<PAGE>   1
                                                                    Exhibit 99.2


 


                             NEW VALLEY CORPORATION

                       CONSOLIDATED FINANCIAL STATEMENTS


                               SEPTEMBER 30, 1997




<PAGE>   2


                     NEW VALLEY CORPORATION AND SUBSIDIARIES

                          QUARTERLY REPORT ON FORM 10-Q
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

                                TABLE OF CONTENTS
                                -----------------

PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>

                                                                                            PAGE

     Item 1.       Consolidated Financial Statements:

<S>                                                                                           <C>
                   Consolidated Balance Sheets as of September 30, 1997 and
                       December 31, 1996.............................................         2

                   Consolidated Statements of Operations for the three months
                       and nine months ended September 30, 1997 and 1996.............         3

                   Consolidated Statement of Changes in Shareholders' Equity
                       (Deficit) for the nine months ended September 30, 1997........         4

                   Consolidated Statements of Cash Flows for the nine months
                       ended September 30, 1997 and 1996.............................         5

                   Notes to the Quarterly Consolidated Financial Statements..........         6


</TABLE>







                                     - 1 -
<PAGE>   3
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                       ----------------- -----------------
                                                                        September 30,      December 31,
                                                                       ----------------- -----------------
                                                                             1997              1996
                                                                       ----------------- -----------------
                               ASSETS
<S>                                                                       <C>                <C>      
Current assets:
    Cash and cash equivalents.....................................        $   16,707         $  57,282
    Investment securities available for sale......................            65,407            61,454
    Trading securities owned......................................            51,920            29,761
    Restricted assets.............................................             1,029             2,080
    Receivable from clearing brokers..............................             1,628            23,870
    Other current assets..........................................             3,774             9,273
                                                                          ----------         ---------
         Total current assets.....................................           140,465           183,720
                                                                          ----------         ---------

Investment in real estate.........................................           261,597           179,571
Investment securities available for sale..........................             2,074             2,716
Restricted assets.................................................             5,566             6,766
Long-term investments, net........................................            19,921            13,270
Furniture and equipment, net......................................             9,508             9,225
Other assets......................................................            27,702            11,272
                                                                          ----------         ---------
         Total assets.............................................         $ 466,833          $406,540
                                                                          ==========         =========

           LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable and accrued liabilities......................        $   59,018         $  44,888
    Prepetition claims and restructuring accruals.................            15,723            15,526
    Income taxes..................................................            18,329            18,243
    Securities sold, not yet purchased............................            24,212            17,143
    Note payable to related party.................................            12,000                --
    Current portion of notes payable and long-term obligations ...             2,311             2,310
                                                                          ----------         ---------
         Total current liabilities................................           131,593            98,110
                                                                          ----------         ---------

Notes payable.....................................................           177,631           157,941
Other long-term obligations.......................................            16,409            12,282
Redeemable preferred shares.......................................           245,740           210,571

Shareholders' equity (deficit):
    Cumulative preferred shares; liquidation preference of $69,769;
       dividends in arrears, $133,248 and $115,944................               279               279
    Common Shares, $.01 par value; 850,000,000 shares
       authorized; 9,577,624 shares outstanding...................                96                96
    Additional paid-in capital....................................           614,123           644,789
    Accumulated deficit...........................................          (743,798)         (721,854)
    Unearned compensation on stock options........................              (306)             (731)
    Unrealized gain on investment securities......................            25,066             5,057
                                                                          ----------         ---------

         Total shareholders' equity (deficit).....................          (104,540)          (72,364)
                                                                          ----------         ---------

         Total liabilities and shareholders' equity (deficit).....         $ 466,833          $406,540
                                                                          ==========         =========

</TABLE>




      See accompanying Notes to Quarterly Consolidated Financial Statements

                                      - 2 -


<PAGE>   4
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                     ---------------------------------------------------------
                                                                          Three Months Ended            Nine Months Ended
                                                                            September 30,                 September 30,
                                                                     ---------------------------------------------------------
                                                                           1997          1996           1997          1996
                                                                     ---------------------------------------------------------
<S>                                                                    <C>           <C>             <C>          <C>      
Revenues:
     Principal transactions, net................................       $    6,131    $    3,926      $  11,857    $  18,836
     Commissions................................................            4,235         4,700         11,059       13,383
     Real estate leasing........................................            7,079         5,941         19,664       17,605
     Interest and dividends.....................................            2,554         4,230          6,677       14,056
     Other income...............................................            6,449         2,479         21,348       19,830
                                                                       ----------    ----------      ---------    ---------

         Total revenues.........................................           26,448        21,276         70,605       83,710
                                                                       ----------    ----------      ---------    ---------
                                                                                                                             
Cost and expenses:
     Operating, general and administrative......................           30,149        24,371         79,967       88,424
     Interest...................................................            4,229         4,627         12,134       13,890
     Provision for loss on long-term investment.................               --            --          3,796           --
                                                                       ----------    ----------      ---------    ---------

         Total costs and expenses...............................           34,378        28,998         95,897      102,314
                                                                       ----------    ----------      ---------    ---------

Loss from continuing operations before income taxes
     and minority interest......................................           (7,930)       (7,722)       (25,292)     (18,604)

Income tax provision (benefit)..................................               24          (233)           119           67

Minority interests in loss from continuing operations
     of consolidated subsidiary.................................            1,124           384          3,098        1,082
                                                                       ----------    ----------      ---------    ---------

Loss from continuing operations.................................           (6,830)       (7,105)       (22,313)     (17,589)

Discontinued operations:
     Income (loss) from discontinued operations.................               --        (5,339)           583       (4,501)
     Income (loss) on sale of discontinued operations...........              256            --           (214)          -- 
                                                                       ----------    ----------      ---------    ---------

     Total discontinued operations..............................              256        (5,339)           369       (4,501)
                                                                       ----------    ----------      ---------    ---------

Net loss........................................................           (6,574)      (12,444)       (21,944)     (22,090)

Dividend requirements on preferred shares.......................          (17,567)      (15,400)       (50,297)     (46,508)
Excess of carrying value of redeemable preferred
     shares over cost of shares purchased.......................               --            --            --         4,279
                                                                       ----------    ----------      ---------    ---------

Net loss applicable to Common Shares............................        $ (24,141)    $ (27,844)     $ (72,241)   $ (64,319)
                                                                       ==========    ==========      =========    =========

Loss per common share:
     Continuing operations......................................          $ (2.55)      $ (2.35)       $ (7.58)     $ (6.25)
     Discontinued operations....................................              .03          (.56)           .04         (.47)
                                                                          -------       -------        -------      -------

     Net loss per Common Share..................................          $ (2.52)      $ (2.91)       $ (7.54)     $ (6.72)
                                                                          =======       =======        =======      =======

Number of shares used in computation............................            9,578         9,578          9,578        9,578
                                                                          =======       =======        =======      =======

</TABLE>



     See accompanying Notes to Quarterly Consolidated Financial Statements


                                     - 3 -

<PAGE>   5
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

       CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                                                                                     Unearned
                                           Class B                                                 Compensation
                                          Preferred     Common       Paid-In       Accumulated       on Stock       Unrealized
                                            Shares      Shares       Capital         Deficit          Options          Gain
                                            ------      ------       -------         -------          -------          ----
<S>                                           <C>          <C>     <C>             <C>             <C>              <C>     
Balance, December 31, 1996............        $279         $96     $644,789        $(721,854)      $   (731)        $  5,057

   Net loss...........................                                               (21,944)
   Undeclared dividends and accretion
     on redeemable preferred shares...                              (32,996)
   Unrealized gain on investment
     securities.......................                                                                                20,009
   Public sale of subsidiary's
     common stock.....................                                2,715
   Adjustment to unearned
     compensation on stock options....                                 (385)                            385
   Compensation expense on stock
     option grants....................                                                                   40
                                              ----         ---     --------        ---------       --------         --------

Balance, September 30, 1997...........        $279         $96     $614,123        $(743,798)      $   (306)        $ 25,066
                                              ====         ===     ========        =========       ========         ========

</TABLE>











     See accompanying Notes to Quarterly Consolidated Financial Statements



                                     - 4 -


<PAGE>   6
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                               ------------------------------------
                                                                                        Nine Months Ended
                                                                                          September 30,
                                                                               ------------------------------------
                                                                                     1997               1996
                                                                               ------------------------------------
<S>                                                                               <C>                 <C>       
Cash flows from operating activities:
   Net loss................................................................       $   (21,944)        $ (22,090)
   Adjustments to reconcile net loss to net cash
    provided from (used for) operating activities:
     Loss (income) from discontinued operations............................              (369)            4,501
     Depreciation and amortization.........................................             6,635             3,507
     Provision for loss on long-term investment............................             3,796                --
     Stock based compensation expense......................................             2,213                --
     Changes in assets and liabilities, net of effects from acquisitions:
        Increase in receivables and other assets...........................            (8,291)           (5,963)
        Decrease (increase) in income taxes................................                86            (3,029)
        Increase in accounts payable and accrued liabilities...............             5,951             8,786
                                                                                    ---------         ---------

Net cash used for continuing operations....................................           (11,923)          (14,288)
Net cash provided from (used for) discontinued operations..................             1,779            (2,659)
                                                                                    ---------         ---------

Net cash used for operating activities.....................................           (10,144)          (16,947)
                                                                                    ---------         ---------

Cash flows from investing activities:
     Sale or maturity of investment securities.............................            37,697            70,319
     Purchase of investment securities.....................................           (20,999)          (17,644)
     Sale or liquidation of long-term investments..........................             2,807            14,500
     Purchase of long-term investments.....................................           (11,404)           (2,639)
     Purchase or improvements of real estate...............................            (6,208)          (24,882)
     Sale of other assets..................................................             5,561                --
     Payment of prepetition claims.........................................            (1,199)           (6,723)
     Return of prepetition claims paid.....................................             1,396                --
     Decrease in restricted assets.........................................             2,251            29,011
     Payment for acquisitions, net of cash acquired........................           (20,014)            1,915
                                                                                    ---------         ---------

Net cash provided from (used for) investing activities.....................           (10,112)           63,857
                                                                                    ---------         ---------

Cash flows from financing activities:
     Payment of preferred dividends........................................                --           (41,419)
     Purchase of Class A preferred stock...................................                --           (10,530)
     Increase in margin loans payable......................................                --               744
     Sale of subsidiary's common stock.....................................             5,417                --
     Proceeds from notes payable...........................................            19,993                --
     Repayment of notes payable to related party...........................           (21,500)               --
     Repayment of notes payable............................................           (20,703)               --
     Repayment of other obligations........................................            (3,526)           (8,888)
                                                                                    ---------         ---------

Net cash used for financing activities.....................................           (20,319)          (60,093)
                                                                                    ---------         ---------

Net decrease in cash and cash equivalents..................................           (40,575)          (13,183)
Cash and cash equivalents, beginning of period.............................            57,282            51,742
                                                                                    ---------         ---------

Cash and cash equivalents, end of period...................................         $  16,707         $  38,559
                                                                                    =========         =========

</TABLE>


     See accompanying Notes to Quarterly Consolidated Financial Statements



                                     - 5 -

<PAGE>   7

                     NEW VALLEY CORPORATION AND SUBSIDIARIES

              NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

1.    PRINCIPLES OF REPORTING

      The consolidated financial statements include the accounts of New Valley
      Corporation and Subsidiaries (the "Company"). The consolidated financial
      statements as of September 30, 1997 presented herein have been prepared by
      the Company without an audit. In the opinion of management, all
      adjustments, consisting only of normal recurring adjustments, necessary to
      present fairly the financial position as of September 30, 1997 and the
      results of operations and cash flows for all periods presented have been
      made. Results for the interim periods are not necessarily indicative of
      the results for an entire year.

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

      These financial statements should be read in conjunction with the
      consolidated financial statements in the Company's Annual Report on Form
      10-K for the year ended December 31, 1996, as filed with the Securities
      and Exchange Commission.

      NEW ACCOUNTING PRONOUNCEMENTS

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

      In June 1997, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 131, "Disclosures about Segments of an
      Enterprise and Related Information" (SFAS 131). SFAS 131 specifies revised
      guidelines for determining an entity's operating segments and the type and
      level of financial information to be disclosed. Once operating segments
      have been determined, SFAS 131 provides for a two-tier test for
      determining those operating segments that would need to be disclosed for
      external reporting purposes. In addition to providing the required
      disclosures for reportable segments, SFAS 131 also requires disclosure of
      certain "second level" information by geographic area and for
      products/services. SFAS 131 also makes a number of changes to existing
      disclosure requirements. SFAS 131 is effective for fiscal years beginning
      after December 15, 1997, with earlier application encouraged. The Company
      has not yet determined the impact of the implementation of SFAS 131.







                                     - 6 -
<PAGE>   8
                    NEW VALLEY CORPORATION AND SUBSIDIARIES
       NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)



2.    ACQUISITION

      On January 31, 1997, the Company entered into a stock purchase agreement
      (the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
      (Overseas)"), a wholly-owned subsidiary of Brooke Group Ltd. ("Brooke"), a
      related party through the ownership of an approximate 42% voting interest
      in the Company. Pursuant to the Purchase Agreement, the Company acquired
      10,483 shares (the "BML Shares") of the common stock of BrookeMil Ltd.
      ("BML") from Brooke (Overseas) for a purchase price of $55,000, consisting
      of $21,500 in cash and a $33,500 9% promissory note of the Company (the
      "Note"). The BML Shares comprise 99.1% of the outstanding shares of BML, a
      real estate development company in Russia. The Note is collateralized by
      the BML Shares and, as of September 30, 1997, had a balance of $12,000
      which is payable on December 31, 1997. The note was subsequently reduced
      to a balance of $8,500 as of November 13, 1997.

      BML is developing a three-phase complex on 2.2 acres of land in downtown
      Moscow, for which it has a 49-year lease. In 1993, the first phase of the
      project, Ducat Place I, a 46,500 sq. ft. Class-A office building, was
      constructed and leased. On April 18, 1997, BML sold Ducat Place I to one
      of its tenants for approximately $7,500, which purchase price has been
      reduced to reflect prepayments of rent. In 1997, BML completed
      construction of Ducat Place II, a 150,000 sq. ft. office building, which
      has been substantially pre-leased to a number of leading international
      companies. The third phase, Ducat Place III, is planned as a 400,000 sq.
      ft. mixed-use complex, with construction anticipated to commence in 1999.
      The Company is currently evaluating plans for financing the construction
      of Ducat Place III.

      The acquisition was treated as a purchase for financial reporting purposes
      and, accordingly, these consolidated financial statements include the
      operations of BML from the date of acquisition.

      The purchase price was allocated as follows: current assets of
      approximately $9,000, investment in real estate of $79,200, other assets
      of $8,800, assumption of current liabilities of $35,146 and long-term
      liabilities of $6,854. Current assets consisted primarily of an asset held
      for sale of $6,400 related to the estimated proceeds from the sale of
      Ducat Place I, net of $1,100 in accrued closing costs. Liabilities
      included a $20,400 loan to a Russian bank for the construction of Ducat
      Place II ("Construction Loan"). In addition, the liabilities of BML
      included approximately $13,800 of rents and related payments prepaid by
      tenants of Ducat Place II for periods generally ranging from 15 to 18
      months. Proforma operating results for the nine months ended September 30,
      1997 and 1996 are not presented herein as the historical operating results
      of BML are not material to the historical operating results of the
      Company.

      In August 1997, BML refinanced all amounts due under the Construction Loan
      with borrowings under a new credit facility with a Russian bank. The new
      credit facility bears interest at 16% per year, matures no later than
      August 2002, with principal payments commencing after the first year, and
      is collateralized by a mortgage on Ducat Place II and guaranteed by the
      Company. At September 30, 1997, borrowings under the new credit agreement
      totaled $19,993.

                                     - 7 -
<PAGE>   9
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

       NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


      The components of the Company's investment in real estate at September 30,
      1997 are as follows:

<TABLE>
<CAPTION>
                                                           U.S.              BML              TOTAL
                                                           ----              ---              -----
          <S>                                           <C>              <C>               <C>      
          Land  ..................................      $  36,162        $  20,773         $  56,935
          Buildings...............................        147,033           65,000           212,033
          Construction-in-progress................             29               --                29
                                                        ---------        ---------         ---------
                Total.............................        183,224           85,773           268,997
          Less:  accumulated depreciation.........         (6,994)            (406)           (7,400)
                                                         --------        ---------          --------
                Net investment in real estate.....       $176,230        $  85,367          $261,597
                                                         ========        =========          ========
</TABLE>

      On November 10, 1997, the Company sold one of its shopping centers located
      in Marathon, Florida for $5,400 which resulted in a gain on sale of
      approximately $1,200.

3.    DISCONTINUED OPERATIONS

      During the fourth quarter of 1996, Thinking Machines Corporation
      ("Thinking Machines") adopted a plan to terminate its parallel processing
      computer sales and service business. Consequently, the operating results
      of this segment have been classified as discontinued operations, and the
      quarterly results for 1996 have been reclassified. Accordingly, the
      financial statements reflect the financial position and the results of
      operations of the discontinued operations of Thinking Machines separately
      from continuing operations.

      Summarized operating results of the discontinued operations of Thinking
      Machines are as follows:
<TABLE>
<CAPTION>

                                              THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                SEPTEMBER 30,                           SEPTEMBER 30,
                                              1997              1996              1997              1996
                                              ----              ----              ----              ----
      <S>                                <C>                 <C>                 <C>               <C>    
      Revenues.........................  $        --         $  3,318            $3,386            $12,115
                                          ==========          =======             =====             ======
      Operating income (loss)..........  $        --         $ (9,409)          $   950           $ (8,044)
                                          ==========          =======            ======            =======
      Income (loss) before income
         taxes and minority interests..  $        --         $ (9,409)          $   950           $ (8,044)
      Minority interests...............  $        --            4,070              (367)             3,543
                                          ----------          -------            ------            -------
      Net income (loss)................  $        --         $ (5,339)          $   583           $ (4,501)
                                          ==========          =======            ======            =======
</TABLE>

      In April 1997, Thinking Machines sold the remaining part of its
      discontinued operations for $2,405 in cash and a percentage of certain
      future operating profits. The sale resulted in the Company recording a
      loss on disposal of discontinued operations of $470, after the recognition
      of minority interests of $592 and the write-off of goodwill of $1,410. In
      July 1997, Thinking Machines received its first installment on the
      operating profits from the discontinued operations which the Company
      recorded as a gain on discontinued operations of $256.

4.    INCOME TAXES

      At September 30, 1997, the Company had approximately $100,000 of
      unrecognized net deferred tax assets, comprised primarily of net operating
      loss carryforwards, available to offset future taxable income for federal
      tax purposes. A valuation allowance has been provided against the amount
      as it is deemed more likely than not that the benefit of the deferred tax
      assets will not be utilized. The Company continues to evaluate the
      realizability of the deferred tax assets and its estimate is subject to
      change. The income tax provision (benefit), which principally represented
      the effects of state income taxes, for the nine months ended September 30,
      1997 and 1996, does not bear a customary relationship with pre-tax
      accounting income principally as a consequence of the change in the
      valuation allowance relating to deferred tax assets.


                                     - 8 -


<PAGE>   10
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

       NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)





 5.   INVESTMENT SECURITIES AVAILABLE FOR SALE

      Investment securities classified as available for sale are carried at fair
      value, with net unrealized gains included as a separate component of
      shareholders' equity (deficit). The Company had realized gains on sales of
      investment securities available for sale of $1,466 and $8,518 for the
      three and nine months ended September 30, 1997, respectively.

      The components of investment securities available for sale at September
      30, 1997 are as follows:
<TABLE>
<CAPTION>

                                                                       GROSS          GROSS
                                                                    UNREALIZED     UNREALIZED        FAIR
                                                         COST          GAIN           LOSS          VALUE
                                                         ----          ----           ----          -----

      <S>                                                 <C>         <C>                          <C>    
      Marketable equity securities:
            RJR Nabisco common stock................      $23,378     $  2,838                     $26,216
            Other marketable equity securities......       10,604       24,395      $     557       34,442
                                                           ------       ------       --------       ------
               Total marketable equity securities...       33,982       27,233            557       60,658
      Marketable debt securities (short-term).......        4,749           --             --        4,749
      Marketable debt securities (long-term)........        3,684           --          1,610        2,074
                                                          -------   ----------        -------      -------
      Total securities available for sale...........       42,415       27,233          2,167       67,481
      Less long-term portion of investment
            securities..............................        3,684           --          1,610        2,074
                                                          -------   ----------        -------      -------
      Investment securities - current portion.......      $38,731      $27,233      $     577      $65,407
                                                           ======       ======       ========       ======
</TABLE>

      As of September 30, 1997, the long-term portion of investment securities
      available for sale consisted of marketable debt securities which mature in
      two years.

      In October 1997, the Company sold certain appreciated securities and
      recognized a gain of approximately $11,000.

6.    LONG-TERM INVESTMENTS

      At September 30, 1997, long-term investments consisted primarily of
      investments in limited partnerships of $18,719 and an equity investment in
      a company of $1,000. The Company determined that an other than temporary
      impairment in the value of its investment in a joint venture had occurred
      and wrote-down this investment to zero in March 1997 with a charge to
      operations of $3,796. The fair value of the Company's long-term
      investments approximates its carrying amount. The Company's estimates of
      the fair value of its long-term investments are subject to judgment and
      are not necessarily indicative of the amounts that could be realized in
      the current market.

      In January 1997, the Company converted an investment in preferred stock
      made in 1995 into a majority equity interest in a small on-line directory
      assistance development stage company and, accordingly, began consolidating
      the results of this company. This long-term investment of $1,001 was
      written off in 1996 due to continuing losses of this company. In May 1997,
      this company completed an initial public offering and, as a result, the
      Company recorded $2,715 as additional paid-in capital which represented
      its 50.1% ownership in this company's shareholders' equity after this
      offering.




                                     - 9 -
<PAGE>   11
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

       NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)




      The Company is required under certain limited partnership agreements to
      make additional investments up to an aggregate of $13,000 as of September
      30, 1997. The Company's investments in limited partnerships are illiquid
      and the ultimate realization of these investments are subject to the
      performance of the underlying partnership and its management by the
      general partners.

7.    REDEEMABLE PREFERRED SHARES

      At September 30, 1997, the Company had authorized and outstanding
      2,000,000 and 1,071,462, respectively, of its Class A Senior Preferred
      Shares. At September 30, 1997 and December 31, 1996, respectively, the
      carrying value of such shares amounted to $245,740 and $210,571, including
      undeclared dividends of $150,871 and $117,117, or $140.81 and $109.31 per
      share. As of September 30, 1997, the unamortized discount on the Class A
      Senior Preferred Shares was $5,057.

      For the nine months ended September 30, 1997, the Company recorded $2,173
      in compensation expense related to certain Class A Senior Preferred Shares
      awarded to an officer of the Company in 1996. At September 30, 1997, the
      balance of the deferred compensation and the unamortized discount related
      to these award shares was $4,302 and $2,870, respectively.

8.    PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS

      The undeclared dividends, as adjusted for conversions of Class B Preferred
      Shares into Common Shares, cumulatively amounted to $133,248 and $115,944
      at September 30, 1997 and December 31, 1996, respectively. These
      undeclared dividends represent $47.75 and $41.55 per share as of the end
      of each period. No accrual was recorded for such undeclared dividends as
      the Class B Preferred Shares are not mandatorily redeemable.

9.    PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

      Those liabilities that are expected to be resolved as part of the
      Company's First Amended Joint Chapter 11 Plan of Reorganization, as
      amended (the "Joint Plan"), are classified in the Consolidated Balance
      Sheets as prepetition claims and restructuring accruals. On January 18,
      1995, approximately $550 million of prepetition claims were paid pursuant
      to the Joint Plan. The prepetition claims remaining as of September 30,
      1997 of $15,723 may be subject to future adjustments depending on pending
      discussions with the various parties and the decisions of the Bankruptcy
      Court.

10.   CONTINGENCIES

      LITIGATION

      On or about March 13, 1997, a shareholder derivative suit was filed
      against the Company, as a nominal defendant, its directors and Brooke in
      the Delaware Chancery Court, by a shareholder of the Company. The suit
      alleges that the Company's purchase of the BML Shares constituted a
      self-dealing transaction which involved the payment of excessive
      consideration by the Company. The plaintiff seeks (i) a declaration that
      the Company's directors breached their fiduciary duties, Brooke aided and
      abetted such breaches and such parties are therefore liable to the
      Company, and (ii) unspecified damages to be awarded to the Company. The
      Company's time to respond to the complaint has not yet expired. The
      Company believes that the allegations are without merit, and it intends to
      defend the suit vigorously.



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<PAGE>   12
                     NEW VALLEY CORPORATION AND SUBSIDIARIES

       NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


      The Company is also a defendant in various other lawsuits and may be
      subject to unasserted claims primarily in connection with its activities
      as a securities broker-dealer and participation in public underwritings.
      These lawsuits involve claims for substantial or indeterminate amounts and
      are in varying stages of legal proceedings. In the opinion of management,
      after consultation with counsel, the ultimate resolution of these matters
      will not have a material adverse effect on the Company's consolidated
      financial position, results of operations, or cash flows.


      Risks and Uncertainties

      BML's real estate development and management operations in Russia could be
      affected by uncertainties in Russia which may include, among others,
      political or diplomatic developments, regional tensions, currency
      repatriation restrictions, foreign exchange fluctuations, inflation, and
      an undeveloped system of commercial laws and legislative reform relating
      to foreign ownership in Russia.








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