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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, 2003
                         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.  [X]

     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, 2003 was approximately $35,429,358. 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 11, 2004, there were 22,117,852 common shares outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement
for the 2004 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

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                                                                               PAGE
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<S>              <C>                                                           <C>
                                      PART I
Item 1.          Business....................................................    1
Item 2.          Properties..................................................   12
Item 3.          Legal Proceedings...........................................   13
Item 4.          Submission of Matters to a Vote of Security-Holders;           13
                   Executive Officers of the Registrant......................

                                      PART II
Item 5.          Market for Registrant's Common Equity and Related              15
                   Stockholder Matters.......................................
Item 6.          Selected Financial Data.....................................   16
Item 7.          Management's Discussion and Analysis of Financial Condition    17
                   and Results of Operations.................................
Item 7A.         Quantitative and Qualitative Disclosures About Market          29
                   Risk......................................................
Item 8.          Financial Statements and Supplementary Data.................   29
Item 9.          Changes in and Disagreements with Accountants on Accounting    29
                   and Financial Disclosure..................................
Item 9A.         Controls and Procedures.....................................   29

                                     PART III
Item 10.         Directors and Executive Officers of the Registrant..........   30
Item 11.         Executive Compensation......................................   30
Item 12.         Security Ownership of Certain Beneficial Owners and            30
                   Management and Related Stockholder Matters................
Item 13.         Certain Relationships and Related Transactions..............   30
Item 14.         Principal Accounting Services and Fees......................   30

                                      PART IV
Item 15.         Exhibits, Financial Statement Schedules, and Reports on Form   31
                   8-K.......................................................
SIGNATURES...................................................................   61
</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 Douglas Elliman
Realty, LLC, which operates 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 a current effective exercise price of $11.30 per common
share and expire on June 14, 2004. 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, 2003,
Vector Group owned 58.1% 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 has been 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 $84.5 million at December 31, 2003) are available for general
corporate purposes, including for acquisition purposes.

                                        1
<PAGE>

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

     Financial information relating to New Valley's business segments can be
found in Note 18 to the consolidated financial statements.

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 $54.3 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, 2003, 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 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, had invested $7.4 million
in the project and had committed to make additional investments of up to an
aggregate of $5.1 million as of December 31, 2003. New Valley funded $1.5
million of this amount in February 2004. New Valley accounts for its investment
in Koa Investors under the equity method and recorded losses of $327,000 and
$1.3 million in 2003 and 2002, respectively, associated with the Kona Surf
Hotel. Koa Investors' losses primarily represent management fees and the 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, which is currently closed, 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 has entered into an agreement with Starwood Hotels and
Resorts Worldwide, Inc. for Starwood to manage the hotel when it reopens as the
Sheraton Keauhou Bay Resort & Spa, a four star family resort with approximately
525 rooms. The planned major renovation of the property includes comprehensive

                                        2
<PAGE>

room enhancements, construction of a fresh water 13,000 square foot fantasy
pool, lobby and entrance improvements, a new gym and spa, retail stores and new
restaurants. A 10,000 square foot convention center, wedding chapel and other
revenue producing amenities would also be restored.

     Koa Investors estimates that the cost of the hotel's renovation will be
approximately $55 million. Preliminary development is underway and, subject to
completing the necessary financing arrangements, the reopening of the hotel is
currently scheduled for late 2004. A predevelopment credit line of $6.5 million
has been obtained from a Taiwanese lender. Koa Investors is currently in
negotiations with a lender to provide construction financing for the planned
renovation. However, no assurance can be given that the necessary 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 $897,000 on the sale. In May 2002, New Valley disposed of its remaining
shopping center in Kanawha, West Virginia and recorded a gain of $564,000 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.

DOUGLAS ELLIMAN 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, which conducts business as
Prudential Douglas Elliman Real Estate, formerly known 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, Preferred Empire Mortgage Company. In December 2002, New Valley and the
other owners of Prudential Douglas Elliman Real Estate contributed their
interests in Prudential Douglas Elliman Real Estate to Douglas Elliman Realty,
LLC, formerly known as Montauk Battery Realty, LLC, a newly formed entity. New
Valley acquired a 50% interest in Douglas Elliman Realty as a result of an
additional investment of approximately $1.4 million by New Valley and the
redemption by Prudential Douglas Elliman Real Estate of various ownership
interests. As part of the transaction, Prudential Douglas Elliman Real Estate
renewed its franchise agreement with The Prudential Real Estate Affiliates, Inc.
for an additional ten-year term. The owners of Douglas Elliman Realty also
agreed, upon receipt of the required regulatory approvals, to contribute to
Douglas Elliman Realty their interests in the related mortgage company.

     In March 2003, Douglas Elliman Realty purchased the New York City-based
residential brokerage firm, Douglas Elliman, LLC, formerly known as Insignia
Douglas Elliman, and an affiliated property management company, for $71.25
million. With that acquisition, the combination of Prudential Douglas Elliman
Real Estate with Douglas Elliman has created the largest residential brokerage
company in the New York metropolitan area. Upon closing of the acquisition,
Douglas Elliman entered into a ten-year franchise agreement with The Prudential
Real Estate Affiliates, Inc. New Valley invested an additional $9.5 million in
subordinated debt and equity of Douglas Elliman Realty to help fund the
acquisition. The subordinated debt, which has a principal amount of $9.5
million, bears interest at 12% per annum and is due in March 2013. As part of
the Douglas Elliman acquisition, Douglas Elliman Realty acquired Douglas
Elliman's affiliate, Residential Management Group LLC, which conducts business
as Douglas Elliman Property Management and is the New York metropolitan area's
largest manager of rental, co-op and condominium housing.

     New Valley accounts for its interest in Douglas Elliman Realty on the
equity method. New Valley recorded income of $1.2 million in 2003 and $594,000
in 2002 associated with Douglas Elliman Realty. New Valley's equity income from
Douglas Elliman Realty includes interest earned by New Valley on the
subordinated debt and 46% of the mortgage company's results from operations.

                                        3
<PAGE>

  Real Estate Brokerage Business

     Douglas Elliman Realty is engaged in the real estate brokerage business
through its subsidiaries Douglas Elliman and Prudential Douglas Elliman Real
Estate. The two brokerage companies have 47 offices with more than 2,250 real
estate brokers in the metropolitan New York area. The companies achieved
combined sales of approximately $6.8 billion of real estate for the year ended
December 31, 2003.

     Douglas Elliman was founded in 1911 and has grown to be one of Manhattan's
leading residential brokers by specializing in the highest end of the sales and
rental marketplaces. It has nine New York City offices, more than 900 real
estate brokers and sales volume of approximately $4 billion of real estate for
the year ended December 31, 2003.

     Prudential Douglas Elliman Real Estate is headquartered in Huntington, New
York and is the largest residential brokerage company on Long Island with
approximately 37 offices. During 2003, Prudential Douglas Elliman Real Estate
closed approximately 6,955 transactions, representing sales volume of
approximately $2.8 billion of real estate. Prudential Douglas Elliman Real
Estate's 37 offices serve approximately 250 communities from Manhattan to
Montauk. In 2002, Prudential Douglas Elliman Real Estate 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.

     Douglas Elliman and Prudential Douglas Elliman Real Estate both act as a
broker or agent in residential real estate transactions. In performing these
services, the companies have 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, their 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 the companies 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. The two
companies also offer buyer brokerage services. When acting as a broker for the
buyer, their 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 companies 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, the companies may, in
certain circumstances, act as a selling broker and as a buying broker in the
same transaction. Their sales and marketing services are mostly provided by
licensed real estate sales associates who have entered into independent
contractor agreements with the companies. The companies recognize revenue and
commission expenses upon the consummation of the real estate sale.

     The two brokerage companies also offer 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 the brokerage companies' franchise agreement with Prudential,
its subsidiaries have an agreement with Prudential Relocation Services, Inc. to
provide relocation services to the Prudential network. The companies anticipate
that participation in Prudential network will continue to provide new relocation
opportunities with firms on a national level.

     Douglas Elliman 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

                                        4
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loans are for home sales transactions in which Prudential Douglas Elliman Real
Estate 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 other fees paid by the borrowers. Preferred Empire
recognizes mortgage origination revenues and costs when the mortgage loan is
consummated.

  Marketing

     As members of The Prudential Real Estate Affiliates, Inc., Douglas Elliman
and Prudential Douglas Elliman Real Estate offer 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 real estate brokerage companies services is
designed to produce a flow of customers between their real estate sales and
marketing business and their mortgage business.

  Competition

     The real estate brokerage business is highly competitive. However, Douglas
Elliman and Prudential Douglas Elliman Real Estate believe that their ability to
offer their customers a range of inter-related services and their level of
residential real estate sales and marketing help position them to meet the
competition and improve their market share.

     In the two brokerage companies' traditional business of residential real
estate sales and marketing, they compete 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. The
companies believe that their major competitors in 2004 will also increasingly
include multi-office real estate organizations, such as GMAC Home Services, NRT
Inc. (whose affiliates include the New York City-based Corcoran Group) and other
privately owned companies. Residential brokerage firms compete for sales and
marketing business primarily on the basis of services offered, reputation,
personal contacts, and, recently to a greater degree, price.

     Both companies' relocation businesses are fully integrated with their
residential real estate sales and marketing business. Accordingly, their major
competitors are many of the same real estate organizations previously noted.
Competition in the relocation business is likewise based primarily on level of
service, reputation, personal contact and, recently to a greater degree, 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 fund, 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 real estate brokerage businesses are subject to
government regulation. For example, their 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, their 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 real estate brokerage
operations of Douglas Elliman and Prudential Douglas Elliman Real Estate into
new geographic markets may subject them 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, Douglas Elliman and Prudential Douglas Elliman Real Estate do
not believe that compliance with environmental, zoning and land use laws and
regulations has had, or will have, a materially adverse effect on their
financial condition or operations.

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     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, and
as a result Preferred Empire is required to submit annual audited financial
statements to the New York Commissioner of Banks and maintain a minimum net
worth of $50,000. As of December 31, 2003, Preferred Empire was in compliance
with these requirements.

     Neither Douglas Elliman nor Prudential Douglas Elliman Real Estate is 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.

  Franchises and Trade Names

     In December 2002, Prudential Douglas Elliman Real Estate renewed for an
additional ten-year term its franchise agreement with The Prudential Real Estate
Affiliates, Inc. and has an exclusive franchise, subject to various exceptions
and to meeting annual revenue thresholds, in New York for the counties of Nassau
and Suffolk on Long Island. In addition, Prudential Douglas Elliman Real Estate
was granted a "right of first refusal" with respect to the boroughs of Brooklyn
and Queens. In March 2003, Douglas Elliman entered into a ten-year franchise
agreement with The Prudential Real Estate Affiliates, Inc. and has an exclusive
franchise, subject to various exceptions and to meeting annual revenue
thresholds, for Manhattan.

     The "Douglas Elliman" trade name is a registered trademark in the United
States and is used extensively in Douglas Elliman's business. The name has been
synonymous with the most exacting standards of excellence in the real estate
industry since Douglas Elliman's formation in 1911. Other trademarks used
extensively in Douglas Elliman's business, which are owned by Douglas Elliman
Realty and registered in the United States, include "We are New York", "Bringing
People and Places Together", "If You Clicked Here You'd Be Home Now" and
"Picture Yourself in the Perfect Home".

     The "Prudential" name and the tagline "From Manhattan to Montauk" are used
extensively in the Prudential Douglas Elliman Real Estate's businesses. In
addition, Prudential Douglas Elliman Real Estate continues to use the trade
names of certain companies that it has acquired.

  Residential Property Management Business

     Douglas Elliman Realty is also engaged in the management of cooperatives,
condominiums and apartments though its subsidiary, Residential Management Group,
LLC, which conducts business as Douglas Elliman Property Management and is the
New York metropolitan area's largest manager of rental, co-op and condominium
housing according to a survey in the February 2003 issue of The Cooperator.
Residential Management Group provides full service third-party fee management
for approximately 250 properties, representing approximately 50,000 units in New
York City, Nassau County, Northern New Jersey and Westchester County. The
company is seeking to continue to expand its property management business in the
Long Island market during 2004. Among the notable properties currently managed
are the Worldwide Plaza, London Terrace and West Village buildings in New York
City. Residential Management Group employs approximately 250 people, of whom
approximately 175 work at the company's headquarters and the remainder at remote
site offices in the New York metropolitan area. In addition to the management of
its client's properties, Residential Management Group provides ancillary
services such as mortgage brokerage services, including resale and financing
arrangements for cooperative and condominium corporations through third-party
financial institutions, leasing brokerage services, and construction management.

                                        6
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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 the interest of Brooke (Overseas) 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.

     In December 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.

     In April 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.

                                        7
<PAGE>

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 common stock 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.

     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.

     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
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

                                        8
<PAGE>

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 the then 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 and Richard J. Lampen, executive officers and directors of
New Valley, Victor M. Rivas, a director of New Valley, and Henry C. Beinstein, a
director of New Valley and Vector Group, also serve as directors of Ladenburg
Thalmann Financial Services, and Bennett S. LeBow, the Chairman and Chief
Executive Officer of New Valley, served as a director of Ladenburg Thalmann
Financial Services until September 2003. Mr. Rivas also serves as President and
CEO of Ladenburg Thalmann Financial Services. Mr. Rivas will retire March 31,
2004 as an officer and director 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 was paid 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.
New Valley's warrant expire on June 14, 2004.

OTHER INVESTMENTS

     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 2001, Thinking Machines recognized gains
of $250,000 related to Oracle's payment of the remaining portion of $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, 2003, 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, 2003, long-term investments consisted primarily of
investments in limited partnerships and limited liability companies of $2.4
million. New Valley has committed to make an additional investment in one of
these limited partnerships of up to $979,000.

EMPLOYEES

     At December 31, 2003, New Valley had 13 full-time employees. New Valley
believes that relations with its employees are satisfactory.

                                        9
<PAGE>

AVAILABLE INFORMATION

     New Valley's website address is www.newvalley.com. New Valley makes
available free of charge on the Investor Relations section of its website
(http://newvalley.com/invest.asp) its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission. New Valley also makes
available through its website other reports filed with the SEC under the
Exchange Act, including its proxy statements and reports filed by officers and
directors under Section 16(a) of that Act. Copies of its Code of Business
Conduct and Ethics and Audit Committee charter will be posted on the Investor
Relations section of its website. New Valley does not intend for information
contained in its website to be part of this Annual Report on Form 10-K.

                                  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 mortgage debt in the amount of
$39.9 million as of December 31, 2003 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,
Douglas Elliman Realty 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 Douglas Elliman Realty, New Valley is subject to the risks and
uncertainties endemic to the residential brokerage business. Both Douglas
Elliman and Prudential Douglas Elliman Real Estate operate as franchisees of The
Prudential Real Estate Affiliates, Inc. Prudential Douglas Elliman Real Estate
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 two brokerage companies' business. The franchise agreements require the
companies to:

     - coordinate with the franchiser on significant matters relating to their
       operations, including the opening and closing of offices;

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

     - indemnify the franchiser against losses arising out of the operations of
       their business under the franchise agreements; and

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

                                        10
<PAGE>

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

     The franchise agreements grant Douglas Elliman and Prudential Douglas
Elliman Real Estate exclusive franchises in New York for the counties of Nassau
and Suffolk on Long Island and for Manhattan, subject to various exceptions and
to meeting annual revenue thresholds. If the two companies fail to achieve these
levels of revenues for two consecutive years or otherwise materially breach the
franchise agreements, the franchisor would have the right to terminate their
exclusivity rights. A loss of these rights could have a material adverse on
Douglas Elliman Realty.

     Interest rates in the United States are currently at 40-year lows. The low
interest rate environment in recent years has significantly contributed to high
levels of existing home sales and residential prices and has positively impacted
Douglas Elliman Realty's operating results. However, the residential real estate
market tends to be cyclical and typically is affected by changes in the general
economic conditions that are beyond Douglas Elliman Realty's control. Any of the
following could have a material adverse effect on Douglas Elliman Realty's
residential business by causing a general decline in the number of home sales
and/or prices, which in turn, could adversely affect its revenues and
profitability:

     - 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 Douglas Elliman Realty'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 Douglas Elliman Realty
and New Valley's investment in that company.

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 Douglas Elliman Realty, 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

                                        11
<PAGE>

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.

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, and Howard M. Lorber,
President and Chief Operating Officer. The loss to New Valley of Mr. LeBow or
Mr. Lorber 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. 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 are exercisable until
June 14, 2004, would increase the number of common shares by more than 80% and
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.

                                        12
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     Reference is made to Notes 9 and 15 to the consolidated financial
statements.

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

     During the last quarter of 2003, no matter was submitted to stockholders
for their vote or approval, through the solicitation of proxies or otherwise.

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
11, 2004. 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............  66    Chairman of the Board and Chief Executive Officer        1988
Howard M. Lorber............  55    President and Chief Operating Officer                    1994
Richard J. Lampen...........  50    Executive Vice President and General Counsel             1995
J. Bryant Kirkland III......  38    Vice President, Treasurer and Chief Financial            1998
                                    Officer
Marc N. Bell................  43    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.

     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 1990 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.

     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 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.

                                        13
<PAGE>

     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 a 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 a Vice President of Vector
Group.

                                        14
<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
2003:
Fourth Quarter..............................................  $4.44   $3.60
Third Quarter...............................................   4.53    3.71
Second Quarter..............................................   5.00    3.11
First Quarter...............................................   4.74    3.18
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
</Table>

HOLDERS

     At March 8, 2004, there were approximately 11,663 holders of record of the
common shares.

DIVIDENDS

     No cash dividends were paid on the common shares in 2003 or 2002.

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, 2003.

                                        15
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                            ----------------------------------------------------
                                              2003       2002       2001       2000       1999
                                            --------   --------   --------   --------   --------
                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                         <C>        <C>        <C>        <C>        <C>
OPERATING RESULTS:
Total revenues............................  $  7,298   $  1,001   $  9,966   $  3,199   $  7,373
Total costs and expenses..................    15,432     14,546     22,930     18,612     25,476
Other income (expense)....................     2,452     (8,518)    (3,071)    51,138     (9,561)
                                            --------   --------   --------   --------   --------
(Loss) income from continuing operations
  before income taxes and minority
  interests...............................    (5,682)   (22,063)   (16,035)    35,725    (27,664)
Income tax provision......................        --         --        260         --         18
Minority interests in (loss) income from
  continuing operations of consolidated
  subsidiaries............................       (20)      (151)      (594)      (323)        92
                                            --------   --------   --------   --------   --------
(Loss) income from continuing
  operations..............................    (5,662)   (21,912)   (15,701)    36,048    (27,774)
Discontinued operations:
(Loss) income from discontinued
  operations..............................        --         --     (5,829)     5,002      2,051
Gain on disposal of discontinued
  operations..............................        --         --      4,346     17,879      4,100
                                            --------   --------   --------   --------   --------
  (Loss) income from discontinued
    operations............................        --         --     (1,483)    22,881      6,151
                                            --------   --------   --------   --------   --------
Net (loss) income.........................    (5,662)   (21,912)   (17,184)    58,929    (21,623)
Dividend requirements on preferred
  shares(a)...............................                   --         --         --    (37,759)
                                            --------   --------   --------   --------   --------
Net (loss) income applicable to common
  shares..................................  $ (5,662)  $(21,912)  $(17,184)  $ 58,929   $(59,382)
                                            ========   ========   ========   ========   ========
Per common and equivalent share(b):
Basic:
  (Loss) income from continuing
    operations............................  $  (0.26)  $  (0.96)  $  (0.69)  $   1.57   $  (3.76)
  (Loss) income from discontinued
    operations............................        --         --      (0.06)      0.99        .35
  Net (loss) income per common share......     (0.26)     (0.96)     (0.75)      2.56      (3.41)
Diluted:
  (Loss) income from continuing
    operations............................  $  (0.26)  $  (0.96)  $  (0.69)  $   1.56   $  (3.76)
  (Loss) income from discontinued
    operations............................        --         --      (0.06)      0.99        .35
  Net (loss) income per common share......     (0.26)     (0.96)     (0.75)      2.55      (3.41)
Cash dividends declared(a)................        --         --         --         --         --
Book value(b).............................  $   4.69   $   4.59   $   5.63   $   6.54   $   3.94
BALANCE SHEET DATA:
Total assets..............................  $161,896   $163,548   $162,698   $263,130   $220,668
Long-term notes payable...................    39,266     39,856     11,142     11,900     19,519
Prepetition claims(c).....................       600        674      2,700     10,229     12,279
Stockholders' equity......................   103,748    103,057    128,480    149,685     91,379
Working capital(d)........................    70,986     80,159    113,628     72,720     23,014
</Table>

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

(a)   Dividend requirements on preferred shares amounts include $444 in 1999
      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.
(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 15 to the consolidated financial statements.

                                        16
<PAGE>

(d)   Working capital represents current assets less current liabilities on the
      New Valley consolidated balance sheets.

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 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 in
its commitment to deploy its financial resources to increase stockholder value.
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 Douglas Elliman Realty to 50%
       in December 2002; and

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

RECENT DEVELOPMENTS

     Sale of BrookeMil.  In April 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

                                        17
<PAGE>

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. 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.  In December 2002, New Valley completed the
acquisition of two commercial office buildings in Princeton, N.J. for an
aggregate purchase price of $54,258. 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.

     Douglas Elliman Realty, LLC.  During 2000 and 2001, New Valley acquired for
$1,744 a 37.2% ownership interest in Prudential Douglas Elliman Real Estate,
formerly known as 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, Preferred Empire Mortgage
Company. In December 2002, New Valley and the other owners of Prudential Douglas
Elliman Real Estate contributed their interests in Prudential Douglas Elliman
Real Estate to Douglas Elliman Realty, LLC, formerly known as Montauk Battery
Realty, LLC, a newly formed entity. New Valley acquired a 50% interest in
Douglas Elliman Realty as a result of an additional investment of $1,413 by New
Valley and the redemption by Prudential Douglas Elliman Real Estate of various
ownership interests. As part of the transaction, Prudential Douglas Elliman Real
Estate renewed its franchise agreement with The Prudential Real Estate
Affiliates, Inc. for an additional ten-year term. The owners of Douglas Elliman
Realty also agreed, upon receipt of required regulatory approvals, to contribute
to Douglas Elliman Realty their interests in the related mortgage company.

     In March 2003, Douglas Elliman Realty purchased the leading New York
City-based residential brokerage firm, Douglas Elliman, LLC, formerly Insignia
Douglas Elliman, and an affiliated property management company, for $71,250.
With that acquisition, the combination of Prudential Douglas Elliman Real Estate
with Douglas Elliman has created the largest residential brokerage company in
the New York metropolitan area. Upon closing of the acquisition, Douglas Elliman
entered into a ten-year franchise agreement with The Prudential Real Estate
Affiliates, Inc. New Valley invested an additional $9,500 in subordinated debt
and equity of Douglas Elliman Realty to help fund the acquisition. The
subordinated debt, which has a principal amount of $9,500, bears interest at 12%
per annum and is due in March 2013.

     New Valley accounts for its interest in Douglas Elliman Realty on the
equity method. New Valley's equity income from Douglas Elliman Realty includes
interest earned by New Valley on the subordinated debt and 46% of the mortgage
company's results from operations.

CRITICAL ACCOUNTING POLICIES

     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, 2003, New Valley
had investment securities available for sale of $17,944. 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,

                                        18
<PAGE>

with net unrealized gains and losses included as a separate component of
stockholders' equity. Realized gains and losses are included in other results
from continuing operations. The cost of securities sold is determined based on
average cost. Gains are recognized when realized in New Valley's consolidated
statement 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 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
an impairment charge with respect to 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.
In 2003, New Valley had net increases to unrealized gains on investment
securities of $7,448, which have been included in accumulated other
comprehensive income in the Company's consolidated statement of changes in
stockholders' equity.

     Investments in Non-Consolidated Real Estate Businesses.  New Valley
accounts for its 50% interest in Douglas Elliman Realty, LLC and in KOA
Investors, LLC on the equity method because it has a significant, but less than
controlling, interest in these entities. New Valley records its investments in
these entities in its consolidated balance sheets as "Investments in
non-consolidated real estate businesses" and its share of the entities' income
or loss as "Equity income (loss) from non-consolidated real estate businesses".
Judgment is required in determining controlling interest. Factors considered by
New Valley in determining whether it has significant influence or has control
include risk and reward sharing, experience and financial condition of the other
investors, voting rights, involvement in day-to-day capital and operating
decisions and continuing involvement. The difference between consolidation and
the equity method impacts certain financial ratios because of the presentation
of the detailed line items reported in the financial statements. However, New
Valley's consolidated net income or loss for the period and its stockholders'
equity at the end of the period are the same whether its investments in these
entities are accounted for under the equity method or these entities are
consolidated. Because New Valley does not control the decision-making process or
business management practices of these entities, it relies on management of
these entities and their independent accountants to provide it with accurate
financial information prepared in accordance with generally accepted accounting
principles that New Valley uses in the application of the equity method. New
Valley is not aware, however, of any errors in or possible misstatements of the
financial information provided by these entities that would have a material
effect on New Valley's consolidated financial statements.

     Long-Term Investments.  At December 31, 2003, New Valley had long-term
investments of $2,429, which principally represented 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 consolidated statements
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, carry
forwards of approximately $161,500 as of December 31, 2003 and capital loss
carry forwards of $5,000, which expire at various dates from 2006 through 2023.
New Valley also has approximately $13,500 of alternative minimum tax credit
carry forwards as of December 31, 2003, which may be carried forward
indefinitely under current U.S. tax law. Generally accepted accounting
principles require that New Valley record a valuation allowance against the
deferred tax asset associated with these loss carry forwards 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 carry forwards 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.

                                        19
<PAGE>

     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 carry forwards. 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 carry forwards is utilized.

RESULTS OF OPERATIONS

     For the years ended December 31, 2003, 2002 and 2001, the results of
continuing operations of New Valley are as follows. The operations of BrookeMil
and Western Realty Development are included in real estate operations. 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.

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         2003       2002       2001
                                                        -------   --------   --------
<S>                                                     <C>       <C>        <C>
Real estate:
  Revenues............................................  $ 7,298   $  1,001   $  9,966
  Expenses............................................    3,531      1,579      9,475
  Other results from continuing operations............      (42)     7,816    (23,537)
                                                        -------   --------   --------
  Operating income (loss) before taxes and minority
     interests........................................  $ 3,725   $  7,238   $(23,046)
                                                        =======   ========   ========
Corporate and other:
  Revenues............................................  $    --   $     --   $     --
  Expenses............................................   11,901     12,967     13,455
  Other results from continuing operations............    2,494    (16,334)    20,466
                                                        -------   --------   --------
  Operating (loss) income before taxes and minority
     interests........................................  $(9,407)  $(29,301)  $  7,011
                                                        =======   ========   ========
</Table>

THE YEAR 2003 COMPARED TO 2002

  Real Estate

     Revenues from real estate operations were $7,298 for the year ended
December 31, 2003 versus $1,001 for the same period in 2002. The increase in
revenues of $6,297 was attributable to additional rental revenues from the
acquisition of two commercial office buildings in Princeton, N.J. in December
2002 offset by the absence of rental revenue from New Valley's remaining U.S.
shopping center, which was disposed of in May 2002. Expenses of the real estate
operations increased $1,952 in the 2003 period due primarily to higher expenses
as a result of the acquisition of the office buildings offset by the expenses
associated with the shopping center and the closing of BrookeMil's Russian
operations.

     Other income from real estate activities for the year ended December 31,
2003 consisted of equity income from non-consolidated real estate businesses of
$901 and a gain on the sale of real estate of $478 offset by interest expense on
the two office buildings of $1,421. Other income from real estate activities for
the year ended December 31, 2002 consisted of a gain on the sale of real estate
of $9,048 offset by equity loss from non-consolidated real estate businesses of
$749 and interest expense on the shopping center and office buildings of $483.

     New Valley recorded a gain on sale of real estate of $478 for the year
ended December 31, 2003 in connection with the release of a liability related to
a previously disposed of property. New Valley recorded gains on sale of real
estate in 2002 of $8,484 in connection with the April 2002 sale of BrookeMil and
$564

                                        20
<PAGE>

from the disposal of the remaining U.S. shopping center, which resulted from the
shopping center's negative book value. New Valley also recorded $767 in
additional general and administrative expenses in 2002 related to the closing of
its Russian operations. These expenses consisted principally of employee
severance.

     The equity income from non-consolidated real estate businesses in 2003
resulted from income of $1,228 from Douglas Elliman Realty offset by a loss of
$327 related to New Valley's investment in Koa Investors, which owns the former
Kona Surf Hotel in Kailua-Kona, Hawaii. New Valley's equity income in Douglas
Elliman Realty has been reduced by New Valley's portion ($2,029) of amortization
expense associated with Douglas Elliman's customer contracts outstanding at the
acquisition date. Koa Investors' loss primarily represented management fees. Koa
Investors capitalizes all costs related to the acquisition and development of
the property during the construction phase.

     The equity losses from non-consolidated real estate businesses in 2002
resulted from a loss of $1,343 related to New Valley's investment in Koa
Investors, offset by income of $594 from Douglas Elliman Realty. Koa Investors'
losses represented management fees and a loss of a deposit on an adjoining golf
course, which it determined not to purchase.

  Corporate and Other

     Corporate and other expenses of $11,901 for the year ended December 31,
2003 consisted primarily of employee compensation and benefits of $7,182 and
legal expense of $1,788, with the remainder representing insurance, rent and
other corporate expenses. Corporate and other expenses of $12,967 for the year
ended December 31, 2002 consisted primarily of employee compensation and
benefits of $8,063 and legal expense of $1,886, with the remainder representing
insurance, rent and other corporate expenses. Compensation expense for 2003
included a $1,500 bonus to New Valley's President and Chief Operating Officer
for his performance during 2003 and, in particular, his role in identifying the
March 2003 acquisition and related financing of Douglas Elliman by New Valley's
50%-owned investee Douglas Elliman Realty. This executive received a $2,000
bonus for 2002 relating, among other things, to his role in consummation of the
acquisition of the office buildings and the related financing, and the increase
in New Valley's ownership in the residential brokerage business.

     For the year ended December 31, 2003, New Valley's income of $2,494 from
corporate and other activities consisted primarily of net gains on investments
of $1,654 and interest and dividend income of $823. For 2002, New Valley's loss
of $16,334 from corporate and other activities resulted primarily from a $13,198
provision for uncollectibility of notes receivable from Ladenburg Thalmann
Financial Services, an impairment charge of $6,776 related to
other-than-temporary declines in marketable securities and a $338 provision for
loss on an investment in a subsidiary offset by net gains on investments of
$1,850 and interest and dividend income of $2,163.

     New Valley evaluated its ability to collect $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 and recorded an
impairment charge of $6,776 for the year ended December 31, 2002. New Valley
will continue to review its marketable securities on a regular basis and
evaluate whether any security has experienced an other-than-temporary decline in
fair value. If such declines occur in the future, New Valley will record
additional impairment charges in its consolidated statements of operations.

     New Valley recorded a $338 charge in 2002 related to a provision for loss
on its net investment in its 72.7% subsidiary, ThinkCorp Holdings Corporation,
formerly known as Thinking Machines Corporation. In

                                        21
<PAGE>

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 payable of $20,300 based on sales by Oracle
of the Darwin product above specified sales targets during a three-year period.
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.

     For the year ended December 31, 2003, New Valley's recorded net gains on
investments of $1,654 and interest and dividend income of $823. For the same
period in the prior year, New Valley recorded net gains on investments of $1,850
and interest and dividend income of $2,163. The decrease in interest income is
due primarily to lower prevailing interest rates and lower cash balances in 2003
versus 2002.

     There was no income tax for the years ended December 31, 2003 and 2002,
respectively. 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 2002 COMPARED TO 2001

  Real Estate

     Revenues from real estate operations were $1,001 for the year ended
December 31, 2002 versus $9,966 for the same period last year. The decrease in
revenues of $8,965 is attributable primarily to the sale of Western Realty
Investments in December 2001 and the disposal of New Valley's remaining shopping
center in May 2002, offset by revenues associated with the two office buildings
acquired in December 2002. Revenues from real estate operations in 2002
consisted of $661 of revenues from the shopping center and $340 of revenues
associated with the two office buildings. Revenues from real estate operations
in 2001 consisted of $8,024 from the office building in Moscow, Russia owned by
Western Realty Investments and $1,942 of other revenue, which was primarily from
the shopping center.

     Expenses of the real estate operations decreased $7,896 in 2002 due to the
sale of Western Realty Investments and the shopping center. Expenses in 2002
consisted of $624 from the shopping center, $800 from BrookeMil and $155 from
the two office buildings. The expenses from BrookeMil included $767 in
additional general and administrative expenses in 2002 related to the closing of
its Russian operations. These expenses consisted principally of employee
severance. Expenses of the real estate operations in 2001 consisted of $7,598
from Western Realty Investments, $735 from BrookeMil and $1,142 of other
expense, primarily from the 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 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 and $483 of interest expense. The equity losses
resulted from a loss of $1,343 related to Koa Investors and income of $594 from
Douglas Elliman Realty. Koa Investors' loss represented 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 during the construction phase. Other expenses from
real estate activities for the year ended December 31, 2001 represented the
$21,842 loss on the sale of Western Realty Investments and $2,592 of interest
expense offset by an $897 gain from the sale of a shopping center.

  Corporate and other

     Corporate and other expenses of $12,967 for the year ended December 31,
2002 consisted primarily of employee compensation and benefits of $8,063 and
legal expense of $1,886, with the remainder representing insurance, rent 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 and legal expense of $1,616, with the remainder representing
insurance, rent and other corporate expenses. The increase in

                                        22
<PAGE>

compensation expense in 2002 related 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 New Valley's ownership in the residential
brokerage business.

     For the year ended December 31, 2002, New Valley's loss of $16,334 from
corporate and other activities resulted primarily from a $13,198 provision for
uncollectibility of notes receivable from Ladenburg Thalmann Financial Services,
an impairment charge of $6,776 related to other-than-temporary declines in
marketable securities and a $338 charge related to a provision for loss on its
net investment in a subsidiary offset by net gains on investments of $1,850 and
interest and dividend income of $2,163. For the year ended December 31, 2001,
New Valley's income of $20,466 from corporate and other activities consisted
primarily of income of $17,620 from the settlement of a lawsuit, $250 of gain
associated with the June 1999 sale of ThinkCorp Holdings' assets, and interest
and dividend income of $3,738 offset by net losses on the sales of investments
of $1,003.

     As discussed above, during 2002, New Valley established a reserve for
uncollectibility of $13,198 against its Ladenburg Thalmann Financial Services
notes and interest receivable, and recorded a write-down of $6,776 related to
other-than-temporary declines of its investment securities.

     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 was launched in 1982 with an expected ten year life, had shortened
lives due to insufficient fuel. In the settlement, New Valley received payment
of $17,551 from the insurers for the shortened lives of the two satellites.

     For the year ended December 31, 2002, New Valley's recorded interest and
dividend income of $2,163 versus $3,738 in the prior year. The decrease in
interest income is due primarily to lower prevailing interest rates in 2002
versus 2001.

     New Valley recorded a $338 charge for the year ended December 31, 2002
related to a provision for loss on its net investment in ThinkCorp Holdings.
Included in corporate income for 2001 is income from computer software related
to a gain associated with the June 1999 sale of ThinkCorp Holdings' assets to
Oracle Corporation. In June 2001, ThinkCorp Holdings 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.

     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 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.

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 the year ended December
31, 2001. 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 "Loss from discontinued
operations," and the net cash flows of these entities have been reports as "Net
cash provided from discontinued operations."

                                        23
<PAGE>

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
for the period January 1, 2001 to December 20, 2001 are as follows:

<Table>
<Caption>
                                                                 2001
                                                               --------
<S>                                                            <C>
Revenues....................................................   $ 88,473
Expenses....................................................    100,503
                                                               --------
Loss from operations before income taxes and minority
  interests.................................................   $(12,030)
                                                               ========
</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.

LIQUIDITY AND CAPITAL RESOURCES

     New Valley's working capital decreased by $9,173 and $33,469 for the years
ended December 31, 2003 and 2002, respectively, and increased by $40,908 for the
year ended December 31, 2001.

     New Valley's working capital decreased to $70,986 at December 31, 2003 from
$80,159 at December 31, 2002 primarily as a result of New Valley's additional
investments in non-consolidated real estate businesses and New Valley's loss
from continuing operations offset by a change in unrealized gain in New Valley's
investment securities available for sale.

     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
office buildings in December 2002 and New Valley's loss from continuing
operations offset by the sale of BrookeMil in April 2002.

     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 of $17,551 from the insurers for the shortened lives of the two
satellites.

     During 2003, New Valley's cash and cash equivalents decreased from $82,113
to $66,593 due primarily to New Valley's $9,500 investment in Douglas Elliman
Realty, LLC and cash used in operations of $8,765 offset by net sales of
investment securities and long-term investments of $5,270.

     During 2002, New Valley's cash and cash equivalents decreased from $92,069
to $82,113 due primarily to the purchase of the two 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.

                                        24
<PAGE>

     Cash used for operating activities was $8,765 for 2003 compared to cash
provided of $6,770 for 2002 and cash used of $10,153 for 2001. The difference
between the years was primarily due to the receipt of $17,551 in 2002 from the
lawsuit settlement.

     Cash used for investing activities was $4,819 for 2003 compared with cash
used of $42,768 in 2002 and cash provided of $43,713 for 2001. The difference
between 2003 and 2002 was primarily attributable to the purchase of the two
office buildings in 2002 for $54,258, the issuance of a note receivable to
Ladenburg Thalmann Financial Services of $5,000 in 2002, the payment of
prepetition claims and restructuring accruals of $2,026 in 2002 versus $74 in
2003 and increases in 2003 of net sales of marketable securities and long-term
investments of $5,697 offset by the sale of BrookeMil for $20,461, net of
closing expenses, in 2002 and the 2003 investments of $9,500 and $1,500 in
Douglas Elliman Realty and Koa Investors, LLC, respectively, versus $913 and
$750 in 2002.

     The difference between 2002 and 2001 was primarily attributable to the
purchase of the two 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 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.

     On December 13, 2002, New Valley completed the acquisition of the two
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, New Valley
borrowed on the closing date $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 matters, misapplications of tenant security deposits
and insurance and condemnation proceeds, and fraud or misrepresentation by New
Valley in connection with the indebtedness.

     The capital expenditures of $2,642 for the year ended December 31, 2001
related to the development of the Kremlin sites.

     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.

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

     In March 2003, Douglas Elliman Realty purchased the leading New York
City-based residential brokerage firm, Douglas Elliman, and an affiliated
property management company, for $71,250. New Valley invested an additional
$9,500 in subordinated debt and equity of Douglas Elliman Realty to help fund
the acquisition. The subordinated debt, which has a principal amount of $9,500,
bears interest at 12% per annum and is due in March 2013.

     New Valley holds a 50% interest in the former Kona Surf Hotel in
Kailua-Kona, Hawaii. Following a major renovation, the property is currently
scheduled to reopen in late 2004 as a Sheraton resort. New Valley had committed
to make additional investments of up to $5,100 at December 31, 2003 in the
project. New

                                        25
<PAGE>

Valley funded $1,500 of this amount in February 2004. New Valley has also
committed to make additional investments in another limited partnership of up to
$979 at December 31, 2003.

     In March 2002, New Valley lent $2,500 to Ladenburg Thalmann Financial
Services, the Company's majority-owned subsidiary until December 2001 which
acquired Ladenburg Thalmann & Co. Inc. from New Valley in May 2001. 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.

     New Valley evaluated its ability to collect $13,198 of 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 the May
2001 acquisition. Management determined, based on the then 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.

     New Valley has received a notice of proposed assessment from a state taxing
authority related to the years ended December 31, 1994 and 1995. If the state
taxing authority were to prevail, New Valley would owe approximately $7,225,
including interest, at December 31, 2003. An initial administrative hearing was
held in December 2003, and the hearing officer has not yet ruled. If New Valley
is unsuccessful in the initial administrative hearing, it may request an
additional administrative hearing prior to challenging the notice of proposed
assessment in court. No assurances can be given that New Valley will prevail in
this matter. New Valley believes it has fully provided for any amounts due in
its consolidated financial statements at December 31, 2003.

     As of December 31, 2003, New Valley had $600 of prepetition
bankruptcy-related claims and restructuring accruals, primarily related to
disputed claims with respect to former employee benefits. These remaining claims
may be subject to future adjustments based on potential settlements or decisions
of the court. On November 14, 2003, the Bankruptcy Court entered a final Decree
and Order in the Company's Chapter 11 proceeding. In August 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, in the second quarter of 2002, the Company
reclassified $711 of accrued dividends to stockholders' equity.

     Cash flows used for financing activities were $1,936 for 2003 as compared
to cash provided of $26,042 for 2002 and cash used of $27,564 for 2001. The 2003
amount primarily consists of the repurchase of 318,572 of New Valley's common
shares for $1,346. The 2002 amount primarily consists of the issuance of the
non-recourse mortgage note payable of $40,500 in connection with the purchase of
the 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.

     In October 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
11, 2004, New Valley had repurchased 1,185,615 shares for approximately $4,695.

                                        26
<PAGE>

     New Valley expects that its available capital resources will be sufficient
to fund its currently anticipated cash requirements for 2004, 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, 2003, 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>
Non-recourse mortgage note payable......  $39,910   $  644    $39,266    $     --    $     --
Operating lease.........................      173      173         --          --          --
Obligations under limited partnership
  agreements............................    6,079    6,079         --          --          --
                                          -------   ------    -------    --------    --------
          Total.........................  $46,162   $6,896    $39,266    $     --    $     --
                                          =======   ======    =======    ========    ========
</Table>

OFF-BALANCE SHEET ARRANGEMENTS

     New Valley has various agreements in which it may be obligated to indemnify
the other party with respect to certain matters. Generally, these
indemnification clauses are included in contracts arising in the normal course
of business under which New Valley customarily agrees to hold the other party
harmless against losses arising from a breach of representations related to such
matters as title to assets sold and licensed or certain intellectual property
rights. Payment by New Valley under such indemnification clauses is generally
conditioned on the other party making a claim that is subject to challenge by
New Valley and dispute resolution procedures specified in the particular
contract. Further, New Valley's obligations under these arrangements may be
limited in terms of time and/or amount, and in some instances, New Valley may
have recourse against third parties for certain payments made by it. It is not
possible to predict the maximum potential amount of future payments under these
indemnification agreements due to the conditional nature of New Valley's
obligations and the unique facts of each particular agreement. Historically,
payments made by New Valley under these agreements have not been material. As of
December 31, 2003, New Valley was not aware of any indemnification agreements
that would or are reasonably likely to have a current or future material adverse
effect on its financial position, results of operations or cash flows.

     In December 2001, New Valley's subsidiary, Western Realty Development LLC,
sold all the membership interests in its subsidiary, Western Realty Investments
LLC, which was the entity through which Western Realty Development owned the
Ducat Place II office building and the adjoining Ducat Place III site in Moscow,
Russia, to Andante Limited, a Bermuda company. In August 2003, Andante submitted
an indemnification claim to Western Realty Development alleging losses of $1,225
from breaches of various representations made in the purchase agreement. Under
the terms of the purchase agreement, Western Realty Development has no
obligation to indemnify Andante unless the aggregate amount of all claims for
indemnification made by Andante exceeds $750, and Andante is required to bear
the first $200 of any proven loss. New Valley would be responsible for 70% of
any damages payable by Western Realty Development. New Valley is contesting the
indemnification claim.

     Restricted assets of $945 and $1,979 at December 31, 2003 and 2002,
respectively, consisted primarily of amounts held in escrow related to New
Valley's real estate operations. New Valley is not aware of any material
variable interest entities.

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

                                        27
<PAGE>

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.

  Equity Price Risk

     New Valley held investment securities available for sale totaling $17,944
at December 31, 2003. 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, 2003, New Valley's outstanding debt consisted of a
non-recourse mortgage note payable with a variable interest rate, 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 borrowing, which could adversely affect its cash flows. As of December 31,
2003, 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.

NEW ACCOUNTING PRONOUNCEMENTS

     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 adoption of this statement did
not impact on New Valley's consolidated financial statements.

     In December 2003, Financial Accounting Standards Board Interpretation
("FIN") No. 46(R), "Consolidation of Variable Interest Entities (revised
December 2003)" was issued. The interpretation revises FIN No. 46,
"Consolidation of Variable Interest Entities" to exempt certain entities from
the requirements of FIN No. 46. The interpretation requires a company to
consolidate a variable interest entity ("VIE"), as defined, when the company
will absorb a majority of the variable interest entity's expected losses,
receive a majority of the variable interest entity's expected residual returns,
or both. FIN No. 46(R) also requires consolidation of existing, non-controlled
affiliates if the VIE is unable to finance its operations without investor
support, or where the other investors do not have exposure to the significant
risks and rewards of ownership. The interpretation applies immediately to a VIE
created or acquired after January 31, 2003. For a VIE acquired before February
1, 2003, FIN No. 46(R) applies in the first interim period ending after March
15, 2004. The Company has not completed its assessment of the impact of this
interpretation, but does not anticipate a material impact on its financial
position and results of operations.

     In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of this statement did not impact on New Valley's consolidated financial
statements.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
immediately for financial instruments entered into or modified

                                        28
<PAGE>

after May 15, 2003 and in the first interim period after June 15, 2003 for all
other financial instruments. The adoption of this statement did not impact on
New Valley's consolidated financial statements.

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 Litigation 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 Litigation 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, changes in current interest
rates and federal, state, city and municipal laws and regulations concerning,
among others, zoning and environmental matters. Douglas Elliman Realty is
additionally subject to the effects of a decline in the volume or value of U.S.
existing home sales, due to adverse changes in economic conditions, changes in
current interest rates or changes in laws and regulations related to real estate
and the mortgage business in the New York metropolitan area. 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 11, 2004, beginning
on page 35 of this report.

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

     None.

ITEM 9A.  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 its disclosure controls
and procedures as of the end of the period covered by this report, and, based on
that evaluation, its principal executive officer and principal financial officer
have concluded that these controls and procedures are effective. There were no
changes in New Valley's internal control over financial reporting during the
period

                                        29
<PAGE>

covered by this report that have materially affected, or are reasonably likely
to materially affect, New Valley's internal control over financial reporting.

     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 or submits 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.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     This information is contained in New Valley's definitive Proxy Statement
for its 2004 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.  PRINCIPAL ACCOUNTING FEES AND SERVICES

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

                                        30
<PAGE>

                                    PART IV

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

     (A) (1) INDEX TO 2003 CONSOLIDATED FINANCIAL STATEMENTS:

     The consolidated financial statements and the notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 11, 2004, appear on
pages 35 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:

<Table>
<S>                                                            <C>
Schedule III -- Real Estate and Accumulated Depreciation....   Page 59
</Table>

     (A) (3) EXHIBITS

<Table>
<S>           <C>
*(2)(a)       Purchase and Sale Agreement, dated March 14, 2003, by and
              among Insignia Financial Group, LLC, Insignia ESG, Inc.,
              Insignia Residential Group, LLC, Insignia IP, Inc. and
              Douglas Elliman Realty, LLC (formerly known as Montauk
              Battery Realty LLC) (incorporated by reference to Exhibit
              2.1 in New Valley's Quarterly Report on Form 10-Q for the
              quarterly period ended March 31, 2003).
*(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)          First Amendment to Loan Agreement dated as of October 24,
              2003 between New Valley Corporation, each of the lenders
              signatory thereto and HSBC Realty Credit Corporation (USA),
              as Administrative Agent (incorporated by reference to
              Exhibit 4.1 in New Valley's Quarterly Report on Form 10-Q
              for the quarterly period ended September 30, 2003).
*(d)          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).
*(e)          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).
*(10)(a)(i)   Restricted Share Agreement, dated November 18, 1996, by and
              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).
</Table>

                                        31
<PAGE>
<Table>
<S>           <C>
*(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).
*(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)(i)       Operating Agreement of Douglas Elliman Realty, LLC (formerly
              known as 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).
</Table>

                                        32
<PAGE>
<Table>
<S>           <C>
*(h)(ii)      First Amendment to Operating Agreement of Douglas Elliman
              Realty, LLC (formerly known as Montauk Battery Realty LLC),
              dated as of March 14, 2003 (incorporated by reference to
              Exhibit 10.1 in New Valley's Quarterly Report on Form 10-Q
              for the quarterly period ended March 31, 2003).
*(h)(iii)     Second Amendment to Operating Agreement of Douglas Elliman
              Realty, LLC, dated as of May 19, 2003 (incorporated by
              reference to Exhibit 10.1 in New Valley's Quarterly Report
              on Form 10-Q for the quarterly period ended June 30, 2003).
*(h)(iv)      Note and Equity Purchase Agreement, dated as of March 14,
              2003 (the "Note and Equity Purchase Agreement"), by and
              between Douglas Elliman Realty, LLC (formerly known as
              Montauk Battery Realty LLC), New Valley Real Estate
              Corporation and The Prudential Real Estate Financial
              Services of America, Inc., including form of 12%
              Subordinated Note due March 14, 2013 (incorporated by
              reference to Exhibit 10.2 in New Valley's Quarterly Report
              on Form 10-Q for the quarterly period ended March 31, 2003).
*(h)(v)       Amendment to the Note and Equity Purchase Agreement, dated
              as of April 14, 2003. (incorporated by reference to Exhibit
              10.3 in New Valley's Quarterly Report on Form 10-Q for the
              quarterly period ended March 31, 2003).
(21)          Subsidiary 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).
(31)(a)       Certification of Chief Executive Officer, Pursuant to
              Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
              302 of the Sarbanes-Oxley Act of 2002.
(31)(b)       Certification of Chief Financial Officer, Pursuant to
              Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
              302 of the Sarbanes-Oxley Act of 2002.
(32)(a)       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.
(32)(b)       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:

        None

                                        33
<PAGE>

                             NEW VALLEY CORPORATION

                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
                      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........   35
  Consolidated Balance Sheets as of December 31, 2003 and
     2002...................................................   36
  Consolidated Statements of Operations for the years ended
     December 31, 2003, 2002 and 2001.......................   37
  Consolidated Statements of Changes in Stockholders' Equity
     for the years ended December 31, 2003, 2002 and 2001...   38
  Consolidated Statements of Cash Flows for the years ended
     December 31, 2003, 2002 and 2001.......................   39
  Notes to Consolidated Financial Statements................   40
FINANCIAL STATEMENT SCHEDULES:
  Schedule III -- Real Estate and Accumulated
     Depreciation...........................................   59
     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.
</Table>

                                        34
<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, 2003 and December 31,
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 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 11, 2004

                                        35
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2003         2002
                                                              ---------    ---------
<S>                                                           <C>          <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents.................................  $  66,593    $  82,113
  Investment securities available for sale..................     17,944       13,391
  Restricted assets.........................................        771        1,811
  Other current assets......................................      1,870          402
                                                              ---------    ---------
          Total current assets..............................     87,178       97,717
                                                              ---------    ---------
Investments in real estate, net.............................     53,012       54,208
Investments in non-consolidated real estate businesses......     18,718        7,808
Restricted assets...........................................        174          168
Long-term investments, net..................................      2,429        3,150
Other assets................................................        385          497
                                                              ---------    ---------
          Total assets......................................  $ 161,896    $ 163,548
                                                              =========    =========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of mortgage note payable..................  $     644    $     644
  Accounts payable and accrued liabilities..................      3,684        5,741
  Prepetition claims and restructuring accruals.............        600          674
  Income taxes..............................................     11,264       10,499
                                                              ---------    ---------
          Total current liabilities.........................     16,192       17,558
                                                              ---------    ---------
Mortgage note payable.......................................     39,266       39,856
Other long-term liabilities.................................      2,690        3,077
Commitments and contingencies...............................         --           --
Stockholders' equity:
  Common Shares, $.01 par value; 100,000,000 and 100,000,000
     shares authorized; 22,117,852 and 22,436,424 shares
     outstanding............................................        221          224
  Additional paid-in capital................................    862,584      863,676
  Accumulated deficit.......................................   (765,468)    (759,806)
  Accumulated other comprehensive income (loss).............      6,411       (1,037)
                                                              ---------    ---------
          Total stockholders' equity........................    103,748      103,057
                                                              ---------    ---------
          Total liabilities and stockholders' equity........  $ 161,896    $ 163,548
                                                              =========    =========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements

                                        36
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 2003           2002           2001
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Revenues:
  Real estate leasing.......................................  $     7,298    $     1,001    $     9,966
                                                              -----------    -----------    -----------
         Total..............................................        7,298          1,001          9,966
                                                              -----------    -----------    -----------
Costs and expenses:
  General and administrative expenses.......................       11,901         12,967         13,455
  Rental real estate activities.............................        3,531          1,579          9,475
                                                              -----------    -----------    -----------
         Total..............................................       15,432         14,546         22,930
                                                              -----------    -----------    -----------
Other results from continuing operations:
  Equity income (loss) from non-consolidated real estate
    businesses..............................................          901           (749)            --
  Gain (loss) on sale of real estate........................          478          9,048        (20,945)
  Gain on lawsuit settlement................................           --             --         17,620
  Gain on sale of assets....................................           --             --            250
  Gain (loss) on sale of investments, net...................        1,654          1,850         (1,003)
  Interest and dividend income..............................          823          2,163          3,738
  Interest expense..........................................       (1,421)          (483)        (2,592)
  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)
  Other income (loss).......................................           17            (35)           (68)
                                                              -----------    -----------    -----------
         Total..............................................        2,452         (8,518)        (3,071)
                                                              -----------    -----------    -----------
Loss from continuing operations before income taxes and
  minority interests........................................       (5,682)       (22,063)       (16,035)
Income tax provision........................................           --             --            260
Minority interests in loss from continuing operations of
  consolidated subsidiaries.................................          (20)          (151)          (594)
                                                              -----------    -----------    -----------
Loss from continuing operations.............................       (5,662)       (21,912)       (15,701)
Discontinued operations:
  Loss from discontinued operations, net of minority
    interests in loss of consolidated subsidiaries of $0, $0
    and $4,845 and income tax benefit expense of $0, $0 and
    $1,356..................................................           --             --         (5,829)
  Gain on disposal of discontinued operations...............           --             --          4,346
                                                              -----------    -----------    -----------
      Loss from discontinued operations.....................           --             --         (1,483)
                                                              -----------    -----------    -----------
Net loss....................................................  $    (5,662)   $   (21,912)   $   (17,184)
                                                              ===========    ===========    ===========
</Table>

<Table>
<Caption>
Loss per common share (Basic and diluted):
<S>                                                           <C>            <C>            <C>
  Continuing operations.....................................  $     (0.26)   $     (0.96)   $     (0.69)
  Discontinued operations...................................           --             --          (0.06)
                                                              -----------    -----------    -----------
      Net loss per common share.............................  $     (0.26)   $     (0.96)   $     (0.75)
                                                              ===========    ===========    ===========
Number of shares used in computation........................   22,146,031     22,757,296     22,826,226
                                                              ===========    ===========    ===========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements

                                        37
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                                          ACCUMULATED
                                                                                             OTHER
                                           COMMON SHARES      ADDITIONAL                 COMPREHENSIVE
                                        -------------------    PAID-IN     ACCUMULATED      (LOSS)
                                          SHARES     AMOUNT    CAPITAL       DEFICIT        INCOME        TOTAL
                                        ----------   ------   ----------   -----------   -------------   --------
<S>                                     <C>          <C>      <C>          <C>           <C>             <C>
Balance, December 31, 2000............  22,890,663    $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.........     (77,600)     (1)        (272)                                     (273)
  Distribution of LTS.................                          (19,529)                                  (19,529)
                                        ----------    ----     --------     ---------       -------      --------
Balance, December 31, 2001............  22,813,063     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 and
    warrants..........................      68,404       1          264                                       265
  Capitalization of dividends
    payable...........................                              711                                       711
  Repurchase of common shares.........    (445,043)     (5)      (1,886)                                   (1,891)
                                        ----------    ----     --------     ---------       -------      --------
Balance, December 31, 2002............  22,436,424     224      863,676      (759,806)       (1,037)      103,057
  Comprehensive income:
    Net loss..........................                                         (5,662)                     (5,662)
    Other comprehensive income:
      Net change in unrealized gain on
         investment securities........                                                        7,448         7,448
                                                                                                         --------
         Total comprehensive income...                                                                      1,786
                                                                                                         --------
  Capitalization of dividends
    payable...........................                              251                                       251
  Repurchase of common shares.........    (318,572)     (3)      (1,343)           --            --        (1,346)
                                        ----------    ----     --------     ---------       -------      --------
Balance, December 31, 2003............  22,117,852    $221     $862,584     $(765,468)      $ 6,411      $103,748
                                        ==========    ====     ========     =========       =======      ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.
                                        38
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2003       2002       2001
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
 Net loss...................................................  $ (5,662)  $(21,912)  $(17,184)
 Loss from discontinued operations..........................        --         --      1,483
                                                              --------   --------   --------
   Subtotal.................................................    (5,662)   (21,912)   (15,701)
                                                              --------   --------   --------
 Adjustments to reconcile net loss to net cash (used for)
   provided from operating activities:
    Depreciation and amortization...........................     1,283        245      2,353
    Equity (income) loss in non-consolidated real estate
     businesses.............................................      (901)       749         --
    Provision for uncollectibility of notes receivable......        --     13,198         --
    Provision for loss on investments.......................        --      6,776         71
    (Gain) loss on sale of real estate, assets and sale or
     liquidation of investments.............................    (1,654)   (10,560)    21,698
    Stock-based compensation expense........................        --        416        930
    Minority interests in loss of consolidated
     subsidiaries...........................................       (20)      (151)      (594)
    Changes in assets and liabilities, net of effects from
     acquisitions and dispositions:
      Decrease (increase) in receivables and other assets...      (403)    18,366    (14,877)
      Decrease in accounts payable and accrued
       liabilities..........................................    (1,408)      (357)    (4,033)
                                                              --------   --------   --------
Net cash (used for) provided from operating activities......    (8,765)     6,770    (10,153)
                                                              --------   --------   --------
Cash flows from investing activities:
   Sale or maturity of investment securities................     4,979      6,398     16,418
   Purchase of investment securities........................      (518)    (6,825)   (10,166)
   Sale or liquidation of long-term investments.............     1,004         --      1,133
   Purchase of long-term investments........................      (195)        --        (17)
   Purchase of non-consolidated real estate businesses......   (11,000)    (1,663)    (5,694)
   Distributions from non-consolidated real estate
    businesses..............................................       991         --         --
   Sale of real estate, net of closing costs................        --     20,461     43,040
   Purchase of and additions to real estate.................        --    (54,945)    (2,642)
   Sale of other assets.....................................        --         --        250
   Payment of prepetition claims and restructuring
    accruals................................................       (74)    (2,026)    (3,129)
   (Increase) decrease in restricted assets.................        (6)      (168)       455
   Cash received in LTS acquisition.........................        --         --      8,010
   Purchase of LTS common stock.............................        --         --     (3,945)
   Repayment of notes receivable............................        --      3,000         --
   Issuance of notes receivable.............................        --     (7,000)        --
                                                              --------   --------   --------
Net cash (used for) provided from investing activities......    (4,819)   (42,768)    43,713
                                                              --------   --------   --------
Cash flows from financing activities:
   Proceeds from participating loan.........................        --         --      2,981
   Decrease in margin loans payable.........................        --         --     (4,675)
   Repayment of participating loan..........................        --    (12,437)        --
   Payment of long-term notes...............................      (590)       (36)   (26,283)
   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..............................    (1,346)    (1,891)      (274)
   Cash impact of LTS distribution..........................        --         --     (8,136)
   Exercise of stock options................................        --        265         --
                                                              --------   --------   --------
Net cash (used for) provided from financing activities......    (1,936)    26,042    (27,564)
                                                              --------   --------   --------
Net cash provided from discontinued operations..............        --         --      4,006
                                                              --------   --------   --------
Net (decrease) increase in cash and cash equivalents........   (15,520)    (9,956)    10,002
Cash and cash equivalents, beginning of year................    82,113     92,069     82,067
                                                              --------   --------   --------
Cash and cash equivalents, end of year......................  $ 66,593   $ 82,113   $ 92,069
                                                              ========   ========   ========
Supplemental cash flow information:
 Cash paid during the year for:
   Interest.................................................  $  1,389   $    487   $  2,730
   Income taxes.............................................        53        196        123
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

                                        39
<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").
All significant intercompany transactions are eliminated in consolidation.

     Certain amounts in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 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 Douglas Elliman Realty, LLC ("Douglas Elliman Realty"),
formerly known as 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, 2003, Vector Group Ltd.
("Vector"), New Valley's principal stockholder, owned 58.1% of New Valley's
Common Shares.

  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, 2003, the Company's remaining accruals totaled $600 for
unsettled prepetition claims and restructuring accruals (see Note 15). 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, principally warrants, which have exercise or holding
period restrictions, are valued at fair value as determined

                                        40
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 results from continuing
operations. 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 an impairment charge
with respect to 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, 2003 and 2002
consisted primarily of amounts held in escrow related to New Valley's real
estate operations.

     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, 2003
are $6,578 in 2004, $6,662 in 2005, $6,519 in 2006, $5,612 in 2007, $5,620 in
2008 and $10,284 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.

     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

                                        41
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares resulting from the exercise of stock options and warrants if such
exercise was dilutive. Options and warrants to purchase Common Shares of
18,032,771, 18,012,771 and 18,199,179 were not included in the computation of
diluted loss per share in 2003, 2002 and 2001, respectively, as the effect would
have been anti-dilutive. Diluted net income (loss) per common share also takes
into account the potential dilution from securities issued by a subsidiary or
investee that enables their holders to obtain the subsidiary's common stock.

     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, 2003, New Valley and Vector each had stock-based
employee compensation plans (see Note 13). 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>
                                                           2003       2002       2001
                                                          -------   --------   --------
<S>                                                       <C>       <C>        <C>
Net loss applicable to Common Shares, as reported.......  $(5,662)  $(21,912)  $(17,184)
Deduct: Amortization of fair value of New Valley option
  grants................................................      (50)      (234)      (926)
Deduct: Amortization of fair value of Vector option
  grants, net...........................................     (572)      (713)      (761)
                                                          -------   --------   --------
Net loss applicable to Common Shares, as adjusted.......  $(6,284)  $(22,859)  $(18,871)
                                                          =======   ========   ========
Adjusted net loss per share -- basic and diluted........  $ (0.28)  $  (1.00)  $  (0.83)
                                                          =======   ========   ========
</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 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 adoption
of this statement did not impact on the Company's consolidated financial
statements.

     In December 2003, Financial Accounting Standards Board Interpretation
("FIN") No. 46(R), "Consolidation of Variable Interest Entities (revised
December 2003)" was issued. The interpretation revises FIN No. 46,
"Consolidation of Variable Interest Entities" to exempt certain entities from
the requirements of FIN No. 46. The interpretation requires a company to
consolidate a variable interest entity ("VIE"), as defined, when the company
will absorb a majority of the variable interest entity's expected losses,
receive a majority of the variable interest entity s expected residual returns,
or both. FIN No. 46(R) also requires consolidation of existing, non-controlled
affiliates if the VIE is unable to finance its operations without investor
support, or where the other investors do not have exposure to the significant
risks and rewards of ownership. The interpretation applies immediately to a VIE
created or acquired after January 31, 2003. For a VIE acquired before February
1, 2003, FIN No. 46(R) applies in the first interim period ending after March
15, 2004. The Company has not completed its assessment of the impact of this
interpretation, but does not anticipate a material impact on its financial
position and results of operations.

     In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including

                                        42
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of this statement did not impact on the
Company's consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
immediately for financial instruments entered into or modified after May 15,
2003 and in the first interim period after June 15, 2003 for all other financial
instruments. The adoption of this statement did not impact on the Company's
consolidated financial statements.

3.  INVESTMENT IN REAL ESTATE AND MORTGAGE NOTE PAYABLE

     The components of the Company's investment in real estate (the office
buildings) and the related non-recourse mortgage note payable collateralized by
such real estate at December 31, 2003 and 2002 are as follows:

<Table>
<Caption>
                                                       DECEMBER 31, 2003   DECEMBER 31, 2002
                                                       -----------------   -----------------
<S>                                                    <C>                 <C>
Land.................................................       $ 7,636             $ 7,636
Buildings............................................        46,622              46,622
                                                            -------             -------
          Total......................................        54,258              54,258
Less accumulated depreciation........................        (1,246)                (50)
                                                            -------             -------
  Net investment in real estate......................       $53,012             $54,208
                                                            =======             =======
Mortgage note payable................................       $39,910             $40,500
Current portion of mortgage note payable.............           644                 644
                                                            -------             -------
Mortgage note payable -- long-term portion...........       $39,266             $39,856
                                                            =======             =======
</Table>

  Office Buildings

     New Valley completed the acquisition of two 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
in 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. The bonus was recorded as compensation expense during 2002 and is
included in general and administrative expenses in the accompanying statement of
operations.

                                        43
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Shopping Centers

     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.

  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 in Moscow, Russia and the adjoining site for the proposed development
of Ducat Place III, to Western Realty Development.

     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. See Note 9
relating to an indemnification claim that has been made by Andante.

     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.

     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. These 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

                                        44
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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                    AS REPORTED
                                        ---------------------------   ---------------------------
                                         YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED
                                        DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                            2002           2001           2002           2001
                                        ------------   ------------   ------------   ------------
<S>                                     <C>            <C>            <C>            <C>
Revenues.............................     $  7,894       $ 7,395        $  1,001       $  9,966
                                          ========       =======        ========       ========
(Loss) income from continuing
  operations.........................     $(18,231)      $ 7,625        $(21,912)      $(15,701)
                                          ========       =======        ========       ========
(Loss) income per common share --
  continuing operations (basic and
  diluted)...........................     $  (0.80)      $  0.33        $  (0.96)      $  (0.69)
                                          ========       =======        ========       ========
</Table>

4.  INVESTMENTS IN NON-CONSOLIDATED REAL ESTATE BUSINESSES

  Residential Brokerage Business

     During 2000 and 2001, New Valley acquired for $1,744 a 37.2% ownership
interest in B&H Associates of NY, doing business as Prudential Douglas Elliman
Real Estate ("Realty"), formerly known as Prudential Long Island 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 Douglas
Elliman Realty, formerly known as Montauk Battery Realty, LLC, a newly formed
entity. New Valley acquired a 50% interest in Douglas Elliman 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, upon receipt of the required
regulatory approvals, to contribute to Douglas Elliman Realty their interests in
the related mortgage company.

     In March 2003, Douglas Elliman Realty purchased the New York City-based
residential brokerage firm, Douglas Elliman, LLC ("Douglas Elliman"), formerly
known as 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 Douglas Elliman Realty to help fund the acquisition. The
subordinated debt, which has a principal amount of $9,500, bears interest at 12%
per annum and is due in March 2013. Interest income, which totaled $932 for the
year ended December 31, 2003, earned by New Valley on the subordinated debt is
recognized in the Company's consolidated statements of operations as part of
equity income from non-consolidated real estate businesses.

     Compensation expense for 2003 included a $1,500 bonus to New Valley's
President and Chief Operating Officer for his performance during 2003 and, in
particular, his role in identifying the March 2003 acquisition and related
financing of Douglas Elliman by New Valley's 50%-owned investee Douglas Elliman
Realty.

     New Valley accounts for its interest in Douglas Elliman Realty on the
equity method and recorded income of $1,228 and $594 for the years ended
December 31, 2003 and 2002, respectively, associated with Douglas Elliman
Realty. New Valley's equity income from Douglas Elliman Realty for the year
ended December 31, 2003 includes $932 of interest income earned by New Valley on
the subordinated debt and $197, which represents 46% of the mortgage company's
results from operations. New Valley's equity income in Douglas Elliman Realty
for the year ended December 31, 2003 has been reduced by New Valley's portion
($2,029) of amortization expense associated with Douglas Elliman's customer
contracts outstanding at the acquisition date.

     Summarized financial information as of December 31, 2003 and for the year
ended December 31, 2003 for Douglas Elliman Realty is presented below. The
summarized financial information for the year ended December 31, 2003 includes
Realty's results from operations from January 1, 2003 to December 31, 2003 and

                                        45
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the results from operations of Douglas Elliman and its affiliated property
management company from March 14, 2003 (date of acquisition) to December 31,
2003.

<Table>
<Caption>
                                                           DECEMBER 31, 2003
                                                           -----------------
<S>                                                        <C>
Cash....................................................        $ 9,062
Other current assets....................................          6,385
Property, plant and equipment, net......................         11,311
Trademarks..............................................         21,663
Goodwill................................................         34,319
Other intangible assets, net............................          4,021
Other noncurrent assets.................................            632
Notes payable -- current................................          8,944
Other current liabilities...............................         10,176
Notes payable -- long term..............................         68,562
Members' deficiency.....................................           (289)
</Table>

<Table>
<Caption>
                                                              YEAR ENDED
                                                           DECEMBER 31, 2003
                                                           -----------------
<S>                                                        <C>
Revenues................................................       $179,853
Costs and expenses......................................        166,278
Depreciation expense....................................          3,640
Amortization expense....................................          5,037
Interest expense, net...................................          4,767
Other income............................................             67
                                                               --------
Net income..............................................       $    198
                                                               ========
</Table>

  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
late 2004 as a Sheraton resort. The Company, which holds a 50% interest in Koa
Investors LLC, the owner of the hotel, had invested $7,400 in the project and
had committed to make additional investments of up to $5,100 at December 31,
2003. The Company funded $1,500 of this amount in February 2004.

     The Company accounts for its interest in Koa Investors under the equity
method and recorded losses of $327 and $1,343 in 2003 and 2002, respectively,
associated with the property. Koa Investors' loss in 2003 primarily represents
management fees. Koa Investors' loss in 2002 primarily represents 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 during the construction phase.

5.  INVESTMENT SECURITIES AVAILABLE FOR SALE

     Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a separate component of
stockholders' equity. The Company had net unrealized gains (losses) on
investment securities available for sale of $6,411 and $(1,037) at December 31,
2003 and 2002, respectively. The Company realized gains (losses) on sales of
investment securities available for sale of $1,566, $1,850 and $(1,887) for the
years ended December 31, 2003, 2002 and 2001, respectively. Realized gains
reduced other comprehensive income in the year of realization, while realized
losses increased other comprehensive income in the year of realization. In
addition, the Company recorded a loss related to other-than-temporary declines
in

                                        46
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, which were all
marketable equity securities, are as follows:

<Table>
<Caption>
                                                              GROSS        GROSS
                                                            UNREALIZED   UNREALIZED    FAIR
                                                   COST        GAIN         LOSS       VALUE
                                                  -------   ----------   ----------   -------
<S>                                               <C>       <C>          <C>          <C>
2003
Investment securities...........................  $11,533     $6,411       $   --     $17,944
                                                  =======     ======       ======     =======
2002
Investment securities...........................  $14,428     $   --       $1,037     $13,391
                                                  =======     ======       ======     =======
</Table>

6.  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.

     New Valley evaluated its ability to collect $13,198 of 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
determined, based on the then 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.

7.  LONG-TERM INVESTMENTS

     Long-term investments consisted of investments in the following:

<Table>
<Caption>
                                                     DECEMBER 31, 2003    DECEMBER 31, 2002
                                                     ------------------   ------------------
                                                     CARRYING    FAIR     CARRYING    FAIR
                                                      VALUE      VALUE     VALUE      VALUE
                                                     --------   -------   --------   -------
<S>                                                  <C>        <C>       <C>        <C>
Limited partnerships...............................   $2,429    $11,739    $3,150    $10,694
</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 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 $979 at December 31, 2003. 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.

                                        47
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company recognized gains of $88, $0 and $883 for the years ended
December 31, 2003, 2002 and 2001, respectively, related to the liquidations of
limited partnership investments. No long-term investments were liquidated in
2002. During 2001, the Company determined that a permanent impairment in the
value of its investments in various online businesses had occurred and,
accordingly, $71 was provided as an impairment charge.

8.  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 2003 and 2002, which totaled $30 and $28,
respectively. The Company did not make discretionary contributions to these
401(k) plans in 2001.

9.  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
November 2004. See Note 16. Rental expense for operating leases was $304, $183
and $434 for the years ended December 31, 2003, 2002 and 2001, respectively.

  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 Douglas Elliman Realty, 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 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

                                        48
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 is ongoing.

     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 and recently filed a motion for summary
judgment on the remaining three claims.

     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.

     In 1994, the Company commenced an action against the United States
government seeking damages for breach of a launch services agreement covering
the launch of one of the Westar satellites owned by New Valley's former Western
Union satellite business. The Company had a contract with NASA to launch two
Westar satellites. The first satellite was launched in 1984, and the second was
scheduled to be launched in 1986. Following the explosion of the space shuttle
Challenger in January 1986, the President of the United States announced a
change in the government's policy regarding commercial satellite launches, and
the Company's satellite was not launched. As a result, the Company sued the
government for breach of contract seeking damages of approximately $34,000. In
1995, the United States Court of Federal Claims granted the government's motion
to dismiss and, in 1997, the United States Court of Appeals for the Federal
Circuit reversed and remanded the case. Discovery recently concluded and a trial
could be scheduled by the court as early as the second quarter of 2004.

     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.

  Other

     The Company has received a notice of proposed assessment from a state
taxing authority related to the years ended December 31, 1994 and 1995. See Note
10.

     As of December 31, 2003, New Valley had $600 of prepetition
bankruptcy-related claims and restructuring accruals. See Note 15. The remaining
claims may be subject to future adjustments based on potential settlements or
decisions of the court.

     In December 2001, New Valley's subsidiary, Western Realty Development, sold
all the membership interests in Western Realty Investments LLC to Andante
Limited. See Note 3. In August 2003, Andante

                                        49
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

submitted an indemnification claim to Western Realty Development alleging losses
of $1,225 from breaches of various representations made in the purchase
agreement. Under the terms of the purchase agreement, Western Realty Development
has no obligation to indemnify Andante unless the aggregate amount of all claims
for indemnification made by Andante exceeds $750, and Andante is required to
bear the first $200 of any proven loss. New Valley would be responsible for 70%
of any damages payable by Western Realty Development. New Valley is contesting
the indemnification claim.

10.  FEDERAL INCOME TAX

     At December 31, 2003 the Company had $95,374 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, 2003, 2002 and 2001, 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 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>
                                                         2003       2002       2001
                                                        -------   --------   --------
<S>                                                     <C>       <C>        <C>
Loss from continuing operations.......................  $(5,662)  $(21,912)  $(15,441)
                                                        -------   --------   --------
Benefit under statutory U.S. tax rates................   (1,981)    (7,669)    (5,404)
Increase in taxes resulting from:
  Nontaxable items....................................    1,212      1,774        944
  State taxes, net of Federal benefit.................     (294)      (876)        33
  Foreign taxes.......................................       --         --        227
  Distribution of LTS.................................       --         --      7,180
Impact of (increase) decrease in net equity
  adjustments.........................................    2,994     (1,211)      (119)
(Decrease) increase in valuation reserve, net of tax
  audit adjustments...................................   (1,931)     7,982     (2,601)
                                                        -------   --------   --------
     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.

                                        50
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss and tax credit carryforwards:
     Minimum tax credit carryforwards.......................  $ 13,512   $ 13,512
     Unrestricted capital loss..............................     1,996      2,642
     Unrestricted net operating loss........................    64,915     63,074
  Alternative minimum tax credit carryforward...............
  Other.....................................................    17,700     18,077
                                                              --------   --------
          Total deferred tax assets.........................    98,123     97,305
                                                              --------   --------
Deferred tax liabilities:
  Other.....................................................     2,749         --
                                                              --------   --------
          Total deferred tax liabilities....................     2,749         --
                                                              --------   --------
Net deferred tax assets.....................................    95,374     97,305
Valuation allowance.........................................   (95,374)   (97,305)
                                                              --------   --------
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 has received a
notice of proposed assessment from a state taxing authority related to the years
ended December 31, 1994 and 1995. If the state taxing authority were to prevail,
New Valley would owe approximately $7,225, including interest, at December 31,
2003. An initial administrative hearing has been scheduled for December 2003,
and the hearing officer has not yet ruled. If New Valley is unsuccessful in the
initial administrative hearing, it may request an additional administrative
hearing prior to challenging the notice of proposed assessment in court. No
assurances can be given that the Company will prevail in this matter. New Valley
believes it has fully provided for any amounts due in its consolidated financial
statements at December 31, 2003.

     As of December 31, 2003, the Company had consolidated net operating loss
carryforwards of approximately $161,500 and consolidated capital loss
carryforwards of approximately $5,000 for tax purposes, which expire at various
dates from 2006 through 2023. New Valley also has approximately $13,500 of
alternative minimum tax credit carry forwards as of December 31, 2003, which may
be carried forward indefinitely under current U.S. tax law.

11.  OTHER LONG-TERM LIABILITIES

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

<Table>
<Caption>
                                                   DECEMBER 31, 2003     DECEMBER 31, 2002
                                                  -------------------   -------------------
                                                  LONG-TERM   CURRENT   LONG-TERM   CURRENT
                                                   PORTION    PORTION    PORTION    PORTION
                                                  ---------   -------   ---------   -------
<S>                                               <C>         <C>       <C>         <C>
Retiree and disability obligations..............   $2,497      $500      $2,895      $500
Other long-term liabilities.....................      193        --         182        --
                                                   ------      ----      ------      ----
          Total other long-term liabilities.....   $2,690      $500      $3,077      $500
                                                   ======      ====      ======      ====
</Table>

12.  WARRANTS

     As of December 31, 2003 and 2002, there were 17,867,438 warrants
outstanding. 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 on June 14, 2004. The Company may
redeem

                                        51
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

13.  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 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

                                        52
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20,000 common shares were issued under the plan to non-employee directors in
each of 2001, 2002 and 2003 with exercise prices of $3.57, $4.15 and $4.01 per
share, respectively.

     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.

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

  New Valley

<Table>
<Caption>
                                                                                            WEIGHTED
                                                                                             AVERAGE
                                                                                            REMAINING
                                                                               WEIGHTED    CONTRACTUAL
                                                NUMBER OF       EXERCISE       AVERAGE        LIFE
                                                 SHARES          PRICE        FAIR VALUE     (YEARS)
                                                ---------   ----------------  ----------   -----------
<S>                                             <C>         <C>               <C>          <C>
Outstanding on December 31, 2000..............  1,271,088    $3.875 - $5.80     $ 3.86        8.65
  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        6.50
  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        6.02
  Granted.....................................     20,000        $4.01          $ 2.45
  Exercised...................................         --
  Cancelled...................................         --
                                                ---------
Outstanding on December 31, 2003..............    165,333    $3.57 - $5.80      $12.37        5.56
                                                =========
</Table>

<Table>
<Caption>
                                               NUMBER OF   WEIGHTED AVERAGE
                                                SHARES      EXERCISE PRICE
                                               ---------   ----------------
<S>                                            <C>         <C>               <C>          <C>
Options exercisable at:
  December 31, 2001..........................    311,613        $5.26
  December 31, 2002..........................    125,333        $5.02
  December 31, 2003..........................    145,333        $4.90
</Table>

                                        53
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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
                                                                                               AVERAGE
                                                                                              REMAINING
                                                                                 WEIGHTED    CONTRACTUAL
                                                         NUMBER OF   EXERCISE    AVERAGE         LIFE
                                                          SHARES      PRICE     FAIR VALUE     (YEARS)
                                                         ---------   --------   ----------   ------------
<S>                                                      <C>         <C>        <C>          <C>
Outstanding on December 31, 2000.......................   572,250     $14.70      $11.80         8.85
  Granted..............................................         0
  Adjustment for stock dividend........................    28,613
  Cancelled............................................         0
                                                          -------
Outstanding on December 31, 2001.......................   600,863     $14.00      $11.23         7.85
  Granted..............................................         0
  Adjustment for stock dividend........................    30,043
  Cancelled............................................         0
                                                          -------
Outstanding on December 31, 2002.......................   630,906     $13.33      $10.69         6.85
  Granted..............................................         0
  Adjustment for stock dividend........................    31,545
  Cancelled............................................         0
                                                          -------
Outstanding on December 31, 2003.......................   662,451     $12.70      $ 9.71         5.85
                                                          =======
</Table>

     The entire amount of the Vector options was exercisable at December 31,
2003 at a weighted average exercise price of $12.70, while none were exercisable
at December 31, 2002 and 2001.

     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 2003, 2002 and
2001 was $49, $43 and $52, respectively. The estimated fair value was calculated
using the Black-Scholes option pricing model, based upon the following
assumptions: volatility of 45.93% in 2003, 31.89% in 2002, and 58.12% in 2001, a
risk-free rate of return of 3.41% in 2003, 4.12% in 2002 and 5.34% in 2001, an
expected life of 10 years, a dividend rate of 0% and no forfeitures.

14.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2003     2002
                                                              ------   ------
<S>                                                           <C>      <C>
Accounts payable and accrued liabilities:
  Accrued compensation......................................  $1,522   $2,057
  Unearned revenues.........................................     461      103
  Taxes.....................................................     302       --
  Accrued expenses and other liabilities....................   1,399    3,581
                                                              ------   ------
          Total.............................................  $3,684   $5,741
                                                              ======   ======
</Table>

                                        54
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15.  PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

     The Company has $600 and $674 of prepetition claims and restructuring
accruals at December 31, 2003 and 2002, respectively. Restructuring accruals at
December 31, 2003 and 2002 consisted primarily of $600 of disputed claims,
primarily related to former employee benefits.

16.  RELATED PARTY TRANSACTIONS

     At December 31, 2003, Vector, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, owned approximately 58.1%
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
support and administrative expenses are allocated to the entity incurring the
expense. The Company reimbursed Vector net amounts of approximately $480, $320
and $376 for the years ended December 31, 2003, 2002 and 2001, respectively,
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 was paid
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 6.

     An executive officer and director of the Company is a shareholder and
registered representative in a broker-dealer to which the Company paid $48 in
2003, $87 in 2002 and $12 in 2001 in brokerage commissions and other income.
This executive officer, a firm of which he serves as chairman of the board of
directors, and the firm's affiliates received ordinary and customary insurance
commissions aggregating approximately $165 in 2003, $140 in 2002 and $162 in
2001 on various insurance policies issued for the Company and its subsidiaries
and investees.

17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value of the Company's financial instruments has 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, 2003    DECEMBER 31, 2002
                                                            ------------------   ------------------
                                                            CARRYING    FAIR     CARRYING    FAIR
                                                             AMOUNT     VALUE     AMOUNT     VALUE
                                                            --------   -------   --------   -------
<S>                                                         <C>        <C>       <C>        <C>
Financial assets:
  Cash and cash equivalents...............................  $66,593    $66,593   $82,113    $82,113
  Investments available for sale..........................   17,944     17,944    13,391     13,391
  Restricted assets.......................................      771        771     1,811      1,811
  Long-term investments...................................    2,429     11,739     3,150     10,694
Financial liabilities:
  Mortgage note payable...................................   39,910     39,910    40,500     40,500
</Table>

                                        55
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, 2002 and 2001. The operations of BrookeMil and
Western Realty Development are included in real estate operations.

<Table>
<Caption>
                                                                            CORPORATE
                                                              REAL ESTATE   AND OTHER    TOTAL
                                                              -----------   ---------   --------
<S>                                                           <C>           <C>         <C>
2003
Revenues....................................................   $  7,298     $     --    $  7,298
Other results from continuing operations....................        (42)       2,494       2,452
Income (loss) from continuing operations before taxes and
  minority interests........................................      3,725       (9,407)     (5,682)
Identifiable assets.........................................     74,594       87,302     161,896
Depreciation and amortization...............................      1,283           --       1,283
Capital expenditures........................................         --           --          --
2002
Revenues....................................................   $  1,001     $     --    $  1,001
Other results from continuing operations....................      7,816      (16,334)     (8,518)
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     $     --    $  9,966
Other results from continuing operations....................    (23,537)      20,466      (3,071)
(Loss) income 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>

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 common stock 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 $10,000 principal

                                        56
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     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 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 6.

     The consolidated financial statements of New Valley reflect the
broker-dealer operations of LTS as discontinued operations for the year ended
December 31, 2001. 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 "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 for the period
from January 1, 2001 through December 20, 2001 are as follows:

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

     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 and were made due
to the completion of settlements related to these matters.

                                        57
<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>
2003:
  Revenues...........................................  $ 1,799   $ 1,777   $  1,797   $  1,925
  Expenses(a)........................................    4,097     3,321      3,433      4,561
  Other results from operations......................     (677)     (371)     1,808      1,692
                                                       -------   -------   --------   --------
     (Loss) income from operations...................   (2,975)   (1,915)       172       (944)
                                                       -------   -------   --------   --------
  Net (loss) income(b)...............................  $(2,975)  $(1,915)  $    172   $   (944)
                                                       =======   =======   ========   ========
(Loss) income per Common Share (Basic):
  Net (loss) income(b)...............................  $ (0.13)  $ (0.09)  $   0.01   $  (0.04)
                                                       =======   =======   ========   ========
  (Loss) income per Common Share (Diluted):
     Net (loss) income(b)............................  $ (0.13)  $ (0.09)  $   0.01   $  (0.04)
                                                       =======   =======   ========   ========
2002:
  Revenues...........................................  $   424   $   237   $     --   $    340
  Expenses(a)........................................    3,388     3,885      2,635      4,487
  Other results from operations......................    1,619     9,909    (12,150)    (7,896)
                                                       -------   -------   --------   --------
     (Loss) income from operations...................   (1,345)    6,261    (14,785)   (12,043)
                                                       -------   -------   --------   --------
  Net (loss) income(b)...............................  $(1,345)  $ 6,261   $(14,785)  $(12,043)
                                                       =======   =======   ========   ========
(Loss) income per Common Share (Basic):
  Net (loss) income(b)...............................  $ (0.06)  $  0.27   $  (0.65)  $  (0.54)
                                                       =======   =======   ========   ========
(Loss) income per Common Share (Diluted):
  Net (loss) income(b)...............................  $ (0.06)  $  0.27   $  (0.65)  $  (0.54)
                                                       =======   =======   ========   ========
</Table>

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

(a)  Includes minority interests in results from operations of consolidated
     subsidiaries.

(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.

                                        58
<PAGE>

                                  SCHEDULE III
                             NEW VALLEY CORPORATION

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                            AS OF DECEMBER 31, 2003
                             (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:
  100 College Road West....    $27,261      $5,219   $31,842       $ --       $5,219     $31,842      $37,061      $  851
  150 College Road West....     12,649       2,417    14,780         --        2,417      14,780       17,197         395
                               -------      ------   -------       ----       ------     -------      -------      ------
          Total............    $39,910      $7,636   $46,622       $ --       $7,636     $46,622      $54,258      $1,246
                               =======      ======   =======       ====       ======     =======      =======      ======

<Caption>

        DESCRIPTION             DATE         DATE     DEPRECIABLE
       AND LOCATION          CONSTRUCTED   ACQUIRED      LIFE
       ------------          -----------   --------   -----------
<S>                          <C>           <C>        <C>
Office Buildings:
  100 College Road West....     2000       Dec 2002       39
  150 College Road West....     2001       Dec 2002       39
          Total............
</Table>

                                        59
<PAGE>

                                                                    SCHEDULE III

                             NEW VALLEY CORPORATION

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                  FOR THE THREE YEARS ENDED DECEMBER 31, 2003
                             (AMOUNTS IN THOUSANDS)

RECONCILIATION OF CARRYING COSTS AND ACCUMULATED DEPRECATION

<Table>
<Caption>
                                                            BUILDINGS AND              ACCUMULATED
                                                   LAND     IMPROVEMENTS     TOTAL     DEPRECIATION
                                                  -------   -------------   --------   ------------
<S>                                               <C>       <C>             <C>        <C>
Balance at January 1, 2001......................  $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
                                                  -------      -------      --------      ------
Additions during period
  Other acquisitions............................       --           --            --          --
  Improvements, etc. ...........................       --           --            --          --
  Reclassifications.............................       --           --            --          --
  Depreciation expense..........................       --           --            --       1,196
                                                  -------      -------      --------      ------
          Total Additions.......................       --           --            --       1,196
                                                  -------      -------      --------      ------
Deductions during period:
  Cost of real estate sold......................       --           --            --          --
                                                  -------      -------      --------      ------
Balance at December 31, 2003....................  $ 7,636      $46,622      $ 54,258      $1,246
                                                  -------      -------      --------      ------
</Table>

                                        60
<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 15, 2004

                                        61
<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 15, 2004.

<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>

                                        62