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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K
                            ------------------------
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
                         COMMISSION FILE NUMBER 1-2493
                             ---------------------
                            ------------------------

                             NEW VALLEY CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<Table>
<S>                                            <C>
                   DELAWARE                                      13-5482050
(State or other jurisdiction of incorporation     (I.R.S. Employer Identification Number)
               or organization)
    100 S.E. SECOND STREET, MIAMI, FLORIDA                         33131
   (Address of principal executive offices)                      (Zip Code)
</Table>

                                 (305) 579-8000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON SHARES, $.01 PAR VALUE
               WARRANTS TO PURCHASE COMMON SHARES, $.01 PAR VALUE

     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 [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  Yes [X]  No [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).  Yes [ ]  No [X]

     The aggregate market value of common shares held by non-affiliates of the
registrant as of June 30, 2002 was approximately $ 38,226,328. Directors and
officers and ten percent or greater stockholders are considered affiliates for
purposes of this calculation but should not necessarily be deemed affiliates for
any other purpose.

     At March 21, 2003, there were 22,117,852 common shares outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Part III (Items 10, 11, 12 and 13) from the definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the registrant's
fiscal year covered by this report.
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                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                          PAGE
                                                                          ----
  <S>       <C>                                                           <C>
                                     PART I
  Item 1.   Business....................................................    1
  Item 2.   Properties..................................................   11
  Item 3.   Legal Proceedings...........................................   11
  Item 4.   Submission of Matters to a Vote of Security-Holders;
              Executive Officers of the Registrant......................   11
                                    PART II
  Item 5.   Market for Registrant's Common Equity and Related
              Stockholder Matters.......................................   14
  Item 6.   Selected Financial Data.....................................   15
  Item 7.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................   16
  Item 7A.  Quantitative and Qualitative Disclosures About Market
              Risk......................................................   27
  Item 8.   Financial Statements and Supplementary Data.................   27
  Item 9.   Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure..................................   28
                                    PART III
  Item 10.  Directors and Executive Officers of the Registrant..........   28
  Item 11.  Executive Compensation......................................   28
  Item 12.  Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters................   28
  Item 13.  Certain Relationships and Related Transactions..............   28
  Item 14.  Controls and Procedures.....................................   28
                                    PART IV
  Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form
              8-K.......................................................   29
  SIGNATURES............................................................   60
  CERTIFICATIONS........................................................   62
</Table>
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     New Valley Corporation, a Delaware corporation, is engaged in the real
estate business and is seeking to acquire additional operating companies. New
Valley owns, through its New Valley Realty Division, two commercial office
buildings in Princeton, N.J. and a 50% interest in the former Kona Surf Hotel in
Kailua-Kona, Hawaii. New Valley also holds a 50% interest in Montauk Battery
Realty LLC, which owns Prudential Douglas Elliman, the largest residential real
estate brokerage company in the New York City metropolitan area. In December
2001, New Valley completed the distribution to its stockholders of its shares in
Ladenburg Thalmann Financial Services Inc., its former majority-owned subsidiary
engaged in the investment banking and brokerage business. The principal
executive office of New Valley is located at 100 S.E. Second Street, Miami,
Florida 33131, and the telephone number is (305) 579-8000.

     New Valley was originally organized under the laws of New York in 1851 and
operated for many years under the name "Western Union Corporation". In 1991,
bankruptcy proceedings were commenced against New Valley. In January 1995, New
Valley emerged from bankruptcy. As part of the plan of reorganization, New
Valley sold the Western Union money transfer and messaging services businesses
and all allowed claims in the bankruptcy were paid in full.

PLAN OF RECAPITALIZATION

     New Valley consummated a plan of recapitalization on June 4, 1999,
following approval by New Valley's stockholders. Pursuant to the plan of
recapitalization:

     - each $15.00 Class A senior preferred share ($100 liquidation) was
       reclassified into 20 Common Shares and one Warrant exercisable for five
       years,

     - each $3.00 Class B preferred share was reclassified into 1/3 of a common
       share and five warrants, and

     - each outstanding common share was reclassified into 1/10 of a common
       share and 3/10 of a warrant.

     The recapitalization had a significant effect on New Valley's financial
position and results of operations. As a result of the exchange of the
outstanding preferred shares for common shares and warrants in the
recapitalization, New Valley's stockholders' equity increased by $343.4 million
from the elimination of the carrying value and dividend arrearages on the
redeemable preferred stock. Furthermore, the recapitalization resulted in the
elimination of the on-going dividend accruals on the existing redeemable
preferred shares of New Valley, as well as the redemption obligation for the
Class A preferred shares in January 2003. Also as a result of the
recapitalization, the number of outstanding common shares more than doubled, and
additional common shares were reserved for issuance upon exercise of the
warrants, which have an initial exercise price of $12.50 per common share. In
addition, Vector Group Ltd., New Valley's principal stockholder, increased its
ownership of the common shares from 42.3% to 55.1%, and its total voting power
from 42% to 55.1%. At December 31, 2002, Vector Group owned 57.3% of New
Valley's common shares.

BUSINESS STRATEGY

     Following the distribution of the Ladenburg Thalmann Financial Services
shares in 2001 and asset dispositions in Russia in December 2001 and April 2002
(discussed below), New Valley is engaged in the real estate business and holds a
significant amount of cash and other investments. The business strategy of New
Valley is to continue to operate its real estate business and to acquire
operating companies through merger, purchase of assets, stock acquisition or
other means, or to acquire control of operating companies through one of such
means. In the interim, New Valley's cash and investments (aggregating
approximately $96 million at December 31, 2002) are available for general
corporate purposes, including for acquisition purposes.

     As a result of the distribution of the Ladenburg Thalmann Financial
Services shares, New Valley's broker-dealer operations, which were the primary
source of New Valley's revenues between May 1995 and

                                        1
<PAGE>

December 2001, have been treated as discontinued operations in its accompanying
consolidated financial statements. See "Discontinued
Operations -- Broker-Dealer".

NEW VALLEY REALTY DIVISION

  Acquisition of Office Buildings

     On December 13, 2002, New Valley completed the acquisition of two
commercial office buildings in Princeton, N.J. for an aggregate purchase price
of $54 million. New Valley purchased the two adjacent office buildings, located
at 100 and 150 College Road West, from 100 College Road, LLC, an entity
affiliated with Patrinely Group LLC and Apollo Real Estate Investment Fund III,
L.P. The two buildings were constructed in July 2000 and June 2001 and have a
total of approximately 225,000 square feet of rentable space.

     New Valley acquired a fee simple interest in each office building (subject
to certain rights of existing tenants) and in the underlying land for each
property. Space in the office buildings is leased to commercial tenants and, as
of December 31, 2002, the office buildings were approximately 98% occupied.

     To finance a portion of the purchase price for the office buildings, on the
closing date, New Valley borrowed $40.5 million from HSBC Realty Credit
Corporation (USA). The loan has a term of four years, bears interest at a
floating rate of 2% above LIBOR, and is collateralized by a first mortgage on
the office buildings, as well as by an assignment of leases and rents. Principal
is amortized to the extent of $53,635 per month during the term of the loan. The
loan may be prepaid without penalty and is non-recourse against New Valley,
except for various specified environmental and related matters, misapplications
of tenant security deposits and insurance and condemnation proceeds, and fraud
or misrepresentation by New Valley in connection with the indebtedness.

     Concurrently with the acquisition of the office buildings, New Valley
engaged a property-management affiliate of Patrinely Group LLC that had
previously managed the office buildings to act as the property manager for the
office buildings. The agreement has a one-year term, but may be terminated by
New Valley on 30 days' notice without cause or economic penalty (other than the
payment of one month's management fee).

  Hawaiian Hotel

     In July 2001, Koa Investors, LLC, an entity owned by New Valley, developer
Brickman Associates and other investors, acquired the leasehold interests in the
former Kona Surf Hotel in Kailua-Kona, Hawaii in a foreclosure proceeding. New
Valley, which holds a 50% interest in Koa Investors, has invested $5.9 million
in the project and was required to make additional investments of up to an
aggregate of $6.6 million as of December 31, 2002. New Valley accounts for its
investment in Koa Investors under the equity method and recorded losses of $1.3
million in 2002 associated with the Kona Surf Hotel. Koa Investors' losses
represent management fees and a loss of a deposit on an adjoining golf course,
which it determined not to purchase. Koa Investors capitalizes all costs related
to the acquisition and development of the property.

     The hotel is located on a 20-acre tract, which is leased under two ground
leases with Kamehameha Schools, the largest private land owner in Hawaii. In
December 2002, Koa Investors and Kamehameha amended the leases to provide for
significant rent abatements over the next ten years and extended the remaining
term of the leases from 33 years to 65 years. In addition, Kamehameha granted
Koa Investors various right of first offer opportunities to develop adjoining
resort sites.

     Koa Investors is presently negotiating with Starwood Hotels and Resorts
Worldwide, Inc. to reopen the hotel as the Sheraton Keauhou Resort, a three star
family resort with approximately 530 rooms. Proposed improvements to the
property would include comprehensive room enhancements, construction of a fresh
water 13,000 square foot fantasy pool, lobby and entrance improvements, a new
gym and beachfront spa, retail stores and new restaurants. A 20,000 square foot
convention center, wedding chapel and other revenue producing amenities would
also be restored.

                                        2
<PAGE>

     Koa Investors estimates that the cost of the hotel's renovation will be
approximately $45 million. Preliminary development is underway and, subject to
completing the necessary financing arrangements, the reopening of the hotel is
scheduled for late 2004. A predevelopment credit line of $5 million was obtained
in 2002 from a Taiwanese lender. Koa Investors is currently in discussion with
the lender to finance the planned renovation. However, no assurance can be given
that such financing will be available on terms acceptable to Koa Investors. Koa
Investors has capitalized all costs related to the acquisition and development
of the property.

  Sales of Shopping Centers

     In February 2001, New Valley sold its Royal Palm Beach, Florida shopping
center for $9.5 million before closing adjustments and expenses and recorded a
gain of $0.9 million on the sale. In May 2002, New Valley disposed of its
remaining shopping center in Kanawha, West Virginia and recorded a gain of
approximately $0.6 million for the year ended December 31, 2002, which
represented the shopping center's negative book value, in connection with the
disposal. No proceeds were received in the disposal.

MONTAUK BATTERY REALTY LLC

     During 2000 and 2001, New Valley acquired for approximately $1.7 million a
37.2% ownership interest in B&H Associates of NY, doing business as Prudential
Long Island Realty, the largest independently owned and operated real estate
brokerage company on Long Island, and a minority interest in an affiliated
mortgage company. On December 19, 2002, New Valley and the other owners of
Prudential Long Island Realty contributed their interests in Prudential Long
Island Realty to Montauk Battery Realty LLC, a newly formed entity. New Valley
acquired a 50% interest in Montauk as a result of an additional investment of
approximately $1.4 million by New Valley and the redemption by Prudential Long
Island Realty of various ownership interests. As part of the transaction,
Prudential Long Island Realty renewed its franchise agreement with The
Prudential Real Estate Affiliates, Inc. for an additional ten-year term. The
owners of Montauk also agreed, subject to receipt of any required regulatory
approvals, to contribute to Montauk their interests in the related mortgage
company. New Valley accounts for its interest in Montauk on the equity method
and recorded income of $0.6 million in 2002 associated with Montauk.

  Business

     Headquartered in Huntington, New York, Prudential Long Island Realty is the
largest residential real estate brokerage company on Long Island with
approximately 40 offices. Prudential Long Island Realty closed approximately
6,850 transactions in 2002 and reported 2002 sales volume of approximately $2.4
billion. Prudential Long Island Realty's 40 offices serve 250 communities from
Manhattan to Montauk. In 2001, Prudential Long Island Realty was ranked as one
of the top 50 residential brokerage companies in the United States based on
closed sales volume by the Real Trends broker survey.

     Prudential Long Island Realty acts as a broker or agent in residential real
estate transactions. In performing these services, Prudential Long Island Realty
has historically represented the seller, either as the listing broker, or as a
co-broker in the sale. In acting as a broker for the seller, Prudential Long
Island Realty's services include assisting the seller in pricing the property
and preparing it for sale, advertising the property, showing the property to
prospective buyers, and assisting the seller in negotiating the terms of the
sale and in closing the transaction. In exchange for these services, the seller
pays to Prudential Long Island Realty a commission, which is generally a fixed
percentage of the sales price. In a co-brokered arrangement the listing broker
typically splits its commission with the other co-broker involved in the
transaction. Prudential Long Island Realty also offers buyer brokerage services.
When acting as a broker for the buyer, Prudential Long Island Realty's services
include assisting the buyer in locating properties that meet the buyer's
personal and financial specifications, showing the buyer properties, and
assisting the buyer in negotiating the terms of the purchase and closing the
transaction. In exchange for these services a commission is paid to the
Prudential Long Island Realty which also is generally a fixed percentage of the
purchase price and is usually, with the consent of the listing broker, deducted
from, and payable out of, the commission payable to the listing broker. With the
consent of a buyer and seller, subject to certain conditions, Prudential Long
Island Realty may, in
                                        3
<PAGE>

certain circumstances, act as a selling broker and as a buying broker in the
same transaction. Prudential Long Island Realty's sales and marketing services
are mostly provided by licensed real estate sales associates who have entered
into independent contractor agreements with Prudential Long Island Realty.
Prudential Long Island Realty recognizes revenue and commission expenses upon
the consummation of the real estate sale.

     Prudential Long Island Realty also offers relocation services to employers,
which provide a variety of specialized services primarily concerned with
facilitating the resettlement of transferred employees. These services include
sales and marketing of transferees' existing homes for their corporate employer,
assistance in finding new homes, moving services, educational and school
placement counseling, customized videos, property marketing assistance, rental
assistance, area tours, international relocation, group move services, marketing
and management of foreclosed properties, career counseling, spouse/partner
employment assistance, and financial services. Clients can select these programs
and services on a fee basis according to their needs.

     As part of Prudential Long Island Realty's franchise agreement with
Prudential, it has an agreement with Prudential Relocation Services, Inc. to
provide relocation services to the Prudential network. Prudential Long Island
Realty anticipates that participation in Prudential network will continue to
provide new relocation opportunities with firms on a national level.

     Prudential Long Island Realty's affiliate, Preferred Empire Mortgage
Company, is engaged in the residential mortgage business, which involves the
origination of loans for one-to-four family residences. Preferred Empire
primarily originates loans for purchases of properties located in Long Island.
Approximately one-half of these loans are for home sales transactions in which
Prudential Long Island Realty acts as a broker. The term "origination" refers
generally to the process of arranging mortgage financing for the purchase of
property directly to the purchaser or for refinancing an existing mortgage.
Preferred Empire's revenues are generated from loan origination fees, which are
generally a percentage of the original principal amount of the loan and are
commonly referred to as "points" and application and investor fees paid by the
borrowers paid by the investors. Preferred Empire also generates revenues
through application fees and processing fees. Preferred Empire recognizes
mortgage origination revenues and costs when the mortgage loan is consummated.

  Marketing

     As a member of The Prudential Real Estate Affiliates, Inc., Prudential Long
Island Realty offers real estate sales and marketing and relocation services,
which are marketed by a multimedia program. This program includes direct mail,
newspaper, internet, catalog, radio and television advertising and is conducted
throughout Manhattan and Long Island. In addition, the integrated nature of the
Prudential Long Island Realty's services is designed to produce a flow of
customers from its real estate sales and marketing business to its mortgage
businesses.

  Competition

     The businesses in which Prudential Long Island Realty is engaged are highly
competitive. However, Prudential Long Island Realty believes that its ability to
offer its customers a range of inter-related services and its level of
residential real estate sales and marketing help position it to meet the
competition and improve its market share.

     In Prudential Long Island Realty's traditional business of residential real
estate sales and marketing, Prudential Long Island Realty competes primarily
with multi-office independent real estate organizations and, to some extent with
franchise real estate organizations, such as Century-21, ERA, RE/MAX and
Coldwell Banker. Prudential Long Island Realty believes that its major
competitors in 2003 will also increasingly include multi-office real estate
organizations, such as GMAC Home Services, NRT and other privately owned
companies. Companies compete for sales and marketing business primarily on the
basis of services offered, reputation, personal contacts, and, to some degree,
price.

     Prudential Long Island Realty's relocation business is fully integrated
with its residential real estate sales and marketing business. Accordingly,
Prudential Long Island Realty's major competitors are many of the

                                        4
<PAGE>

same real estate organizations previously noted. Competition in the relocation
business is based primarily on level of service, reputation, personal contact
and, recently to a greater extent, price.

     In its mortgage loan origination business, Preferred Empire competes with
other mortgage originators, such as mortgage bankers, state and national banks,
and thrift institutions. Because Preferred Empire does not sell or service
mortgage loans, many of Preferred Empire's competitors for mortgage services
have substantially greater resources than the Preferred Empire.

  Government Regulation

     Several facets of the Prudential Long Island Realty's business are subject
to government regulation. For example, Prudential Long Island Realty's real
estate sales and marketing divisions are licensed as real estate brokers in the
states in which they conduct their real estate brokerage businesses. In
addition, the Prudential Long Island Realty's real estate sales associates must
be licensed as real estate brokers or salespersons in the states in which they
do business. Future expansion of the Prudential Long Island Realty's operations
into new geographic markets may subject it to similar licensing requirements in
other states.

     A number of states and localities have adopted laws and regulations
imposing environmental controls, disclosure rules, zoning, and other land use
restrictions, which can materially impact the marketability of certain real
estate. However, Prudential Long Island Realty does not believe that compliance
with environmental, zoning, and land use laws and regulations has had, or will
have, a materially adverse effect on its financial condition or operations.

     In Preferred Empire's mortgage business, mortgage loan origination
activities are subject to the Equal Credit Opportunity Act, the Federal
Truth-in-Lending Act, the Real Estate Settlement Procedures Act, and the
regulations promulgated thereunder which prohibit discrimination and require the
disclosure of certain information to borrowers concerning credit and settlement
costs. Additionally, there are various state laws affecting the Preferred
Empire's mortgage operations, including licensing requirements and substantive
limitations on the interest and fees that may be charged. States also have the
right to conduct financial and regulatory audits of the loans under their
jurisdiction. Preferred Empire is licensed as a mortgage broker in New York,
where Preferred Empire is required to submit annual audited financial statements
to the Commissioner of Banks and maintain a minimum net worth of $50,000.

     Prudential Long Island Realty is not aware of any material licensing or
other government regulatory requirements governing its relocation business,
except to the extent that such business also involves the rendering of real
estate brokerage services, the licensing and regulation of which are described
above.

  Trade Names and Franchises

     In December 2002, Prudential Long Island Realty renewed for an additional
ten-year term its franchise agreement with The Prudential Real Estate
Affiliates, Inc. and has an exclusive franchise, subject to meeting or
maintaining certain annual revenue thresholds, in New York for Nassau/Suffolk
County, Long Island and for Manhattan. In addition, Prudential Long Island
Realty was granted a "right of first refusal" with respect to the boroughs of
Brooklyn and Queens. The "Prudential" name and the tagline "From Manhattan to
Montauk" are used extensively in the Prudential Long Island Realty's businesses.
In addition, Prudential Long Island Realty continues to use the trade names of
certain companies that it has acquired.

  Acquisition of Douglas Elliman

     On March 14, 2003, Montauk acquired Insignia Douglas Elliman and Insignia
Residential Group for $71.25 million from Insignia Financial Group Inc. New
Valley has invested an additional $9.5 million in subordinated debt and equity
of Montauk Battery Realty to help fund the acquisition. The subordinated debt
bears interest at 12% per annum and is due in March 2013.

     The new combined brokerage company, to be known as Prudential Douglas
Elliman, has more than 2,000 real estate brokers serving over 50 offices
throughout New York City and Long Island, including six branches in the
Hamptons.
                                        5
<PAGE>

     As part of the Douglas Elliman acquisition, Montauk acquired another
Insignia division, Insignia Residential Group, which is the New York
metropolitan area's largest manager of rental, co-op and condominium housing.

     Founded in 1911, Insignia Douglas Elliman grew to be one of Manhattan's
leading residential brokers while specializing in the highest end of the sales
and rental marketplaces. It had ten New York City offices and more than 800 real
estate brokers and achieved sales of nearly $4 billion for the year ended
December 31, 2002.

RUSSIAN REAL ESTATE

  BrookeMil Ltd

     In January 1997, New Valley purchased BrookeMil Ltd. from Brooke (Overseas)
Ltd., an indirect wholly-owned subsidiary of Vector Group. BrookeMil, which was
engaged in the real estate development business in Moscow, Russia, was the
developer of a three-phase complex on 2.2 acres of land in downtown Moscow, for
which it had 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 successfully built and
leased. In April 1997, BrookeMil sold Ducat Place I to one of its tenants,
Citibank. In 1997, BrookeMil completed construction of Ducat Place II, a premier
150,000 sq. ft. office building. Ducat Place II was leased to a number of
leading international companies and was one of the leading modern office
buildings in Moscow due to its design and full range of amenities. The third
phase, Ducat Place III, had been planned as an office tower. BrookeMil was also
engaged in the acquisition and preliminary development of the Kremlin sites in
Moscow.

  Western Realty Development

     In February 1998, New Valley and Apollo Real Estate Investment Fund III,
L.P. organized Western Realty Development LLC to make real estate investments in
Russia. New Valley contributed the real estate assets of BrookeMil, including
the Ducat Place II office building and the adjoining site for the proposed
development of Ducat Place III, to Western Realty Development, and Apollo
contributed $73.3 million, including the investment in Western Realty Repin LLC
discussed below.

     Western Realty Development made a $30 million participating loan to Western
Tobacco Investments LLC which held Brooke (Overseas)'s interest in Liggett-Ducat
Ltd., which was engaged in the tobacco business in Russia. In August 2000,
Western Tobacco Investments was sold to Gallaher Group Plc and the proceeds were
divided between Vector Group and Western Realty Development in accordance with
the terms of the participating loan, which was terminated at the closing.
Through their investments in Western Realty Development, New Valley received
$57.2 million in cash proceeds from the sale and Apollo received $68.3 million.
New Valley recorded a gain of $52.5 million in connection with the transaction
in 2000.

     On December 21, 2001, Western Realty Development sold to Andante Limited, a
Bermuda company, all of the membership interests in its subsidiary Western
Realty Investments LLC, the entity through which Western Realty Development
owned Ducat Place II and the adjoining Ducat Place III site. The purchase price
for the sale was approximately $42 million including the assumption of mortgage
debt and payables. Of the net cash proceeds from the sale, New Valley received
approximately $22 million, and Apollo received approximately $9.5 million. New
Valley recorded a loss of approximately $21.8 million in connection with the
sale in 2001.

  Western Realty Repin

     In June 1998, New Valley and Apollo organized Western Realty Repin to make
a loan to BrookeMil. The proceeds of the loan were used by BrookeMil for the
acquisition and preliminary development of the Kremlin sites, two adjoining
sites totaling 10.25 acres located on the Sofiskaya Embankment of the Moscow
River. The sites are directly across the river from the Kremlin and have views
of the Kremlin walls, towers and nearby church domes. The Kremlin sites were
planned for development as a residential and hotel complex, subject to market
conditions and the availability of financing.

                                        6
<PAGE>

     On April 30, 2002, New Valley sold the shares of BrookeMil for
approximately $22 million before closing expenses. BrookeMil owned the two
Kremlin sites in Moscow, which were New Valley's remaining real estate holdings
in Russia. Under the terms of the Western Realty Repin participating loan to
BrookeMil, New Valley received approximately $7.5 million of the net proceeds
from the sale and Apollo received approximately $12.5 million of the proceeds.
New Valley recorded a gain on the sale of real estate, which had a negative book
value of approximately $1.0 million prior to the sale, of approximately $8.5
million for the year ended December 31, 2002 in connection with the sale.

     DISCONTINUED OPERATIONS -- BROKER-DEALER

     In May 1995, a subsidiary of New Valley acquired all of the outstanding
shares of common stock and other equity interests of Ladenburg Thalmann & Co.
Inc. for $25.8 million, net of cash acquired. Ladenburg Thalmann & Co. is a full
service broker-dealer, which has been a member of the New York Stock Exchange
since 1876.

     In December 1999, New Valley completed the sale of a 19.9% interest in
Ladenburg Thalmann & Co. to Berliner Effektengesellschaft AG, a German public
financial holding company. New Valley received $10.2 million in cash and
Berliner shares valued in accordance with the purchase agreement.

     On May 7, 2001, GBI Capital Management Corp. acquired all of the
outstanding common stock of Ladenburg Thalmann & Co., and the name of GBI was
changed to Ladenburg Thalmann Financial Services Inc. New Valley received
18,598,098 shares, $8.01 million in cash and $8.01 million principal amount of
senior convertible notes due December 31, 2005. The notes issued to New Valley
bear interest at 7.5% per annum and are convertible into 3,844,216 shares of
Ladenburg Thalmann Financial Services common stock. Upon closing, New Valley
also acquired an additional 3,945,060 shares of Ladenburg Thalmann Financial
Services from the former Chairman of Ladenburg Thalmann Financial Services for
$1.00 per share. Following completion of the transactions, New Valley owned
53.6% and 49.5% of the common stock of Ladenburg Thalmann Financial Services, on
a basic and fully diluted basis, respectively. Ladenburg Thalmann Financial
Services (AMEX: LTS) is registered under the Securities Act of 1934 and files
periodic reports and other information with the SEC.

     To provide the funds for the acquisition of the common stock of Ladenburg
Thalmann & Co., Ladenburg Thalmann Financial Services borrowed $10 million from
Frost-Nevada, Limited Partnership and issued to Frost-Nevada $10 million
principal amount of 8.5% senior convertible notes due December 31, 2005. The
notes issued to the Ladenburg Thalmann & Co. stockholders and to Frost-Nevada
are secured by a pledge of the Ladenburg Thalmann & Co. stock. In June 2002, New
Valley, Berliner and Frost-Nevada agreed with Ladenburg Thalmann Financial
Services to forbear until May 15, 2003 payment of the interest due to them under
the convertible notes on the interest payment dates commencing June 30, 2002
through March 31, 2003. In March 2003, the holders of the convertible notes
agreed to extend the interest forbearance period to January 15, 2005 with
respect to interest payments due through December 31, 2004. Interest on the
deferred amounts accrues at 8% on the New Valley and Berliner notes and 9% on
the Frost-Nevada note.

     The actual number of shares of common stock issued to the former Ladenburg
Thalmann & Co. stockholders may be further increased and the conversion prices
of the senior convertible notes may be further decreased on or about May 7,
2003, pending a final resolution of Ladenburg Thalmann Financial Services'
pre-closing litigation adjustments.

     On November 30, 2001, New Valley announced that it would distribute its
22,543,158 shares of Ladenburg Thalmann Financial Services common stock to
holders of New Valley common shares through a special dividend. The special
dividend was accomplished through a pro rata distribution of the Ladenburg
Thalmann Financial Services shares, paid on December 20, 2001 to New Valley
holders of record as of December 10, 2001. New Valley stockholders received
0.988 of a Ladenburg Thalmann Financial Services share for each share of New
Valley.

     Following the distribution, New Valley continues to hold the $8.01 million
principal amount of Ladenburg Thalmann Financial Services' senior convertible
notes and a warrant to purchase 100,000 shares of its common stock at $1.00 per
share.
                                        7
<PAGE>

     In March 2002, Ladenburg Thalmann Financial Services borrowed $2.5 million
from New Valley. The loan, which bears interest at 1% above the prime rate, was
due on the earlier of December 31, 2003 or the completion of one or more equity
financings where Ladenburg Thalmann Financial Services receives at least $5.0
million in total proceeds. In July 2002, Ladenburg Thalmann Financial Services
borrowed an additional $2.5 million from New Valley on the same terms. In
November 2002, New Valley agreed, in connection with a $3.5 million loan to
Ladenburg Thalmann Financial Services by an affiliate of its clearing broker, to
extend the maturity of the notes to December 31, 2006 and to subordinate the
notes to the repayment of the loan.

     During 2002, Ladenburg Thalmann Financial Services incurred significant
operating losses as its revenues and liquidity were adversely affected by the
overall declines in the U.S. equity markets and the continued weak operating
environment for the broker-dealer industry. Accordingly, New Valley evaluated
its ability to collect its notes receivable and related interest from Ladenburg
Thalmann Financial Services at September 30, 2002. These notes receivable
included the $5 million of notes issued in March 2002 and July 2002 and the
$8.01 million convertible note issued to New Valley in May 2001. Management
determined, based on current trends in the broker-dealer industry and Ladenburg
Thalmann Financial Services' operating results and liquidity needs, that a
reserve for uncollectibility should be established against these notes and
interest receivable. As a result, New Valley recorded a charge of $13.2 million
in the third quarter of 2002.

     On October 8, 2002, Ladenburg Thalmann Financial Services borrowed an
additional $2 million from New Valley. The loan, which bore interest at 1% above
the prime rate, was repaid in December 2002 with the proceeds from the loan to
Ladenburg Thalmann Financial Services from an affiliate of its clearing broker.

     Howard M. Lorber, Bennett S. LeBow and Richard J. Lampen, executive
officers and directors of New Valley, and Victor M. Rivas and Henry C.
Beinstein, directors of New Valley, also serve as directors of Ladenburg
Thalmann Financial Services. Mr. Rivas also serves as President and CEO of
Ladenburg Thalmann Financial Services. J. Bryant Kirkland III, New Valley's Vice
President, Treasurer and Chief Financial Officer, served as Chief Financial
Officer of Ladenburg Thalmann Financial Services from June 2001 to October 2002.
In 2002, Ladenburg Thalmann Financial Services accrued compensation of $100,000
for Mr. Kirkland in connection with his services, which is payable in four
quarterly installments commencing April 1, 2003. Messrs. LeBow and Lorber serve
as executive officers and directors, and Mr. Lampen serves as an executive
officer, of Vector Group, New Valley's principal stockholder, and Robert J.
Eide, a director of Ladenburg Thalmann Financial Services, serves as a director
of Vector Group.

     Following December 20, 2001, holders of New Valley's outstanding warrants
are entitled, upon exercise of a warrant and payment of the $12.50 exercise
price per warrant, to receive a common share of New Valley and a cash payment of
$1.20, an amount equal to 0.988 of the current market price of a share of
Ladenburg Thalmann Financial Services common stock on December 20, 2001. The
current market price was determined based on the average daily closing prices
for a share of Ladenburg Thalmann Financial Services common stock for the 15
consecutive trading days commencing 20 trading days before December 20, 2001.

OTHER INVESTMENTS

     On January 15, 2003, New Valley announced it had reached an agreement in
principal with Globalstar L.P., pursuant to which New Valley would invest $55
million as part of a plan of reorganization of Globalstar. Globalstar, which is
currently in bankruptcy, is engaged in the global mobile satellite
telecommunications services business. On January 30, 2003, New Valley announced
that the agreement in principle had terminated due to New Valley's inability to
reach final agreement with Globalstar's Creditors Committee. New Valley has had
continuing discussions with Globalstar regarding a proposed investment in its
business.

     In June 1999, New Valley's 73% owned subsidiary, ThinkCorp Holdings
Corporation, formerly known as Thinking Machines Corporation, sold substantially
all of its assets, consisting of its Darwin(R) data mining software and services
business, to Oracle Corporation. The purchase price was $4.7 million in cash at
the closing of the sale and a contingent payment of up to an additional $20.3
million, based on sales by Oracle of the Darwin product above specified sales
targets during the three-year period ended November 30, 2002. Oracle has
informed Thinking Machines that it did not achieve the specified sales target
for the 2000, 2001 and 2002 periods. In 2000 and 2001, Thinking Machines
recognized gains of $150,000 and $250,000 related to
                                        8
<PAGE>

Oracle's payment of the $400,000 of the purchase price escrowed in connection
with the sale. In 2002, New Valley recorded a $338,000 charge related to a
provision for loss on its net investment in Thinking Machines.

     At December 31, 2002, New Valley owned approximately 48% of the outstanding
shares of CDSI Holdings, Inc., which completed an initial public offering in May
1997. CDSI holds a minority interest in a marketing services company that
provides direct mail and telemarketing services.

     As of December 31, 2002, long-term investments consisted primarily of
investments in limited partnerships and limited liability companies of $3.2
million. New Valley is also required to make an additional investment in one of
these limited partnerships of up to $983,000.

EMPLOYEES

     At December 31, 2002, New Valley had 13 full-time employees. New Valley
believes that relations with its employees are satisfactory.

                                  RISK FACTORS

NEW VALLEY HAS EXPERIENCED CONTINUING LOSSES; IT HAS HIGH LEVERAGE AND A FIXED
CHARGE COVERAGE DEFICIT

     New Valley has experienced losses from continuing operations for four of
the last five years. New Valley had outstanding debt in the amount of $40.5
million as of December 31, 2002 and its earnings would have been inadequate to
cover fixed charges for the past two most recent years. New Valley's future
operating performance and ability to make planned expenditures will depend on
future economic conditions and financial, business and other factors that may be
beyond its control. If New Valley cannot service its fixed charges, it would
significantly harm New Valley.

NEW VALLEY IS SUBJECT TO RISKS RELATING TO THE INDUSTRIES IN WHICH IT OPERATES

     Risks of real estate ventures.  New Valley has two significant investments
in Montauk and the former Kona Surf Hotel in Hawaii where it holds only a 50%
interest. New Valley must seek approval from other parties for important actions
regarding these joint ventures. Since these other parties' interests may differ
from those of New Valley, a deadlock could arise that might impair the ability
of the ventures to function. Such a deadlock could significantly harm the
ventures.

     New Valley plans to pursue a variety of real estate development projects.
Development projects are subject to special risks including potential increase
in costs, inability to meet deadlines which may delay the timely completion of
projects, reliance on contractors who may be unable to perform and the need to
obtain various governmental and third party consents.

     Risks relating to the residential brokerage business.  Through its
investment in Montauk, New Valley is subject to the risks and uncertainties
endemic to the residential brokerage business. As a franchisee, Prudential
Douglas Elliman operates each of its offices under its franchiser's brand name,
but generally does not own any of the brand names under which it operates. The
franchiser has significant rights over the use of the franchised service marks
and the conduct of Prudential Douglas Elliman's business. The franchise
agreement requires Prudential Douglas Elliman to:

     - Coordinate with the franchiser on significant matters relating to
       Prudential Douglas Elliman's operations, including the opening and
       closing of offices;

     - Make substantial royalty payments to its franchiser and contribute
       significant amounts to national advertising funds maintained by the
       franchiser;

     - Indemnify the franchiser against losses arising out of the operations of
       Prudential Douglas Elliman's business under the franchise agreements; and

                                        9
<PAGE>

     - Maintain standards and comply with guidelines relating to its operations
       which are applicable to all franchisees of the franchiser's real estate
       franchise system.

     Prudential Douglas Elliman's franchiser has the right to terminate
Prudential Douglas Elliman's franchises, upon the occurrence of certain events,
including a bankruptcy or insolvency event or a change in control affecting
Prudential Douglas Elliman, a transfer by Prudential Douglas Elliman of its
rights under the franchise agreement and Prudential Douglas Elliman's failure to
promptly pay amounts due under the franchise agreements. A termination of
Prudential Douglas Elliman's franchise agreement could adversely affect New
Valley's investment in Montauk.

     Recent years have been characterized by high levels of existing home sales
and residential prices. However, the residential real estate market tends to be
cyclical and typically is affected by changes in the general economic conditions
that are beyond Prudential Douglas Elliman's control. Any of the following could
have a material adverse effect on Prudential Douglas Elliman's business by
causing a general decline in the number of home sales and/or prices, which in
turn, could adversely affect revenues and profitability:

     - continued periods of economic slowdown or recession;

     - a change in the current low interest rate environment resulting in rising
       interest rates;

     - decreasing home ownership rates; or

     - declining demand for real estate.

     All of Prudential Douglas Elliman's current operations are located in the
New York metropolitan area. Local and regional economic conditions in this
market could differ materially from prevailing conditions in other parts of the
country. A downturn in the residential real estate market or economic conditions
in that region could have a material adverse effect on Prudential Douglas
Elliman and New Valley's investment in Montauk.

NEW VALLEY'S POTENTIAL INVESTMENTS ARE UNIDENTIFIED AND MAY NOT SUCCEED

     New Valley currently holds a significant amount of marketable securities
and cash not committed to any specific investments. This subjects a holder of
New Valley's common shares to increased risk and uncertainty because the holder
will not be able to evaluate how this cash will be invested and the economic
merits of particular investments. There may be substantial delay in locating
suitable investment opportunities. In addition, New Valley may lack relevant
management experience in the areas in which New Valley may invest. There is a
risk that New Valley will fail in targeting, consummating or effectively
managing any of these investments.

NEW VALLEY MAY BECOME SUBJECT TO BURDENSOME REGULATION UNDER THE INVESTMENT
COMPANY ACT

     The Investment Company Act and its regulations generally impose substantive
restrictions on a company that owns "investment securities" having a value in
excess of 40% of the company's "total assets". Following the distribution of the
Ladenburg Thalmann Financial Services shares and asset dispositions in Russia,
New Valley was above this threshold and relied on the one-year exemption from
registration under the Investment Company Act provided by Rule 3a-2, which
expired on December 19, 2002. Prior to that time, through New Valley's
acquisition of the two office buildings in Princeton, N.J. and the increase to
50% of its ownership in Montauk, New Valley was engaged primarily in a business
or businesses other than that of investing, reinvesting, owning, holding or
trading in securities and the value of its investment securities was below the
40% threshold. Under the Investment Company Act, New Valley is required to
determine the value of its total assets for purposes of the 40% threshold based
on "market" or "fair" values, depending on the nature of the asset, at the end
of the last preceding fiscal quarter and based on cost for assets acquired since
that date. If New Valley were required to register under the Investment Company
Act, it would be subject to a number of severe substantive restrictions on its
operations, capital structure and management. For example, it would be
prohibited from entering into principal transactions and joint transactions with
affiliates. It would also be prohibited from issuing convertible securities and
options and would be subject to limitations on leverage.

                                        10
<PAGE>

NEW VALLEY'S MANAGEMENT DOES NOT DEVOTE ITS FULL TIME TO NEW VALLEY'S AFFAIRS

     New Valley is dependent upon the services of Bennett S. LeBow, the Chairman
of the Board and Chief Executive Officer of New Valley. The loss to New Valley
of Mr. LeBow could harm New Valley. In addition, management divides its time
between New Valley and Vector Group and, consequently, does not spend its full
time on New Valley business.

VECTOR GROUP CONTROLS A MAJORITY OF NEW VALLEY'S SHARES

     As a result of the recapitalization and assuming that no warrant holder
exercises its warrants, Vector Group currently owns approximately 58% of the
outstanding common shares of New Valley. As holder of the absolute majority of
the common shares, Vector Group is able to elect all of New Valley's directors
and control the management of New Valley. Also, Vector Group's ownership of
common shares makes it impossible for a third party to acquire control of New
Valley without the consent of Vector Group and therefore may discourage third
parties from seeking to acquire New Valley. A third party would have to
negotiate any such transaction with Vector Group, and the interests of Vector
may be different from the interests of other New Valley stockholders. This may
depress the price of the common shares.

NEW VALLEY ENGAGES IN SUBSTANTIAL RELATED PARTY TRANSACTIONS

     New Valley has had substantial dealings with its controlling stockholder
and its affiliates, certain members of management and certain directors. New
Valley may continue to have such dealings in the future. While New Valley
believes these arrangements and transactions are fair to and in the best
interest of New Valley, they were not negotiated at arms length.

THE MARKET FOR NEW VALLEY'S COMMON SHARES IS RELATIVELY ILLIQUID

     New Valley completed a plan of recapitalization in June 1999 that made
far-reaching changes in New Valley's capital structure. At this time, it is
still unclear what the long-term impact of the recapitalization will be on the
common shares. Although New Valley's common shares began trading on the Nasdaq
SmallCap Market in September 2000, the liquidity of their trading market remains
limited. The potential future issuance of the common shares on exercise of the
warrants, which would increase the number of common shares by more than 80%, may
depress the price of the common shares. New Valley has not declared a cash
dividend on the common shares since 1984, and does not currently intend to pay
such dividends in the foreseeable future.

ITEM 2. PROPERTIES

     New Valley's principal executive office is in Miami, Florida, where it
shares offices with Vector Group and various of their subsidiaries. New Valley
has entered into an expense sharing agreement for use of such office space. New
Valley's operating properties are described above.

ITEM 3. LEGAL PROCEEDINGS

     Reference is made to Notes 8, 14 and 15 to the Consolidated Financial
Statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS; EXECUTIVE OFFICERS
        OF THE REGISTRANT

     New Valley held its 2002 annual meeting of stockholders on October 24,
2002. There were 22,881,467 New Valley common shares entitled to be voted on the
September 11, 2002 record date for the meeting. The only matter submitted to the
New Valley's stockholders for a vote at the annual meeting was to elect the

                                        11
<PAGE>

following eight director nominees to serve for the ensuing year and until their
successors are elected. The votes cast and withheld for such nominees were as
follows:

<Table>
<Caption>
                          NOMINEE                                 FOR       WITHHELD
                          -------                              ----------   --------
<S>                                                            <C>          <C>
Henry C. Beinstein..........................................   20,819,071    88,531
Arnold I. Burns.............................................   20,819,084    88,518
Ronald J. Kramer............................................   20,818,329    89,273
Richard J. Lampen...........................................   20,819,084    88,518
Bennett S. LeBow............................................   20,817,469    90,133
Howard M. Lorber............................................   20,819,066    88,536
Barry W. Ridings............................................   20,819,087    88,515
Victor M. Rivas.............................................   20,015,268   892,334
</Table>

     Based on these voting results, each of the directors nominated was elected.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The table below, together with accompanying text, presents certain
information regarding all current executive officers of New Valley as of March
21, 2003. There are no family relationships among the executive officers of New
Valley. Each of the executive officers of New Valley serves until the election
and qualification of his successor or until his death, resignation or removal by
the Board of Directors of New Valley.

<Table>
<Caption>
                                                                                        YEAR INDIVIDUAL
                                                                                           BECAME AN
            NAME              AGE                       POSITION                       EXECUTIVE OFFICER
            ----              ---                       --------                       -----------------
<S>                           <C>   <C>                                                <C>
Bennett S. LeBow............  65    Chairman of the Board and Chief Executive Officer        1988
Howard M. Lorber............  54    President and Chief Operating Officer                    1994
Richard J. Lampen...........  49    Executive Vice President and General Counsel             1995
J. Bryant Kirkland III......  37    Vice President, Treasurer and Chief Financial            1998
                                    Officer
Marc N. Bell................  42    Vice President, Associate General Counsel and            1998
                                    Secretary
</Table>

     BENNETT S. LEBOW has been Chairman of the Board of New Valley since January
1988 and Chief Executive Officer thereof since November 1994. Mr. LeBow has been
the Chairman of the Board and Chief Executive Officer of Vector Group, a New
York Stock Exchange-listed holding company engaged in the manufacture and sale
of cigarettes, since June 1990 and a director of Vector Group since October
1986, and currently holds various positions with Vector Group's subsidiaries.
Mr. LeBow has been a director of Ladenburg Thalmann Financial Services since May
2001.

     HOWARD M. LORBER has been President and Chief Operating Officer of New
Valley since November 1994 and serves as a director of New Valley. Since January
2001, Mr. Lorber has served as President, Chief Operating Officer and a director
of Vector Group. Mr. Lorber has been Chairman of the Board of Hallman & Lorber
Assoc., Inc., consultants and actuaries to qualified pension and profit sharing
plans, and various of its affiliates since 1975; a stockholder and a registered
representative of Aegis Capital Corp., a broker-dealer and a member firm of the
National Association of Securities Dealers, since 1984; Chairman of the Board of
Directors since 1987 and Chief Executive Officer since November 1993 of Nathan's
Famous, Inc., a chain of fast food restaurants; a consultant to Vector Group and
its subsidiaries from January 1994 to January 2001; a director of United Capital
Corp., a real estate investment and diversified manufacturing company, since May
1991; a director of Prime Hospitality Corp., a company doing business in the
lodging industry, since May 1994; and Chairman of the Board of Ladenburg
Thalmann Financial Services since May 2001. He is also a trustee of Long Island
University and Babson College.

     RICHARD J. LAMPEN has been Executive Vice President and General Counsel of
New Valley since October 1995 and serves as a director of New Valley. Since July
1996, Mr. Lampen has served as Executive Vice President of Vector Group and
since November 1998 as President and Chief Executive Officer of CDSI. Mr. Lampen
is a director of CDSI and Ladenburg Thalmann Financial Services. From May 1992
to

                                        12
<PAGE>

September 1995, Mr. Lampen was a partner at Steel Hector & Davis, a law firm
located in Miami, Florida. From January 1991 to April 1992, Mr. Lampen was a
Managing Director at Salomon Brothers Inc, an investment bank, and was an
employee at Salomon Brothers Inc from 1986 to April 1992. Mr. Lampen has served
as a director of a number of other companies, including U.S. Can Corporation,
The International Bank of Miami, N.A. and Spec's Music, Inc., as well as a
court-appointed independent director of Trump Plaza Funding, Inc.

     J. BRYANT KIRKLAND III has been Vice President, Treasurer and Chief
Financial Officer of New Valley since January 1998, and since November 1994 has
served in various financial capacities with New Valley and with Vector Group.
Since January 2001, Mr. Kirkland has served as Vice President of Vector Group.
Mr. Kirkland has served as Vice President and Chief Financial Officer of CDSI
since January 1998 and as a director of CDSI since November 1998. From June 2001
until October 2002, Mr. Kirkland served as Chief Financial Officer of Ladenburg
Thalmann Financial Services.

     MARC N. BELL has been a Vice President of New Valley since February 1998
and has served as Associate General Counsel and Secretary of New Valley since
November 1994. Since May 1994, Mr. Bell has served as General Counsel and
Secretary of Vector Group and since January 1998 as Vice President of Vector
Group.

                                        13
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     New Valley's common shares are traded on the NASDAQ SmallCap Market under
the symbol NVAL. The following table sets forth, for the calendar quarters
indicated, the range of per share prices for the common shares as quoted on the
NASDAQ SmallCap Market

<Table>
<Caption>
                                                                HIGH         LOW
                                                              --------     --------
<S>                                                           <C>          <C>
NASDAQ SMALLCAP MARKET
2002:
Fourth Quarter..............................................  $   4.48     $   3.25
Third Quarter...............................................      4.19         3.70
Second Quarter..............................................      4.20         3.95
First Quarter...............................................      4.49         3.35
2001:
Fourth Quarter..............................................  $   4.25     $   2.93
Third Quarter...............................................      3.67         2.93
Second Quarter..............................................      3.05         2.55
First Quarter...............................................      3.16         2.24
</Table>

HOLDERS

     At March 21, 2003, there were approximately 12,297 holders of record of the
common shares.

DIVIDENDS

     No cash dividends were paid on the common shares in 2002 or 2001. A special
dividend of 0.988 of a share of Ladenburg Thalmann Financial Services was paid
on each of New Valley's common shares on December 20, 2001. The information
presented above concerning the price range of the common shares is adjusted for
the special dividend.

RECENT SALES OF UNREGISTERED SECURITIES

     No securities of New Valley, which were not registered under the Securities
Act of 1933, have been issued or sold by New Valley during the three months
ended December 31, 2002.

                                        14
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                                    YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------------------------
                                                     2002        2001        2000        1999        1998
                                                   ---------   ---------   ---------   ---------   ---------
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>         <C>         <C>         <C>         <C>
OPERATING RESULTS:
Total revenues...................................  $   5,014   $  12,701   $  13,492   $  12,012   $  35,417
Total costs and expenses.........................     15,029      25,522      24,277      33,516      48,603
Other (expense) income...........................    (12,048)     (3,214)     46,510      (6,160)     (4,072)
                                                   ---------   ---------   ---------   ---------   ---------
(Loss) income from continuing operations before
  income taxes and minority interests............    (22,063)    (16,035)     35,725     (27,664)    (17,258)
Income tax provision.............................         --         260          --          18          --
Minority interests in (loss) income from
  continuing operations of consolidated
  subsidiaries...................................       (151)       (594)       (323)         92      (2,089)
                                                   ---------   ---------   ---------   ---------   ---------
(Loss) income from continuing operations.........    (21,912)    (15,701)     36,048     (27,774)    (15,169)
Discontinued operations:
(Loss) income from discontinued operations.......         --      (5,829)      5,002       2,051      (8,160)
Gain on disposal of discontinued operations......         --       4,346      17,879       4,100       7,740
                                                   ---------   ---------   ---------   ---------   ---------
  (Loss) income from discontinued operations.....         --      (1,483)     22,881       6,151        (420)
                                                   ---------   ---------   ---------   ---------   ---------
Net (loss) income................................    (21,912)    (17,184)     58,929     (21,623)    (15,589)
Dividend requirements on preferred shares(a).....         --          --          --     (37,759)    (80,964)
                                                   ---------   ---------   ---------   ---------   ---------
Net (loss) income applicable to common shares....  $ (21,912)  $ (17,184)  $  58,929   $ (59,382)  $ (96,553)
                                                   =========   =========   =========   =========   =========
Per common and equivalent share (b):
Basic:
  (Loss) income from continuing operations.......  $   (0.96)  $   (0.69)  $    1.57   $   (3.76)  $  (10.04)
  (Loss) income from discontinued operations.....         --       (0.06)       0.99         .35       (0.04)
  Net (loss) income per common share.............      (0.96)      (0.75)       2.56       (3.41)     (10.08)
Diluted:
  (Loss) income from continuing operations.......  $   (0.96)  $   (0.69)  $    1.56   $   (3.76)  $  (10.04)
  (Loss) income from discontinued operations.....         --       (0.06)       0.99         .35       (0.04)
  Net (loss) income per common share.............      (0.96)      (0.75)       2.55       (3.41)     (10.08)
Dividends declared(a)............................         --          --          --          --          --
Book value(b)....................................  $    4.59   $    5.63   $    6.54   $    3.94   $  (21.44)

BALANCE SHEET DATA:
Total assets.....................................  $ 163,548   $ 162,698   $ 263,130   $ 220,668   $ 272,722
Long-term obligations............................     39,856      11,142      11,900      19,519      54,801
Prepetition claims(c)............................        674       2,700      10,229      12,279      12,364
Redeemable preferred shares(d)...................         --          --          --          --     316,202
Stockholders' equity (deficiency)................    103,057     128,480     149,685      91,379    (205,312)
Working capital(e)...............................     80,159     113,628      72,720      23,014       7,870
</Table>

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

(a)   Dividend requirements on preferred shares amounts include $444 in 1999 and
      $891 in 1998 accrued on the redeemable Class A senior preferred shares to
      reflect the effective dividend yield over the life of such securities. All
      preferred dividends, whether or not declared, are reflected as a deduction
      in arriving at net loss applicable to common shares. No dividends on
      preferred shares were declared in 1999 and 1998.
(b)   For periods subsequent to June 4, 1999, all per share data have been
      restated to reflect New Valley's recapitalization, which occurred on that
      date.
(c)   Represents prepetition claims against New Valley in its bankruptcy case.
      See Note 14 to the Consolidated Financial Statements.
(d)   Includes cumulative preferred dividends on the redeemable Class A senior
      preferred shares of $219,068 at December 31, 1998.
(e)   Working capital represents current assets less current liabilities on the
      New Valley Consolidated Balance Sheets.

                                        15
<PAGE>

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

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INTRODUCTION

     The following discussion assesses the results of operations, capital
resources and liquidity of New Valley and its consolidated subsidiaries and
should be read in conjunction with the Consolidated Financial Statements and the
related notes included elsewhere in this report. The operating results of the
periods presented were not significantly affected by inflation. The consolidated
financial statements include the accounts of BrookeMil, Thinking Machines and
other subsidiaries and the discontinued operations of Ladenburg Thalmann
Financial Services.

     New Valley's financial statements have been affected by its complete
redeployment of its assets since it emerged from bankruptcy in January 1995.
These transactions include:

     - the sale of the money transfer business in January 1995 and the messaging
       service business in October 1995. These operations generated virtually
       all of New Valley's revenues before 1995;

     - the acquisition of the Ladenburg Thalmann & Co. broker-dealer business in
       May 1995;

     - the purchase of New Valley's U.S. office buildings and shopping centers
       in January 1996 and the sale of the office buildings in September 1998
       and five of the shopping centers in August 1999;

     - the acquisition of BrookeMil in January 1997;

     - the formation in February 1998 of the Western Realty Development joint
       venture, to which New Valley contributed a significant portion of
       BrookeMil's operations;

     - the formation in June 1998 of the Western Realty Repin joint venture to
       provide financing to BrookeMil;

     - the sale of Western Tobacco Investments in August 2000 and New Valley's
       receipt of $57,208 in sale proceeds;

     - the sale of Ladenburg Thalmann & Co. to Ladenburg Thalmann Financial
       Services in May 2001 for shares of Ladenburg Thalmann Financial Services,
       convertible notes and cash;

     - the distribution to New Valley's stockholders of its 53.6% interest in
       Ladenburg Thalmann Financial Services and the sale of Western Realty
       Investments in December 2001. New Valley received approximately $22,000
       of sale proceeds from the Western Realty Investments transaction. The
       broker-dealer operations, which were the primary source of New Valley's
       revenues from May 1995 to December 2001, are treated as discontinued
       operations in New Valley's financial statements;

     - the sale of BrookeMil for approximately $22,000, before closing expenses,
       in April 2002;

     - the disposal of New Valley's remaining U.S. shopping center in May 2002;

     - the purchase of two commercial office buildings in Princeton, N. J. and
       the increase in New Valley's ownership in Montauk Battery Realty to 50%
       in December 2002; and

     - the purchase by Montauk in March 2003 of Insignia Douglas Elliman, and an
       affiliated property management company, for $71,250. New Valley invested
       an additional $9,500 in subordinated debt and equity of Montauk to help
       fund the acquisition.

RECENT DEVELOPMENTS

     Sale of BrookeMil.  On April 30, 2002, New Valley sold the shares of
BrookeMil for approximately $22,000 before closing expenses. BrookeMil owned the
two Kremlin sites in Moscow, which were New Valley's remaining real estate
holdings in Russia. Under the terms of the Western Realty Repin LLC
participating loan to BrookeMil, New Valley received approximately $7,500 of the
net proceeds from the sale and Apollo Real Estate Investment Fund III, L.P.
received approximately $12,500 of the proceeds. These

                                        16
<PAGE>

amounts are subject to adjustment based on final closing expenses. New Valley
recorded a gain on sale of real estate of $8,484 for the year ended December 31,
2002 in connection with the sale. New Valley also recorded $767 in additional
general and administrative expenses in 2002 related to the closing of its
Russian operations. The expenses consisted principally of employee severance.

     Shopping Center.  New Valley disposed of its remaining U.S. shopping center
in May 2002 and recorded a gain of $564 for the year ended December 31, 2002,
which represented the shopping center's negative book value, in connection with
the disposal. No proceeds were received in the disposal.

     Purchase of Office Buildings.  On December 13, 2002, New Valley completed
the acquisition of two commercial office buildings in Princeton, N.J. for an
aggregate purchase price of $54,000. The two buildings were constructed in July
2000 and June 2001 and have a total of approximately 225,000 square feet of
rentable space. New Valley funded $40,500 of the purchase price with a
non-recourse mortgage loan due in December 2006.

     Montauk Battery Realty LLC.  During 2000 and 2001, New Valley acquired for
approximately $1,744 a 37.2% ownership interest in Prudential Long Island
Realty, the largest independently owned and operated residential real estate
brokerage company on Long Island, and a minority interest in an affiliated
mortgage company. On December 19, 2002, New Valley and the other owners of
Prudential Long Island Realty contributed their interests in Prudential Long
Island Realty to Montauk Battery Realty LLC, a newly formed entity. New Valley
acquired a 50% interest in Montauk as a result of an additional investment of
approximately $1,413 by New Valley and the redemption by Prudential Long Island
Realty of various ownership interests. As part of the transaction, Prudential
Long Island Realty renewed its franchise agreement with The Prudential Real
Estate Affiliates, Inc for an additional ten-year term. The owners of Montauk
also agreed, subject to receipt of any required regulatory approvals, to
contribute to Montauk their interests in the related mortgage company.

     In March 2003, Montauk purchased the leading New York City - based
residential brokerage firm, Insignia Douglas Elliman, and an affiliated property
management company, for $71,250. As a result of the acquisition, Montauk's
brokerage operations, to be known as Prudential Douglas Elliman, will be the
largest residential brokerage company in the New York metropolitan area. New
Valley invested an additional $9,500 in subordinated debt and equity of Montauk
to help fund the acquisition. The subordinated debt bears interest at 12% per
annum and is due in March 2013.

CRITICAL ACCOUNTING POLICIES

     Financial Reporting Release No. 60, issued by the Securities and Exchange
Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
New Valley's consolidated financial statements include a summary of the
significant accounting policies and methods used in the preparation of the
consolidated financial statements, which is located in Note 2. The following is
a brief discussion of the more significant accounting policies and methods used
by New Valley.

     General.  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,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.

     Investment securities available for sale.  At December 31, 2002, New Valley
had investment securities available for sale of $13,391. New Valley classifies
investments in debt and marketable equity securities as either available for
sale or held to maturity. Investments classified as available for sale are
carried at fair value, with net unrealized gains and losses included as a
separate component of stockholders' equity. Realized gains and losses are
included in other income. The cost of securities sold is determined based on
average cost. Gains are recognized when realized in New Valley's consolidated
statements of operations. Losses are recognized as realized or upon the
determination of the occurrence of an other-than-temporary decline in fair
value. New Valley's policy is to review its securities on a regular basis to
evaluate whether any security has experienced an

                                        17
<PAGE>

other-than-temporary decline in fair value. If it is determined that an
other-than-temporary decline exists in one of New Valley's marketable
securities, it is New Valley's policy to record a realized loss on such
investment in the Company's consolidated statements of operations. In 2002, New
Valley recorded a write down of $6,776 related to other-than-temporary declines
of its investment securities.

     Long-Term Investments.  At December 31, 2002, New Valley had long-term
investments of $3,150, representing investments in various limited partnerships.
The principal business of the limited partnerships is investing in real estate
and investment securities. These long-term investments are illiquid, and the
value of the investments is dependant on the performance of the underlying
partnership and its management by the general partners. In assessing potential
impairment for these investments, New Valley considers the external markets for
these types of investments as well as the forecasted financial performance of
its investees. If these forecasts are not met, New Valley may have to recognize
an impairment charge in its statement of operations.

     Income Taxes.  The year 2000 was the only year out of the last five in
which New Valley has reported net income. New Valley's losses during these and
prior years have generated federal tax net operating loss, or NOL, carryforwards
of approximately $156,900 as of December 31, 2002 and capital loss carryforwards
of $6,600, which expire at various dates from 2006 through 2022. Generally
accepted accounting principles require that New Valley record a valuation
allowance against the deferred tax asset associated with these loss
carryforwards if it is "more likely than not" that New Valley will not be able
to utilize it to offset future taxes. Due to the size of the loss carryforwards
in relation to New Valley's history of unprofitable operations and to the
continuing uncertainties surrounding its operations as it seeks to acquire
additional operating companies, New Valley has not recognized any of this net
deferred tax asset. New Valley currently provides for income taxes only to the
extent that it expects to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) for current income.

     It is possible, however, that New Valley could be profitable in the future
at levels which cause management to conclude that it is more likely than not
that it will realize all or a portion of the carryforwards. Upon reaching such a
conclusion, New Valley would immediately record the estimated net realizable
value of the deferred tax asset at that time and would then provide for income
taxes at a rate equal to its combined federal and state effective rates, which
would approximate 40% under current tax rates, rather than the nominal rate
currently being used. Subsequent revisions to the estimated net realizable value
of the deferred tax asset could cause New Valley's provision for income taxes to
vary significantly from period to period, although its cash tax payments would
remain unaffected until the benefit of the loss carryforwards is utilized.

RESULTS OF OPERATIONS

     For the years ended December 31, 2002, 2001 and 2000, the results of
continuing operations of New Valley's primary operating units are as follows.
The operations of BrookeMil are included in real estate operations. For 2001,
the operations of Western Realty Development are included in real estate
operations. For 2000, New Valley's interest in Western Realty Development, which
was accounted for on the equity method prior to December 29, 2000, is included
in corporate and other activities. In December 2001, New Valley completed the
distribution to its stockholders of its shares in Ladenburg Thalmann Financial
Services, its former majority-owned subsidiary engaged in the investment banking
and brokerage business. The broker-dealer operations are treated as discontinued
operations in the consolidated financial statements and are discussed in the
following discussion.

                                        18
<PAGE>

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                                2002       2001      2000
                                                              --------   --------   -------
<S>                                                           <C>        <C>        <C>
Real estate:
  Revenues..................................................  $  1,001   $  9,966   $ 3,199
  Expenses..................................................     2,062     12,067     8,534
  Other income (expense)....................................     8,299    (20,945)       --
                                                              --------   --------   -------
  Operating income (loss) before taxes and minority
     interests..............................................  $  7,238   $(23,046)  $(5,335)
                                                              ========   ========   =======
Corporate and other:
  Revenues..................................................  $  4,013   $  2,735   $10,293
  Expenses..................................................    12,967     13,455    15,743
  Other (expense) income....................................   (20,347)    17,731    46,510
                                                              --------   --------   -------
  Operating (loss) income before taxes and minority
     interests..............................................  $(29,301)  $  7,011   $41,060
                                                              ========   ========   =======
</Table>

THE YEAR 2002 COMPARED TO 2001

     Consolidated total revenues were $5,014 for the year ended December 31,
2002 versus $12,701 for the same period last year. The decrease in revenues of
$7,687 is attributable primarily due to the sale of Western Realty Investments
and the disposal of New Valley's remaining shopping center offset by increased
net gains on the sale of investments.

  Real Estate

     Revenues from the real estate operations for the year ended December 31,
2002 decreased $8,965 primarily due to the absence of rental revenue of $8,024
from Western Realty Investments, which was sold in December 2001, and New
Valley's remaining shopping center, which was disposed of in May 2002. The
decreases in revenues and expenses were offset by the inclusion of rental
revenues and related expenses associated with the two commercial office
buildings, which New Valley purchased on December 13, 2002.

     Revenues from real estate operations in 2002 consisted of $661 of revenues
from the shopping center disposed in May 2002 and $340 of revenues associated
with the two commercial office buildings acquired in December 2002. Revenues
from real estate in 2001 consisted of $8,024 from Western Realty Investments and
$1,942, which was primarily from the shopping center disposed in 2002.

     Expenses of the real estate operations decreased $10,005 in the 2002 period
due primarily to lower expenses as a result of the sale of Western Realty
Investments and the shopping center. Expenses in 2002 consisted of $1,033 from
the shopping center, which was disposed in May 2002, $800 related to BrookeMil's
operations and $229 from the two commercial office buildings. The expenses
related to BrookeMil's operations included $767 in additional general and
administrative expenses for the year ended December 31, 2002 related to the
closing of its Russian operations. The expenses consisted principally of
employee severance. Expenses of the real estate operations in the 2001 period
consisted of $8,669 from Western Realty Investments, $735 from BrookeMil and
$2,663, primarily from the disposed shopping center. BrookeMil incurred expenses
of $735 for the year ended December 31, 2001 in connection with the development
of the Kremlin sites.

     Other income from real estate activities in 2002 consisted of gains on sale
of real estate for the year ended December 31, 2002 of $8,484 in connection with
the April 2002 sale of BrookeMil and $564 from the disposal of the shopping
center offset by equity loss from real estate businesses of $749. The equity
losses resulted from a loss of $1,343 related to New Valley's investment in Koa
Investors, which owns the former Kona Surf Hotel in Kailua-Kona, Hawaii, and
income of $594 from Montauk. Koa Investors' losses represent management fees and
a loss of a deposit on an adjoining golf course, which it determined not to
purchase. Koa Investors capitalizes all costs related to the acquisition and
development of the property. Other expense from real estate activities for the
year ended December 31, 2001 represented the $21,842 loss on the sale of Western
Realty Investments, offset by a $897 gain from the sale of the shopping center.

                                        19
<PAGE>

  Corporate and other

     For the year ended December 31, 2002, New Valley's revenues of $4,013
related to corporate and other activities consisted of net gains on investments
of $1,850 and interest and dividend income of $2,163. In the prior year,
revenues related to corporate and other activities were $2,735, which consisted
of interest and dividend income of $3,738 offset by losses on investments of
$1,003. The decrease in interest and dividend income is due primarily to lower
interest rates in 2002 versus 2001 offset by higher cash balances in the 2002
period.

     Corporate and other expenses of $12,967 for the year ended December 31,
2002 consisted primarily of employee compensation and benefits of $8,063 with
the remainder being legal, insurance and other corporate expenses. Corporate and
other expenses of $13,455 for the year ended December 31, 2001 consisted
primarily of employee compensation and benefits of $6,849 with the remainder
being legal, insurance and other corporate expenses. The increase in
compensation expense in 2002 relates primarily to an increase of $1,500 of
bonuses payable in 2002, offset by a $375 fee paid in 2001 to a director for his
services in the LTS acquisition. New Valley's President and Chief Operating
Officer received a $2,000 bonus for 2002 relating, among other things, to his
role in the consummation of the acquisition of the office buildings and the
related financing, and the increase in the Company's ownership in the
residential brokerage business.

     Included in corporate revenues is income from computer software for 2001
related to a gain associated with the June 1999 sale of Thinking Machines'
Darwin(R) software and services business to Oracle Corporation. In June 2001,
Thinking Machines recognized a $250 gain from Oracle's payment of the remaining
$250 from the $400 of the purchase price escrowed in connection with the sale.

     New Valley recorded a $338 charge for the year ended December 31, 2002
related to a provision for loss on its net investment in its 73% subsidiary,
ThinkCorp Holdings Corporation, formerly known as Thinking Machines Corporation.
In June 1999, ThinkCorp Holdings sold substantially all of its assets,
consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price included a contingent payment of up to $20,300
based on sales by Oracle of the Darwin product above specified sales targets
during the three-year period ended November 30, 2002. Based on Oracle having
informed ThinkCorp Holdings that the specified sales targets for the 2000 and
2001 periods were not achieved and the overall market conditions in the U.S.
computer industry, New Valley determined it was more likely than not that it
would not recover its investment in ThinkCorp Holding. Oracle subsequently
advised ThinkCorp Holdings that the specified sales target for 2002 was likewise
not met.

     During 2002, Ladenburg Thalmann Financial Services incurred significant
operating losses as its revenues and liquidity were adversely affected by the
overall declines in the U.S. equity markets and the continued weak operating
environment for the broker-dealer industry. Accordingly, New Valley evaluated
its ability to collect its $13,198 of notes receivable and related interest from
Ladenburg Thalmann Financial Services at September 30, 2002. New Valley
determined, based on the then current trends in the broker-dealer industry and
Ladenburg's operating results and liquidity needs, that a reserve for
uncollectibility should be established against these notes and interest
receivable. As a result, New Valley recorded a charge of $13,198 in the third
quarter of 2002.

     During the second half of 2002, the market value of certain marketable
equity securities held by New Valley declined significantly. New Valley's
management assessed the nature of the market declines by evaluating both the
financial condition of the issuers of the underlying securities and conditions
prevailing in the U.S. capital markets. As a result, New Valley's management
determined that the declines were other-than-temporary declines and recorded an
impairment of $6,776 for the year ended December 31, 2002. New Valley will
continue to review its securities on a regular basis and evaluate whether any
security has experienced an other-than-temporary decline in fair value. If such
declines continue to occur in the future, New Valley will record additional
realized losses from the declines in the Company's consolidated statements of
operations.

     There was no income tax provision for the year ended December 31, 2002. The
income tax provision related to the year ended December 31, 2001 related to
Russian income tax expense at Western Realty

                                        20
<PAGE>

Investments. The effective tax rate 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.

THE YEAR 2001 COMPARED TO 2000

  Real Estate

     Real estate revenues were $9,966 for the year ended December 31, 2001 as
compared to $3,199 for the year ended December 31, 2000. The increase of $6,767
in real estate revenues was attributable to the inclusion of $8,024 of Western
Realty Development rental revenues from the Ducat Place II office building in
Moscow, offset by a decrease in revenues as a result of the sale of one of New
Valley's two U.S. shopping centers in February 2001. Prior to December 29, 2000,
Western Realty Development was accounted for under the equity method of
accounting and, accordingly, the amounts earned were recorded in other income
(expense) from corporate activities. Subsequent to December 29, 2000, the
revenues from Western Realty Development are included in real estate revenues.

     Revenues from real estate in 2001 consisted of $8,024 from Western Realty
Investments and $1,942, which was primarily from the shopping center disposed in
2002. Revenues from real estate in 2000 consisted of $3,199 were earned by New
Valley's two U.S. shopping centers.

     Expenses of the real estate operations in the 2001 period consisted of
$8,669 from Western Realty Investments, $735 from BrookeMil and $2,663,
primarily from the disposed shopping center. BrookeMil incurred expenses of $735
for the year ended December 31, 2001, in connection with the development of the
Kremlin sites. Expenses of the real estate operations in the 2000 period
consisted of $4,614, primarily from New Valley's two U.S. shopping centers and
$3,920 from BrookeMil. BrookeMil incurred expenses of $3,920 for 2000 related to
the Kremlin sites. BrookeMil's expenses for the 2000 period consisted primarily
of accrued interest expense of $3,373 associated with the participating loan
from Western Realty Repin.

     Other expense from real estate activities for the year ended December 31,
2001 represented the $21,842 loss on the sale of Western Realty Investments,
offset by a $897 gain from the sale of the shopping center.

  Corporate and other

     Corporate and other revenues were $2,735 for the year ended December 31,
2001 as compared to $10,293 for the year ended December 31, 2000. The decrease
in corporate and other revenues primarily relates to net gains on sale of
investments of $7,271 recognized during 2000 compared to a loss during 2001 of
$1,003 which was offset by an increase in interest and dividend income of $716
for 2001.

     Corporate and other expenses were $13,455 for the year ended December 31,
2001, a decline of $2,288 from the prior year. Corporate and other expenses of
$13,455 for the year ended December 31, 2001 consisted primarily of employee
compensation and benefits of $6,849 with the remainder being legal, insurance
and other corporate expenses. Corporate and other expenses of $15,743 for the
year ended December 31, 2000 consisted primarily of employee compensation and
benefits of $7,278 with the remainder being legal, insurance and other corporate
expenses. The decline in corporate expenses was primarily the result of a
decrease in legal and administrative expenses.

     Other income from corporate activities recorded during 2001 primarily
related to a gain on lawsuit settlement arising from the resolution of an
insurance claim involving New Valley's former Western Union satellite business.
The other income recorded during 2000 primarily related to a gain of $52,421 on
the sale of Western Tobacco Investments, offset by a loss of $5,597 from the
operations of investees accounted for on the equity method.

     Other income from computer software for 2001 related to a gain associated
with the June 1999 sale of Thinking Machines' Darwin(R) software and services
business to Oracle Corporation. In June 2001, Thinking Machines recognized a
$250 gain from Oracle's payment of the remaining $250 from the $400 of the
purchase price escrowed in connection with the sale. Revenues for 2000 related
to the $150 payment of the first

                                        21
<PAGE>

installment of the escrowed funds. Computer software expenses related to general
and administrative expenses.

     Income tax expense for 2001 was $260 versus $0 for 2000. The income taxes
related principally to foreign income taxes of Western Realty Development. The
effective tax rate 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.

DISCONTINUED OPERATIONS

     Ladenburg Thalmann Financial Services.  On November 30, 2001, New Valley
announced that it would distribute its 53.6% interest in Ladenburg Thalmann
Financial Services common stock to holders of New Valley common shares through a
special dividend. The special dividend was accomplished through a pro rata
distribution of the Ladenburg Thalmann Financial Services shares, paid on
December 20, 2001 to holders of record as of December 10, 2001. New Valley
stockholders received 0.988 of a Ladenburg Thalmann Financial Services share for
each share of New Valley.

     The consolidated financial statements of New Valley reflect the
broker-dealer operations as discontinued operations for all periods presented.
Accordingly, revenues, costs and expenses, and cash flows of the discontinued
operations have been excluded from the respective captions in the consolidated
statements of operations and consolidated statements of cash flows. The net
operating results of these entities have been reported, net of applicable income
taxes and minority interests, as "Income (loss) from discontinued operations,"
and the net cash flows of these entities have been reports as "Net cash provided
from discontinued operations." New Valley accounted for the discontinued
operations of Ladenburg Thalmann Financial Services by prorating Ladenburg
Thalmann Financial Services' income and expenses through December 20, 2001, the
date of the distribution.

     Summarized operating results of the discontinued broker-dealer operations
are as follows:

<Table>
<Caption>
                                                        2001       2000
                                                      --------    -------
<S>                                                   <C>         <C>
Revenues............................................  $ 88,473    $90,111
Expenses............................................   100,503     83,813
                                                      --------    -------
Operating (loss) income before income taxes and
  minority interests................................  $(12,030)   $ 6,298
                                                      ========    =======
</Table>

     Gains on Disposal of Discontinued Operations.  New Valley recorded a gain
on disposal of discontinued operations of $4,346 for the year ended December 31,
2001 related to the adjustment of accruals established during New Valley's
bankruptcy proceedings in 1993 and 1994. The reversal of these accruals reduced
various restructuring and tax accruals previously established and were made due
to the completion of settlements related to these matters.

     In 2000, New Valley recorded a gain on disposal of discontinued operations
of $17,879 related to the adjustment of accruals established during New Valley's
bankruptcy proceedings in 1993 and 1994. The reversal of these accruals reduced
restructuring, employee benefit and various tax accruals previously established
and were made due to the completion of settlements or the expiration of statutes
of limitations related to these matters.

LIQUIDITY AND CAPITAL RESOURCES

     New Valley's working capital decreased by $33,469 for the year ended
December 31, 2002 and increased by $40,908 and $49,706 for the years ended
December 31, 2001 and 2000, respectively.

     New Valley's working capital decreased to $80,159 at December 31, 2002 from
$113,628 at December 31, 2001 primarily as a result of the purchase of the two
commercial office buildings in December 2002 and New Valley's loss from
continuing operations offset by the sale of BrookeMil in April 2002.

                                        22
<PAGE>

     New Valley's working capital increased to $113,628 at December 31, 2001
from $72,720 at December 31, 2000 primarily as a result of the sale of Western
Realty Investments, the settlement of a lawsuit which resulted in income of
$17,620 and the sale of New Valley's Royal Palm Beach, Florida shopping center.

     The lawsuit settlement resulted from litigation, which arose out of the
insurers' participation in a program of insurance covering the amount of fuel in
the Westar IV and V communication satellites owned by New Valley's former
Western Union satellite business, which was sold in 1989. The two satellites,
each of which were launched in 1982 with an expected ten year life, had
shortened lives due to insufficient fuel. In the settlement, New Valley received
payment from the insurers for the shortened lives of the two satellites.

     During 2002, New Valley's cash and cash equivalents decreased from $92,069
to $82,113 due primarily to the purchase of the two commercial office buildings
in December 2002 and New Valley's loss from continuing operations for the year
ended December 31, 2002 offset by the receipt of $17,551 from the lawsuit and
the sale of BrookeMil.

     During 2001, New Valley's cash and cash equivalents increased from $82,067
to $92,069 due primarily to the sale of Western Realty Investments.

     During 2000, New Valley's cash and cash equivalents increased from $11,512
to $82,067 due primarily to a $57,208 distribution from joint venture related to
the Western Tobacco Investments sale and net sales of $23,929 of marketable
securities and long-term investments.

     Cash provided from operating activities for the year ended December 31,
2002 was $6,770 compared with cash used for operating activities for the year
ended December 31, 2001 of $10,153. The difference is primarily due to the
receipt of $17,551 offset by New Valley's loss from continuing operations.

     Cash used for operating activities for the year ended December 31, 2001 was
$10,153 as compared to $11,273 from the prior year. Cash used for operating
activities was primarily due to general and administrative expenses offset by
interest and dividend income in both years.

     New Valley's working capital increased to $72,720 at December 31, 2000 from
$23,014 at December 31, 1999 primarily as a result of a $57,208 distribution
from joint venture related to the sale of Western Tobacco Investments.

     Cash used for investing activities for the year ended December 31, 2002 was
$42,768 compared to cash provided from investing activities of $43,713 for the
year ended December 31, 2001. The difference is primarily attributable to the
purchase of the two commercial office buildings in 2002 for $54,258 versus the
sale of Western Realty Investments in 2001 for $32,986 and $9,174 received from
the sale of one of New Valley's two U.S. Shopping Centers in 2001, $8,010 of
cash received in connection with the Ladenburg Thalmann Financial Services'
acquisition in 2001, and net purchases of marketable securities and long-term
investments of $2,090 in 2002 versus net sales of investment securities of
$1,674 in 2001. The difference was offset by the sale of BrookeMil for $20,461,
net of closing expenses, in 2002.

     Cash provided from investing activities for the year ended December 31,
2001 was $43,713 compared to $77,208 for the year ended December 31, 2000. The
difference is primarily attributable to net sales of $1,674 of investment
securities and long term investments in 2001 versus $23,929 in 2000. The amounts
for 2001 also include $32,986 received from the sale of Western Realty
Investments, the cash received of $8,010 in connection with the sale of
Ladenburg Thalmann & Co. to Ladenburg Thalmann Financial Services in May 2001
and $9,174 received from the sale of one of New Valley's two U.S. shopping
centers versus a distribution from joint venture of $57,208 in 2000.

     On December 13, 2002, New Valley completed the acquisition of two
commercial office buildings in Princeton, N.J. for an aggregate purchase price
of $54,258. To finance a portion of the purchase price for the office buildings,
on the closing date, New Valley borrowed $40,500 from HSBC Realty Credit
Corporation (USA). The loan has a term of four years, bears interest at a
floating rate of 2% above LIBOR, and is secured by a first mortgage on the
office buildings, as well as by an assignment of leases and rents. Principal is
amortized to the extent of $54 per month during the term of the loan. The loan
may be prepaid without penalty and is non-recourse against New Valley, except
for various specified environmental and related
                                        23
<PAGE>

matters, misapplications of tenant security deposits and insurance and
condemnation proceeds, and fraud or misrepresentation by New Valley in
connection with the indebtedness. During the twelve months ended September 30,
2002, the buildings generated revenues of approximately $6,895 and net operating
income, before depreciation and debt service, of approximately $4,936.

     The capital expenditures for the years ended December 31, 2001 and 2000
related to the development of the Kremlin sites ($2,642 and $3,663,
respectively).

     As of December 31, 2002, New Valley had $674 of prepetition
bankruptcy-related claims and restructuring accruals including claims for lease
rejection damages. The remaining claims may be subject to future adjustments
based on potential settlements or decisions of the court. In August 2002, New
Valley paid $2,000 to settle a claim for unclaimed monies that certain states
were seeking on behalf of money transfer customers and the restructuring
accruals were reduced by a corresponding amount in 2002. In connection with the
settlement, New Valley reclassified $711 of accrued dividends to stockholders'
equity for the year ended December 31, 2002.

     In March 2002, Ladenburg Thalmann Financial Services borrowed $2,500 from
New Valley. The loan, which bears interest at 1% above the prime rate, was due
on the earlier of December 31, 2003 or the completion of one or more equity
financings where Ladenburg Thalmann Financial Services receives at least $5,000
in total proceeds. In July 2002, Ladenburg Thalmann Financial Services borrowed
an additional $2,500 from New Valley on the same terms. In November 2002, New
Valley agreed, in connection with a $3,500 loan to Ladenburg Thalmann Financial
Services by an affiliate of its clearing broker, to extend the maturity of the
notes to December 31, 2006 and to subordinate the notes to the repayment of the
loan.

     During 2002, Ladenburg Thalmann Financial Services incurred significant
operating losses as its revenues and liquidity were adversely affected by the
overall declines in the U.S. equity markets and the continued weak operating
environment for the broker-dealer industry. Accordingly, New Valley evaluated
its ability to collect its notes receivable and related interest from Ladenburg
Thalmann Financial Services at September 30, 2002. These notes receivable
included the $5,000 of notes issued in March 2002 and July 2002 and the $8,010
convertible note issued to New Valley in May 2001. Management determined, based
on current trends in the broker-dealer industry and Ladenburg Thalmann Financial
Services' operating results and liquidity needs, that a reserve for
uncollectibility should be established against these notes and interest
receivable. As a result, New Valley recorded a charge of $13,198 in the third
quarter of 2002.

     On October 8, 2002, Ladenburg Thalmann Financial Services borrowed an
additional $2,000 from New Valley. The loan, which bore interest at 1% above the
prime rate, was repaid in December 2002 with the proceeds from the loan to
Ladenburg Thalmann Financial Services from an affiliate of its clearing broker.

     In April 2002, New Valley sold the shares of BrookeMil for approximately
$22,000 before closing expenses. New Valley recorded a gain of approximately
$8,484 in the second quarter of 2002 in connection with the sale.

     New Valley holds a 50% interest in the former Kona Surf Hotel in
Kailua-Kona, Hawaii. Following a major renovation, the property is scheduled to
reopen in 2004 as a Sheraton resort. New Valley is required to make additional
investments of up to an aggregate of $6,600 at December 31, 2002 in the project.
New Valley is also required to make additional investments in another limited
partnership of up to $983 at December 31, 2002.

     During 2000 and 2001, New Valley acquired for approximately $1,744 a 37.2%
ownership interest in Prudential Long Island Realty, the largest independently
owned and operated real estate brokerage company on Long Island, and a minority
interest in an affiliated mortgage company. On December 19, 2002, New Valley and
the other owners of Prudential Long Island Realty contributed their interests in
Prudential Long Island Realty to Montauk Battery Realty LLC, a newly formed
entity. New Valley acquired a 50% interest in Montauk as a result of an
additional investment of $1,413 by New Valley and the redemption by Prudential
Long Island Realty of various ownership interests.

                                        24
<PAGE>

     In March 2003, Montauk purchased the leading New York City - based
residential brokerage firm, Insignia Douglas Elliman, and an affiliated property
management company, for $71,250. As a result of the acquisition, Montauk's
brokerage operations, to be known as Prudential Douglas Elliman, will be the
largest residential brokerage company in the New York metropolitan area. New
Valley invested an additional $9,500 in subordinated debt and equity of Montauk
to help fund the acquisition. The subordinated debt bears interest at 12% per
annum and is due in March 2013.

     Cash flows provided from financing activities were $26,042 for the year
ended December 31, 2002 versus cash used in financing activities of $27,564 for
the year ended December 31, 2001. The 2002 amount primarily consists of the
issuance of a note payable of $40,500 in connection with the purchase of two
commercial office buildings offset by a repayment of the participating loan to
Apollo in connection with the sale of BrookeMil. The 2001 amount primarily
consists of the net repayment of notes payable of $16,759 in connection with the
sale of a shopping center in January 2001 and Western Realty in December 2001
and a decrease in margin loans payable of $4,675. The 2001 amount also included
cash provided from financing activities of $2,981 in connection with borrowings
under the participating loan.

     Cash flows used for financing activities were $27,564 for the year ended
December 31, 2001 as compared to cash flows provided from financing activities
of $2,881 for the year ended December 31, 2000. The decrease was primarily due
to the net repayment of notes payable and other liabilities of $16,759 in 2001,
the cash impact of the distribution of Ladenburg Thalmann Financial Services of
$8,136 in 2001 and a decrease in margin loans payable of $4,675 in 2001 versus
an increase of $3,692 in margin loans in 2000.

     In May 2001, Western Realty Development's Russian subsidiary entered into a
credit agreement with ZAO Raiffeisenbank Austria. The subsidiary borrowed $8,700
in the third quarter of 2001 under the credit agreement, and $8,265 was
outstanding at the time of the sale of Western Realty Investments. The principal
balance was assumed in connection with the sale of Western Realty Investments.

     On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
March 21, 2003, New Valley had repurchased 1,185,615 shares for approximately
$4,695.

     On January 15, 2003, New Valley announced it had reached an agreement in
principal with Globalstar L.P., pursuant to which New Valley would invest
$55,000 as part of a plan of reorganization of Globalstar. Globalstar, which is
currently in bankruptcy, is engaged in the global mobile satellite
telecommunications services business. On January 30, 2003, New Valley announced
that the agreement in principle had terminated due to New Valley's inability to
reach final agreement with Globalstar's Creditors Committee. New Valley has had
continuing discussions with Globalstar regarding a proposed investment in its
business.

     New Valley expects that its available capital resources will be sufficient
to fund its currently anticipated cash requirements for 2003, including the
currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness.

CONTRACTUAL OBLIGATIONS

     As of December 31, 2002, New Valley was contractually obligated to make
payments as follows:

<Table>
<Caption>
                                                                PAYMENTS DUE BY PERIOD
                                                       ----------------------------------------
                                                                                         AFTER
          CONTRACTUAL OBLIGATIONS             TOTAL    1 YEAR   2-3 YEARS   4-5 YEARS   5 YEARS
          -----------------------            -------   ------   ---------   ---------   -------
<S>                                          <C>       <C>      <C>         <C>         <C>
Note payable...............................  $40,500   $  656    $1,312      $38,532      $--
Operating lease............................      136      136        --           --       --
Obligations under limited partnership
  agreements...............................    7,583    7,583        --           --       --
                                             -------   ------    ------      -------      ---
          Total............................  $48,219   $8,375    $1,312      $38,532      $--
                                             =======   ======    ======      =======      ===
</Table>

                                        25
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The adoption of this statement
did not impact on New Valley's consolidated financial statements for the year
ended December 31, 2002.

     In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 requires that liabilities for
costs associated with an exit activity or disposal of long-lived assets be
recognized when the liabilities are incurred and can be measured at fair value.
SFAS No. 146 is effective for the Company for any exit or disposal activities
that are initiated after December 31, 2002. The Company is currently assessing
the impact of this statement.

     In November 2002, Financial Accounting Standards Board Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantors, Including Indirect Guarantees of Indebtedness of Others" was issued.
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under the guarantee.
Guarantors will also be required to meet expanded disclosure obligations. The
initial recognition and measurement provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for annual and interim financial statements that end
after December 15, 2002. The Company is currently assessing the impact of this
interpretation.

     In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee and director compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for annual financial
statements for fiscal years ending after December 15, 2002 and for interim
financial statements commencing after such date. The Company has not elected the
fair value-based method of accounting for stock-based compensation under SFAS
No. 123, as amended by SFAS No. 148.

     In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 is effective February 1, 2003 for variable interest
entities created after January 31, 2003, and July 1, 2003 for variable interest
entities created prior to February 1, 2003. Although the Company does not
believe this interpretation will have a material impact on its consolidated
financial statements, it is evaluating the interpretation related to the
potential impact associated with its equity investments in its real estate
businesses.

MARKET RISK

     Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. Market risk is inherent to
both derivative and non-derivative financial instruments, and accordingly, the
scope of New Valley's market risk management procedures extends beyond
derivatives to include all market risk sensitive financial instruments.

                                        26
<PAGE>

  Equity Price Risk

     New Valley held investment securities available for sale totaling $13,391
at December 31, 2002. Adverse market conditions could have a significant effect
on the value of New Valley's investments.

     New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.

  Interest Rate Risk

     As of December 31, 2002, New Valley's outstanding debt has variable
interest rates, which increases the risk of fluctuating interest rates. New
Valley's exposure to market risk includes interest rate fluctuations in
connection with its variable rate borrowings, which could adversely affect its
cash flows. As of December 31, 2002, New Valley had no interest rate caps or
swaps. Based on a hypothetical 100 basis point increase or decrease in interest
rates (1%), New Valley's annual interest expense could increase or decrease by
approximately $400.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     New Valley and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, including any statements that may be contained in
the foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in its reports to stockholders, which represent New
Valley's expectations or beliefs with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Reform Act, New Valley has identified under "Risk Factors" in
Item 1 above and in this section important factors that could cause actual
results to differ materially from those contained in any forward-looking
statements made by or on behalf of New Valley.

     New Valley's operating businesses are subject to intense competition,
changes in consumer preferences, and local economic conditions. New Valley
Realty is additionally subject to the uncertainties relating to the real estate
business, including, without limitation, required capital improvements to
facilities, local real estate market conditions and federal, state, city and
municipal laws and regulations concerning, among others, zoning and
environmental matters. Uncertainties affecting New Valley generally include,
without limitation, the effect of market conditions on the salability of New
Valley's investment securities, the uncertainty of other potential acquisitions
and investments by New Valley, the effects of governmental regulation on New
Valley's ability to target and/or consummate any such acquisitions and the
effects of limited management experience in areas in which New Valley may become
involved.

     Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. New Valley does not undertake to update
any forward-looking statement that may be made from time to time on behalf of
New Valley.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Market Risk" is incorporated
herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the Consolidated Financial Statements and Notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 21, 2003, beginning
on page 33 of this report.

                                        27
<PAGE>

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     This information is contained in New Valley's definitive Proxy Statement
for its 2003 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the registrant's
fiscal year covered by this report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, and incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

     This information is contained in the Proxy Statement and incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDERS MATTERS

     This information is contained in the Proxy Statement and incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     This information is contained in the Proxy Statement and incorporated
herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of New Valley's
management, including its principal executive officer and principal financial
officer, New Valley has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this annual report, and, based on their evaluation, its principal executive
officer and principal financial officer have concluded that these controls and
procedures are effective. There were no significant changes in New Valley's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.

     Disclosure controls and procedures are New Valley's controls and other
procedures that are designed to ensure that information required to be disclosed
by it in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by it in the reports that it
files under the Exchange Act is accumulated and communicated to its management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding disclosure.

                                        28
<PAGE>

                                    PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (A) (1) INDEX TO 2002 CONSOLIDATED FINANCIAL STATEMENTS:

     The Consolidated Financial Statements and the Notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 21, 2003, appear on
pages 33 through 57 of this report. Financial statement schedules not included
in this report have been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the Notes
thereto.

     (A) (2) FINANCIAL STATEMENT SCHEDULES:

Schedule III -- Real Estate and Accumulated Depreciation.................Page 58

     (A)(3) EXHIBITS

<Table>
<S>          <C>
*(3)(a)      Amended and Restated Certificate of Incorporation dated June
             4, 1999 of New Valley (incorporated by reference to Exhibit
             3(a) in New Valley's Form S-1, dated June 14, 1999,
             Registration No. 333-79837).
*(b)         By-Laws of New Valley adopted July 29, 1996 (incorporated by
             reference to Exhibit (3)(ii) in New Valley's Quarterly
             Report on Form 10-Q for the quarterly period ended June 30,
             1996).
*(4)(a)      Form of Warrant Agreement, dated as of June 4, 1999, between
             American Stock Transfer & Trust Company, as Warrant Agent,
             and New Valley including form of warrant (incorporated by
             reference to Exhibit 4(c) in New Valley's Form S-1, dated
             June 14, 1999, Registration No. 333-79837).
*(b)         Loan Agreement dated December 13, 2002 between New Valley
             and HSBC Realty Credit Corporation (USA), as Administrative
             Agent, including the form of Note (incorporated by reference
             to Exhibit 4.1 in New Valley's Current Report on Form 8-K
             dated December 13, 2002).
*(c)         Mortgage and Security Agreement dated December 13, 2002 from
             New Valley, as Mortgagor, to HSBC Realty Credit Corporation
             (USA), as Administrative Agent and Mortgagee (incorporated
             by reference to Exhibit 4.2 in New Valley's Current Report
             on Form 8-K dated December 13, 2002).
*(d)         Assignment of Leases and Rents dated December 13, 2002 by
             New Valley in favor of HSBC Realty Credit Corporation (USA),
             as Administrative Agent (incorporated by reference to
             Exhibit 4.3 in New Valley's Current Report on Form 8-K dated
             December 13, 2002).
*            Restricted Share Agreement, dated November 18, 1996, by and
 (10)(a)(i)  between New Valley and Howard M. Lorber (incorporated by
             reference to Exhibit 10(a)(ii) in New Valley's Form 10-K for
             the fiscal year ended December 31, 1996).
*(ii)        Option Agreement, dated November 18, 1996, between New
             Valley and Howard M. Lorber (incorporated by reference to
             Exhibit 10(a)(iii) in New Valley's Form 10-K for the fiscal
             year ended December 31, 1996).
*(iii)       New Valley Corporation 2000 Long-Term Incentive Plan
             (incorporated by reference to Appendix A of New Valley's
             Proxy Statement dated April 18, 2000).
*(iv)        New Valley Corporation Non-Employee Directors Stock Option
             Program (incorporated by reference to Appendix B of New
             Valley's Proxy Statement dated April 18, 2000).
*(b)(i)      Employment Agreement, dated as of June 1, 1995, as amended,
             effective as of January 1, 1996, between New Valley and
             Bennett S. LeBow (incorporated by reference to Exhibit
             10(b)(i) in New Valley's Form 10-K for the fiscal year ended
             December 31, 1995).
</Table>

                                        29
<PAGE>
<Table>
<S>          <C>
*(ii)        Employment Agreement ("Lorber Employment Agreement"), dated
             as of June 1, 1995, as amended, effective as of January 1,
             1996, between New Valley and Howard M. Lorber (incorporated
             by reference to Exhibit 10(b)(ii) in New Valley's Form 10-K
             for the fiscal year ended December 31, 1995).
*(iii)       Amendment dated January 1, 1998 to Lorber Employment
             Agreement (incorporated by reference to Exhibit 10(b)(iii)
             in New Valley's Form 10-K for the fiscal year ended December
             31, 1997).
*(iv)        Employment Agreement, dated September 22, 1995, between New
             Valley and Richard J. Lampen (incorporated by reference to
             Exhibit 10(c) in New Valley's Quarterly Report on Form 10-Q
             for the quarterly period ended September 30, 1995).
*(v)         Employment Agreement, dated August 1, 1999, between New
             Valley and J. Bryant Kirkland III (incorporated by reference
             to Exhibit 10.2 in New Valley's Quarterly Report on Form
             10-Q for the quarterly period ended June 30, 1999).
*(c)         Expense Sharing Agreement, dated as of January 18, 1995, by
             and between Vector Group and New Valley (incorporated by
             reference to Exhibit 10(a) in New Valley's Quarterly Report
             on Form 10-Q for the quarterly period ended September 30,
             1995).
*(d)         Form of Margin Agreement, dated September 12, 1995, between
             ALKI and Bear Stearns & Co. (incorporated by reference to
             Exhibit 2 in the Schedule 13D filed by, among others, New
             Valley with the SEC on March 11, 1996, as amended, with
             respect to the common stock of RJR Nabisco Holdings Corp.).
*(e)(i)      Form of 7.50% Convertible Promissory Note due December 31,
             2005 in the principal amount of $8,010,000 of Ladenburg
             Thalmann Financial Services payable to NVCC (incorporated by
             reference to Exhibit 4.2 to Ladenburg Thalmann Financial
             Services' Current Report on Form 8-K/A dated August 31,
             2001).
*(ii)        Form of Pledge and Security Agreement between Ladenburg
             Thalmann Financial Services, NVCC, Berliner
             Effektengesellschaft AG ("Berliner"), Frost-Nevada, Limited
             Partnership and U.S. Bank Trust National Association, as
             collateral agent (incorporated by reference to Exhibit 10.3
             in New Valley's Current Report on Form 8-K dated February
             16, 2001).
*(f)(i)      Interest Purchase Agreement, dated December 21, 2001,
             between Western Realty Development, as the Seller, and
             Andante Limited, as the Purchaser (incorporated by reference
             to Exhibit 10.1 in New Valley's Current Report on Form 8-K
             dated December 20, 2001).
*(ii)        Guaranty dated as of December 21, 2001 by New Valley in
             favor of Andante Limited (incorporated by reference to
             Exhibit 10.2 in New Valley's Current Report on Form 8-K
             dated December 20, 2001).
*(g)         Purchase and Sale Agreement, dated as of November 27, 2002,
             between 100 College Road, LLC, as Seller, and New Valley
             Corporation, as Purchaser (incorporated by reference to
             Exhibit 10.1 in New Valley's Current Report on Form 8-K
             dated December 4, 2002).
*(h)         Operating Agreement of Montauk Battery Realty LLC dated
             December 17, 2002 (incorporated by reference to Exhibit 10.1
             in New Valley's Current Report on Form 8-K dated December
             13, 2002).
(21)         Subsidiaries of New Valley.
(23)         Consent of PricewaterhouseCoopers LLP relating to New
             Valley's Registration Statement on Form S-8 (No. 333-46370)
             and Registration Statement on Form S-3 (No. 333-79837).
</Table>

                                        30
<PAGE>
<Table>
<S>          <C>
*(99)(a)     Western Realty Development LLC's Consolidated Financial
             Statements for the year ended December 31, 2000
             (incorporated by reference to Exhibit 99 in New Valley's
             Form 10-K for the fiscal year ended December 31, 2000).
(b)          Certification of Chief Executive Officer, Pursuant to 18
             U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002.
(c)          Certification of Chief Financial Officer, Pursuant to 18
             U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002.
</Table>

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

* Incorporated by reference.

     The foregoing list omits instruments defining the rights of holders of
long-term debt of New Valley and its consolidated subsidiaries where the total
amount of securities authorized thereunder does not exceed 10% of the total
assets of New Valley and its consolidated subsidiaries. New Valley hereby agrees
to furnish a copy of each such instrument or agreement to the SEC upon request.

     Exhibits not filed herewith are incorporated by reference to the exhibits
in the prior filings indicated in parenthesis. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
report pursuant to Item 14(c) is listed in Exhibit Nos. 10(a) and 10(b).

     (B) REPORTS ON FORM 8-K:

<Table>
<Caption>
                            DATE                              ITEMS   FINANCIAL STATEMENTS
                            ----                              -----   --------------------
<S>                                                           <C>     <C>
December 5, 2002............................................   5, 7           None
December 20, 2002...........................................  2,5,7           None
</Table>

                                        31
<PAGE>

                             NEW VALLEY CORPORATION

                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
                      ITEMS 8, 14(A)(1) AND (2), AND 14(D)

        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

   Financial Statements and Schedules of the Registrant and its subsidiaries,
        required to be included in Items 8, 14(a)(1) and (2), and 14(d)
                               are listed below:

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
FINANCIAL STATEMENTS:
  Report of Independent Certified Public Accountants........   33
  Consolidated Balance Sheets as of December 31, 2002 and
     2001...................................................   34
  Consolidated Statements of Operations for the years ended
     December 31, 2002, 2001 and 2000.......................   35
  Consolidated Statements of Changes in Stockholders' Equity
     for the years ended December 31, 2002, 2001 and
     2000...................................................   36
  Consolidated Statements of Cash Flows for the years ended
     December 31, 2002, 2001 and 2000.......................   37
  Notes to Consolidated Financial Statements................   38
FINANCIAL STATEMENT SCHEDULES:
  Schedule III -- Real Estate and Accumulated
     Depreciation...........................................   58
     Financial Statement Schedules not listed above have
     been omitted because they are not applicable or the
     required information is contained in the Consolidated
     Financial Statements or accompanying Notes
  Western Realty Development LLC
  The consolidated financial statements of Western Realty
  Development LLC for the year ended December 31, 2000 are
  filed as Exhibit 99 to this report and are incorporated
  herein by reference
</Table>

                                        32
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and the
Stockholders of New Valley Corporation

     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of New Valley Corporation and its subsidiaries at December 31, 2002 and
December 31, 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Miami, Florida
March 21, 2003

                                        33
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2002        2001
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS

Current assets:
  Cash and cash equivalents.................................  $ 82,113    $ 92,069
  Investment securities available for sale..................    13,391      20,902
  Restricted assets.........................................     1,811      17,380
  Other current assets......................................       402       2,714
                                                              --------    --------
          Total current assets..............................    97,717     133,065
                                                              --------    --------

Investments in real estate, net.............................    54,208      10,581
Investments in real estate business, net....................     7,808       6,894
Restricted assets...........................................       168           6
Furniture and equipment, net................................        35          35
Convertible notes receivable................................        --       8,010
Long-term investments, net..................................     3,150       3,150
Other assets................................................       462         957
                                                              --------    --------
          Total assets......................................  $163,548    $162,698
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of notes payable and long-term
     obligations............................................  $    644    $     84
  Accounts payable and accrued liabilities..................     5,741       7,574
  Prepetition claims and restructuring accruals.............       674       2,700
  Income taxes..............................................    10,499       9,079
                                                              --------    --------
          Total current liabilities.........................    17,558      19,437
                                                              --------    --------
Notes payable...............................................    39,856      11,142
Other long-term liabilities.................................     3,077       3,639
Commitments and contingencies...............................        --          --
Stockholders' equity:
  Common Shares, $.01 par value; 100,000,000 and 100,000,000
     shares authorized; 22,436,424 and 22,813,063 shares
     outstanding............................................       224         228
  Additional paid-in capital................................   863,676     864,171
  Accumulated deficit.......................................  (759,806)   (737,894)
  Accumulated other comprehensive (loss) income.............    (1,037)      1,975
                                                              --------    --------
          Total stockholders' equity........................   103,057     128,480
                                                              --------    --------
          Total liabilities and stockholders' equity........  $163,548    $162,698
                                                              ========    ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements
                                        34
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 2002           2001           2000
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Revenues:
  Real estate leasing.......................................  $     1,001    $     9,966    $     3,199
  Gain (loss) on sale of investments, net...................        1,850         (1,003)         7,271
  Interest and dividend income..............................        2,163          3,738          3,022
                                                              -----------    -----------    -----------
         Total..............................................        5,014         12,701         13,492
                                                              -----------    -----------    -----------
Costs and expenses:
  Selling, general and administrative expenses..............       12,939         13,377         15,310
  Rental real estate activities, excluding interest.........        1,607          9,553          3,302
  Interest expense..........................................          483          2,592          5,665
                                                              -----------    -----------    -----------
         Total..............................................       15,029         25,522         24,277
                                                              -----------    -----------    -----------
Other results from continuing operations:
  Income from joint venture.................................           --             --         52,421
  Equity loss from real estate business.....................         (749)            --             --
  Gain (loss) on sale of real estate........................        9,048        (20,945)            --
  Gain on lawsuit settlement................................           --         17,620             --
  Gain on sale of assets....................................           --            250            150
  Provision for loss on net investment in subsidiary........         (338)            --             --
  Provision for uncollectibility of notes receivable........      (13,198)            --             --
  Provision for loss on investments.........................       (6,776)           (71)        (2,808)
  Other Loss................................................          (35)           (68)        (3,253)
                                                              -----------    -----------    -----------
         Total..............................................      (12,048)        (3,214)        46,510
                                                              -----------    -----------    -----------
(Loss) income from continuing operations before income taxes
  and minority interests....................................      (22,063)       (16,035)        35,725
Income tax provision........................................           --            260             --
Minority interests in loss from continuing operations of
  consolidated subsidiaries.................................         (151)          (594)          (323)
                                                              -----------    -----------    -----------
(Loss) income from continuing operations....................      (21,912)       (15,701)        36,048
Discontinued operations:
  (Loss) income from discontinued operations, net of
    minority interests in (loss) income of consolidated
    subsidiaries of $0, (4,845) and $1,212 and income tax
    (benefit) expense of $0, $(1,356) and $84...............           --         (5,829)         5,002
  Gain on disposal of discontinued operations...............           --          4,346         17,879
                                                              -----------    -----------    -----------
      (Loss) income from discontinued operations............           --         (1,483)        22,881
                                                              -----------    -----------    -----------
Net (loss) income...........................................  $   (21,912)   $   (17,184)   $    58,929
                                                              ===========    ===========    ===========
(Loss) income per common share (Basic):
  Continuing operations.....................................  $     (0.96)   $     (0.69)   $      1.57
  Discontinued operations...................................           --          (0.06)          0.99
                                                              -----------    -----------    -----------
      Net (loss) income per common share....................  $     (0.96)   $     (0.75)   $      2.56
                                                              ===========    ===========    ===========
Number of shares used in computation........................   22,757,296     22,826,226     23,040,332
                                                              ===========    ===========    ===========
(Loss) income per common share (Diluted):
  Continuing operations.....................................  $     (0.96)   $     (0.69)   $      1.56
  Discontinued operations...................................           --          (0.06)          0.99
                                                              -----------    -----------    -----------
      Net (loss) income per common share....................  $     (0.96)   $     (0.75)   $      2.55
                                                              ===========    ===========    ===========
Number of shares used in computation........................   22,757,296     22,826,226     23,072,975
                                                              ===========    ===========    ===========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements
                                        35
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                                             ACCUMULATED
                                                                 ADDITIONAL                     OTHER
                                                        COMMON    PAID-IN     ACCUMULATED   COMPREHENSIVE
                                                        SHARES    CAPITAL       DEFICIT        INCOME         TOTAL
                                                        ------   ----------   -----------   -------------   ---------
<S>                                                     <C>      <C>          <C>           <C>             <C>
Balance, December 31, 1999............................   $232     $868,340      (779,639)      $ 2,446      $  91,379
  Comprehensive income:
    Net income........................................                            58,929                       58,929
    Other comprehensive income:
      Net change in unrealized gain on investment
         securities...................................                                            (175)          (175)
                                                                                                            ---------
         Total comprehensive income...................                                                         58,754
                                                                                                            ---------
  Compensation expense on stock option grants.........                 721                                        721
  Repurchase of common shares.........................     (3)      (1,166)                                    (1,169)
                                                         ----     --------     ---------       -------      ---------
Balance, December 31, 2000............................    229      867,895      (720,710)        2,271        149,685
  Comprehensive loss:
    Net loss..........................................                           (17,184)                     (17,184)
    Other comprehensive income:
      Net change in unrealized gain on investment
         securities...................................                                            (296)          (296)
                                                                                                            ---------
         Total comprehensive loss.....................                                                        (17,480)
                                                                                                            ---------
  Compensation expense on stock option grants.........                 906                                        906
  Effect of acquisition of LTS........................              15,171                                     15,171
  Repurchase of common shares.........................     (1)        (272)                                      (273)
  Distribution of LTS.................................             (19,529)                                   (19,529)
                                                         ----     --------     ---------       -------      ---------
Balance, December 31, 2001............................    228      864,171      (737,894)        1,975        128,480
  Comprehensive loss:
    Net loss..........................................                           (21,912)                     (21,912)
    Other comprehensive income:
      Net change in unrealized loss on investment
         securities...................................                                          (3,012)        (3,012)
                                                                                                            ---------
         Total comprehensive loss.....................                                                        (24,924)
                                                                                                            ---------
  Compensation expense on stock option grants.........                 416                                        416
  Exercise of stock options...........................      1          264                                        265
  Capitalization of dividends payable.................                 711                                        711
  Repurchase of common shares.........................     (5)      (1,886)                                    (1,891)
                                                         ----     --------     ---------       -------      ---------
Balance, December 31, 2002............................   $224     $863,676     $(759,806)      $(1,037)     $ 103,057
                                                         ====     ========     =========       =======      =========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements
                                        36
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
 Net (loss) income..........................................  $(21,912)  $(17,184)  $ 58,929
 Loss (income) from discontinued operations.................        --      1,483    (22,881)
                                                              --------   --------   --------
   Subtotal.................................................   (21,912)   (15,701)    36,048
                                                              --------   --------   --------
 Adjustments to reconcile net (loss) income to net cash
   provided from (used for) operating activities:
    Depreciation and amortization...........................       245      2,353      1,020
    Income from joint venture...............................        --         --    (52,421)
    Equity loss in real estate business.....................       749         --         --
    Provision for uncollectibility of notes receivable......    13,198         --         --
    Provision for loss on investments.......................     6,776         71      2,808
    (Gain) loss on sale of real estate, assets and sale or
     liquidation of investments.............................   (10,560)    21,698     (7,421)
    Stock-based compensation expense........................       416        930        541
    Minority interests in loss of consolidated
     subsidiaries...........................................      (151)      (594)      (323)
    Changes in assets and liabilities, net of effects from
     acquisitions and dispositions:
      Decrease (increase) in receivables and other assets...    18,366    (14,877)     5,897
      (Decrease) increase in accounts payable and accrued
      Liabilities...........................................      (357)    (4,033)     2,578
                                                              --------   --------   --------
Net cash provided from (used for) operating activities......     6,770    (10,153)   (11,273)
                                                              --------   --------   --------
Cash flows from investing activities:
   Sale or maturity of investment securities................     6,398     16,418     58,811
   Purchase of investment securities........................    (6,825)   (10,166)   (32,324)
   Sale or liquidation of long-term investments.............        --      1,133          4
   Purchase of long-term investments........................        --        (17)    (1,362)
   Purchase of real estate businesses.......................    (1,663)    (5,694)    (1,200)
   Sale of real estate, net of closing costs................    20,461     43,040         --
   Purchase of and additions to real estate.................   (54,945)    (2,642)    (3,663)
   Sale of other assets.....................................        --        250        150
   Payment of prepetition claims and restructuring
    accruals................................................    (2,026)    (3,129)      (376)
   (Increase) decrease in restricted assets.................      (168)       455      1,885
   Cash received in LTS acquisition.........................        --      8,010         --
   Purchase of LTS common stock.............................        --     (3,945)        --
   Cash acquired from joint venture.........................        --         --        648
   Contributions to joint venture...........................        --         --     (2,573)
   Distribution from joint venture..........................        --         --     57,208
   Repayment of notes receivable............................     3,000         --         --
   Issuance of notes receivable.............................    (7,000)        --         --
                                                              --------   --------   --------
Net cash (used for) provided from investing activities......   (42,768)    43,713     77,208
                                                              --------   --------   --------
Cash flows from financing activities:
   Proceeds from participating loan.........................        --      2,981        663
   (Decrease) increase in margin loans payable..............        --     (4,675)     3,692
   Repayment of participating loan..........................   (12,437)        --         --
   Payment of long-term notes and other liabilities.........       (36)   (26,283)      (284)
   Increase in long-term borrowings.........................    40,500      9,524         --
   Distributions by Western Realty Development..............        (8)      (324)        --
   Deferred financing costs.................................      (351)      (377)        --
   Repurchase of common shares..............................    (1,891)      (274)    (1,190)
   Cash impact of LTS distribution..........................        --     (8,136)        --
   Exercise of stock options................................       265         --         --
                                                              --------   --------   --------
Net cash (used for) provided from financing activities......    26,042    (27,564)     2,881
                                                              --------   --------   --------
Net cash provided from discontinued operations..............        --      4,006      1,739
                                                              --------   --------   --------
Net (decrease) increase in cash and cash equivalents........    (9,956)    10,002     70,555
Cash and cash equivalents, beginning of year................    92,069     82,067     11,512
                                                              --------   --------   --------
Cash and cash equivalents, end of year......................  $ 82,113   $ 92,069   $ 82,067
                                                              ========   ========   ========
Supplemental cash flow information:
 Cash paid during the year for:
   Interest.................................................  $    487   $  2,730   $  1,590
   Income taxes.............................................       196        123      1,037
Detail of acquisition of interest in consolidated joint
 venture:
 Historical value of assets acquired........................  $     --   $     --   $ 79,644
 Liabilities acquired.......................................        --         --     13,314
 Capital acquired...........................................        --         --     66,978
                                                              --------   --------   --------
 Net cash held by joint venture.............................  $     --   $     --   $    648
                                                              ========   ========   ========
Detail of acquisitions:
 Assets acquired, including cash............................  $     --   $ 62,024   $     --
 Liabilities assumed, including minority interest...........        --    (60,014)        --
 Increase in paid in capital................................        --    (15,171)        --
                                                              --------   --------   --------
 Cash received..............................................        --     13,161         --
 Less cash received associated with discontinued
   operations...............................................        --      5,151         --
                                                              --------   --------   --------
 Net cash received in acquisition...........................  $     --   $  8,010   $     --
                                                              ========   ========   ========
Detail of distributions:
 Assets distributed, including cash.........................  $     --   $(90,645)  $     --
 Liabilities distributed, including minority interest.......        --     79,252         --
 Decrease to paid in capital................................        --     19,529         --
                                                              --------   --------   --------
 Cash held by distributed subsidiary........................        --     (8,136)        --
 Less cash distributed......................................        --         --         --
                                                              --------   --------   --------
 Net cash...................................................  $     --   $ (8,136)  $     --
                                                              ========   ========   ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements
                                        37
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

1.  BASIS OF PRESENTATION

 Principles of Consolidation

     The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries ("New Valley" or the "Company").
Prior to December 29, 2000, the Company's investment in Western Realty
Development LLC was accounted for under the equity method. Effective December
29, 2000, Western Realty Development LLC became a consolidated subsidiary of New
Valley. All significant intercompany transactions are eliminated in
consolidation.

     Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.

 Nature of Operations

     The Company is engaged in the real estate business and is seeking to
acquire additional operating companies. The Company owns, through its New Valley
Realty Division, two commercial office buildings in Princeton, N.J. and a 50%
interest in the former Kona Surf Hotel in Kailua-Kona, Hawaii. New Valley also
holds a 50% interest in Montauk Battery Realty LLC, which operates a residential
real estate brokerage company in the New York metropolitan area. In December
2001, New Valley completed the distribution to its stockholders of its shares in
Ladenburg Thalmann Financial Services Inc. ("LTS"), its former majority-owned
subsidiary engaged in the investment banking and brokerage business. The
broker-dealer operations, which were the primary source of New Valley's revenues
from May 1995 to December 2001, are treated as discontinued operations in the
consolidated financial statements. At December 31, 2002, Vector Group Ltd.
("Vector"), New Valley's principal stockholder, owned 57.3% of New Valley's
Common Stock.

 Reorganization

     The Company was originally organized in 1851 and operated for many years
under the name "Western Union Corporation". In 1991, bankruptcy proceedings were
commenced against the Company. In January 1995, the Company emerged from
bankruptcy. As part of the plan of reorganization, the Company sold the Western
Union money transfer and messaging services businesses and all allowed claims in
the bankruptcy were paid in full.

     At December 31, 2002, the Company's remaining accruals totaled $674 for
unsettled prepetition claims and restructuring accruals (see Note 14 ). The
Company's accounting policy is to evaluate the remaining restructuring accruals
on a quarterly basis and adjust liabilities as claims are settled or dismissed
by the bankruptcy court.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Estimates.  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.

     Cash and Cash Equivalents.  The Company considers all highly liquid
financial instruments with an original maturity of less than three months to be
cash equivalents.

     Fair Value of Financial Instruments.  Investments in securities and
securities sold, not yet purchased traded on a national securities exchange or
listed on NASDAQ are valued at the last reported sales prices of the reporting
period. Futures contracts are valued at their last reported sales price.
Investments in securities,

                                        38
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

principally warrants, which have exercise or holding period restrictions, are
valued at fair value as determined by the Company's management based on the
intrinsic value of the warrants discounted for such restrictions. For cash and
cash equivalents, restricted assets and short-term loans, the carrying value of
these amounts is a reasonable estimate of their fair value. The fair value of
long-term debt, including current portion, is estimated based on current rates
offered to the Company for debt of the same maturities.

     Investment Securities.  The Company classifies investments in debt and
marketable equity securities as either available for sale or held to maturity.
Investments classified as available for sale are carried at fair value, with net
unrealized gains and losses included as a separate component of stockholders'
equity. Debt securities classified as held to maturity are carried at amortized
cost. Realized gains and losses are included in other income. The cost of
securities sold is determined based on average cost.

     Gains are recognized when realized in the Company's consolidated statements
of operations. Losses are recognized as realized or upon the determination of
the occurrence of an other-than-temporary decline in fair value. The Company's
policy is to review its securities on a regular basis to evaluate whether any
security has experienced an other-than-temporary decline in fair value. If it is
determined that an other-than-temporary decline exists in one of the Company's
marketable securities, it is the Company's policy to record a realized loss on
such investment in the Company's consolidated statements of operations. In 2002,
the Company recorded a write down of $6,776 related to other-than-temporary
declines of its investment securities.

     Restricted Assets.  Restricted assets at December 31, 2002 consisted
primarily of amounts held in escrow related to New Valley's real estate
operations. Restricted assets at December 31, 2001 consisted primarily of
$16,856 held in escrow by the United States District Court of New Jersey in
connection with a settlement of a lawsuit (see Note 15), which cash was released
to the Company in March 2002.

     Property and Equipment.  Shopping centers were depreciated over periods
approximating 25 years, the estimated useful life, using the straight-line
method. Office buildings are depreciated over periods approximating 39 years,
the estimated useful life, using the straight-line method. Furniture and
equipment (including equipment subject to capital leases) is depreciated over
the estimated useful lives, using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over their estimated useful
lives or the lease term, if shorter. The cost and the related accumulated
depreciation are eliminated upon retirement or other disposition and any
resulting gain or loss is reflected in operations. Repairs and maintenance costs
are charged to expense as incurred.

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

     Real Estate Leasing Revenues.  The real estate properties are being leased
to tenants under operating leases. Base rental revenue is generally recognized
on a straight-line basis over the term of the lease. The lease agreements for
certain properties contain provisions which provide for reimbursement of real
estate taxes and operating expenses over base year amounts, and in certain cases
as fixed increases in rent. In addition, the lease agreements for certain
tenants provide additional rentals based upon revenues in excess of base
amounts, and such amounts are accrued as earned. The future minimum rents
scheduled to be received on non-cancelable operating leases at December 31, 2002
are $6,578 in 2003, $6,578 in 2004, $6,666 in 2005, $6,532 in 2006, $5,232 in
2007 and $14,872 thereafter.

     Basic Income (Loss) Per Common Share.  Basic net income (loss) per common
share is based on the weighted average number of Common Shares outstanding.

                                        39
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Diluted Income (Loss) Per Common Share.  Diluted net income (loss) per
common share assuming full dilution is based on the weighted average number of
Common Shares outstanding plus the additional common shares resulting from the
exercise of stock options and warrants if such exercise was dilutive. Options
and warrants to purchase Common Shares of 12,290 and 0 were not included in the
computation of diluted loss per share in 2002 and 2001, respectively, as the
effect would have been anti-dilutive.

     Stock-Based Compensation.  Compensation costs related to employee stock
plans are recognized utilizing the intrinsic value-based method prescribed by
APB No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. The Company has adopted the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148.

     As of December 31, 2002, New Valley and Vector each had stock-based
employee compensation plans (see Note 12). Had the fair value method of
accounting been applied to the Company's and Vector's stock options granted to
employees, the pro forma effect would have been as follows:

<Table>
<Caption>
                                                            2002       2001      2000
                                                          --------   --------   -------
<S>                                                       <C>        <C>        <C>
Net (loss) income applicable to Common Shares, as
  reported..............................................  $(21,912)  $(17,184)  $58,529
Deduct: Amortization of fair value of New Valley option
  grants................................................      (234)      (926)   (1,394)
Add: Stock option compensation included in Vector net
  income................................................       975        927       337
Deduct: Amortization of fair value of Vector option
  grants................................................    (1,688)    (1,688)   (1,688)
                                                          --------   --------   -------
Net (loss) income applicable to Common Shares, as
  adjusted..............................................  $(22,859)  $(18,871)  $55,784
                                                          ========   ========   =======
Adjusted net (loss) income per share -- basic and
  diluted...............................................  $  (1.00)  $  (0.83)  $  2.42
                                                          ========   ========   =======
</Table>

     Recoverability of Long-Lived Assets.  An impairment loss is recognized
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The estimation of fair value is generally
measured by discounting expected future cash flows at the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the best information available making whatever estimates, judgments and
projections are considered necessary.

  New Accounting Pronouncements

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The adoption of this statement
did not impact on the Company's consolidated financial statements for the year
ended December 31, 2002.

     In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. SFAS No. 146 requires that liabilities for
costs associated with an exit activity or disposal of long-lived assets be
recognized when the liabilities are incurred and can be measured at fair value.
SFAS No. 146 is effective for us for any exit or disposal activities that are
initiated after December 31, 2002. The Company is currently assessing the impact
of this statement.

     In November 2002, Financial Accounting Standards Board Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantors, Including Indirect Guarantees of Indebtedness of Others" was issued.
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under the guarantee.
Guarantors will also be required to meet expanded disclosure obligations. The
initial recognition and measurement provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective

                                        40
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for annual and interim financial statements that end after December 15, 2002.
The Company is currently assessing the impact of this interpretation.

     In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123" was
issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee and director compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for annual financial
statements for fiscal years ending after December 15, 2002 and for interim
financial statements commencing after such date. The Company has not elected the
fair value-based method of accounting for stock-based compensation under SFAS
No. 123, as amended by SFAS No. 148.

     In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 is effective February 1, 2003 for variable interest
entities created after January 31, 2003, and July 1, 2003 for variable interest
entities created prior to February 1, 2003. Although the Company does not
believe this interpretation will have a material impact on its consolidated
financial statements, it is evaluating the interpretation related to the
potential impact associated with the Company's equity investments in its real
estate businesses.

3.  INVESTMENT IN REAL ESTATE, INVESTMENT IN REAL ESTATE BUSINESSES AND NOTES
PAYABLE

     The components of the Company's investment in real estate and the related
non-recourse notes payable collateralized by such real estate at December 31,
2002 and 2001 are as follows:

<Table>
<Caption>
                                                            2002                   2001
                                                          ---------   ------------------------------
                                                                                 WESTERN
                                                           OFFICE     SHOPPING    REALTY
                                                          BUILDINGS    CENTER     REPIN      TOTAL
                                                          ---------   --------   --------   --------
<S>                                                       <C>         <C>        <C>        <C>
Land....................................................   $ 7,636    $ 2,510    $     --   $  2,510
Buildings...............................................    46,622     11,198          --     11,198
Kremlin sites...........................................        --         --      37,427     37,427
Participating loan......................................        --         --     (38,406)   (38,406)
                                                           -------    -------    --------   --------
          Total.........................................    54,258     13,708        (979)    12,729
  Less accumulated depreciation.........................       (50)    (2,148)         --     (2,148)
                                                           -------    -------    --------   --------
     Net investment in real estate......................   $54,208    $11,560    $   (979)  $ 10,581
                                                           =======    =======    ========   ========
Notes payable...........................................   $40,500    $11,226          --   $ 11,226
Current portion of notes payable........................       644         84          --         84
                                                           -------    -------    --------   --------
Notes payable -- long-term portion......................   $39,856    $11,142    $     --   $ 11,142
                                                           =======    =======    ========   ========
</Table>

                                        41
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Office Buildings

     New Valley completed the acquisition of two commercial office buildings in
Princeton, N.J. on December 13, 2002 for $54,258. A portion of the purchase
price was financed with a mortgage loan of $40,500, which is due in December
2006. The loan bears interest at a floating rate of 2% above LIBOR, and is
collateralized by a first mortgage on the office buildings, as well as by an
assignment of leases and rents. Principal is amortized to the extent of $54 per
month during the term of the loan. The loan may be prepaid without penalty and
is non-recourse against New Valley, except for various specified environmental
and related matters, misapplications of tenant security deposits and insurance
and condemnation proceeds, and fraud or misrepresentation by New Valley in
connection with the indebtedness.

     New Valley's President and Chief Operating Officer received a $2,000 bonus
for 2002 relating, among other things, to his role in the consummation of the
acquisition of the office buildings and the related financing and the increase
in the Company's ownership in the residential brokerage business discussed
below.

  Shopping Center

     In May 2002, New Valley disposed of its Kanawha, West Virginia shopping
center and recorded a gain of $564 for the year ended December 31, 2002, which
represented the shopping center's negative book value, in connection with the
disposal. No proceeds were received in the disposal.

     In February 2001, the Company sold its Royal Palm Beach, Florida shopping
center for $9,500 before closing adjustments and expenses and recorded a gain of
$897 for the year ended December 31, 2001.

  Residential Brokerage Business

     During 2000 and 2001, New Valley acquired for approximately $1,744 a 37.2%
ownership interest in B&H Associates of NY, doing business as Prudential Long
Island Realty ("Realty"), a residential real estate brokerage company on Long
Island, and a minority interest in an affiliated mortgage company. On December
19, 2002, New Valley and the other owners of Realty contributed their interests
in Realty to Montauk Battery Realty LLC ("Montauk"), a newly formed entity. New
Valley acquired a 50% interest in Realty as a result of an additional investment
of $1,413 by New Valley and the redemption by Realty of various ownership
interests. As part of the transaction, Realty renewed for a ten-year term its
franchise agreement with The Prudential Real Estate Affiliates, Inc. The owners
of Realty also agreed, subject to receipt of any required regulatory approvals,
to contribute to Montauk their interests in the related mortgage company.

     In March 2003, Montauk purchased the New York City - based residential
brokerage firm, Insignia Douglas Elliman, and an affiliated property management
company, for $71,250. Following the acquisition, Montauk's brokerage operations
will be known as Prudential Douglas Elliman. New Valley invested an additional
$9,500 in subordinated debt and equity of Montauk to help fund the acquisition.
The subordinated debt bears interest at 12% per annum and is due in March 2013.

     New Valley accounts for its interest in Montauk on the equity method and
recorded income of $594 in 2002 associated with Montauk.

  Hawaiian Hotel

     In 2001, together with developer Brickman Associates and other investors,
New Valley acquired control of the former Kona Surf Hotel in Kailua-Kona,
Hawaii. Following a major renovation, the property is scheduled to reopen in
2004 as a Sheraton resort. The Company, which holds a 50% interest in KOA
Investors LLC, the owner of the hotel, has invested $5,900 in the project and is
required to make additional investments of up to an aggregate of $6,600 as of
December 31, 2002.

                                        42
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company accounts for its investments in the Kona Surf Hotel under the
equity method and recorded losses of $1,343 in 2002 associated with the
property. Koa Investors' losses represent management fees and a loss of a
deposit on an adjoining gold course, which it determined not to purchase. Koa
Investors capitalizes all costs related to the acquisition and development of
the property.

  Russian Real Estate

     Western Realty Development LLC.  In February 1998, the Company and Apollo
Real Estate Investment Fund III, L.P. ("Apollo") organized Western Realty
Development LLC ("Western Realty Development") to make real estate and other
investments in Russia. The Company contributed the real estate assets of its
subsidiary, BrookeMil Ltd. ("BrookeMil"), including the Ducat Place II office
building and the adjoining site for the proposed development of Ducat Place III,
to Western Realty Development and Apollo contributed $73,281, including the
investment in Western Realty Repin discussed below.

     Western Realty Development had three classes of equity: Class A interests,
represented 30% of the ownership of Western Realty Development, and Class B and
Class C interests, which collectively represented 70% of the ownership of
Western Realty Development. Prior to December 29, 2000, Apollo owned the Class A
interests, New Valley owned the Class B interests and BrookeMil owned the Class
C interests. On December 29, 2000, WRD Holding Corporation, a wholly-owned
subsidiary of New Valley, purchased for $4,000 29/30ths of the Class A Interests
of Western Realty Development previously held by Apollo. WRD Holding paid the
purchase price of $4,000 with a promissory note due November 30, 2005. The note,
which was collateralized by a pledge of the purchased Class A interests, bore
interest at a rate of 7% per annum, compounded annually. The outstanding
principal balances of the note, which were classified in other long-term
liabilities in the consolidated balance sheets at December 31, 2002 and 2001,
were $8 and $290, respectively.

     As a result of the purchase of the Class A interests, New Valley and its
subsidiaries were entitled to 99% of subsequent distributions from Western
Realty Development and Apollo was entitled to 1% of subsequent distributions.
Accordingly, effective December 29, 2000, New Valley no longer accounted for its
interests in Western Realty Development using the equity method of accounting
and Western Realty Development became a consolidated subsidiary of New Valley.

     Summarized financial information for the period from January 1, 2000 to
December 29, 2000 for Western Realty Development follows:

<Table>
<Caption>
                                                           JANUARY 1, 2000 TO
                                                           DECEMBER 29, 2000
                                                           ------------------
<S>                                                        <C>
Revenues.................................................       $ 9,782
Costs and expenses.......................................         8,678
Real estate impairment charge............................            --
Accretion of return on participating loan................         3,460
Gain on sale of Western Tobacco Investments..............        84,417
Income tax expense.......................................           207
                                                                -------
Net income...............................................       $88,774
                                                                =======
</Table>

     Western Realty Development made a $30,000 participating loan to, and
payable out of a 30% profits interest in, Western Tobacco Investments LLC, which
held the interests of Brooke (Overseas) Ltd., a wholly-owned subsidiary of
Vector, in Liggett-Ducat Ltd. In August 2000, Vector completed the sale of
Western Tobacco Investments to Gallaher Group Plc and the proceeds were divided
between Vector and Western Realty Development in accordance with the
participating loan, which was terminated at the closing. Through their
investments in Western Realty Development, the Company received $57,358 in cash
proceeds from the

                                        43
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sale and Apollo received $68,402. The Company recorded a gain of $52,512 in
connection with the transaction during the year ended December 31, 2000.

     On December 21, 2001, Western Realty Development sold to Andante Limited, a
Bermuda company, all of the membership interests in its subsidiary Western
Realty Investments LLC, the entity through which Western Realty Development
owned Ducat Place II and the adjoining Ducat Place III site. The purchase price
for the sale was approximately $42,000 including the assumption of mortgage debt
and payables. Of the net cash proceeds from the sale, New Valley received
approximately $22,000, and Apollo received approximately $9,500. New Valley
recorded a loss of $21,842 in connection with the sale in 2001.

     Western Realty Repin LLC.  In June 1998, the Company and Apollo organized
Western Realty Repin LLC ("Western Realty Repin") to make a loan to BrookeMil.
The proceeds of the loan have been used by BrookeMil for the acquisition and
preliminary development of two adjoining sites totaling 10.25 acres located in
Moscow across the Moscow River from the Kremlin. The Kremlin Sites were planned
for development as a residential and hotel complex subject to market conditions
and the availability of financing. As of December 31, 2001, BrookeMil had
invested $37,427 in the Kremlin sites. The amounts were classified, net of
participating loan payable of $38,406 at December 31, 2001 as "Investment in
real estate, net" in the consolidated balance sheet.

     On April 30, 2002, New Valley sold the shares of BrookeMil for
approximately $22,000 before closing expenses. BrookeMil owned the two Kremlin
sites in Moscow, which were the Company's remaining real estate holdings in
Russia. Under the terms of the Western Realty Repin participating loan to
BrookeMil, New Valley received approximately $7,500 of the net proceeds from the
sale and Apollo received approximately $12,500 of the proceeds. New Valley
recorded a gain on the sale of real estate of $8,484 for the year ended December
31, 2002 in connection with the sale of the property, which had a negative book
value of $979 prior to the sale. New Valley also recorded $767 in additional
general and administrative expenses in 2002 related to the closing of its
Russian operations. The expenses consisted principally of employee severance.

  Pro forma results

     The following table presents unaudited pro forma results from continuing
operations as if the purchase of the office buildings and the sale of Western
Realty Investments had occurred on January 1, 2001. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had these transactions been consummated as of each
respective date.

<Table>
<Caption>
                                                               PRO FORMA      PRO FORMA
                                                               YEAR ENDED     YEAR ENDED
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2002           2001
                                                              ------------   ------------
<S>                                                           <C>            <C>
Revenues....................................................    $ 12,040        $10,056
                                                                ========        =======
(Loss) income from continuing operations....................    $(19,607)       $ 7,625
                                                                ========        =======
(Loss) income from continuing operations per common share
  (basic and diluted).......................................    $  (0.86)       $  0.33
                                                                ========        =======
</Table>

4.  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
stockholders' equity. The Company had net unrealized (losses) gains on
investment securities available for sale of $(1,037) and $1,975 at December 31,
2002 and 2001, respectively. The Company realized gains (losses) on sales of
investment securities available for sale of $1,850, $(1,887) and $7,271 for the
years ended December 31, 2002, 2001 and 2000, respectively. Realized gains
reduced other comprehensive income in the year of realization, while realized
losses increased other comprehensive income

                                        44
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in the year of realization. In addition, the Company recorded a loss related to
other-than-temporary declines in the fair value of its marketable equity
securities totaling $6,776 for the year ended December 31, 2002. See Note 2.

     The components of investment securities available for sale are as follows:

<Table>
<Caption>
                                                              GROSS        GROSS
                                                            UNREALIZED   UNREALIZED    FAIR
                                                   COST        GAIN         LOSS       VALUE
                                                  -------   ----------   ----------   -------
<S>                                               <C>       <C>          <C>          <C>
2002
Marketable equity securities....................  $14,428     $   --       $1,037     $13,391
                                                  =======     ======       ======     =======
2001
Marketable equity securities....................  $18,927     $1,933       $2,835     $18,025
Marketable warrants.............................       --      2,877           --       2,877
                                                  -------     ------       ------     -------
Investment securities...........................  $18,927     $4,810       $2,835     $20,902
                                                  =======     ======       ======     =======
</Table>

5.  NOTES RECEIVABLE

     In March 2002, LTS borrowed $2,500 from New Valley. The loan, which bears
interest at 1% above the prime rate, was due on the earlier of December 31, 2003
or the completion of one or more equity financings where LTS receives at least
$5,000 in total proceeds. In July 2002, LTS borrowed an additional $2,500 from
New Valley on the same terms. In November 2002, New Valley agreed, in connection
with a $3,500 loan to LTS by an affiliate of its clearing broker, to extend the
maturity of the notes to December 31, 2006 and to subordinate the notes to the
repayment of the loan.

     During 2002, LTS incurred significant operating losses as its revenues and
liquidity were adversely affected by the overall declines in the U.S. equity
markets and the continued weak operating environment for the broker-dealer
industry. Accordingly, New Valley evaluated its ability to collect its notes
receivable and related interest from LTS at September 30, 2002. These notes
receivable included the $5,000 of notes issued in March 2002 and July 2002 and
the $8,010 convertible note issued to New Valley in May 2001 (see Note 19). New
Valley evaluated its ability to collect the $13,198 of notes and interest
receivable from LTS at September 30, 2002. New Valley determined, based on
current trends in the broker-dealer industry and LTS's operating results and
liquidity needs, that a reserve for uncollectibility should be established
against these notes and interest receivable. As a result, New Valley recorded a
charge of $13,198 in the third quarter of 2002.

     On October 8, 2002, LTS borrowed an additional $2,000 from New Valley. The
loan, which bore interest at 1% above the prime rate, was repaid in December
2002 with the proceeds from the loan to LTS from an affiliate of its clearing
broker.

6.  LONG-TERM INVESTMENTS

     Long-term investments consisted of investments in the following:

<Table>
<Caption>
                                                      DECEMBER 31, 2002    DECEMBER 31, 2001
                                                      ------------------   -----------------
                                                      CARRYING    FAIR     CARRYING    FAIR
                                                       VALUE      VALUE     VALUE     VALUE
                                                      --------   -------   --------   ------
<S>                                                   <C>        <C>       <C>        <C>
Limited partnerships................................   $3,150    $10,694    $3,150    $9,987
</Table>

     The principal business of the partnerships is investing in real estate and
investment securities. The estimated fair value of the limited partnerships was
provided by the partnerships based on the indicated market values of the
underlying assets or investment portfolio. The Company's estimates of the fair
value of its

                                        45
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

long-term investments are subject to judgment and are not necessarily indicative
of the amounts that could be realized in the current market. The Company is
required to make additional investments in one of its limited partnerships up to
an aggregate of $983 at December 31, 2002. In addition, the investments in
limited partnerships are illiquid, and the ultimate realization of these
investments is subject to the performance of the underlying partnership and its
management by the general partners.

     The Company recognized gains of $883 on liquidations of investments of
certain limited partnerships for the year ended December 31, 2001. During 2001
and 2000, the Company determined that a permanent impairment in the value of its
investments in various online businesses had occurred and, accordingly, $71 and
$2,808, respectively, was provided as an impairment charge.

7.  PENSIONS AND RETIREE BENEFITS

     The Company maintains 401(k) plans for substantially all employees. These
401(k) plans allow eligible employees to invest a percentage of their pre-tax
compensation. The Company made a discretionary match of 3% of its employee's
contributions to the 401(k) plans in 2002, which totaled $28. The Company did
not make discretionary contributions to these 401(k) plans in 2001 and 2000.

8.  COMMITMENT AND CONTINGENCIES

  Leases

     The Company remits to Vector, under an expense sharing agreement, rent
expense related to a noncancelable lease agreement for office space, expiring in
May 2003. See Note 16. Vector has informed the Company it is in negotiations to
extend the existing lease. Rental expense for operating leases was $183 in 2002,
$434 in 2001 and $763 in 2000.

  Investment Company Act of 1940

     The Investment Company Act and its regulations generally impose substantive
restrictions on a company that owns "investment securities" having a value in
excess of 40% of the company's "total assets". Following the distribution of the
Ladenburg Thalmann Financial Services shares and asset dispositions in Russia,
New Valley was above this threshold and relied on the one-year exemption from
registration under the Investment Company Act provided by Rule 3a-2, which
expired on December 19, 2002. Prior to that time, through New Valley's
acquisition of the two office buildings in Princeton, N.J. and the increase to
50% of its ownership in Montauk, New Valley was engaged primarily in a business
or businesses other than that of investing, reinvesting, owning, holding or
trading in securities and the value of its investment securities was below the
40% threshold. Under the Investment Company Act, New Valley is required to
determine the value of its total assets for purposes of the 40% threshold based
on "market" or "fair" values, depending on the nature of the asset, at the end
of the last preceding fiscal quarter and based on cost for assets acquired since
that date. If New Valley were required to register under the Investment Company
Act, it would be subject to a number of severe substantive restrictions on its
operations, capital structure and management. For example, it would be
prohibited from entering into principal transactions and joint transactions with
affiliates. It would also be prohibited from issuing convertible securities and
options and would be subject to limitations on leverage.

  Lawsuits

     In March 1997, a stockholder derivative suit was filed against the Company,
as a nominal defendant, its directors and Brooke Group Holding Inc. ("Brooke
Group Holding"), an indirect wholly-owned subsidiary of Vector in the Delaware
Chancery Court by a stockholder of the Company. The suit alleges that the
Company's purchase of the BrookeMil shares from Brooke (Overseas) Ltd., which
was then an indirect subsidiary of Brooke Group Holding, in January 1997
constituted a self-dealing transaction which involved the

                                        46
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payment of excessive consideration by the Company. The plaintiff seeks a
declaration that the Company's directors breached their fiduciary duties and
Brooke Group Holding aided and abetted such breaches and that damages be awarded
to the Company. In December 1999, another stockholder of the Company commenced
an action in Delaware Chancery Court substantially similar to the March 1997
action. This stockholder alleges, among other things, that the consideration
paid by the Company for the BrookeMil shares was excessive, unfair and wasteful,
that the special committee of the Company's board lacked independence, and that
the appraisal and fairness opinion were flawed. By order of the court, both
actions were consolidated. In January 2001, the court denied a motion to dismiss
the consolidated action. Brooke Group Holding and the Company believe that the
allegations in the case are without merit. Discovery in the case has commenced.

     In July 1999, a purported class action was commenced on behalf of the
Company's former Class B preferred shareholders against the Company, Brooke
Group Holding and certain directors and officers of the Company in Delaware
Chancery Court. The complaint alleges that the recapitalization, approved by a
majority of each class of the Company's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy statement
relating to the recapitalization was materially deficient and the defendants
breached their fiduciary duties to the Class B preferred shareholders in
approving the transaction. The plaintiffs seek class certification of the action
and an award of compensatory damages as well as all costs and fees. The Court
has dismissed six of plaintiff's nine claims alleging inadequate disclosure in
the proxy statement. Brooke Group Holding and the Company believe that the
remaining allegations are without merit. Discovery in the case has commenced.

     Although there can be no assurances, 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.

     As of December 31, 2002, New Valley had $674 of prepetition
bankruptcy-related claims and restructuring accruals including claims for lease
rejection damages. The remaining claims may be subject to future adjustments
based on potential settlements or decisions of the court. On August 8, 2002, the
Company paid $2,000 to settle a claim for unclaimed monies that certain states
were seeking on behalf of money transfer customers and the restructuring
accruals were reduced by a corresponding amount in the third quarter of 2002. In
connection with the settlement, the Company reclassified $711 of accrued
dividends to stockholders' equity for the year ended December 31, 2002.

9.  FEDERAL INCOME TAX

     At December 31, 2002 the Company had $83,793 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 this deferred tax asset as it is presently deemed more
likely than not that the benefit of the tax asset will not be utilized. The
Company continues to evaluate the realizability of its deferred tax assets and
its estimate is subject to change. The provision for income taxes, which
represented the effect of the alternative minimum tax and state income taxes for
the three years ended December 31, 2002, 2001 and 2000, does not bear a
customary relationship with pre-tax accounting income from continuing operations
principally as a consequence of the change in the valuation allowance relating
to deferred tax assets. The provision for income taxes on continuing operations
differs from the amount of income

                                        47
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tax determined by applying the applicable U.S. statutory federal income tax rate
(35%) to pretax income from continuing operations as a result of the following
differences:

<Table>
<Caption>
                                                            2002       2001      2000
                                                          --------   --------   -------
<S>                                                       <C>        <C>        <C>
(Loss) income from continuing operations................  $(21,912)  $(15,441)  $36,048
                                                          --------   --------   -------
Provision under statutory U.S. tax rates................    (7,669)    (5,404)   12,617
Increase in taxes resulting from:
  Nontaxable items......................................     1,774        944     3,520
  State taxes, net of Federal benefit...................      (876)        33     2,138
  Foreign taxes.........................................        --        227        --
  Distribution of LTS...................................        --      7,180     1,696
Increase (decrease) in valuation reserve, net of equity
  and tax audit adjustments.............................     6,771     (2,720)  (19,971)
                                                          --------   --------   -------
     Income tax provision...............................  $     --   $    260   $    --
                                                          ========   ========   =======
</Table>

     Income taxes associated with discontinued operations and extraordinary
items have been shown net of the utilization of the net operating loss
carryforward and the change in other deferred tax assets.

     Deferred tax amounts are comprised of the following at December 31:

<Table>
<Caption>
                                                                2002       2001
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforward:
     Restricted net operating loss..........................  $     --   $  3,113
     Unrestricted capital loss..............................     2,642         --
     Unrestricted net operating loss........................    63,074     46,418
  Other.....................................................    18,077     30,220
                                                              --------   --------
          Total deferred tax assets.........................    83,793     79,751
                                                              --------   --------
Deferred tax liabilities:
  Other.....................................................        --       (794)
                                                              --------   --------
          Total deferred tax liabilities....................        --       (794)
                                                              --------   --------
Net deferred tax assets.....................................    83,793     78,957
Valuation allowance.........................................   (83,793)   (78,957)
                                                              --------   --------
Net deferred taxes..........................................  $     --   $     --
                                                              ========   ========
</Table>

     The Company has established a liability for income taxes payable for
various federal and state taxes based on income. The Company is being audited by
federal and state revenue divisions, including an audit by the Internal Revenue
Service of the Company's 1998 and 1999 tax years. The Company believes it has
adequately reserved for any potential adjustments as a result of the audits.

     As of December 31, 2002, the Company had consolidated net operating loss
carryforwards of approximately $156,900 and consolidated capital loss
carryforwards of $6,600 for tax purposes, which expire at various dates from
2006 through 2023.

                                        48
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  OTHER LONG-TERM LIABILITIES

     The components of other long-term liabilities, excluding notes payable, are
as follows:

<Table>
<Caption>
                                                      DECEMBER 31, 2002     DECEMBER 31, 2001
                                                     -------------------   -------------------
                                                     LONG-TERM   CURRENT   LONG-TERM   CURRENT
                                                      PORTION    PORTION    PORTION    PORTION
                                                     ---------   -------   ---------   -------
<S>                                                  <C>         <C>       <C>         <C>
Retiree and disability obligations.................   $2,895      $500      $3,277      $500
Other long-term liabilities........................      182        --         362        --
                                                      ------      ----      ------      ----
          Total other long-term liabilities........   $3,077      $500      $3,639      $500
                                                      ======      ====      ======      ====
</Table>

11.  WARRANTS

     As of December 31, 2002 and 2001, there were 17,867,438 and 17,867,566
warrants outstanding, respectively. Each warrant entitles the holder to purchase
one Common Share at an exercise price of $12.50 per share. The warrants became
exercisable on June 14, 1999 and terminate five years thereafter. The Company
may redeem the warrants for $0.01 per warrant on 30 days' notice to the holders
if, any time after June 4, 2002, the average reported closing price or bid price
of a Common Share exceeds $12.50 for any 20 consecutive trading days ending
within five days before the date of such notice. The warrants may instead be
exercised following such notice and before redemption.

     The exercise price will be reduced by the amount of cash dividends or cash
distributions paid on the Common Shares. If the Company distributes evidences of
indebtedness or assets (other than cash dividends or cash distributions),
holders of warrants will be entitled to participate in the distribution at the
time of exercise on a basis that the Company determines in its good faith
discretion to be fair and appropriate. In addition, the exercise price and the
number of shares issuable on exercise will be adjusted for any issuance of a
dividend of additional Common Shares to holders of Common Shares or
subdivisions, combinations or reclassifications or other changes in the
outstanding Common Shares.

     Subsequent to the LTS distribution on December 20, 2001, holders of New
Valley's outstanding warrants are entitled, upon exercise of a warrant and
payment of the $12.50 exercise price per warrant, to receive a common share of
New Valley and a cash payment of $1.20, an amount equal to 0.988 of the current
market price of a share of LTS common stock on December 20, 2001. The current
market price was determined based on the average daily closing prices for a
share of LTS common stock for the 15 consecutive trading days commencing 20
trading days before December 20, 2001.

12.  STOCK OPTION PLANS

  New Valley

     On January 19, 2000, the Company adopted its 2000 Long-Term Incentive Plan
(the "Stock Plan"), which was approved by the stockholders of the Company on May
24, 2000. The Stock Plan authorizes the granting of up to 2,500,000 common
shares, subject to adjustment, of the Company through awards of stock options
(which may include incentive stock options and/or nonqualified stock options),
stock appreciation rights and restricted common shares. All officers, employees
and consultants of the Company and its subsidiaries are eligible to receive
awards under the Stock Plan.

     On March 22, 2000, the Company granted incentive and non-qualified stock
options to purchase a total of 1,196,299 common shares to approximately 100
employees of LTS. On October 27, 2000, the Company granted options for an
additional 28,266 common shares to two employees of LTS. In the case of both
grants, the exercise price of the options was $3.875 per share, the fair market
value on the date of grant. The options had terms of between seven and ten years
and vested over periods of three to five years after the date of grant.
Following New Valley's distribution of its LTS shares on December 20, 2001, LTS
was no longer a subsidiary

                                        49
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of New Valley under the terms of the Stock Plan. As a result, for purposes of
the Stock Plan, the recipients' employment by a subsidiary of New Valley was
deemed to have terminated as of December 20, 2001 and all unexercised options
expired on March 20, 2002.

     On January 19, 2000, the Company also adopted the Non-Employee Directors
Stock Option Program, which was approved by the stockholders of the Company on
May 24, 2000. A total of 200,000 common shares are issuable under the program,
subject to adjustment. Under the program, each non-employee director will
receive an option to acquire 10,000 common shares upon the later of the adoption
of the program or the date such individual becomes a non-employee director. In
addition, commencing with the 2001 annual meeting of stockholders and with
respect to each subsequent annual meeting, an option to acquire an additional
5,000 common shares will be granted automatically to each non-employee director
upon reelection as a director. The exercise price for each option awarded under
the program will be equal to the fair market value of a common share on the date
of grant. Each option will become exercisable on the first anniversary of the
date of grant. On the date of adoption of the program, options to purchase a
total of 40,000 common shares for an exercise price of $4.6875 per share were
issued to the four non-employee directors of the Company. Options for an
additional 20,000 common shares were issued under the plan to non-employee
directors in 2001 with an exercise price of $3.57 per share, and options for an
additional 20,000 common shares were issued under the plan to non-employee
directors in 2002 with an exercise price of $4.15 per share.

     On November 18, 1996, the Company granted an executive officer and director
of the Company nonqualified options to purchase 330,000 Common Shares at a price
of $.58 per share and 97,000 Class B Preferred Shares at a price of $1.85 per
share. These old common share options were changed into options to purchase
33,000 Common Shares and 99,000 Warrants for an aggregate exercise price of $191
in connection with the plan of recapitalization. The options on the Class B
Preferred Shares were changed into options to purchase 32,333 Common Shares and
485,000 Warrants at an aggregate exercise price of $179 in connection with the
Company's 1999 plan of recapitalization. These options became fully vested on
July 1, 2002 and may be exercised on or prior to July 1, 2006.

  Vector

     Executive officers of New Valley participate in the 1999 Long-Term
Incentive Plan sponsored by Vector. The Vector stock plan provides for grants to
key employees of Vector and its subsidiaries of stock options and various other
stock-based awards. The options granted under the plan in 1999 entitle the
recipients to purchase shares of Vector common stock at a price either equal to,
or in excess of, the fair market value on the date of grant. The participants
also receive dividend equivalent rights on both vested and unvested option
shares. The options granted under the plan have a ten-year term and become
exercisable on the fourth anniversary of the date of grant, subject to earlier
exercise upon a change of control or death or disability.

                                        50
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's stock options granted to employees and
non-employee directors follows:

  New Valley

<Table>
<Caption>
                                                                                         WEIGHTED
                                                            NUMBER OF      EXERCISE      AVERAGE
                                                             SHARES         PRICE       FAIR VALUE
                                                            ---------   --------------  ----------
<S>                                                         <C>         <C>             <C>
Outstanding on December 31, 1999..........................     65,333    $5.55-$5.80      $27.15
  Granted.................................................  1,264,565   $3.875-$4.6875    $ 2.60
  Exercised...............................................          0
  Cancelled...............................................    (58,810)
                                                            ---------
Outstanding on December 31, 2000..........................  1,271,088    $3.875-$5.80     $ 3.86
  Granted.................................................     20,000       $3.57         $ 2.61
  Exercised...............................................          0
  Cancelled...............................................   (959,475)
                                                            ---------
Outstanding on December 31, 2001..........................    331,613   $3.57 - $5.80     $ 7.50
  Granted.................................................     20,000       $4.15         $ 2.13
  Exercised...............................................    (68,276)
  Cancelled...............................................   (138,004)
                                                            ---------
Outstanding on December 31, 2002..........................    145,333   $3.57 - $5.80     $13.74
                                                            =========
Options exercisable at:
  December 31, 2000.......................................    234,720
  December 31, 2001.......................................    300,724
  December 31, 2002.......................................    125,333
</Table>

  Vector

     A summary of Vector options granted to New Valley employees since New
Valley became a subsidiary of Vector on June 4, 1999 follows. Such table
includes only option grants to the Company's employees who were not also
employees of Vector at the time of the grant.

<Table>
<Caption>
                                                                                      WEIGHTED
                                                              NUMBER OF   EXERCISE    AVERAGE
                                                               SHARES      PRICE     FAIR VALUE
                                                              ---------   --------   ----------
<S>                                                           <C>         <C>        <C>
Outstanding on December 31, 1999............................   545,000     $15.44      $12.39
  Granted...................................................         0
  Adjustment for stock dividend.............................    27,250
  Cancelled.................................................         0
                                                               -------
Outstanding on December 31, 2000............................   572,250     $14.70      $11.80
  Granted...................................................         0
  Adjustment for stock dividend.............................    28,613
  Cancelled.................................................         0
                                                               -------
Outstanding on December 31, 2001............................   600,863     $14.00      $11.23
  Granted...................................................         0
  Adjustment for stock dividend.............................    30,043
  Cancelled.................................................         0
                                                               -------
Outstanding on December 31, 2002............................   630,906     $13.33      $10.69
                                                               =======
</Table>

     None of the Vector options were exercisable at December 31, 2002 and 2001.

                                        51
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock options. In 1995, the FASB issued the fair value
method. SFAS No. 123, "Accounting for Stock-Based Compensation", which, if fully
adopted, changes the methods of recognition of cost on certain stock options.

     The estimated fair value at grant date of options granted in 2002 was $43.
The estimated fair value in 2002 was calculated using the Black-Scholes option
pricing model, based upon the following assumptions: volatility of 31.89%, a
risk-free rate of return of 4.12%, an expected life of 10 years, a dividend rate
of 0% and no forfeitures. The estimated fair value at grant date of options
granted in 2001 was $52. The estimated fair value in 2001 was calculated using
the Black-Scholes option pricing model, based upon the following assumptions:
volatility of 58.12%, a risk-free of return of 5.34%, an expected life of 10
years, a dividend rate of 0% and no forfeitures. The estimated fair value at
grant date of options granted in 2000 was $3,288. The estimated fair value in
2000 was calculated using the Black-Scholes option pricing model, based upon the
following assumptions: volatility ranging from 44.45% to 54.74%, a risk-free of
return ranging from the 5.79% to 6.69%, an expected life of 10 years, a dividend
rate of 0% and no forfeitures.

13.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     The composition of accounts payable and accrued liabilities is as follows:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              ----------------
                                                               2002      2001
                                                              ------    ------
<S>                                                           <C>       <C>
Accounts payable and accrued liabilities:
  Accrued compensation......................................  $2,057    $  650
  Unearned revenues.........................................     103        --
  Taxes.....................................................      --        65
  Accrued expenses and other liabilities....................   3,581     6,859
                                                              ------    ------
          Total.............................................  $5,741    $7,574
                                                              ======    ======
</Table>

14.  PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

     The following is a schedule of prepetition claims and restructuring
accruals at December 31, 2002 and 2001. The remaining prepetition claims may be
subject to future adjustments depending on pending discussions with the various
parties and the decisions of the bankruptcy court.

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                              2002      2001
                                                              ----     ------
<S>                                                           <C>      <C>
Restructuring accruals(a)...................................  $674     $  700
Money transfer payable(b)...................................    --      2,000
                                                              ----     ------
          Total.............................................  $674     $2,700
                                                              ====     ======
</Table>

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

(a)  Restructuring accruals at December 31, 2002 consisted of $600 of disputed
     claims, primarily related to former employee benefits, and $74 for other
     restructuring accruals. Restructuring accruals at December 31, 2001
     consisted of $600 of disputed claims, primarily related to former employee
     benefits, and $100 of other restructuring accruals.
(b)  Represents unclaimed money transfers issued by the Company prior to January
     1, 1990. On August 8, 2002, the Company paid $2,000 to settle a claim for
     unclaimed monies that certain states were seeking on behalf of money
     transfer customers.

                                        52
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15.  LAWSUIT SETTLEMENT

     In the fourth quarter of 2001, New Valley settled a lawsuit against certain
of its former insurers, which resulted in income of approximately $17,620. The
litigation arose out of the insurers' participation in a program of insurance
covering the amount of fuel in the Westar IV and V communication satellites
owned by New Valley's former Western Union satellite business, which was sold in
1989. The two satellites, each of which were launched in 1982 with an expected
ten year life, had shortened lives due to insufficient fuel. In the settlement,
New Valley received payment from the insurers for the shortened lives of the two
satellites. The settlement calls for dismissal of the lawsuit against the
settling insurers as well as dismissal of the counterclaims brought against New
Valley by these insurers.

16.  RELATED PARTY TRANSACTIONS

     At December 31, 2002, Vector, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, owned approximately 57.3%
of the Company's Common Shares. Several of the other officers and directors of
the Company are also affiliated with Vector. In 1995, the Company signed an
expense sharing agreement with Vector pursuant to which certain lease, legal and
administrative expenses are allocated to the entity incurring the expense. The
Company expensed approximately $236 in 2002, $482 in 2001 and $344 in 2000 under
this agreement.

     During 2001, the Company paid a fee of $750 to a director of the Company
who served as President of Ladenburg Thalmann. The fee was paid for his services
in connection with the closing of the acquisition of Ladenburg Thalmann by LTS.
One-half of the fee was reimbursed to the Company by Ladenburg Thalmann.

     An executive officer of the Company served as Chief Financial Officer of
LTS from June 2001 through October 2002. In 2002, LTS accrued compensation of
$100 for this executive officer in connection with his services, which is
payable in four quarterly installments commencing April 1, 2003. Various
executive officers and directors of the Company serve as members of the Board of
Directors of LTS, which is indebted to the Company. See Note 5.

     A director of the Company serves as a managing director of an investment
bank that provided services to Brooke (Overseas) in connection with the 2000
sale of Western Tobacco Investments. Brooke (Overseas) paid this firm $750 in
connection with such services. An executive officer and director of the Company
is a shareholder and registered representative in a broker-dealer to which the
Company paid $87 in 2002, $12 in 2001 and $101 in 2000 in brokerage commissions
and other income. This executive officer, a firm of which he serves as chairman
of the board, and the firm's affiliates, received ordinary and customary
insurance commissions aggregating approximately $140 in 2002, $162 in 2001 and
$27 in 2000 on various insurance policies issued for the Company and its
subsidiaries and investees.

                                        53
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies described below. However, considerable judgment is
required to develop the estimates of fair value and, accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized in a current market exchange.

<Table>
<Caption>
                                                            DECEMBER 31, 2002    DECEMBER 31, 2001
                                                            ------------------   ------------------
                                                            CARRYING    FAIR     CARRYING    FAIR
                                                             AMOUNT     VALUE     AMOUNT     VALUE
                                                            --------   -------   --------   -------
<S>                                                         <C>        <C>       <C>        <C>
Financial assets:
  Cash and cash equivalents...............................  $82,113    $82,113   $92,069    $92,069
  Investments available for sale..........................   13,391     13,391    20,902     20,902
  Restricted assets.......................................    1,811      1,811    17,380     17,380
  Long-term investments...................................    3,150     10,694     3,150      9,987
Financial liabilities:
  Notes payable...........................................   40,500     40,500    11,226     11,226
</Table>

18.  BUSINESS SEGMENT INFORMATION

     The following table presents certain financial information of the Company's
continuing operations before taxes and minority interests as of and for the
years ended December 31, 2002, 2001 and 2000. The operations of BrookeMil are
included in real estate operations, while the Company's interest in Western
Realty Development, which was accounted for on the equity method prior to
December 29, 2000, is included in corporate and other activities. The activities
of Western Realty Development are included in real estate operations for the
2001 period. The corporate and other segment includes identifiable assets of
$48,770 at December 31, 2000, which were previously classified in the
broker-dealer segment, which was discontinued and disposed of, on December 20,
2001.

<Table>
<Caption>
                                                                            CORPORATE
                                                              REAL ESTATE   AND OTHER     TOTAL
                                                              -----------   ----------   --------
<S>                                                           <C>           <C>          <C>
2002
Revenues....................................................   $  1,001      $  4,013    $  5,014
Other income (expense)......................................      8,299       (20,347)    (12,048)
Income (loss) from continuing operations before taxes and
  minority interests........................................      7,238       (29,301)    (22,063)
Identifiable assets.........................................     62,755       100,793     163,548
Depreciation and amortization...............................        245            --         245
Capital expenditures........................................     54,945            --      54,945
2001
Revenues....................................................   $  9,966      $  2,735    $ 12,701
Other (expense) income......................................    (20,945)       17,731      (3,214)
Income (loss) from continuing operations before taxes and
  minority interests........................................    (23,046)        7,011     (16,035)
Identifiable assets.........................................     10,581       152,117     162,698
Depreciation and amortization...............................      2,353            --       2,353
Capital expenditures........................................      2,642            --       2,642
</Table>

                                        54
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                            CORPORATE
                                                              REAL ESTATE   AND OTHER     TOTAL
                                                              -----------   ----------   --------
<S>                                                           <C>           <C>          <C>
2000
Revenues....................................................   $  3,199      $ 10,293    $ 13,492
Other income................................................         --        46,510      46,510
Income (loss) from continuing operations before taxes and
  minority interests........................................     (5,335)       41,060      35,725
Identifiable assets.........................................     96,227       166,903     263,130
Depreciation and Amortization...............................      1,020            --       1,020
Capital expenditures........................................      3,663            --       3,663
</Table>

19.  DISCONTINUED OPERATIONS

     Ladenburg Thalmann.  In May 1995, the Company consummated its acquisition
of Ladenburg Thalmann & Co. Inc. ("Ladenburg Thalmann"), a registered
broker-dealer and investment bank, for $25,750, net of cash acquired. In
December 1999, the Company sold 19.9% of Ladenburg Thalmann to Berliner
Effektengesellschaft AG ("Berliner"), a German public financial holding company.
The Company received approximately $10,200 in cash and Berliner shares valued in
accordance with the purchase agreement.

     On May 7, 2001, GBI Capital Management Corp. acquired all of the
outstanding common stock of Ladenburg Thalmann, and the name of GBI was changed
to Ladenburg Thalmann Financial Services Inc. New Valley received 18,598,098
shares of common stock, $8,010 in cash and $8,010 principal amount of senior
convertible notes due December 31, 2005. The notes issued to New Valley bear
interest at 7.5% per annum and are convertible into 3,844,216 shares of LTS
common stock. Upon closing, New Valley also acquired an additional 3,945,060
shares of LTS from the former Chairman of LTS for $1.00 per share. Following
completion of the transactions, New Valley owned 53.6% and 49.5% of the common
stock of LTS, on a basic and fully diluted basis, respectively.

     To provide the funds for the acquisition of the common stock of Ladenburg
Thalmann & Co., LTS borrowed $10,000 from Frost-Nevada, Limited Partnership and
issued to Frost-Nevada $10 million principal amount of 8.5% senior convertible
notes due December 31, 2005. The notes issued to the Ladenburg Thalmann & Co.
stockholders and to Frost-Nevada are collateralized by a pledge of the Ladenburg
Thalmann & Co. stock. In June 2002, New Valley, Berliner and Frost-Nevada agreed
with LTS to forbear until May 15, 2003 payment of the interest due to them under
the convertible notes on the interest payment dates commencing June 30, 2002
through March 31, 2003. In March 2003, the holders of the convertible notes
agreed to extend the interest forbearance period to January 15, 2005 with
respect to interest payments due through December 31, 2004. Interest on the
deferred amounts accrues at 8% on the New Valley and Berliner notes and 9% on
the Frost-Nevada note.

     The actual number of shares of common stock issued to the former Ladenburg
Thalmann stockholders may be further increased and the conversion prices of the
senior convertible notes may be further decreased on or about May 7, 2003,
pending a final resolution of LTS's pre-closing litigation adjustments.

     On November 30, 2001, New Valley announced that it would distribute its
22,543,158 shares of LTS common stock to holders of New Valley common shares
through a special dividend. The special dividend was accomplished through a pro
rata distribution of the LTS shares, paid on December 20, 2001 to New Valley
holders of record as of December 10, 2001. New Valley stockholders received
0.988 of a LTS share for each share of New Valley.

     Following the distribution, New Valley continues to hold $8,010 principal
amount of LTS's senior convertible promissory notes and a warrant to purchase
100,000 shares of LTS common stock at $1.00 per

                                        55
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share and $5,000 of other notes receivable. In 2002, New Valley established a
reserve for uncollectibility against these notes and related interest
receivable. See Note 5.

     The consolidated financial statements of New Valley reflect the
broker-dealer operations of LTS as discontinued operations for all periods
presented. Accordingly, revenues, costs and expenses, and cash flows of the
discontinued operations have been excluded from the respective captions in the
consolidated statements of operations and consolidated statements of cash flows.
The net operating results of these entities have been reported, net of
applicable taxes and minority interests, as "Income (loss) from discontinued
operations," and the net cash flows of these entities have been reported as "Net
cash provided from discontinued operations." New Valley accounted for the
discontinued operations of LTS by prorating LTS's income and expenses through
December 20, 2001, the date of the distribution.

     Summarized financial data of the discontinued operations are as follows:

<Table>
<Caption>
                                                              2001(1)      2000
                                                              -------     -------
<S>                                                           <C>         <C>
Revenues....................................................  $88,473     $90,111
(Loss) income from operations before income taxes...........  (12,030)      6,298
(Benefit) provision for income taxes........................   (1,356)         84
Minority interests in subsidiary (loss) income..............   (4,845)      1,212
                                                              -------     -------
Net (loss) income...........................................  $(5,829)    $ 5,002
                                                              =======     =======
</Table>

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

(1) Results of operations included for the period January 1 through December 20,
    2001.

     Gains on Disposal of Discontinued Operations.  The Company recorded a gain
on disposal of discontinued operations of $4,346 for the year ended December 31,
2001 related to the adjustment of accruals established during the Company's
bankruptcy proceedings in 1993 and 1994. The reversal of these accruals reduced
various restructuring and tax accruals previously established. The reversal of
these accruals reduced various restructuring accruals previously established and
were made due to the completion of settlements related to these matters.

     In 2000, the Company recorded a gain on disposal of discontinued operations
of $17,879 related to the adjustment of accruals established during the
Company's bankruptcy proceedings in 1993 and 1994. The reversal of these
accruals reduced restructuring, employee benefit and various tax accruals
previously established. The reversal of these accruals reduced various
restructuring and tax accruals previously established and were made due to the
completion of settlements or the expiration of statutes of limitations related
to these matters.

                                        56
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

                      QUARTERLY FINANCIAL DATA (UNAUDITED)
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
                                                                             QUARTERS
                                                              --------------------------------------
                                                                1ST       2ND       3RD       4TH
                                                              -------   -------   -------   --------
<S>                                                           <C>       <C>       <C>       <C>
2002:
  Revenues..................................................  $ 2,284   $ 1,732   $   568   $    430
  Expenses(a)...............................................    3,625     3,986     2,635      4,632
  Other results from continuing operations..................       (4)    8,515   (12,718)    (7,841)
                                                              -------   -------   -------   --------
    (Loss) income from continuing operations................   (1,345)    6,261   (14,785)   (12,043)
                                                              -------   -------   -------   --------
  Income from discontinued operations.......................       --        --        --         --
  Gain from discontinued operations.........................       --        --        --         --
                                                              -------   -------   -------   --------
    Income from discontinued operations.....................       --        --        --         --
                                                              -------   -------   -------   --------
  Net (loss) income(b)......................................  $(1,345)  $ 6,261   $(14,785) $(12,043)
                                                              =======   =======   =======   ========
(Loss) income per Common Share (Basic):
    (Loss) income from continuing operations................  $ (0.06)  $  0.27   $ (0.65)  $  (0.54)
  Discontinued operations...................................       --        --        --         --
                                                              -------   -------   -------   --------
  Net (loss) income(b)......................................  $ (0.06)  $  0.27   $ (0.65)  $  (0.54)
                                                              =======   =======   =======   ========
(Loss) income per Common Share (Diluted):
  (Loss) income from continuing operations..................  $ (0.06)  $  0.27   $ (0.65)  $  (0.54)
  Discontinued operations...................................       --        --        --         --
                                                              -------   -------   -------   --------
  Net (loss) income(b)......................................  $ (0.06)  $  0.27   $ (0.65)  $  (0.54)
                                                              =======   =======   =======   ========
2001:
  Revenues..................................................  $ 4,308   $ 3,773   $ 2,895   $  1,725
  Expenses(a)...............................................    6,612     6,897     5,456      6,223
  Other results from continuing operations..................      884       136        (6)    (4,228)
                                                              -------   -------   -------   --------
    Loss from continuing operations.........................   (1,420)   (2,988)   (2,567)    (8,726)
                                                              -------   -------   -------   --------
  Income from discontinued operations(c)....................     (268)   (1,576)   (3,050)      (935)
  Gain from discontinued operations(d)......................       --     2,279        --      2,067
                                                              -------   -------   -------   --------
  (Loss) income from discontinued operations................     (268)      703    (3,050)     1,132
                                                              -------   -------   -------   --------
  Net loss(b)...............................................  $(1,688)  $(2,285)  $(5,617)  $ (7,594)
                                                              =======   =======   =======   ========
Loss per Common Share (Basic):
  Loss from continuing operations...........................  $ (0.06)  $ (0.13)  $ (0.12)  $  (0.38)
  Discontinued operations(c)(d).............................    (0.01)     0.03     (0.13)      0.05
                                                              -------   -------   -------   --------
  Net loss(b)...............................................  $ (0.07)  $ (0.10)  $ (0.25)  $  (0.33)
                                                              =======   =======   =======   ========
Loss per Common Share (Diluted):
  Loss from continuing operations...........................  $ (0.06)  $ (0.13)  $ (0.12)  $  (0.38)
  Discontinued operations(c)(d).............................    (0.01)     0.03     (0.13)      0.05
                                                              -------   -------   -------   --------
  Net loss(b)...............................................  $ (0.07)  $ (0.10)  $ (0.25)  $  (0.33)
                                                              =======   =======   =======   ========
</Table>

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

(a)  Includes minority interests in results from continuing operations of
     consolidated subsidiaries and provision (benefit) for federal, state and
     foreign income taxes.
(b)  The sum of quarterly income (loss) per share may not equal income (loss)
     per share for the year, because the per share data for each quarter and for
     the year is independently computed.
(c)  (Loss) income from the Company's broker-dealer subsidiary.
(d)  The 2001 amounts represent adjustments of accruals established during the
     Company's bankruptcy proceedings in 1993 and 1994. See Note 15.

                                        57
<PAGE>

                                                                    SCHEDULE III

                             NEW VALLEY CORPORATION

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                  FOR THE THREE YEARS ENDED DECEMBER 31, 2002
                             (AMOUNTS IN THOUSANDS)
<Table>
<Caption>
                                                                                     GROSS AMOUNT CARRIED
                                                                                      AT CLOSE OF PERIOD
                                                                    COST       --------------------------------
                                               INITIAL COST      CAPITALIZED              BUILDINGS
        DESCRIPTION                         ------------------     NET OF                    AND                  ACCUMULATED
       AND LOCATION          ENCUMBRANCES    LAND     BUILDING    DELETIONS     LAND     IMPROVEMENTS    TOTAL    DEPRECIATION
       ------------          ------------   -------   --------   -----------   -------   ------------   -------   ------------
<S>                          <C>            <C>       <C>        <C>           <C>       <C>            <C>       <C>
Office Buildings:
 Bernards Township, NJ.....    $    --      $10,059   $ 38,432    $ (48,491)   $    --     $    --      $    --      $   --
 Bernards Township, NJ.....         --        2,342      9,172      (11,514)        --          --           --          --
 Troy, MI..................         --       23,581    (23,581)          --         --          --           --
 Troy, MI..................         --        7,049     21,147      (28,196)        --          --           --          --
 Ducat Place I.............         --        5,561     (5,561)          --         --          --
 Ducat Place II............         --           --     59,300      (59,300)        --          --           --          --
 Ducat Place III...........         --       13,600         --      (13,600)        --          --           --          --
 Kindergarten Building.....         --           --        912         (912)        --          --           --          --
 Kremlin Site..............         --           --         --           --         --          --           --          --
 100 College Road West.....     27,664        5,219     31,842           --      5,219      31,842       37,061          34
 150 College Road West.....     12,836        2,417     14,780           --      2,417      14,780       17,197          16
                               -------      -------   --------    ---------    -------     -------      -------      ------
                                40,500       40,686    204,727     (191,155)     7,636      46,622       54,258          50
                               -------      -------   --------    ---------    -------     -------      -------      ------
Shopping Centers:
 Tri Cities, WA............         --        2,981      7,692      (10,673)        --          --           --          --
 Santa Fe, NM..............         --        3,233      6,423       (9,656)        --          --           --          --
 Milwaukie, OR.............         --          949      6,374       (7,323)        --          --           --          --
 Marathon, FL..............         --          624      3,299       (3,923)        --          --           --          --
 Seattle, WA...............         --        3,354      9,069      (12,423)        --          --           --          --
 Charleston, WV............         --        2,510     10,516      (13,026)        --          --           --          --
 Royal Palm Beach, FL......         --        2,032      7,867       (9,899)        --          --           --          --
 Lincoln, NE...............         --        1,254      4,750       (6,004)        --          --           --          --
                               -------      -------   --------    ---------    -------     -------      -------      ------
                                    --       16,937     55,990      (72,927)        --          --           --          --
                               -------      -------   --------    ---------    -------     -------      -------      ------
       Total...............    $40,500      $57,623   $260,717    $(264,082)   $ 7,636     $46,622      $54,258      $   50
                               =======      =======   ========    =========    =======     =======      =======      ======

<Caption>

        DESCRIPTION             DATE          DATE     DEPRECIABLE
       AND LOCATION          CONSTRUCTED    ACQUIRED      LIFE
       ------------          -----------   ----------  -----------
<S>                          <C>           <C>         <C>
Office Buildings:
 Bernards Township, NJ.....     1991       Jan 1996        40
 Bernards Township, NJ.....     1994       Jan 1996        40
 Troy, MI..................     1987       Jan 1996        40
 Troy, MI..................     1990       Jan 1996        40
 Ducat Place I.............     1993       Jan 1997        40
 Ducat Place II............     1997       Jan 1997        40
 Ducat Place III...........     1997       Jan 1997        40
 Kindergarten Building.....                April 1998      40
 Kremlin Site..............     1998                       40
 100 College Road West.....     2000       Dec 2002        39
 150 College Road West.....     2001       Dec 2002        39
Shopping Centers:
 Tri Cities, WA............     1980       Jan 1996        25
 Santa Fe, NM..............     1964       Jan 1996        25
 Milwaukie, OR.............     1978       Jan 1996        25
 Marathon, FL..............     1972       Jan 1996        25
 Seattle, WA...............     1988       Jan 1996        25
 Charleston, WV............     1985       Jan 1996        25
 Royal Palm Beach, FL......     1985       Jan 1996        25
 Lincoln, NE...............     1964       Jan 1996        25
       Total...............
</Table>

                                        58
<PAGE>

                                                                    SCHEDULE III

                             NEW VALLEY CORPORATION

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                  FOR THE THREE YEARS ENDED DECEMBER 31, 2002
                             (AMOUNTS IN THOUSANDS)

RECONCILIATION OF CARRYING COSTS AND ACCUMULATED DEPRECIATION

<Table>
<Caption>
                                                              BUILDINGS AND               ACCUMULATED
                                                    LAND      IMPROVEMENTS      TOTAL     DEPRECIATION
                                                   -------   ---------------   --------   ------------
<S>                                                <C>       <C>               <C>        <C>
Balance at January 1, 2000.......................  $35,995       $19,603       $ 55,598      $2,245
                                                   -------       -------       --------      ------
Additions during period
  Other acquisitions.............................       --            --             --
  Improvements, etc..............................    3,664            --          3,664
  Reclassifications..............................      549          (549)            --
  Real estate in joint venture acquired..........   16,920        65,133         82,053       5,696
  Depreciation expense...........................       --            --             --       1,020
                                                   -------       -------       --------      ------
          Total Additions........................   21,133        64,584         85,717       6,716
                                                   -------       -------       --------      ------
Deductions during period:
  Cost of real estate sold.......................       --            --             --          --
                                                   -------       -------       --------      ------
Balance at December 31, 2000.....................  $57,128       $84,187       $141,315      $8,961
                                                   -------       -------       --------      ------
Additions during period
  Other acquisitions.............................       --            --             --
  Improvements, etc..............................    3,562            --          3,562
  Reclassifications..............................       --            --             --
  Depreciation expense...........................       --            --             --       2,123
                                                   -------       -------       --------      ------
          Total Additions........................    3,562            --          3,562       2,123
                                                   -------       -------       --------      ------
Deductions during period:
  Cost of real estate sold.......................   20,753        72,989         93,742       8,936
                                                   -------       -------       --------      ------
Balance at December 31, 2001.....................  $39,937       $11,198       $ 51,135      $2,148
                                                   -------       -------       --------      ------
Additions during period
  Other acquisitions.............................    7,636        46,622         54,258
  Improvements, etc..............................      687            --            687
  Reclassifications..............................       --            --             --
  Depreciation expense...........................       --            --             --       2,123
                                                   -------       -------       --------      ------
          Total Additions........................    8,323        46,622         54,945       2,123
                                                   -------       -------       --------      ------
Deductions during period:
  Cost of real estate sold.......................   40,624        11,198         51,822       4,221
                                                   -------       -------       --------      ------
Balance at December 31, 2002.....................  $ 7,636       $46,622       $ 54,258      $   50
                                                   -------       -------       --------      ------
</Table>

                                        59
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 and 15(d) 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.

                                          NEW VALLEY CORPORATION

                                          (REGISTRANT)

                                          By: /s/ J. BRYANT KIRKLAND III
                                            ------------------------------------
                                              J. Bryant Kirkland III
                                            Vice President, Treasurer
                                            and Chief Financial Officer

Date: March 31, 2003

                                        60
<PAGE>

                               POWER OF ATTORNEY

     The undersigned directors and officers of New Valley Corporation hereby
constitute and appoint Howard M. Lorber, Richard J. Lampen, J. Bryant Kirkland
III and Marc N. Bell, and each of them, with full power to act without the other
and with full power of substitution and resubstitution, our true and lawful
attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below, this Annual Report on Form 10-K and any and all
amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 2003.

<Table>
<Caption>
                      SIGNATURE                                              TITLE
                      ---------                                              -----
<C>                                                        <S>

                /s/ BENNETT S. LEBOW                       Chairman of the Board and Chief Executive
-----------------------------------------------------      Officer (Principal Executive Officer)
                  Bennett S. LeBow

             /s/ J. BRYANT KIRKLAND III                    Vice President, Treasurer and Chief
-----------------------------------------------------      Financial Officer (Principal Financial
               J. Bryant Kirkland III                      Officer and Principal Accounting Officer)

               /s/ HENRY C. BEINSTEIN                      Director
-----------------------------------------------------
                 Henry C. Beinstein

                 /s/ ARNOLD I. BURNS                       Director
-----------------------------------------------------
                   Arnold I. Burns

                /s/ RONALD J. KRAMER                       Director
-----------------------------------------------------
                  Ronald J. Kramer

                /s/ RICHARD J. LAMPEN                      Director
-----------------------------------------------------
                  Richard J. Lampen

                /s/ HOWARD M. LORBER                       Director
-----------------------------------------------------
                  Howard M. Lorber

                /s/ BARRY W. RIDINGS                       Director
-----------------------------------------------------
                  Barry W. Ridings

                 /s/ VICTOR M. RIVAS                       Director
-----------------------------------------------------
                   Victor M. Rivas
</Table>

                                        61
<PAGE>

                                 CERTIFICATION

I, Bennett S. LeBow, certify that:

     1. I have reviewed this annual report on Form 10-K of New Valley
Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003
                                          /s/ Bennett S. LeBow
                                          --------------------------------------
                                          Bennett S. LeBow
                                          Chairman and Chief Executive Officer

                                        62
<PAGE>

                                 CERTIFICATION

I, J. Bryant Kirkland III, certify that:

     1. I have reviewed this annual report on Form 10-K of New Valley
Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003
                                          /s/ J. Bryant Kirkland III
                                          --------------------------------------
                                          J. Bryant Kirkland III
                                          Vice President and Chief Financial
                                          Officer

                                        63