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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, 2001
                         COMMISSION FILE NUMBER 1-2493

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

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

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

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

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

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

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

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

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 25, 2002 was approximately $38,365,630. 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 25, 2002, there were 22,881,416 Common Shares outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Part III (Items 10, 11, 12 and 13) from the definitive Proxy Statement for
the 2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the registrant's
fiscal year covered by this report.

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                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                          PAGE
                                                                          ----
  <S>       <C>                                                           <C>
                                     PART I
  Item 1.   Business....................................................    1
  Item 2.   Properties..................................................    8
  Item 3.   Legal Proceedings...........................................    8
  Item 4.   Submission of Matters to a Vote of Security-Holders;
              Executive Officers of the Registrant......................    8
                                    PART II
  Item 5.   Market for Registrant's Common Equity and Related
              Stockholder Matters.......................................   10
  Item 6.   Selected Financial Data.....................................   11
  Item 7.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................   12
  Item 7A.  Quantitative and Qualitative Disclosures About Market
              Risk......................................................   21
  Item 8.   Financial Statements and Supplementary Data.................   21
  Item 9.   Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure..................................   21
                                    PART III
  Item 10.  Directors and Executive Officers of the Registrant..........   21
  Item 11.  Executive Compensation......................................   21
  Item 12.  Security Ownership of Certain Beneficial Owners and
              Management................................................   21
  Item 13.  Certain Relationships and Related Transactions..............   21
                                    PART IV
  Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
              8-K.......................................................   21
  SIGNATURES............................................................   55
</Table>
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     New Valley, a Delaware corporation, is currently engaged in the real estate
business through its New Valley Realty division and is seeking to acquire
additional operating companies. 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 bankruptcy plan, New Valley sold
the Western Union money transfer and messaging services businesses and all
allowed claims in the bankruptcy were paid in full.

PLAN OF RECAPITALIZATION

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

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

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

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

     The recapitalization had a significant effect on New Valley's financial
position and results of operations. As a result of the exchange of the
outstanding preferred shares for common shares and warrants in the
recapitalization, New Valley's stockholders' equity increased by $343.4 million
from the elimination of the carrying value and dividend arrearages on the
redeemable preferred stock. Furthermore, the recapitalization resulted in the
elimination of the on-going dividend accruals on the existing redeemable
preferred shares of New Valley, as well as the redemption obligation for the
Class A preferred shares in January 2003. Also as a result of the
recapitalization, the number of outstanding common shares more than doubled, and
additional common shares were reserved for issuance upon exercise of the
warrants, which have an initial exercise price of $12.50 per common share. In
addition, Vector Group Ltd., New Valley's principal stockholder, increased its
ownership of the common shares from 42.3% to 55.1%, and its total voting power
from 42% to 55.1%. At December 31, 2001, Vector Group owned 56.3% of New
Valley's common shares.

BUSINESS STRATEGY

     Following the recent distribution of the Ladenburg Thalmann Financial
Services shares and asset dispositions in Russia (discussed below), New Valley
is engaged in the real estate business and holds a significant amount of cash
and other investments. The business strategy of New Valley is to continue to
operate its real estate business and to acquire operating businesses through
merger, purchase of assets, stock acquisition or other means, or to acquire
control of operating companies through one of such means, with the purpose of
being primarily engaged in a business or businesses other than that of
investing, reinvesting, owning, holding or trading in securities. In the
interim, New Valley's cash and investments (aggregating approximately $113
million at December 31, 2001) are available for general corporate purposes,
including for acquisition purposes. Pending any use of these funds in the real
estate business or for acquisitions, New Valley's liquid assets have been
invested consistent with the preservation of their value.

     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 since 1995, have been

                                        1
<PAGE>

treated as discontinued operations in its accompanying consolidated financial
statements. See "Discontinued Operations -- Broker-Dealer".

     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". New Valley, which is now above
this threshold following the distribution of the Ladenburg Thalmann Financial
Services shares and asset dispositions in Russia, has been relying since
December 2001 on the one-year exemption from registration under the Investment
Company Act provided by Rule 3a-2. New Valley will attempt to be engaged, within
the one-year period prescribed by Rule 3a-2, primarily in a business or
businesses other than that of investing, reinvesting, owning, holding or trading
in securities. However, there is a risk that New Valley will not be successful
in becoming engaged in such business and will become subject to the Investment
Company Act. 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 REALTY DIVISION

     In January 1996, New Valley acquired four office buildings and eight
shopping centers for an aggregate purchase price of $183.9 million, consisting
of $23.9 million in cash and $160 million in non-recourse mortgage financing
provided by the sellers. The office buildings and shopping centers have been
operated through its New Valley Realty division.

     The shopping centers were acquired for an aggregate purchase price of $72.5
million. Each seller was an affiliate of Apollo Real Estate Investment Fund III,
L.P. The shopping centers are located in Marathon and Royal Palm Beach, Florida;
Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukie, Oregon; Richland and
Marysville, Washington; and Kanawha, West Virginia.

     In November 1997, New Valley sold its Marathon, Florida shopping center for
$5.4 million and recognized a gain of $1.2 million on the sale. In August 1999,
New Valley sold five shopping centers for an aggregate purchase price of $46.1
million before closing adjustments and expenses. The shopping centers were
subject to approximately $35 million of mortgage financing, which was assumed by
the purchasers at closing. New Valley recorded a gain of approximately $3.8
million on the sale of the five centers. In February 2001, New Valley sold its
Royal Palm Beach, Florida shopping center for $9.5 million before closing
adjustments and expenses and recorded a gain of $0.9 million on the sale.

     In September 1998, New Valley completed the sale to institutional investors
of the office buildings for an aggregate purchase price of $112.4 million and
recognized a gain of $4.7 million on the sale. New Valley received approximately
$13.4 million in cash from the transaction before closing adjustments and
expenses. The office buildings were subject to approximately $99.3 million of
mortgage financing which was retired at closing.

     Space in New Valley's remaining shopping center in Kanawha, West Virginia
is leased to a variety of commercial tenants and, as of December 31, 2001, the
aggregate occupancy of the center was 90%. The property is subject to
approximately $11.2 million of an underlying mortgage in favor of its senior
lender and a second mortgage in favor of the original sellers. New Valley is in
negotiations to dispose of the Kanawha shopping center.

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 is 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

                                        2
<PAGE>

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 has been leased to a number of leading international companies and is
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.

     Western Realty Development.  In February 1998, New Valley and Apollo Real
Estate Investment Fund III, L.P. organized Western Realty Development 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 discussed below.

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

     On December 21, 2001, Western Realty Development sold to Andante Limited, a
Bermuda company, all of the membership interests in its subsidiary Western
Realty Investments LLC, the entity through which Western Realty Development
owned Ducat Place II and the adjoining Ducat Place III site. The purchase price
for the sale was approximately $42 million including the assumption of mortgage
debt and payables. Of the net cash proceeds from the sale, New Valley received
approximately $21 million, and Apollo received approximately $9 million. These
amounts are subject to adjustment based on final closing expenses. New Valley
recorded a loss of $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 have
been used by BrookeMil for the acquisition and preliminary development of the
Kremlin sites, two adjoining sites totaling 10.25 acres located on the Sofiskaya
Embankment of the Moscow River. The sites are directly across the river from the
Kremlin and have views of the Kremlin walls, towers and nearby church domes. The
Kremlin sites were planned for development as a residential and hotel complex,
subject to market conditions and the availability of financing. BrookeMil owned
100% of both sites at December 31, 2001.

     Through December 31, 2001, Western Realty Repin had advanced $42.2 million,
of which $29.5 million was funded by Apollo to BrookeMil. The loan bears no
fixed interest and is payable only out of distributions by the entities owning
the Kremlin sites to BrookeMil. Such distributions must be applied first to pay
the principal of the loan and then as contingent participating interest on the
loan. Any rights of payment on the loan are subordinate to the rights of all
other creditors of BrookeMil. BrookeMil used a portion of the proceeds of the
loan to reimburse New Valley for expenditures on the Kremlin sites previously
incurred. The loan is due and payable upon the dissolution of BrookeMil and is
collateralized by a pledge of New Valley's shares of BrookeMil.

     As of December 31, 2001, BrookeMil had invested $37.4 million in the
Kremlin sites. In acquiring its interest in one of the Kremlin sites, BrookeMil
agreed with the City of Moscow to invest an additional $22 million in 2000 in
the development of the property. In April 2000, Western Realty Repin arranged
short-term financing to fund the investment. Under the terms of the investment,
BrookeMil is required to utilize such financing amount to make construction
expenditures on the site by June 2002, although BrookeMil is seeking an
extension of that date. Failure to make the expenditures could result in the
forfeiture of a 34.8% interest in the site.

     In connection with the sale of Western Tobacco Investments, Gallaher also
agreed for $1.5 million to purchase from a subsidiary of BrookeMil additional
land adjacent to the Liggett-Ducat manufacturing facility outside Moscow,
Russia. Closing of the sale occurred in the fourth quarter of 2001 following
satisfaction of various regulatory requirements.

                                        3
<PAGE>

     New Valley has engaged in discussions to sell the Kremlin sites, its
remaining real estate holdings in Russia. New Valley anticipates it would
receive approximately 37.5% of the net proceeds of a sale.

DISCONTINUED OPERATIONS -- BROKER-DEALER

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

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

     On May 7, 2001, GBI Capital Management Corp. acquired all of the
outstanding common stock of Ladenburg Thalmann & Co. for 23,218,599 shares, $10
million in cash and $10 million principal amount of senior convertible notes due
December 31, 2005, and the name of GBI was changed to Ladenburg Thalmann
Financial Services Inc. The notes bear interest at 7.5% per annum and are
convertible into 4,799,271 shares of Ladenburg Thalmann Financial Services
common stock. Upon closing, New Valley also acquired an additional 3,945,060
shares of Ladenburg Thalmann Financial Services from the former Chairman of
Ladenburg Thalmann Financial Services for $1.00 per share. Following completion
of the transactions, New Valley owned 53.6% and 49.5% of the common stock of
Ladenburg Thalmann Financial Services, on a basic and fully diluted basis,
respectively. Ladenburg Thalmann Financial Services (AMEX: LTS) is registered
under the Securities Act of 1934 and files periodic reports and other
information with the SEC.

     To provide the funds for the acquisition of the common stock of Ladenburg
Thalmann & Co., Ladenburg Thalmann Financial Services borrowed $10 million from
Frost-Nevada, Limited Partnership and issued to Frost-Nevada $10 million
principal amount of senior convertible notes due December 31, 2005. The notes
bear interest at 8.5% per annum and are convertible into 6,497,475 shares of
Ladenburg Thalmann Financial Services common stock. The notes issued to the
Ladenburg Thalmann & Co. stockholders and to Frost-Nevada are secured by a
pledge of the Ladenburg Thalmann & Co. stock. If, during any period of 20
consecutive trading days, the closing sale price of Ladenburg Thalmann Financial
Services' common stock is at least $8.00, the principal and all accrued interest
on the notes will be automatically converted into shares of its common stock.
The notes also provide that if a change of control occurs, as defined in the
notes, Ladenburg Thalmann Financial Services must offer to purchase all of the
outstanding notes at a purchase price equal to the unpaid principal amount of
the notes and the accrued interest.

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

     The transaction was accounted for under the purchase method of accounting
as a reverse acquisition. For accounting purposes, Ladenburg Thalmann & Co. was
treated as the acquirer of Ladenburg Thalmann Financial Service as Ladenburg
Thalmann & Co.'s stockholders held a majority of the Ladenburg Thalmann
Financial Services common stock following the closing of the transaction.
Between May 7, 2001, the date of the acquisition, and December 20, 2001, the
date of the distribution of the Ladenburg Thalmann Financial Services shares
when Ladenburg Thalmann Financial Services became a discontinued operation,
Ladenburg Thalmann Financial Services was accounted for as a consolidated
subsidiary of New Valley.

     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.

                                        4
<PAGE>

     Following completion of the special dividend of the Ladenburg Thalmann
Financial Services' shares, New Valley continues to hold $8,010,000 principal
amount of Ladenburg Thalmann Financial Services' senior convertible promissory
notes, convertible into 3,844,216 shares of its common stock, and a warrant to
purchase 100,000 shares of its common stock at $1.00 per share. New Valley
intends within a 12-month period from November 30, 2001 to distribute to its
stockholders the remaining interests of New Valley in Ladenburg Thalmann
Financial Services' common stock.

     On March 27, 2002, Ladenburg Thalmann Financial Services borrowed $2.5
million from us. The loan, which bears interest at 1% above the prime rate, is
due on the earlier of June 30, 2002 or the completion of one or more equity
financings where Ladenburg Thalmann Financial Services receives at least $5,000
in total proceeds.

     Ladenburg Thalmann Financial Services is a holding company engaged in
various broker-dealer businesses including retail, institutional securities and
principal and agency trading, primarily through its wholly-owned subsidiaries
Ladenburg Thalmann & Co. and Ladenburg Capital Management Inc., formerly known
as GBI Capital Partners Inc. Ladenburg Thalmann & Co. provides its services
principally for middle market and emerging growth companies and high net worth
individuals through a coordinated effort among corporate finance, research,
capital markets, investment management, brokerage and trading professionals.
Ladenburg Capital Management, a broker-dealer subject to regulation by the SEC
and the NASD, acts as an introducing broker, market maker, underwriter and
trader for its own account.

     Howard M. Lorber, Bennett S. LeBow and Richard J. Lampen, executive
officers and directors of New Valley, and Victor M. Rivas and Henry C.
Beinstein, directors of New Valley, also serve as directors of Ladenburg
Thalmann Financial Services. Mr. Rivas also serves as President and CEO of
Ladenburg Thalmann Financial Services. J. Bryant Kirkland III, New Valley's Vice
President, Treasurer and Chief Financial Officer, is Chief Financial Officer of
Ladenburg Thalmann Financial Services. Messrs. LeBow and Lorber serve as
executive officers and directors, and Mr. Lampen serves as an executive officer,
of Vector Group, which owns approximately 56.3% of New Valley's common shares,
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
will be entitled, upon exercise of a warrant and payment of the $12.50 exercise
price per warrant, to receive a common share of New Valley and a cash payment of
$1.20, an amount equal to 0.988 of the current market price of a share of
Ladenburg Thalmann Financial Services common stock on December 20, 2001. The
current market price was determined based on the average daily closing prices
for a share of Ladenburg Thalmann Financial Services common stock for the 15
consecutive trading days commencing 20 trading days before December 20, 2001.

OTHER ACQUISITIONS AND INVESTMENTS

     Thinking Machines Corporation.  Thinking Machines Corporation, New Valley's
73% owned subsidiary, designed, developed, marketed and supported software
offering prediction-based management solutions under the name LoyaltyStream(TM)
for businesses such as financial services and telecommunications providers. This
software was designed to help reduce customer attrition, control costs, more
effectively cross-sell or bundle products or services and manage risks.
Incorporated in LoyaltyStream was Darwin(R), a data mining software tool set
with which a customer can analyze large amounts of its pre-existing data as well
as external demographics data to predict behavior or outcomes. The customer can
then send this information through systems integration to those divisions of the
customer, which can use it to more effectively anticipate and solve business
problems. Thinking Machines recognized no material revenues from the sale or
licensing of such software and services.

     In June 1999, Thinking Machines sold substantially all of its assets,
consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price was $4.7 million in cash at the closing of the
sale and up to an additional $20.3 million, payable in cash on January 31 in
each of the years 2001 through 2003, based on sales by Oracle of the Darwin
product above specified sales targets. Oracle has informed Thinking Machines
that it did not achieve the specified sales target for the 2000 and 2001
periods. In 2000 and

                                        5
<PAGE>

2001, Thinking Machines recognized gains of $150,000 and $250,000 related to
Oracle's payment of the $400,000 of the purchase price escrowed in connection
with the sale.

     Miscellaneous Investments.  At December 31, 2001, 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, 2001, long-term investments consisted primarily of
investments in limited partnerships and limited liability companies of $10.0
million.

EMPLOYEES

     At December 31, 2001, New Valley had approximately 25 full-time employees.
New Valley believes that relations with its employees are satisfactory.

                                  RISK FACTORS

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

     Following the recent distribution of the Ladenburg Thalmann Financial
Services shares and asset dispositions in Russia, New Valley is engaged in the
real estate business and holds a significant amount of cash and marketable
securities which it may be required to reinvest in operating companies in the
near future in order to avoid potentially burdensome regulation under the
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". New
Valley, which is now above this threshold following the distribution of the
Ladenburg Thalmann Financial Services shares and asset dispositions in Russia,
has been relying since December 2001 on the one-year exemption from registration
under the Investment Company Act provided by Rule 3a-2. New Valley will attempt
to be engaged, within the one-year period prescribed by Rule 3a-2, primarily in
a business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities. However, there is a risk that New Valley will
not be successful in becoming engaged in such business and will become subject
to the Investment Company Act. 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 IS SUBJECT TO RISKS RELATING TO ITS REMAINING RUSSIAN REAL ESTATE
HOLDINGS

     New Valley owns the Kremlin sites in Moscow, Russia, which it has engaged
in discussions to sell. These properties are subject to a high level of risk.

     In its on-going transition from a centrally-controlled economy under
communist rule, Russia has experienced dramatic political, social and economic
upheaval. There is a risk that further reforms necessary to complete this
transition will not occur. In August 1998, the economy of the Russian Federation
entered a period of even greater economic instability which has continued since
that time. The country's currency
                                        6
<PAGE>

continues to devalue. There is continued volatility in the debt and equity
markets, and hyperinflation persists. Confidence in the banking sector has yet
to be restored, and there continues to be a general lack of liquidity in the
economy. In addition, New Valley may be harmed by regulatory, political and
legal developments beyond the control of companies operating in the Russian
Federation, including:

     - diplomatic developments;

     - decisions of international lending organizations;

     - regional tensions;

     - currency repatriation restrictions;

     - foreign exchange fluctuations;

     - an undeveloped system of commercial laws, including laws on real estate
       titles and mortgages, and a relatively untested judicial system;

     - an evolving taxation system subject to constant changes which may be
       applied retroactively and subject to varying interpretations by tax
       authorities which may not coincide with that of management and can result
       in assessments of additional taxes, penalties and interest, which can be
       significant; and

     - other legal developments and, in particular, the risks of expropriation,
       nationalization and confiscation of assets and changes in legislation
       relating to foreign ownership.

     In acquiring a 34.8% interest in one of the Kremlin sites, New Valley
agreed with the City of Moscow to invest an additional $22 million by May 2000
in the development of the property. In April 2000, Western Realty Repin arranged
short-term financing to fund the investment. Under the terms of the investment,
BrookeMil is required to utilize such financing amount to make construction
expenditures on the site by June 2002, although BrookeMil is seeking an
extension of that date. There is a risk that BrookeMil will not be able to
obtain this extension. Failure to make the expenditures could result in the
forfeiture of a 34.8% interest in the site.

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

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

VECTOR GROUP CONTROLS A MAJORITY OF NEW VALLEY'S SHARES

     As a result of the recapitalization and assuming that no warrant holder
exercises its warrants, Vector Group owns approximately 56.3% 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 Group 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.

                                        7
<PAGE>

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

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

ITEM 2.  PROPERTIES

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

ITEM 3.  LEGAL PROCEEDINGS

     Reference is made to Notes 8 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 2001, 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
25, 2002. 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........  64     Chairman of the Board and Chief Executive                1988
                                 Officer
Howard M. Lorber........  53     President and Chief Operating Officer                    1994
Richard J. Lampen.......  48     Executive Vice President and General Counsel             1995
J. Bryant Kirkland               Vice President, Treasurer and Chief Financial
  III...................  36     Officer                                                  1998
Marc N. Bell............  41     Vice President, Associate General Counsel and            1998
                                 Secretary
</Table>

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

     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 a stockholder and a registered
representative of Aegis Capital Corp., a broker-dealer and a member firm of the
National Association of Securities Dealers, since 1984; Chairman of the Board of
Directors since 1987 and Chief Executive Officer since November 1993 of Nathan's
Famous, Inc., a chain of fast food restaurants; a consultant to Vector Group
                                        8
<PAGE>

and Liggett from January 1994 to January 2001; a director and member of the
Audit Committee of United Capital Corp., a real estate investment and
diversified manufacturing company, since May 1991; a director and member of the
Audit Committee 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.

     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 Thinking Machines, 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. Spec's Music, Inc. and
Panaco, Inc., as well as a court-appointed independent director of Trump Plaza
Funding, Inc.

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

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

                                        9
<PAGE>

                                    PART II

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

     Effective September 27, 2000, the common shares have traded on the NASDAQ
SmallCap Market under the symbol NVAL. Prior to September 27, 2000, the common
shares were quoted on the NASD OTC Electronic Bulletin Board, a NASD sponsored
and operated inter-dealer automated quotation system under the symbol NVAL.

     The following table sets forth, for the calendar quarters indicated, the
range of per share prices for the common shares. From September 27, 2000 prices
reflect quotations on the NASDAQ SmallCap Market and prior to that date reflect
quotations on the NASD OTC Electronic Bulletin Board. Quotations prior to
September 27, 2000 reflect inter-dealer prices in the over-the-counter market,
without retail markups, markdowns or commissions, and do not necessarily
represent actual transactions.

<Table>
<Caption>
                                                              HIGH      LOW
                                                              -----    -----
<S>                                                           <C>      <C>
NASDAQ SMALLCAP MARKET
2001:
Fourth Quarter..............................................  $4.25    $2.93
Third Quarter...............................................   3.67     2.93
Second Quarter..............................................   3.05     2.55
First Quarter...............................................   3.16     2.24

2000:
Fourth Quarter..............................................  $3.77    $2.24
Third Quarter (from September 27, 2000).....................   3.82     3.67

NASD OTC ELECTRONIC BULLETIN BOARD

2000:
Third Quarter (prior to September 27, 2000).................  $4.07    $2.65
Second Quarter..............................................   3.16     1.99
First Quarter...............................................   3.00     2.85
</Table>

HOLDERS

     At March 25, 2002, there were approximately 12,595 holders of record of the
common shares.

DIVIDENDS

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

RECENT SALES OF UNREGISTERED SECURITIES

     No securities of New Valley which were not registered under the Securities
Act of 1933 have been issued or sold by New Valley during the three months ended
December 31, 2001.

                                        10
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                2001       2000       1999       1998       1997
                                              --------   --------   --------   --------   --------
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                           <C>        <C>        <C>        <C>        <C>
OPERATING RESULTS:
Total revenues..............................  $ 12,701   $ 13,492   $ 12,012   $ 35,417   $ 56,901
Total costs and expenses....................    25,522     24,277     33,516     48,603     67,539
Other income (expense)......................    (3,214)    46,510     (6,160)    (4,072)    (2,506)
                                              --------   --------   --------   --------   --------
(Loss) income from continuing operations
  before income taxes and minority
  interests.................................   (16,035)    35,725    (27,664)   (17,258)   (13,144)
Income tax provision........................       260         --         18         --         --
Minority interests in (loss) income from
  continuing operations of consolidated
  subsidiaries..............................      (594)      (323)        92     (2,089)    (1,347)
                                              --------   --------   --------   --------   --------
(Loss) income from continuing operations....   (15,701)    36,048    (27,774)   (15,169)   (11,797)
Discontinued operations:
(Loss) income from discontinued
  operations................................    (5,829)     5,002      2,051     (8,160)   (12,463)
Gain on disposal of discontinued
  operations................................     4,346     17,879      4,100      7,740      3,687
                                              --------   --------   --------   --------   --------
  (Loss) income from discontinued
     operations.............................    (1,483)    22,881      6,151       (420)    (8,776)
                                              --------   --------   --------   --------   --------
Net (loss) income...........................   (17,184)    58,929    (21,623)   (15,589)   (20,573)
Dividend requirements on preferred
  shares(a).................................        --         --    (37,759)   (80,964)   (68,475)
                                              --------   --------   --------   --------   --------
Net income (loss) applicable to common
  shares....................................  $(17,184)  $ 58,929   $(59,382)  $(96,553)  $(89,048)
                                              ========   ========   ========   ========   ========
Per common and equivalent share(b):
Basic:
  (Loss) income from continuing
     operations.............................  $  (0.69)  $   1.57   $  (3.76)  $ (10.04)  $  (8.38)
  Gain from discontinued operations.........     (0.06)      0.99        .35      (0.04)     (0.92)
  Net (loss) income per Common Share........     (0.75)      2.56      (3.41)    (10.08)     (9.30)
Diluted:
  (Loss) income from continuing
     operations.............................  $  (0.69)  $   1.56   $  (3.76)  $ (10.04)  $  (8.38)
  Gain from discontinued operations.........     (0.06)      0.99        .35      (0.04)     (0.92)
  Net (loss) income per Common Share........     (0.75)      2.55      (3.41)    (10.08)     (9.30)
Dividends declared(a).......................        --         --         --         --         --
Book value(b)...............................  $   5.63   $   6.54   $   3.94   $ (21.44)  $ (13.61)
BALANCE SHEET DATA:
Total assets................................  $162,698   $263,130   $220,668   $272,722   $441,391
Long-term obligations.......................    11,142     11,900     19,519     54,801    185,024
Prepetition claims(c).......................     2,700     10,229     12,279     12,364     12,611
Redeemable preferred shares(d)..............        --         --         --    316,202    258,638
Stockholders' equity (deficiency)...........   128,480    149,685     91,379   (205,312)  (130,399)
Working capital (deficiency)................   113,628     72,720     23,014      7,870     (6,986)
</Table>

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

(a) Dividend requirements on preferred shares amounts include $444 in 1999, $891
    in 1998 and $692 in 1997 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, 1998 and 1997.
(b) All per share data have been restated to reflect New Valley's
    recapitalization which occurred on June 4, 1999.
(c) Represents prepetition claims against New Valley in its bankruptcy case. See
    Note 15 to the Consolidated Financial Statements.
(d) Includes cumulative preferred dividends on the redeemable Class A senior
    preferred shares of $219,068 and $163,302 at December 31, 1998 and 1997,
    respectively. See Note 11 to the Consolidated Financial Statements.

                                        11
<PAGE>

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

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INTRODUCTION

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

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

     - the sale of the money transfer business in January 1995 and the messaging
       service business in October 1995. These operations, which generated
       virtually all of New Valley's revenues before 1995, are treated as
       discontinued in New Valley's financial statements;

     - 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; and

     - 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 $21,000 of sale
       proceeds from the Western Realty Investments transaction. The
       broker-dealer operations, which were the primary source of New Valley's
       revenues since 1995, are treated as discontinued operations in New
       Valley's financial statements.

RECENT DEVELOPMENTS

     Distribution of Ladenburg Thalmann Financial Services Shares.  On November
30, 2001, New Valley announced that it would distribute its 22,543,158 shares of
Ladenburg Thalmann Financial Services common stock, a 53.6% interest, 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.

     Sale of Western Realty Investments.  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 the Ducat Place II office building and
the adjoining Ducat Place III site in Moscow, Russia. The purchase price for the
sale was approximately $42,000 including the assumption of mortgage debt and
payables. Of the net cash proceeds

                                        12
<PAGE>

from the sale, New Valley received approximately $21,000, and Apollo received
approximately $9,000. These amounts are subject to adjustment based on final
closing expenses. New Valley recorded a loss of $21,842 in connection with the
sale in 2001.

     New Valley is currently engaged in discussions to sell the Kremlin sites,
its remaining real estate holdings in Russia. New Valley anticipates it would
receive approximately 37.5% of the net proceeds of a sale.

CRITICAL ACCOUNTING POLICIES

     Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 of our consolidated financial statements includes a
summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.

     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.

     Long-Term Investments.  At December 31, 2001, New Valley had long-term
investments of $10,044, representing investments in various limited
partnerships. The principal business of the limited partnerships is investing in
real estate and investment securities. These long-term investments are illiquid,
and the value of the investments is dependant on the performance of the
underlying partnership and its management by the general partners. In assessing
potential impairment for these investments, New Valley considers the external
markets for these types of investments as well as the forecasted financial
performance of its investees. If these forecasts are not met, New Valley may
have to recognize an impairment charge in its statement of operations.

     Income Taxes.  The year 2000 was the only year out of the last five in
which New Valley has reported net income. New Valley's losses during these and
prior years have generated a sizeable federal tax net operating loss, or NOL,
carryforward of approximately $123,000 as of December 31, 2001 which expire at
various dates from 2002 through 2008. Generally accepted accounting principles
require that New Valley record a valuation allowance against the deferred tax
asset associated with this NOL 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
NOL carryforward in relation to New Valley's history of unprofitable operations
and to the continuing uncertainties surrounding its operations as it seeks to
acquire additional operating companies, New Valley has not recognized any of
this net deferred tax asset. New Valley currently provides for income taxes only
to the extent that it expects to pay cash taxes (primarily state taxes and the
federal alternative minimum tax) for current income.

     It is possible, however, that New Valley could be profitable in the future
at levels which cause management to conclude that it is more likely than not
that it will realize all or a portion of the NOL carryforward. 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 NOL is utilized.

RESULTS OF OPERATIONS

     For the years ended December 31, 2001, 2000 and 1999, the results of
continuing operations of New Valley's primary operating units are as follows.
The operations of BrookeMil are included in real estate operations. For 2001,
the operations of Western Realty Development are included in real estate
operations. For 2000 and 1999, New Valley's interest in Western Realty
Development, which was accounted for on the

                                        13
<PAGE>

equity method prior to December 29, 2000, is included in corporate and other
activities. In December 2001, New Valley completed the distribution to its
stockholders of its shares in Ladenburg Thalmann Financial Services, its former
majority-owned subsidiary engaged in the investment banking and brokerage
business. The broker-dealer operations are treated as discontinued operations in
the consolidated financial statements. As a result, the statement of operations
has been reformatted and certain prior year amounts have been reclassified to
conform to the current year presentation.

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2001       2000        1999
                                                              --------    -------    --------
<S>                                                           <C>         <C>        <C>
Real estate:
  Revenues..................................................  $  9,966    $ 3,199    $  7,056
  Expenses..................................................    12,067      8,534      14,096
  Other (expense) income....................................   (20,945)        --       3,828
                                                              --------    -------    --------
  Operating loss before taxes and minority interests........  $(23,046)   $(5,335)   $ (3,212)
                                                              ========    =======    ========
Computer software:
  Revenues..................................................  $     --    $    --    $    317
  Expenses..................................................       136        143       7,498
  Other income..............................................       250        150       4,028
                                                              --------    -------    --------
  Operating income (loss) before taxes and minority
     interests..............................................  $    114    $     7    $ (3,153)
                                                              ========    =======    ========
Corporate and other:
  Revenues..................................................  $  2,735    $10,293    $  4,639
  Expenses..................................................    13,319     15,600      11,922
  Other income (expense)....................................    17,481     46,360     (14,016)
                                                              --------    -------    --------
  Operating income (loss) before taxes and minority
     interests..............................................  $  6,897    $41,053    $(21,299)
                                                              ========    =======    ========
</Table>

THE YEAR 2001 COMPARED TO 2000

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

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

     Real estate expenses were $12,067 for the year ended December 31, 2001 as
compared to $8,534 for the year ended December 31, 2000. The $3,533 increase in
real estate expenses is attributable to the inclusion of $7,494 of expenses from
Western Realty Development, offset by lower expenses as a result of the sale of
the shopping center and lower expenses at BrookeMil. BrookeMil incurred expenses
of $735 for 2001 and $3,920 for 2000 related to the Kremlin sites. BrookeMil's
expenses for the 2000 period consisted primarily of accrued interest expense of
$3,373 associated with the participating loan from Western Realty Repin.
Corporate and other expenses were $13,319 for the year ended December 31, 2001,
a decline of $2,281 from the prior year. The decline was primarily the result of
a decrease in legal and administrative expense, offset by an increase in
compensation and benefits of $785 in 2001.

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

                                        14
<PAGE>

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

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

     Income tax expense for 2001 was $260 versus $0 for 2000. The income taxes
related principally to foreign income taxes of Western Realty Development. The
effective tax rate does not bear a customary relationship with pre-tax
accounting income principally as a consequence of the change in the valuation
allowance relating to deferred tax assets.

THE YEAR 2000 COMPARED TO 1999

     Real estate revenues were $3,199 for the year ended December 31, 2000 as
compared to $7,056 for the year ended December 31, 1999. The decrease in real
estate revenues of $3,857 primarily related to the sale of five U.S. shopping
centers in August 1999.

     Corporate and other revenues were $10,293 for the year ended December 31,
2000 as compared to $4,639 for the year ended December 31, 2000. The increase in
corporate and other revenues of $5,654 was due to increased gains on the sales
of investments and greater interest and dividend income.

     Real estate expenses were $8,534 for the year ended December 31, 2000 as
compared to $14,086 for the year ended December 31, 1999. Expenses of the real
estate operations decreased primarily from the sale of the shopping centers and
a lower level of expenses incurred at BrookeMil. BrookeMil incurred expenses of
$3,920 in 2000 and $5,339 in 1999 related to the Kremlin sites. The expenses
consisted primarily of accrued interest expense of $3,373 in the 2000 period and
$4,698 in the 1999 period associated with the Western Realty Repin participating
loan. BrookeMil also experienced a foreign currency loss of $460 on cash
restricted for future investments in the Kremlin sites in the 1999 period.

     Corporate and other expenses were $15,600 for the year ended December 31,
2000 as compared to $11,922 for the year ended December 31, 1999. Corporate and
other expenses includes employee compensation and benefits.

     Computer software expenses were $143 for the year ended December 31, 2001
as compared to $7,498 for the year ended December 31, 2000. Expenses of the
computer operations were substantially reduced due to the Thinking Machines
asset sale in June 1999. Prior to the sale, operating expenses of Thinking
Machines consisted of cost of sales, selling, general and administrative
expenses, research and development expense and interest expense reflected in the
1999 results. Since the sale, operating expenses have consisted of general and
administrative expenses and interest expense.

     Other income from real estate activities in 1999 of $3,828 related to a
gain on the sale of the five shopping centers.

     Other income (expense) from corporate and other activities was income of
$46,360 for the year ended December 31, 2000 as compared to expense of $14,016
for the year ended December 31, 1999. For 2000, other corporate income included
income of $52,421 from the sale of Western Tobacco Investments, offset by a loss
of $5,597 from the operations of investees accounted for on the equity method.
Other corporate expense of $14,016 recorded in 1999 primarily related to losses
from joint venture of $16,513 offset by a gain of $4,256 from the sale of a
19.9% interest in Ladenburg Thalmann & Co. The loss from the joint venture
recorded during 1999 included equity in losses of the joint venture in addition
to a non-cash $11,561 impairment charge

                                        15
<PAGE>

associated with Western Realty Development. In 1999, Western Realty Development
evaluated the recoverability of its long-lived assets in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of."
Western Realty Development determined a permanent impairment had occurred
related to economic difficulties in the Russian economy following the financial
crisis of August 1998. Based on an appraisal conducted by an independent third
party, Western Realty Development recorded an impairment charge for the year
ended December 31, 1999 of $11,561 associated with its investment in the site
for the proposed Ducat Place III office building and related goodwill. The fair
market value was determined based on current market conditions and anticipated
future discounted cash flows.

     Computer software revenue of $150 for the year ended December 31, 2000
represents a portion of the gain recognized from the sale of Thinking Machines'
assets. The other income in 1999 of $4,028 for the year ended December 31, 1999
for computer software is primarily composed of a gain of $3,801 from the sale of
Thinking Machines' assets.

     Income tax expense for 2000 was $0 versus $18 for 1999. The income taxes
related principally to foreign income taxes of Western Realty Development. The
effective tax rate does not bear a customary relationship with pre-tax
accounting income principally as a consequence of the change in the valuation
allowance relating to deferred tax assets.

DISCONTINUED OPERATIONS

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

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

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

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------    -------    -------
<S>                                                    <C>         <C>        <C>
Revenues.............................................  $ 88,473    $90,111    $77,753
Expenses.............................................   100,503     83,813     75,065
                                                       --------    -------    -------
Operating income (loss) before taxes and minority
  interests..........................................  $(12,030)   $ 6,298    $ 2,688
                                                       ========    =======    =======
</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.

     The Company recorded a gain on disposal of discontinued operations of
$17,879 related to the adjustment of accruals established during the Company's
bankruptcy proceedings in 1993 and 1994. The reversal of these accruals reduced
restructuring, employee benefit and various tax accruals previously established.

                                        16
<PAGE>

     The Company recorded a gain on disposal of discontinued operations of
$4,100 in 1999 related to the settlement of a lawsuit originally initiated by
the Western Union telegraph business.

LIQUIDITY AND CAPITAL RESOURCES

     New Valley's working capital increased by $40,908, $49,706 and $15,144 for
the years ended December 31, 2001, 2000 and 1999.

     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.

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

     New Valley's working capital increased to $23,014 at December 31, 1999 from
$7,870 at December 31, 1998 primarily as a result of the sale of the five U.S.
shopping centers and a 19.9% interest in Ladenburg Thalmann & Co. and
liquidations of various long-term investments. The amount was offset by net
increases in New Valley's unrealized loss on marketable securities and
investments of $7,075.

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

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

     During 1999, New Valley's cash and cash equivalents decreased from $16,444
to $11,512 due primarily to a decrease in margin loans payable of $12,105 and
investments of $7,075, offset by the sales of the shopping centers, Thinking
Machines' assets and the Ladenburg Thalmann & Co. stock.

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

     Cash used from operating activities for the year ended December 31, 2000
was $11,273 as compared to $277 for the prior year. The difference is primarily
due to the increased interest expense associated with the Western Realty Repin
loan and higher non-cash stock compensation expense in 1999.

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

     Cash provided from investing activities for the year ended December 31,
2000 was $77,208 compared to $29,490 for the year ended December 31, 1999. The
difference is primarily attributable to a distribution from joint venture of
$57,208 and net sales of $23,929 of marketable securities and long-term
investments in the 2000 period versus net purchases of $9,525 of marketable
securities and long-term investments in 1999 offset by $46,208 of cash received
from the sale of New Valley's five U.S. shopping centers in 1999. The difference
is also attributable to a decrease in restricted assets of $1,885 for 2000
versus an increase in restricted assets of $2,095 in 1999. The changes in
restricted assets primarily relate to BrookeMil's investment in the Kremlin
sites.

     The capital expenditures for the years ended December 31, 2001, 2000 and
1999 related principally to the development of the Kremlin sites ($2,642, $3,663
and $13,990, respectively). In acquiring its interest in one of
                                        17
<PAGE>

the Kremlin sites, BrookeMil agreed with the City of Moscow to invest an
additional $22,000 by May 2000 in the development of the property. In April
2000, Western Realty Repin arranged short-term financing to fund the investment.
Under the terms of the investment, BrookeMil is required to utilize such
financing amount to make construction expenditures on the site by June 2002,
although BrookeMil is seeking an extension of that date. Failure to make the
expenditures could result in forfeiture of a 34.8% interest in the site.

     In June 1998, New Valley and Apollo organized Western Realty Repin to make
a loan to BrookeMil. The proceeds from the loan have been used by BrookeMil for
the acquisition and preliminary development of the Kremlin sites. Through
December 31, 2001, Western Realty Repin has advanced $42,230 to BrookeMil, of
which Apollo has funded $29,519. The loan bears no fixed interest and is payable
only out of distributions by the entities owning the Kremlin sites to BrookeMil.
The loan is due and payable upon the dissolution of BrookeMil and is
collateralized by a pledge of New Valley's shares of BrookeMil. Such
distributions must be applied first to pay the principal of the loan and then as
contingent participating interest on the loan. Any rights of payment on the loan
are subordinate to the rights of all other creditors of BrookeMil. BrookeMil
used a portion of the proceeds to repay New Valley for certain expenditures on
the Kremlin sites previously incurred.

     New Valley has engaged in discussions to sell the Kremlin sites, its
remaining real estate holdings in Russia. New Valley anticipates it would
receive approximately 37.5% of the net proceeds of a sale.

     In connection with the sale of Western Tobacco Investments, Gallaher also
agreed for $1,500 to purchase from a subsidiary of BrookeMil additional land
adjacent to the Liggett-Ducat manufacturing facility outside Moscow, Russia.
Closing of the sale occurred in the fourth quarter of 2001 following
satisfaction of various regulatory requirements.

     In August 1999, New Valley completed the sale of five of its shopping
centers for an aggregate purchase price of $46,125 ($45,288 after closing
adjustments and expenses) including the assumption of $35,023 of mortgage
financing. New Valley received approximately $10,265 in cash from the
transaction after closing adjustments and expenses and recorded a gain of $3,828
associated with the sale of the shopping centers. In February 2001, New Valley
sold its Royal Palm Beach, Florida shopping center for $9,500 before closing
adjustments and recognized a gain of $897 million on the sale.

     New Valley is in negotiations to dispose of its remaining shopping center
in Kanawha, West Virginia. The Kanawha, West Virginia shopping center is subject
to a $6,837 senior mortgage note due September 2024 which bears interest at
9.03% per annum for the first seven years and at floating rates thereafter (or
11.03% per annum if the loan is still in a securitization) and a $4,388
subordinated note due September 2006 which bears interest at 9.0% per annum. The
financing on the shopping center is non-recourse to New Valley, except for
misappropriations of insurance and other proceeds, failures to apply rent and
other income to required maintenance and taxes, environmental liabilities and
certain other matters.

     In June 1999, Thinking Machines sold substantially all of its assets,
consisting of its Darwin(R) software and services business, to Oracle
Corporation. The purchase price was $4,700 in cash at the closing of the sale
and up to an additional $20,300, payable in cash on January 31 in each of the
years 2001 through 2003, based on sales by Oracle of the Darwin(R) product above
specified sales targets. Oracle has informed Thinking Machines that it did not
achieve the specified sales target for the 2000 and 2001 periods. At the closing
of the Oracle sale, $4,136 of loans, including interest, were repaid by Thinking
Machines to New Valley. New Valley has lent Thinking Machines an additional
$623, net of repayments, bearing interest at 15% per annum, since the closing.

     On March 27, 2002, Ladenburg Thalmann Financial Services borrowed $2,500
from New Valley. The loan, which bears interest at 1% above the prime rate, is
due on the earlier of June 30, 2002 or the completion of one or more equity
financings where Ladenburg Thalmann Financial Services receives at least $5,000
in total proceeds.

     Cash flows used for financing activities were $27,564 for the year ended
December 31, 2001 as compared to cash flows provided from financing activities
of $2,881 for the year ended December 31, 2001. The decrease was primarily due
to the net repayment of notes payable and other liabilities of $16,759 in 2001,
the cash
                                        18
<PAGE>

impact of the distribution of Ladenburg Thalmann Financial Services of $8,136 in
2001 and a decrease in margin loans payable of $4,675 in 2001 versus an increase
of $3,692 in margin loans in 2000.

     Cash flows provided from financing activities were $2,881 for the year
ended December 31, 2000 as compared to cash used for financing activities of
$38,409 for the year ended December 31, 1999. The increase was primarily due to
$35,023 of debt repayments associated with the sales of New Valley's five U.S.
shopping centers in 1999 and an increase of $3,692 in 2000 in New Valley's
margin loans versus a $12,105 net payment on New Valley's margin loans in 1999.
The increase was offset by the issuance of $4,473 of the participating loan in
1999 versus an issuance of $663 of the participating loan in 2000.

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

     On October 5, 1999, New Valley's board of directors authorized the
repurchase of up to 2,000,000 common shares from time to time on the open market
or in privately negotiated transactions depending on market conditions. As of
March 25, 2002, New Valley had repurchased 422,000 shares for approximately
$1,457.

     New Valley expects that its available capital resources will be sufficient
to fund its currently anticipated cash requirements for 2002, including the
currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. New
Valley adopted SFAS No. 133 on January 1, 2001, the effect of which did not have
a material impact on its balance sheet.

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative
goodwill to be written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001, and SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
Amortization expense related to goodwill was $279 for the year ended December
31, 2001.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. New Valley is currently
assessing the impact, if any, of the adoption of this statement.

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
                                        19
<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 $20,902
at December 31, 2001. 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.

  Foreign Market Risk

     BrookeMil's operations are conducted in Russia. The Russian Federation
continues to experience economic difficulties following the financial crisis of
August 1998. Consequently, the country's currency continues to devalue, there is
continued volatility in the debt and equity markets, hyperinflation persists,
confidence in the banking sector has yet to be restored and there continues to
be a general lack of liquidity in the economy. In addition, laws and regulations
affecting businesses operating within the Russian Federation continue to evolve.

     The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond the control of companies
operating in the Russian Federation. The operations of BrookeMil may be
significantly affected by these factors for the foreseeable future.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

     Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such

                                        20
<PAGE>

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 29, 2002, beginning
on page 28 of this report.

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     This information is contained in New Valley's definitive Proxy Statement
for its 2002 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

     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.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (A)(1) INDEX TO 2001 CONSOLIDATED FINANCIAL STATEMENTS:

     The Consolidated Financial Statements and the Notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 29, 2002, appear on
pages 28 through 57 of this report. Financial statement schedules not included
in this report have been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or the Notes
thereto.

     (A)(2) FINANCIAL STATEMENT SCHEDULES:

Schedule III -- Real Estate and Accumulated Depreciation.................Page 53

                                        21
<PAGE>

     (A)(3) EXHIBITS

<Table>
<S>          <C>
*(2)(a)      Amended and Restated Limited Liability Company Agreement
             (Second Restatement), dated as of February 20, 1998, by and
             among Western Realty Development, New Valley, BrookeMil and
             Apollo Real Estate Investment Fund III, L.P. (incorporated
             by reference to Exhibit 10.1 in New Valley's Current Report
             on Form 8-K dated February 20, 1998).
*(b)         Limited Liability Company Agreement, dated as of June 18,
             1998, by and among Western Realty Repin, Apollo Real Estate
             Investment Fund III, L.P., and New Valley (incorporated by
             reference to Exhibit 10.3 in New Valley's Quarterly Report
             on Form 10-Q for the quarterly period ended June 30, 1998).
*(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)         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).
*(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).
*(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).
</Table>

                                        22
<PAGE>
<Table>
<S>          <C>
*(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)         Asset Purchase Agreement, dated as of May 18, 1999, by and
             between Oracle Corporation and Thinking Machines Corporation
             (incorporated by reference to Exhibit 10(h)(ii) in New
             Valley's Form S-1, dated June 14, 1999, Registration No.
             333-79837).
*(e)         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.).
*(f)(i)      Participating Loan Agreement, dated as of June 18, 1998, by
             and between Western Realty Repin and BrookeMil (incorporated
             by reference to Exhibit 10.4 in New Valley's Quarterly
             Report on Form 10-Q for the quarterly period ended June 30,
             1998).
*(ii)        Interest Purchase Agreement, dated as of December 29, 2000,
             between WRD Holding Corporation and Apollo (incorporated by
             reference to Exhibit 10.1 in New Valley's Current Report on
             Form 8-K dated December 29, 2000).
*(iii)       Promissory Note of WRD Holding, dated December 29, 2000, in
             favor of Apollo (incorporated by reference to Exhibit 10.2
             in New Valley's Current Report on Form 8-K dated December
             29, 2000).
*(iv)        Pledge Agreement, dated as of December 29, 2000, between
             Apollo and WRD Holding (incorporated by reference to Exhibit
             10.3 in New Valley's Current Report on Form 8-K dated
             December 29, 2000).
*(g)(i)      Purchase and Sale Agreement, dated as of June 14, 2000,
             between Gallaher (Overseas) Holdings Ltd. and Brooke
             (Overseas) Ltd. (incorporated by reference to Exhibit 10.1
             in Vector Group's Current Report on Form 8-K dated June 14,
             2000).
*(ii)        Amendment to Purchase and Sale Agreement, dated as of August
             4, 2000, between Gallaher Overseas (Holdings) Ltd. and
             Brooke (Overseas) Ltd. (incorporated by reference to Exhibit
             10.3 in Vector Group's Current Report on Form 8-K dated
             August 4, 2000).
*(h)(i)      Stock Purchase Agreement, dated February 8, 2001, among
             Ladenburg Thalmann Financial Services (formerly known as GBI
             Capital Management Corp.), New Valley, New Valley Capital
             Corporation (formerly known as Ladenburg, Thalmann Group
             Inc.)("NVCC"), Berliner Effektengesellschaft AG ("Berliner")
             and Ladenburg, Thalmann & Co. (incorporated by reference to
             Exhibit 10.1 in New Valley's Current Report on Form 8-K
             dated February 16, 2001).
*(ii)        Amendment No. 1 to the Stock Purchase Agreement, dated April
             25, 2001, among Ladenburg Thalmann Financial Services, New
             Valley, NVCC and Ladenburg Thalmann & Co. (incorporated by
             reference in Exhibit 10.6 to New Valley's Form 8-K dated May
             7, 2001).
*(iii)       Amendment No. 2 to the Stock Purchase Agreement, dated
             August 31, 2001, as amended, by and among Ladenburg Thalmann
             Financial Services, New Valley, NVCC, Berliner and Ladenburg
             Thalmann & Co. (incorporated by reference to Exhibit 4.1 to
             Ladenburg Thalmann Financial Services' Current Report on
             Form 8-K/A dated August 31, 2001).
*(iv)        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).
</Table>

                                        23
<PAGE>
<Table>
<S>          <C>
*(v)         Form of Pledge and Security Agreement between Ladenburg
             Thalmann Financial Services, NVCC, 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).
*(vi)        Investor Rights Agreement, dated as of February 8, 2001,
             among New Valley, NVCC, Berliner, Ladenburg Thalmann
             Financial Services, Frost-Nevada, Limited Partnership and
             the individual stockholders of Ladenburg Thalmann Financial
             Services signatories thereto (incorporated by reference to
             Exhibit 10.6 in New Valley's Current Report on Form 8-K
             dated February 16, 2001).
*(vii)       Stock Purchase Agreement, dated as of February 8, 2001, by
             and between NVCC and Joseph Berland (incorporated by
             reference to Exhibit 10.7 in New Valley's Current Report on
             Form 8-K dated February 16, 2001).
*(i)(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).
(21)         Subsidiaries of New Valley.
(23)         Consent of PricewaterhouseCoopers LLP relating to New
             Valley's Registration Statement on Form S-8 (No. 333-46370)
             and Registration Statement on Form S-3 (No. 333-79837).
*(99)        Western Realty Development LLC's Consolidated Financial
             Statements for the years ended December 31, 2000 and 1999
             (incorporated by reference to Exhibit 99 in New Valley's
             Form 10-K for the fiscal year ended December 31, 2000).
</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

                                        24
<PAGE>

                             NEW VALLEY CORPORATION

                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
                      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........   26
  Consolidated Balance Sheets as of December 31, 2001 and
     2000...................................................   27
  Consolidated Statements of Operations for the years ended
     December 31, 2001, 2000 and 1999.......................   28
  Consolidated Statements of Changes in Stockholders' Equity
     for the years ended December 31, 2001, 2000 and 1999...   29
  Consolidated Statements of Cash Flows for the years ended
     December 31, 2001, 2000 and 1999.......................   30
  Notes to Consolidated Financial Statements................   31

FINANCIAL STATEMENT SCHEDULES:
  Schedule III -- Real Estate and Accumulated Depreciation
     Financial Statement Schedules not listed above have
      been omitted because they are not applicable or the
      required information is contained in the Consolidated
      Financial Statements or accompanying Notes.
  Western Realty Development LLC
  The consolidated financial statements of Western Realty
     Development LLC are filed as Exhibit 99 to this report
     and are incorporated herein by reference.
</Table>

                                        25
<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 (the "Company") at
December 31, 2001 and December 31, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2001, 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 29, 2002

                                        26
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2001        2000
                                                              --------    --------
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 92,069    $ 82,067
  Investment securities available for sale..................    20,902      29,331
  Trading securities owned..................................        --      18,348
  Restricted assets.........................................    17,380       1,039
  Receivable from clearing brokers..........................        --      10,126
  Other current assets......................................     2,714       2,865
                                                              --------    --------
          Total current assets..............................   133,065     143,776
                                                              --------    --------
Investment in real estate, net..............................    10,581      96,227
Furniture and equipment, net................................        35       8,249
Restricted assets...........................................         6       3,060
Convertible notes receivable................................     8,010          --
Long-term investments, net..................................    10,044       4,654
Deferred tax assets.........................................        --         466
Other assets................................................       957       6,698
                                                              --------    --------
          Total assets......................................  $162,698    $263,130
                                                              ========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Margin loans payable......................................  $     --    $  4,675
  Current portion of notes payable and long-term
     obligations............................................        84      15,816
  Accounts payable and accrued liabilities..................     7,574      27,001
  Prepetition claims and restructuring accruals.............     2,700      10,229
  Income taxes..............................................     9,079       9,765
  Securities sold, not yet purchased........................        --       3,570
                                                              --------    --------
          Total current liabilities.........................    19,437      71,056
                                                              --------    --------
Notes payable...............................................    11,142      11,900
Other long-term liabilities.................................     3,639      30,489
Commitments and contingencies...............................        --          --
Stockholders' equity:
  Common Shares, $.01 par value; 100,000,000 and 100,000,000
     shares authorized; 22,813,063 and 23,890,663 shares
     outstanding............................................       228         229
  Additional paid-in capital................................   864,197     867,895
  Accumulated deficit.......................................  (737,894)   (720,710)
  Unearned compensation on stock options....................       (26)         --
  Accumulated other comprehensive income....................     1,975       2,271
                                                              --------    --------
          Total stockholders' equity........................   128,480     149,685
                                                              --------    --------
          Total liabilities and stockholders' equity........  $162,698    $263,130
                                                              ========    ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.
                                        27
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 2001           2000           1999
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Revenues:
  Real estate leasing.......................................  $     9,966    $     3,199    $     7,056
  (Loss) gain on sale of investments, net...................       (1,003)         7,271          2,373
  Interest and dividend income..............................        3,738          3,022          2,266
  Computer sales and service................................           --             --            317
                                                              -----------    -----------    -----------
         Total..............................................       12,701         13,492         12,012
                                                              -----------    -----------    -----------
Costs and expenses:
  Selling, general and administrative expenses..............       13,377         15,310         20,063
  Rental real estate activities, excluding interest.........        9,553          3,302          5,413
  Interest expense..........................................        2,592          5,665          8,040
                                                              -----------    -----------    -----------
         Total..............................................       25,522         24,277         33,516
                                                              -----------    -----------    -----------
Other results from continuing operations:
  Income (loss) from joint venture..........................           --         52,421        (16,513)
  (Loss) gain on sale of real estate........................      (20,945)            --          3,828
  Gain on lawsuit settlement................................       17,620             --             --
  Gain on sale of assets....................................          250            150          4,028
  Gain on sale of subsidiary stock..........................           --             --          4,256
  Provision for loss on long-term investments...............          (71)        (2,808)            --
  Other loss................................................          (68)        (3,253)        (1,759)
                                                              -----------    -----------    -----------
         Total..............................................       (3,214)        46,510         (6,160)
                                                              -----------    -----------    -----------
(Loss) income from continuing operations before income taxes
  and minority interests....................................      (16,035)        35,725        (27,664)
Income tax provision........................................          260             --             18
Minority interests in (loss) income from continuing
  operations of consolidated subsidiaries...................         (594)          (323)            92
                                                              -----------    -----------    -----------
(Loss) income from continuing operations....................      (15,701)        36,048        (27,774)
Discontinued operations:
  (Loss) income from discontinued operations, net of
    minority interests in (loss) income of consolidated
    subsidiaries of $(4,845), $1,212 and $575 and income tax
    (benefit) expense of $(1,356), $84 and $62..............       (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...........................................      (17,184)        58,929        (21,623)
Dividend requirements on preferred shares...................           --             --        (37,759)
                                                              -----------    -----------    -----------
Net (loss) income applicable to Common Shares...............  $   (17,184)   $    58,929    $   (59,382)
                                                              ===========    ===========    ===========
(Loss) income per common share (Basic):
  Continuing operations.....................................  $     (0.69)   $      1.57    $     (3.76)
  Discontinued operations...................................        (0.06)          0.99            .35
                                                              -----------    -----------    -----------
         Net (loss) income per Common Share.................  $     (0.75)   $      2.56    $     (3.41)
                                                              ===========    ===========    ===========
Number of shares used in computation........................  22,826,226..    23,040,332     17,433,105
                                                              ===========    ===========    ===========
(Loss) income per common share (Diluted):
  Continuing operations.....................................  $     (0.69)   $      1.56    $     (3.76)
  Discontinued operations...................................        (0.06)          0.99            .35
                                                              -----------    -----------    -----------
         Net (loss) income per Common Share.................  $     (0.75)   $      2.55    $     (3.41)
                                                              ===========    ===========    ===========
Number of shares used in computation........................  22,826,226..    23,072,975     17,433,105
                                                              ===========    ===========    ===========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.
                                        28
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                                           UNEARNED      ACCUMULATED
                                          CLASS B             ADDITIONAL                 COMPENSATION       OTHER
                                         PREFERRED   COMMON    PAID-IN     ACCUMULATED     ON STOCK     COMPREHENSIVE
                                          SHARES     SHARES    CAPITAL       DEFICIT       OPTIONS         INCOME         TOTAL
                                         ---------   ------   ----------   -----------   ------------   -------------   ---------
<S>                                      <C>         <C>      <C>          <C>           <C>            <C>             <C>
Balance, December 31, 1998.............     279         96      550,119      (758,016)       (475)          2,685        (205,312)
  Comprehensive loss:
    Net loss...........................                                       (21,623)                                    (21,623)
    Other comprehensive income:
      Net change in unrealized gain on
        investment securities..........                                                                      (239)           (239)
                                                                                                                        ---------
        Total comprehensive loss.......                                                                                   (21,862)
                                                                                                                        ---------
  Undeclared dividends and accretion on
    redeemable preferred shares........                         (25,830)                                                  (25,830)
  Effect of recapitalization and
    reverse split......................    (279)       137          142                                                        --
  Expenses related to
    recapitalization...................                            (777)                                                     (777)
  Conversion of redeemable preferred
    shares to common shares............                         343,435                                                   343,435
  Effect of purchase of subsidiary's
    preferred stock....................                           1,542                                                     1,542
  Adjustment to unearned compensation
    on stock options...................                             (59)                       59                              --
  Compensation expense on stock option
    grants.............................                             348                        83                             431
  Repurchase of common shares..........                 (1)        (191)                                                     (192)
  Other, net...........................                             (56)                                                      (56)
                                           ----       ----     --------     ---------       -----          ------       ---------
Balance, December 31, 1999.............      --        232      868,673      (779,639)       (333)          2,446          91,379
  Comprehensive income:
    Net income.........................                                        58,929                                      58,929
    Other comprehensive income:
      Net change in unrealized gain on
        investment securities..........                                                                      (175)           (175)
                                                                                                                        ---------
        Total comprehensive income.....                                                                                    58,754
                                                                                                                        ---------
  Compensation expense on stock option
    grants.............................                             906                      (185)                            721
  Adjustment to unearned compensation
    on stock options...................                            (518)                      518                              --
  Repurchase of common shares..........                 (3)      (1,166)                                                   (1,169)
                                           ----       ----     --------     ---------       -----          ------       ---------
Balance, December 31, 2000.............      --        229      867,895      (720,710)         --           2,271         149,685
  Comprehensive loss:
    Net loss...........................                                       (17,184)                                    (17,184)
    Other comprehensive income:
      Net change in unrealized gain on
        investment securities..........                                                                      (296)           (296)
                                                                                                                        ---------
        Total comprehensive loss.......                                                                                   (17,480)
                                                                                                                        ---------
  Adjustment to unearned compensation
    on stock options...................                               2                        (2)                             --
  Compensation expense on stock option
    grants.............................                             930                       (24)                            906
  Effect of acquisition of LTS.........                          15,171                                                    15,171
  Repurchase of common shares..........                 (1)        (272)                                                     (273)
  Distribution of LTS..................                         (19,529)                                                  (19,529)
                                           ----       ----     --------     ---------       -----          ------       ---------
Balance, December 31, 2001.............    $ --       $228     $864,197     $(737,894)      $ (26)         $1,975       $ 128,480
                                           ====       ====     ========     =========       =====          ======       =========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                  Statements.
                                        29
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2001       2000       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
 Net (loss) income..........................................  $(17,184)  $ 58,929   $(21,623)
 (Loss) income from discontinued operations.................     1,483    (22,881)    (6,151)
                                                              --------   --------   --------
   Subtotal.................................................   (15,701)    36,048    (27,774)
                                                              --------   --------   --------
 Adjustments to reconcile net (loss) income to net cash used
   for operating activities:
    Depreciation and amortization...........................     2,353      1,020      2,034
    (Income) loss from joint venture........................        --    (52,421)    16,513
    Provision for loss on long-term investments.............        71      2,808         --
    Gain on sale of assets..................................      (250)      (150)    (4,028)
    Gain on sale of subsidiary stock........................        --         --     (4,256)
    Loss (gain) on sale of real estate and sale or
     liquidation of investments.............................    21,948     (7,271)    (5,940)
    Stock-based compensation expense........................       930        541      2,015
    Other...................................................        --         --      1,745
    Changes in assets and liabilities, net of effects from
     acquisitions and dispositions:
      (Increase) decrease in receivables and other assets...   (14,877)     5,897      7,850
      (Decrease) increase in accounts payable and accrued
      liabilities...........................................    (4,627)     2,255     11,564
                                                              --------   --------   --------
Net cash used for operating activities......................   (10,153)   (11,273)      (277)
                                                              --------   --------   --------
Cash flows from investing activities:
 Sale or maturity of investment securities..................    16,418     58,811     11,197
 Purchase of investment securities..........................   (10,166)   (32,324)   (19,532)
 Sale or liquidation of long-term investments...............     1,133          4      5,810
 Purchase of long-term investments..........................    (5,711)    (2,562)    (7,000)
 Sale of real estate, net of closing costs..................    43,040         --     46,208
 Purchase of and additions to real estate...................    (2,642)    (3,663)   (14,344)
 Sale of other assets.......................................       250        150      5,857
 Sale of subsidiary's stock.................................        --         --      5,137
 Payment of prepetition claims and restructuring accruals...    (3,129)      (376)       (84)
 Decrease (increase) in restricted assets...................       455      1,885     (2,095)
 Cash received in LTS acquisition...........................     8,010         --         --
 Purchase of LTS common stock...............................    (3,945)        --         --
 Cash acquired from joint venture...........................        --        648         --
 Contributions to joint venture.............................        --     (2,573)        --
 Distribution from joint venture............................        --     57,208         --
 Purchase of subsidiary's preferred stock...................        --         --     (1,509)
 Other, net.................................................        --         --       (155)
                                                              --------   --------   --------
Net cash provided from investing activities.................    43,713     77,208     29,490
                                                              --------   --------   --------
Cash flows from financing activities:
 Proceeds from participating loan...........................     2,981        663     11,575
 (Decrease) increase in margin loans payable................    (4,675)     3,692    (12,105)
 Repayment of note receivable to related party..............        --         --        950
 Payment of long-term notes and other liabilities...........   (26,283)      (284)   (57,636)
 Increase in long-term borrowings...........................     9,524         --     19,898
 Distributions by Western Realty Development................      (324)        --         --
 Deferred financing costs...................................      (377)        --         --
 Expenses associated with recapitalization..................        --         --       (777)
 Repurchase of common shares................................      (274)    (1,190)      (194)
 Cash impact of LTS distribution............................    (8,136)        --         --
 Other, net.................................................        --         --       (120)
                                                              --------   --------   --------
Net cash (used for) provided from financing activities......   (27,564)     2,881    (38,409)
                                                              --------   --------   --------
Net cash provided from discontinued operations..............     4,006      1,739      4,264
                                                              --------   --------   --------
Net increase (decrease) in cash and cash equivalents........    10,002     70,555     (4,932)
Cash and cash equivalents, beginning of year................    82,067     11,512     16,444
                                                              --------   --------   --------
Cash and cash equivalents, end of year......................  $ 92,069   $ 82,067   $ 11,512
                                                              ========   ========   ========
Supplemental cash flow information:
 Cash paid during the year for:
   Interest.................................................  $  2,730   $  1,590   $  3,328
   Income taxes.............................................       123      1,037      1,857
Detail of acquisition of interest in consolidated joint
 venture:
 Historical value of assets acquired........................  $     --   $ 79,644   $     --
 Liabilities acquired.......................................        --     13,314         --
 Capital acquired...........................................        --     66,978         --
                                                              --------   --------   --------
 Net cash held by joint venture.............................  $     --   $    648   $     --
                                                              ========   ========   ========
Detail of acquisitions:
 Assets acquired, including cash............................  $ 62,024   $     --   $     --
 Liabilities assumed, including minority interest...........   (60,014)        --         --
 Increase to paid in capital................................   (15,171)        --         --
                                                              --------   --------   --------
 Cash received..............................................    13,161         --         --
 Less cash received associated with discontinued
   operations...............................................     5,151         --         --
                                                              --------   --------   --------
 Net cash received in acquisitions..........................  $  8,010   $     --   $     --
                                                              ========   ========   ========
Detail of distributions:
 Assets distributed.........................................  $(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 of distributed subsidiary.........................  $ (8,136)  $     --   $     --
                                                              ========   ========   ========
</Table>

  The accompanying notes are an integral part of these Consolidated Financial
                                   Statements
                                        30
<PAGE>

                    NEW VALLEY CORPORATION AND SUBSIDIARIES

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

1.  BASIS OF PRESENTATION

  Principles of Consolidation

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

  Nature of Operations

     The Company is currently engaged in the real estate business through its
New Valley Realty division and is seeking to acquire additional operating
companies. In December 2001, New Valley determined to sell certain of its
remaining real estate holdings and 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 since 1995, are treated as discontinued
operations in the consolidated financial statements. As a result of the
foregoing, the statement of operations has been reformatted and certain prior
year amounts have been reclassified to conform to current year presentation.

     Following the recent distribution of the LTS shares and asset dispositions
in Russia the business strategy of New Valley is to continue to operate its real
estate business and to acquire operating businesses through merger, purchase of
assets, stock acquisition or other means, or to acquire control of operating
companies through one of such means, with the purpose of being primarily engaged
in a business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities. In the interim, New Valley's cash and
investment securities (aggregating $112,971 at December 31, 2001) are available
for general corporate purposes, including for acquisition purposes. Pending any
use of these funds in the real estate business or for acquisitions, New Valley's
liquid assets have been invested consistent with the preservation of their
value.

     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". New Valley, which is now above
this threshold following the distribution of LTS and asset dispositions in
Russia, has been relying since December 2001 on the one-year exemption from
registration under the Investment Company Act provided by Rule 3a-2. New Valley
will attempt to be engaged, within the one-year period prescribed by Rule 3a-2,
primarily in a business or businesses other than that of investing, reinvesting,
owning, holding or trading in securities. If the Company 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 also be prohibited from issuing convertible
securities and options and would be subject to limitations on leverage.

  Plan of Recapitalization

     On June 4, 1999, the Company consummated a plan of recapitalization
following approval by the Company's stockholders. Under the recapitalization
plan, each of the Company's Class A Senior Preferred Shares was reclassified and
changed into 20 Common Shares and one Warrant to purchase Common Shares. Each of
the Class B Preferred Shares was reclassified and changed into one-third of a
Common Share and five Warrants. Each outstanding Common Share was reclassified
and changed into one-tenth of a Common Share and three-tenths of a Warrant. The
authorized number of Common Shares was reduced from 850,000,000 to 100,000,000.
The Warrants issued as part of the recapitalization plan have an initial
exercise price of $12.50

                                        31
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

per share subject to adjustment in certain circumstances and are exercisable
until June 14, 2004. The Warrants are not callable by the Company for a
three-year period.

     The recapitalization had a significant effect on the Company'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, the Company's stockholders' equity increased by $343,435 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
the Company, as well as the redemption obligation for the Series 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. In addition, Vector Group
Ltd. ("Vector"), the Company'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, 2001, Vector owned 56.3% of the Company'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 bankruptcy plan, 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, 2001, the Company's remaining accruals totaled $2,700 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 by the Company's
management based on the intrinsic value of the warrants discounted for such
restrictions. For cash and cash equivalents, restricted assets, receivable from
clearing brokers 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 trading, available for sale or held to
maturity. Trading securities are carried at fair value, with unrealized gains
and losses included in income. 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
                                        32
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

classified as held to maturity are carried at amortized cost. Realized gains and
losses are included in other income. The cost of securities sold is determined
based on average cost.

     Restricted Assets.  Restricted assets at December 31, 2001 consisted
primarily of $16,856 held in escrow by the United States District Court of New
Jersey in connection with a settlement of a lawsuit (see Note 16), which cash
was released to the Company in March 2002. Restricted assets at December 31,
2000 consisted primarily of $2,598 pledged as collateral for a $2,500 letter of
credit, which was used as collateral for a long-term lease of commercial office
space by Ladenburg Thalmann & Co. Inc. ("Ladenburg Thalmann").

     Property and Equipment.  Shopping centers are depreciated over periods
approximating 25 years, the estimated useful life, using the straight-line
method. Office buildings were depreciated over periods approximating 40 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.

     Securities Sold, Not Yet Purchased.  Securities sold, not yet purchased
represent obligations of the Company to deliver a specified security at a
contracted price and thereby create a liability to repurchase the security in
the market at prevailing prices. Accordingly, these transactions involve, to
varying degrees, elements of market risk, as the Company's ultimate obligation
to satisfy the sale of securities sold, not yet purchased may exceed the amount
recognized in the consolidated balance sheet.

     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.

     Basic Income (Loss) Per Common Share.  Basic net income (loss) per common
share is based on the weighted average number of Common Shares outstanding. For
1999, net income (loss) per common share represents net income (loss) after
dividend requirements on redeemable and non-redeemable preferred shares
(undeclared) and any adjustment for the difference between excess of carrying
value of redeemable preferred shares over the cost of the shares purchased.

     Diluted Income (Loss) Per Common Share.  Diluted net income (loss) per
common share assuming full dilution is based on the weighted average number of
Common Shares outstanding plus the additional common shares resulting from the
exercise of stock options and warrants if such exercise was dilutive. Options
and warrants to purchase Common Shares were not included in the computation of
diluted loss per share in 2001 and 1999 as the effect would have been
anti-dilutive.

     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

                                        33
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. New
Valley adopted SFAS No. 133 on January 1, 2001, the effect of which did not have
a material impact on its balance sheet.

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative
goodwill to be written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001, and SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
Amortization expense related to goodwill included in loss from continuing
operations was $279 for the year ended December 31, 2001.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company is currently
assessing the impact, if any, of the adoption of this statement.

3.  INVESTMENT IN REAL ESTATE AND NOTES PAYABLE

     The components of the Company's investment in real estate and the related
non-recourse notes payable collateralized by such real estate at December 31,
2001 and 2000 are as follows:

<Table>
<Caption>
                                                            DECEMBER 31, 2001
                                               --------------------------------------------
                                                            WESTERN     WESTERN
                                               SHOPPING     REALTY       REALTY
                                               CENTERS    DEVELOPMENT    REPIN      TOTAL
                                               --------   -----------   --------   --------
<S>                                            <C>        <C>           <C>        <C>
Land.........................................  $ 2,510     $     --     $     --   $  2,510
Buildings....................................   11,198           --           --     11,198
Kremlin sites................................       --           --       37,427     37,427
Participating loan...........................       --           --      (38,406)   (38,406)
                                               -------     --------     --------   --------
          Total..............................   13,708           --         (979)    12,729
Less accumulated depreciation................   (2,148)          --           --     (2,148)
                                               -------     --------     --------   --------
  Net investment in real estate..............  $11,560     $     --     $   (979)  $ 10,581
                                               =======     ========     ========   ========
Notes payable................................  $11,226           --           --   $ 11,226
Current portion of notes payable.............       84           --           --         84
                                               -------     --------     --------   --------
Notes payable -- long-term portion...........  $11,142     $     --     $     --   $ 11,142
                                               =======     ========     ========   ========
</Table>

                                        34
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                            DECEMBER 31, 2000
                                               --------------------------------------------
                                                            WESTERN     WESTERN
                                               SHOPPING     REALTY       REALTY
                                               CENTERS    DEVELOPMENT    REPIN      TOTAL
                                               --------   -----------   --------   --------
<S>                                            <C>        <C>           <C>        <C>
Land.........................................  $ 4,543     $ 16,920     $     --   $ 21,463
Buildings....................................   19,052       65,135           --     84,187
Kremlin sites................................       --           --       35,665     35,665
Participating loan...........................       --           --      (36,127)   (36,127)
                                               -------     --------     --------   --------
          Total..............................   23,595       82,055         (462)   105,188
Less accumulated depreciation................   (3,265)      (5,696)          --     (8,961)
                                               -------     --------     --------   --------
  Net investment in real estate..............  $20,330     $ 76,359     $   (462)  $ 96,227
                                               =======     ========     ========   ========
Notes payable................................  $19,529     $  8,187           --   $ 27,716
Current portion of notes payable.............    8,303        7,513           --     15,816
                                               -------     --------     --------   --------
Notes payable -- long-term portion...........  $11,226     $    674     $     --   $ 11,900
                                               =======     ========     ========   ========
</Table>

  Shopping Centers

     The Company's investment in shopping centers and related notes payable
consists of its Kanawha, West Virginia center at December 31, 2001 and the
Kanawha center and the Royal Palm Beach, Florida center at December 31, 2000.

     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. Notes payable relating to the
shopping center with a balance of $8,226 at December 31, 2000 were repaid upon
closing.

     In August 1999, the Company sold five shopping centers for an aggregate
purchase price of $46,125 before closing adjustments and expenses. The shopping
centers were subject to approximately $35,023 of mortgage financing, which was
assumed by the purchasers at closing. In connection with the transaction, the
Company recorded a gain of $3,828 associated with the transaction.

     In connection with the sale of five shopping centers in August 1999, the
Company refinanced the notes payable on its remaining shopping center in
Kanawha, West Virginia and transferred the Kanawha shopping center to a 99.0%
owned limited liability company. The Kanawha, West Virginia shopping center is
now subject to a $6,837 senior mortgage note due September 2024 which bears
interest at 9.03% per annum for the first seven years and at floating rates
thereafter (or 11.03% per annum if the loan is still in a securitization) and a
$4,388 subordinated note due September 2006 which bears interest at 9.0% per
annum. The financing on the shopping center is non-recourse to the Company,
except for misappropriations of insurance and other proceeds, failures to apply
rent and other income to required maintenance and taxes, environmental
liabilities and certain other matters. New Valley is in negotiations to dispose
of the Kanawha shopping center.

  Russian Real Estate

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

                                        35
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Western Realty Development has three classes of equity: Class A interests,
representing 30% of the ownership of Western Realty Development, and Class B and
Class C interests, which collectively represent 70% of the ownership of Western
Realty Development. Prior to December 29, 2000, Apollo owned the Class A
interests, New Valley owned the Class B interests and BrookeMil owned the Class
C interests. On December 29, 2000, WRD Holding Corporation, a wholly-owned
subsidiary of New Valley, purchased for $4,000 29/30ths of the Class A Interests
of Western Realty Development previously held by Apollo. WRD Holding paid the
purchase price of $4,000 with a promissory note due November 30, 2005. The note,
which is secured by a pledge of the purchased Class A interests, bears interest
at a rate of 7% per annum, compounded annually. The outstanding principal
balances of the note, which were classified in other long-term liabilities in
the consolidated balance sheets at December 31, 2001 and 2000, were $290 and
$19,968, respectively.

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

     Prior to December 29, 2000, the ownership and voting interests in Western
Realty Development were held equally by Apollo and the Company. Apollo was
entitled to a preference on distributions of cash from Western Realty
Development to the extent of its investment commitment of $43,750, of which
$42,574 had been funded, $41,266 was returned in connection with the sale of
Western Tobacco Investments LLC ("Western Tobacco Investments") (discussed
below) and $1,308 was outstanding as of December 31, 2000, together with a 15%
annual rate of return. The Company was then entitled to a return of its
investment commitment of $23,750, of which $22,574 was funded, $21,266 was
returned in connection with the sale of Western Tobacco Investments and $1,308
was outstanding as of December 31, 2000, together with a 15% annual rate of
return. Subsequent distributions were made 70% to the Company and 30% to Apollo.
Prior to December 29, 2000, the Company accounted for its interest in Western
Realty Development using the equity method of accounting and recognized losses
incurred by Western Realty Development to the extent that cumulative earnings of
Western Realty Development were not sufficient to satisfy Apollo's preferred
return.

     Summarized financial information for the period from January 1, 2000 to
December 29, 2000 and the year ended December 31, 1999 for Western Realty
Development follows:

<Table>
<Caption>
                                                       JANUARY 1, 2000 TO      YEAR ENDED
                                                       DECEMBER 29, 2000    DECEMBER 31, 1999
                                                       ------------------   -----------------
<S>                                                    <C>                  <C>
Revenues.............................................       $ 9,782              $11,537
Costs and expenses...................................         8,678               15,708
Real estate impairment charge........................            --               11,561
Accretion of return on participating loan............         3,460                5,858
Gain on sale of Western Tobacco Investments..........        84,417                   --
Income tax expense...................................           207                   --
                                                            -------              -------
Net income (loss)....................................       $88,774              $(9,874)
                                                            =======              =======
</Table>

     The Company recorded its initial basis in the investment in the joint
venture in the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying value of
the investment and the Company's proportionate interest in the underlying value
of net assets of the joint venture.

     Western Realty Development made a $30,000 participating loan to, and
payable out of a 30% profits interest in, Western Tobacco Investments, which
held the interests of Brooke (Overseas) Ltd. ("Brooke (Overseas)"), a
wholly-owned subsidiary of Vector, in Liggett-Ducat Ltd. As a result of the sale
of Western Tobacco Investments, Western Realty Development was entitled to
receive the return of all amounts
                                        36
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

advanced on the loan, together with a 15% annual rate of return, and 30% of
subsequent distributions. Western Realty Development recognized income of $3,460
and $5,858, which represented the 15% return on the loan plus 30% of any net
income applicable to common interests of Western Tobacco Investments, for the
years ended December 31, 2000 and 1999. The loan, together with the 15% annual
rate of return thereon, was repaid and terminated in connection with the sale of
Western Tobacco Investments in August 2000.

     In August 2000, Vector completed the sale of Western Tobacco Investments to
Gallaher Group Plc for $334,100 in cash and $64,400 of assumed debt and capital
commitments. The cash proceeds from the transaction after estimated closing
expenses were divided among Vector and Western Realty Development in accordance
with the participating loan, which was terminated at the closing. Through their
investments in Western Realty Development, the Company received $57,358 in cash
proceeds from the sale and Apollo received $68,402. The Company recorded a gain
of $52,512 in connection with the transaction during the year ended December 31,
2000.

     In 1999, Western Realty Development determined a permanent impairment had
occurred related to economic difficulties in the Russian economy following the
financial crisis of August 1998. Based on an appraisal conducted by an
independent third party, Western Realty Development recorded an impairment
charge for the year ended December 31, 1999 of $11,561 associated with its
investment in the site for the proposed Ducat Place III office building and
related goodwill. The fair market value was determined based on current market
conditions and anticipated future discounted cash flows. Management had
concluded that the Ducat Place III site had a fair value of $16,000 at December
31, 1999.

     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 $21,000, and Apollo received approximately $9,000. These amounts
are subject to adjustment based on final closing expenses. New Valley recorded a
loss of $21,842 in connection with the sale in 2001.

  Western Realty Repin LLC

     In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a loan to BrookeMil. The proceeds of the loan
have been used by BrookeMil for the acquisition and preliminary development of
two adjoining sites totaling 10.25 acres located in Moscow across the Moscow
River from the Kremlin. The Kremlin Sites were planned for development as a
residential and hotel complex subject to market conditions and the availability
of financing. BrookeMil owned 100% of both sites at December 31, 2001.

     Western Realty Repin has three classes of equity: Class A Interests, of
which $18,750 were outstanding at December 31, 2000 and are owned by Apollo;
Class B Interests, of which $6,250 were outstanding at December 31, 2000 and are
owned by New Valley; and Class C Interests, of which Apollo had subscribed for
$10,781 ($10,769 funded) and New Valley had subscribed for $6,468 ($6,461
funded) at December 31, 2001. Apollo and New Valley are entitled to receive on a
pro-rata basis an amount equal to each party's investment in Class C interests,
together with a 20% annual return. After the distributions to the Class C
interests have been made, Apollo will be entitled to a preference on
distributions of cash from Western Realty Repin to the extent of its investment
of $18,750 in Class A interests, together with a 20% annual rate of return. The
Company will then be entitled to a return of its investment of $6,250 in Class B
interests, together with a 20% annual rate of return. Subsequent distributions
will be made 50% to the Company and 50% to Apollo.

     Through December 31, 2001, Western Realty Repin had advanced $42,230 to
BrookeMil, of which $29,519 was funded by Apollo. The loan bears no fixed
interest and is payable only out of distributions by the

                                        37
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

entities owning the Kremlin sites to BrookeMil. Such distributions must be
applied first to pay the principal of the loan and then as contingent
participating interest on the loan. Any rights of payment on the loan are
subordinate to the rights of all other creditors of BrookeMil. BrookeMil used a
portion of the proceeds of the loan to repay the Company for certain
expenditures on the Kremlin sites previously incurred. The loan is due and
payable upon the dissolution of BrookeMil and is collateralized by a pledge of
the Company's shares of BrookeMil.

     As of December 31, 2001 and 2000, BrookeMil had invested $37,427 and
$35,665, respectively, in the Kremlin sites. The amounts were classified, net of
participating loan payable of $38,406 and $36,127 at December 31, 2001 and 2000,
respectively, as "Investment in real estate, net" in the consolidated balance
sheet. In connection with the acquisition of a 34.8% interest in one of the
Kremlin sites, BrookeMil agreed with the City of Moscow to invest an additional
$22,000 by May 2000 in the development of the property. In April 2000, Western
Realty Repin arranged short-term financing to fund the investment. Under the
terms of the investment, BrookeMil is required to utilize such financing amount
to make construction expenditures on the site by June 2002, however, BrookeMil
is seeking an extension of that date. Failure to make the expenditures could
result in forfeiture of the 34.8% interest in the site.

     New Valley has engaged in discussions to sell the Kremlin sites. However,
in light of the recent economic turmoil in Russia, no assurance can be given
that the Kremlin sites will be sold. At December 31, 2001, pursuant to the terms
of the participating loan, New Valley would receive 37.5% of the first $24,687
from a disposition of the Kremlin sites with the remaining 62.5% payable to
Apollo, which is thereafter generally entitled to the remainder of proceeds.

     In connection with the sale of Western Tobacco Investments, Gallaher also
agreed to purchase for $1,500 from a subsidiary of BrookeMil additional land
adjacent to the Liggett-Ducat manufacturing facility outside Moscow, Russia.
Closing of the sale occurred in the fourth quarter of 2001 following
satisfaction of various regulatory requirements.

4.  INVESTMENT SECURITIES AVAILABLE FOR SALE

     Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a separate component of
stockholders' equity. The Company had net unrealized gains on investment
securities available for sale of $1,975 and $2,271 at December 31, 2001 and
2000, respectively.

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

<Table>
<Caption>
                                                              GROSS        GROSS
                                                            UNREALIZED   UNREALIZED    FAIR
                                                   COST        GAIN         LOSS       VALUE
                                                  -------   ----------   ----------   -------
<S>                                               <C>       <C>          <C>          <C>
2001
Marketable equity securities....................  $18,927     $1,933       $2,835     $18,025
Marketable warrants.............................       --      2,877           --       2,877
                                                  -------     ------       ------     -------
Investment securities...........................  $18,927     $4,810       $2,835     $20,902
                                                  =======     ======       ======     =======
2000
Marketable equity securities....................  $24,010     $  411       $4,096     $20,325
Marketable debt securities......................    3,050         --           --       3,050
Marketable warrants.............................       --      5,956           --       5,956
                                                  -------     ------       ------     -------
Investment securities...........................  $27,060     $6,367       $4,096     $29,331
                                                  =======     ======       ======     =======
</Table>

                                        38
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.  TRADING SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

     The components of trading securities owned and securities sold, not yet
purchased, which were held at Ladenburg Thalmann were as follows:

<Table>
<Caption>
                                                                   DECEMBER 31, 2000
                                                              ---------------------------
                                                               TRADING       SECURITIES
                                                              SECURITIES    SOLD, NOT YET
                                                                OWNED         PURCHASED
                                                              ----------    -------------
<S>                                                           <C>           <C>
Common stock................................................   $14,671         $3,170
Equity and index options....................................       768            149
Other.......................................................     2,909            251
                                                               -------         ------
                                                               $18,348         $3,570
                                                               =======         ======
</Table>

6.  LONG-TERM INVESTMENTS

     Long-term investments consisted of investments in the following:

<Table>
<Caption>
                                                 DECEMBER 31, 2001     DECEMBER 31, 2000
                                                -------------------   -------------------
                                                CARRYING     FAIR     CARRYING     FAIR
                                                 VALUE       VALUE     VALUE       VALUE
                                                --------    -------   --------    -------
<S>                                             <C>         <C>       <C>         <C>
Limited partnerships..........................  $10,044     $16,882    $4,654     $10,493
</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 an investor in real estate partnerships where it is
required to make additional investments of up to an aggregate of $8,300 at
December 31, 2001. In addition, the investments in limited partnerships are
illiquid, and the ultimate realization of these investments is subject to the
performance of the underlying partnership and its management by the general
partners.

     The Company recognized gains of $883, $0 and $659 on liquidations of
investments of certain limited partnerships for the years ended December 31,
2001, 2000 and 1999, respectively. During 2001 and 2000, the Company determined
that a permanent impairment in the value of its investments in various online
businesses had occurred and, accordingly, $71 and $2,808, respectively, was
provided as an impairment charge.

7.  PENSIONS AND RETIREE BENEFITS

     The Company maintains 401(k) plans for substantially all employees. These
401(k) plans allow eligible employees to invest a percentage of their pre-tax
compensation. The Company did not make discretionary contributions to these
401(k) plans in 2001, 2000 and 1999.

                                        39
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  COMMITMENT AND CONTINGENCIES

  Leases

     The Company is currently obligated under a noncancelable lease agreement
for office space, expiring in May 2003. The following is a schedule by fiscal
year of future minimum rental payments required under the agreements that have
noncancelable terms of one year or more at December 31, 2001:

<Table>
<S>                                                           <C>
2002........................................................  $320
2003........................................................   136
2004 and thereafter.........................................    --
                                                              ----
          Total.............................................  $456
                                                              ====
</Table>

     Rental expense for operating leases was $434 in 2001, $763 in 2000 and $804
in 1999.

  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, the Company's
principal stockholder, 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), 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 alleges, among other things, that the consideration
paid by the Company for the BrookeMil shares was excessive, unfair and wasteful,
that the special committee of the Company's board lacked independence, and that
the appraisal and fairness opinion were flawed. By order of the court, both
actions were consolidated. In January 2001, the court denied a motion to dismiss
the consolidated action. Brooke Group Holding and the Company believe that the
allegations in the case are without merit. Discovery in the case has commenced.

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

     Although there can be no assurances, in the opinion of management, after
consultation with counsel, the ultimate resolution of these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.

     As of December 31, 2001, New Valley had $2,700 of prepetition
bankruptcy-related claims and restructuring accruals including claims for lease
rejection damages and for unclaimed monies that certain states are seeking on
behalf of money transfer customers. The remaining claims may be subject to
future adjustments based on potential settlements or decisions of the court.

                                        40
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Russian Operations

     Russian taxation is subject to varying interpretations and constant
changes. Furthermore, the interpretation of tax legislation by tax authorities
as applied to the transactions and activity of the Company may not coincide with
that of management. As a result, transactions may be challenged by tax
authorities and the Company may be assessed additional taxes, penalties and
interest, which can be significant.

     Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and from
time to time potential exposures are identified. At any point in time a number
of open matters may exist, however, management believes that adequate provision
has been made for all material liabilities. Tax years remain open to review by
the authorities for three years.

9.  FEDERAL INCOME TAX

     At December 31, 2001 the Company had $78,816 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, 2001, 2000 and 1999, 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>
                                                            2001      2000       1999
                                                          --------   -------   --------
<S>                                                       <C>        <C>       <C>
(Loss) income from continuing operations................  $(15,591)  $41,134   $(25,643)
                                                          --------   -------   --------
Provision (benefit) under statutory U.S. tax rates......    (5,457)   14,397     (8,975)
Increase in taxes resulting from:
  Nontaxable items......................................       944     3,520      2,608
  State taxes, net of Federal benefit...................        33     2,138         39
  Foreign taxes.........................................       227        --         17
  Distribution of LTS...................................     7,233        --         --
(Decrease) increase in valuation reserve, net of tax
  audit adjustments.....................................    (2,720)  (19,971)     6,391
                                                          --------   -------   --------
     Income tax provision...............................  $    260   $    84   $     80
                                                          ========   =======   ========
</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.

                                        41
<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>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforward:
     Restricted net operating loss..........................  $  3,113   $  6,225
     Unrestricted net operating loss........................    46,418     35,657
  Other.....................................................    30,220     43,136
                                                              --------   --------
          Total deferred tax assets.........................    79,751     85,018
                                                              --------   --------
Deferred tax liabilities:
  Other.....................................................      (794)    (2,875)
                                                              --------   --------
          Total deferred tax liabilities....................      (794)    (2,875)
                                                              --------   --------
Net deferred tax assets.....................................    78,957     82,143
Valuation allowance.........................................   (78,957)   (81,677)
                                                              --------   --------
Net deferred taxes..........................................  $     --   $    466
                                                              ========   ========
</Table>

     In December 1987, the Company consummated various restructuring
transactions that included changes in the ownership of the Company's stock. The
Internal Revenue Code restricts the amount of future income that may be offset
by losses and credits incurred prior to an ownership change. The Company's
annual limitation on the use of its net operating losses is approximately
$7,700, computed by multiplying the "long-term tax exempt rate" at the time of
change of ownership by the fair market value of the Company's outstanding stock
immediately before the ownership change. The limitation is cumulative; any
unused limitation from one year may be added to the limitation of a following
year. Operating losses incurred subsequent to an ownership change are generally
not subject to such restrictions.

     The Company has concluded audits with the Internal Revenue Service through
December 31, 1997. The Company believes it has adequately reserved for any
potential adjustments, which may occur in future years.

     As of December 31, 2001, the Company had consolidated net operating loss
carryforwards of approximately $123,000 for tax purposes, which expire at
various dates from 2002 through 2008. Approximately $7,743 of net operating loss
carryforwards constituted pre-change losses and $115,257 of net operating losses
were unrestricted.

10.  OTHER LONG-TERM LIABILITIES

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

<Table>
<Caption>
                                                  DECEMBER 31, 2001      DECEMBER 31, 2000
                                                 --------------------   --------------------
                                                   LONG-                  LONG-
                                                   TERM       CURRENT     TERM       CURRENT
                                                  PORTION     PORTION    PORTION     PORTION
                                                 ---------    -------   ---------    -------
<S>                                              <C>          <C>       <C>          <C>
Retiree and disability obligations.............   $3,277       $500      $ 3,533      $500
Minority interests.............................       10         --        6,322        --
Note payable for Western Realty Development
  Class A interests............................      290         --       19,968        --
Other long-term liabilities....................       62         --          666        --
                                                  ------       ----      -------      ----
          Total other long-term liabilities....   $3,639       $500      $30,489      $500
                                                  ======       ====      =======      ====
</Table>

                                        42
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11.  PREFERRED SHARES

     In connection with the Company's recapitalization in June 1999, each of the
Company's Class A Senior Preferred Shares was reclassified into 20 Common Shares
and one Warrant to purchase Common Shares and each of the Company's Class B
Preferred Shares was reclassified into one-third of a Common Share and five
Warrants to purchase Common Shares.

     Prior to the recapitalization, the holders of Class A Senior Preferred
Shares were entitled to receive a quarterly dividend, as declared by the Board,
payable at the rate of $19.00 per annum. The Class A Senior Preferred Shares
were mandatorily redeemable on January 1, 2003 at $100 per share plus accrued
dividends. The Company reflected dividend arrearages on such shares of $25,829
in the consolidated statement of operations for the year ended December 31,
1999.

     Prior to the plan of recapitalization, the holders of the Class B Preferred
Shares were entitled to receive a quarterly dividend, as declared by the Board
of Directors, at a rate of $3.00 per annum. Undeclared dividends were accrued
quarterly at a rate of 12% per annum, and such accrued and unpaid dividends
accrued additional dividends, compounded monthly at the rate of 12% per annum.
The Company reflected dividend arrearages on such shares of $11,930 in the
consolidated statement of operations for the year ended December 31, 1999.

12.  WARRANTS

     As of December 31, 2001 and 2000, there were 17,867,566 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. The Company may redeem the warrants
for $0.01 per warrant on 30 days' notice to the holders if, any time after June
4, 2002, the average reported closing price or bid price of a Common Share
exceeds $12.50 for any 20 consecutive trading days ending within five days
before the date of such notice. The warrants may instead be exercised following
such notice and before redemption.

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

     Subsequent to 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 common stock on December 20, 2001. The current market price
was determined based on the average daily closing prices for a share of
Ladenburg 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

                                        43
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. The recipients of the
options were approximately 100 employees of Ladenburg Thalmann. On October 27,
2000, the Company granted an additional 28,266 of stock options to two employees
of Ladenburg Thalmann. 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 have terms of between seven and ten years and vest 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 terminated 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

     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
plan of recapitalization. These options may be exercised on or prior to July 1,
2006 and vest one-sixth on July 1, 1997 and one-sixth on each of the five
succeeding anniversaries thereof through July 1, 2002.

  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.

                                        44
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Summary

     A summary of stock options granted to employees follows. The summary of
Vector options include only option grants to the Company's employees who were
not also employees of Vector at the time of the grant.

  New Valley

<Table>
<Caption>
                                                                                         WEIGHTED
                                                            NUMBER OF      EXERCISE      AVERAGE
                                                             SHARES         PRICE       FAIR VALUE
                                                            ---------   --------------  ----------
<S>                                                         <C>         <C>             <C>
Outstanding on December 31, 1998..........................    330,000       $5.80         $27.15
  Granted.................................................          0
  Exercised...............................................          0
  Net impact of recapitalization..........................   (264,667)
  Cancelled...............................................          0
                                                            ---------
Outstanding on December 31, 1999..........................     65,333    $5.55-$5.80      $27.15
  Granted.................................................  1,264,565   $3.875-$4.6875    $ 2.60
  Exercised...............................................          0
  Cancelled...............................................    (58,810)
                                                            ---------
Outstanding on December 31, 2000..........................  1,271,088    $3.875-$5.80     $ 3.86
  Granted.................................................     20,000       $3.57         $ 2.61
  Exercised...............................................          0
  Cancelled...............................................   (959,475)
                                                            ---------
Outstanding on December 31, 2001..........................    331,613   $3.57 - $5.80     $ 7.50
                                                            =========
Options exercisable at:
  December 31, 1999.......................................     32,667
  December 31, 2000.......................................    234,720
  December 31, 2001.......................................    300,724
</Table>

  Vector

<Table>
<Caption>
                                                                                      WEIGHTED
                                                              NUMBER OF   EXERCISE    AVERAGE
                                                               SHARES      PRICE     FAIR VALUE
                                                              ---------   --------   ----------
<S>                                                           <C>         <C>        <C>
Outstanding on December 31, 1998............................         0     $15.44      $12.39
  Granted...................................................   545,000
  Exercised.................................................         0
  Cancelled.................................................         0
                                                               -------
Outstanding on December 31, 1999............................   545,000     $15.44      $12.39
  Granted...................................................         0
  Adjustment for stock dividend.............................    27,250
  Exercised.................................................         0
  Cancelled.................................................         0
                                                               -------
Outstanding on December 31, 2000............................   572,250     $14.70      $11.80
  Adjustment for stock dividend.............................    28,613
  Exercised.................................................         0
  Cancelled.................................................         0
                                                               -------
Outstanding on December 31, 2001............................   600,863     $14.00      $11.23
                                                               =======
</Table>

     None of the Vector options were exercisable at December 31, 2001, 2000 and
1999.

                                        45
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

     The Company will continue to account for stock options granted employees at
their intrinsic value. 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>
                                                            2001      2000       1999
                                                          --------   -------   --------
<S>                                                       <C>        <C>       <C>
Net (loss) income applicable to Common Shares, as
  reported..............................................  $(17,184)  $54,529   $(59,382)
Estimated fair value of New Valley option grants........      (926)   (1,394)      (316)
Estimated fair value of Vector option grants............      (761)   (1,351)      (117)
                                                          --------   -------   --------
Net (loss) income applicable to Common Shares, as
  adjusted..............................................  $(18,871)  $51,784   $(59,815)
                                                          ========   =======   ========
Adjusted net (loss) income per share - basic and
  diluted...............................................  $  (0.83)  $  2.24   $  (3.43)
                                                          ========   =======   ========
</Table>

     The fair value of option grants to employees is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions for options granted. The estimated dividend yield is 0% and no
forfeitures are assumed.

<Table>
<Caption>
                                                   RISK-FREE       EXPECTED       EXPECTED    WEIGHTED AVERAGE
                     DATE                        INTEREST RATE   LIFE IN YEARS   VOLATILITY      FAIR VALUE
                     ----                        -------------   -------------   ----------   ----------------
<S>                                              <C>             <C>             <C>          <C>
New Valley
June 4, 2001...................................      5.34%            10            58.12%         $2.61
October 27, 2000...............................      5.79%            10            54.74%         $2.78
March 22, 2000.................................      6.40%            10            44.45%         $2.57
January 19, 2000...............................      6.69%            10            47.92%         $3.24
Vector
November 4, 1999...............................      5.60%            10            69.67%         $11.80
</Table>

14.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              ------    -------
<S>                                                           <C>       <C>
Accounts payable and accrued liabilities:
  Accrued compensation......................................  $  650    $ 7,841
  Deferred rent.............................................      --      5,724
  Unearned revenues.........................................      --      1,989
  Taxes.....................................................      65        829
  Accrued expenses and other liabilities....................   6,859     10,618
                                                              ------    -------
          Total.............................................  $7,574    $27,001
                                                              ======    =======
</Table>

                                        46
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15.  PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

     The following is a schedule of prepetition claims and restructuring
accruals at December 31, 2001 and 2000. The remaining prepetition claims may be
subject to future adjustments depending on pending discussions with the various
parties and the decisions of the bankruptcy court.

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              ------    -------
<S>                                                           <C>       <C>
Restructuring accruals(a)...................................  $  700    $ 5,950
Money transfer payable(b)...................................   2,000      4,279
                                                              ------    -------
          Total.............................................  $2,700    $10,229
                                                              ======    =======
</Table>

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

(a) Restructuring accruals at December 31, 2001 consisted of $600 of disputed
    claims, primarily related to former employee benefits, and $100 of other
    restructuring accruals. Restructuring accruals at December 31, 2000
    consisted of $5,700 of disputed claims, primarily related to leases and
    former employee benefits, and $250 of other restructuring accruals.
(b) Represents unclaimed money transfers issued by the Company prior to January
    1, 1990. The Company is currently in litigation in the bankruptcy court
    seeking a determination that these monies are not an obligation of the
    Company. There can be no assurance as to the outcome of the litigation.

16.  LAWSUIT SETTLEMENT

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

17.  RELATED PARTY TRANSACTIONS

     At December 31, 2001, Vector, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, owned approximately 56.3%
of the Company's Common Shares. Several of the other officers and directors of
the Company are also affiliated with Vector. In 1995, the Company signed an
expense sharing agreement with Vector pursuant to which certain lease, legal and
administrative expenses are allocated to the entity incurring the expense. The
Company expensed approximately $482 in 2001, $344 in 2000 and $307 in 1999 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.

     A director of the Company serves as a managing director of an investment
bank that provided services to the Company in 1999 in connection with the sale
of an interest in Ladenburg Thalmann to Berliner Effektengesellschaft AG
("Berliner"). The Company paid this firm a fee of $254 in cash and 8,816
Berliner shares in connection with such services. During 2000, the investment
bank provided services to Brooke (Overseas) in connection with the sale of
Western Tobacco Investments. Brooke (Overseas) paid this firm $750 in connection
with such services. An executive officer and director of the Company is a
shareholder and registered representative in a broker-dealer to which the
Company paid $12 in 2001, $101 in 2000 and $59 in

                                        47
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999 in brokerage commissions and other income. The broker-dealer, in the
ordinary course of its business, has engaged in brokerage activities with
Ladenburg Thalmann on customary terms.

18.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<Table>
<Caption>
                                                         DECEMBER 31, 2001     DECEMBER 31, 2000
                                                        -------------------   -------------------
                                                        CARRYING     FAIR     CARRYING     FAIR
                                                         AMOUNT      VALUE     AMOUNT      VALUE
                                                        --------    -------   --------    -------
<S>                                                     <C>         <C>       <C>         <C>
Financial assets:
  Cash and cash equivalents...........................  $92,069     $92,069   $82,067     $82,067
  Investments available for sale......................   20,902      20,902    29,331      29,331
  Trading securities owned............................       --          --    18,348      18,348
  Restricted assets...................................   17,380      17,380     1,039       1,039
  Receivable from clearing brokers....................       --          --    10,126      10,126
  Long-term investments...............................   10,044      16,882     4,654      10,493
Financial liabilities:
  Margin loans payable................................       --          --     4,675       4,675
  Notes payable.......................................   11,226      11,226    27,716      27,716
</Table>

19.  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, 2001, 2000 and 1999. The operations of BrookeMil are
included in real estate operations, while the Company's interest in Western
Realty Development, which was accounted for on the equity method prior to
December 29, 2000, is included in corporate and other activities. The activities
of Western Realty Development are included in real estate operations for the
2001 period. The corporate and other segment includes identifiable assets of
$48,770 and

                                        48
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$47,480 at December 31, 2000 and 1999, respectively, previously classified in
the broker-dealer segment, which was discontinued and disposed of, effective
December 20, 2001.

<Table>
<Caption>
                                                                       COMPUTER   CORPORATE
                                                         REAL ESTATE   SOFTWARE   AND OTHER    TOTAL
                                                         -----------   --------   ---------   -------
<S>                                                      <C>           <C>        <C>         <C>
2001
Revenues...............................................   $  9,966          --    $  2,735    $12,701
Other (expense) income.................................    (20,945)        250      17,481     (3,214)
Operating (loss) income................................    (23,046)        114       6,897    (16,035)
Identifiable assets....................................   $ 10,581          --     152,117    162,698
Depreciation and amortization..........................      2,353          --          --      2,353
Capital expenditures...................................      2,642          --          --      2,642
2000
Revenues...............................................   $  3,199                $ 10,293    $13,492
Other income...........................................         --         150      46,360     46,510
Operating (loss) income................................     (5,335)          7      41,053     35,725
Identifiable assets....................................     96,227         250     166,653    263,130
Depreciation and amortization..........................      1,020          --          22      1,042
Capital expenditures...................................      3,663          --          --      3,663
1999
Revenues...............................................   $  7,056     $   317    $  4,639    $12,012
Other income (expense).................................      3,828       4,028     (14,016)    (6,160)
Operating loss.........................................     (3,212)     (3,153)    (21,299)   (27,664)
Identifiable assets....................................     57,920         403     162,345    220,668
Depreciation and amortization..........................      1,766         199         107      2,072
Capital expenditures...................................     14,314          30          --     14,344
</Table>

20.  DISCONTINUED OPERATIONS

     Ladenburg Thalmann.  In May 1995, the Company consummated its acquisition
of Ladenburg Thalmann, a registered broker-dealer and investment bank, for
$25,750, net of cash acquired. The acquisition was treated as a purchase for
financial reporting purposes. The excess of the consideration paid over the
estimated fair value of net assets acquired of $1,342 was recorded as goodwill
to be amortized on a straight-line basis over 15 years.

     In December 1999, the Company completed the sale of a 19.9% interest in
Ladenburg Thalmann to 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. The Company recorded a $4,256 gain in
1999 in connection with the transaction.

     On May 7, 2001, GBI Capital Management Corp. acquired all of the
outstanding common stock of Ladenburg Thalmann, for 23,218,599 shares of common
stock, $10,000 in cash and $10,000 principal amount of senior convertible notes
due December 31, 2005, and the name of GBI was changed to Ladenburg Thalmann
Financial Services Inc. The notes bear interest at 7.5% per annum and are
convertible into 4,799,271 shares of LTS common stock. Upon closing, New Valley
also acquired an additional 3,945,060 shares of LTS from the former Chairman of
LTS for $1.00 per share. Following completion of the transactions, New Valley
owned 53.6% and 49.5% of the common stock of LTS, on a basic and fully diluted
basis, respectively.

     To provide the funds for the acquisition of the common stock of Ladenburg
Thalmann, LTS borrowed $10,000 from Frost-Nevada, Limited Partnership and issued
to Frost-Nevada $10,000 principal amount of

                                        49
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

senior convertible notes due December 31, 2005. The notes bear interest at 8.5%
per annum and are convertible into 6,497,475 shares of Ladenburg common stock.
The notes issued to the Ladenburg Thalmann stockholders and to Frost-Nevada are
secured by a pledge of the Ladenburg Thalmann stock. If, during any period of 20
consecutive trading days, the closing sale price of LTS's common stock is at
least $8.00, the principal and all accrued interest on the notes will be
automatically converted into shares of LTS's common stock. The notes also
provide that if a change of control occurs, as defined in the notes, LTS must
offer to purchase all of the outstanding notes at a purchase price equal to the
unpaid principal amount of the notes and the accrued interest.

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

     The transaction was accounted for under the purchase method of accounting
as a reverse acquisition. For accounting purposes, Ladenburg Thalmann was
treated as the acquirer of LTS as Ladenburg Thalmann's stockholders held a
majority of the LTS common stock following the closing of the transaction.
Between May 7, 2001, the date of the acquisition, and December 20, 2001, the
date of the distribution of the LTS shares when LTS became a discontinued
operation, LTS was accounted for as a consolidated subsidiary of New Valley.

     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 completion of the special dividend of the LTS's shares, New
Valley continues to hold $8,010 principal amount of LTS's senior convertible
promissory notes, convertible into 3,844,216 shares of LTS common stock, and a
warrant to purchase 100,000 shares of LTS common stock at $1.00 per share. New
Valley intends within a 12-month period from November 30, 2001 to distribute to
its stockholders the remaining interests of New Valley in LTS's common stock.

     On March 27, 2002, LTS borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, is due on the earlier of June 30,
2002 or the completion of one or more equity financings where LTS receives at
least $5,000 in total proceeds.

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

                                        50
<PAGE>
                    NEW VALLEY CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized financial data of the discontinued operations are as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                            ---------------------------
                                                            2001(1)    2000      1999
                                                            -------   -------   -------
<S>                                                         <C>       <C>       <C>
Revenues..................................................  $88,473   $90,111   $77,753
(Loss) income from operations before income taxes.........  (12,030)    6,298     2,688
(Benefit) provision for income taxes......................   (1,356)       84        62
Minority interests in subsidiary (loss) income............   (4,845)    1,212       575
                                                            -------   -------   -------
Net (loss) income.........................................  $(5,829)  $ 5,002   $ 2,051
                                                            =======   =======   =======
</Table>

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

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

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

     The Company recorded a gain on disposal of discontinued operations of
$17,879 related to the adjustment of accruals established during the Company's
bankruptcy proceedings in 1993 and 1994. The reversal of these accruals reduced
restructuring, employee benefit and various tax accruals previously established.

     The Company recorded a gain on disposal of discontinued operations of
$4,100 in 1999 related to the settlement of a lawsuit originally initiated by
the Western Union telegraph business.

                                        51
<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>
2001:
  Revenues..................................................  $ 4,308   $ 3,773   $ 2,895   $ 1,725
  Expenses(a)...............................................    6,612     7,232     5,456     5,888
  Other results from continuing operations..................      884       471        (6)   (4,563)
                                                              -------   -------   -------   -------
    Loss from continuing operations.........................   (1,420)   (2,988)   (2,567)   (8,726)
                                                              -------   -------   -------   -------
  Income from discontinued operations(c)....................     (268)   (1,576)   (3,050)     (935)
  Gain from discontinued operations(d)......................       --     2,279        --     2,067
                                                              -------   -------   -------   -------
    (Loss) income from discontinued operations                   (268)      703    (3,050)    1,132
                                                              -------   -------   -------   -------
  Net loss(b)...............................................  $(1,688)  $(2,285)  $(5,617)  $(7,594)
                                                              =======   =======   =======   =======
Loss per Common Share (Basic):
  Loss from continuing operations...........................  $ (0.06)  $ (0.13)  $ (0.12)  $ (0.38)
  Discontinued operations(c), (d)...........................    (0.01)     0.03     (0.13)     0.05
                                                              -------   -------   -------   -------
  Net loss(b)...............................................  $ (0.07)  $ (0.10)  $ (0.25)  $ (0.33)
                                                              =======   =======   =======   =======
Loss per Common Share (Diluted):
  Loss from continuing operations...........................  $ (0.06)  $ (0.13)  $ (0.12)  $ (0.38)
  Discontinued operations(c), (d)...........................    (0.01)     0.03     (0.13)     0.05
                                                              -------   -------   -------   -------
  Net loss(b)...............................................  $ (0.07)  $ (0.10)  $ (0.25)  $ (0.33)
                                                              =======   =======   =======   =======
2000:
  Revenues..................................................  $ 5,904   $ 2,548   $ 1,985   $ 3,055
  Expenses(a)...............................................    6,161     6,632     5,175     5,986
  Other results from continuing operations..................   (1,773)     (288)   50,341    (1,770)
                                                              -------   -------   -------   -------
    (Loss) income from continuing operations................   (2,030)   (4,372)   47,151    (4,701)
                                                              -------   -------   -------   -------
  Income from discontinued operations(c)....................    3,826       174        73       929
  Gain from discontinued operations(d)......................       --        --        --    17,879
                                                              -------   -------   -------   -------
  (Loss) income from discontinued operations                    3,826       174        73    18,808
                                                              -------   -------   -------   -------
  Net income (loss).........................................  $ 1,796   $(4,198)  $47,224   $14,107
                                                              =======   =======   =======   =======
Income (loss) per Common Share (Basic):
  (Loss) income from continuing operations..................  $ (0.09)  $ (0.19)  $  2.06   $ (0.20)
  Discontinued operations(c), (d)...........................     0.17      0.01        --      0.82
                                                              -------   -------   -------   -------
  Net income (loss)(b)......................................  $  0.08   $ (0.18)  $  2.06   $  0.62
                                                              =======   =======   =======   =======
Income (loss) per Common Share (Diluted):
  Income (loss) from continuing operations..................  $ (0.09)  $ (0.19)  $  2.05   $ (0.20)
  Discontinued operations(c), (d)...........................     0.17      0.01        --      0.82
                                                              -------   -------   -------   -------
  Net income (loss)(b)......................................  $  0.08   $ (0.18)  $  2.05   $  0.62
                                                              =======   =======   =======   =======
</Table>

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

(a) Includes minority interests in results from continuing operations of
    consolidated subsidiaries and provision (benefit) for federal, state and
    foreign income taxes.
(b) The sum of quarterly income (loss) per share may not equal income (loss) per
    share for the year, because the per share data for each quarter and for the
    year is independently computed.
(c) (Loss) income from the Company's broker-dealer subsidiary.
(d) The 2001 and 2000 amounts represent adjustments of accruals established
    during the Company's bankruptcy proceedings in 1993 and 1994. See Note 15.

                                        52
<PAGE>

                                                                    SCHEDULE III

                             NEW VALLEY CORPORATION

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                  FOR THE THREE YEARS ENDED DECEMBER 31, 2001
                             (AMOUNTS IN THOUSANDS)
<Table>
<Caption>
                                                                                     GROSS AMOUNT CARRIED
                                                                                      AT CLOSE OF PERIOD
                                                                    COST       --------------------------------
                                               INITIAL COST      CAPITALIZED              BUILDINGS
        DESCRIPTION                         ------------------     NET OF                    AND                  ACCUMULATED
       AND LOCATION          ENCUMBRANCES    LAND     BUILDING    DELETIONS     LAND     IMPROVEMENTS    TOTAL    DEPRECIATION
       ------------          ------------   -------   --------   -----------   -------   ------------   -------   ------------
<S>                          <C>            <C>       <C>        <C>           <C>       <C>            <C>       <C>
Office Buildings:
 Bernards Township, NJ.....    $    --      $10,059   $ 38,432    $ (48,491)   $    --     $    --      $    --      $   --
 Bernards Township, NJ.....         --        2,342      9,172      (11,514)        --          --           --          --
 Troy, MI..................         --                  23,581      (23,581)        --          --           --          --
 Troy, MI..................         --        7,049     21,147      (28,196)        --          --           --          --
 Ducat Place I.............                      --      5,561       (5,561)        --          --           --
 Ducat Place II............         --           --     59,300      (59,300)        --          --           --          --
 Ducat Place III...........         --       13,600         --      (13,600)        --          --           --          --
 Kindergarten Building.....         --           --        912            8        920          --          920          --
 Kremlin Site..............         --           --         --       36,507     36,507          --       36,507          --
                               -------      -------   --------    ---------    -------     -------      -------      ------
                                    --       33,050    158,105     (153,728)    37,427          --       37,427          --
                               -------      -------   --------    ---------    -------     -------      -------      ------
Shopping Centers:
 Tri Cities, WA............         --        2,981      7,692      (10,673)        --          --           --          --
 Santa Fe, NM..............         --        3,233      6,423       (9,656)        --          --           --          --
 Milwaukie, OR.............         --          949      6,374       (7,323)        --          --           --          --
 Marathon, FL..............         --          624      3,299       (3,923)        --          --           --          --
 Seattle, WA...............         --        3,354      9,069      (12,423)        --          --           --          --
 Charleston, WV............     11,226        2,510     10,516          646      2,511      11,161       13,672       2,148
 Royal Palm Beach, FL......         --        2,032      7,867       (9,899)        --          --           --          --
 Lincoln, NE...............         --        1,254      4,750       (6,004)        --          --           --          --
                               -------      -------   --------    ---------    -------     -------      -------      ------
                                11,226       16,937     55,990      (59,255)     2,511      11,161       13,672       2,148
                               -------      -------   --------    ---------    -------     -------      -------      ------
       Total...............    $11,226      $49,987   $214,095    $(212,983)   $39,938     $11,161      $51,099      $2,148
                               =======      =======   ========    =========    =======     =======      =======      ======

<Caption>

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

                                        53
<PAGE>

                                                                    SCHEDULE III

                             NEW VALLEY CORPORATION

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                  FOR THE THREE YEARS ENDED DECEMBER 31, 2001
                             (AMOUNTS IN THOUSANDS)

RECONCILIATION OF CARRYING COSTS AND ACCUMULATED DEPRECIATION

<Table>
<Caption>
                                                              BUILDINGS AND               ACCUMULATED
                                                    LAND      IMPROVEMENTS      TOTAL     DEPRECIATION
                                                   -------   ---------------   --------   ------------
<S>                                                <C>       <C>               <C>        <C>
  Balance at 1/1/99..............................  $34,100       $53,871       $ 87,971      $5,096
                                                   -------       -------       --------      ------
  Additions during period
     Acquisitions through foreclosure............       --            --             --
     Other acquisitions..........................       --            --             --
     Improvements, etc...........................   14,344            --         14,344
     Depreciation expense........................       --            --             --       2,918
                                                   -------       -------       --------      ------
          Total Additions........................   14,344            --         14,344       2,918
                                                   -------       -------       --------      ------
  Deductions during period:
     Cost of real estate sold....................   12,449        34,268         46,717       5,769
                                                   -------       -------       --------      ------
  Balance at 12/31/99............................  $35,995       $19,603       $ 55,598      $2,245
                                                   -------       -------       --------      ------
  Additions during period
     Acquisitions through foreclosure............       --            --             --
     Other acquisitions..........................       --            --             --
     Improvements, etc...........................    3,664            --          3,664
     Reclassifications...........................      549          (549)            --
     Real estate in joint venture acquired.......   16,920        65,133         82,053       5,696
     Depreciation expense........................       --            --             --       1,020
                                                   -------       -------       --------      ------
          Total Additions........................   21,133        64,584         85,717       6,716
                                                   -------       -------       --------      ------
  Deductions during period:
     Cost of real estate sold....................       --            --             --          --
                                                   -------       -------       --------      ------
  Balance at 12/31/00............................  $57,128       $84,187       $141,315      $8,961
                                                   -------       -------       --------      ------
  Additions during period
     Acquisitions through foreclosure............       --            --             --
     Other acquisitions..........................    3,562            --          3,562
     Improvements, etc...........................       --            --             --
     Reclassifications...........................       --            --             --
     Real estate in joint venture acquired.......       --            --             --          --
     Depreciation expense........................       --            --             --       2,123
                                                   -------       -------       --------      ------
          Total Additions........................    3,562            --          3,562       2,123
                                                   -------       -------       --------      ------
  Deductions during period:
     Cost of real estate sold....................   20,752        73,026         93,778       8,936
                                                   -------       -------       --------      ------
  Balance at 12/31/01............................  $39,938       $11,161       $ 51,099      $2,148
                                                   -------       -------       --------      ------
</Table>

                                        54
<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: April 1, 2002

                                        55
<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 April 1, 2002.

<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>

                                        56