are described in Note 5 of the Notes to Consolidated Condensed
    Financial Statements of the Company's Quarterly Report on Form 10-Q for the
    quarter ended March 31, 1998. Recently, as detailed below, the Mississippi
    and Texas settlement agreements have been amended pursuant to their "most
    favored nation" clauses to reflect terms of the Minnesota settlement. The
    Florida, Texas and Minnesota health care cost recovery settlements and
    certain ancillary agreements are filed as Exhibits to various reports of
    the Company filed with the Securities and Exchange Commission, and the
    amendments to the Mississippi and Texas settlements and certain ancillary
    agreements are filed as Exhibits to this Form 10-Q, and the discussion
    herein is qualified by reference thereto. These settlements resulted in
    pre-tax charges to earnings of $163.4 in the third and fourth quarter of
    1997, and $42.7 and $185.1 in the quarter and six months ended June 30,
    1998.

    Following the settlement with Minnesota, Lorillard was contacted by
    counsel for the States of Texas, Florida and Mississippi seeking to discuss
    the issue of what effect, if any, the settlement of the Minnesota action
    has upon the terms of the prior settlements with those states pursuant to
    the "most favored nation" ("MFN") provision of those prior state
    settlements. That provision provides that, in the event the settling
    defendants enter into a subsequent pre-verdict settlement with a non-
    federal governmental entity on terms more favorable to such entity than the
    terms of the prior state settlements (after due consideration of relevant
    differences in population or other appropriate factors), the terms of the
    prior state settlements will be revised to provide treatment at least as
    relatively favorable. As discussed below, the Mississippi and Texas
    settlement

                                     Page 31

    agreements were recently amended pursuant to this provision. Lorillard
    cannot presently determine what the result of any discussions with Florida
    regarding the MFN issue may be, nor can it determine what the result of any
    litigation with Florida concerning that issue may be. A determination of
    this issue adverse to Lorillard could result in an obligation to make
    substantial additional payments to Florida.

    On July 6 and July 24, 1998 respectively, Lorillard and the other settling
    defendants reached agreements with the States of Mississippi and Texas to
    amend those States' settlements pursuant to the MFN provision. The
    Mississippi and Texas MFN amendments call for the settling defendants to
    make additional settlement payments to Mississippi and Texas aggregating
    $550.0 and $2,275.0, respectively. These amounts are payable in January of
    the year indicated:
    <TABLE>
    <CAPTION>

                          1999      2000      2001      2002     2003    Total
                      ---------------------------------------------------------

    <S>                <C>       <C>       <C>       <C>      <C>       <C>
    Mississippi        $ 41.7    $145.2    $145.2    $145.2   $ 72.7   $  550.0
    Texas               156.5     605.1     605.1     605.1    303.2    2,275.0
                      ---------------------------------------------------------
                       $198.2    $750.3    $750.3    $750.3   $375.9   $2,825.0
                      =========================================================
    </TABLE>

    These payments, which in the case of payments after 1999 will be adjusted
    for inflation, changes in domestic sales volume, and, under specified
    circumstances, increases in net operating profits from domestic sales, will
    be allocated among the settling defendants in accordance with their
    relative unit volume of domestic cigarette sales.

    In the event a settling defendant defaults on its obligation to make timely
    payment of the above amounts, the remaining settling defendants may, in
    their absolute discretion, pay the missing payment. If they elect not to
    make up the missing payment, each settling defendant can be required by the
    state to pay its share of the remaining payments scheduled above within 30
    days of the default, subject to inflation and volume adjustments. The
    obligations of the settling defendants under the amended settlement
    agreements are several and not joint; the amended settlement agreements do
    not obligate any settling defendant to pay the share of another settling
    defendant.

    The nominal amounts of the ongoing annual payments, (the "Ongoing Annual
    Payments") contemplated by the original Mississippi and Texas settlement
    agreements are unchanged by the MFN amendments.

    The MFN amendments modify the provisions of the original settlement
    agreements that address the impact enactment of federal tobacco legislation
    before November 30, 2000 would have on such settlements. Under the MFN
    amendments, the settling defendants will be entitled to receive a dollar-
    for-dollar offset against their Ongoing Annual Payments for amounts that
    Mississippi or Texas, as the case may be, could elect to receive pursuant
    to such federal tobacco legislation ("Federal Settlement Funds"), except to
    the extent that: (i) such Federal Settlement Funds are required to be used
    for purposes other than health care or tobacco-related purposes; (ii) such
    federal tobacco legislation does not provide for the abrogation, settlement
    or relinquishment of state tobacco-related claims; or (iii) state receipt
    of such Federal Settlement Funds is conditioned upon (A) the relinquishment
    of

                                     Page 32

    rights or benefits under that respective state's settlement (excepting any
    Ongoing Annual Payment amounts subject to the offset); or (B) actions or
    expenditures by such state unrelated to health care or tobacco (including
    but not limited to tobacco education, cessation, control or enforcement).

    The MFN amendments also supersede the MFN provisions contained in the
    original settlement agreements. Under the revised MFN provision if the
    settling defendants enter into any future pre-verdict settlement agreement
    of similar health care cost recovery litigation on terms more favorable to
    a non-federal governmental plaintiff, the Mississippi and Texas settlements
    will not otherwise be revised except to the extent such future settlement
    provides for: (i) joint and several liability for monetary payments, (ii) a
    parent company guaranty or other credit assurance, (iii) the implementation
    of different non-economic tobacco-related public health measures, or (iv)
    monetary offsets in the event of federal tobacco legislation that are more
    favorable to such plaintiff than those described above.

    The settling defendants agreed as part of the MFN amendments to disclose
    specified future payments for lobbying or related purposes in Mississippi
    and Texas, to support enumerated legislative and regulatory proposals and
    to not support legislation, rules or policies that would diminish
    Mississippi's and Texas' rights under the amended settlement agreements.

    The settling defendants also submitted to a Consent Judgment enjoining the
    settling defendants from (i) offering or selling non-tobacco services or
    merchandise (e.g., caps, jackets or bags) in Mississippi and Texas bearing
    the name or logo of a tobacco brand other than tobacco products or items
    with the sole function of advertising; (ii) making any material
    misrepresentation of fact regarding the health consequences of using
    tobacco products; (iii) entering into any contract, combination or
    conspiracy to limit health information or research into smoking and health
    or product development; and (iv) taking any action to target children in
    Mississippi and Texas in the advertising, promotion or marketing of
    cigarettes.

    In connection with the MFN amendments, the parties executed new agreements
    governing settling defendants' payment of attorneys fees to counsel for
    Mississippi and Texas. (Copies of these agreements are filed as Exhibits to
    this Form 10-Q, and the discussion herein is qualified by reference
    thereto.) The agreements provide that beginning in November 1998, a three-
    member arbitration panel will consider and determine the amount of
    attorneys' fees to be awarded. These awards will be allocated among the
    settling defendants in accordance with their relative unit volume of
    domestic cigarette shipments. Under the agreements, there is an annual cap
    of $500.0 on aggregate attorneys' fees to be paid pursuant to arbitration
    awards, including those to be paid for counsel for Mississippi and Texas. A
    one-time $250.0 payment may be paid for cases that were settled in 1997.
    This aggregate annual cap includes; (i) all attorneys' fees paid pursuant
    to an award by the panel in connection with settlements of any smoking and
    health cases (other than individual cases), (ii) all attorneys' fees paid
    pursuant to an award by the panel for activities in connection with smoking
    and health cases resolved by operation of federal legislation provided such
    legislation imposes an obligation on the settling defendants to pay
    attorneys' fees, and (iii) all attorneys' and professional fees paid
    pursuant to an award by the panel for contributions made toward the
    enactment of federal tobacco legislation.

    The settling defendants have made payments to counsel for Mississippi and
    Texas totaling $200.0 as advances against awards of attorneys' fees by the
    arbitration panel, such advances to be credited against the annual cap over

                                     Page 33
    several years commencing in 1999.

    Included in the charges stated above for settlements of reimbursement cases
    are charges recorded by Lorillard of $30.7 ($18.4 after taxes) in the
    second quarter of 1998 to accrue for its share of all fixed and
    determinable portions of the MFN amendments with Mississippi and Texas as
    described above.

    LIGGETT SETTLEMENT - Liggett Group, Inc. and its parent company, Brooke
    Group, Ltd., Inc. ("Liggett"), and the Attorneys General for a total of 40
    states, have announced that they have reached agreements (the "Liggett
    Settlements") to settle the reimbursement claims made by those states. The
    proposed settlements reportedly will require Liggett: to make one-time
    payments to each of the settling states in an amount of as much as $1.0; to
    pay to the settling states an aggregate percentage of as much as 30% of its
    pre-tax profits annually for the next 25 years; to acknowledge that
    cigarette smoking is addictive (Liggett has supplemented the warning
    notices it places on its cigarette packages to reflect that
    acknowledgment); to acknowledge that cigarette smoking causes disease; to
    acknowledge that cigarette companies have targeted marketing programs
    towards minors; and to cooperate in suits against the other cigarette
    manufacturers by releasing Liggett documents to the Attorneys General and
    to allow its employees to testify in these matters. The Liggett Settlements
    also purport to be on behalf of "all persons who, prior to or during the
    term of [the Liggett Settlements], have smoked cigarettes or have used
    other tobacco products and have suffered or claim to have suffered injury
    as a consequence thereof."

    Pursuant to the Liggett Settlements described above, Liggett has submitted
    numerous documents from its files to courts and defendants in several of
    the Reimbursement Cases and in other cases as well. Liggett has also served
    descriptive logs of such documents on counsel for plaintiffs and defendants
    in those cases. Defendants have reviewed the Liggett logs and the Liggett
    documents to determine which Liggett documents are subject to a joint-
    defense privilege claim by other defendants.

    DEFENSES - One of the defenses raised by Lorillard in certain cases is
    preemption by the Federal Cigarette Labeling and Advertising Act (the
    "Labeling Act"). In the case of Cipollone v. Liggett Group, Inc., et al.,
    the United States Supreme Court, in a plurality opinion issued on June 24,
    1992, held that the Labeling Act as enacted in 1965 does not preempt common
    law damage claims but that the Labeling Act, as amended in 1969, does
    preempt claims against tobacco companies arising after July 1, 1969, which
    assert that the tobacco companies failed to adequately warn of the alleged
    health risks of cigarettes, sought to undermine or neutralize the Labeling
    Act's mandatory health warnings, or concealed material facts concerning the
    health effects of smoking in their advertising and promotion of cigarettes.
    The Supreme Court held that claims against tobacco companies based on
    fraudulent misrepresentation, breach of express warranty, or conspiracy to
    misrepresent material facts concerning the alleged health effects of
    smoking are not preempted by the Labeling Act. The Supreme Court in so
    holding did not consider whether such common law damage actions were valid
    under state law. The effect of the Supreme Court's decision on pending and
    future cases against Lorillard and other tobacco companies will likely be
    the subject of further legal proceedings. Additional litigation involving
    claims such as those held to be preempted by the Supreme Court in Cipollone
    could be encouraged if legislative proposals to eliminate the federal
    preemption defense, pending in Congress since 1991, are enacted. It is not
    possible to predict whether any such legislation will be enacted.

    Lorillard believes that it has a number of defenses to pending cases, in
    addition to defenses based on preemption described above, and Lorillard
    will

                                     Page 34

    continue to maintain a vigorous defense in all such litigation. These
    defenses, where applicable, include, among others, statutes of limitations
    or repose, assumption of the risk, comparative fault, the lack of proximate
    causation, and the lack of any defect in the product alleged by a
    plaintiff. Lorillard believes that some or all of these defenses may, in
    many of the pending or anticipated cases, be found by a jury or court to
    bar recovery by a plaintiff. Application of various defenses, including
    those based on preemption, are likely to be the subject of further legal
    proceedings in the Class Action cases and in the Reimbursement Cases.

    Other Legal Proceedings:  In September 1997, a purported class action was
    commenced by private plaintiffs in Alabama state court alleging that the
    U.S. tobacco companies and others conspired to fix cigarette prices in
    Alabama, that agreements leading to price increases were reached during the
    negotiations leading to the Proposed Resolution, and that prices were
    increased pursuant to the alleged conspiracy in 1997 (Mosley, et al. v.
    Philip Morris Companies Inc., et al.). The parties have settled this action
    for a payment by defendants in an aggregate amount approximating sixty
    thousand dollars to cover costs incurred by plaintiff's counsel.

    Department of Justice Investigation - Early in 1994, the Energy and
    Commerce Subcommittee on Health and the Environment of the U.S. House of
    Representatives (the "Subcommittee") launched an oversight investigation
    into tobacco products, including possible regulation of nicotine-containing
    cigarettes as drugs. During the course of such investigation, the
    Subcommittee held hearings at which executives of each of the major tobacco
    manufacturers testified. Following the November 1994 elections, the
    incoming Chairman of the Energy and Commerce Committee indicated that this
    investigation by the Subcommittee would not continue, and on December 20,
    1994, the outgoing majority staff of the Subcommittee issued two final
    reports. One of these reports questioned the scientific practices of what
    it characterized as the tobacco industry's "long-running campaign" related
    to ETS, but reached no final conclusions. The second report asserted that
    documents obtained from American Tobacco Company, a competitor of
    Lorillard's, "reflect an intense research and commercial interest in
    nicotine."

    The U.S. Department of Justice is investigating allegations of perjury in
    connection with the testimony provided by tobacco industry executives,
    including Lorillard executives, to the Subcommittee in April 1994.
    Lorillard has not received any request for documents or testimony. It is
    impossible at this time to predict the outcome of this investigation.

    In 1996 Lorillard responded to a grand jury subpoena for documents in
    connection with a grand jury investigation commenced in 1992 by the United
    States Attorney's Office for the Eastern District of New York regarding
    possible fraud by Lorillard and other tobacco companies relating to smoking
    and health research undertaken or administered by the Council for Tobacco
    Research - USA, Inc. There have been no requests for any testimony by any
    Lorillard personnel. At the present time, Lorillard is unable to predict
    whether the United States Attorney's Office will ultimately determine to
    bring any proceeding against Lorillard. An adverse outcome of this
    investigation could result in criminal, administrative or other proceedings
    against Lorillard.

    In March 1996, the Company and Lorillard each received a grand jury
    subpoena duces tecum from the United States Attorney's Office for the
    Southern District of New York seeking documents, advertisements or related
    materials distributed by the Company and Lorillard to members of the
    general public relating to, among other things, the health effects of
    cigarettes, nicotine or tobacco products, the addictiveness of such
    products, and Congressional

                                     Page 35

    hearings relating to cigarettes or the tobacco industry. The Company and
    Lorillard responded to the subpoena. The Company and Lorillard were
    informed in the latter part of 1996 that responsibility for this
    investigation has been transferred from the United States Attorney's Office
    for the Southern District of New York to the United States Department of
    Justice in Washington, D.C. It is impossible at this time to predict the
    ultimate outcome of this investigation.

    While Lorillard intends to defend vigorously all smoking and health related
    litigation which may be brought against it, it is not possible to predict
    the outcome of any of this litigation. Litigation is subject to many
    uncertainties, and it is possible that some of these actions could be
    decided unfavorably.

    Many of the recent developments in relation to smoking and health discussed
    above have received wide-spread media attention including the release of
    documents by the industry. These developments may reflect adversely on the
    tobacco industry and could have adverse effects on the ability of Lorillard
    and other cigarette manufacturers to prevail in smoking and health
    litigation.

    Except for the effect of the Proposed Resolution if implemented as
    described above, management is unable to make a meaningful estimate of the
    amount or range of loss that could result from an unfavorable outcome of
    pending litigation. It is possible that the Company's results of operations
    or cash flows in a particular quarterly or annual period or its financial
    position could be materially affected by an unfavorable outcome of certain
    pending litigation.

    Other Litigation -- The Company and its subsidiaries are also parties to
    other litigation arising in the ordinary course of business. The outcome of
    this other litigation will not, in the opinion of management, materially
    affect the Company's results of operations or equity.

6.  In the opinion of Management, the accompanying consolidated condensed
    financial statements reflect all adjustments (consisting of only normal
    recurring accruals) necessary to present fairly the financial position as
    of  June 30, 1998 and December 31, 1997 and the results of operations for
    the three and six months and changes in cash flows for the six months ended
    June 30, 1998 and 1997, respectively.

    Results of operations for the second quarter and the first six months of
    each of the years is not necessarily indicative of results of operations
    for that entire year.

                                     Page 36

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.
         ----------------------------------------------------------------------


Liquidity and Capital Resources:
-------------------------------

Insurance
---------

  CNA Financial Corporation and subsidiaries ("CNA"). CNA is an 84% owned
subsidiary of the Company.

  Statutory surplus of the property and casualty insurance subsidiaries was
approximately $7.0 billion at June 30, 1998, compared to approximately $7.1
billion on December 31, 1997. The major component of this change was a decline
of $369.0 million of other items, primarily dividends paid to CNA, partially
offset by statutory net income of $147.0 million and an increase in net
unrealized investment gains of $181.0 million. The statutory surplus of the
life insurance subsidiaries was approximately $1.3 billion at June 30, 1998,
compared to $1.2 billion at year end 1997.

  The principal cash flow sources of CNA's property and casualty and life
insurance subsidiaries are premiums, investment income, and sales and
maturities of investments. The primary operating cash flow uses are payments
for claims, policy benefits and operating expenses.

  For the first six months of 1998, CNA's operating cash flows were a negative
$579.6 million, compared to a negative $669.7 million for the six months ended
June 30, 1997. Negative cash flows for 1998 and 1997 are substantially the
result of claim payments resulting primarily from the settlement of the
Fibreboard litigation.

  Net cash flows from operations are invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries consider the
cash flow requirements of the insurance products sold and the tax attributes of
the various types of marketable investments.

  On August 5, 1998, CNA announced a reassessment of its businesses which would
involve reorganization of a number of its businesses and corporate support
areas. The organizational changes include the closing of a number of facilities
and consolidating certain processing locations, reducing workforce and
enhancing computer systems.

  Within its commercial insurance business, CNA will consolidate four regional
offices into two zone offices and streamline decision-making processes in
support of branch offices and agents. The plan also calls for a reduction of
its claim processing offices from 24 to 8 and system upgrades to enable CNA to
centralize its policy processing into one center located in Orlando, Florida.
These changes are expected to reduce paperwork and allow branch employees to
spend more time with customers.

  Within its risk management business, CNA will form a new holding company with
a simplified cost structure. Two separate claim organizations will be united to
form a new claims service company for risk management clients. The new company
will employ one of the largest claims technical staff in the insurance industry
as well as achieve cost savings through economies of scale.

  CNA's remaining businesses anticipate finalizing their reorganization plans
by the end of the third quarter of 1998.

                                     Page 37

  With finalization of the plan expected to occur by the end of third quarter,
CNA estimates that it will record a pre-tax charge of $100.0 to $140.0 million
for restructuring costs. CNA expects additional pre-tax transition costs of
$200.0 to $260.0 million related to the restructuring, which will be incurred
over the next 12 to 18 months. The pre-tax impact on third-quarter earnings
from these reorganization charges is estimated to be $175.0 to $260.0 million.
CNA anticipates that its current workforce of approximately 24,000 employees
will be reduced by approximately 10%.

  While CNA has not yet completed its analysis of anticipated cost savings, it
estimates that its reorganization, which includes the restructuring plan as
well as revenue enhancements and operating efficiencies, will result in
anticipated reductions of approximately 2 points in CNA's expense ratio and
savings of approximately $300.0 to $350.0 million on an annualized basis. CNA
expects a portion of the anticipated savings will be realized beginning in the
latter part of 1998 and to achieve the full expense ratio reduction within 18
months.

  On January 8, 1998, CNA issued $150.0 million principal amount of 6.45%
senior notes due January 15, 2008 and $150.0 million principal amount of 6.95%
senior notes due January 15, 2018. The net proceeds were used to pay down bank
loans drawn under a revolving credit facility. Concurrent with the reduction in
bank debt, CNA terminated $300.0 million notional amount of interest rate
swaps.

  On April 15, 1998, CNA issued $500.0 million principal amount of 6.50% senior
notes due April 15, 2005. The net proceeds were used to pay down existing bank
debt, provide refinancing of certain senior notes and provide funds for
acquisitions.

  On August 5, 1998, CNA's board of directors approved a plan to purchase, in
open market or privately negotiated transactions, its outstanding common stock
from time to time as market conditions warrant.

Cigarettes
----------

  Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.

  Lorillard and other cigarette manufacturers continue to be confronted with an
increasing level of litigation and regulatory issues.

  The volume of lawsuits against Lorillard and other manufacturers of tobacco
products seeking damages for cancer and other health effects claimed to have
resulted from an individual's use of cigarettes, addiction to smoking, or
exposure to environmental tobacco smoke has increased substantially through
1997 and in 1998. See Note 5 of the Notes to Consolidated Condensed Financial
Statements. In a number of cases, the Company is named as a defendant. Tobacco
litigation includes claims brought by individual plaintiffs and claims brought
as class actions on behalf of a large number of individuals for damages
allegedly caused by smoking; and claims brought on behalf of governmental
entities, private citizens, or other organizations seeking reimbursement of
health care costs allegedly incurred as a result of smoking. In addition,
claims have been brought against Lorillard seeking damages resulting from
exposure to asbestos fibers which had been incorporated, for a limited period
of time, ending more than forty years ago, into filter material used in one
brand of cigarettes manufactured by Lorillard. In the foregoing actions,
plaintiffs claim substantial compensatory and punitive damages in amounts
ranging into the billions of dollars.

                                     Page 38

  It has also been reported that the Executive branch of the government has
urged the U.S. Justice Department to commence an action against the tobacco
industry seeking reimbursement of Medicare expenditures resulting from injuries
or other health effects allegedly caused by use of tobacco products.

  In 1997 and 1998, Lorillard, together with other companies in the United
States tobacco industry, reached agreements to settle certain tobacco related
litigation. See "Settlements of Reimbursement Cases" and "Broin v. Philip
Morris Companies, Inc. et al." in Note 5 of the Notes to Consolidated Condensed
Financial Statements.

FDA Regulations

  The Food and Drug Administration ("FDA") has published regulations (the "FDA
Regulations") severely restricting cigarette advertising and promotion and
limiting the manner in which tobacco products can be sold. The FDA premised its
regulations on the need to reduce smoking by underage youth and young adults.
The FDA Regulations include:

(i)   Regulations making unlawful the sale by retail merchants of cigarettes
      to anyone under age 18. These regulations also require retail merchants
      to request proof of age for any person under age 27 who attempts to
      purchase cigarettes.

(ii)  Regulations limiting all cigarette advertising to a black and white,
      text only format in most publications and outdoor advertising such as
      billboards, prohibiting billboards advertising cigarettes within 1,000
      feet of a school or playground, banning the use of cigarette brand
      names, logos and trademarks on premium items and prohibiting the
      furnishing of any premium item in consideration for the purchase of
      cigarettes or the redemption of proofs-of-purchase coupons.

(iii) Regulations prohibiting the use of cigarette brand names to sponsor
      sporting and cultural events.

  Lorillard and other cigarette manufacturers have filed a lawsuit, Coyne
Beahm, Inc., et al. v. United States Food & Drug Administration, et al., in the
United States District Court for the Middle District of North Carolina
challenging the FDA's assertion of jurisdiction over cigarettes. The Court
granted, in part, and denied, in part, plaintiffs' motion for summary judgment.
The Court held that if an adequate factual foundation is established, the FDA
has the authority to regulate tobacco products as medical devices under the
Federal Food, Drug & Cosmetic Act, may impose restrictions regarding access to
tobacco products by persons under the age of 18, and may impose labeling
requirements on tobacco products' packaging. The Court, however, also held that
the FDA is not authorized to regulate the promotion or advertisement of tobacco
products. The Court also stayed the effective date for the FDA Regulations
relating to advertising and promotion of tobacco products, but allowed the
access restrictions to take effect as of February 27, 1997. Both the plaintiffs
and the defendants have filed an appeal of the District Court's ruling to the
Fourth Circuit Court of Appeals, and oral arguments were heard by that Court on
June 8, 1998. To date, the Court has not rendered its decision.

Proposed Resolution of Certain Regulatory and Litigation Issues

  On June 20, 1997, Lorillard, together with other companies in the United
States tobacco industry, entered into a Memorandum of Understanding to support
the adoption of federal legislation and any necessary ancillary undertakings,
incorporating the features described in the proposed resolution attached to the
Memorandum of Understanding (together, the "Proposed Resolution"). The Proposed
Resolution would permit extensive regulation of the industry by the FDA and

                                     Page 39

would impose large monetary obligations on the industry to be paid to the
federal government and to the states. The Proposed Resolution would require the
manufacturers to sign private contracts, or Protocols, which embody significant
restrictions on the industry's commercial free speech advertising. In return,
the Proposed Resolution would resolve much of the industry's litigation and
establish a rational litigation system for future lawsuits. The Proposed
Resolution, by the nature of its terms, could be implemented only by federal
legislation. Incorporated by reference into this filing is the discussion of
the Proposed Resolution in the Company's annual report on Form 10-K for the
year ended December 31, 1997.

  Since the Proposed Resolution was announced, it has been the subject of
intense review and criticism by the White House, the public health community,
and other interested parties. Certain members of Congress have offered, or
indicated that they intend to offer, alternative legislation. No bill
introduced would adopt the Proposed Resolution as agreed to. Over 50 bills have
been introduced in Congress regarding the issues raised in the Proposed
Resolution, including bills seeking more stringent regulation of tobacco
products by the Food and Drug Administration and more punitive monetary
payments by the companies. One particular bill initially introduced by Senator
John McCain from Arizona, was approved by the Senate Commerce Committee. The
McCain bill included, among other things, provisions more stringent than those
in the Proposed Resolution regarding FDA regulation, licensing of tobacco
manufacturers and retailers, surcharges against the industry for failure to
achieve underage smoking reduction goals, advertising restrictions and labeling
requirements, industry payments, smoking restrictions, civil liability
limitations, a method for determining the amount and payment of attorneys'
fees, and public disclosure of industry documents. On June 17, 1998, the United
States Senate voted to return the McCain bill to the Senate Commerce Committee
after several weeks of debate. It is unlikely that the McCain bill will be
reconsidered by that Committee or by the Senate during this Congressional term.

  On April 18, 1998, Lorillard, along with the other signatory companies to the
Proposed Resolution, announced a withdrawal from the legislative process to
enact a comprehensive tobacco settlement. Lorillard remains committed to the
Proposed Resolution, but does not believe that the current political process in
Washington can produce legislation that is fair to the industry.

  For information with respect to these matters, as well as with respect to
discussions regarding an attempt to achieve a comprehensive legislative
resolution to litigation and regulatory issues affecting the United States
tobacco industry, see Note 5 of the Notes to Consolidated Condensed Financial
Statements.

Cigarette Excise Taxes

  The United States federal excise tax on cigarettes is presently $12.00 per
1,000 cigarettes ($0.24 per pack of 20 cigarettes). In early August of 1997,
the United States Congress approved and the President signed into law an
increase in the federal excise tax on cigarettes of $7.50 per 1,000 cigarettes
($0.15 per pack of 20 cigarettes). This increase is phased in at a rate of
$5.00 per 1,000 cigarettes in the year 2000 and an additional $2.50 per 1,000
cigarettes in the year 2002. Various states have proposed, and certain states
have recently passed, increases in their state tobacco excise taxes. Such
actions may adversely affect Lorillard's volume, operating revenues and
operating income. 

                                     Page 40

Hotels
------

  Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.

  Funds from operations continue to exceed operating requirements. Loews Hotels
has entered into an agreement with the owners of the Universal Florida resort
to develop hotels at the resort. Capital expenditures in relation to the
Universal Florida hotel project will be funded by a combination of equity
contributions by the development partners and mortgages. Loews Hotels will
obtain its share of the equity contributions for the development of these
hotels under arrangements with the Company.

Offshore Drilling
-----------------

  Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore").
Diamond Offshore Drilling, Inc. is a 50.3% owned subsidiary of the Company.

  For the first six months of 1998, Diamond Offshore's cash provided by
operating activities amounted to $224.1 million, compared to $159.7 million in
the 1997 period. This increase in operating cash flow was primarily
attributable to a $70.9 million increase in net income for the first half of
1998, an $11.7 million increase in depreciation and amortization expense, and
various changes in operating assets and liabilities.

  Diamond Offshore continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and
harsh environment operations. Diamond Offshore has revised its 1998 budgeted
capital expenditures for rig upgrades to $125.2 million from $108.5 million.
Diamond Offshore expended $35.3 million, including capitalized interest
expenses, for significant rig upgrades during the six months ended June 30,
1998. The rig upgrade projects include the conversion of an accommodation
vessel to a semisubmersible drilling unit capable of operating in harsh
environments and ultra-deep water. Diamond Offshore has revised the estimated
cost of conversion to approximately $210.0 million from $190.0 million due to
additional steel requirements and mechanical and electrical system costs. Upon
completion of the conversion, the rig will begin a five year drilling program
in the Gulf of Mexico, which is anticipated to commence in late 1999. Other
upgrade projects included the cantilever conversion project on the Ocean
Warwick, a jack-up drilling rig located in the Gulf of Mexico, which was
completed in March 1998. In addition, leg strengthening and other modifications
for another jack-up rig operating in the Gulf of Mexico were completed in May
1998. The rig returned to the shipyard for repairs shortly after its return to
work due to leg damage sustained on location. The repairs were completed in
June 1998 and the rig is currently idle in the Gulf of Mexico. Diamond Offshore
has also budgeted $126.7 million for 1998 capital expenditures associated with
its continuing rig enhancement program, spare equipment and other corporate
requirements. These expenditures include purchases of anchor chain, drill pipe,
riser, and other drilling equipment. During the first six months of 1998, $38.0
million was expended on this program. 

  Diamond Offshore believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for major upgrades, continuing rig enhancements and working capital
requirements.

  The ability to minimize costs and downtime is critical to Diamond Offshore's
results of operations. However, the company's plan to retain qualified rig
personnel includes periodic compensation enhancements. As of July 1, 1998,

                                     Page 41

Diamond Offshore has adjusted the compensation levels for most offshore
positions. Although Diamond Offshore does not expect such adjustments to have a
material effect on its current results of operations, significant increases in
costs, including compensation and training, may occur in the future. In
addition, because of periodic inspections required by certain regulatory
agencies, 15 of Diamond Offshore's rigs will be in the shipyard for a portion
of 1998. At June 30, 1998, eight of these 15 inspections were completed.
Diamond Offshore intends to focus on returning these rigs to operations as soon
as reasonably possible, in order to minimize the downtime and associated loss
of revenues.

  Also, increased rig construction and enhancement programs are ongoing by
Diamond Offshore's competitors. A significant increase in the supply of
technologically advanced rigs capable of drilling in deep water may have an
adverse effect on the average operating dayrates for Diamond Offshore's rigs,
particularly its more advanced semisubmersible units, and on the overall
utilization level of Diamond Offshore's fleet. In such case, Diamond Offshore's
results of operations would be adversely affected.

  As a result of the recent decline in product prices, the contract drilling
market has begun to experience declining dayrates and decreased utilization
primarily in the shallow waters of the Gulf of Mexico. The impact of these
changing market conditions could have an adverse affect on Diamond Offshore's
future results of operations, although the extent of such change cannot be
accurately predicted.

  Since June 30, 1998 and through August 13, 1998, Diamond Offshore purchased
1,700,000 shares of its outstanding Common Stock at an aggregate cost of
approximately $47.4 million. Depending on market conditions, Diamond Offshore
from time to time may purchase additional shares in the open market or
otherwise.

Watches and Clocks
------------------

  Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.

  Funds from operations continue to exceed operating requirements. Bulova's
cash and cash equivalents, and investments amounted to $41.3 million at June
30, 1998, as compared to $29.1 million at December 31, 1997. Funds for other
capital expenditures and working capital requirements are expected to be
provided from operations.

Parent Company
--------------

  Since June 30, 1998 and through August 13, 1998, the Company purchased
288,600 shares of its outstanding Common Stock at an aggregate cost of
approximately $24.2 million. Depending on market conditions, the Company from
time to time may purchase additional shares in the open market or otherwise.

Investments:
-----------

  Investment activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments. Equity securities, which are considered
part of the Company's trading portfolio, short sales and derivative instruments
are marked to market and reported as investment gains or losses in the income
statement. The remaining securities are carried at fair value with a net

                                     Page 42

unrealized loss of $2.1 and $3.2 million at June 30, 1998 and December 31,
1997, respectively.

  The Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) for its asset and
liability management activities, (ii) for income enhancements for its portfolio
management strategy, and (iii) to benefit from anticipated future movements in
the underlying markets that Company management expects to occur. If such
movements do not occur or if the market moves in the opposite direction from
what management expects, significant losses may occur. 

  Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.

  The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote.

  The Company does not believe that any of the derivative instruments utilized
by it are unusually complex or volatile, nor do these instruments contain
imbedded leverage features which would expose the Company to a higher degree of
risk. See "Results of Operations" and "Quantitative and Qualitative Disclosures
about Market Risk" for additional information with respect to derivative
instruments, including recognized gains and losses on these instruments. See
also Note 4 of the Notes to Consolidated Financial Statements in the 1997
Annual Report on Form 10-K.

                                     Page 43

Insurance
---------

  A summary of CNA's general account fixed maturity securities portfolio and
short-term investments, at carrying value, are as follows:

<TABLE>
<CAPTION>

                                                                    Change in
                                                                    Unrealized
                                            June 30,   December 31,  Gains
                                              1998         1997      (Losses)
                                           ------------------------------------
                                                        (In millions)
<S>                                         <C>           <C>        <C>
Fixed maturity securities:
  U.S. Treasury securities and 
   obligations of government agencies .     $11,043.0     $12,980.0  $ 18.0  
  Asset-backed securities .............       5,697.0       4,804.0     8.0 
  Tax exempt securities ...............       5,996.0       4,724.0   (28.0)
  Taxable .............................       6,823.0       7,040.0    18.0  
                                            ---------------------------------
       Total fixed maturity securities.      29,559.0      29,548.0    16.0 
Stocks ................................       1,054.0         814.0   107.0 
Short-term and other investments.......       5,498.0       5,829.0   (54.0)  
Derivative security investments .......          64.0          12.0      
                                            ---------------------------------
       Total ..........................     $36,175.0     $36,203.0 $  69.0  
                                            =================================
Short-term investments:
  Commercial paper ....................     $ 1,598.0     $ 1,850.0
  Security repurchase collateral ......         251.0         154.0
  Escrow ..............................         969.0       1,065.0
  U.S. Treasuries .....................         536.0         558.0
  Money markets .......................         446.0         624.0
  Others ..............................         588.0         633.0
Other investments .....................       1,110.0         945.0
                                            -----------------------
       Total short-term and other 
        investments ...................     $ 5,498.0     $ 5,829.0
                                            =======================
</TABLE>

  CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks with investments concentrated
in high quality securities to support its insurance underwriting operations.   

  CNA has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of CNA's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, tax and credit considerations, or other similar factors. Accordingly,
fixed maturity securities are classified as available for sale.

  CNA invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk (principally interest rate,
equity price and foreign currency risk). CNA also uses derivatives to mitigate
the risk associated with its indexed group annuity contract by purchasing S&P
500 futures contracts in a notional amount equal to the original customer
deposit.

                                     Page 44

  CNA considers its derivatives as being held for purposes other than trading.
Derivative securities, except for interest rate swaps associated with certain
corporate borrowings, are recorded at fair value at the reporting date with
changes in market value reflected in investment gains and losses. The interest
rate swaps on corporate borrowings are accounted for on the accrual basis with
the related income or expense recorded as an adjustment to interest expense;
the changes in fair value are not recorded.

  The general account portfolio consists primarily of high quality (BBB or
higher) marketable fixed maturity securities, approximately 94.3% of which are
rated as investment grade. At June 30, 1998, tax exempt securities and short-
term investments excluding collateral for securities sold under repurchase
agreements, comprised approximately 16.6% and 11.4%, respectively, of the
general account's total investment portfolio compared to 13.1% and 13.1%,
respectively, at December 31, 1997. Historically, CNA has maintained short-term
assets at a level that provided for liquidity to meet its short-term
obligations, as well as reasonable contingencies and anticipated claim payout
patterns. Short-term investments at both June 30, 1998 and December 31, 1997
are substantially higher than historical levels in anticipation of Fibreboard-
related claim payments. At June 30, 1998, the major components of the short-
term investment portfolio consist primarily of high grade commercial paper and
U.S. Treasury bills.

  As of June 30, 1998, the market value of CNA's general account investments in
fixed maturities was $29.6 billion and was greater than amortized cost by
approximately $545.0 million. This compares to a market value of $29.5 billion
and approximately $528.0 million of net unrealized investment gains at December
31, 1997. The gross unrealized investment gains and losses for the fixed
maturity securities portfolio at June 30, 1998 were $653.0 and $108.0 million,
respectively, compared to $644.0 and $116.0 million, respectively, at December
31, 1997.

  Net unrealized investment gains on general account fixed maturities at June
30, 1998 include net unrealized investment gains on high yield securities of
$4.0 million, compared to net unrealized investment losses of $2.0 million at
December 31, 1997. High yield securities are bonds rated as below investment
grade by bond rating agencies, plus private placements and other unrated
securities which, in the opinion of management, are below investment grade
(below BBB). Fair values of high yield securities in the general account
decreased $203.0 million to approximately $1.7 billion at June 30, 1998 when
compared to December 31, 1997.

  At June 30, 1998, total Separate Account cash and investments amounted to
approximately $5.5 billion with taxable fixed maturity securities representing
approximately 82.5% of the Separate Accounts' portfolios. Approximately 68.7%
of Separate Account investments are used to fund guaranteed investments for
which CNA's life insurance affiliate guarantees principal and a specified
return to the contract holders. The duration of fixed maturity securities
included in the guaranteed investment portfolio are generally matched with the
corresponding payout pattern of the liabilities of the guaranteed investment
contracts. The fair value of all fixed maturity securities in the guaranteed
investment portfolio was $3.5 billion at June 30, 1998 compared to $3.8 billion
at December 31, 1997. At June 30, 1998, fair value exceeded amortized cost by
approximately $79.0 million, as compared to an unrealized gain of approximately
$71.0 million at December 31, 1997. The gross unrealized investment gains and
losses for the guaranteed investment fixed maturity securities portfolio at
June 30, 1998 were $93.0 and $14.0 million, respectively, as compared to a gain
of $87.0 million and loss of $16.0 million at December 31, 1997.

  Carrying values of high yield securities in the guaranteed investment
portfolio were $272.0 and $310.0 million at June 30, 1998 and December 31,

                                     Page 45

1997, respectively. Net unrealized investment losses on high yield securities
held in such Separate Accounts were $4.0 million at June 30, 1998, compared to
$1.0 million at December 31, 1997. 

  High yield securities generally involve a greater degree of risk than that of
investment grade securities. Expected returns should, however, compensate for 
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. At June 30, 1998, CNA's investment in high
yield bonds, including Separate Accounts, was approximately 3.4% of its total
assets. In addition, CNA's investment in mortgage loans and investment real
estate are substantially below the industry average, representing less than one
quarter of one percent of its total assets.

  Included in CNA's fixed maturity securities at June 30, 1998 (general and
guaranteed investment portfolios) are $8.0 billion of asset-backed securities,
consisting of approximately 51.3% in collateralized mortgage obligations
("CMO's"), 16.1% in corporate asset-backed obligations, 23.5% in corporate
mortgage backed security pass-through obligations and 9.1% in U.S. government
agency issued pass-through certificates. The majority of CMO's held are
corporate mortgaged backed securities, which are actively traded in liquid
markets and are priced monthly by broker-dealers. At June 30, 1998, the fair
value of asset-backed securities exceeded the amortized cost by approximately
$139.0 million compared to net unrealized investment gains of $114.0 million at
December 31, 1997. CNA limits the risks associated with interest rate
fluctuations and prepayment by concentrating its CMO investments in early
planned amortization classes with relatively short principal repayment windows.

  At June 30, 1998, 38.8% of the general account's fixed maturity securities
portfolio was invested in U.S. government securities, 36.2% in other AAA rated
securities and 13.9% in AA and A rated securities. CNA's guaranteed investment
fixed maturity securities portfolio is comprised of 3.8% U.S. government
securities, 62.9% in other AAA rated securities and 14.2% in AA and A rated
securities. These ratings are primarily from Standard and Poor's.

Results of Operations:
----------------------

  Revenues increased by $655.7 and $511.7 million, or 13.8% and 5.3%,
respectively, and net income increased by $183.4 million and decreased by
$139.6 million, respectively, for the quarter and six months ended June 30,
1998 as compared to the corresponding periods of the prior year. The following
table sets forth the major sources of the Company's consolidated revenues and
net income.

                                     Page 46

<TABLE>
<CAPTION>

                                                         Three Months Ended            Six Months Ended
                                                              June 30,                     June 30,
                                                      -----------------------------------------------------
                                                          1998          1997           1998         1997
                                                      -----------------------------------------------------
                                                                         (In millions)

<S>                                                    <C>           <C>             <C>          <C>
Revenues (a):
  Property and casualty insurance .......              $3,454.4      $3,256.7        $ 6,754.0    $6,332.0
  Life insurance ........................                 978.6         988.2          2,008.4     2,029.6
  Cigarettes ............................                 709.6         604.3          1,285.3     1,120.8
  Hotels ................................                  64.9          61.1            113.4       107.0
  Offshore drilling .....................                 331.3         234.0            623.9       441.6
  Watches and clocks ....................                  28.5          27.9             60.8        57.9
  Investment (loss) income-net (non-    
   insurance companies) .................                (162.1)       (420.7)          (643.2)     (394.2)
  Other and eliminations-net ............                   (.4)         (2.4)            (2.7)       (6.5)
                                                       ----------------------------------------------------
                                                       $5,404.8      $4,749.1        $10,199.9    $9,688.2
                                                       ====================================================

Net income (a):
  Property and casualty insurance .......              $  153.5      $  163.7        $   321.8    $  284.4
  Life insurance ........................                  37.5          42.4             79.0        77.1
  Cigarettes ............................                 138.6         123.5            160.7       203.0
  Hotels ................................                  10.0           8.9             11.5         9.1
  Offshore drilling .....................                  52.2          30.6             90.0        57.4
  Watches and clocks ....................                   1.8           1.2              4.1         2.7
  Investment (loss) income-net (non- 
   insurance companies) .................                (106.3)       (275.1)          (421.4)     (260.6)
  Corporate interest expense ............                 (21.7)        (16.6)           (44.0)      (32.4)
  Unallocated corporate expense and 
   other-net ............................                 (18.4)        (14.8)           (38.2)      (37.6)
                                                       ----------------------------------------------------
                                                       $  247.2      $   63.8        $   163.5    $  303.1
                                                       ====================================================

(a) Includes investment gains (losses) as follows:
<CAPTION>

                                                           Three Months Ended            Six Months Ended
                                                                June 30,                     June 30,
                                                        ---------------------------------------------------
                                                            1998          1997          1998         1997
                                                        ---------------------------------------------------

<S>                                                     <C>            <C>             <C>         <C>
Revenues:
  Property and casualty insurance .......               $ 191.3        $ 127.7         $ 325.9     $ 146.0
  Life insurance ........................                  42.3           43.4            90.5        72.5
  Investment income-net .................                (208.0)        (466.5)         (741.4)     (485.1)
                                                        ---------------------------------------------------
                                                        $  25.6        $(295.4)        $(325.0)    $(266.6)
                                                        ===================================================

Net income:
  Property and casualty insurance .......               $ 103.1        $  69.4         $ 175.4     $  79.5
  Life insurance ........................                  20.6           22.0            46.3        36.9
  Investment income-net .................                (135.0)        (303.4)         (481.7)     (317.3)
                                                        ---------------------------------------------------
                                                        $ (11.3)       $(212.0)        $(260.0)    $(200.9)
                                                        ===================================================
</TABLE>

                                     Page 47

Insurance
---------

  Property and casualty revenues, excluding investment gains, increased by
$134.1 and $242.1 million, or 4.3% and 3.9%, for the quarter and six months
ended June 30, 1998, as compared to the same periods a year ago.

  Property and casualty premium revenues increased by $136.5 and $193.0
million, or 5.4% and 3.9%, for the quarter and six months ended June 30, 1998,
from the prior year's comparable periods. The increase is attributable to
higher involuntary risk earned premium of approximately $206.0 million and an
increase in personal lines premiums of approximately $41.0 million, partially
offset by lower commercial lines premiums of approximately $54.0 million.
Involuntary premium for 1997 reflected reductions in estimates of premium for
1996 and prior periods, primarily in the workers' compensation line of
business, and a greater willingness on the part of the involuntary market,
including CNA, to write these types of risks. The 1998 estimated premiums
reflect a return to historical levels. The increase in personal lines premium
continues the trend seen in 1997 and the first quarter of 1998 and is
attributable to growth in private passenger automobile business and individual
long-term care. The decrease in commercial lines is primarily due to a decrease
in accident and health business. Net investment income decreased by $2.0 and
$10.0 million, or 0.4% and 1.1%, for the quarter and six months ended June 30,
1998, compared with the same period in the prior year, due to lower yielding
investments. The bond segment of the investment portfolio yielded 6.2% in the
first half of 1998 compared with 6.4% for the same period a year ago.

  Life insurance revenues, excluding investment gains, decreased by $8.5 and
$39.2 million, or 0.9% and 2.0%, for the quarter and six months ended June 30,
1998 as compared to the same periods a year ago. Life premium revenues
decreased by $17.4 and $52.4 million, or 2.1% and 3.1%, for the quarter and six
months ended June 30, 1998. The decrease is primarily due to lower premiums for
the Federal Employees Health Benefit Plan ("FEHBP") and a reduction in
individual annuities. The decrease in FEHBP premiums is due to improved claim
experience upon which premiums are based and continues the trend from the first
quarter of this year. The decrease in individual annuity premium is
attributable to a shift in CNA's marketing efforts towards more profitable
products. Life net investment income increased by $14.0 and $20.0 million, or
14.1% and 9.8%, for the quarter and six months ended June 30, 1998, compared to
the same periods a year ago. The bond segment of the life investment portfolio
yielded approximately 6.4% in the first half of 1998 and 1997.

  Property and casualty underwriting losses for the quarter and six months
ended June 30, 1998 were $373.0 and $661.0 million, compared to $277.2 and
$570.4 million for the same periods in 1997. The increase in underwriting
losses is primarily due to an increase in catastrophe losses for the first six
months of 1998. Pre-tax catastrophe losses were approximately $126.0 and $151.0
million for the quarter and six months ended June 30, 1998 as compared to $45.0
and $76.0 million in 1997. The increase in catastrophe losses is mainly due to
spring storms throughout the United States.

                                     Page 48

  The components of CNA's investment gains are as follows:

<TABLE>
<CAPTION>

                                                              Three Months Ended           Six Months Ended
                                                                  June 30,                     June 30,
                                                          -------------------------------------------------
                                                            1998          1997           1998         1997
                                                          -------------------------------------------------
                                                                            (In millions)

<S>                                                       <C>           <C>            <C>          <C>
Bonds:
  U.S. Government .......................                 $ 46.0        $ 43.1         $ 96.0       $ 49.0
  Tax exempt ............................                   16.0           1.7           32.0          2.2
  Asset-backed ..........................                   14.0           2.4           27.0          9.2
  Taxable ...............................                   40.0          73.6           69.0         84.0
                                                          -------------------------------------------------
     Total bonds ........................                  116.0         120.8          224.0        144.4
Stocks ..................................                   17.0           9.6           13.0         39.3
Derivative instruments ..................                   41.0          (4.0)          34.0          (.7)
Separate Accounts and other .............                   58.0          45.6          144.0         55.0
                                                          -------------------------------------------------
     Total investment gains .............                 $232.0        $172.0         $415.0       $238.0
                                                          =================================================
</TABLE>

  CNA's primary property and casualty subsidiary, Continental Casualty Company,
is party to litigation with Fibreboard Corporation involving coverage for
certain asbestos-related claims and defense costs (see Note 5 of the Notes to
Consolidated Condensed Financial Statements).

Cigarettes
----------

  Revenues increased by $105.3 and $164.5 million, or 17.4% and 14.7%,
respectively, and net income increased by $15.1 million, or 12.2%, and
decreased by $42.3 million, or 20.8%, respectively, for the quarter and six
months ended June 30, 1998 as compared to the corresponding periods of the
prior year.

  The increase in revenues is composed primarily of an increase of
approximately $76.3 and $134.9 million, or 12.7% and 12.1%, respectively, due
to higher average unit prices and an increase of approximately $22.4 and $16.9
million, or 3.7% and 1.5%, reflecting higher unit sales volume for the quarter
and six months ended June 30, 1998, as compared to the corresponding periods of
the prior year.

  Net income for the quarter and six months ended June 30, 1998 includes a pre-
tax charge of $45.1 and $187.5 million ($27.0 and $112.1 million after taxes)
to reflect the settlement of tobacco litigation in Texas, Mississippi, Florida
and Minnesota. Included in the tobacco litigation charges was $30.7 million
($18.4 million after taxes) for the three months ended June 30, 1998 for the
amended settlements with the states of Mississippi and Texas (see Note 5 of the
Notes to Consolidated Condensed Financial Statements). Excluding these charges,
net income would have increased by $42.1 and $69.8 million, or 34.1% and 34.4%,
as a result of the improved revenues, partially offset by higher legal
expenses.

  Lorillard's unit sales volume increased by 3.8% and 0.9%, while Newport's
sales volume increased by 8.4% and 5.5% for the quarter and six months ended
June 30, 1998, as compared to the corresponding periods of the prior year.
Newport, a full price brand, accounted for 78.3% of Lorillard's unit sales.
Discount brand sales have decreased from an average of 31.4% of industry sales

                                     Page 49

during 1994 to an average of 27.0% during 1997. At June 30, 1998, they
represented 26.6% of industry sales.

Hotels
------

  Revenues increased by $3.8 and $6.4 million, or 6.2% and 6.0%, respectively,
and net income increased by $1.1 and $2.4 million, or 12.4% and 26.4%,
respectively, for the quarter and six months ended June 30, 1998, as compared
to the prior year, due primarily to higher overall average room rates and
increased occupancy rates at the New York properties. Revenues also increased
for the quarter due to the collection of a $2.2 million pre-opening advance
which had been fully reserved. These increases were partially offset by lower
results from the Loews Monte Carlo.

Offshore drilling
-----------------

  Revenues increased by $97.3 and $182.3 million, or 41.6% and 41.3%, and net
income increased by $21.6 and $32.6 million, or 70.6% and 56.8%, respectively,
for the quarter and six months ended June 30, 1998, as compared to the prior
year.

  Revenues from semisubmersible rigs increased by $79.3 and $144.0 million, or
33.9% and 32.6%, for the quarter and six months ended June 30, 1998. The
revenue increase is due to higher dayrates ($69.2 and $126.4 million),
recognized by semisubmersible rigs located in the North Sea and the Gulf of
Mexico. These increases were partially offset by revenues foregone ($14.7 and
$47.8 million) during mandatory inspections. Revenues from jackup rigs
increased by $16.4 and $32.9 million, or 7.0% and 7.5%, due to improvements in
dayrates, primarily in the Gulf of Mexico ($17.9 and $38.6 million).

  Net income for the quarter and six months ended June 30, 1998 increased due
primarily to the higher revenues discussed above, partially offset by increased
contract drilling expenses due to higher utilization of rigs and increased
depreciation and administrative expenses.

Watches and Clocks
------------------

  Revenues increased by $0.6 and $2.9 million, or 2.2% and 5.0%, respectively,
and net income increased by $0.6 and $1.4 million, or 50.0% and 51.9%,
respectively, for the quarter and six months ended June 30, 1998 as compared to
the corresponding periods of the prior year.

  Revenues increased for the quarter and six months ended June 30, 1998 due
primarily to increased watch unit prices and, for the six months ended June 30,
1998, increased sales volume.

  Net income increased for the quarter and six months ended June 30, 1998 due
primarily to the increased revenue discussed above and lower cost of sales.

Other
-----

  Revenues increased by $260.6 million, or 61.6%, and decreased $245.2 million,
or 61.2%, respectively, and net loss decreased by $160.1 million, or 52.2%, and
increased by $173.0, or 52.3%, respectively, for the quarter and six months
ended June 30, 1998 as compared to the corresponding periods of the prior year.

                                     Page 50

  The components of investment (losses) gains included in Investment (loss)
income-net are as follows:

<TABLE>
<CAPTION>

                                          Three Months Ended  Six Months Ended
                                               June 30,            June 30,
                                            1998     1997       1998     1997
                                         --------------------------------------
                                                    (In millions)

<S>                                       <C>      <C>        <C>      <C>
Revenues:
  Derivative instruments (1) ............ $(121.6) $(357.4)   $(500.2) $(380.7)
  Equity securities, including short
   positions (1) ........................   (82.7)  (135.3)    (229.3)  (149.3)
  Fixed maturities ......................    (3.7)    (3.3)     (12.0)    14.9
  Short-term investments, primarily U.S.      
   government securities ................      .5      (.3)        .6      (.4)
  Gain on issuance of subsidiary's stock              29.1                29.1
  Other .................................     (.5)      .7        (.5)     1.3
                                          ------------------------------------
                                           (208.0)  (466.5)    (741.4)  (485.1)
Income tax benefit ......................    72.9    163.2      259.6    169.7
Minority interest .......................      .1      (.1)        .1     (1.9)
                                          ------------------------------------
 
     Net (loss) income .................. $(135.0) $(303.4)   $(481.7) $(317.3)
                                          ====================================
</TABLE>

  (1) Includes losses on short sales, equity index futures and options
      aggregating $171.1, $475.9, $713.4 and $522.1 for the quarter and six
      months ended June 30, 1998 and 1997, respectively. The Company continues
      to maintain these positions.

  Exclusive of securities transactions, revenues increased $2.1 and $11.1
million, or 4.8% and 13.2%, for the quarter and six months ended June 30, 1998
due primarily to increased investment interest income. Net loss increased by
$8.3 and $8.6 million for the quarter and six months ended June 30, 1998 due to
higher corporate interest expenses, partially offset by the increased interest
income. 

Year 2000 Issue
---------------

  Most of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs contain time-sensitive software that recognize a date using "00" as
the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

  The Company has completed an assessment of the scope of this problem and is
working to modify or replace the affected software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project cost is estimated at approximately $70.0 to $80.0
million.

                                     Page 51

  The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 issue could have a
material impact on the operations of the Company. In addition, due to the
interdependent nature of computer systems, the Company may be adversely
impacted depending upon whether it or other entities not affiliated with the
Company (vendors and business partners) address this issue successfully. In
addition, property and casualty insurance subsidiaries may have an underwriting
exposure related to the Year 2000. Although CNA has not received any claims for
coverage from its policyholders based on losses resulting from Year 2000
issues, there can be no assurance that policyholders will not suffer losses of
this type and seek compensation under CNA's insurance policies. If any claims
are made, coverage, if any, will depend on the facts and circumstances of the
claim and the provisions of the policy. At this time, CNA is unable to
determine whether the adverse impact, if any, in connection with the foregoing
circumstances would be material. 

  The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

Accounting Standards
--------------------

  In December 1997, the AICPA's Accounting Standards Executive Committee issued
SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting by all entities that are
subject to insurance-related assessments. It requires that entities recognize
liabilities for insurance-related assessments when all of the following
criteria have been met: an assessment has been imposed or a probable assessment
will be imposed; the event obligating an entity to pay an imposed or probable
assessment has occurred on or before the date of the financial statements; and
the amount of the assessment can be reasonably estimated. This SOP is effective
for fiscal years beginning after December 15, 1998. The Company is currently
evaluating the effects of this SOP on its accounting for insurance-related
assessments.

  In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement standardizes
disclosure requirements for pension and other postretirement benefits to the
extent practicable, requires additional information on changes in benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful to users
of financial statements. It also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement supersedes
the disclosure requirements of a number of earlier opinions of the FASB and
does not address measurement or recognition. It is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
effects of this Statement on its benefit plan disclosures.

  In March 1998, the AICPA's Accounting Standards Executive Committee issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained

                                     Page 52

for Internal Use," which provides guidance on accounting for costs of computer
software developed or obtained for internal use and for determining whether
computer software is for internal use. For purposes of this SOP, internal-use
software is software acquired, internally developed or modified solely to meet
the entity's internal needs for which no substantive plan exists or is being
developed to market the software externally during the software's development
or modification. Accounting treatment for costs associated with software
developed or obtained for internal use, as defined by this SOP, is based upon a
number of factors, including the point in time during the project that costs
are incurred as well as the types of costs incurred. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company is currently evaluating the effects of this SOP.

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
accounting and reporting for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company is currently evaluating the effects of this Statement on its
accounting and reporting for derivatives and hedges.

Forward-Looking Statements
--------------------------

  When included in this Report, the words "believes," "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, competition, changes in financial
markets (interest rate, currency, commodities and stocks), changes in foreign,
political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, judicial decisions and rulings in
smoking and health litigation, the impact of bills introduced in Congress in
relation to tobacco operations, implementation of the Proposed Resolution,
changes in foreign and domestic oil and gas exploration and production
activity, customer preferences and various other matters, many of which are
beyond the Company's control. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any statement is based. 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.
        -----------------------------------------------------------

  Loews Corporation is a large diversified financial services company. As such,
it has significant amounts of financial instruments that involve market risk.
The Company's measure of market risk exposure represents an estimate of the
change in fair value of its financial instruments. Changes in the trading

                                     Page 53

portfolio would be recognized as investment gains (losses) in the income
statement. Market risk exposure is presented for each class of financial
instrument held by the Company at June 30, assuming immediate adverse market
movements of the magnitude described below. The Company believes that the
various rates of adverse market movements represent a measure of exposure to
loss under hypothetically assumed adverse conditions. The estimated market risk
exposure represents the hypothetical loss to future earnings and does not
represent the maximum possible loss nor any expected actual loss, even under
adverse conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based
on its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.

  The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than trading
purposes.

Trading portfolio:

<TABLE>
<CAPTION>

June 30, 1998
-------------------------------------------------------------------------------
                                                       Fair Value        Market
Category of risk exposure:                          Asset (Liability)     Risk
-------------------------------------------------------------------------------
(In millions)

<S>                                                      <C>           <C>
Equity markets (1):
 Equity securities                                       $ 218.1       $  54.5
 Options purchased                                         328.3        (230.1)
 Options written                                           (49.8)         (2.3)
 Futures                                                                (249.9)
 Short sales                                              (763.5)       (190.9)
Commodities:
 Oil (2):
  Swaps                                                     (1.5)          3.2
  Energy purchase obligations                              (14.1)         (6.0)
 Gold (3):
  Options purchased                                         13.6         (13.6)
  Options written                                           (3.4)          3.4
 Other (4)                                                    .3           (.9)
-------------------------------------------------------------------------------
</TABLE>

Note: The calculation of estimated market risk exposure is based on assumed
      adverse changes in the underlying reference price or index of (1) an
      increase in equity prices of 25%, (2) a decline in oil prices of 20%,
      (3) an increase in gold prices of 20% and (4) a decrease of 10%. Adverse
      changes on options which differ from those presented above would not
      necessarily result in a proportionate change to the estimated market
      risk exposure.

  The most significant areas of market risk in the Company's trading portfolio
result from positions held in S&P futures contracts, short sales of certain
equity securities and put options purchased on the S&P 500 index. The Company
enters into these positions primarily to benefit from anticipated future

                                     Page 54

movements in the underlying markets that Company management expects to occur.
If such movements do not occur or if the market moves in the opposite direction
from what management expects, significant losses may occur. The Company
continues to maintain these positions.

  Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company and
has responsibility to ensure that the investment positions are consistent with
that strategy and the level of risk acceptable to it. The Company may manage
risk by buying or selling instruments or entering into offsetting positions. 


Other than trading portfolio:

<TABLE>
<CAPTION>

June 30, 1998
-------------------------------------------------------------------------------
                                                       Fair Value       Market
Category of risk exposure:                          Asset (Liability)    Risk
-------------------------------------------------------------------------------
(In millions)

<S>                                                    <C>           <C>
Equity market (1):
 Equity securities:
  CNA Financial general accounts (a)                   $ 1,054.0     $  (264.0)
  CNA Financial separate accounts                          208.0         (52.0)
 Equity index futures, separate accounts (b)                            (209.0)
Interest rate (2):     
 Fixed maturities (a)                                   31,010.1      (1,633.0)
 Short-term investments (a)                              7,609.5          (9.0)
 Interest rate swaps                                        (3.0)          9.0
 Separate Accounts:
  Fixed maturities (a)                                   4,496.0        (219.0)
  Short-term investments (a)                               605.0          (1.0)
 Long-term debt                                         (5,713.4)
-------------------------------------------------------------------------------
</TABLE>

Note: The calculation of estimated market risk exposure is based on assumed
      adverse changes in the underlying reference price or index of (1) a
      decrease in equity prices of 25% and (2) an increase in interest rates
      of 100 basis points.

(a)   Certain securities are denominated in foreign currencies. Assuming a 20%
      decline in the underlying exchange rates would result in an aggregate
      foreign currency exchange rate risk of $(392.0).
(b)   This market risk would be offset by decreases in liabilities to
      customers under variable insurance contracts.

  Equity Price Risk - The Company has exposure to equity price risk as a result
of its investment in equity securities and equity derivatives. Equity price
risk results from changes in the level or volatility of equity prices which
affect the value of equity securities or instruments which derive their value
from such securities or indexes. Equity price risk was measured assuming an
instantaneous 25% change in the underlying reference price or index from its
level at June 30, 1998, with all other variables held constant.

                                     Page 55

  Interest Rate Risk - The Company has exposure to interest rate risk arising
from changes in the level or volatility of interest rates. The Company attempts
to mitigate its exposure to interest rate risk by utilizing instruments such as
interest rate swaps, interest rate caps, commitments to purchase securities,
options, futures and forwards. The Company monitors its sensitivity to interest
rate risk by evaluating the change in its financial assets and liabilities
relative to fluctuations in interest rates. The evaluation is made using an
instantaneous parallel change in interest rates by varying magnitudes on a
static balance sheet to determine the effect such a change in rates would have
on the Company's market value at risk and the resulting effect on shareholders'
equity. The analysis presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates and prices
which the Company believes are reasonably possible over a one-year period. 

  The analysis assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of the period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
time to maturity. Also the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Accordingly the analysis may not be indicative of, is not intended to provide,
and does not provide a precise forecast of the effect of changes of market
interest rates on the Company's earnings or shareholders' equity. Further, the
computations do not contemplate any actions the Company would undertake in
response to changes in interest rates.

  The Company's long-term debt, including interest rate swap agreements, as of
June 30, 1998 is denominated in U.S. Dollars. The Company's debt has been
primarily issued at fixed rates, and as such, interest expense would not be
impacted by interest rate shifts. 

  The sensitivity analysis assumes an instantaneous shift in market interest
rates increasing 100 basis points from their levels at June 30, 1998, with all
other variables held constant. 

  Foreign Exchange Risk - Foreign exchange rate risk arises from the
possibility that changes in foreign currency exchange rates will impact the
value of financial instruments. The Company has foreign exchange exposure when
it buys or sells foreign currencies or financial instruments denominated in a
foreign currency. This exposure is mitigated by the Company's asset/liability
matching strategy and through the use of futures for those instruments which
are not matched. The Company's foreign transactions are primarily denominated
in Canadian Dollars, British Pounds, German Deutschmarks and Japanese Yen. The
sensitivity analysis also assumes an instantaneous 20% change in the foreign
currency exchange rates versus the U.S. Dollar from their levels at June 30,
1998, with all other variables held constant.

  Commodity Price Risk - The Company has exposure to commodity price risk as a
result of its investments in energy purchase obligations, gold options and
other investments. Commodity price risk results from changes in the level or
volatility of commodity prices that impact instruments which derive their value
from such commodities. Commodity price risk was measured assuming an
instantaneous change of 20% and 10% in the value of the underlying commodities. 

                                     Page 56

                        PART II. OTHER INFORMATION

Item 1. Legal Proceedings.
        -----------------

  1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
lawsuits is incorporated by reference to Note 5 of the Notes to Consolidated
Condensed Financial Statements in Part I.

  2. Lorillard is involved in various lawsuits involving tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from the use of cigarettes or from exposure to tobacco smoke. Information
involving such lawsuits is incorporated by reference to Note 5 of the Notes to
Consolidated Condensed Financial Statements in Part I.

Item 4.  Submission of Matters to a Vote of Security Holders.
         ---------------------------------------------------

    Set forth below is information relating to the 1998 Annual Meeting of
Shareholders of the Registrant:

  The annual meeting was called to order at 11:00 A.M., May 12, 1998. 
Represented at the meeting, in person or by proxy, were 103,646,155 shares,
approximately 90.1% of the issued and outstanding shares entitled to vote.

  The following business was transacted:

Election of Directors
-------------------------------------------------------------------------------
  Over 98% of the votes cast for directors were voted for the election of the
following directors. The number of votes for and withheld with respect to each
director was as follows:

                                              Votes For      Votes Withheld
                                              ---------      --------------

     Charles B. Benenson                     101,643,862         2,002,293
     John Brademas                           101,644,315         2,001,840
     Dennis H. Chookaszian                   101,647,016         1,999,139
     Paul J. Fribourg                        101,647,139         1,999,016
     Bernard Myerson                         101,600,908         2,045,247
     Edward J. Noha                          101,579,010         2,067,145
     Gloria R. Scott                         101,631,308         2,014,847
     Andrew H. Tisch                         101,540,162         2,105,993
     James S. Tisch                          101,574,417         2,017,738
     Jonathan M. Tisch                       101,583,843         2,062,312
     Laurence A. Tisch                       101,556,813         2,089,342
     Preston R. Tisch                        101,568,411         2,077,744

Ratification of the appointment of Independent Certified Public Accountants
-------------------------------------------------------------------------------
  Approved-- 103,353,698 shares, approximately 99.7% of the shares voting,
voted to ratify the appointment of Deloitte & Touche, LLP as independent
certified public accountants for the Company. 140,438 shares, approximately
0.1% of the shares voting, voted against, and 152,019 shares, approximately
0.2% of the shares voting, abstained.

                                     Page 57

Shareholder proposal relating to reporting of executive compensation
-------------------------------------------------------------------------------
  Rejected-- 85,477,678 shares, approximately 89.6% of the shares voting, voted
against this shareholder proposal. 3,567,145 shares, approximately 3.8% of the
shares voting, were cast for, and 6,323,417 shares, approximately 6.6% of the
shares voting, abstained. In addition, there were 8,277,917 shares as to which
brokers indicated that they did not have authority to vote ("broker non-votes").

Shareholder proposal relating to pregnant women
-------------------------------------------------------------------------------
  Rejected-- 84,264,878 shares, approximately 88.4% of the shares voting, voted
against this shareholder proposal. 3,262,605 shares, approximately 3.4% of the
shares voting, were cast for, and 7,838,358 shares, approximately 8.2% of the
shares voting, abstained. In addition, there were 8,280,314 broker non-votes.

Shareholder proposal relating to teen smoking
-------------------------------------------------------------------------------
  Rejected-- 84,794,827 shares, approximately 88.9% of the shares voting, voted
against this shareholder proposal. 2,668,432 shares, approximately 2.8% of the
shares voting, were cast for, and 7,904,982 shares, approximately 8.3% of the
shares voting, abstained. In addition, there were 8,277,914 broker non-votes.

Shareholder proposal relating to independent directors
-------------------------------------------------------------------------------
  Rejected-- 69,131,815 shares, approximately 72.5% of the shares voting, voted
against this shareholder proposal. 25,680,990 shares, approximately 27.0% of
the shares voting, were cast for, and 555,434 shares, approximately 0.5% of the
shares voting, abstained. In addition, there were 8,277,916 broker non-votes.

Shareholder proposal relating to confidential voting
-------------------------------------------------------------------------------
  Rejected-- 54,025,770 shares, approximately 56.6% of the shares voting, voted
against this shareholder proposal. 40,908,196 shares, approximately 42.9% of
the shares voting, were cast for; and 431,875 shares, approximately 0.5% of the
shares voting, abstained. In addition, there were 8,280,314 broker non-votes.

Shareholder proposal relating to nominating committee
-------------------------------------------------------------------------------
  Rejected-- 72,493,202 shares, approximately 76.0% of the shares voting, voted
against this shareholder proposal. 22,301,002 shares, approximately 23.4% of
the shares voting, were cast for, and 571,635 shares, approximately 0.6% of the
shares voting, abstained. In addition, there were 8,280,316 broker non-votes.

Shareholder proposal relating to cigarette filters
-------------------------------------------------------------------------------
  Rejected-- 83,881,349 shares, approximately 88.0% of the shares voting, voted
against this shareholder proposal. 3,786,727 shares, approximately 4.0% of the
shares voting, were cast for, and 7,700,166 shares, approximately 8.0% of the
shares voting, abstained. In addition, there were 8,277,913 broker non-votes.

                                     Page 58

Item 6. Exhibits and Reports on Form 8-K.
        --------------------------------

   (a) Exhibits--

         (10.1) Stipulation of Amendment to Settlement Agreement and For Entry
                of Agreed Order, dated July 2, 1998, regarding the settlement
                of the Mississippi health care cost recovery action.

         (10.2) Mississippi Fee Payment Agreement, dated July 2, 1998,
                regarding the payment of attorneys' fees.

         (10.3) Mississippi MFN Escrow Agreement, dated July 2, 1998.

         (10.4) Stipulation of Amendment to Settlement Agreement and For Entry
                of Consent Decree, dated July 24, 1998, regarding the
                settlement of the Texas health care recovery action.

         (10.5) Texas Fee Payment Agreement, dated July 24, 1998, regarding the
                payment of attorneys' fees.

         (27.1) Financial Data Schedule for the six months ended June 30, 1998.

   (b) Current reports on Form 8-K--There were no reports on Form 8-K filed for
three months ended June 30, 1998.

                                     Page 59

                                   SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



                                                     LOEWS CORPORATION
                                                     -----------------
                                                     (Registrant)





Dated: August 14, 1998                           By  /s/ Peter W. Keegan
                                                     -------------------------
                                                     PETER W. KEEGAN
                                                     Senior Vice President and
                                                     Chief Financial Officer
                                                     (Duly authorized officer
                                                     and principal financial
                                                     officer)

                                     Page 60

