NEW VALLEY CORP, S-1/A, 1999-06-14

NEW VALLEY CORP
S-1/A, 1999-06-14
REAL ESTATE

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<PAGE> 1

REGISTRATION NO. 333-79837

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

NEW VALLEY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 6211 13-5482050
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
(305) 579-8000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

RICHARD J. LAMPEN
EXECUTIVE VICE PRESIDENT
NEW VALLEY CORPORATION
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
(305) 579-8000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code or
Agent For Service)

COPY TO:

MARK L. WEISSLER, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY LLP
ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10005
(212) 530-5000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.

IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [ ]

IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND
LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]

IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]

IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(d)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]

IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
CHECK THE FOLLOWING BOX. [ ]

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED(1) REGISTERED PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Shares $.01 par value.... 18,482,629(2) $12.50 $231,032,863(3) $64,228(4)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) This Registration Statement relates to the maximum number of common shares,
par value $.01 per share, of the Company (the "Common Shares") issuable to
holders of outstanding warrants to purchase Common Shares (the "Warrants").
(2) Based on 18,482,629, the maximum number of Common Shares to be received upon
the exercise of all outstanding Warrants.
(3) Pursuant to Rules 457(g) of the Securities Act of 1933, as amended, and
solely for the purpose of calculating the registration fee, the proposed
maximum aggregate offering price is based on the sum of (i) the product of
18,482,629, the maximum number of Common Shares that will be received upon
the exercise of all outstanding Warrants, and (ii) $12.50, the stated
exercise price of the Warrants, subject to adjustments.

(4) Previously paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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- --------------------------------------------------------------------------------
<PAGE> 2

PROSPECTUS

SUBJECT TO COMPLETION, DATED JUNE 14, 1999

18,482,629
NEW VALLEY CORPORATION

Common Shares

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

This is a prospectus filed with the Securities and Exchange Commission
covering up to 18,482,629 Common Shares to be issued on the exercise of Warrants
issued by the Company to its stockholders under a plan of recapitalization. Each
Warrant entitles the holder to purchase one Common Share at an exercise price of
$12.50, subject to adjustments. The Warrants are exercisable for a period of
five years from the effective date of the registration statement of which this
prospectus is a part.

YOU SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTING IN THE COMPANY. SEE
"RISK FACTORS" BEGINNING ON PAGE 2.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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

JUNE , 1999

The information in this prospectus is not completed and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE> 3

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO
ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD
NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT COVER OF THE DOCUMENT. WE ARE NOT MAKING AN
OFFER TO SELL THESE SECURITIES WHERE THE OFFER IS NOT PERMITTED.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 3
Disclaimer Regarding Forward-Looking Statements............. 5
Use of Proceeds............................................. 5
Dilution.................................................... 6
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... 7
Selected Financial Data..................................... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Business.................................................... 28
Management.................................................. 37
Description of Capital Stock................................ 47
Plan of Distribution........................................ 49
Legal Matters............................................... 52
Experts..................................................... 52
Index to Financial Statements............................... F-1
</TABLE>

<PAGE> 4

SUMMARY

This summary highlights selected information from this document and may not
contain all the information that is important to you. You should read the entire
document carefully.

THE COMPANY

The Company is engaged:

- through its subsidiary Ladenburg Thalmann & Co. Inc. in the investment
banking and brokerage business;

- through its subsidiary BrookeMil Ltd. in real estate development in
Russia;

- through its New Valley Realty division in the ownership and management of
commercial real estate in the United States; and

- in the acquisition of operating companies.

The mailing address of the principal executive offices of the Company is
100 S.E. Second Street, Miami, Florida 33131, and its telephone number at that
address is (305) 579-8000.

PLAN OF RECAPITALIZATION

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

- each $15.00 Class A Increasing Rate Cumulative Senior Preferred Share
($100 liquidation), $.01 par value, was reclassified into 20 Common
Shares and one Warrant,

- each $3.00 Class B Cumulative Convertible Preferred Share, $.10 par
value, 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 COMMON SHARES

This prospectus covers up to 18,482,629 Common Shares, par value $.01 per
share, of the Company to be issued on exercise of Warrants issued by the Company
to its stockholders under the plan of recapitalization. The Common Shares are
quoted on the OTC Electronic Bulletin Board, a National Association of
Securities Dealers sponsored inter-dealer automated quotation system, under the
symbols NVAL.

DESCRIPTION OF THE WARRANTS

The Warrants have an exercise price of $12.50 per share subject to
adjustments in certain circumstances. They may be exercised for a period of five
years from the effective date of the registration statement covering the
underlying Common Shares, of which this prospectus forms a part. The Company may
redeem the warrants at $0.01 per warrant at

1
<PAGE> 5

any time after June 4, 2002, the third anniversary of the recapitalization, if
the Common Shares trade for a specified period above $12.50 per share.

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

Generally, holders of Warrants will not recognize gain or loss on the
exercise of Warrants for Common Shares.

2
<PAGE> 6

RISK FACTORS

THE COMPANY HAS EXPERIENCED CONTINUING LOSSES; IT HAS HIGH LEVERAGE AND A FIXED
CHARGE COVERAGE DEFICIT

The Company has experienced losses from continuing operations for the last
four years. The Company had outstanding debt in the amount of $57.5 million as
of March 31, 1999 and a margin loan payable of $4.0 million, and its earnings
have been inadequate to cover fixed charges for the four most recent years. The
Company's ability to make required payments on its debt will depend on its
ability to generate cash sufficient for such purposes. Similarly, the Company's
future operating performance and ability to make planned expenditures will
depend on future economic conditions and financial, business and other factors
which may be beyond its control. There is a risk that the Company will not be
able to generate enough funds to repay its debt. If the Company cannot service
its fixed charges, it would significantly harm the Company.

THE COMPANY IS SUBJECT TO RISKS RELATING TO THE INDUSTRIES IN WHICH IT OPERATES

Each of the Company's operating businesses, Ladenburg, BrookeMil and New
Valley Realty division, and its interests in Western Realty Ducat Development
LLC and Western Realty Repin LLC, are subject to substantial risks.

THE SECURITIES INDUSTRY. Ladenburg is subject to uncertainties endemic to
the securities industry. These include the volatility of domestic and
international financial, bond and stock markets, as demonstrated by recent
disruptions in the financial markets, extensive governmental regulation,
litigation, intense competition and substantial fluctuations in the volume and
price level of securities. Ladenburg also depends on the solvency of various
counterparties. As a result, revenues and earnings may vary significantly from
quarter to quarter and from year to year. In periods of low volume,
profitability is impaired because certain expenses remain relatively fixed.
Ladenburg is much smaller and has much less capital than many firms in the
industry.

RISKS OF REAL ESTATE JOINT VENTURES AND CONSTRUCTION PROJECTS. The Company
has a significant joint venture. The ownership and voting interests in this
joint venture are held equally by the Company and another party, and the Company
must seek the approval of the other party for actions regarding the joint
venture. Since the other party's interests may differ from those of the Company,
a deadlock could arise that might impair the ability of the joint venture to
function. Such a deadlock could significantly harm the joint venture. The joint
venture also may make it more difficult for the Company to forge alliances in
Russia with other entities.

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

RISKS RELATING TO OPERATIONS IN RUSSIA. The Company has significant real
estate development operations in Russia. These operations 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. The Russian economy

3
<PAGE> 7

suffers from significant inflation, declining industrial production, rising
unemployment and underemployment, and an unstable currency. In addition,
BrookeMil and Western Realty Ducat may be harmed by:

- political or diplomatic developments;

- regional tensions;

- currency repatriation restrictions;

- foreign exchange fluctuations;

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

- an evolving tax system subject to constant changes which may be applied
retroactively; and

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

The uncertainties in Russia may impair BrookeMil's and Western Realty
Ducat's ability to complete planned financing and investing activities. The
development of certain Russian properties will require significant amounts of
debt and other financing. In acquiring its interest in the Kremlin sites,
BrookeMil agreed with the City of Moscow to invest an additional $6.0 million in
1999 (which has been funded) and $22 million in 2000 in the development of the
property. The Company is actively pursuing various financing alternatives on
behalf of Western Realty Ducat and BrookeMil. However, given the recent economic
turmoil in Russia, there is a risk that financing will not be available on
acceptable terms. Failure to obtain sufficient capital for the projects would
force Western Realty Ducat and BrookeMil to curtail or delay their projects.

THE COMPANY'S MANAGEMENT DOES NOT DEVOTE ITS FULL TIME TO THE COMPANY'S AFFAIRS

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

BROOKE CONTROLS A MAJORITY OF THE COMPANY'S SHARES

As a result of the recapitalization and assuming that no warrant holder
exercises its warrants, Brooke's ownership of the outstanding Common Shares
increased from 42.3% to 55.1% and its total voting power from 42% to 55.1%. As
holder of the absolute majority of the Common Shares, Brooke is able to elect
all of the Company's directors and control the management of the Company. Also,
the increase in Brooke's ownership of Common Shares makes it impossible for a
third party to acquire control of the Company without the consent of Brooke and
therefore may discourage third parties from seeking to acquire the Company. A
third party would have to negotiate any such transaction with Brooke, and the
interests of Brooke may be different from the interests of other Company
stockholders. This may depress the price of the Common Shares.

4
<PAGE> 8

THE COMPANY ENGAGES IN SUBSTANTIAL RELATED PARTY TRANSACTIONS

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

THE VALUE OF AND MARKET FOR COMMON SHARES IS UNCERTAIN

The Company has recently completed a plan of recapitalization that made
far-reaching changes in the Company's capital structure. At this time, it is
unclear how the Common Shares will be valued after the recapitalization.
Moreover, while the Company will seek to have the Common Shares quoted on the
Nasdaq SmallCap Market, or if possible the Nasdaq National Market System, there
is a risk that the Company will not be able to satisfy applicable listing
requirements. Even if the Common Shares are quoted, the liquidity of their
trading market is uncertain. The potential future issuance of the Common Shares
on exercise of the Warrants, which would increase the number of Common Shares by
more than 76%, may depress the price of the Common Shares. The Company has not
declared a dividend on the Common Shares since 1984, and does not currently
intend to pay such dividends in the foreseeable future.

DISCLAIMER REGARDING
FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. We may also make
written or oral forward-looking statements in our periodic reports to the SEC,
in our annual reports to stockholders, in our proxy statements, in our offering
circulars and prospectuses, in press releases and other written materials and in
oral statements made by our officers, directors or employees to third parties.
Statements that are not historical facts, including statements about our beliefs
and expectations, are forward-looking statements. These statements are based on
current plans, estimates and projections, and therefore you should not place
undue reliance on them. Forward-looking statements speak only as of the date
they are made, and we undertake no duty to update publicly any of them in light
of new information or future events.

Forward-looking statements involve inherent risks and uncertainties. We
caution you that a number of important factors could cause actual results to
differ materially from those contained in any forward-looking statement. Such
factors include but are not limited to those factors described in "RISK FACTORS"
of this prospectus.

USE OF PROCEEDS

The aggregate net proceeds from the issuance and sale of the Common Shares
on exercise of all of the outstanding Warrants will be approximately
$231,032,863. These proceeds will be used for general corporate purposes.

5
<PAGE> 9

DILUTION

Our pro forma net tangible book value as of March 31, 1999, giving effect
to the recapitalization as if it had occurred on such date, was $104,062,000 or
$4.46 per share. Net tangible book value is defined as the book value of all the
assets of the Company, less all liabilities and intangible assets. Without
taking into account any changes in net tangible book value after March 31, 1999,
other than to give effect to the exercise of all outstanding Warrants and the
application of the net proceeds therefrom, the pro forma net tangible book value
of the Company's Common Shares as of March 31, 1999 would have been
approximately $335,094,863 or $8.02 per share. The following table gives effect
to the exercise of all outstanding Warrants at an exercise price of $12.50 per
Warrant. The table illustrates the immediate increase in net tangible book value
of $3.56 per share to the Company's existing stockholders and an immediate
dilution of $4.48 per share to new investors.

<TABLE>
<S> <C>
Pro forma net tangible book value per share as of March 31,
1999 (giving effect to the recapitalization).............. $ 4.46
Increase in net tangible book value per share attributable
to exercise of Warrants................................... 3.56
------
Pro forma net tangible book value per share as of March 31,
1999 giving effect to the recapitalization and the
exercise of the Warrants.................................. $ 8.02
Immediate dilution per share to new investors............... 4.48
------
Exercise price per Warrant.................................. $12.50
======
</TABLE>

6
<PAGE> 10

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The Pro Forma Condensed Consolidated Statements of Operations for the year
ended December 31, 1998 and the three months ended March 31, 1999 have been
prepared giving effect to the recapitalization which occurred on June 4, 1999,
the Company's sale of its four office buildings in Troy, Michigan and Bernards
Township, New Jersey which occurred on September 28, 1998, and the sale by
Thinking Machines, the Company's 73%-owned subsidiary, of its Darwin(R) software
and services business which occurred on June 2, 1999 and the Pro Forma Condensed
Consolidated Balance Sheet as of March 31, 1999 has been prepared giving effect
to the recapitalization and the Thinking Machines sale. The pro forma financial
information should be read in conjunction with the information set forth under
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Introduction -- Plan of Recapitalization,"
"Business -- New Valley Realty Division -- Sale of Properties",
"Business -- Other Acquisitions and Investments -- Thinking Machines
Corporation" and the Consolidated Financial Statements and the related notes
included elsewhere in this prospectus.

Since there has not been a change in the equity ownership of the Company of
greater than 50% as a result of the recapitalization, the recapitalization will
not be subject to purchase accounting. Consequently, the pro forma information
does not reflect any adjustment to the carrying value of assets and liabilities
of the Company based on the fair market value as of the date of the
recapitalization.

The Pro Forma Condensed Consolidated Statements of Operations were prepared
as if the recapitalization, the sale of the office buildings and the Thinking
Machines sale had occurred at the beginning of the period presented. The Pro
Forma Condensed Consolidated Balance Sheet as of March 31, 1999 was prepared as
if the recapitalization and the Thinking Machines sale had occurred on March 31,
1999.

The pro forma expenses do not reflect non-recurring costs directly
attributed to the plan of recapitalization which were expensed upon consummation
of the recapitalization. The pro forma financial information does not purport to
show the results, which would actually have occurred had such transactions been
completed as of the date and for the period presented or which may occur in the
future.

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<PAGE> 11

NEW VALLEY CORPORATION AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------
PRO FORMA ADJUSTMENTS
----------------------------
THINKING
MACHINES
HISTORICAL SALE RECAPITALIZATION PRO FORMA
---------- -------- ---------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net......... $ 4,776 $ 4,776
Commissions......................... 11,126 11,126
Corporate finance fees.............. 1,438 1,438
Gain on sale of investments, net.... 499 499
Loss in joint venture............... (1,503) (1,503)
Real estate leasing................. 2,230 2,230
Computer sales and service.......... 251 $ (251)(a) --
Interest and dividends.............. 1,261 1,261
Other income........................ 2,692 -- 2,692
---------- ------- -----------
Total revenues.................... 22,770 (251)(a) 22,519
---------- ------- -----------
Costs and expenses:
Selling, general and
administrative.................... 26,592 (1,760)(a) 24,832
Interest............................ 2,325 (92)(a) 2,233
---------- ------- -----------
Total costs and expenses.......... 28,917 (1,852) 27,065
---------- ------- -----------
Loss from continuing operations before
income taxes and minority
interests........................... (6,147) 1,601 (4,546)
Income tax provision.................. 15 15
Minority interests in loss from
continuing operations of
consolidated subsidiaries........... 480 (435)(a) 45
---------- ------- -----------
Loss from continuing operations....... (5,682) 1,166 (4,516)
Discontinued operations:
Gain on disposal of discontinued
operations........................ 4,100 -- 4,100
---------- ------- -----------
Income from discontinued
operations........................ 4,100 -- 4,100
---------- ------- -----------
Net loss.............................. (1,582) 1,166 (416)
Dividend requirements on Preferred
Shares.............................. (22,219) -- $ 22,219(b) --
---------- ------- ----------- -----------
Net loss applicable to Common
Shares.............................. $ (23,801) $ 1,166 $ 22,219(b) $ (416)
========== ======= =========== ===========
Loss per Common Share (basic and
diluted):
Continuing operations............... $ (2.92) $ (0.20)
Discontinued operations............. .43 .18
---------- -----------
Net loss per Common Share........... $ (2.49) $ (0.02)
========== ===========
Number of shares used in
computation......................... 9,577,624 13,739,637(b) 23,317,261
========== =========== ===========
Number of earnings to fixed
changes(b).......................... -- --
========== ===========
</TABLE>

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

(a) To eliminate the operations of Thinking Machines.
(b) To adjust for the conversion of outstanding Preferred Shares and Common
Shares to new Common Shares and Warrants.

8
<PAGE> 12

NEW VALLEY CORPORATION AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------
SALE OF THINKING
OFFICE MACHINES
HISTORICAL BUILDINGS SALE RECAPITALIZATION PRO FORMA
---------- --------- -------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Principal transactions,
net.................... $ 11,430 $ 11,430
Commissions.............. 28,284 28,284
Corporate finance fees... 14,733 14,733
Gain on sale of
investments, net....... 11,768 11,768
Loss in joint venture.... (4,976) -- (4,976)
Real estate leasing...... 20,577 $(10,222)(a) 10,355
Gain on sale of real
estate................. 4,682 (4,682)(a) --
Computer sales and
service................ 794 $ (794)(b) --
Interest and dividends... 8,808 (71)(a) 8,737
Other income............. 5,987 -- -- 5,987
---------- -------- ------- -----------
Total revenues......... 102,087 (14,975) (794) 86,318
---------- -------- ------- -----------
Costs and expenses:
Selling, general and
administrative......... 110,375 (4,914)(a) (6,837)(b) 98,624
Interest................. 13,939 (5,494)(a) (87)(b) 8,358
Provision for loss on
long-term
investments............ 3,185 -- -- 3,185
---------- -------- ------- -----------
Total costs and
expenses............. 127,499 (10,408) (6,924) 110,167
---------- -------- ------- -----------
Loss from continuing
operations before income
taxes and minority
interests................ (25,412) (4,567) 6,130 (23,849)
Income tax provision....... 6 6
Minority interests in loss
from continuing
operations of
consolidated
subsidiaries............. 2,089 -- (1,644)(b) 445
---------- -------- ------- -----------
Loss from continuing
operations............... (23,329) (4,567) 4,486 (23,410)
Discontinued operations:
Gain on disposal of
discontinued
operations............. 7,740 -- -- 7,740
---------- -------- ------- -----------
Income from discontinued
operations............. 7,740 -- -- 7,740
---------- -------- ------- -----------
Net loss................... (15,589) (4,567) 4,486 (15,670)
Dividend requirements on
preferred shares......... 80,964 -- -- $ 80,964(c) --
---------- -------- ------- ----------- -----------
Net loss applicable to
Common Shares............ $ (96,553) (4,567) $ 4,486 $ 80,964(c) $ (15,670)
========== ======== ======= =========== ===========
</TABLE>

9
<PAGE> 13

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

(a) To eliminate the operations of the office buildings.
(b) To eliminate the operations of Thinking Machines.
(c) To adjust for the conversion of outstanding Preferred Shares and Common
Shares to new Common Shares and Warrants.

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<PAGE> 14

NEW VALLEY CORPORATION AND SUBSIDIARIES

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------
THINKING
MACHINES
HISTORICAL SALE RECAPITALIZATION PRO FORMA
---------- -------- ---------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 10,312 $4,300(b) $ 14,612
Investment securities available for
sale............................... 36,563 36,563
Trading securities owned............. 6,562 6,562
Restricted assets.................... 1,192 350(a) 1,542
Receivable from clearing brokers..... 12,575 12,575
Other current assets................. 3,647 (492)(a) 3,155
--------- ------ -----------
Total current assets............... 70,851 4,158 75,009
--------- ------ -----------
Investment in real estate, net......... 83,049 83,049
Furniture and equipment, net........... 10,393 (342)(a) 10,051
Restricted assets...................... 8,909 8,909
Long-term investments, net............. 11,726 11,726
Investment in joint venture............ 63,690 63,690
Other assets........................... 6,020 (42)(a) 5,978
--------- ------ -----------
Total assets....................... $ 254,638 $3,774 $ 258,412
========= ====== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Margin loan payable.................. $ 4,044 $ 4,044
Current portion of notes payable and
other long-term obligations........ 2,708 2,708
Accounts payable and accrued
liabilities........................ 26,863 $ (232)(a),(b) $ 600(d) 27,231
Prepetition claims and restructuring
accruals........................... 12,340 12,340
Income taxes......................... 18,361 18,361
Securities sold, not yet purchased... 2,659 -- -- 2,659
--------- ------ ------------ -----------
Total current liabilities.......... 66,975 (232) 600 67,343
--------- ------ ------------ -----------
Notes payable.......................... 54,801 54,801
Other long-term obligations............ 28,200 1,094(a) 29,294
Redeemable preferred shares............ 332,198 (332,198)(e) --
Commitment and contingencies...........
Stockholders' equity (deficiency):
Cumulative preferred shares;
liquidation preference of $69,769
and $0; dividends in arrears
$172,905 and $0.................... 279 (279)(e) --
Common Shares, $.01 par value;
850,000,000 and 100,000,000 shares
authorized; 9,577,624 and
23,317,261 shares outstanding...... 96 137(e) 233
Additional paid-in capital........... 534,568 331,740(d),(e) 866,308
Accumulated deficit.................. (759,598) 2,912(c) (756,686)
Unearned compensation on stock
options............................ (148) (148)
Accumulated other comprehensive
income............................. (2,733) -- -- (2,733)
--------- ------ ------------ -----------
Total stockholders' equity
(deficiency)..................... (227,536) 2,912 331,598 106,974
--------- ------ ------------ -----------
Total liabilities and stockholders'
equity (deficiency).............. $ 254,638 $3,774 $ 258,412
========= ====== ===========
</TABLE>

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

(a) To eliminate the operations of Thinking Machines.
(b) To record the sale of Thinking Machines' assets.
(c) Represents the gain realized on the sale of Thinking Machines' assets.
(d) To record costs associated with the plan of recapitalization.
(e) To record the plan of recapitalization.

11
<PAGE> 15

SELECTED FINANCIAL DATA

The selected financial data presented in the following table for and as of
the end of each of the three-month periods ended March 31, 1999 and 1998 and
each year in the five-year period ended December 31, 1998, 1997, 1996, 1995 and
1994 have been derived from the financial statements of the Company. Balance
Sheets at December 31, 1998 and 1997, and the related Statements of Operations,
Statements of Changes in Stockholders' Deficiency and Statements of Cash Flows
for each of the three fiscal years ended December 31, 1998, 1997 and 1996 and
related notes, appear elsewhere in this prospectus. The financial data for each
of the three-month periods ended March 31, 1999 and 1998 are derived from
unaudited financial statements of the Company and include all adjustments,
consisting of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial position and results of
operations for those periods. Operating results for the three months ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the entire year ended December 31, 1999. The historical data presented in the
following table does not reflect the effects of the recapitalization.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total revenues......... $ 22,770 $ 33,840 $102,087 $114,568 $130,865 $ 67,730 $ 10,381
Total costs and
expenses(a).......... 28,917 34,260 127,499 139,989 149,454 66,064 26,146
-------- -------- -------- -------- -------- -------- ----------
(Loss) income from
continuing operations
before income taxes,
minority interests,
and extraordinary
items................ (6,147) (420) (25,412) (25,421) (18,589) 1,666 (15,765)
Income tax provision
(benefit)............ 15 6 6 186 300 292 (500)
Minority interests in
loss from continuing
operations of
consolidated
subsidiaries......... 480 583 2,089 1,347 4,241 -- --
-------- -------- -------- -------- -------- -------- ----------
(Loss) income from
continuing operations
before extraordinary
items................ (5,682) 157 (23,329) (24,260) (14,648) 1,374 (15,265)
Income from
discontinued
operations........... 4,100 -- 7,740 3,687 7,158 16,873 1,135,706
-------- -------- -------- -------- -------- -------- ----------
(Loss) income before
extraordinary
items................ (1,582) 157 (15,589) (20,573) (7,490) 18,247 1,120,441
Extraordinary
items(b)............. -- -- -- -- -- -- (110,500)
-------- -------- -------- -------- -------- -------- ----------
Net (loss) income...... (1,582) 157 (15,589) (20,573) (7,490) 18,247 1,009,941
Dividend requirements
on preferred
shares(c)............ (22,219) (18,832) (80,964) (68,475) (61,949) (72,303) (80,037)
Excess of carrying
value of redeemable
preferred shares over
cost of shares
purchased............ -- -- -- -- 4,279 40,342 --
-------- -------- -------- -------- -------- -------- ----------
Net (loss) income
applicable to Common
Shares............... $(23,801) $(18,675) $(96,553) $(89,048) $(65,160) $(13,714) $ 929,904
======== ======== ======== ======== ======== ======== ==========
</TABLE>

12
<PAGE> 16

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Per common and
equivalent share(f):
Basic:
Loss from
continuing
operations before
extraordinary
items............ $ (2.92) $ (1.95) $ (10.89) $ (9.68) $ (7.55) $ (3.20) $ (10.12)
Discontinued
operations....... .43 -- .81 .38 .75 1.77 120.63
Extraordinary
items............ -- -- -- -- -- -- (11.74)
Net (loss)
income........... (2.49) (1.95) (10.08) (9.30) (6.80) (1.43) 98.77
Diluted:
Loss from
continuing
operations before
extraordinary
items............ $ (2.92) $ (1.95) $ (10.89) $ (9.68) $ (7.55) $ (3.20) $ (9.00)
Discontinued
operations....... .43 -- .81 .38 .75 1.77 107.36
Extraordinary
items............ -- -- -- -- -- -- (10.45)
Net (loss)
income........... (2.49) (1.95) (10.08) (9.30) (6.80) (1.43) 87.91
Dividends
declared(c).......... -- -- -- -- -- -- --
Book value............. $ (23.75) $ (21.44) $ (13.61) $ (7.55) $ (3.18) $ (4.01)
BALANCE SHEET DATA:
Total assets......... $254,638 $272,722 $441,391 $406,540 $385,822 $1,069,891
Long-term
obligations........ 54,801 54,801 185,024 170,223 11,967 36,177
Prepetition
claims(d).......... 12,340 12,364 12,611 15,526 33,392 619,833
Redeemable preferred
shares(e).......... 322,198 316,202 258,638 210,571 226,396 317,798
Stockholders'
deficiency......... (227,536) (205,312) (130,399) (72,364) (30,461) (38,444)
Working capital
(deficiency)....... 3,876 7,870 (6,986) 85,610 155,565 284,849
</TABLE>

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

(a) Includes reorganization (benefit) expense of $(9,706), $(2,044) and $22,734
in 1996, 1995, 1994, respectively.

(b) Represents extraordinary loss on the extinguishment of debt in 1994.

(c) The dividend requirements on preferred share amounts for the three months
ended March 31, 1999 and 1998 and the years ended December 31, 1998, 1997,
1996, 1995 and 1994 include $260, $202, $891, $692, $417, $521 and $4,847,
respectively, accrued on the 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 income (loss) applicable to Common Shares. No dividends on
Preferred Shares were declared in 1999, 1998 and 1997. Dividends of $40 per
share in 1996 and $50 per share in both 1995 and 1994 were declared on the
Class A Senior Preferred Shares.

(d) Represents prepetition claims against the Company in its bankruptcy case.
See Note 17 to the Consolidated Financial Statements and "Business -- Legal
Proceedings."

(e) Includes cumulative preferred dividends on the redeemable Class A Senior
Preferred Shares of $234,581, $176,161, $219,068, $163,302, $117,117,
$121,893 and $176,761 at March 31, 1999 and 1998 and December 31, 1998,
1997, 1996, 1995 and 1994, respectively. See Note 13 to the Consolidated
Financial Statements.

(f) All per share data have been restated to reflect the one-for-20 reverse
stock split completed on July 29, 1996 but do not give effect to the
recapitalization.

13
<PAGE> 17

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 the Company and its consolidated subsidiaries. It
should be read in conjunction with the Selected Financial Data and the
Consolidated Financial Statements, Unaudited Interim Condensed Consolidated
Financial Statements and the related notes included elsewhere in this document.
The operating results of the periods presented were not significantly affected
by inflation. The consolidated financial statements include the accounts of
Ladenburg, BrookeMil, Thinking Machines and other subsidiaries.

The Company'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 (booked in 1994)
and the messaging service business in October 1995. These operations,
which generated virtually all of the Company's revenues before 1995, are
treated as discontinued in the Company's financial statements,

- the acquisition of the broker-dealer business in May 1995,

- the purchase of the Company's U.S. office buildings and shopping centers
in January 1996 and the sale of the office buildings in September 1998,

- the acquisition of BrookeMil in January 1997,

- the formation in February 1998 of the Western Realty Ducat joint venture,
to which the Company contributed a significant portion of BrookeMil's
operations and which is accounted for on the equity method, and

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

THE COMPANY'S INVESTMENT IN RJR NABISCO. The Company expensed $100 in 1997
and $11,724 in 1996 relating to its investment in the common stock of RJR
Nabisco Holdings Corp. Under a December 27, 1995 agreement between the Company
and Brooke, the Company agreed to reimburse Brooke for certain reasonable
out-of-pocket expenses in connection with RJR Nabisco. The Company paid Brooke a
total of $17 in 1997 and $2,370 in 1996.

On February 29, 1996, the Company entered into a total return equity swap
transaction with an unaffiliated financial institution relating to 1,000,000
shares of RJR Nabisco common stock. The size of the swap was reduced to 750,000
shares of RJR Nabisco common stock as of August 13, 1996. During the third
quarter of 1996, the swap was terminated when the Company reduced its holdings
of RJR Nabisco common stock, and the Company recognized a loss on the swap of
$7,305 for the year ended December 31, 1996.

CLASS A SENIOR PREFERRED SHARES. During 1996, the Company repurchased
72,104 Class A Senior Preferred Shares for an aggregate consideration of
$10,530. The Company

14
<PAGE> 18

declared and paid cash dividends on the Class A Senior Preferred Shares of $40
per share in 1996.

REINCORPORATION. On July 29, 1996, the Company reincorporated from New
York to Delaware and effected a one-for 20 reverse stock split of the Common
Shares. All per share data has been restated to retroactively reflect the
reverse stock split, and a total of $1,820 was reclassified from the Company's
Common Shares account to the additional paid-in capital account.

PLAN OF RECAPITALIZATION. The Company consummated the plan of
recapitalization on June 4, 1999, following approval by the Company's
stockholders. Pursuant to the plan of recapitalization:

- each $15.00 Class A Increasing Rate Cumulative Senior Preferred Share
($100 liquidation), $.01 par value, was reclassified into 20 Common
Shares and one Warrant,

- each $3.00 Class B Cumulative Convertible Preferred Share, $.10 par
value, 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 plan of recapitalization will have a significant effect on the
Company's financial position and results of operations. As a result of the
recapitalization, on a pro forma basis at March 31, 1999, the carrying value and
dividend arrearages of $332,198 of redeemable preferred stock were eliminated,
changing a stockholders' deficiency of $227,536 into stockholders' equity of
$104,062. Furthermore, the recapitalization resulted in the elimination of the
existing redeemable preferred shares of the Company and the on-going dividend
accruals thereon, 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,
Brooke increased its ownership of the outstanding Common Shares from 42.3% to
55.1%, and its total voting power from 42% to 55.1%.

NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." This new standard is designed to improve the earnings per
share information provided in financial statements by simplifying the existing
computational guidelines, revising disclosure requirements and increasing the
comparability of earnings per share data on an international basis. Prior years'
earnings per share have been restated to conform with this standard.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The statement, which the Company adopted in the first quarter of 1998,
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. Where
applicable, earlier periods have been restated to conform to the standards
established by SFAS No. 130. The adoption of SFAS 130 did not have a material
impact on the Company's financial statements.

For transactions entered into beginning in 1998, the Company has adopted
and is reporting under SOP 97-2, "Software Revenue Recognition." The adoption of
SOP 97-2 did not have a material impact on the Company's financial statements.

15
<PAGE> 19

In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Under SOP 98-1, the carrying value of software
developed or obtained for internal use is assessed based on an analysis of
estimated future cash flows on an undiscounted basis and before interest
charges. SOP 98-1 is effective for transactions entered into in fiscal years
beginning after December 15, 1998. The Company believes that adoption of SOP
98-1 will not have a material impact on its financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for
reporting by public business enterprises of information about operating
segments. The Company has adopted SFAS No. 131 and has restated its financial
statements to conform to the pronouncement in the fourth quarter of 1998.

In June 1998, FASB issued SFAS 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, 1999. SFAS 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 so, the type of hedge
transaction. The Company has not yet determined the impact of adoption of SFAS
133 on its earnings or statements of financial position.

YEAR 2000 COSTS. The "Year 2000 issue" relates to computer programs that
were written using two digits rather than four digits to define the applicable
year. If the Company's or its subsidiaries' computer programs with
date-sensitive functions are not Year 2000 compliant, they may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failure or miscalculations causing disruption to operations, including an
inability to process transactions or engage in similar normal business
activities.

THE COMPANY AND BROOKEMIL. Both the Company and BrookeMil use personal
computers for all transactions. All such computers and related systems and
software are less than three years old and are Year 2000 compliant. As a result,
the Company believes the Company and BrookeMil are Year 2000 compliant.

It is unclear whether the Russian government and other organizations that
provide significant infrastructure services have addressed the Year 2000 problem
sufficiently to mitigate potential substantial disruption of these
infrastructure services. The substantial disruption of these services would have
an adverse affect on the operations of BrookeMil and Western Realty Ducat.
Furthermore, the current financial crisis could affect the ability of the
Russian government and other organizations to fund Year 2000 compliance
programs.

LADENBURG. Ladenburg has recently completed a plan to address Year 2000
compliance. Ladenburg's plan addresses external interfaces with third party
computer systems necessary in the broker-dealer industry. It also addresses
internal operations software necessary to continue operations on a daily basis.
Ladenburg anticipates that all phases of its Year 2000 plan except for the
contingency planning phase will be complete by July 1999 and will cost
approximately $650. The cost is inclusive of hardware and software upgrades and
replacements as well as consulting. Ladenburg anticipates that the

16
<PAGE> 20

remaining costs will be incurred by July 1999. Ladenburg completed its
contingency planning phase in May 1999.

EXTERNAL SERVICE PROVIDERS. The modifications for Year 2000 compliance by
the Company and its subsidiaries are proceeding according to plan and are
expected to be completed by 1999. However, the failure of the Company's service
providers to resolve their own processing issues in a timely manner could result
in material financial risk. The most significant outside service provider is
Ladenburg's clearing agent. Ladenburg has been informed by its clearing agent
that it has initiated an extensive effort to ensure that it is Year 2000
compliant. Ladenburg has been informed by its clearing agent that it completed
the remediation process in July 1998 and anticipates completion of internal
testing of its Year 2000 compliant software in June 1999. The clearing agent has
informed Ladenburg that it will conduct system-wide testing of its Year 2000
software throughout 1999.

Although the Company and its subsidiaries are in the process of confirming
that their service providers are adequately addressing Year 2000 issues, there
remains a risk that interaction with service providers will impair the Company's
or its subsidiaries' services.

RESULTS OF OPERATIONS

For the years ended December 31, 1998, 1997 and 1996, and the three months
ended March 31, 1999 and 1998, results of continuing operations of the Company's
primary operating units were as follows. The operations of BrookeMil are
included in the real estate operations, while the Company's interest in the
Western Realty Ducat joint venture, which is accounted for on the equity method,
is included in corporate and other activity.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999 YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1999 1998 1998 1997 1996
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Broker-dealer:
Revenues...................... $19,030 $19,425 $ 66,569 $56,197 $ 71,960
Expenses...................... 19,005 20,649 72,744 66,155 72,305
------- ------- -------- ------- --------
Operating income (loss) before
taxes and minority
interests.................. $ 25 $(1,224) $ (6,175) $(9,958) $ (345)
======= ======= ======== ======= ========
Real estate:
Revenues...................... $ 2,323 $ 7,776 $ 25,259 $27,067 $ 23,559
Expenses...................... 3,548 7,796 25,451 34,894 24,304
------- ------- -------- ------- --------
Operating loss before taxes
and minority interests..... $(1,225) $ (20) $ (192) $(7,827) $ (745)
======= ======= ======== ======= ========
Computer software:
Revenues...................... $ 251 $ 413 $ 794 $ 3,947 $ 15,017
Expenses...................... 1,852 1,662 6,924 12,103 30,099
------- ------- -------- ------- --------
Operating loss before taxes
and minority interests..... $(1,601) $(1,249) $ (6,130) $(8,156) $(15,082)
======= ======= ======== ======= ========
</TABLE>

17
<PAGE> 21

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED 1998

Consolidated total revenues were $22,770 for the three months ended March
31, 1999 versus $33,840 for the same period last year. The decrease in revenues
of $11,070 is attributable primarily to the $5,453 decrease in revenues from the
real estate operations as a result of the sale of the U.S. office buildings in
September 1998 and the contribution of Ducat Place II to Western Realty Ducat in
February 1998. Revenues were also lower as a result of decreased gains on
investments of $4,158 in 1999.

Ladenburg's revenues for the first quarter of 1999 decreased $395 as
compared to revenues for the first quarter of 1998. Ladenburg's expenses for the
first quarter of 1999 decreased $1,644 as compared to expenses for the first
quarter of 1998 due primarily to a decrease in administrative overhead.

Revenues from the real estate operations for the first quarter of 1999
decreased $5,453 primarily due to the sale of the office buildings in September
1998 and the contribution of Ducat Place II to Western Realty Ducat in February
1998. Expenses of the real estate operations decreased $4,248 in the 1999 period
due primarily to the sale of the office buildings. In the first quarter of 1999,
BrookeMil incurred expenses of $1,391, which were related to the acquisition of
the Kremlin Sites. A foreign currency loss of $236, which resulted from the
devaluation of rubles held in an escrow account, was included in BrookeMil's
expenses for the first quarter of 1999. The Company anticipates that the
currency loss will be offset by lower future expenditures in the development of
the Kremlin sites. During 1999, BrookeMil also incurred interest expense
associated with the Repin loan of $978.

Thinking Machines had revenues of $251 for the three months ended March 31,
1999. Direct costs of these revenues were $90 for the period. Operating expenses
of Thinking Machines consisted of primarily selling, general and administrative
of $684 and research and development of $1,000 for the three months ended March
31, 1999. Thinking Machines had revenues of $413 for the three months ended
March 31, 1998. Direct costs of these revenues were $185 for the period.
Operating expenses of Thinking Machines consisted of selling, general and
administrative of $661 and research and development of $816 for the three months
ended March 31, 1998. As discussed below, on June 2, 1999, Thinking Machines
sold the assets of its Darwin(R) software and services business to Oracle
Corporation.

For the first quarter of 1999, the Company's revenues of $1,165 related to
corporate and other activities primarily consisted of net gains on investments
of $499 and interest and dividend income of $492 as compared to net gains on
investments of $5,596 and

18
<PAGE> 22

interest and dividends income of $596 for the same period in the prior year.
Corporate revenues in 1999 were offset by $1,503 of loss in joint venture.

Corporate and other expenses of $4,511 for the first quarter of 1999
consisted primarily of employee compensation and benefits of $2,280 and expenses
of a certain non-significant consolidated subsidiary of $493. Corporate and
other expenses for the first quarter of 1998 of $4,153 consisted primarily of
employee compensation and benefits of $1,849 and expenses associated with a
50.1% consolidated subsidiary of $613.

Income tax for the first quarter of 1999 was $15 versus $6 for the first
quarter of 1998 due to state tax expense. 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.

FISCAL 1998 COMPARED TO FISCAL 1997

Consolidated total revenues for 1998 were $102,087 as compared with
$114,568 for 1997. The decrease in revenues of $12,481 is primarily attributable
to the decrease in corporate and other revenues and revenues at Thinking
Machines offset by an increase in revenues at Ladenburg. The decrease in
corporate and other revenues was a result of a decline in gains on investments
of $8,033 and a loss in Western Realty Ducat of $4,976. During 1998, Ladenburg
experienced an increase in commissions offset by a decline in principal
transactions as compared to the prior year. The decrease in Thinking Machines'
revenues was due to the termination of its parallel processing computer sales
and service business commencing in the fourth quarter of 1996.

Ladenburg's revenues for 1998 consisted of commissions of $28,284,
principal transactions of $11,276, corporate finance fees of $14,673, syndicate
and underwriting income of $2,834 and other income of $9,502. Ladenburg's
revenues for 1997 consisted of principal transactions of $17,115, commissions of
$16,727, corporate finance fees of $11,971, syndicate and underwriting income of
$3,269, and other income of $7,115. Expenses of Ladenburg for 1998 consisted of
employee compensation and benefits of $47,845 and other expenses of $24,899.
Expenses of Ladenburg for 1997 consisted of employee compensation and benefits
of $42,495 and other expenses of $23,660.

Revenues from the real estate operations in 1998 decreased $1,808 primarily
due to lower fourth quarter revenues as a result of the sale of the office
buildings in September 1998 and the contribution of Ducat Place II to Western
Realty Ducat offset by the $4,682 gain on the sale of the office buildings.
Expenses of the real estate operations decreased $9,443 due primarily to the
absence of significant expenses associated with Ducat Place II and Ducat Place
III resulting from the contribution of the properties to Western Realty Ducat
and the sale of the office buildings. A foreign currency loss of $1,860, which
resulted from the devaluation of rubles held in an escrow account, was included
in BrookeMil's expenses for 1998. The currency loss will be offset by lower
future expenditures in the development of the Kremlin sites.

Thinking Machines' revenues in 1998 resulted from software and maintenance
revenue of $680 and service and other revenues of $114. To date, Thinking
Machines has had only minimal revenues from the sale or leasing of such software
and services. Prior to the June 2, 1999 asset sale, Thinking Machines was
developing and marketing a data mining software product. Thinking Machines'
revenues in 1997 resulted from parallel processing computer sales and service of
$3,386, software and maintenance revenue of $241, service

19
<PAGE> 23

revenues of $109, interest income of $94 and other income of $117. Operating
expenses of Thinking Machines in 1998 consisted of cost of sales of $821,
selling, general and administrative of $2,571, research and development of
$3,444 and interest expense of $88. Operating expenses of Thinking Machines in
1997 consisted of cost of sales of $3,463 ($2,309 of which related to the
parallel processing computer division), selling, general and administrative of
$5,206 and research and development of $3,434.

For 1998, the Company's revenues of $9,465 related to corporate and other
activities consisted primarily of net gains on investments of $11,767 and
interest and dividends income of $2,199, offset by the $4,976 loss in the
Western Realty Ducat joint venture. During 1998, the principal component of net
gains on investments were $4,770 from the liquidation of long-term investments
and $6,997 from the liquidation of portfolio holdings. For 1997, the Company's
revenues of $27,357 related to corporate and other activities consisted
primarily of net gains on investments of $19,800 and interest and dividends
income of $3,252. During 1997, the principal component of net gain on
investments consisted of $7,570 and $11,392 from sales of RJR Nabisco and
Milestone Scientific Inc. equity, respectively.

Corporate and other expenses of $22,380 for 1998 consisted primarily of
employee compensation and benefits of $8,937, a provision for loss on a
long-term investment of $3,185, expenses of certain non-significant subsidiaries
of $3,719 and interest expense of $366. Corporate and other expenses of $26,837
for 1997 consisted primarily of a provision for loss on a long-term investment
of $3,796, employee compensation and benefits of $9,495 and interest expense of
$1,640.

Income tax expense for 1998 was $6 compared to $186 in 1997. Income tax
expense for 1998 and 1997 related to state income taxes at Ladenburg and $107 of
Russian profits tax at BrookeMil in 1997.

The Company recorded a gain on disposal of discontinued operations of
$7,740 in 1998 related to the settlement of a lawsuit originally initiated by
the Company's former Western Union telegraph business. The Company received an
additional $4,100 in the first quarter of 1999 from the settlement of a similar
lawsuit and will recognize $4,100 of income from discontinued operations for the
three months ended March 31, 1999. During 1997, the Company recorded a gain on
disposal of discontinued operations of $3,687 related to reversals in estimates
of certain pre-petition claims under Chapter 11 and restructuring accruals which
resulted from the Company's former money transfer business. The amounts reversed
were accrued in prior years upon the commencement of purported claims against
the Company in bankruptcy court. 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.

THE YEAR 1997 COMPARED TO 1996

Consolidated total revenues for 1997 were $114,568 as compared with
$130,865 for 1996. The decrease in revenues of $16,297 is attributable primarily
to the decrease in revenues of Ladenburg and Thinking Machines. The decrease in
Ladenburg's revenues resulted from a decline in net principal transactions of
$11,231 and a decline of $4,532 in other Ladenburg revenues. During 1997,
Ladenburg experienced a decline in syndicate and underwriting activity,
commission income and net profits as compared to the prior year. The decrease in
Thinking Machines' revenues was due to the termination of its parallel
processing computer sales and service business commencing in the fourth quarter
of 1996.

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<PAGE> 24

Ladenburg's revenues for 1997 consisted of principal transactions of
$17,115, commissions of $16,727, corporate finance fees of $11,971, syndicate
and underwriting income of $3,269, and other income of $7,115. Expenses of
Ladenburg for 1997 consisted of employee compensation and benefits of $42,495
and other expenses of $23,660. For 1996, Ladenburg's revenues consisted of
principal transactions of $28,344, commissions of $17,755, corporate finance
fees of $10,230, syndicate and underwriting income of $7,104 and other income of
$8,527. Expenses of Ladenburg in 1996 consisted of employee compensation and
benefits of $48,613 and other expenses of $23,692.

Revenues from the real estate operations in 1997 increased $3,508 due
primarily to $3,490 in revenues of BrookeMil from February 1, 1997, the date of
acquisition. Expenses of the real estate operations increased $10,590 due
primarily to $11,448 in expenses of BrookeMil from the date of acquisition.

Thinking Machines' revenues in 1997 resulted from parallel processing
computer sales and service of $3,386, software and maintenance revenue of $241,
service revenues of $109, interest income of $117 and other income of $94.
Thinking Machines' revenues in 1996 resulted from parallel processing computer
sales and service of $15,017. Operating expenses of Thinking Machines in 1997
consisted of cost of sales of $3,463, $2,309 of which related to the parallel
processing computer division, selling, general and administrative of $5,206 and
research and development of $3,434. Operating expenses of Thinking Machines in
1996 consisted of $21,239 of costs associated with the parallel processing
computer division, selling, general and administrative of $5,984 and research
and development of $2,876. In 1996, Thinking Machines wrote down certain assets,
principally inventory, associated with its parallel processing computer sales
and service division to their net realizable value and recorded a charge of
$6,200 for these reserves.

For 1997, the Company's revenues of $27,357 for corporate and other
activities consisted primarily of net gains on investments of $19,800 and
interest and dividends income of $3,252. The Company's revenues for corporate
and other activities of $20,329 for 1996 consisted primarily of $12,001 of
interest and dividends income, gain on termination of various service agreements
with First Financial of $1,285 and net gain on investments of $2,528. During
1997, the principal component of net gain on investments consisted of $7,570
from sales of RJR Nabisco equity and $11,392 from sales of Milestone Scientific
Inc. equity. During 1996, the net gain on investments consisted of the gain on
the sale of the investment in a Brazilian airplane manufacturer of $4,285, the
liquidation of two limited partnerships for a gain of $4,201, and the net
realized gain on sales of investment securities held for sale of $1,347, net of
the loss on the RJR Nabisco swap of $7,305.

Corporate and other expenses of $26,837 for 1997 consisted primarily of a
provision for loss on a long-term investment of $3,796, employee compensation
and benefits of $9,495 and interest expense of $1,640. Corporate and other
expenses for 1996 of $22,746 consisted primarily of expenses related to the RJR
Nabisco investment of $11,724, employee compensation and benefits of $7,262, and
interest expense of $4,116, net of $9,706 in reversals of restructuring
accruals. The reversal of restructuring accruals related primarily to the
settlement of certain lease obligations, which were prepetition claims. The
Company did not reverse any restructuring accruals from continuing operations in
1997; however, reversals of $3,687 of accruals related to prepetition claims
filed relating to the Company's former money transfer business were recorded as
income from discontinued operations in 1997.

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<PAGE> 25

Income tax expense for 1997 was $186 compared to $300 in 1996. Income tax
expense for 1997 and 1996 related to state income taxes at Ladenburg in 1997 and
1996 and $107 of Russian profits tax at BrookeMil in 1997.

During the fourth quarter of 1996, the Company settled a receivable claim
originally begun by Western Union Telegraph Company for a gain of $6,374 and
reduced certain liabilities related to Western Union retirees by $784. The
Company recorded the gain on settlement and liability reduction as a gain on
disposal of discontinued operations of $7,158. During 1997, the Company recorded
a gain on disposal of discontinued operations of $3,687 related to reversals in
estimates of certain prepetition claims under Chapter 11 and restructuring
accruals which resulted from the Company's former money transfer business.

LIQUIDITY AND CAPITAL RESOURCES

The Company's net working capital decreased to $3,876 at March 31, 1999
from $7,870 at December 31, 1998 primarily as a result of a $5,418 decline in
the market value of the Company's investments held for sale.

The Company's working capital increased by $14,856 for the year ended
December 31, 1998 and decreased by $92,596 and $69,955 for the years ended
December 31, 1997 and 1996, respectively.

The Company's working capital increased to $7,870 at December 31, 1998 from
a working capital deficit at $6,986 at December 31, 1997 as a result primarily
of the sale of the office buildings, liquidations of various long-term
investments and the contribution of Ducat Place II and Ducat Place III and the
liabilities associated therewith to Western Realty Ducat. The amount was offset
by changes in the Company's unrealized loss on marketable securities.

The Company's working capital decreased by $92,596 from $85,610 at December
31, 1996 to a deficit of $6,986 at December 31, 1997 as a result primarily of
the purchase of BrookeMil and net purchases of long-term investments of $15,384
offset by the net sale of long-term investments of $2,807.

At December 31, 1996, the Company's net working capital was $85,610 and had
decreased by $69,955 from $155,565 at December 31, 1995 as the result primarily
of the payment of preferred dividends of $41,419, the repurchase of redeemable
preferred stock of $10,530 and the purchase of and additions to the office
buildings and shopping centers of $24,496. These items were offset by net
liquidations of investments of $15,241.

During the first quarter 1999, the Company's cash and cash equivalents
decreased from $16,444 to $10,312 due primarily to net purchases of $6,411 of
marketable securities and long-term investments and a decrease in the Company's
margin loans payable of $9,044. The amounts were offset by the incurrence of the
Western Realty Repin loan of $4,473.

During 1998, the Company's cash and cash equivalents increased from $11,606
to $16,444 due primarily to the sale of the office buildings and liquidations of
long-term investments offset by capital expenditures of $21,835 and purchases of
long-term investments of $13,590.

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<PAGE> 26

During 1997, the Company's cash and cash equivalents decreased from $57,282
to $11,606 due primarily to the purchase of BrookeMil and net purchases of
long-term investments offset by the net sale of long-term investments of $2,807.

During 1996, the Company's cash flows came primarily from the sale of its
investments of $178,380 and the release of restricted assets of $29,159. These
funds were used principally to repay margin loan financing of $75,119, to pay
preferred dividends of $41,419, for purchase of and additions to the office
buildings and shopping centers of $24,496, and to fund operations ($22,699).

Cash provided from operating activities for the three months ended March
31, 1999 was $8,744 as compared to cash used for operating activities of $2,722
from the prior year. The difference is due primarily to a decrease of $9,986 in
receivables from clearing brokers in 1999 and the $446 decrease in Ladenburg's
net trading securities owned for the 1999 period versus an $1,967 increase for
the 1998 period. The amount was offset by a decrease in net income of $1,739.

Cash used for operating activities for the year ended December 31, 1998
increased to $13,957 compared to $249 for the prior year. The difference is due
primarily to a net decrease in Ladenburg's net trading securities of $8,665, a
decrease in accounts payable and accrued liabilities of $2,144 and gains on the
sale of the office buildings and other long-term investments of $9,452 in 1998.
These amounts were offset by cash provided from discontinued operations of
$7,740 and a decrease in the Company's loss from continuing operations of $931.

Cash used for operating activities for the year ended December 31, 1997
decreased to $249 compared to $22,699 for the year ended December 31, 1996. The
difference is due primarily to the $19,708 increase in non-cash charges in 1997,
consisting of increased depreciation and amortization of $4,657, provision for
losses on long-term investments of $2,795, reversals of restructuring accruals
of $9,706 and non-cash stock compensation expense of $2,550, and increases in
net working capital items of $12,354 in 1997, offset by an increase in net loss
of $13,083.

Cash flows used for investing activities for the three months ended March
31, 1999 were $10,269 compared to cash flows provided from investing activities
of $4,148 for the three months ended March 31, 1998. The difference is primarily
attributable to the $6,411 used to acquire marketable securities and long-term
investments in 1999 compared to net sales of investments of $7,166.

Cash flows provided from investing activities for the year ended December
31, 1998 were $104,213 compared to cash flows used for investing activities of
$21,110 for the year ended December 31, 1997. The difference is attributable
primarily to the sale of the office buildings for $111,292 in 1998, the net
liquidation of long-term investments in 1998 of $12,305 and $20,014 used to
acquire the BrookeMil stock in the 1997 period. The amount is offset by capital
expenditures in 1998 of $18,236 compared with $10,777 in 1997 and greater net
sales of investments in the 1997 period.

Cash flows used for investing activities for the year ended December 31,
1997 were $21,110 compared with cash flows provided from investing activities of
$165,856 for the year ended December 31, 1996. The difference resulted from
changes in net purchases and sales of investment securities of $132,547,
purchases and liquidations of long-term investments of $30,818, restricted
assets of $26,029 and acquisitions of businesses in 1997

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<PAGE> 27

of $21,929. The above-mentioned items were offset by net purchases of real
estate of $25,760.

The capital expenditures for the three months ended March 31, 1999 related
principally to the development of the Kremlin Sites ($1,608). BrookeMil also
held $3,525, in restricted cash, at March 31, 1999, which is restricted for
future investment in the Kremlin Sites. In connection with the acquisition of
its interest in one of the Kremlin Sites, BrookeMil has agreed with the City of
Moscow to invest an additional $6,000 in 1999 (which has been funded) and
$22,000 in 2000 in the development of the property.

The capital expenditures for the year ended December 31, 1998 related
principally to the development of the Kremlin sites ($18,013). BrookeMil also
held $252 in cash at December 31, 1998, which was restricted for future
investment 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 $6,000
in 1999 and $22,000 in 2000 in the development of the property. BrookeMil funded
$4,800 of this amount in the first quarter of 1999.

In June 1998, the Company and Apollo organized Western Realty Repin to make
a $25,000 participating loan to BrookeMil. The proceeds from the loan will be
used by BrookeMil for the acquisition and preliminary development of the Kremlin
sites. Through March 31, 1999, Western Realty Repin had advanced $25,000 (of
which $18,773 has been funded by Apollo) to BrookeMil. The loan, which bears no
fixed interest, is payable only out of distributions, if made, by the entities
owning the Kremlin sites. Distributions will be applied first to pay the
principal of the loan and then as contingent participating interest on the loan.
Rights of payment on the loan are subordinate to the rights of all other
creditors. BrookeMil used a portion of the proceeds to reimburse the Company for
certain expenditures on the Kremlin sites.

In May 1999, Western Realty Ducat purchased the remaining 48% of the one
Kremlin site that BrookeMil does not currently own and the land lease rights for
the property. Western Realty Ducat will transfer the shares to BrookeMil, which
funded the purchase.

The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BrookeMil. However, given the recent economic turmoil in Russia, there is a risk
that such financing will not be available on acceptable terms. Failure to obtain
sufficient capital for the projects would force Western Realty Ducat and
BrookeMil to curtail or limit the planned development of Ducat Place III and the
Kremlin sites.

On September 28, 1998, the Company completed a sale of the office buildings
to institutional investors for an aggregate purchase price of $112,400 before
closing adjustments and expenses. The Company received approximately $13,000 in
cash from the transaction before closing adjustments and expenses. The office
buildings were subject to approximately $99,000 of mortgage financing, which was
retired at closing. The Company recorded a gain of $4,682 associated with the
sale of the office buildings. The Company may seek to dispose of or refinance
various of the shopping centers in the future.

In September 1998, the Company made a $2,000 loan due December 31, 1999 to
its 73%-owned subsidiary Thinking Machines and acquired warrants to purchase
additional shares in a rights offering. In 1999, the Company lent Thinking
Machines an additional $1,848. The amount bore interest at 15% per annum.

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<PAGE> 28

On June 2, 1999, Thinking Machines sold all the assets of its Darwin(R)
software and services business, which comprise substantially all of its assets,
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 Darwin product above
specified sales targets. At the closing of the Oracle sale, $4,136 of the loans,
including interest, were repaid by Thinking Machines and the Company offered to
purchase all of Thinking Machines' outstanding preferred stock for $1,950.

In September 1998, the Company made a one-year $950 loan to BGLS, an
affiliate of the Company, bearing interest at 14% per annum. At March 31, 1999,
the amount outstanding, including interest, on the BGLS loan was $1,019.

Cash flows used for financing activities increased to $4,607 for the three
months ended March 31, 1999 from $3,133 for the three months ended March 31,
1998 due primarily to the $9,044 net payment on the Company's margin loan offset
by the borrowing of a $4,473 participating loan from Western Realty Repin.

Cash flows used for financing activities increased to $85,418 for the year
ended December 31, 1998 compared to $24,317 in the 1997 period. The difference
consisted of the retirement of notes payable associated with the sale of the
office buildings offset by the fundings of the Repin loan in the 1998 period and
the payment of $42,746 of net notes payable in the 1997 period offset by an
increase in margin loan payable of $13,012.

Cash flows used in financing activities decreased to $24,317 for the year
ended December 31, 1997 from $137,617 for the prior year. The difference was
attributable primarily to the payment of preferred dividends in 1996 of $41,419,
repurchases of Class A Senior Preferred Shares in 1996 of $10,530 and changes in
the margin loan payable. The amount was offset by payment of long-term
liabilities of $52,190.

Of the $55,000 purchase price for the BrookeMil shares acquired by the
Company on January 31, 1997, the Company paid $21,500 in cash at the closing and
executed a note in the principal amount of $33,500 to Brooke (Overseas) for the
balance. The note, which was collateralized by the BrookeMil shares, was paid
during 1997. The source of funds used by the Company for the acquisition,
including the payment of the note, was general working capital including cash
and cash equivalents and proceeds from the sale of investment securities
available for sale.

When the Company bought the BrookeMil shares, certain liabilities
aggregating approximately $40,000 remained liabilities of BrookeMil after the
closing. These liabilities included the $20,400 construction loan owed to
Vneshtorgbank. In addition, the liabilities of BrookeMil at the time of purchase
included approximately $13,800 of rents and related payments prepaid by tenants
in Ducat Place II for periods generally ranging from 15 to 18 months.

In August 1997, BrookeMil refinanced all amounts due under the construction
loan with borrowings under a new credit facility with the Russian bank SBS-Agro.
The new credit facility bears interest at 16% per year, matures no later than
August 2002 with principal payments commencing after the first year, and is
collateralized by a mortgage on Ducat Place II and guaranteed by the Company. At
March 31, 1999, borrowings under the new credit agreement totaled $18,846.

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Of the $72,500 aggregate purchase price for the shopping centers acquired
by the Company on January 11, 1996 from various limited partnerships, the
Company paid $12,500 in cash at the closing. Under loan and security agreements,
the Company executed eight promissory notes in the aggregate principal amount of
$60,000 to the applicable selling partnership for the balance of the purchase
price. Each note has a term of approximately five years and bears interest at
the rate of 8% per annum for the first two and one-half years and 9% for the
remainder of the term. There is no amortization of principal except out of
payments made to obtain the release of mortgages from the property and to the
extent net operating income from the shopping centers is available as provided
in the loan and security agreements. On December 6, 1996, the Company sold a
portion of one of the shopping centers for $1,750, and on November 10, 1997 the
Company sold the Marathon shopping center for $5,400. At March 31, 1999, the
aggregate principal amount of the promissory notes was $54,801. The Company may
seek to dispose of or refinance various of the shopping centers in the future.

Under agreements entered into after January 11, 1996, the closing date of
the shopping center purchase, income from the shopping centers is paid to a
trustee bank. Under these agreements, certain payments, including regular
payments of principal and interest on existing senior mortgages to lenders to
the partnerships on the Richland, Washington property and interest on the
shopping center notes, are to be made before the Company receives income for
such period from the shopping centers. In addition, under the shopping center
notes, if the net operating income from the shopping centers does not cover the
interest payments, the interest rate is reduced to a rate per annum not less
than 6%. The interest otherwise payable will be deferred until the earlier of
the date on which sufficient net operating income is available and the maturity
date. The Company has also agreed to use any net income from the shopping
centers it receives in excess of a specified return on its cash investment in
the shopping centers to pay down principal on the shopping center notes.

The shopping centers are subject to underlying mortgages in favor of senior
lenders and second mortgages in favor of the selling partnerships. The shopping
center notes are non-recourse against the Company, except for misappropriations
of insurance and certain other proceeds, failures to apply rent and other income
to required maintenance and taxes, environmental liabilities and certain other
matters.

The Company expects that its available working capital will be sufficient
to fund its currently anticipated cash requirements for 1999 and currently
anticipated cash requirements of its operating businesses, investments,
commitments, and payments of principal and interest on its outstanding
indebtedness.

MARKET RISK

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

Current and proposed underwriting, corporate finance, merchant banking and
other commitments are subject to due diligence reviews by Ladenburg's senior
management, as

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well as professionals in the appropriate business and support units involved.
Credit risk related to various financing activities is reduced by the industry
practice of obtaining and maintaining collateral. The Company monitors its
exposure to counterparty risk through the use of credit exposure information,
the monitoring of collateral values and the establishment of credit limits.

EQUITY PRICE RISK

Ladenburg maintained inventories of trading securities at March 31, 1999
with fair values of $6,562 in long positions and $2,659 in short positions.
Ladenburg performed an entity-wide analysis of its financial instruments and
assessed the related risk and materiality. Based on this analysis, in the
opinion of management, the market risk associated with the Ladenburg's financial
instruments at March 31, 1999 will not have a material adverse effect on the
consolidated financial position or results of operations of the Company.

The Company held investment securities available for sale totaling $36,563
at March 31, 1999. Approximately 45% of these securities represent an investment
in RJR Nabisco, which is a defendant in numerous tobacco products-related
litigation, claims and proceedings. The effect of an adverse lawsuit against RJR
Nabisco could have a significant effect on the value of the Company's
investment.

The Company also holds long-term investments in limited partnerships and
limited liability companies. The Company's 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 general
partners.

FOREIGN MARKET RISK

BrookeMil's and Western Realty Ducat's operations are conducted in Russia.
During 1998, the economy of the Russian Federation entered a period of economic
instability. The impact includes, but is not limited to, a steep decline in
prices of domestic debt and equity securities, a severe devaluation of the
currency, a moratorium on foreign debt repayments, an increasing rate of
inflation and increasing rates on government and corporate borrowings. The
return to economic stability is dependent to a large extent on the effectiveness
of the fiscal measures taken by government and other actions beyond the control
of companies operating in the Russian Federation. The operations of BrookeMil
and Western Realty Ducat may be significantly affected by these factors for the
foreseeable future.

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 BrookeMil and Western Realty
Ducat may not coincide with that of management. As a result, transactions may be
challenged by tax authorities and BrookeMil and Western Realty Ducat 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 six years.

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BUSINESS

The Company was organized under the laws of New York in 1851. The principal
executive office of the Company is located at 100 S.E. Second Street, Miami,
Florida 33131, and the telephone number is (305) 579-8000.

On January 18, 1995, the Company emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors under its
bankruptcy plan. The plan was confirmed on November 1, 1994, and the Company
disposed of certain assets. On July 29, 1996, the Company reincorporated from
New York to Delaware and effected a one-for-20 reverse stock split of the Common
Shares. On June 4, 1999, the Company implemented its plan of recapitalization.

The Company is engaged through Ladenburg in the investment banking and
brokerage business, through BrookeMil in real estate development in Russia,
through its New Valley Realty division in the ownership and management of
commercial real estate in the United States, and in the acquisition of operating
companies.

LADENBURG THALMANN & CO. INC.

On May 31, 1995, the Company acquired all of the outstanding shares of
common stock and other equity interests of Ladenburg for $25.8 million, net of
cash acquired, subject to adjustment. Ladenburg is a full service broker-dealer,
which has been a member of the New York Stock Exchange since 1876. Its
specialties include investment banking, trading, research, market making,
private client services, institutional sales and asset management.

Ladenburg's investment banking area maintains relationships with businesses
and provides them with research, advisory and investor relations support.
Services include merger and acquisition consulting, management of and
participation in underwriting of equity and debt financing, private debt and
equity financing, and rendering appraisals, financial evaluations and fairness
opinions. Ladenburg's listed securities, fixed income and over-the-counter
trading areas trade a variety of financial instruments. Ladenburg's client
services and institutional sales departments serve over 20,000 accounts
worldwide and its asset management area provides investment management and
financial planning services to numerous individuals and institutions.

Ladenburg is a subsidiary of Ladenburg Thalmann Group Inc., which has other
subsidiaries specializing in merchant banking, venture capital and investment
banking activities on an international level. In July 1997, Ladenburg Thalmann
International, a wholly-owned subsidiary of Ladenburg Group, together with
Societe Generale, formed a fund for investment in public and private equity
securities in Ukraine. The subsidiary's Kiev office serves as investment advisor
to the fund.

BROOKEMIL LTD.

On January 31, 1997, the Company entered into a purchase agreement with
Brooke (Overseas), under which the Company acquired the BrookeMil shares. Brooke
(Overseas) is a subsidiary of Brooke, the Company's controlling stockholder. The
shares comprise 99.1% of the outstanding shares of BrookeMil, a real estate
development company in Russia.

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<PAGE> 32

The Company paid Brooke (Overseas) a purchase price of $55 million for the
BrookeMil shares, consisting of $21.5 million in cash and a $33.5 million 9%
note. The note, which was collateralized by the BrookeMil shares, was paid
during 1997. The source of funds used by the Company for the acquisition,
including the payment of the note, was general working capital including cash
and cash equivalents and proceeds from the sale of investment securities
available for sale. The amount of consideration paid by the Company was
determined based on a number of factors including current valuations of the
assets, future development plans, local real estate market conditions and
prevailing economic and political conditions in Russia.

The Company retained independent legal counsel and financial advisors to
assist the Company in evaluating and negotiating the transaction, which was
approved by a special committee of the independent directors of the Company. As
required by the bankruptcy plan, the transaction was approved by not less than
two-thirds of the entire Board of Directors, including the approval of at least
one of the directors elected by the holders of the Preferred Shares, and a
fairness opinion from an investment banking firm was obtained. The stockholders
of the Company did not vote on the BrookeMil transaction or the acquisition of
Ladenburg or the office buildings and shopping centers described below, as their
approval was not required by applicable corporate law or the Company's
constituent documents.

BrookeMil is developing a three-phase complex on 2.2 acres of land in
downtown Moscow, for which it has a 49-year lease. In 1993, the first phase of
the project, Ducat Place I, a 46,500 sq. ft. Class-A office building, was
successfully built and leased. On April 18, 1997, BrookeMil sold Ducat Place I
to one of its tenants, Citibank, for approximately $7.5 million. This price had
been reduced to reflect approximately $6.2 million of rent prepayments by
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 including Motorola, Conoco, Lukoil-Arco and
Morgan Stanley. Ducat Place II 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, has been planned as a 450,000 sq. ft. office tower. The site of the
proposed third phase of the project was used by Liggett-Ducat Ltd., an affiliate
of Brooke and BGLS, as the site for its former tobacco factory under a use
agreement with BrookeMil. Liggett-Ducat Ltd., which recently completed
construction of a new factory on the outskirts of Moscow, is vacating the site.

Under the BrookeMil purchase agreement, certain specified liabilities of
BrookeMil aggregating approximately $40 million remained as liabilities of
BrookeMil after the purchase of the BrookeMil shares. These liabilities included
the $20.4 million construction loan. In addition, the liabilities of BrookeMil
at the time of purchase included approximately $13.8 million of rents and
related payments prepaid by tenants in Ducat Place II for periods generally
ranging from 15 to 18 months.

In August 1997, BrookeMil refinanced all amounts due under the construction
loan with borrowings under a new credit facility with the Russian bank SBS-Agro.
The new credit facility bears interest at 16% per year, matures no later than
August 2002 with principal payments commencing after the first year, and is
collateralized by a mortgage on Ducat Place II and guaranteed by the Company. At
June 1, 1999, borrowings under the new credit agreement totaled $17.5 million.

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WESTERN REALTY DUCAT. In February 1998, the Company and Apollo Real Estate
Investment Fund III, L.P. organized Western Realty Ducat to make real estate and
other investments in Russia. The Company agreed to contribute the real estate
assets of BrookeMil, including Ducat Place II and the site for Ducat Place III,
to Western Realty Ducat, and Apollo agreed to contribute up to $58.75 million,
including the investment in Western Realty Repin discussed below. Through March
31, 1999, Apollo had funded $36.5 million of its investment in Western Realty
Ducat.

The ownership and voting interests in Western Realty Ducat are held equally
by Apollo and the Company. Apollo will be entitled to a preference on
distributions of cash from Western Realty Ducat to the extent of its investment
($40 million), together with a 15% annual rate of return. The Company will then
be entitled to a return of $20 million of BrookeMil-related expenses incurred
and cash invested by the Company since March 1, 1997, together with a 15% annual
rate of return. Subsequent distributions will be made 70% to the Company and 30%
to Apollo. Western Realty Ducat will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. Material corporate transactions by Western Realty Ducat will generally
require the unanimous consent of the Board of Managers. Accordingly, the Company
accounts for its non-controlling interest in Western Realty Ducat on the equity
method.

The Company, Brooke and their affiliates have other business relationships
with affiliates of Apollo. On January 11, 1996, the Company acquired from an
affiliate of Apollo eight shopping centers for $72.5 million. The Company and
pension plans sponsored by BGLS have invested in investment partnerships managed
by an affiliate of Apollo. Affiliates of Apollo have owned a substantial amount
of debt securities of BGLS and hold warrants to purchase common stock of Brooke.

Western Realty Ducat will seek additional real estate and other investments
in Russia. Western Realty Ducat has made a $30 million participating loan to,
payable out of a 30% profits interest in, a company organized by Brooke
(Overseas) which holds Brooke (Overseas)'s interest in Liggett-Ducat Ltd. and
the new factory being constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow.

WESTERN REALTY REPIN. In June 1998, the Company and Apollo organized
Western Realty Repin to make a loan to BrookeMil. The proceeds of the loan will
be 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.
BrookeMil is planning the development of a 1.1 million sq. ft. hotel, office,
retail and residential complex on the Kremlin sites. BrookeMil owned 95.2% of
one site and 52% of the other site at March 31, 1999. Apollo will be entitled to
a preference on distributions of cash from Western Realty Repin to the extent of
its investment of $18.75 million, together with a 20% annual rate of return, and
the Company will then be entitled to a return of its investment of $6.25
million, together with a 20% annual rate of return. Subsequent distributions
will be made 50% to the Company and 50% to Apollo. Western Realty Repin will be
managed by a board of managers consisting of an equal number of representatives
chosen by Apollo and the Company. Material corporate transactions by Western
Realty Repin will generally require the unanimous consent of the board of
managers.

Through March 31, 1999, Western Realty Repin had advanced $25 million, of
which $18.8 million was funded by Apollo, under the Repin loan. This loan is
classified in other

30
<PAGE> 34

long-term obligations on the March 31, 1999 consolidated balance sheet included
in the Consolidated Financial Statements appearing elsewhere in this prospectus.
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 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 March 31, 1999, BrookeMil had invested $19.6 million in the Kremlin
sites and held approximately $3.5 million in cash, which was restricted for
future investment. In acquiring its interest in one of the Kremlin sites,
BrookeMil agreed with the City of Moscow to invest an additional $6.0 million in
1999 (which has been funded) and $22 million in 2000 in the development of the
property.

NEW VALLEY REALTY DIVISION

ACQUISITION OF OFFICE BUILDINGS AND SHOPPING CENTERS. In January 1996, the
Company acquired the office buildings and 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 the Company's New
Valley Realty division. On September 28, 1998, the Company sold the office
buildings.

The office buildings consisted of two adjacent commercial office buildings
in Troy, Michigan and two adjacent commercial office buildings in Bernards
Township, New Jersey. The Company acquired the office buildings in Michigan from
Belle Mead of Michigan, Inc. and the office buildings in New Jersey from Jared
Associates, L.P., for an aggregate purchase price of $111.4 million. Each seller
was an affiliate of Bellemead Development Corporation, which was indirectly
wholly-owned by The Chubb Corporation. The purchase price for the office
buildings was $23.5 million for the 700 Tower Drive property, located in Troy,
Michigan; $28.1 million for the 800 Tower Drive property, located in Troy,
Michigan; $48.3 million for the Westgate I property, located in Bernards
Township, New Jersey; and $11.4 million for the Westgate II property, located in
Bernards Township, New Jersey. The two Michigan buildings were constructed in
1987 and the two New Jersey buildings were constructed in 1991. The gross square
footage of the office buildings ranged from approximately 50,300 square feet to
approximately 244,000 square feet.

The Company acquired a fee simple interest in each office building subject
to certain rights of existing tenants, together with a fee simple interest in
the land underlying three of the office buildings and a 98-year ground lease
underlying one of the office buildings. Under the ground lease, Bellemead
Michigan, as lessor, was entitled to receive rental payments of a fixed monthly
amount and a specified portion of the income received from the 700 Tower Drive
property. Space in the office buildings was leased to commercial tenants and the
office buildings were fully occupied at the time of the sale.

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<PAGE> 35

On January 11, 1996, the Company acquired the shopping centers for an
aggregate purchase price of $72.5 million. Each seller was an affiliate of
Apollo. The shopping centers are located in Marathon and Royal Palm Beach,
Florida; Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukee, Oregon; Richland
and Marysville, Washington; and Charleston, West Virginia. The Company acquired
a fee simple interest in each shopping center and the underlying land for each
property. Space in the shopping center is leased to a variety of commercial
tenants and, as of March 31, 1999, the aggregate occupancy of the shopping
centers was approximately 94%. The shopping centers were constructed at various
times during the period 1963-1988. The gross square footage of the shopping
centers ranges from approximately 108,500 square feet to approximately 222,500
square feet.

The purchase price paid for the shopping centers was as follows: $3.9
million for the Marathon Shopping Center property, located in Marathon, Florida;
$9.8 million for the Village Royale Plaza Shopping Center property, located in
Royal Palm Beach, Florida; $6 million for the University Place property, located
in Lincoln, Nebraska; $9.6 million for the Coronado Shopping Center property,
located in Santa Fe, New Mexico; $7.3 million for the Holly Farm Shopping Center
property, located in Milwaukee, Oregon; $10.6 million for the Washington Plaza
property, located in Richland, Washington; $12.4 million for the Marysville
Towne Center property, located in Marysville, Washington; and $12.9 million for
the Kanawha Mall property, located in Charleston, West Virginia. The properties
are subject to underlying mortgages in favor of senior lenders and second
mortgages in favor of the sellers.

When it acquired the shopping centers, the Company engaged a
property-management firm, whose principals were the former minority partners in
the sellers that had previously operated the shopping centers, to act as the
managing and leasing agent. Effective December 31, 1996, this firm's engagement
was terminated, and Kravco Company was engaged as managing and leasing agent for
the Kanawha Mall and Insignia Commercial Group, Inc. as managing and leasing
agent for the remaining shopping centers.

SALE OF PROPERTIES. On November 10, 1997, the Company sold its Marathon,
Florida shopping center for $5.4 million and recognized a gain of $1.2 million
on the sale.

On September 28, 1998, the Company sold the office buildings to
institutional investors for an aggregate purchase price of $112.4 million and
recognized a gain of $4.7 million on the sale. The Company received
approximately $13.4 million in cash from the transaction before closing
adjustments and expenses. The office buildings were subject to approximately $99
million of mortgage financing, which was retired at closing.

The Company sold the office buildings in Michigan to PW/MS OP Sub I, LLC, a
Delaware limited liability company, and the office buildings in New Jersey to
OTR, an Ohio general partnership acting as the duly authorized nominee of The
State Teachers Retirement System of Ohio. Before the closing of the sale, the
Michigan purchaser assigned and delegated to the New Jersey purchaser its rights
and obligations under the agreement pertaining to the purchase of the office
buildings in New Jersey. The sale was negotiated on an arm's-length basis
between the Company and the Michigan purchaser.

OTHER ACQUISITIONS AND INVESTMENTS

THINKING MACHINES CORPORATION. Thinking Machines, the Company'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

32
<PAGE> 36

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. To date, no material
revenues have been recognized by Thinking Machines from the sale or licensing of
such software and services.

On June 2, 1999, Thinking Machines sold all assets of its Darwin(R)software
and services business, which comprise substantially all of its assets, 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 Darwin product
above specified sales targets.

In February 1996, a subsidiary of the Company made a $10.6 million
investment and acquired a controlling interest in Thinking Machines when
Thinking Machines emerged from bankruptcy. In December 1997, the Company
acquired additional shares for $3.15 million in a rights offering, thus
increasing its ownership to approximately 73% of the outstanding Thinking
Machines shares. In September 1998, the Company made a $2 million loan due
December 31, 1999 to Thinking Machines and acquired warrants to purchase
additional shares in a rights offering. In 1999, the Company lent Thinking
Machines an additional $1.8 million. The amount bore interest at 15% per annum.
At the closing of the Oracle sale, $4.1 million of the loans were repaid by
Thinking Machines and the Company offered to purchase all of Thinking Machines'
outstanding preferred stock for $1.95 million.

During the fourth quarter of 1996, Thinking Machines announced its
intention to dispose of its parallel processing computer sales and service
business. As a result, Thinking Machines wrote down certain assets, principally
inventory, related to these operations to their net realizable value by $6.1
million. Thinking Machines sold its parallel processing software business on
November 19, 1996 for $4.3 million and sold its remaining parallel processing
service business in April 1997 for $2.4 million in cash and a percentage of
certain future operating profits. During 1997 and 1998, Thinking Machines
received profit participation payments totaling $1.2 million and $37,000,
respectively.

CDSI HOLDINGS, INC. At March 31, 1999, the Company owned approximately 48%
of the outstanding shares of CDSI Holdings, Inc. (formerly known as PC411,
Inc.), a development stage company, which completed an initial public offering
with net proceeds of $5.9 million in May 1997. CDSI is engaged in the marketing
of an inventory control system for tobacco products through its subsidiary,
Controlled Distribution Systems, Inc., and holds a minority interest in a
business engaged in the delivery of an on-line electronic directory information
service.

MISCELLANEOUS INVESTMENTS. As of March 31, 1999, long-term investments
consisted primarily of investments in limited partnerships of $11.7 million. The
Company determined that an other than temporary impairment in the value of its
investment in a joint venture had occurred and wrote down this investment to
zero in 1997 with a charge to operations of $3.8 million.

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<PAGE> 37

The Company has invested $3.5 million in various Internet-related
businesses. These investments include a minority interest in JFAX.COM, Inc., an
Internet-based messaging and communications services provider to individuals and
businesses, which has filed a registration statement with the SEC in connection
with a proposed public offering. The Company also holds a minority interest in
Ant 21, LLC, which is engaged in the online music industry and operates under
the domain name www.atomicpop.com.

The Company may acquire additional operating businesses through merger,
purchase of assets, stock acquisition or other means, or seek to acquire control
of operating companies through one of such means.

BANKRUPTCY REORGANIZATION

On November 15, 1991, an involuntary petition under the Bankruptcy Code was
commenced against the Company. On March 31, 1993, the Company consented to the
entry of an order for relief under the Bankruptcy Code.

On November 1, 1994, the bankruptcy court entered an order confirming the
Company's bankruptcy plan. In addition to providing for the sale of assets to
First Financial, the plan provided for:

- the satisfaction of allowed claims in full, in cash, including settlement
of all issues relating to post-petition interest,

- the discharge unless otherwise specifically provided of all pending
lawsuits, prepetition indebtedness other than disputed claims, accrued
interest and post-petition interest, and

- the reinstatement of the Class A Senior Preferred Shares, the Class B
Preferred Shares, the Common Shares, and all other equity security
interests in the Company.

The plan required the Company to pay a $50 per share cash dividend to the
holders of the Class A Senior Preferred Shares and to make a tender offer to
purchase up to 150,000 Class A Senior Preferred Shares at a price of $80 per
share.

When the bankruptcy plan became effective, the Company paid approximately
$550 million on account of allowed prepetition claims and emerged from
bankruptcy. At March 31, 1999, the Company's remaining accruals totaled
approximately $12.3 million for unsettled prepetition claims and restructuring
accruals.

DISCONTINUED OPERATIONS

Under the bankruptcy plan, on November 15, 1994, the Company sold the
assets and operations of its core business, the money transfer business,
including the capital stock of its money transfer subsidiary and certain related
assets, to First Financial. On January 13, 1995, it sold to First Financial all
of the trademarks and tradenames used in the money transfer business,
constituting the Western Union name and trademark. The aggregate purchase price
was approximately $1,193 million, and included $893 million in cash and $300
million representing the assumption by First Financial of substantially all of
the Company's obligations under the Western Union pension plan. The Company
recognized a gain on this sale of approximately $1,056 million in 1994.

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<PAGE> 38

The First Financial agreement required the Company to pay $7 million to
terminate various service agreements with First Financial. The Company
recognized a gain on the termination of these service agreements over
approximately $1.3 million representing the excess over the amounts previously
accrued under these agreements.

Through October 1, 1995, the Company was engaged in the messaging services
business through a wholly-owned subsidiary. On October 31, 1995, the Company
sold substantially all of the assets exclusive of certain contracts and conveyed
substantially all of the liabilities of the subsidiary to First Financial for
$20 million, subject to certain adjustments. This transaction was effective as
of October 1, 1995. The Company recognized a gain on this sale of approximately
$13 million during the fourth quarter of 1995.

EMPLOYEES

At March 31, 1999, the Company had approximately 448 full-time employees of
which approximately 367 were employed by Ladenburg. The Company believes that
relations with its employees are satisfactory.

PROPERTIES

The Company's principal executive office is in Miami, Florida, where it
shares offices with Brooke and various of their subsidiaries. The Company has
entered into an expense sharing agreement for use of such office space.
Ladenburg's principal offices are located in New York. Ladenburg leases
approximately 74,000 square feet of office space under a lease that expires on
June 30, 2015. The Company's operating properties are described above.

LEGAL PROCEEDINGS

On January 18, 1995, approximately $550 million of the approximately $620
million of prepetition claims were paid under the bankruptcy plan. Another $57
million of prepetition claims and restructuring accruals have been settled and
paid or adjusted since January 18, 1995. 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.

On or about March 13, 1997, a stockholder derivative suit was filed in the
Delaware Chancery Court against the Company, as a nominal defendant, its
directors and Brooke. The suit alleges that the Company's purchase of the
BrookeMil shares 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, Brooke
aided and abetted these breaches and these parties are therefore liable to the
Company, and unspecified damages to be awarded to the Company. The Company's
time to respond to the complaint has not yet expired. The Company believes that
the allegations are without merit. Although there can be no assurances, the
Company believes, after consultation with counsel, that the ultimate resolution
of this matter will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily concerning its activities as a securities
broker-dealer and its participation in public underwritings. These lawsuits
involve claims for substantial or indeterminate

35
<PAGE> 39

amounts and are in varying stages of legal proceedings. In the opinion of the
Company, 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.

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<PAGE> 40

MANAGEMENT

DIRECTORS

The table below, together with accompanying text, presents certain
information regarding all directors of the Company as of June 1, 1999. Each
director is a citizen of the United States of America.

<TABLE>
<CAPTION>
NAME OF ADDRESS AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
- --------------- --- -------------------- --------------
<S> <C> <C> <C>
Bennett S. LeBow....................... 61 Chairman of the Board and December 1987
New Valley Corporation Chief Executive Officer
100 S.E. Second Street of the Company
Miami, FL 33131
President and Chief
Howard M. Lorber....................... 50 Operating January 1991
New Valley Corporation Officer of the Company
100 S.E. Second Street
Miami, FL 33131
Richard J. Lampen...................... 45 Executive Vice President and July 1996
New Valley Corporation General Counsel of the
100 S.E. Second Street Company
Miami, FL 33131

Arnold I. Burns........................ 69 Managing Director, Arnold November 1994
Arnhold and S. Bleichroeder, Inc. and S. Bleichroeder, Inc.
1345 Avenue of the Americas
New York, NY 10105

Ronald J. Kramer....................... 40 Chairman and Chief Executive November 1994
Ladenburg Thalmann Group Inc. Officer of Ladenburg
1209 Orange Street Thalmann Group Inc.
Wilmington, DE 19801

Henry C. Beinstein..................... 56 Executive Director, Schulte November 1994
Schulte Roth & Zabel LLP Roth & Zabel LLP
900 Third Avenue
New York, NY 10022

Barry W. Ridings....................... 47 Managing Director, November 1994
BT Alex. Brown Incorporated BT Alex. Brown
1290 Avenue of the Americas Incorporated
New York, NY 10104
</TABLE>

BENNETT S. LEBOW has been Chairman of the Board of the Company since
January 1988 and Chief Executive Officer thereof since November 1994 and
currently holds various positions with the Company's subsidiaries. Since June
1990, Mr. LeBow has been the Chairman of the Board, President and Chief
Executive Officer of Brooke, a New York Stock Exchange-listed holding company,
and since October 1986 has been a director of Brooke. Since November 1990, he
has been Chairman of the Board, President and Chief Executive Officer of BGLS,
which directly or indirectly holds Brooke's equity interests in several private
and public companies. Mr. LeBow has been a director of Liggett Group Inc., a
manufacturer and seller of cigarettes, since June 1990. Liggett is a
wholly-owned subsidiary of BGLS.

37
<PAGE> 41

HOWARD M. LORBER has been President and Chief Operating Officer of the
Company since November 1994. Mr. Lorber has been Chairman of the Board and Chief
Executive Officer of Hallman & Lorber Assoc., Inc., consultants and actuaries to
qualified pension and profit sharing plans, and various of its affiliates since
1975. 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 Brooke and its subsidiaries
since January 1994; 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 a director of PLM International Inc., a leasing company, since January
1999.

RICHARD J. LAMPEN has been the Executive Vice President and General Counsel
of the Company since October 1995. Since July 1996, Mr. Lampen has served as
Executive Vice President of Brooke and BGLS and since November 1998 as President
and Chief Executive Officer of CDSI Holdings Inc., a marketer of an inventory
control system in which the Company also has a controlling interest. Mr. Lampen
has been a director of Thinking Machines, a developer and marketer of data
mining and knowledge discovery software in which the Company has a controlling
interest, since February 1996; a director of CDSI since January 1997; and a
director of Panaco, Inc., an independent oil and gas exploration and production
company, since February 1999. From May 1992 to September 1995, Mr. Lampen was a
partner at Steel Hector & Davis, a law firm located in Miami, Florida. From
January 1991 to April 1992, Mr. Lampen was a Managing Director at Salomon
Brothers Inc, an investment bank, and was an employee at Salomon Brothers Inc
from 1986 to April 1992. Mr. Lampen has served as a director of a number of
other companies, including U.S. Can Corporation, The International Bank of
Miami, N.A. and Spec's Music, Inc., as well as a court-appointed independent
director of Trump Plaza Funding, Inc.

ARNOLD I. BURNS has been a Managing Director at Arnhold and S.
Bleichroeder, Inc., an investment bank, since February 1999. Mr. Burns was a
partner of Proskauer Rose LLP, a New York-based law firm, from September 1988 to
January 1999. Mr. Burns was Associate Attorney General of the United States in
1986 and Deputy Attorney General from 1986 to 1988.

RONALD J. KRAMER has been Chairman and Chief Executive Officer of Ladenburg
Thalmann Group Inc. since June 1995 and Chairman of the Board and Chief
Executive Officer of its subsidiary, a broker-dealer and investment bank, since
December 1995 and an employee for more than the past five years. Ladenburg is a
wholly-owned subsidiary of the Company. Mr. Kramer currently serves on the
Boards of Directors of Griffon Corporation and Lakes Gaming, Inc.

HENRY C. BEINSTEIN became the Executive Director of Schulte Roth & Zabel
LLP, a New York-based law firm, in August 1997. Before that, Mr. Beinstein had
served as the Managing Director of Milbank, Tweed, Hadley & McCloy LLP, a New
York-based law firm, commencing November 1995. Mr. Beinstein was the Executive
Director of Proskauer Rose LLP from April 1985 through October 1995. Mr.
Beinstein is a certified public accountant in New York and New Jersey and before
joining Proskauer was a partner and National Director of Finance and
Administration at Coopers & Lybrand.

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<PAGE> 42

BARRY W. RIDINGS has been a Managing Director of BT Alex. Brown
Incorporated, an investment banking firm, since March 1990. Mr. Ridings
currently serves as a director of Siem Industries Inc., Noodle Kidoodle, Inc.
and Furr's/Bishop's, Incorporated.

EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
YEAR INDIVIDUAL
BECAME AN
EXECUTIVE
NAME AGE POSITION OFFICER
- ---- --- -------- ---------------
<S> <C> <C> <C>
Bennett S. LeBow............. 61 Chairman of the Board and 1988
Chief Executive Officer
Howard M. Lorber............. 50 President and Chief Operating 1994
Officer
Richard J. Lampen............ 45 Executive Vice President and 1995
General Counsel
J. Bryant Kirkland III....... 34 Vice President, Treasurer and 1998
Chief Financial Officer
Marc N. Bell................. 38 Vice President, Associate 1998
General Counsel and Secretary
</TABLE>

HOWARD M. LORBER has been President and Chief Operating Officer of the
Company since November 1994 and serves as a director of the Company. See
"-- Directors."

RICHARD J. LAMPEN has been Executive Vice President and General Counsel of
the Company since October 1995 and serves as a director of the Company. See
"-- Directors."

J. BRYANT KIRKLAND III has been Vice President, Treasurer and Chief
Financial Officer of the Company since January 1998 and since November 1994 has
served in various financial capacities with the Company and with Brooke and
BGLS. Mr. Kirkland has served as Vice President and Chief Financial Officer of
CDSI Holdings, Inc. since January 1998 and as a director of CDSI since November
1998. Before November 1994, Mr. Kirkland served as Director of Financial
Planning and Control of Liggett.

MARC N. BELL has been the Vice President of the Company since February 1998
and has served as Associate General Counsel and Secretary of the Company since
November 1994. Since May 1994, Mr. Bell has served as General Counsel and
Secretary of Brooke and BGLS and since January 1998 as Vice President. Before
May 1994, Mr. Bell was with the law firm of Zuckerman, Spaeder, Taylor & Evans
in Miami, Florida and from June 1991 to May 1993, with the law firm of
Fischbein-Badillo-Wagner-Harding in New York, New York.

39
<PAGE> 43

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding all persons
known by the Company to own beneficially more than 5% of the Company's Common
Shares (the only class of its voting securities) and Warrants as of June 1,
1999. The number of shares beneficially owned by each beneficial owner listed
below is based upon the numbers reported by such owner in documents publicly
filed with the SEC, publicly available information or information available to
the Company. The number of shares and percentage of class include shares of
which such beneficial owner has the right to acquire beneficial ownership as
specified in Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. The
information set forth in the following table gives effect to the
recapitalization.

Canyon Capital Advisors LLC...... 1,142,360(3) 4.9(4) 57,118 *
Mitchell R. Julis
Joshua S. Friedman
R. Christian B. Evensen
Suite 200
9665 Wilshire Boulevard
Beverly Hills, CA 90212
</TABLE>

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

* The percentage beneficially owned does not exceed 1% of the class.

(1) Based on Amendment No. 17 to Schedule 13D dated June 7, 1999, filed jointly
by Brooke, BGLS, New Valley Holdings Inc., a direct wholly-owned subsidiary
of BGLS, and Bennett S. LeBow. According to the filing, BGLS exercises sole
voting power and sole dispositive power, subject to the pledge described
below, over 85,603 Common Shares and 1,260,349 Warrants and NV Holdings
exercises sole voting power and sole dispositive power, subject to the
pledge over 12,763,516 Common Shares and 1,809,315 Warrants. Each of BGLS
and NV Holdings disclaims beneficial ownership of the shares beneficially
owned by the other under Rule 13d-3 under the Exchange Act, or for any other
purpose. Each of Brooke and Mr. LeBow disclaims beneficial ownership of
these shares under Rule 13d-3, or for any other purpose. BGLS and NV
Holdings have pledged their Company shares to secure certain notes issued by
BGLS. The securities issued in the recapitalization are subject to the
pledge and have been delivered to the trustee to perfect the lien. The
indenture also provides for restrictions on certain affiliated transactions
between the Company and Brooke, BGLS and their affiliates, as well as for
certain restrictions on the use of future distributions received from the
Company.

40
<PAGE> 44

(2) Assuming exercise of the warrants held by the named individual and entities
only, the percentage of class would be 60.3%. Assuming exercise of all
outstanding warrants, the percentage of class would be 38.3%.

(3) Canyon Capital Advisors LLC is an investment advisor to various managed
accounts. Capital Advisors LLC is owned in equal shares by entities
controlled by Messrs. Julis, Friedman and Evensen. The named entity and
individuals have reported that, as of March 5, 1999, the entity had sole
power, and the individuals shared power, to vote or to direct the voting and
to dispose or direct the disposition of 57, 118 Class A Senior Preferred
Shares.

(4) Assuming exercise of the warrants held by the named individuals and entities
only, the percentage of class would be 5.1%. Assuming exercise of all
outstanding warrants, the percentage of class would be .7%.

The following table sets forth, as of June 1, 1999, the beneficial
ownership of the Company's Common Shares and Warrants by each of the Company's
directors, each of the executive officers named in the Summary Compensation
Table below and all directors and executive officers as a group. The percentage
of each class includes shares of which such person has the right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under the Exchange Act.
The information set forth in the following table gives effect to the
recapitalization.

<TABLE>
<CAPTION>
NUMBER NUMBER
OF COMMON PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS WARRANTS OF CLASS
- ---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Bennett S. LeBow(1)(4)........... 12,849,119 55.1%(7) 3,069,664 17.2%
Howard M. Lorber(2)(4)........... 752,703 3.2(8) 328,112 1.8
Richard J. Lampen(4).............
Ronald J. Kramer(5)..............
Arnold I. Burns(5)...............
Henry C. Beinstein(3)(5)......... 11,500 *(9) 172,500 1.0
Barry W. Ridings(5)..............
Marc N. Bell(6)..................
J. Bryant Kirkland III(6)........
All directors and executive
officers as a group (9
persons)(1).................... 13,613,323 58.3(10) 3,570,276 19.6
</TABLE>

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

* The percentage beneficially owned does not exceed 1% of the class.

(1) Includes the BGLS shares and the NV Holding shares, as to which Mr. LeBow
disclaims beneficial ownership. See footnote (1) to the preceding table.

(2) Includes 32,666 Common Shares and 292,000 Warrants subject to employee
stock options exercisable within 60 days of June 1, 1999.

(3) Includes 833 Common Shares beneficially owned by his spouse, as to which
shares Mr. Beinstein disclaims beneficial ownership.

(4) The named individual is a director and an executive officer of the Company.

41
<PAGE> 45

(5) The named individual is a director of the Company.

(6) The named individual is an executive officer of the Company.

(7) Assuming exercise of the warrants held by the named individual only, the
percentage of class would be 60.3%. Assuming exercise of all outstanding
warrants, the percentage of class would be 38.3%.

(8) Assuming exercise of the warrants held by the named individual only, the
percentage of class would be 4.6%. Assuming exercise of all outstanding
warrants, the percentage of class would be 2.6%.

(9) Assuming exercise of the warrants held by the named individual only, the
percentage of class would be .8%. Assuming exercise of all outstanding
warrants, the percentage of class would be .4%.

(10) Assuming exercise of the warrants held by the group only, the percentage of
class would be 63.8%. Assuming exercise of all outstanding warrants, the
percentage of class would be 41.4%.

EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation awarded
to, earned by or paid during the past three years to those persons who were, at
December 31, 1998, the Company's Chief Executive Officer and the other executive
officers whose cash compensation exceeded $100,000.

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL SECURITIES
COMPENSATION RESTRICTED UNDERLYING
--------------------- STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD($) (#)
- --------------------------- ---- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Bennett S. LeBow..................... 1998 $2,000,000 -- -- --
Chairman and Chief 1997 2,000,000 -- -- --
Executive Officer 1996 2,000,000 -- -- --

Howard M. Lorber..................... 1998 1,400,000 $250,000 -- --
President and Chief Operating 1997 1,400,000 976,544(2) -- --
Officer 1996 1,250,000 300,000 $4,356,000(3) 427,000(4)

Richard J. Lampen(5)................. 1998 750,000 750,000 -- --
Executive Vice President and 1997 650,000 -- -- --
General Counsel 1996 600,000 100,000 -- --

Marc N. Bell(6)...................... 1998 300,000 300,000 -- --
Vice President, Associate
General Counsel and Secretary

J. Bryant Kirkland III(7)............ 1998 200,000 200,000 -- --
Vice President, Chief Financial
Officer and Treasurer
</TABLE>

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

(1) The aggregate value of perquisites and other personal benefits received by
the named executive officers are not reflected because the amounts were
below the reporting requirements established by SEC rules.

(2) Includes $476,544 paid to Mr. Lorber under the Company's obligation to
reimburse him for taxes relating to the vesting of the 1996 restricted stock
award. See "-- Employment Agreements."

(3) Represents an award of 36,000 Class A Senior Preferred Shares valued based
on the closing price on the date of issuance. Subject to earlier vesting
upon a change of control, the shares vest in six equal annual installments
commencing on July 1, 1997. The shares are identical with all other Class A
Senior Preferred Shares issued and

42
<PAGE> 46

outstanding as of July 1, 1996, including undeclared dividends of $3.776
million and declared dividends of $1.08 million. Dividends are payable on
the shares provided that such payments will be deferred until the time of
vesting. At December 31, 1998, the shares had a market value of $3.6 million
without giving effect to any diminution in value attributable to the
restrictions. As a result of the recapitalization, these shares were
converted into 720,000 Common Shares and 36,000 Warrants.

(4) Represents options to purchase 330,000 Common Shares and 97,000 Class B
Preferred Shares granted in 1996. As a result of the recapitalization, these
options now relate to 65,333 Common Shares and 584,000 Warrants.

(5) The table reflects 100% of Mr. Lampen's salary and bonus, all of which are
paid by the Company, and includes his salary and bonus from the Company and
a bonus of $500,000 awarded by Brooke for 1998. Of Mr. Lampen's salary and
bonus from the Company, 25% (or $250,000, $162,500 and $175,000 in 1998,
1997 and 1996, respectively) and all of the 1998 bonus from Brooke have been
or will be reimbursed to the Company by Brooke.

(6) In February 1998, Mr. Bell was appointed a Vice President of the Company.
The table reflects 100% of Mr. Bell's salary and bonus, all of which are
paid by Brooke. Of Mr. Bell's salary and bonus from Brooke, $200,000 has
been or will be reimbursed to Brooke by New Valley.

(7) In January 1998, Mr. Kirkland was appointed a Vice President of the Company.
The table reflects 100% of Mr. Kirkland's salary and bonus, all of which are
paid by the Company, and includes his salary and bonus from the Company and
a bonus of $133,333 awarded by Brooke for 1998. Of Mr. Kirkland's salary and
bonus from the Company, 25% (or $66,666) and all of the 1998 bonus from
Brooke have been or will be reimbursed to the Company by Brooke.

The following table sets forth certain information concerning unexercised
options held by the named executive officers as of December 31, 1998. The table
includes options exercisable within 60 days of the date of this prospectus.

AGGREGATED FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard M. Lorber
Class B Preferred
Shares................... 32,332(1) 64,668(3) $158,427* $316,873*
Common Shares............ 110,000(2) 220,000(4) -- --
</TABLE>

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

* Calculated using the closing price of $6.75 per Class B Preferred Share on
December 31, 1998 less the option exercise price.

(1) As a result of the recapitalization these options now are exercisable for
10,777 Common Shares and 161,660 Warrants with the aggregate exercise price
remaining the same.

43
<PAGE> 47

(2) As a result of the recapitalization these options now are exercisable for
11,000 Common Shares and 33,000 Warrants with the aggregate exercise price
remaining the same.

(3) As a result of the recapitalization these options now are exercisable for
21,556 Common Shares and 323,340 Warrants with the aggregate exercise price
remaining the same.

(4) As a result of the recapitalization these options now are exercisable for
22,000 Common Shares and 66,000 Warrants with the aggregate exercise price
remaining the same.

COMPENSATION OF DIRECTORS

In 1998, each non-employee director of the Company received an annual fee
of $35,000 for serving on the Board and a $1,000 fee for attending each meeting
of the Board or a committee of the Board.

EMPLOYMENT AGREEMENTS

Mr. LeBow is a party to an employment agreement with the Company dated as
of June 1, 1995, as amended effective as of January 1, 1996. The agreement has
an initial term of three years effective as of January 18, 1995, with an
automatic one-year extension on each anniversary of the effective date unless
notice of non-extension is given by either party within the 60-day period before
this date. As of January 1, 1999, Mr. LeBow's annual base salary was $2 million.
After termination of his employment without cause, he would continue to receive
his base salary for a period of 36 months commencing with the next anniversary
of the effective date following the termination notice. After termination of his
employment within two years of a change of control, he would receive a lump sum
payment equal to 2.99 times his then current base salary.

Howard M. Lorber is a party to an employment agreement with the Company
dated June 1, 1995. The agreement has an initial term of three years effective
as of January 18, 1995, with an automatic one-year extension on each anniversary
of the effective date unless notice of non-extension is given by either party
within 60 days before this date. As of January 1, 1999, Mr. Lorber's annual base
salary was $1.65 million. The Board must periodically review this base salary
and may increase but not decrease it from time to time in its sole discretion.
In addition, the Board may award an annual bonus to Mr. Lorber at its sole
discretion. The Board awarded Mr. Lorber a bonus of $250,000 for 1998. In
January 1998, Mr. Lorber and the Company entered into an amendment to his
employment agreement under which he is entitled to receive an additional annual
bonus in an amount necessary to reimburse him, on an after-tax basis, for all
applicable taxes incurred by him during the prior calendar year as a result of
the grant to him, or vesting, of the 1996 award of 36,000 restricted Class A
Senior Preferred Shares and options to acquire 330,000 Common Shares and 97,000
Class B Preferred Shares. In January 1998 Mr. Lorber received an additional
bonus of $476,544, which Mr. Lorber and the Company have agreed will constitute
full satisfaction of the Company's obligations under the amendment for 1997.
After termination of his employment without cause, he would continue to receive
his base salary for a period of 36 months commencing with the next anniversary
of the effective date following the termination notice. After termination of his

44
<PAGE> 48

employment within two years of a change of control, he is entitled to receive a
lump sum payment equal to 2.99 times the sum of his then current base salary and
the bonus amounts earned by him for the twelve-month period ending with the last
day of the month immediately before the month in which the termination occurs.

Richard J. Lampen is a party to an employment agreement with the Company
dated September 22, 1995. The agreement has an initial term of two and a quarter
years from October 1, 1995 with automatic renewals after the initial term for
additional one-year terms unless notice of non-renewal is given by either party
within the 90-day period before the termination date. As of January 1, 1999, his
annual base salary was $750,000. In addition, the Board may award an annual
bonus to Mr. Lampen at its sole discretion. The Board awarded Mr. Lampen a bonus
of $250,000 for 1998 and Brooke awarded Mr. Lampen a bonus of $500,000 for 1998.
The Board must review such base salary annually and may increase but not
decrease it from time to time, in its sole discretion. After termination of his
employment without cause, he will receive severance pay in a lump sum equal to
the amount of his base salary he would have received if he was employed for one
year after termination of his employment term.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company does not currently have a compensation committee. The Board
acts on compensation matters as a committee of the whole. Mr. LeBow has been
Chairman of the Board of the Company since 1988 and Chief Executive Officer
since November 1994, Mr. Lorber was named President and Chief Operating Officer
of the Company in November 1994, Mr. Kramer was named Chairman of the Board and
Chief Executive Officer of Ladenburg Group, Inc. in June 1995 and Chairman of
the Board and Chief Executive Officer of Ladenburg in December 1995, and Mr.
Lampen was named Executive Vice President and General Counsel of the Company in
October 1995.

During 1998, Mr. LeBow was Chairman of the Board, President and Chief
Executive Officer of Brooke and BGLS and a member of Brooke's compensation
committee. During 1998, Mr. Lampen was Executive Vice President of Brooke and
BGLS.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Mr. Lorber, a director and executive officer of the Company, is a
stockholder and registered representative of Aegis, a broker-dealer that has
performed services for the Company and its affiliates since before January 1,
1996. Aegis received commissions and other income from the Company and its
affiliates in the aggregate amount of approximately $317,000 during 1996,
$522,000 during 1997, $128,000 during 1998 and $26,000 for the four months ended
April 30, 1999. Aegis, in the ordinary course of its business, engages in
brokerage activities with Ladenburg on customary terms. Mr. Lorber is also
Chairman of the Board and Chief Executive Officer of Hallman & Lorber and its
affiliates, and serves as a consultant to Brooke and BGLS and is a stockholder
of Brooke.

Hallman & Lorber and its affiliates received ordinary and customary
insurance commissions aggregating approximately $136,000 during 1996, $133,000
during 1997, $128,000 during 1998 and $29,000 for the four months ended April
30, 1999, on various insurance policies issued for the Company and its
affiliates.

On December 18, 1996, the Company loaned BGLS $990,000 under a promissory
note due January 31, 1997 bearing interest at 14%. On January 2, 1997, the
Company

45
<PAGE> 49

loaned BGLS an additional $975,000 under another promissory note due January 31,
1997 bearing interest at 14%. Both loans including interest were repaid on
January 31, 1997. In September 1998, the Company made a one-year $950,000 loan
to BGLS which bears interest at 14%.

On January 31, 1997, the Company entered into the BrookeMil purchase
agreement with Brooke (Overseas), a wholly-owned subsidiary of Brooke, under
which the Company acquired the BrookeMil shares. The Company paid Brooke
(Overseas) a purchase price of $55 million, consisting of $21.5 million in cash
and a $33.5 million 9% promissory note of the Company. The note has been paid in
full. The amount of consideration paid by the Company was determined based on a
number of factors including current valuations of the assets, future development
plans, local real estate market conditions and prevailing economic and political
conditions in Russia. The Company retained independent legal counsel and
financial advisors to evaluate and negotiate the transaction, which was approved
by a special committee of the independent directors of the Company. Under the
terms of the bankruptcy plan, the transaction was approved by not less than
two-thirds of the entire Board, including the approval of at least one of the
directors elected by the holders of the Preferred Shares, and a fairness opinion
from an investment banking firm was obtained. See "Business -- BrookeMil Ltd."
and "-- Legal Proceedings" as well as Notes 3 and 10 to the Company's
Consolidated Financial Statements for information concerning the transaction and
a pending lawsuit relating to the Company's purchase of the BrookeMil shares.

In 1995, the Company and Brooke entered into an expense sharing agreement
under which certain lease, legal and administrative expenses are allocated to
the entities incurring the expense. Under this agreement the Company expensed
approximately $462,000 for 1996, $312,000 for 1997, $502,000 for 1998 and
$148,000 for the three months ended March 31, 1999.

During 1996, the Company entered into a court-approved settlement with
Brooke and BGLS relating to their application under the Bankruptcy Code for
reimbursement of expenses incurred by them in the Company's bankruptcy
proceedings. Under the settlement, the Company reimbursed Brooke and BGLS
$655,217 for such expenses. The terms of the settlement were substantially
similar to the terms of previous settlements between the Company and other
applicants who had sought reimbursement of reorganization-related legal fees and
expenses.

Richard Ressler, a former director of the Company, is Chairman of the Board
and the beneficial owner of 17.8% of the shares of MAI Systems Corporation,
Brooke's former indirect majority-owned subsidiary. In 1996 MAI entered into
certain arrangements with Ladenburg under which MAI has sold computer and
software products and has been providing related professional and support
services to Ladenburg. Ladenburg paid MAI approximately $100,000 in 1996 and
$610,000 in 1997 for such products and services. In addition, Ladenburg paid
another company controlled by Mr. Ressler approximately $10,000 in 1996 and
$143,000 in 1997 for communications consulting services.

In March 1997, the Company acquired a membership interest in Orchard/JFAX
Investors, LLC, of which Mr. Ressler serves as a managing member, for $1
million. Orchard/JFAX Investors, LLC holds a controlling interest in JFAX.COM,
Inc., an Internet-based messaging and communications services provider in which
the Company has an indirect minority interest.

46
<PAGE> 50

In February 1998, the Company and Apollo organized Western Realty Ducat to
make real estate and other investments in Russia. When Western Realty Ducat was
formed, the Company agreed to contribute to Western Realty Ducat the real estate
assets of BrookeMil, and Apollo agreed to contribute up to $58 million. Western
Realty Ducat has made a $30 million participating loan to, payable out of a 30%
profits interest in, a company organized by Brooke (Overseas) that holds Brooke
(Overseas)'s interest in Liggett-Ducat Ltd. and the new factory constructed by
Liggett-Ducat Ltd. on the outskirts of Moscow.

Until January 1999, Mr. Burns, a director of the Company, was a partner of
Proskauer Rose LLP, a law firm which has been engaged to perform legal services
for the Company in the past and which may be so engaged in the future. The fees
received for such legal services in 1996, 1997 and 1998 did not exceed five
percent of the law firm's revenues.

From October 1995 through August 1997, Mr. Beinstein, a director of the
Company, served as the Managing Director of Milbank, Tweed, Hadley & McCloy LLP,
a law firm which has performed services for the Company in the past and may do
so in the future. The fees received for these services in 1996 and 1997 did not
exceed five percent of the law firm's revenues.

For information concerning certain agreements and transactions between the
Company and Brooke relating to RJR Nabisco, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Introduction -- The
Company's Investment in RJR Nabisco" and Note 5 to the Company's Consolidated
Financial Statements.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 100,000,000 Common
Shares and 10,000,000 Class C Preferred Shares. American Stock Transfer & Trust
Company, New York, New York, serves as the transfer agent and registrar for the
Common Shares.

The following summaries of the terms of the Company's capital stock are not
complete and are qualified by reference to the Certificate of Incorporation
which has been incorporated by reference as an exhibit to the registration
statement of which this prospectus forms a part.

Each outstanding share of the Company's capital stock is fully paid and
nonassessable.

CLASS C PREFERRED SHARES

The Board has authority to issue the Class C Preferred Shares in one or
more series and to fix their terms. The Class C Preferred Shares rank senior to
the Common Shares in liquidation and in respect of dividends.

47
<PAGE> 51

COMMON SHARES

DIVIDENDS. Holders of the Common Shares are entitled to dividends when
declared by the Board out of legally available funds. Payment of dividends is
subject to the rights of the holders of shares ranking above Common Shares as to
distributions and limitations on the payment of dividends contained in certain
of the Company's outstanding debt instruments.

LIQUIDATION RIGHTS. On liquidation of the Company, the net assets of the
Company will be distributed pro rata to the holders of Common Shares (after
payment is made on any outstanding Preferred Shares, if any) of the stated
liquidation preference together with all cumulative dividends for the current
and all prior quarterly periods.

VOTING RIGHTS. Each Common Share is entitled to one vote for all purposes,
except as otherwise provided by law or as expressly provided in the Certificate
of Incorporation.

MARKET FOR COMMON SHARES. The Common Shares are quoted on the OTC
Electronic Bulletin Board, a National Association of Securities Dealers
sponsored inter-dealer automated quotation system, under the symbols NVAL.

The following table sets forth, for the calendar quarters indicated, the
range of per share prices for the Common Shares. Prices reflect quotations on
the NASD OTC Electronic Bulletin Board. Quotations reflect inter-dealer prices
in the over-the-counter market, without retail markups, markdowns or
commissions, and do not necessarily represent actual transactions. No cash
dividends have been declared by the Company on the Common Shares, and the
Company does not currently intend to pay a dividend on the Common Shares in the
foreseeable future. On June 11, 1999, the last trading price as quoted on the
NASD OTC Electronic Bulletin Board for the post-recapitalization Common Shares
was $4.625 per share.

48
<PAGE> 52

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1999
Second Quarter (from June 7, 1999 through June 11, 1999
(post-recapitalization period))........................... 5.125 4.625
Second Quarter (through June 4, 1999 effective date of
recapitalization)......................................... $ .75 $ .22
First Quarter............................................... .84 .38
1998
Fourth Quarter.............................................. 2.00 .25
Third Quarter............................................... .50 .32
Second Quarter.............................................. .94 .44
First Quarter............................................... 1.18 .50
1997
Fourth Quarter.............................................. 1.00 .47
Third Quarter............................................... 1.22 .75
Second Quarter.............................................. 1.56 .91
First Quarter............................................... 1.94 1.38
</TABLE>

At June 7, 1999, there were approximately 14,066 holders of record of the Common
Shares.

PLAN OF DISTRIBUTION

The Common Shares are to be issued upon the exercise of the outstanding
Warrants issued to the Company stockholder's pursuant to a plan of
recapitalization which was implemented on June 4, 1999.

DESCRIPTION OF THE WARRANTS

The Warrants are governed by a warrant agreement between the Company and
American Stock Transfer and Trust Company, as warrant agent. Below is a brief
summary of the terms of the Warrants and the warrant agreement. This summary is
subject to the provisions of the warrant agreement and the warrant certificates
representing the Warrants. The warrant agreement, including the form of warrant
certificate, is an exhibit to the registration statement of which this
prospectus is a part.

EXERCISE OF WARRANTS. Each Warrant entitles the holder to purchase one
Common Share at an exercise price of $12.50 per share. The Warrants may be
exercised during the period commencing on the effective date of the Company's
registration statement covering the underlying Common Shares, of which this
prospectus is a part, and ending on the fifth anniversary thereafter. The
Company may redeem the warrants for $0.01 per warrant on 30 days' notice to the
holders if, at any time after June 4, 2002, the third anniversary of the
effective time of the plan of recapitalization, 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, however, may be exercised by the holders during the period following
such notice and before such redemption.

49
<PAGE> 53

The Warrants may be exercised by surrendering properly endorsed
certificates to the warrant agent together with full payment of the exercise
price for each Common Share underlying the Warrant being exercised, and any
applicable transfer or other taxes.

ADJUSTMENT OF PURCHASE PRICE. The exercise price will be reduced by the
amount of any 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. The Company also has the right,
at any time, to voluntarily reduce the Exercise Price to such amount and for
such periods as may be deemed appropriate by the Board of Directors of the
Company.

AMENDMENT. The Warrants may be amended only if the Company has obtained
the consent of the holders of Warrants representing a majority of the Common
Shares issuable upon exercise of all outstanding Warrants. However, no amendment
may increase the exercise price of the Warrants or decrease the number of Common
Shares issuable upon exercise of a Warrant without the consent of the holders of
Warrants representing at least 66 2/3% of the Common Shares issuable upon
exercise of all outstanding Warrants.

NOTICES. Notices to each registered Warrant holder will be made by the
Company by first-class mail, postage prepaid, in the following circumstances:

- upon the fixing of a date for redemption, the establishing of the
exercise date, and the fixing of a reduced exercise price and reduced
exercise price period, for the Warrants,

- upon any adjustment to the exercise price of the Warrants or the number
of Common Shares purchasable upon exercise of a Warrant,

- upon the authorization by the Company of the issuance to all holders of
Common Shares of rights or warrants to subscribe for or purchase Common
Shares (or of any other subscription rights or warrants), or the
distribution to all holders of Common Shares of evidences of indebtedness
or assets (other than cash dividends or distributions in cash),

- upon any consolidation or merger to which the Company is a party and for
which approval by holders of Common Shares is required, or the conveyance
or transfer of the properties or assets of the Company substantially as
an entirety, or any reclassification or change of Common Shares (other
than a change in par value, if any, or as a result of a subdivision or
combination), or

- the voluntary or involuntary dissolution, liquidation or winding up of
the Company.

In addition, upon the declaration of cash dividends or distributions in
cash on all Common Shares, the Company shall cause notice of such payment to be
given to the Warrant holders in such manner as the Company determines to be fair
and appropriate, including by public announcement.

OTHER MATTERS. The Company is not required to issue any fractional
Warrants or any fractional Common Shares on the exercise of warrants or the
occurrence of adjustments

50
<PAGE> 54

under antidilution provisions. Instead, the Company will pay cash based on the
market value of the Common Shares.

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

The following discussion describes certain material federal income tax
considerations relating to the exercise of the Warrants and represents the
opinion of Milbank, Tweed, Hadley & McCloy LLP. This discussion is based upon
the Internal Revenue Code of 1986, existing and proposed regulations,
legislative history, judicial decisions, and current administrative rulings and
practices, all as amended and in effect on the date hereof. Any of these
authorities could be repealed, overruled, or modified at any time. Any change
could be retroactive and, accordingly, could cause the tax consequences to vary
substantially from the consequences described here. No ruling from the IRS with
respect to the matters discussed has been requested, and there is no assurance
that the IRS would agree with the conclusions set forth in this discussion. All
stockholders should consult their own tax advisors.

This discussion may not address certain federal income tax consequences
that may be relevant to particular stockholders in light of their personal
circumstances (such as persons subject to the alternative minimum tax) or to
certain types of stockholders who may be subject to special treatment under the
federal income tax laws (such as dealers in securities, insurance companies,
foreign individuals and entities, financial institutions, and tax-exempt
entities). This discussion also does not address any tax consequences under
state, local, or foreign laws. The following discussion of federal income tax
considerations is for general information only and is not tax advice.

STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES TO THEM OF THE PLAN OF RECAPITALIZATION, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE
TAX LAWS, AND ANY PENDING OR PROPOSED LEGISLATION.

EXERCISE OF WARRANTS FOR COMMON SHARES

Generally, holders of Warrants will not recognize gain or loss upon the
exercise of Warrants for Common Shares. The holder's basis in the Common Shares
received in exchange for a Warrant will equal the holder's basis in the Warrant
plus any amount paid on the exercise of the Warrant. The holder's holding period
for the Common Shares will begin on the day the Warrant is exercised. Under
Section 305 of the Code, holders of Warrants may be deemed to receive a deemed
distribution of stock if the number of Common Shares which a Warrant holder may
acquire by exercising its Warrant is adjusted to reflect certain distributions
with respect to the Common Shares. An adjustment made pursuant to a bona fide
formula that has the effect of preventing the dilution of the interest of the
Warrant holders generally will not have that effect. Under the Warrants' anti-
dilution provisions, in certain circumstances it is possible that some
adjustments to the exercise price of the Warrants will be treated as a
distribution. The distribution would be treated as a dividend to the extent of
the Company's current and accumulated earnings and profits in the year of
distribution, then as a return of capital to the extent of the holder's basis in
the Warrant and then as capital gain.

51
<PAGE> 55

LEGAL MATTERS

The legality of the Common Shares to be issued upon the exercise of the
Warrants, as well as certain tax matters concerning the Warrants, are being
passed on by Milbank, Tweed, Hadley & McCloy LLP, New York, New York.

EXPERTS

The consolidated financial statements of the Company and subsidiaries at
December 31, 1998 and December 31, 1997 and for each of the three years in the
period ended December 31, 1998 included in this prospectus have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

52
<PAGE> 56

NEW VALLEY CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the years ended December 31, 1998, 1997
and 1996.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998..................................... F-32
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998................ F-33
Condensed Consolidated Statements of Changes in
Stockholders' Equity (Deficiency) for the three months
ended March 31, 1999 and 1998............................. F-34
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998................ F-35
Notes to Condensed Consolidated Financial Statements........ F-36
</TABLE>

F-1
<PAGE> 57

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of stockholders' equity and cash flows present fairly, in all
material respects, the financial position of New Valley Corporation and its
subsidiaries (the "Company") at December 31, 1998 and December 31, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1997 and 1996
financial statements of Thinking Machines Corporation, a consolidated
subsidiary, which statements reflect total assets of $5,604,159 at December 31,
1997, and total revenues of $350,234 for the year ended December 31, 1997. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Thinking Machines Corporation, is based solely on the
report of the other auditors. We conducted our audits of the consolidated
financial statements in accordance with generally accepted auditing standards
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 and the report of
other auditors provide a reasonable basis for the opinion expressed above.

As discussed in the notes to the consolidated financial statements, the
investments and operations of the Company, and those of similar companies in the
Russian Federation, have been significantly affected, and could continue to be
affected for the foreseeable future, by the country's unstable economy caused in
part by the currency volatility in the Russian Federation.

PricewaterhouseCoopers LLP

Miami, Florida

March 19, 1999

F-2
<PAGE> 58

NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 16,444 $ 11,606
Investment securities available for sale............... 37,567 51,993
Trading securities owned............................... 8,984 49,988
Restricted assets...................................... 1,220 232
Receivable from clearing brokers....................... 22,561 1,205
Other current assets................................... 4,675 3,618
--------- ---------
Total current assets................................ 91,451 118,642
--------- ---------
Investment in real estate, net........................... 82,875 259,968
Furniture and equipment, net............................. 10,444 12,194
Restricted assets........................................ 6,082 5,484
Long-term investments, net............................... 9,226 27,224
Investment in joint venture.............................. 65,193 --
Other assets............................................. 7,451 17,879
--------- ---------
Total assets........................................ $ 272,722 $ 441,391
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable.................................... $ 13,088 $ 13,012
Current portion of notes payable and long-term
obligations......................................... 2,745 760
Accounts payable and accrued liabilities............... 32,047 55,222
Prepetition claims and restructuring accruals.......... 12,364 12,611
Income taxes........................................... 18,702 18,413
Securities sold, not yet purchased..................... 4,635 25,610
--------- ---------
Total current liabilities........................... 83,581 125,628
--------- ---------
Notes payable............................................ 54,801 176,314
Other long-term liabilities.............................. 23,450 11,210
Commitments and contingencies............................ -- --
Redeemable preferred shares.............................. 316,202 258,638
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of
$69,769, dividends in arrears: 1998 -- $165,856;
1997 -- $139,412.................................... 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding............ 96 96
Additional paid-in capital............................. 550,119 604,215
Accumulated deficit.................................... (758,016) (742,427)
Unearned compensation on stock options................. (475) (158)
Accumulated other comprehensive income................. 2,685 7,596
--------- ---------
Total stockholders' deficiency...................... (205,312) (130,399)
--------- ---------
Total liabilities and stockholders' deficiency...... $ 272,722 $ 441,391
========= =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-3
<PAGE> 59

NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Principal transactions, net................ $ 11,430 $ 16,754 $ 28,344
Commissions................................ 28,284 16,727 17,755
Corporate finance fees..................... 14,733 12,514 10,230
Gain on sale of investments, net........... 11,768 19,202 10,014
Loss in joint venture...................... (4,976) -- --
Real estate leasing........................ 20,577 27,067 23,559
Gain on sale of real estate................ 4,682 1,290 --
Computer sales and service................. 794 3,947 15,017
Interest and dividends..................... 8,808 9,417 16,951
Other income............................... 5,987 7,650 8,995
---------- ---------- ----------
Total revenues.......................... 102,087 114,568 130,865
---------- ---------- ----------
Costs and expenses:
Selling, general and administrative
expenses................................ 110,375 119,205 140,399
Interest................................... 13,939 16,988 17,760
Recovery of restructuring charges.......... -- -- (9,706)
Provision for loss on long-term
investments............................. 3,185 3,796 1,001
---------- ---------- ----------
Total costs and expenses................ 127,499 139,989 149,454
---------- ---------- ----------
Loss from continuing operations before income
taxes and minority interests............... (25,412) (25,421) (18,589)
Income tax provision......................... 6 186 300
Minority interests in loss from continuing
operations of consolidated subsidiaries.... 2,089 1,347 4,241
---------- ---------- ----------
Loss from continuing operations.............. (23,329) (24,260) (14,648)
Discontinued operations (Note 22):
Gain on disposal of discontinued
operations.............................. 7,740 3,687 7,158
---------- ---------- ----------
Income from discontinued operations..... 7,740 3,687 7,158
---------- ---------- ----------
Net loss..................................... (15,589) (20,573) (7,490)
Dividend requirements on preferred shares.... (80,964) (68,475) (61,949)
Excess of carrying value of redeemable
preferred shares over cost of shares
purchased.................................. -- -- 4,279
---------- ---------- ----------
Net loss applicable to Common Shares......... $ (96,553) (89,048) $ (65,160)
========== ========== ==========
Income (loss) per common share (Basic and
Diluted):
Continuing operations...................... $ (10.89) (9.68) $ (7.55)
Discontinued operations.................... .81 .38 .75
---------- ---------- ----------
Net loss................................ $ (10.08) (9.30) $ (6.80)
========== ========== ==========
Number of shares used in computation......... 9,577,624 9,577,624 9,577,624
========== ========== ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-4
<PAGE> 60

NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(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
--------- ------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995..... $279 $ 1,916 $679,058 $(714,364) $ 2,650
Net loss..................... (7,490)
Undeclared dividends and
accretion on redeemable
preferred shares........... (41,123)
Purchase of redeemable
preferred shares........... 4,279
Effect of 1-for-20 reverse
stock split................ (1,820) 1,820
Issuance of stock options.... 755 $(755)
Compensation expense on stock
option grants.............. 24
Unrealized gain on investment
securities................. 2,407
---- ------- -------- --------- ----- -------
Balance, December 31, 1996..... 279 96 644,789 (721,854) (731) 5,057
Net loss..................... (20,573)
Undeclared dividends and
accretion on redeemable
preferred shares........... (45,148)
Unrealized gain on investment
securities................. 2,539
Compensation expense on stock
option grants.............. 15
Adjustment to unearned
compensation on stock
options.................... (558) 558
Public sale of subsidiaries'
common stock, net.......... 5,132
---- ------- -------- --------- ----- -------
Balance, December 31, 1997..... 279 96 604,215 (742,427) (158) 7,596
Net loss..................... (15,589)
Undeclared dividends and
accretion on redeemable
preferred shares........... (54,520)
Adjustment to unearned
compensation on stock
options.................... 424 (424)
Compensation expense on stock
option grants.............. 107
Unrealized loss on investment
securities................. (4,911)
---- ------- -------- --------- ----- -------
Balance, December 31, 1998..... $279 $ 96 $550,119 $(758,016) $(475) $ 2,685
==== ======= ======== ========= ===== =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-5
<PAGE> 61

NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(15,589) $(20,573) $ (7,490)
Adjustments to reconcile net loss to net cash used for
operating activities:
Income from discontinued operations...................... (7,740) (3,687) (7,158)
Depreciation and amortization............................ 6,495 9,414 4,757
Loss in joint venture.................................... 4,976 -- --
Provision for loss on long-term investments.............. 3,185 3,796 1,001
Gain on sales of real estate and liquidation of long-term
investments............................................ (9,452) (1,290) --
Reversal of restructuring accruals....................... -- -- (9,706)
Stock based compensation expense......................... 3,151 2,934 384
Other.................................................... 578 -- --
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Decrease (increase) in receivables and other assets...... 19,376 4,474 (13,813)
Increase (decrease) in income taxes payable.............. 396 170 (2,040)
(Decrease) increase in accounts payable and accrued
liabilities............................................ (27,073) 4,513 11,336
-------- -------- ---------
Net cash used for continuing operations..................... (21,697) (249) (22,699)
Net cash provided from discontinued operations.............. 7,740 -- --
-------- -------- ---------
Net cash used for operating activities...................... (13,957) (249) (22,699)
-------- -------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities.................. 22,888 45,472 160,088
Purchase of investment securities.......................... (19,429) (30,756) (12,825)
Sale or liquidation of long-term investments............... 25,895 2,807 18,292
Purchase of long-term investments.......................... (13,590) (15,384) (3,051)
Sale of real estate, net of closing costs.................. 111,292 8,718 --
Purchase of and additions to real estate................... (18,236) (10,777) (24,496)
Purchase of furniture and equipment........................ (583) (3,478) (5,240)
Payment of prepetition claims and restructuring accruals... (1,061) (828) (8,160)
Payment for acquisitions, net of cash acquired............. -- (20,014) 1,915
(Increase) decrease in restricted assets................... (1,586) 3,130 29,159
Cash contributed to joint venture.......................... (442) -- --
Net proceeds from disposal of business..................... -- -- 10,174
Other, net................................................. (935) -- --
-------- -------- ---------
Net cash provided from (used for) investing activities...... 104,213 (21,110) 165,856
-------- -------- ---------
Cash flows from financing activities:
Payment of preferred dividends............................. -- -- (41,419)
Proceeds from participating loan........................... 14,300 -- --
Purchase of redeemable preferred shares.................... -- -- (10,530)
Increase (decrease) in margin loan payable................. 76 13,012 (75,119)
Payment of long-term notes and other liabilities........... (99,303) (62,739) (10,549)
Increase in long-term borrowings........................... -- 19,993 --
Issuance of subsidiary stock............................... -- 5,417 --
Other, net................................................. (491) -- --
-------- -------- ---------
Net cash used for financing activities...................... (85,418) (24,317) (137,617)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,838 (45,676) 5,540
Cash and cash equivalents, beginning of year................ 11,606 57,282 51,742
-------- -------- ---------
Cash and cash equivalents, end of year...................... $ 16,444 $ 11,606 $ 57,282
======== ======== =========
Supplemental cash flow information:
Cash paid during the year for:
Interest................................................. $ 11,958 $ 16,667 $ 17,482
Income taxes............................................. 169 116 2,341
Detail of acquisitions:
Fair value of assets acquired.............................. $ -- $ 94,114 $ 27,301
Liabilities assumed........................................ -- 74,100 16,701
-------- -------- ---------
Cash paid.................................................. -- 20,014 10,600
Less cash acquired......................................... -- -- (12,515)
-------- -------- ---------
Net cash paid for acquisition.............................. $ -- $(20,014) $ (1,915)
======== ======== =========
Detail of contribution to joint venture:
Fair value of assets contributed........................... $ 97,107 $ -- $ --
Liabilities contributed.................................... (37,380) -- --
Capital contribution....................................... (60,169) -- --
-------- -------- ---------
Net cash contributed to joint venture...................... $ (442) $ -- --
======== ======== =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-6
<PAGE> 62

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 (the "Company"). The Company's
investment in Western Realty Development LLC has been accounted for under the
equity method. All significant intercompany transactions are eliminated in
consolidation.

Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation.

NATURE OF OPERATIONS

The Company and its subsidiaries are engaged in the investment banking and
brokerage business, in the ownership and management of commercial real estate,
and in the acquisition of operating companies. As discussed in Note 21, the
investment banking and brokerage segment accounted for 65% and 49% of the
Company's revenues and 24% and 39% of the Company's operating loss from
continuing operations for the years ended December 31, 1998 and 1997,
respectively. The Company's investment banking and brokerage segment provides
its services principally for middle market and emerging growth companies through
a coordinated effort among corporate finance, research, capital markets,
investment management, brokerage and trading professionals.

PROPOSED RECAPITALIZATION PLAN

The Company intends to submit for approval of its stockholders at its 1999
annual meeting a proposed recapitalization of its capital stock (the
"Recapitalization Plan"). Under the Recapitalization Plan, each of the Company's
outstanding Class A Senior Preferred Shares would be reclassified and changed
into 20 Common Shares and one Warrant to purchase Common Shares (the
"Warrants"). Each of the Class B Preferred Shares would be reclassified and
changed into one-third of a Common Share and five Warrants. The existing Common
Shares would be reclassified and changed into one-tenth of a Common Share and
three-tenths of a Warrant. The authorized number of Common Shares would be
reduced from 850,000,000 to 100,000,000. The Warrants to be issued as part of
the Recapitalization Plan would have an exercise price of $12.50 per share
subject to adjustment in certain circumstances and be exercisable for five years
following the effective date of the Company's Registration Statement covering
the underlying Common Shares. The Warrants would not be callable by the Company
for a three-year period. Upon completion of the Recapitalization Plan, the
Company will apply for listing of the Common Shares and Warrants on NASDAQ.

Completion of the Recapitalization Plan would be subject to, among other
things, approval by the required holders of the various classes of the Company's
shares, effectiveness of the Company's proxy statement and prospectus for the
annual meeting, receipt of a fairness opinion and compliance with the
Hart-Scott-Rodino Act.

F-7
<PAGE> 63
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Brooke Group Ltd. ("Brooke"), the Company's principal stockholder, has
agreed to vote all of its shares in the Company in favor of the Recapitalization
Plan. As a result of the Recapitalization Plan and assuming no warrant holder
exercises its Warrants, Brooke will increase its ownership of the outstanding
Common Shares of the Company from 42.3% to 55.1% and its total voting power from
42% to 55.1%.

The Company believes the proposed Recapitalization Plan will simplify the
current capital structure of the Company by replacing it with a single class of
equity securities. The exchange of the Preferred Shares for Common Shares will
eliminate dividend arrearages, thus increasing the net worth of the Company by
approximately $316,202 on a pro forma basis as of December 31, 1998. It will
also remove the need to redeem the Class A Senior Preferred Shares in 2003. The
resulting improvement in the net worth of the Company, along with a hoped for
increase in the price of the Common Shares, should increase the likelihood of
having the Common Shares quoted on NASDAQ. This, along with a more transparent
capital structure, should increase the liquidity of the Company's securities,
improve the valuation of the Common Shares and provide a currency for
acquisitions and financings. Finally, the recapitalization will allow the voting
rights of stockholders to properly reflect the economic interest of such
stockholders.

REORGANIZATION

On November 15, 1991, an involuntary petition under Chapter 11 of Title 11
of the United States Code (the "Bankruptcy Code") was commenced against the
Company in the United States Bankruptcy Court for the District of New Jersey
(the "Bankruptcy Court"). On March 31, 1993, the Company consented to the entry
of an order for relief placing it under the protection of Chapter 11 of the
Bankruptcy Code.

On November 1, 1994, the Bankruptcy Court entered an order confirming the
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the "Joint
Plan"). The terms of the Joint Plan provided for, among other things, the sale
of Western Union Financial Services Company, Inc. ("FSI"), a wholly-owned
subsidiary of the Company, and certain other Company assets related to FSI's
money transfer business, payment in cash of all allowed claims, payment of
postpetition interest in the amount of $178,000 to certain creditors, a $50 per
share cash dividend to the holders of the Company's Class A Senior Preferred
Shares, a tender offer by the Company for up to 150,000 shares of the Class A
Senior Preferred Shares, at a price of $80 per share, and the reinstatement of
all of the Company's equity interests.

On November 15, 1994, pursuant to the Asset Purchase Agreement, dated as of
October 20, 1994, as amended (the "Purchase Agreement"), by and between the
Company and First Financial Management Corporation ("FFMC"), FFMC purchased all
of the common stock of FSI and other assets relating to FSI's money transfer
business for $1,193,000 (the "Purchase Price"). The Purchase Price consisted of
$593,000 in cash, $300,000 representing the assumption of the Western Union
Pension Plan obligation, and $300,000 paid on January 13, 1995 for certain
intangible assets of FSI. The Purchase Agreement contained various terms and
conditions, including the escrow of $45,000 of the Purchase Price, a put option
by the Company to sell to FFMC, and a call option by FFMC to purchase, Western
Union Data Services Company, Inc., a wholly-owned

F-8
<PAGE> 64
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiary of the Company engaged in the messaging service business (the
"Messaging Services Business"), for $20,000, exercisable during the first
quarter of 1996, and various services agreements between the Company and FFMC.

On January 18, 1995, the effective date of the Joint Plan, the Company paid
approximately $550,000 on account of allowed prepetition claims and emerged from
bankruptcy. At December 31, 1998, the Company's remaining accruals totaled
$12,364 for unsettled prepetition claims and restructuring accruals (see Note
17). 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.

REINCORPORATION AND REVERSE STOCK SPLIT. On July 29, 1996, the Company
completed its reincorporation from the State of New York to the State of
Delaware and effected a one-for-twenty reverse stock split of the Company's
Common Shares. In connection with the reverse stock split, all per share data
have been restated to reflect retroactively the reverse stock split.

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 loan, 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. The fair value of the Company's
redeemable preferred shares is based on their last reported sales price.

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 (deficiency). Debt securities
classified as held to maturity are carried at amortized cost. Realized gains and
losses are included in other income, except for those relating to the Company's
broker-dealer

F-9
<PAGE> 65
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

subsidiary which are included in principal transactions revenues. The cost of
securities sold is determined based on average cost.

RESTRICTED ASSETS. Restricted assets at December 31, 1998 consisted
primarily of $5,831 pledged as collateral for a $5,000 letter of credit which is
used as collateral for a long-term lease of commercial office space. Restricted
assets at December 31, 1997 consisted primarily of $5,484 pledged as collateral
for the $5,000 letter of credit.

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 (see Note 7).
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.

INCOME TAXES. Under Statement of Financial Accounting Standards ("SFAS")
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. The future minimum rents
scheduled to be received on non-cancelable operating leases at December 31, 1998
are $6,013, $5,519, $4,685, $4,239 and $3,662 for the years 1999, 2000, 2001,
2002 and 2003, respectively, and $16,872 for subsequent years.

BASIC INCOME (LOSS) PER COMMON SHARE. Basic net income (loss) per common
share is based on the weighted average number of Common Shares outstanding. 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

F-10
<PAGE> 66
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the shares purchased. 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 conversion of convertible
preferred shares and the exercise of stock options and warrants if such
conversion was dilutive.

Options to purchase 330,000 common shares at $.58 per share and 40,417
common shares issuable upon the conversion of Class B Preferred Shares were not
included in the computation of diluted loss per share as the effect would have
been anti-dilutive.

In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards
designed to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Prior years' EPS have been restated to conform
with standards established by SFAS No. 128.

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. Beginning in 1995 with the adoption of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", assets are grouped and evaluated at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the estimated
future cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected undiscounted future cash flows,
the Company measures the amount of the impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows at the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the best information available making whatever estimates, judgments and
projections are considered necessary.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 did not have a material impact on the
Company's financial statements.

For transactions entered into in fiscal years beginning after December 15,
1997, the Company adopted and is reporting in accordance with SOP 97-2,
"Software Revenue Recognition". The adoption of SOP 97-2 did have a material
impact on the Company's financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for the way
that public

F-11
<PAGE> 67
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

business enterprises report information about operating segments. The Company
has adopted SFAS No. 131 and has restated its financial statements accordingly.

3. ACQUISITIONS AND DISPOSITIONS

On May 31, 1995, the Company consummated its acquisition of Ladenburg,
Thalmann & Co. Inc. ("Ladenburg"), 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 and, accordingly, these consolidated
financial statements include the operations of Ladenburg from the date of
acquisition. The excess of the consideration paid over the estimated fair value
of net assets acquired of $1,342 has been recorded as goodwill to be amortized
on a straight-line basis over 15 years.

On January 10 and January 11, 1996, the Company acquired four commercial
office buildings (the "Office Buildings") and eight shopping centers (the
"Shopping Centers") for an aggregate purchase price of $183,900, consisting of
$23,900 in cash and $160,000 in non-recourse mortgage financing provided by the
sellers. In addition, the Company has capitalized approximately $800 in costs
related to the acquisitions. The Company paid $11,400 in cash and executed four
promissory notes aggregating $100,000 for the Office Buildings. On September 28,
1998, the Company completed the sale to institutional investors of the Office
Buildings for an aggregate purchase price of $112,400 and recognized a gain of
$4,682 on the sale. The Company received approximately $13,400 in cash from the
transaction before closing adjustments and expenses. The Office Buildings were
subject to approximately $99,300 of mortgage financing which was retired at
closing.

The following table presents unaudited pro forma results from continuing
operations as if the sale of the Office Buildings had occurred on January 1,
1998 and January 1, 1997, respectively. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had this acquisition been consummated as of each
respective date.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues...................................... $ 87,112 $ 99,996
========= ========
Loss from continuing operations............... $ (27,896) $(23,925)
========= ========
Loss from continuing operations applicable to
common shares............................... $(108,860) $(92,400)
========= ========
Loss from continuing operations per common
share....................................... $ (11.37) $ (9.65)
========= ========
</TABLE>

The Shopping Centers were acquired for an aggregate purchase price of
$72,500, consisting of $12,500 in cash and $60,000 in eight promissory notes. In
November 1997, the Company sold one of the Shopping Centers for $5,400 and
realized a gain of $1,200.

On January 11, 1996, the Company provided a $10,600 convertible bridge loan
to finance Thinking Machines Corporation ("Thinking Machines"), a developer and
marketer

F-12
<PAGE> 68
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of data mining and knowledge discovery software and services. In February 1996,
the bridge loan was converted into a controlling interest in a partnership which
held approximately 61.4% of Thinking Machines' outstanding common shares. In
December 1997, the Company acquired for $3,150 additional shares in Thinking
Machines pursuant to a rights offering by Thinking Machines to its existing
stockholders which increased the Company's ownership to approximately 72.7% of
the outstanding Thinking Machines shares. As a result of the rights offering,
the Company recorded $2,417 as additional paid-in-capital which represented its
interest in the increase in Thinking Machines' stockholders' equity. In
September 1998, the Company made a $2,000 loan due December 31, 1999 to Thinking
Machines and acquired warrants to purchase additional shares pursuant to a
rights offering by Thinking Machines to its existing stockholders. In the first
quarter of 1999, the Company lent Thinking Machines an additional $1,250. The
acquisition of Thinking Machines through the conversion of the bridge loan was
accounted for as a purchase for financial reporting purposes, and accordingly,
the operations of Thinking Machines subsequent to January 31, 1996 are included
in the operations of the Company. The fair value of assets acquired, including
goodwill of $1,726, was $27,301 and liabilities assumed totaled $7,613. In
addition, minority interests in the amount of $9,088 were recognized at the time
of acquisition. To date, no material revenues have been recognized by Thinking
Machines with respect to the sale or licensing of such software and services.
Thinking Machines is also subject to uncertainties relating to, without
limitation, the development and marketing of computer products, including
customer acceptance and required funding, technological changes, capitalization,
and the ability to utilize and exploit its intellectual property and propriety
software technology.

On January 31, 1997, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke (Overseas)"), a
wholly-owned subsidiary of Brooke Group Ltd. ("Brooke"), an affiliate of the
Company, pursuant to which the Company acquired 10,483 shares (the "BrookeMil
Shares") of the common stock of BrookeMil Ltd. ("BrookeMil") from Brooke
(Overseas) for a purchase price of $55,000, consisting of $21,500 in cash and a
$33,500 9% promissory note of the Company (the "Note"). The BrookeMil Shares
comprise 99.1% of the outstanding shares of BrookeMil, a real estate development
company in Russia. The Note, which was collateralized by the BrookeMil Shares,
was paid during 1997.

BrookeMil is developing a three-phase complex on 2.2 acres of land in
downtown Moscow. In 1993, the first phase of the project, Ducat Place I, a
46,500 sq. ft. Class-A office building, was constructed and leased. On April 18,
1997, BrookeMil sold Ducat Place I to one of its tenants for approximately
$7,500, which purchase price had been reduced to reflect prepayments of rent. In
1997, BrookeMil completed construction of Ducat Place II, a 150,000 sq. ft.
office building. Ducat Place II has been leased to a number of leading
international companies. The development of the third phase, Ducat Place III,
has been planned as a 450,000 sq. ft. mixed-use complex. The site of Ducat Place
III, which is currently used by a subsidiary of Brooke (Overseas) as the site
for a factory, is subject to a put option held by the Company. The option allows
the Company to put this site back to Brooke (Overseas) and BGLS Inc., a
subsidiary of Brooke, at the greater of the appraised fair value of the property
at the date of exercise or $13,600 during the period the subsidiary of Brooke
(Overseas) operates the factory on such site.

F-13
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NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the Purchase Agreement, certain specified liabilities of
BrookeMil aggregating approximately $40,000 remained as liabilities of BrookeMil
after the purchase of the BrookeMil Shares by the Company. These liabilities
included a $20,400 loan to a Russian bank for the construction of Ducat Place II
(the "Construction Loan"). In addition, the liabilities of BrookeMil at the time
of purchase included approximately $13,800 of rents and related payments prepaid
by tenants of Ducat Place II for periods generally ranging from 15 to 18 months.

The fair value of the assets acquired, including goodwill of $12,400 was
$95,500. The Company, through its interest in Western Realty, is amortizing the
goodwill over a five year period.

In August 1997, BrookeMil refinanced all amounts due under the Construction
Loan with borrowings under a new credit facility with another Russian bank. The
new credit facility bears interest at 16% per year, matures no later than August
2002, with principal payments commencing after the first year, and is
collateralized by a mortgage on Ducat Place II and guaranteed by the Company. At
December 31, 1997, borrowings under the new credit facility totaled $19,700.

4. RUSSIAN REAL ESTATE JOINT VENTURES

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
Ducat") to make real estate and other investments in Russia. In connection with
the formation of Western Realty Ducat, the Company agreed, among other things,
to contribute the real estate assets of BrookeMil, including Ducat Place II and
the site for Ducat Place III, to Western Realty Ducat and Apollo agreed to
contribute up to $58,750, including the investment in Western Realty Repin
discussed below. Through December 31, 1998, Apollo had funded $32,364 of its
investment in Western Realty Ducat.

The ownership and voting interests in Western Realty Ducat are held equally
by Apollo and the Company. Apollo will be entitled to a preference on
distributions of cash from Western Realty Ducat to the extent of its investment
($40,000), together with a 15% annual rate of return, and the Company will then
be entitled to a return of $20,000 of BrookeMil-related expenses incurred and
cash invested by the Company since March 1, 1997, together with a 15% annual
rate of return; subsequent distributions will be made 70% to the Company and 30%
to Apollo. Western Realty Ducat will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and the
Company. All material corporate transactions by Western Realty Ducat will
generally require the unanimous consent of the Board of Managers. Accordingly,
the Company has accounted for its non-controlling interest in Western Realty
Ducat using the equity method of accounting. Through December 31, 1998, Apollo
has funded $32,364 of its investment in Western Realty Ducat.

F-14
<PAGE> 70
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest in the underlying value of net assets of the joint venture. The Company
recognizes losses incurred by Western Realty Ducat to the extent that cumulative
earnings of Western Realty Ducat are not sufficient to satisfy Apollo's
preferred return.

Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000 participating
loan to, and payable out of a 30% profits interest in Western Tobacco
Investments LLC ("WTI"), a company organized by Brooke (Overseas) which, among
other things, holds the interests of Brooke (Overseas) in Liggett-Ducat Ltd. and
the new factory being constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow. Western Realty Ducat has recognized as other income $1,991, which
represents 30% of WTI's net income for the period from April 28, 1998 (date of
inception) to December 31, 1998.

Summarized financial information as of December 31, 1998 and for the period
from February 20, 1998 (date of inception) to December 31, 1998 for Western
Realty Ducat follows:

<TABLE>
<S> <C>
Current assets.............................................. $ 857
Participating loan receivable............................... 31,991
Real estate, net............................................ 85,761
Furniture and fixtures, net................................. 179
Noncurrent assets........................................... 631
Goodwill, net............................................... 7,636
Notes payable -- current.................................... 5,299
Current liabilities......................................... 5,802
Notes payable............................................... 14,356
Long-term liabilities....................................... 756
Members' equity............................................. 100,842
Revenues.................................................... 10,176
Costs and expenses.......................................... 13,099
Other income................................................ 1,991
Income tax benefit.......................................... 760
Net loss.................................................... (1,692)
</TABLE>

Western Realty Repin LLC

In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the "Repin Loan")
to BrookeMil. The proceeds of the loan will be used by BrookeMil for the
acquisition and preliminary development of two adjoining sites totaling 10.25
acres (the "Kremlin Sites") located in Moscow across the Moscow River from the
Kremlin. BrookeMil, which is planning the development of a 1.1 million sq. ft.
hotel, office, retail and residential complex on the Kremlin Sites, owned 94.6%
of one site and 52% of the other site at December 31, 1998. Apollo will be
entitled to a preference on distributions of cash from Western Realty Repin to
the extent of its investment ($18,750), together with a 20% annual rate of
return, and the Company will then be entitled to a return of its investment
($6,250), together with a 20% annual rate of return; subsequent distributions
will be made 50% to the

F-15
<PAGE> 71
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company and 50% to Apollo. Western Realty Repin will be managed by a Board of
Managers consisting of an equal number of representatives chosen by Apollo and
the Company. All material corporate transactions by Western Realty Repin will
generally require the unanimous consent of the Board of Managers.

Through December 31, 1998, Western Realty Repin has advanced $19,067 under
the Repin Loan to BrookeMil, of which $14,300 was funded by Apollo and is
classified in other long-term obligations on the consolidated balance sheet at
December 31, 1998. The Repin Loan, which bears no fixed interest, is payable
only out of 100% of the distributions, if made, by the entities owning the
Kremlin Sites to BrookeMil. Such distributions shall be applied first to pay the
principal of the Repin Loan and then as contingent participating interest on the
Repin Loan. Any rights of payment on the Repin Loan are subordinate to the
rights of all other creditors of BrookeMil. BrookeMil used a portion of the
proceeds of the Repin Loan to repay the Company for certain expenditures on the
Kremlin Sites previously incurred. The Repin 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, 1998, BrookeMil had invested $18,013 in the Kremlin
Sites and held $252, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin Sites,
BrookeMil has agreed with the City of Moscow to invest an additional $6,000 in
1999 and $22,000 in 2000 in the development of the property. BrookeMil funded
$4,800 of this amount in the first quarter of 1999.

The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated subsidiary
by New Valley which is eliminated in consolidation. Based on the distribution
terms contained in the Western Realty Repin LLC agreement, the 20% annual rate
of return preference to be received by Apollo on funds advanced to Western
Realty Repin is treated as interest cost in the consolidated statement of
operations.

The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BrookeMil. However, in light of the recent economic turmoil in Russia, no
assurance can be given that such financing will be available on acceptable
terms. Failure to obtain sufficient capital for the projects would force Western
Realty Ducat and BrookeMil to curtail or delay the planned development of Ducat
Place III and the Kremlin Sites.

5. INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a separate component of
stockholders' equity (deficiency). The Company had net unrealized gains on
investment securities available for sale of $2,685 and $7,596 at December 31,
1998 and 1997, respectively.

F-16
<PAGE> 72
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>
1998
Marketable equity securities........... $34,882 $ 1,856 $2,877 $33,861
Marketable warrants.................... -- 3,706 -- 3,706
------- ------- ------ -------
Investment securities.................. $34,882 $ 5,562 $2,877 $37,567
======= ======= ====== =======
1997
Short-term investments................. $ 6,218 -- -- $ 6,218
Marketable equity securities........... 34,494 $ 7,492 $2,101 39,885
Marketable warrants.................... -- 4,939 -- 4,939
Marketable debt securities............. 3,685 -- 2,734 951
------- ------- ------ -------
Investment securities.................. $44,397 $12,431 $4,835 $51,993
======= ======= ====== =======
</TABLE>

During 1998, the Company determined that an other than temporary impairment
had occurred in marketable debt securities (face amount of $14,900, cost of
$3,185) of a company that was in default at the time of purchase and is
currently in default under its various debt obligations. The Company wrote down
this investment to zero resulting in a $3,185 charge to operations.

Investment in RJR Nabisco

The Company expensed $100 in 1997 and $11,724 in 1996 relating to its
investment in the common stock of RJR Nabisco Holdings Corp. ("RJR Nabisco").
Pursuant to a December 31, 1995 agreement between the Company and Brooke whereby
the Company agreed to reimburse Brooke and its subsidiaries for certain
reasonable out-of-pocket expenses relating to RJR Nabisco, the Company paid
Brooke and its subsidiaries a total of $17 and $2,370 in 1997 and 1996.

On February 29, 1996, the Company entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to 750,000
shares of RJR Nabisco common stock as of August 13, 1996). The Company entered
into the Swap in order to be able to participate in any increase or decrease in
the value of the RJR Nabisco common stock during the term of the Swap. The
transaction was for a period of up to six months, unless extended by the
parties, subject to earlier termination at the election of the Company, and
provided for the Company to make a payment to the Counterparty of $1,537 upon
commencement of the Swap. At the termination of the transaction, if the price of
the RJR Nabisco common stock during a specified period prior to such date (the
"Final Price") exceeded $34.42, the price of the RJR Nabisco common stock during
a specified period following the commencement of the Swap (the "Initial Price"),
the Counterparty was required to pay the Company an amount in cash equal to the
amount of such appreciation with respect to the shares of RJR Nabisco common
stock subject to the Swap plus the value of any dividends with a record date
occurring during the Swap period.

F-17
<PAGE> 73
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If the Final Price was less than the Initial Price, then the Company was
required to pay the Counterparty at the termination of the transaction an amount
in cash equal to the amount of such decline with respect to the shares of RJR
Nabisco common stock subject to the Swap, offset by the value of any dividends,
provided that, with respect to approximately 225,000 shares of RJR Nabisco
common stock, the Company was not required to pay any amount in excess of an
approximate 25% decline in the value of the shares. The potential obligations of
the Counterparty under the Swap were guaranteed by the Counterparty's parent, a
large foreign bank, and the Company pledged certain collateral in respect of its
potential obligations under the Swap and agreed to pledge additional collateral
under certain conditions. The Company marked its obligation with respect to the
Swap to fair value with unrealized gains or losses included in income. During
the third quarter of 1996, the Swap was terminated in connection with the
Company's reduction of its holdings of RJR Nabisco common stock, and the Company
recognized a loss on the Swap of $7,305 for the year ended December 31, 1996.

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

The components of trading securities owned and securities sold, not yet
purchased are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------- -----------------------------
TRADING SECURITIES SOLD, TRADING SECURITIES SOLD,
SECURITIES NOT YET SECURITIES NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Common stock..................... $4,243 $4,395 $16,208 $ 4,513
Equity and index options......... 870 240 5,290 17,494
Other............................ 3,871 -- 28,490 3,603
------ ------ ------- -------
$8,984 $4,635 $49,988 $25,610
====== ====== ======= =======
</TABLE>

F-18
<PAGE> 74
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. 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,
1998 are as follows:

<TABLE>
<CAPTION>
RUSSIAN
REAL SHOPPING
ESTATE CENTERS TOTAL
------- -------- -------
<S> <C> <C> <C>
Land................................................ $18,013 $16,087 $34,100
Buildings........................................... 912 52,959 53,871
------- ------- -------
Total............................................... 18,925 69,046 87,971
Less accumulated depreciation....................... -- (5,096) (5,096)
------- ------- -------
Net investment in real estate....................... $18,925 $63,950 $82,875
======= ======= =======
Notes payable....................................... $ -- $54,801 $54,801
Current portion of notes payable.................... -- -- --
------- ------- -------
Notes payable -- long-term portion.................. $ -- $54,801 $54,801
======= ======= =======
</TABLE>

At December 31, 1998, the Company's investment in real estate
collateralized eight promissory notes aggregating $54,801 due 2001 related to
the Shopping Centers. Each Shopping Center note has a term of five years,
requires no principal amortization, and bears interest payable monthly at the
rate of 8% for the first two and one-half years and at the rate of 9% for the
remainder of the term.

The components of the Company's investment in real estate and the related
notes payable collateralized by such real estate at December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
U.S. RUSSIAN
OFFICE REAL SHOPPING
BUILDINGS ESTATE CENTERS TOTAL
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Land...................................... $ 19,450 $22,623 $16,087 $ 58,160
Buildings................................. 92,332 66,688 51,430 210,450
-------- ------- ------- --------
Total..................................... 111,782 89,311 67,517 268,610
Less accumulated depreciation............. (4,616) (879) (3,147) (8,642)
-------- ------- ------- --------
Net investment in real estate............. $107,166 $88,432 $64,370 $259,968
======== ======= ======= ========
Notes payable............................. $ 99,302 $20,078 $54,801 $174,181
Current portion of notes payable.......... 336 424 760
-------- ------- ------- --------
Notes payable -- long-term portion........ $ 98,966 $19,654 $54,801 $173,421
======== ======= ======= ========
</TABLE>

At December 31, 1997, the Company's investment in real estate
collateralized four promissory notes aggregating $99,302 related to the Office
Buildings and eight promissory notes aggregating $54,801 related to the Shopping
Centers.

In 1997, the Company sold one of the Shopping Centers for $5,400 and
realized a gain of $1,200. In 1998, the Company sold its U.S. Office Buildings
for $112,400 and realized a gain of $4,682.

F-19
<PAGE> 75
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM INVESTMENTS

Long-term investments consisted of investments in the following:

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Limited partnerships........................ $9,226 $12,282 $27,224 $33,329
</TABLE>

The principal business of the limited partnerships is investing in
investment securities. The estimated fair value of the limited partnerships was
provided by the partnerships based on the indicated market values of the
underlying investment portfolio. The Company is not required to make additional
investments in limited partnerships as of December 31, 1998. The Company's
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. During 1997, the Company sold for an
amount which approximated its $2,000 cost an investment in a foreign corporation
which owned an interest in a Russian bank. During 1997, the Company determined
that an other than temporary impairment in the value of its investment in a
joint venture had occurred and wrote down this investment to zero with a charge
to operations of $3,796.

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

The Company recognized gains of $4,652 on liquidations of investments of
certain limited partnerships for the year ended December 31, 1998.

The Company's estimate 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.

9. PENSIONS AND RETIREE BENEFITS

Ladenburg has a Profit Sharing Plan (the "Plan") for substantially all its
employees. The Plan includes two features: profit sharing and a deferred
compensation vehicle. Contributions to the profit sharing portion of the Plan
are made by Ladenburg on a discretionary basis. The deferred compensation
feature of the Plan enables non-salaried employees to invest up to 15% of their
pre-tax annual compensation. For the year ended December 31, 1996, employer
contributions to the Plan were approximately $200, excluding those made under
the deferred compensation feature described above. The Plan was inactive in 1997
and 1998.

The Company maintains 401(k) plans for substantially all employees, except
those employees of Thinking Machines. These 401(k) plans allow eligible
employees to invest a

F-20
<PAGE> 76
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

percentage of their pre-tax compensation. Ladenburg elected to contribute $500
of matching contributions in 1997. The Company did not make discretionary
contributions to these 401(k) plans in 1998 and 1996.

10. COMMITMENT AND CONTINGENCIES

Leases

The Company, Thinking Machines and Ladenburg are currently obligated under
three noncancelable lease agreements for office space, expiring in May 2003,
April 1999 and December 2015, respectively. 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, 1998:

<TABLE>
<S> <C>
1999........................................................ $ 5,431
2000........................................................ 5,163
2001........................................................ 4,309
2002........................................................ 4,115
2003 and thereafter......................................... 50,382
-------
Total..................................................... $69,400
=======
</TABLE>

Rental expense for operating leases during 1998, 1997 and 1996 was $6,397,
$4,404 and $3,914, respectively.

Lawsuits

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

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

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

F-21
<PAGE> 77
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Russian Operations

During 1998, the economy of the Russian Federation entered a period of
economic instability. The impact includes, but is not limited to, a steep
decline in prices of domestic debt and equity securities, a severe devaluation
of the currency, a moratorium on foreign debt repayments, an increasing rate of
inflation and increasing rates on government and corporate borrowings. The
return to economic stability is dependent to a large extent on the effectiveness
of the fiscal measures taken by government and other actions beyond the control
of companies operating in the Russian Federation. The operations of BrookeMil
and Western Realty Ducat may be significantly affected by these factors for the
foreseeable future.

Russian Taxation: 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 BrookeMil and Western
Realty Ducat may not coincide with that of management. As a result, transactions
may be challenged by tax authorities and BrookeMil and Western Realty Ducat 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 six years.

Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have addressed the
Year 2000 Problem sufficiently to mitigate potential substantial disruption to
these infrastructure services. The substantial disruption of these services
would have an adverse affect on the operations of BrookeMil and Western Realty
Ducat. Furthermore, the current financial crisis could affect the ability of the
government and other organizations to fund Year 2000 compliance programs.

11. FEDERAL INCOME TAX

At December 31, 1998, the Company had $102,061 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, 1998, 1997 and 1996, 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

F-22
<PAGE> 78
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Loss from continuing operations................... $(23,323) $(24,074) $(14,348)
-------- -------- --------
(Credit) provision under statutory U.S. tax
rates........................................... (8,163) (8,426) (5,022)
Increase (decrease) in taxes resulting from:
Nontaxable items................................ 4,281 2,603 (224)
State taxes, net of Federal benefit............. 4 55 195
Foreign Taxes................................... -- 108 --
Increase (decrease) in valuation reserve.......... 3,884 5,846 5,351
-------- -------- --------
Income tax provision............................ $ 6 $ 186 $ 300
======== ======== ========
</TABLE>

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

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

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward:
Restricted net operating loss....................... $ 12,450 $ 15,561
Unrestricted net operating loss..................... 70,552 70,216
Other............................................... 21,718 17,209
--------- ---------
Total deferred tax assets........................... 104,720 102,986
--------- ---------
Deferred tax liabilities:
Other.................................................. (2,659) (5,542)
--------- ---------
Total deferred tax liabilities........................... (2,659) (5,542)
--------- ---------
Net deferred tax assets.................................. 102,061 97,444
Valuation allowance...................................... (102,061) (97,444)
--------- ---------
Net deferred taxes....................................... $ -- $ --
========= =========
</TABLE>

In December 1987, the Company consummated certain restructuring
transactions that included certain 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.

F-23
<PAGE> 79
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's tax years from 1993 to 1995 are presently under audit with
the Internal Revenue Service. The Company believes it has adequately reserved
for any potential adjustments which may occur.

As of December 31, 1998, the Company had consolidated net operating loss
carryforwards of approximately $206,000 for tax purposes, which expire at
various dates through 2008. Approximately $31,000 net operating loss
carryforwards constitute pre-change losses and $175,000 of net operating losses
were unrestricted.

12. OTHER LONG-TERM LIABILITIES

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

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1998 1997
------------------- -------------------
LONG-TERM CURRENT LONG-TERM CURRENT
PORTION PORTION PORTION PORTION
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Retiree and disability obligations........ $ 4,715 $500 $ 3,638 $2,000
Minority interests........................ 2,699 -- 6,112 --
Participating loan payable................ 15,795 -- -- --
Other long-term liabilities............... 241 -- 1,460 --
------- ---- ------- ------
Total other long-term liabilities......... $23,450 $500 $11,210 $2,000
======= ==== ======= ======
</TABLE>

13. REDEEMABLE PREFERRED SHARES

At December 31, 1998 and 1997, the Company had authorized and outstanding
2,000,000 and 1,071,462, respectively, of its Class A Senior Preferred Shares.
At December 31, 1998 and 1997, respectively, the carrying value of such shares
amounted to $316,202 and $258,638, including undeclared dividends of $219,068
and $163,302, or $204.46 and $152.41 per share.

The holders of Class A Senior Preferred Shares are currently 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 are mandatorily redeemable
on January 1, 2003 at $100 per share plus accrued dividends. The Class A Senior
Preferred Shares were recorded at their market value ($80 per share) at December
30, 1987, the date of issuance. The discount from the liquidation value is
accreted, utilizing the interest method, as a charge to additional paid-in
capital and an increase to the recorded value of the Class A Senior Preferred
Shares, through the redemption date. As of December 31, 1998, the unamortized
discount on the Class A Senior Preferred Shares was $6,846.

In the event a required dividend or redemption is not made on the Class A
Senior Preferred Shares, no dividends shall be paid or declared and no
distribution made on any junior stock other than a dividend payable in junior
stock. If at any time six quarterly dividends payable on the Class A Senior
Preferred Shares shall be in arrears or such shares are not redeemed when
required, the number of directors will be increased by two and the holders of
the Class A Senior Preferred Shares, voting as a class, will have the

F-24
<PAGE> 80
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

right to elect two directors until full cumulative dividends shall have been
paid or declared and set aside for payment. Such directors were designated
pursuant to the Joint Plan in November 1994.

The Company declared and paid cash dividends on the Class A Senior
Preferred Shares of $40 per share in 1996. Undeclared dividends are accrued
quarterly and such accrued and unpaid dividends shall accrue additional
dividends in respect thereof compounded monthly at the rate of 19% per annum,
both of which are included in the carrying amount of redeemable preferred
shares, offset by a charge to additional paid-in capital.

During the first quarter of 1996, the Company repurchased 72,104 of its
Class A Senior Preferred Shares for an aggregate consideration of $10,530. The
repurchase increased the Company's additional paid-in capital by $4,279 based on
the difference between the purchase price and the carrying values of the shares.

On November 18, 1996, the Company granted to an executive officer and
director of the Company 36,000 Class A Senior Preferred Shares (the "Award
Shares"). The Award Shares are identical with all other Class A Senior Preferred
Shares issued and outstanding as of July 1, 1996, including undeclared dividends
of $3,776 and declared dividends of $1,080. The Award Shares vested one-sixth on
July 1, 1997 and one-sixth on each of the five succeeding one-year anniversaries
thereof through and including July 1, 2002. The Company recorded deferred
compensation of $5,436 representing the fair market value of the Award Shares on
November 18, 1996 and $3,020 of original issue discount representing the
difference between the book value of the Award Shares on November 18, 1996 and
their fair market value. The deferred compensation will be amortized over the
vesting period and the original issue discount will be accreted, utilizing the
interest method, through the redemption date, both through a charge to
compensation expense. During 1998, 1997 and 1996, the Company recorded $3,043,
$2,934 and $359, respectively, in compensation expense related to the Award
Shares and, at December 31, 1998 and 1997, the balance of the deferred
compensation and the unamortized discount related to the Award Shares was $5,721
and $6,890, respectively.

For information on Class A Senior Preferred Shares owned by Brooke, see
Note 18.

14. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS

The holders of the Class B Preferred Shares, 12,000,000 shares authorized
and 2,790,776 shares outstanding as of December 31, 1998 and 1997, are entitled
to receive a quarterly dividend, as declared by the Board, at a rate of $3.00
per annum. Undeclared dividends are accrued quarterly at a rate of 12% per
annum, and such accrued and unpaid dividends shall accrue additional dividends
in respect thereof, compounded monthly at the rate of 12% per annum.

Each Class B Preferred Share is convertible at the option of the holder
into .41667 Common Shares based on a $25 liquidation value and a conversion
price of $60 per Common Share.

F-25
<PAGE> 81
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At the option of the Company, the Class B Preferred Shares are redeemable
in the event that the closing price of the Common Shares equals or exceeds 140%
of the conversion price at a specified time prior to the redemption. If redeemed
by New Valley, the redemption price would equal $25 per share plus accrued
dividends.

In the event a required dividend is not paid on the Class B Preferred
Shares, no dividends shall be paid or declared and no distribution made on any
junior stock other than a dividend payable in junior stock. If at any time six
quarterly dividends on the Class B Preferred Shares are in arrears, the number
of directors will be increased by two, and the holders of Class B Preferred
Shares and any other classes of preferred shares similarly entitled to vote for
the election of two additional directors, voting together as a class, will have
the right to elect two directors to serve until full cumulative dividends shall
have been paid or declared and set aside for payment. Such directors were
designated pursuant to the Joint Plan in November 1994.

No dividends on the Class B Preferred Shares have been declared since the
fourth quarter of 1988. The undeclared dividends, as adjusted for conversions of
Class B Preferred Shares into Common Shares, cumulatively amounted to $165,856
and $139,412 at December 31, 1998 and 1997, respectively. These undeclared
dividends represent $59.43 and $49.95 per share as of the end of each period. No
accrual was recorded for such undeclared dividends as the Class B Preferred
Shares are not mandatorily redeemable.

15. COMMON SHARES

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 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 and including July 1, 2002. The Company recognized
compensation expense of $108 in 1998, $15 in 1997 and $24 in 1996 from these
option grants and recorded deferred compensation of $475 and $158 representing
the intrinsic value of these options at December 31, 1998 and December 31, 1997,
respectively.

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock options. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which, if fully adopted, changes the
methods of recognition of cost on certain stock options. Had compensation cost
for the nonqualified stock options been determined based upon the fair value at
the grant date consistent with SFAS No. 123, the Company's net loss in 1998 and
1997 would have been increased by $316 and by $33 in 1996. The fair value of the
nonqualified stock options was estimated at $1,774 using the Black-Scholes
option-pricing model with the following assumptions: volatility of 171% for the
Class B Preferred Shares and 101% for the Common Shares, a risk free interest
rate of 6.2%, an expected life of 10 years, and no expected dividends or
forfeiture.

F-26
<PAGE> 82
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Accounts payable and accrued liabilities:
Accrued compensation...................................... $ 9,753 $11,202
Deferred rent............................................. 4,739 4,560
Unearned revenues......................................... 79 10,163
Taxes (property and miscellaneous)........................ 7,037 9,429
Accrued expenses and other liabilities.................... 10,439 19,868
------- -------
Total.................................................. $32,047 $55,222
======= =======
</TABLE>

17. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

On January 18, 1995, approximately $550,000 of the approximately $620,000
of prepetition claims were paid pursuant to the Joint Plan. Another $57,000 of
prepetition claims and restructuring accruals have been settled and paid or
adjusted since January 18, 1995. 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,
-----------------
1998 1997
------- -------
<S> <C> <C>
Restructuring accruals(a)................................... $ 8,085 $ 8,196
Money transfer payable(b)................................... 4,279 4,415
------- -------
Total..................................................... $12,364 $12,611
======= =======
</TABLE>

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

(a) Restructuring accruals at December 31, 1998 consisted of $6,771 of disputed
claims, primarily related to leases and former employee benefits, and
$1,178 of other restructuring accruals. In 1996, the Company reversed
$9,706 of prior year restructuring accruals as a result of settlements on
certain of its prepetition claims and vacated real estate lease
obligations.

(b) Represents unclaimed money transfers issued by the Company prior to January
1, 1990. The Company is currently in litigation in 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.

18. RELATED PARTY TRANSACTIONS

At December 31, 1998, Brooke, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, held 3,989,710 Common
Shares (approximately 41.7% of such class), 618,326 Class A Senior Preferred
Shares (approximately 57.7% of such class), and 250,885 Class B Preferred Shares

F-27
<PAGE> 83
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(approximately 8.9% of such class) which represented in the aggregate 42.1% of
all voting power. Several of the other officers and directors of the Company are
also affiliated with Brooke. In 1995, the Company signed an expense sharing
agreement with Brooke pursuant to which certain lease, legal and administrative
expenses are allocated to the entity incurring the expense. The Company expensed
approximately $502, $312 and $462 under this agreement in 1998, 1997, and 1996,
respectively.

The Joint Plan imposes a number of restrictions on transactions between the
Company and certain affiliates of the Company, including Brooke.

On December 18, 1996, the Company loaned BGLS Inc. ("BGLS"), a wholly-owned
subsidiary of Brooke, $990 under a short-term promissory note due January 31,
1997 and bearing interest at 14%. On January 2, 1997, the Company loaned BGLS an
additional $975 under another short-term promissory note due January 31, 1997
and bearing interest at 14%. Both loans including interest were repaid on
January 31, 1997. In September 1998, the Company made a one-year $950,000 loan
to BGLS, which bears interest at 14% per annum. At December 31, 1998, the loan
and accrued interest thereon of $984 was included in other current assets.

During 1998, one director of the Company and during 1996 and 1997, two
directors of the Company, were affiliated with law firms that rendered legal
services to the Company. The Company paid these firms $516, $568 and $4,141
during 1998, 1997 and 1996, respectively, for legal services. An executive
officer and director of the Company is a shareholder and registered
representative in a broker-dealer to which the Company paid $128, $522 and $317
in 1998, 1997 and 1996, respectively, in brokerage commissions and other income,
and is also a shareholder in an insurance company that received ordinary and
customary insurance commissions from the Company and its affiliates of $128,
$133 and $136 in 1998, 1997 and 1996, respectively. The broker-dealer, in the
ordinary course of its business, engages in brokerage activities with Ladenburg
on customary terms.

During 1996, the Company entered into a court-approved Stipulation and
Agreement (the "Settlement") with Brooke and BGLS relating to Brooke's and
BGLS's application under the Federal Bankruptcy Code for reimbursement of legal
fees and expenses incurred by them in connection with the Company's bankruptcy
reorganization proceedings. Pursuant to the Settlement, the Company reimbursed
Brooke and BGLS $655 for such legal fees and expenses. The terms of the
Settlement were substantially similar to the terms of previous settlements
between the Company and other applicants who had sought reimbursement of
reorganization-related legal fees and expenses.

In connection with the acquisition of the Office Buildings by the Company
in 1996, a director of Brooke received a commission of $220 from the seller.

See Note 3 for information concerning the purchase by the Company on
January 31, 1997 of BrookeMil from a subsidiary of Brooke.

19. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Ladenburg -- As a nonclearing broker, Ladenburg's transactions are cleared
by other brokers and dealers in securities pursuant to clearance agreements.
Although Ladenburg

F-28
<PAGE> 84
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

clears its customers through other brokers and dealers in securities, Ladenburg
is exposed to off-balance-sheet risk in the event that customers or other
parties fail to satisfy their obligations. In accordance with industry practice,
agency securities transactions are recorded on a settlement-date basis. Should a
customer fail to deliver cash or securities as agreed, Ladenburg may be required
to purchase or sell securities at unfavorable market prices.

The clearing operations for Ladenburg's securities transactions are
provided by several brokers. At December 31, 1998, substantially all of the
securities owned and the amounts due from brokers reflected in the consolidated
balance sheet are positions held at and amounts due from one clearing broker.
Ladenburg is subject to credit risk should this broker be unable to fulfill its
obligations.

In the normal course of its business, Ladenburg enters into transactions in
financial instruments with off-balance-sheet risk. These financial instruments
consist of financial futures contracts and written index option contracts.
Financial futures contracts provide for the delayed delivery of a financial
instrument with the seller agreeing to make delivery at a specified future date,
at a specified price. These futures contracts involve elements of market risk in
excess of the amounts recognized in the consolidated statement of financial
condition. Risk arises from changes in the values of the underlying financial
instruments or indices. At December 31, 1998, Ladenburg had commitments to
purchase and sell financial instruments under futures contracts of $3,113 and
$1,378, respectively.

Equity index options give the holder the right to buy or sell a specified
number of units of a stock market index, at a specified price, within a
specified time from the seller ("writer") of the option and are settled in cash.
Ladenburg generally enters into these option contracts in order to reduce its
exposure to market risk on securities owned. Risk arises from the potential
inability of the counterparties to perform under the terms of the contracts and
from changes in the value of a stock market index. As a writer of options,
Ladenburg receives a premium in exchange for bearing the risk of unfavorable
changes in the price of the securities underlying the option. Financial
instruments have the following notional amounts as December 31, 1998:

<TABLE>
<CAPTION>
LONG SHORT
------- ------
<S> <C> <C>
Equity and index options.................................... $24,555 $3,755
Financial futures contracts................................. 2,954 1,532
</TABLE>

The table below discloses the fair value at December 31, 1998 of these
commitments, as well as the average fair value during the year ended December
31, 1998, based on monthly observations.

<TABLE>
<CAPTION>
DECEMBER 31, 1998 AVERAGE
------------------ ------------------
LONG SHORT LONG SHORT
------- ------- ------- -------
<S> <C> <C> <C> <C>
Equity and index options.................. $ 870 $ 241 $ 5,385 $12,469
Financial futures contracts............... 3,113 1,378 23,261 2,098
</TABLE>

For the years ended December 31, 1998, 1997, and 1996, the net loss arising from
options and futures contracts included in net gain on principal transactions was
$3,661 $2,399, and

F-29
<PAGE> 85
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$6,012, respectively. The Company's accounting policy related to derivatives is
to value these instruments, including financial futures contracts and written
index option contracts, at the last reported sales price. The measurement of
market risk is meaningful only when related and offsetting transactions are
taken into consideration.

20. 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, 1998 DECEMBER 31, 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............. $ 16,444 $ 16,444 $ 11,606 $ 11,606
Investments available for sale........ 37,567 37,567 51,993 51,993
Trading securities owned.............. 8,984 8,984 49,988 49,988
Restricted assets..................... 7,302 7,302 5,716 5,716
Receivable from clearing brokers...... 22,561 22,561 1,205 1,205
Long-term investments (Note 8)........ 9,226 12,282 27,224 33,329
Financial liabilities:
Margin loans payable.................. 13,088 13,088 13,012 13,012
Notes payable......................... 57,546 57,546 177,074 177,074
Redeemable preferred shares........... 316,202 107,146 258,638 102,860
</TABLE>

F-30
<PAGE> 86
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

21. 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, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
1998
Revenues....................... $66,569 $ 25,259 $ 794 $ 9,465 $102,087
Operating loss................. (6,175) (192) (6,130) (12,915) (25,412)
Identifiable assets............ 53,160 87,670 1,241 130,651 272,722
Depreciation and
amortization................. 1,125 4,373 693 304 6,495
Capital expenditures........... 428 18,270 83 38 18,819

1997
Revenues....................... $56,197 $ 27,067 $ 3,947 $ 27,357 $114,568
Operating (loss) income........ (9,958) (7,827) (8,156) 520 (25,421)
Identifiable assets............ 77,511 276,770 5,604 81,506 441,391
Depreciation and
amortization................. 1,035 7,469 815 95 9,414
Capital expenditures........... 1,627 10,777 466 1,385 14,255

1996
Revenues....................... $71,960 $ 23,559 $ 15,017 $ 20,329 $130,865
Operating loss................. (345) (745) (15,082) (2,417) (18,589)
Identifiable assets............ 76,302 182,645 11,686 135,787 406,540
Depreciation and
Amortization................. 600 3,622 532 3 4,757
Capital expenditures........... 3,644 183,193 1,596 18 188,451
</TABLE>

22. DISCONTINUED OPERATIONS

During the fourth quarter of 1996, the Company received $5,774 in cash and
$600 in a promissory note (paid in 1997) in settlement of a receivable claim
originally filed by the Company's former Western Union telegraph business. In
addition, the Company reduced its liability related to certain Western Union
retirees by $784. The Company recorded the gain on settlement of $6,374 and
liability reduction of $784 as gain on disposal of discontinued operations.
During 1997, the Company recorded a gain on disposal of discontinued operations
of $3,687 related to reversals in estimates of certain pre-petition claims under
Chapter 11 and restructuring accruals which resulted from the Company's former
money transfer business. The Company recorded a gain on disposal of discontinued
operations of $7,740 in 1998 related to the settlement of a lawsuit originally
initiated by the Western Union telegraph business.

F-31
<PAGE> 87

NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 10,312 $ 16,444
Investment securities available for sale.............. 36,563 37,567
Trading securities owned.............................. 6,562 8,984
Restricted assets..................................... 1,192 1,220
Receivable from clearing brokers...................... 12,575 22,561
Other current assets.................................. 3,647 4,675
--------- ---------
Total current assets............................... 70,851 91,451
--------- ---------
Investment in real estate, net.......................... 83,049 82,875
Furniture and equipment, net............................ 10,393 10,444
Restricted assets....................................... 8,909 6,082
Long-term investments, net.............................. 11,726 9,226
Investment in joint venture............................. 63,690 65,193
Other assets............................................ 6,020 7,451
--------- ---------
Total assets....................................... $ 254,638 $ 272,722
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable................................... $ 4,044 $ 13,088
Current portion of notes payable and long-term
obligations........................................ 2,708 2,745
Accounts payable and accrued liabilities.............. 26,863 32,047
Prepetition claims and restructuring accruals......... 12,340 12,364
Income taxes.......................................... 18,361 18,702
Securities sold, not yet purchased.................... 2,659 4,635
--------- ---------
Total current liabilities.......................... 66,975 83,581
--------- ---------
Notes payable........................................... 54,801 54,801
Other long-term liabilities............................. 28,200 23,450
Commitments and contingencies........................... -- --
Redeemable preferred shares............................. 332,198 316,202
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of
$69,769, dividends in arrears: $172,905 and
$165,856........................................... 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding........... 96 96
Additional paid-in capital............................ 534,568 550,119
Accumulated deficit................................... (759,598) (758,016)
Unearned compensation on stock options................ (148) (475)
Accumulated other comprehensive income................ (2,733) 2,685
--------- ---------
Total stockholders' deficiency..................... (227,536) (205,312)
--------- ---------
Total liabilities and stockholders' deficiency..... $ 254,638 $ 272,722
========= =========
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements

F-32
<PAGE> 88

NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Principal transactions, net........................... $ 4,776 $ 5,893
Commissions........................................... 11,126 6,676
Corporate finance fees................................ 1,438 3,238
Gain on sale of investments, net...................... 499 5,596
Loss from joint venture............................... (1,503) (329)
Real estate leasing................................... 2,230 7,776
Computer sales and service............................ 251 413
Interest and dividends................................ 1,261 2,849
Other income.......................................... 2,692 1,728
---------- ----------
Total revenues..................................... 22,770 33,840
---------- ----------
Cost and expenses:
Selling, general and administrative................... 26,592 30,100
Interest.............................................. 2,325 4,160
---------- ----------
Total costs and expenses........................... 28,917 34,260
---------- ----------
Loss from continuing operations before income taxes and
minority interests.................................... (6,147) (420)
Income tax provision.................................... 15 6
Minority interest in loss of consolidated
subsidiaries.......................................... 480 583
---------- ----------
(Loss) income from continuing operations................ (5,682) 157
Discontinued operations:
Gain on disposal of discontinued operations........... 4,100 --
---------- ----------
Income from discontinued operations................... 4,100 --
---------- ----------
Net (loss) income.................................. (1,582) 157
Dividend requirements on preferred shares............... (22,219) (18,832)
---------- ----------
Net loss applicable to Common Shares.................... $ (23,801) $ (18,675)
========== ==========
Loss per Common Share (basic and diluted):
Continuing operations................................. $ (2.92) $ (1.95)
Discontinued operations............................... .43 --
---------- ----------
Net loss per Common Share............................. $ (2.49) $ (1.95)
========== ==========
Number of shares used in computation.................... 9,577,624 9,577,624
========== ==========
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements

F-33
<PAGE> 89

NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
UNEARNED ACCUMULATED
CLASS B COMPENSATION OTHER
PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK COMPREHENSIVE
SHARES SHARES CAPITAL DEFICIT OPTIONS INCOME
--------- ------ -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998.................... $279 $96 $550,119 $(758,016) $(475) $ 2,685
Net income.............. (1,582)
Undeclared dividends and
accretion on
redeemable preferred
shares................ (15,171)
Unrealized loss on
investment
securities............ (5,418)
Adjustment to unearned
compensation on stock
options............... (327) 327
Compensation expense on
stock option grants... (53)
---- --- -------- --------- ----- -------
Balance, March 31, 1999... $279 $96 $534,568 $(759,598) $(148) $(2,733)
==== === ======== ========= ===== =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-34
<PAGE> 90

NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(1,582) $ 157
Adjustments to reconcile net (loss) income to net cash
provided from (used for) operating activities:
Income from discontinued operations.................... (4,100) --
Loss from joint venture................................ 1,503 329
Depreciation and amortization.......................... 898 2,344
Stock based compensation expense....................... 774 828
Changes in assets and liabilities, net of effects from
acquisitions:
Decrease (increase) in receivables and other
assets............................................ 14,375 (9,586)
(Decrease) increase in income taxes.................. (340) 440
(Decrease) increase in accounts payable and accrued
liabilities....................................... (6,884) 2,766
------- -------
Net cash provided from (used for) continuing
operations........................................... 4,644 (2,722)
Net cash provided from discontinued operations......... 4,100 --
------- -------
Net cash provided from (used for) operating activities...... 8,744 (2,722)
------- -------
Cash flows from investing activities:
Sale or maturity of investment securities.............. 2,947 8,129
Purchase of investment securities...................... (6,858) (913)
Sale or liquidation of long-term investments........... -- 1,901
Purchase of long-term investments...................... (2,500) (1,951)
Sale of real estate.................................... 920 --
Purchase of real estate................................ (1,615) (1,419)
Purchase of furniture and fixtures..................... (312) (197)
Payment of prepetition claims.......................... (24) (847)
Increase in restricted assets.......................... (2,827) (68)
Net cash transferred to joint venture.................. -- (487)
------- -------
Net cash (used for) provided from investing activities...... (10,269) 4,148
------- -------
Cash flows from financing activities:
Decrease in margin loan payable........................ (9,044) (2,842)
Proceeds from participating loan....................... 4,473 --
Prepayment of notes payable............................ (36) (291)
------- -------
Net cash used for financing activities...................... (4,607) (3,133)
------- -------
Net decrease in cash and cash equivalents................... (6,132) (1,707)
Cash and cash equivalents, beginning of period.............. 16,444 11,606
------- -------
Cash and cash equivalents, end of period.................... $10,312 $ 9,899
======= =======
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements

F-35
<PAGE> 91

NEW VALLEY CORPORATION AND SUBSIDIARIES

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

1. PRINCIPLES OF REPORTING

The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries (the "Company"). The
consolidated financial statements as of March 31, 1999 presented herein have
been prepared by the Company and are unaudited. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position as of March 31, 1999 and the results of
operations and cash flows for all periods presented have been made. Results for
the interim periods are not necessarily indicative of the results for an entire
year.

These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 as filed with the Securities and Exchange
Commission (Commission File Number 1-2493).

Use of 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.

Reclassifications

Certain reclassifications have been made to prior interim period financial
information to conform with current year presentation.

Proposed Recapitalization Plan

The Company has submitted for approval of its stockholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed recapitalization
of its capital stock (the "Recapitalization Plan"). Under the Recapitalization
Plan, each of the Company's outstanding Class A Senior Preferred Shares would be
reclassified and changed into 20 Common Shares and one Warrant to purchase
Common Shares (the "Warrants"). Each of the Class B Preferred Shares would be
reclassified and changed into one-third of a Common Share and five Warrants. The
existing Common Shares would be reclassified and changed into one-tenth of a
Common Share and three-tenths of a Warrant. The authorized number of Common
Shares would be reduced from 850,000,000 to 100,000,000. The Warrants to be
issued as part of the Recapitalization Plan would have an exercise price of
$12.50 per share subject to adjustment in certain circumstances and be
exercisable for five years following the effective date of the Company's
Registration Statement covering the underlying Common Shares. The Warrants would
not be callable by the Company for a

F-36
<PAGE> 92
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

three-year period. Upon completion of the Recapitalization Plan, the Company
will apply for listing of the Common Shares and Warrants on NASDAQ.

Completion of the Recapitalization Plan would be subject to, among other
things, approval by the required holders of the various classes of the Company's
shares. Brooke Group Ltd. ("Brooke"), the Company's principal stockholder, has
agreed to vote all of its shares in the Company in favor of the Recapitalization
Plan. As a result of the Recapitalization Plan and assuming no warrant holder
exercises its Warrants, Brooke will increase its ownership of the outstanding
Common Shares of the Company from 42.3% to 55.1% and its total voting power from
42% to 55.1%.

The Company believes the proposed Recapitalization Plan will simplify the
current capital structure of the Company by replacing it with a single class of
equity securities. The exchange of the Preferred Shares for Common Shares will
eliminate dividend arrearages, thus increasing the net worth of the Company by
approximately $332,198 on a pro forma basis as of March 31, 1999. It will also
remove the need to redeem the Class A Senior Preferred Shares in 2003. The
resulting improvement in the net worth of the Company, along with a hoped for
increase in the price of the Common Shares, should increase the likelihood of
having the Common Shares quoted on NASDAQ. This, along with a more transparent
capital structure, should increase the liquidity of the Company's securities,
improve the valuation of the Common Shares and provide a currency for
acquisitions and financings. Finally, the recapitalization will allow the voting
rights of stockholders to properly reflect the economic interest of such
stockholders.

NEW ACCOUNTING PRONOUNCEMENTS

In June, 1998, FASB issued Statement of Accounting Standards ("SFAS") 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, 1999. SFAS 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. The Company has not yet determined
the impact that the adoption of SFAS 133 will have on its earnings or statement
of financial position.

2. INVESTMENT IN WESTERN REALTY

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
Ducat") to make real estate and other investments in Russia. In connection with
the formation of Western Realty Ducat, the Company agreed, among other things,
to contribute the real estate assets of BML, including Ducat Place II and the
site for Ducat Place III, to Western Realty Ducat and Apollo agreed to
contribute up to $58,750, including the investment in Western Realty Repin
discussed below. Through March 31, 1999, Apollo had funded $36,529 of its
investment in Western Realty Ducat.

F-37
<PAGE> 93
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The ownership and voting interests in Western Realty Ducat are held equally
by Apollo and the Company. Apollo will be entitled to a preference on
distributions of cash from Western Realty Ducat to the extent of its investment
($40,000), together with a 15% annual rate of return, and the Company will then
be entitled to a return of $20,000 of BML-related expenses incurred and cash
invested by the Company since March 1, 1997, together with a 15% annual rate of
return; subsequent distributions will be made 70% to the Company and 30% to
Apollo. Western Realty Ducat will be managed by a Board of Managers consisting
of an equal number of representatives chosen by Apollo and the Company. All
material corporate transactions by Western Realty Ducat will generally require
the unanimous consent of the Board of Managers. Accordingly, the Company has
accounted for its non-controlling interest in Western Realty Ducat using the
equity method of accounting.

The Company recorded its 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. The Company recognizes losses incurred by
Western Realty Ducat to the extent that cumulative earnings of Western Realty
Ducat are not sufficient to satisfy Apollo's preferred return.

Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000 participating
loan to, and payable out of a 30% profits interest in Western Tobacco
Investments LLC ("WTI"), a company organized by Brooke (Overseas) Ltd., a
subsidiary of Brooke, which, among other things, holds the interests of Brooke
(Overseas) Ltd. in Liggett-Ducat Ltd. and the new factory being constructed by
Liggett-Ducat Ltd. on the outskirts of Moscow. Western Realty Ducat has
recognized as other income $1,002, which represents 30% of WTI's net income for
the three months ended March 31, 1999.

Summarized financial information as of March 31, 1999 and December 31, 1998
and for the three month period ended March 31, 1999 and for the period from
February 20, 1998 (date of inception) to March 31, 1998 for Western Realty Ducat
follows:

<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Current assets................................... $ 2,939 $ 857
Participating loan receivable.................... 32,993 31,991
Real estate, net................................. 86,307 85,761
Furniture and fixtures, net...................... 230 179
Noncurrent assets................................ 538 631
Goodwill, net.................................... 7,016 7,636
Notes payable -- current......................... 5,703 4,999
Current liabilities.............................. 5,445 5,802
Notes payable.................................... 13,143 14,656
Long-term liabilities............................ 756 756
Members' equity.................................. 104,976 100,842
</TABLE>

F-38
<PAGE> 94
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FEBRUARY 20, 1998
THREE MONTHS ENDED (DATE OF INCEPTION)
MARCH 31, 1999 TO MARCH 31, 1998
------------------ -------------------
<S> <C> <C>
Revenues.................................... $3,448 $ 927
Costs and expenses.......................... 4,425 1,256
Other income................................ 1,002 --
Income tax provision........................ 16 --
Net loss.................................... 9 (329)
</TABLE>

Western Realty Repin LLC

In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the "Repin Loan")
to BML. The proceeds of the loan will be used by BML for the acquisition and
preliminary development of two adjoining sites totaling 10.25 acres (the
"Kremlin Sites") located in Moscow across the Moscow River from the Kremlin.
BML, which is planning the development of a 1.1 million sq. ft. hotel, office,
retail and residential complex on the Kremlin Sites, owned 95.2% of one site and
52% of the other site at March 31, 1999. Apollo will be entitled to a preference
on distributions of cash from Western Realty Repin to the extent of its
investment ($18,750), together with a 20% annual rate of return, and the Company
will then be entitled to a return of its investment ($6,250), together with a
20% annual rate of return; subsequent distributions will be made 50% to the
Company and 50% to Apollo. Western Realty Repin will be managed by a Board of
Managers consisting of an equal number of representatives chosen by Apollo and
the Company. All material corporate transactions by Western Realty Repin will
generally require the unanimous consent of the Board of Managers.

Through March 31, 1999, Western Realty Repin has advanced $25,000 under the
Repin Loan to BML, of which $18,773 was funded by Apollo and is classified in
other long-term obligations on the consolidated balance sheet at March 31, 1999.
The Repin Loan, which bears no fixed interest, is payable only out of 100% of
the distributions, if made, by the entities owning the Kremlin Sites to BML.
Such distributions shall be applied first to pay the principal of the Repin Loan
and then as contingent participating interest on the Repin Loan. Any rights of
payment on the Repin Loan are subordinate to the rights of all other creditors
of BML. BML used a portion of the proceeds of the Repin Loan to repay the
Company for certain expenditures on the Kremlin Sites previously incurred. The
Repin Loan is due and payable upon the dissolution of BML and is collateralized
by a pledge of the Company's shares of BML.

As of March 31, 1999, BML had invested $19,621 in the Kremlin Sites and
held $3,525, in cash, which was restricted for future investment. In connection
with the acquisition of its interest in one of the Kremlin Sites, BML has agreed
with the City of Moscow to invest an additional $6,000 (which has been funded)
in 1999 and $22,000 in 2000 in the development of the property.

F-39
<PAGE> 95
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Western Realty Repin LLC agreement, the 20% annual rate of return preference
to be received by Apollo on funds advanced to Western Realty Repin is treated as
interest cost in the consolidated statement of operations.

The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various financing alternatives on behalf of Western Realty Ducat and
BML. However, in light of the recent economic turmoil in Russia, no assurance
can be given that such financing will be available on acceptable terms. Failure
to obtain sufficient capital for the projects would force Western Realty Ducat
and BML to curtail or delay the planned development of Ducat Place III and the
Kremlin Sites.

3. INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of accumulated other
comprehensive income. The Company had realized gains on sales of investment
securities available for sale of $499 for the three months ended March 31, 1999.

The components of investment securities available for sale at March 31,
1999 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Marketable equity securities............. $39,297 $ 254 $6,444 $33,107
Marketable warrants...................... -- 3,456 -- 3,456
------- ------ ------ -------
Investment securities.................... $39,297 $3,710 $6,444 $36,563
======= ====== ====== =======
</TABLE>

4. LONG-TERM INVESTMENTS

At March 31, 1999, long-term investments consisted primarily of investments
in limited partnerships of $11,726. The Company believes the fair value of the
limited partnerships exceeds their carrying amount by approximately $2,600 based
on the indicated market values of the underlying investment portfolio provided
by the partnerships. The Company's investments in limited partnerships are
illiquid and the ultimate realization of these investments are subject to the
performance of the underlying partnership and its management by the general
partners.

5. REDEEMABLE PREFERRED SHARES

At March 31, 1999, the Company had authorized and outstanding 2,000,000 and
1,071,462, respectively, of its Class A Senior Preferred Shares. At March 31,
1999 and December 31, 1998, respectively, the carrying value of such shares
amounted to $332,198 and $316,202, including undeclared dividends of $234,581
and $219,068 or $218.94 and $204.46 per share. As of March 31, 1999, the
unamortized discount on the Class A Senior Preferred Shares was $6,586.

F-40
<PAGE> 96
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the three months ended March 31, 1999 and 1998, the Company recorded
$774 and $828 in compensation expense related to certain Class A Senior
Preferred Shares awarded to an officer of the Company in 1996. At March 31, 1999
and December 31, 1998, the balance of the deferred compensation and the
unamortized discount related to these award shares was $5,416 and $5,721,
respectively.

6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS

The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $172,905 and $165,856 at
March 31, 1999 and December 31, 1998, respectively. These undeclared dividends
represent $61.96 and $59.43 per share as of the end of each period. No accrual
was recorded for such undeclared dividends as the Class B Preferred Shares are
not mandatorily redeemable.

7. CONTINGENCIES

Lawsuits

On or about March 13, 1997, a shareholder derivative suit was filed against
the Company, as a nominal defendant, its directors and Brooke in the Delaware
Chancery Court, by a stockholder of the Company. The suit alleges that the
Company's purchase in January 1997 of the shares of BML from Brooke (Overseas)
Ltd. constituted a self-dealing transaction which involved the payment of
excessive consideration by the Company. The plaintiff seeks (i) a declaration
that the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the Company, and
(ii) unspecified damages to be awarded to the Company. The Company's time to
respond to the complaint has not yet expired. The Company believes that the
allegations were without merit. Although there can be no assurances, management
is of the opinion, after consultation with counsel, that the ultimate resolution
of this matter will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

Russian Operations

F-41
<PAGE> 97
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

control of companies operating in the Russian Federation. The operations of BML
and Western Realty Ducat may be significantly affected by these factors for the
foreseeable future.

Russian Taxation: 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 BML and Western
Realty Ducat may not coincide with that of management. As a result, transactions
may be challenged by tax authorities and BML and Western Realty Ducat may be
assessed additional taxes, penalties and interest, which can be significant.

Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have addressed the
Year 2000 Problem sufficiently to mitigate potential substantial disruption to
these infrastructure services. The substantial disruption of these services
would have an adverse affect on the operations of BML and Western Realty Ducat.
Furthermore, the current financial crisis could affect the ability of the
government and other organizations to fund Year 2000 compliance programs.

8. 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
three months ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------- ----------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
1999
Revenues........................ $19,030 $2,323 $ 251 $ 1,166 $22,770
Operating (loss) income......... 25 (1,225) (1,601) (3,346) (6,147)
Identifiable assets............. 38,957 91,091 985 123,605 254,638
Depreciation and amortization... 198 532 120 48 898
Capital expenditures............ -- 1,615 26 286 1,927

1998
Revenues........................ $19,425 $7,776 $ 413 $ 6,226 $33,840
Operating (loss) income......... (1,224) (20) (1,249) 2,073 (420)
Depreciation and amortization... 304 1,746 236 58 2,344
Capital expenditures............ 112 1,419 27 58 1,616
</TABLE>

F-42
<PAGE> 98
NEW VALLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME FROM DISCONTINUED OPERATIONS

The Company recorded a gain on disposal of discontinued operations of
$4,100 for the three months ended March 31, 1999 related to the settlement of a
lawsuit originally initiated by the Company's former Western Union telegraph
business.

10. COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the reporting and
disclosure of comprehensive income and its components. Comprehensive income is a
measure that reflects all changes in stockholders' equity, except those
resulting from transactions with stockholders. For the Company, comprehensive
income includes net income and changes in the value of equity securities that
have not been included in net income. For the three months ended March 31, 1999
and 1998, comprehensive loss applicable to Common Shares was $29,219 and
$21,493, respectively.

11. SUBSEQUENT EVENT

F-43
<PAGE> 99

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the securities offered hereby. All
of the amounts show are estimated except the Securities and Exchange Commission
registration fee.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 64,228
Printing expenses........................................... 50,000
Legal fees and expenses..................................... 10,000
Accounting fees and expenses................................ 5,000
Blue Sky filing fees and expenses........................... 5,000
Miscellaneous expenses...................................... 15,772
--------
Total..................................................... $150,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law and Article Seventh of
the Company's Restated Certificate of Incorporation and Article V of the
Company's By-laws provide for indemnification of the Company's directors and
officers in a variety of circumstances, which may include liabilities under the
Securities Act of 1933.

Section 102 of the Delaware General Corporation Law allows a corporation to
eliminate the personal liability of a director of a corporation to the
corporation or to any of its stockholders for monetary damage for a breach of
his fiduciary duty as a director, except in the case where the director (i)
breaches his duty of loyalty, (ii) fails to act in good faith, engages in
intentional misconduct or knowingly violates a law, (iii) authorized the payment
of a dividend or approves a stock repurchase in violation of the Delaware
General Corporation Law or (iv) obtains an improper personal benefit. Article
Eighth of the Company's Restated Certificate of Incorporation includes a
provision which eliminates directors' personal liability to the full extent
permitted under the Delaware General Corporation Law.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On November 18, 1996, the Company issued 36,000 Class A Senior Preferred
Shares and granted stock options to purchase 330,000 Common Shares and 97,000
Class B Preferred Shares at exercise prices of $.58 and $1.85 per share,
respectively, to an executive officer of the Company. The transactions described
above did not involve a public offering of the Company's securities and were
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) thereunder.

II-1
<PAGE> 100

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

The following is a list of exhibits filed as a part of this Registration
Statement or incorporated by reference herein:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*(2)(a) -- Joint Plan (incorporated by reference to Exhibit 2 in the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994)
*(b) -- Plan Amendment (incorporated by reference to Exhibit 2 in
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994)
*(c) -- Notice of Modification to the First Amended Joint Chapter 11
Plan of Reorganization (incorporated by reference to Exhibit
2 in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994)
*(d) -- Agreement and Plan of Merger dated as of May 22, 1996, by
and between the Company and NV Delaware Inc. (incorporated
by reference to Annex II in the Company's Definitive Proxy
Statement dated May 22, 1996)
*(e) -- Agreement and Plan of Merger dated as of May 22, 1996, by
and between NV Delaware Inc. and NV Merger Sub Inc.
(incorporated by reference to Annex V in the Company's
Definitive Proxy Statement dated May 22, 1996)
*(f) -- Stock Purchase Agreement dated as of January 31, 1997, among
BrookeMil, Brooke (Overseas) Ltd., BGLS and the Company
(incorporated by reference to Exhibit 2.1 in the Company's
Current Report on Form 8-K dated January 31, 1997)
*(g) -- Amended and Restated Limited Liability Company Agreement
(Second Restatement) dated as of February 20, 1998 by and
among Western Realty Development LLC, the Company, BrookeMil
Ltd. and Apollo Real Estate Investment Fund III, L.P.
(incorporated by reference to Exhibit 10.1 in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998)
*(h) -- Limited Liability Company Agreement, dated as of June 18,
1998, by and among Western Realty Repin LLC, Apollo Real
Estate Fund III, L.P., and the Company (incorporated by
reference to Exhibit 10.3 in the Company'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 the Company
*(b) -- By-Laws of the Company adopted July 29, 1996 (incorporated
by reference to Exhibit (3)(ii) in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1996)
</TABLE>

II-2
<PAGE> 101

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*(4)(a) -- Loan and Security Agreement dated January 11, 1996 by and
between AP Century III, L.P., AP Century IV, L.P., AP
Century V, L.P., AP Century VI, L.P. and AP Century VIII,
L.P., as Lenders, and the Company, as Borrower (the
Properties) (incorporated by reference to Exhibit 4.3 in
Amendment No. 1 in the Company's Current Report on Form 8-K
dated January 25, 1996, as amended)
*(b) -- Amendment to Loan and Security Agreement, dated December 27,
1996, by and between AP Century III, L.P., AP Century IV,
L.P., AP Century V, L.P., AP Century VI, L.P. and AP Century
VIII, L.P. (incorporated by reference to Exhibit 4(d) in the
Company's Form 10-K for the fiscal year ended December 31,
1996)
(c) -- Form of Warrant Agreement, dated as of June 4, 1999, between
American Stock Transfer & Trust Company, as Warrant Agent,
and the Company including form of warrant
*(5) -- Opinion of Milbank, Tweed, Hadley & McCloy LLP as to the
legality of the Common Shares being registered (previously
filed)
*(8) -- Opinion of Milbank, Tweed, Hadley & McCloy LLP as to certain
federal income tax considerations (previously filed)
*(10)(a)(i) -- Restricted Share Agreement, dated November 18, 1996, by and
between the Company and Howard M. Lorber (incorporated by
reference to Exhibit 10 (a)(ii) in the Company's Form 10-K
for the fiscal year ended December 31, 1996)
*(ii) -- Option Agreement, dated November 18, 1996, between the
Company and Howard M. Lorber (incorporated by reference to
Exhibit 10 (a)(iii) in the Company's Form 10-K for the
fiscal year ended December 31, 1996)
*(b)(i) -- Employment Agreement dated as of June 1, 1995, as amended,
effective as of January 1, 1996, between the Company and
Bennett S. LeBow (incorporated by reference to Exhibit
10(b)(i) in the Company'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 the Company and Howard M. Lorber (incorporated
by reference to Exhibit 10(b)(ii) in the Company'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 the Company's Form 10-K for the fiscal year ended
December 31, 1997)
*(iv) -- Employment Agreement dated September 22, 1995, between the
Company and Richard J. Lampen (incorporated by reference to
Exhibit 10(c) in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1995)
*(c)(i) -- Purchase Agreement, dated as of October 20, 1994, between
First Financial Management Corporation ("FFMC") and the
Company (incorporated by reference to Exhibit 10(a) in the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994)
</TABLE>

II-3
<PAGE> 102

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*(ii) -- Amendment No. 1 to the Purchase Agreement, dated November
14, 1994, between FFMC and the Company (incorporated by
reference to Exhibit 10(b) in the Company's Current Report
on Form 8-K dated November 1, 1994)
*(iii) -- Pension and Retiree Benefits Administration Services
Agreement, dated November 1, 1994, between the Company and
Western Union Financial Services, Inc. ("FSI") (incorporated
by reference to Exhibit 10(e) in the Company's Current
Report on Form 8-K dated November 1, 1994)
*(iv) -- Settlement Agreement dated October 19, 1994 among the
Company, the Statutory Committee of Unsecured Creditors, the
Official Committee of Secured Noteholders, FSI, FFMC and the
Pension Benefit Guaranty Corporation (incorporated by
reference to Exhibit 10(c) in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1994)
*(v) -- Stipulation dated October 20, 1994 among the Western Union
Employee Benefit Committee, the Company and the Pension
Benefit Guaranty Corporation (incorporated by reference to
Exhibit 10(d) in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994)
*(vi) -- Settlement Agreement, Stipulation and Order dated October
28, 1994 among the Company, BGLS, NV Holdings, the Statutory
Committee of Unsecured Creditors, the Official Committee of
Secured Noteholders and the Official Committee of Equity
Security Holders, the Preferred A Stockholders'
Sub-Committee of the Equity Committee and certain beneficial
holders of Series A Senior Preferred Shares of the Company
(incorporated by reference to Exhibit 10(b) in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1994)
*(vii) -- Asset Purchase Agreement dated September 30, 1995 among the
Company, Western Union Data Services Company, Inc. ("DSI")
and FFMC (incorporated by reference to Exhibit 10(b) in the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995)
*(viii) -- Release and Termination Agreement, dated September 30, 1995,
among the Company, FSI, DSI and FFMC, which agreement
terminated certain agreements among such parties in
connection with the sale of DSI (incorporated by reference
to Exhibit 10(y) in the Company's Form 10-K for the fiscal
year ended December 31, 1995)
*(d) -- Sale-Purchase Agreement, dated as of September 2, 1998, by
and between the Company and PW/MS OP Sub I, LLC
(incorporated by reference to Exhibit 2.1 in the Company's
Current Report on Form 8-K dated September 28, 1998)
</TABLE>

II-4
<PAGE> 103

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*(e)(i) -- Purchase Agreement dated January 11, 1996 between the
Company and AP Century I, L.P., AP Century II, L.P., AP
Century III, L.P., AP Century IV, L.P., A.P. Century V,
L.P., A.P. Century VI, L.P., A.P. Century VIII, L.P. and AP
Century IX, L.P. (incorporated by reference to Exhibit 2.2
in the Company's Current Report on Form 8-K dated January
25, 1996, as amended)
*(ii) -- Indemnity Agreement, dated January 11, 1996, from Apollo
Real Estate Investment to the Company regarding loan
document discrepancies (incorporated by reference to Exhibit
10(k)(i) in the Company's Form 10-K for the fiscal year
ended December 31, 1995)
*(iii) -- Indemnity Agreement, dated January 11, 1996, from Apollo
Real Estate Investment to the Company regarding existing
lender consents (incorporated by reference to Exhibit
10(k)(ii) in the Company's Form 10-K for the fiscal year
ended December 31, 1995)
*(iv) -- Environmental Indemnity Agreement, dated January 11, 1996,
from Apollo to the Company regarding University Place
Property (incorporated by reference to Exhibit 10(k)(iii) in
the Company's Form 10-K for the fiscal year ended December
31, 1995)
*(v) -- Environmental Indemnity Agreement, dated January 11, 1996,
from the Company to Apollo regarding post-closing
contamination (incorporated by reference to Exhibit
10(k)(iv) in the Company's Form 10-K for the fiscal year
ended December 31, 1995)
*(f) -- Expense Sharing Agreement made and entered into as of
January 18, 1995, by and between Brooke and the Company
(incorporated by reference to Exhibit 10(a) in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995)
*(g) -- Use Agreement dated as of January 31, 1997, entered into by
and between BrookeMil and Liggett-Ducat Joint Stock Company
(incorporated by reference to Exhibit 10.3 in the Company's
Current Report on Form 8-K dated January 31, 1997)
*(h)(i) -- TMC Investment Partnership Agreement dated as of February 2,
1996, between Ladenburg Thalmann Capital Corp. and Levin-A
Limited Partnership (incorporated by reference to Exhibit
10(r) in the Company's Form 10-K for the fiscal year ended
December 31, 1995)
(ii) -- Asset Purchase Agreement, dated as of May 18, 1999, by and
between Oracle Corporation and Thinking Machines Corporation
*(i) -- Form of Margin Agreement dated September 12, 1995, between
ALKI and Bear Stearns & Co. (incorporated by reference to
Exhibit 2 in the Schedule 13D)
*(j)(i) -- Non-Negotiable Promissory Note of Western Realty Development
LLC dated February 27, 1998 in favor of Apollo Real Estate
Investment Fund III, L.P. (incorporated by reference to
Exhibit 10.1 in the Company's Current Report on Form 8-K
dated February 20, 1998)
</TABLE>

II-5
<PAGE> 104

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*(ii) -- Pledge Agreement dated as of February 27, 1998 by and
between Apollo Real Estate Investment Fund III, L.P. and the
Company (incorporated by reference to Exhibit 10.2 in the
Company's Current Report on Form 8-K dated February 20,
1998)
*(iii) -- Participating Loan Agreement, dated as of April 28, 1998, by
and between Western Realty Development LLC, Western Tobacco
Investments LLC and Brooke (Overseas) Ltd. (incorporated by
reference to Exhibit 10.2 in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998)
*(iv) -- Participating Loan Agreement, dated as of June 18, 1998, by
and between Western Realty Repin LLC and BrookeMil Ltd.
(incorporated by reference to Exhibit 10.4 in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998)
*(21) -- Subsidiaries of the Company (incorporated by reference to
Exhibit 21 in the Company's Form 10-K for the fiscal year
ended December 31, 1998
(23)(a) -- Consent of PricewaterhouseCoopers LLP
(b) -- Consent of Arthur Andersen LLP
(c) -- Consent of Milbank, Tweed, Hadley & McCloy LLP (included in
their opinions filed as Exhibit 5 and Exhibit 8) (previously
filed)
(24) -- Power of Attorney (included on signature page to the
Company's Registration Statement on Form S-1, Commission
File No. 333-79837) (previously filed)
*(99)(a) -- Order confirming First Amended Joint Chapter 11 Plan of
Reorganization for the Company entered by the United States
Bankruptcy Court for the District of New Jersey on November
1, 1994 (incorporated by reference to Exhibit 99(b) in the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994)
*(b) -- Order Authorizing Sale of Shares and Related Assets entered
by the United States Bankruptcy Court for the District of
New Jersey on November 1, 1994 (incorporated by reference to
Exhibit 99(a) in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994)
</TABLE>

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

* Incorporated by reference.

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

(b) Financial Statements Schedules

Schedule III -- Real Estate and Accumulated Depreciation

II-6
<PAGE> 105

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of New Valley Corporation

In connection with our audits of the consolidated financial statements of
New Valley Corporation and Subsidiaries as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, which
financial statements are included in the Prospectus, we have also audited the
financial statement schedule listed in Item 21 herein.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

/s/ PricewaterhouseCoopers LLP

Miami, Florida
March 19, 1999

II-7
<PAGE> 106

SCHEDULE III
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>

COST
INITIAL COST CAPITALIZED
------------------ NET OF
DESCRIPTION AND LOCATION ENCUMBRANCES LAND BUILDING DELETIONS LAND
------------------------ ------------ ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Office Buildings:
Bernards Township, NJ............ $ 43,838 $10,059 $ 38,432 $ (48,491) $ --
Bernards Township, NJ............ 10,283 2,342 9,172 (11,514) --
Troy, MI......................... 22,384 23,581 (23,581) --
Troy, MI......................... 22,798 7,049 21,147 (28,196) --
Ducat Place I.................... -- 5,561 (5,561) --
Ducat Place II................... 20,078 -- 59,300 (59,300) --
Ducat Place III.................. -- 13,600 -- (13,600) --
Kindergarten Building............ -- -- 912 -- --
Kremlin Site..................... -- -- -- 18,013 18,013
-------- ------- -------- --------- -------
119,381 33,050 158,105 (172,230) 18,013
-------- ------- -------- --------- -------
Shopping Centers:
Tri Cities, WA................... 5,919 2,981 7,692 -- 2,981
Santa Fe, NM..................... 8,331 3,233 6,423 11 3,233
Portland, OR..................... 4,875 949 6,374 (1,098) 722
Marathon, FL..................... -- 624 3,299 (3,923) --
Seattle, WA...................... 10,717 3,354 9,069 544 3,354
Charleston, WV................... 11,238 2,510 10,516 317 2,511
Royal Palm Beach, FL............. 8,539 2,032 7,867 8 2,032
Lincoln, NE...................... 5,182 1,254 4,750 260 1,254
-------- ------- -------- --------- -------
54,801 16,937 55,990 (3,881) 16,087
-------- ------- -------- --------- -------
Total...................... $174,182 $49,987 $214,095 $(176,111) $34,100
======== ======= ======== ========= =======

<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
-------------------------------------
BUILDINGS
AND ACCUMULATED DATE DATE DEPRECIABLE
DESCRIPTION AND LOCATION IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTED ACQUIRED LIFE
------------------------ ------------ ------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <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............ 912 912 -- April 1998 40
Kremlin Site..................... -- 18,013 -- 1998 40
------- ------- ------
912 18,925 --
------- ------- ------
Shopping Centers:
Tri Cities, WA................... 7,692 10,673 807 1980 Jan 1996 25
Santa Fe, NM..................... 6,434 9,667 667 1964 Jan 1996 25
Portland, OR..................... 5,503 6,225 542 1978 Jan 1996 25
Marathon, FL..................... -- -- -- 1972 Jan 1996 25
Seattle, WA...................... 9,613 12,967 948 1988 Jan 1996 25
Charleston, WV................... 10,832 13,343 791 1985 Jan 1996 25
Royal Palm Beach, FL............. 7,875 9,907 826 1985 Jan 1996 25
Lincoln, NE...................... 5,010 6,264 515 1964 Jan 1996 25
------- ------- ------
52,959 69,046 5,096
------- ------- ------
Total...................... $53,871 $87,971 $5,096
======= ======= ======
</TABLE>

II-8
<PAGE> 107

NEW VALLEY CORPORATION

REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(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 1/1/96.................... $ -- $ -- $ -- $ --
------- -------- -------- ------
Additions during period:
Acquisitions through foreclosure... -- -- -- --
Other acquisitions................. 36,387 148,322 184,709 --
Improvements, etc.................. -- 209 209 --
Depreciation expense............... -- -- -- 3,622
------- -------- -------- ------
Total additions...................... 36,387 148,531 184,918 3,622
------- -------- -------- ------
Deductions during period:
Cost of real estate sold........... 227 1,498 1,725 --
------- -------- -------- ------
Balance at 12/31/96.................. $36,160 $147,033 $183,193 $3,622
------- -------- -------- ------
Additions during period:
Acquisitions through foreclosure... -- -- --
Other acquisitions................. 22,623 64,861 87,484
Improvements, etc.................. -- 7,454 7,454
Depreciation expense................. -- -- -- 5,197
------- -------- -------- ------
Total additions................. 22,623 72,315 94,938 5,197
------- -------- -------- ------
Deductions during period:
Cost of real estate sold........... 624 8,897 9,521 177
------- -------- -------- ------
Balance at 12/31/97.................. $58,159 $210,451 $268,610 $8,642
------- -------- -------- ------
</TABLE>

II-9
<PAGE> 108

SCHEDULE III

NEW VALLEY CORPORATION

REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)

<TABLE>
<S> <C> <C> <C> <C>
Additions during period:
Acquisition through foreclosure........... $ -- $ -- $ -- $
Other acquisitions........................ -- -- --
Improvements, etc......................... 17,324 912 18,236
Depreciation expense...................... -- -- -- 3,985
------- ------- -------- ------
Total additions........................ 17,324 912 18,236 3,985
------- ------- -------- ------
Deductions during period:
Real estate contributed to joint
venture................................ 21,933 65,650 87,583 1,050
Cost of real estate sold.................. 19,450 91,842 111,292 6,481
------- ------- -------- ------
Balance at 12/31/98......................... $34,100 $53,871 $ 87,971 $5,096
------- ------- -------- ------
</TABLE>

Financial statement schedules not included in this Registration Statement
have been omitted because they are not applicable or the required information is
shown in the Company's Consolidated Financial Statements or the Notes thereto.

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 19(a) (3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

II-10
<PAGE> 109

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-11
<PAGE> 110

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Miami, and
State of Florida, on the 14th day of June, 1999.

NEW VALLEY CORPORATION

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

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on June 14, 1999.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

* Chairman of the Board of Directors
- ----------------------------------------------------- and Chief Executive Officer
Bennett S. LeBow (Principal Executive Officer)

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

* Director
- -----------------------------------------------------
Henry C. Beinstein

* Director
- -----------------------------------------------------
Arnold I. Burns

* Director
- -----------------------------------------------------
Ronald J. Kramer

* Director
- -----------------------------------------------------
Richard J. Lampen

* Director
- -----------------------------------------------------
Howard M. Lorber
</TABLE>

II-12
<PAGE> 111

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
- -----------------------------------------------------
Barry W. Ridings

*By: /s/ J. BRYANT KIRKLAND III
----------------------------------
J. Bryant Kirkland III
Attorney-in-Fact
</TABLE>

II-13

<PAGE> 1
Exhibit 3(a)

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NEW VALLEY CORPORATION

1. The name of the corporation (which is hereinafter referred
to as the "Corporation") is New Valley Corporation.

2. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
May 20, 1996 under the name of NV Merger Sub Inc.

3. This Amended and Restated Certificate of Incorporation has
been duly proposed by resolutions adopted and declared advisable by the Board
of Directors of the Corporation, duly adopted by the stockholders of the
Corporation at a stockholder meeting on May 21, 1999 and duly acknowledged and
executed by the officers of the Corporation in accordance with the provisions
of Sections 103, 242 and 245 of the General Corporation Law of the State of
Delaware (the "DGCL") and, upon filing with the Secretary of State in
accordance with Section 103, shall thenceforth supersede the original
Certificate of Incorporation, as previously restated and amended, and shall, as
it may thereafter be amended in accordance with its terms and by law, be the
Amended and Restated Certificate of Incorporation of the Corporation.

4. Upon the filing (the "Effective Time") of this Amended and
Restated Certificate of Incorporation pursuant to the DGCL: (i) the total
number of Common Shares, par value $.01 per share (the "Common Shares"), of
which the Corporation shall have the authority to issue shall be reduced from
850,000,000 to 100,000,000; (ii) each $15.00 Class A Increasing Rate Cumulative
Senior Preferred Share ($100 Liquidation Value), par value $.01 per share (the
"Class A Senior Preferred Shares"), issued and outstanding immediately prior to
the Effective Time shall be reclassified as, and changed into, one validly
issued, fully paid and non-assessable Class D Redeemable Preferred Share ($.01
Liquidation Value), par value $.01 per share, authorized by Article THIRD of
this Amended and Restated Certificate of Incorporation (the "Class D Preferred
Shares"); (iii) each $3.00 Class B Cumulative Convertible Preferred Share, par
value $.10 per share (the "Class B Preferred Shares"), issued and outstanding
immediately prior to the Effective Time shall be reclassified as, and changed
into, one validly issued, fully paid and non-assessable Class E Redeemable
Preferred Share ($.01 Liquidation Value), par value $.01 per share, authorized
by Article THIRD of this Amended and Restated Certificate of Incorporation (the
"Class E Preferred Shares"); (iv) each Common Share issued and outstanding
immediately prior to the Effective Time shall be reclassified as, and changed
into, one validly issued, fully paid and non-assessable Class F Redeemable

<PAGE> 2

Preferred Share ($.01 Liquidation Value), par value $.01 per share, authorized
by Article THIRD of this Amended and Restated Certificate of Incorporation (the
"Class F Preferred Shares"); and (v) all Common Shares, Class A Senior
Preferred Shares and Class B Preferred Shares held in the treasury of the
Corporation shall be retired. Each certificate that theretofore represented a
share or shares of Class A Senior Preferred Shares, Class B Preferred Shares or
Common Shares shall thereafter represent that number of shares of Class D
Preferred Shares, Class E Preferred Shares or Class F Preferred Shares,
respectively, into which the share or shares of Class A Senior Preferred
Shares, Class B Preferred Shares or Common Shares, as applicable, represented
by such certificate shall have been reclassified.

5. The text of the Certificate of Incorporation of the
Corporation, as previously restated and amended, is hereby amended and restated
to read in its entirety as follows:

FIRST: The name of the Corporation is New Valley Corporation.

SECOND: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "DGCL").

THIRD: The aggregate number of shares which the Corporation shall have the
authority to issue shall consist of (i) 10,000,000 shares, par value $1.00 per
share, designated as Class C Preferred Shares (the "Class C Preferred Shares"),
(ii) 1,100,000 shares, par value $.01 per share, designated as Class D
Redeemable Preferred Shares (the "Class D Preferred Shares"), (iii) 3,000,000
shares, par value $.01 per share, designated as Class E Redeemable Preferred
Shares (the "CLASS E PREFERRED SHARES"), (iv) 10,000,000 shares, par value $.01
per share, designated as Class F Redeemable Preferred Shares (the "CLASS F
PREFERRED SHARES") and (v) 100,000,000 shares, par value $.01 per share,
designated as Common Shares (the "Common Shares").

The rights, preferences and limitations of said classes of stock are as
follows:

A. CLASS C PREFERRED SHARES

(i) ISSUANCE AND DESIGNATION. The Class C Preferred Shares
may be issued from time to time by the Board of Directors as shares of one or
more series of Class C Preferred Shares, and the Board of Directors is
expressly authorized, prior to issuance, in the resolution or resolutions
providing for the issue of shares of each particular series, to fix the
following:

(1) The distinctive serial designation of such
series which shall distinguish it from other series;

(2) The number of shares included in such series,
which number may be increased or decreased from time to time unless
otherwise provided by the Board of Directors in creating the series;

(3) The annual dividend rate (or method of
determining such rate) for shares of such series and the date or dates
upon which such dividends shall be payable;

2
<PAGE> 3

(4) Whether dividends on the shares of such series
shall be cumulative and, in the case of shares of any series having
cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series
shall be cumulative;

(5) The amount or amounts which shall be paid out of
the assets of the Corporation to the holders of the shares of such
series upon voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;

(6) The price or prices at which, the period or
periods within which and the terms and conditions upon which the
shares of such series may be redeemed, in whole or in part, at the
option of the Corporation;

(7) The obligation, if any, of the Corporation to
purchase or redeem shares of such series pursuant to a sinking fund or
otherwise and the price or prices at which, the period or periods
within which and the terms and conditions upon which the shares of
such series shall be redeemed, in whole or in part, pursuant to such
obligation;

(8) The period or periods within which and the terms
and conditions, if any, including the price or prices or the rate or
rates of conversion and the terms and conditions of any adjustments
thereof, upon which the shares of such series shall be convertible at
the option of the holder into shares of any class of stock or into
shares of any other series of preferred shares, except into shares of
a class having rights or preferences as to dividends or distribution
of assets upon liquidation which are prior or superior in rank to
those of the shares being converted;

(9) The voting rights, if any, of the shares of such
series in addition to those required by law, including the number of
votes per share and any requirement for the approval by the holders of
up to 66-2/3% of all Class C Preferred Shares, or of the shares of one
or more series, or of both, as a condition to specified corporate
action or amendments to the Amended and Restated Certificate of
Incorporation; and

(10) Any other relative rights, preferences or
limitations of the shares of the series not inconsistent herewith or
with applicable law.

(ii) RANKING. All Class C Preferred Shares (a) shall rank
senior to the Class D Preferred Shares, Class E Preferred Shares, Class F
Preferred Shares and Common Shares in respect of the right to receive payments
out of the assets of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (b) shall be of equal rank
regardless of series. The shares of any one series of the Class C Preferred
Shares shall be identical with each other in all respects except as to the
dates from and after which dividends thereon shall be cumulative. In case the
stated dividends or the amounts payable on liquidation are not paid in full,
the shares of all series of the Class C Preferred Shares shall share ratably in
the payment of dividends, including accumulations, if any, in accordance with
the sums which would be payable on said shares if all dividends were declared
and paid in full, and in any distribution of assets other than by way of
dividends in accordance with the sums which would be payable on such

3
<PAGE> 4

distribution if all sums payable were discharged in full. All Class C Preferred
Shares redeemed, purchased or otherwise acquired by the Corporation (including
shares surrendered for conversion) shall be cancelled and thereupon restored
the status of authorized but unissued Class C Preferred Shares undesignated as
to series.

B. CLASS D PREFERRED SHARES

(i) RANKING. All Class D Preferred Shares (a) shall rank
junior to the Class C Preferred Shares in respect of the right to receive
payments out of the assets of the Corporation upon voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, (b) shall rank
senior to the Common Shares in respect of the right to receive payments out of
the assets of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (c) shall rank PARI PASSU with
the Class E Preferred Shares and Class F Preferred Shares in respect of the
right to receive payments out of the assets of the Corporation upon voluntary
or involuntary liquidation, dissolution or winding up of the Corporation. All
Class D Preferred Shares redeemed, purchased or otherwise acquired by the
Corporation shall be cancelled and may not be reissued. Upon the automatic
redemption of the Class D Preferred Shares by the Corporation pursuant to
paragraph (iv) below, the Class D Preferred Shares so redeemed shall not be
reissued by the Corporation and shall be removed from the Corporation's Amended
and Restated Certificate of Incorporation.

(ii) DIVIDEND RATE. The holders of Class D Preferred Shares
shall not be entitled to receive dividends.

(iii) PREFERENCE ON LIQUIDATION, ETC. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation and after the stated amounts payable in such event on shares
ranking senior to the Class D Preferred Shares shall have been paid in full or
provision for payment thereof shall have been made, the holders of Class D
Preferred Shares shall be entitled, before any distribution or payment is made
to the holders of any junior stock, to be paid in full an amount equal to $.01
per share (which amount is hereinafter referred to as the "liquidation
amount").

If such payment shall have been made in full to all holders
of Class D Preferred Shares, the remaining assets of the Corporation shall be
distributed among the holders of junior stock, according to their respective
rights and preferences and in each case according to their respective number of
shares. For the purpose of this paragraph (iii), the consolidation or merger of
the Corporation with any other corporation shall not be deemed to constitute a
liquidation, dissolution or winding up of the Corporation, unless any junior
stock is redeemed or receives payment in cash or securities senior to the Class
D Preferred Shares.

(iv) REDEMPTION. Immediately following the Effective Time,
each Class D Preferred Share shall automatically be redeemed for 20 Common
Shares and one warrant, which warrant shall entitle the holder thereof to
purchase one Common Share and which warrant shall have the form specified in,
and be subject to, the provisions of the Warrant Agreement, dated as of June 4,
1999, between the Corporation and American Stock Transfer & Trust Company, as
warrant agent (each, a "Warrant" and together, the "Warrants").

4
<PAGE> 5

(v) VOTING RIGHTS. The holders of Class D Preferred Share
shall not be entitled to any voting rights, except as required by law.

(vi) DEFINITIONS. As used herein with respect to the Class D
Preferred Shares, the following term shall have the following meaning:

The term "junior stock" shall mean the Common Shares and any
other class or series of shares of the Corporation hereafter authorized over
which Class D Preferred Shares have preference or priority in the distribution
of assets on any liquidation, dissolution or winding up of the Corporation.

(vii) OTHER. The Class D Preferred Shares shall not have any
relative, participating, optional or other special rights and powers other than
as set forth herein.

C. CLASS E PREFERRED SHARES

(i) RANKING. All Class E Preferred Shares (a) shall rank
junior to the Class C Preferred Shares in respect of the right to receive
payments out of the assets of the Corporation upon voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, (b) shall rank
senior to the Common Shares in respect of the right to receive payments out of
the assets of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (c) shall rank PARI PASSU with
the Class D Preferred Shares and Class F Preferred Shares in respect of the
right to receive payments out of the assets of the Corporation upon voluntary
or involuntary liquidation, dissolution or winding up of the Corporation. All
Class E Preferred Shares redeemed, converted, purchased or otherwise acquired
by the Corporation shall be cancelled and may not be reissued. Upon the
automatic redemption of the Class E Preferred Shares by the Corporation
pursuant to paragraph (iv) below, the Class E Preferred Shares so redeemed
shall not be reissued by the Corporation and shall be removed from the
Corporation's Amended and Restated Certificate of Incorporation.

(ii) DIVIDEND RATE. The holders of Class E Preferred Shares
shall not be entitled to receive dividends.

(iii) PREFERENCE ON LIQUIDATION, ETC. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation and after the stated amounts payable in such event on shares
ranking senior to the Class E Preferred Shares shall have been paid in full or
provision for payment thereof shall have been made, the holders of Class E
Preferred Shares shall be entitled, before any distribution or payment is made
to the holders of any junior stock, to be paid in full an amount equal to $.01
per share (which amount is hereinafter referred to as the "liquidation
amount").

If such payment shall have been made in full to all holders
of Class E Preferred Shares, the remaining assets of the Corporation shall be
distributed among the holders of junior stock, according to their respective

5
<PAGE> 6

rights and preferences and in each case according to their respective number of
shares. For the purpose of this paragraph (iii), the consolidation or merger of
the Corporation with any other corporation shall not be deemed to constitute a
liquidation, dissolution or winding up of the Corporation, unless any junior
stock is redeemed or receives payment in cash or securities senior to the Class
E Preferred Shares.

(iv) REDEMPTION. Immediately following the Effective Time,
each Class E Preferred Share shall automatically be redeemed for 1/3 of a
Common Share and five Warrants; however, no fractional Common Shares will
actually be issued, but rather such fractional Common Shares, if any, will be
bundled and sold in accordance with the Corporation's proxy
statement/prospectus dated April 14, 1999 filed with the Securities and
Exchange Commission (the "1999 PROXY STATEMENT").

(v) VOTING RIGHTS. The holders of Class E Preferred Share
shall not be entitled to any voting rights, except as required by law.

(vi) DEFINITIONS. As used herein with respect to the Class E
Preferred Shares, the following term shall have the following meaning:

The term "junior stock" shall mean the Common Shares and any
other class or series of shares of the Corporation hereafter authorized over
which Class E Preferred Shares have preference or priority in the distribution
of assets on any liquidation, dissolution or winding up of the Corporation.

(vii) OTHER. The Class E Preferred Shares shall not have any
relative, participating, optional or other special rights and powers other than
as set forth herein.

D. CLASS F PREFERRED SHARES

(i) RANKING. All Class F Preferred Shares (a) shall rank
junior to the Class C Preferred Shares in respect of the right to receive
payments out of the assets of the Corporation upon voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, (b) shall rank
senior to the Common Shares in respect of the right to receive payments out of
the assets of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (c) shall rank PARI PASSU with
the Class D Preferred Shares and Class E Preferred Shares in respect of the
right to receive payments out of the assets of the Corporation upon voluntary
or involuntary liquidation, dissolution or winding up of the Corporation. All
Class F Preferred Shares redeemed, converted, purchased or otherwise acquired
by the Corporation shall be cancelled and may not be reissued. Upon the
automatic redemption of the Class F Preferred Shares by the Corporation
pursuant to paragraph (iv) below, the Class F Preferred Shares so redeemed
shall not be reissued by the Corporation and shall be removed from the
Corporation's Amended and Restated Certificate of Incorporation.

(ii) DIVIDEND RATE. The holders of Class F Preferred Shares
shall not be entitled to receive dividends.

6
<PAGE> 7

(iii) PREFERENCE ON LIQUIDATION, ETC. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation and after the stated amounts payable in such event on shares
ranking senior to the Class F Preferred Shares shall have been paid in full or
provision for payment thereof shall have been made, the holders of Class F
Preferred Shares shall be entitled, before any distribution or payment is made
to the holders of any junior stock, to be paid in full an amount equal to $.01
per share (which amount is hereinafter referred to as the "liquidation
amount").

If such payment shall have been made in full to all holders
of Class F Preferred Shares, the remaining assets of the Corporation shall be
distributed among the holders of junior stock, according to their respective
rights and preferences and in each case according to their respective number of
shares. For the purpose of this paragraph (iii), the consolidation or merger of
the Corporation with any other corporation shall not be deemed to constitute a
liquidation, dissolution or winding up of the Corporation, unless any junior
stock is redeemed or receives payment in cash or securities senior to the Class
F Preferred Shares.

(iv) REDEMPTION. Immediately following the Effective Time,
each Class F Preferred Share shall automatically be redeemed for 1/10 of a
Common Share and 3/10 of a Warrant; however, no fractional Common Shares or
Warrants will actually be issued, but rather such fractional Common Shares and
Warrants, if any, will be bundled and sold in accordance with the 1999 Proxy
Statement.

(v) VOTING RIGHTS. The holders of Class F Preferred Share
shall not be entitled to any voting rights, except as required by law.

(vi) DEFINITIONS. As used herein with respect to the Class F
Preferred Shares, the following term shall have the following meaning:

The term "junior stock" shall mean the Common Shares and any
other class or series of shares of the Corporation hereafter authorized over
which Class F Preferred Shares have preference or priority in the distribution
of assets on any liquidation, dissolution or winding up of the Corporation.

(vii) OTHER. The Class F Preferred Shares shall not have any
relative, participating, optional or other special rights and powers other than
as set forth herein.

E. COMMON SHARES

(i) RANKING. Subject to the rights of shares ranking senior
to the Common Shares, dividends may be paid upon the Common Shares, when and as
declared by the Board of Directors, but only out of funds legally available
therefor.

(ii) LIQUIDATION, ETC. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation and after the stated amounts payable in such event on shares
ranking senior to the Common Shares shall have been paid in full or provision

7
<PAGE> 8

for the payment thereof shall have been made, the remaining net assets of the
Corporation shall be distributed pro rata to the holders of Common Shares.

(iii) VOTING RIGHTS. Except as otherwise provided by law or
as otherwise expressly provided herein or in the certificate of amendment
required by law with respect to any series of shares established by the Board
of Directors, the holders of the Common Shares shall have the exclusive right
to vote for the election of directors and for all other purposes.

FOURTH: No holder of shares of the Corporation of any class, now or hereafter
authorized, shall have any preferential or pre-emptive right to subscribe for,
purchase or receive any shares of the Corporation of any class, now or
hereafter authorized, or any options or warrants for such shares, or any rights
to subscribe for or purchase such shares, or any securities convertible into or
exchangeable for such shares, which may at any time be issued, sold or offered
for sale by the Corporation.

FIFTH: The address of the Corporation's registered office in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.

SIXTH: By-laws of the Corporation may be adopted, amended or repealed by the
Board of Directors of the Corporation by the vote of a majority of the
directors present at a meeting of the Board of Directors at which a quorum is
present.

SEVENTH: The Corporation shall, to the fullest extent now or hereafter
authorized or permitted by applicable law, indemnify any person who is or was
made, or threatened to be made, a party to, or is involved in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, whether involving any actual or alleged breach
of duty, neglect or error, any accountability, or any actual or alleged
misstatement, misleading statement or other act or omission and whether brought
or threatened in any court or administrative or legislative body or agency,
including an action by or in the right of the Corporation to procure a judgment
in its favor and an action by or in the right of any other corporation of any
type or kind, domestic or foreign, or any partnership, joint venture, trust,
employee benefit plan or other enterprise, which any director or officer of the
Corporation is serving, has served or has agreed to serve in any capacity at
the request of the Corporation, by reason of the fact that he, his testator or
intestate, is or was or has agreed to become a director or officer of the
Corporation, or is or was serving or has agreed to serve such other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, against judgments, fines, amounts paid or to be
paid in settlement and expenses (including attorneys' fees, costs and charges)
incurred as a result of such action, suit or proceeding, or appeal therein. The
Corporation may indemnify any person (including a person entitled to
indemnification pursuant to the previous sentence) to whom the Corporation is
permitted to provide indemnification or the advancement of expenses to the
fullest extent now or hereafter permitted by applicable law, whether pursuant
to rights granted pursuant to, or provided by, the DGCL, or any other law, or
other rights created by (i) a resolution of stockholders, (ii) a resolution of
directors, or (iii) an agreement providing for such indemnification, it being
expressly intended that this Article SEVENTH authorizes the creation of other
rights in any such manner. The rights to indemnification set forth in this
Article SEVENTH shall not be exclusive of any other rights to which any person

8
<PAGE> 9

may now or hereafter be entitled under any statute, provision of this Amended
and Restated Certificate of Incorporation, by-law, agreement, contract,
resolution, vote of shareholders or otherwise. No amendment or repeal of this
Article SEVENTH shall adversely affect any right or protection of any person
the Corporation has agreed to indemnify existing hereunder in respect of any
act or omission occurring prior to such amendment or repeal.

EIGHTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.

This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with Section 245 of the DGCL and will become effective as
of the close of business on June 4, 1999.

9
<PAGE> 10

IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation to be signed by its Executive Vice
President and General Counsel who hereby acknowledges under penalties of
perjury that the facts stated herein are true and that this Amended and
Restated Certificate of Incorporation is the Corporation's act and deed, this
4th day of June, 1999.

NEW VALLEY CORPORATION

By: /s/ Richard J. Lampen
-----------------------------------
Name: Richard J. Lampen
Title: Executive Vice President and
General Counsel

Attest: /s/ Marc N. Bell
------------------------------------
Name: Marc N. Bell
Title: Vice President and Secretary

<PAGE> 1
Exhibit 4(c)

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

NEW VALLEY CORPORATION

AND

AMERICAN STOCK TRANSFER & TRUST COMPANY,

Warrant Agent

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

WARRANT AGREEMENT

Dated as of June 4, 1999

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

<PAGE> 2
TABLE OF CONTENTS*
<TABLE>
<CAPTION>

PAGE
----
<S> <C> <C>
Section 1. Appointment of Warrant Agent..................................................1

Section 2. Warrant Certificates..........................................................1

Section 3. Execution and Countersignature of Warrant Certificates........................2

Section 4. Warrants and Issuance of Warrant Certificates.................................2

Section 5. Registration; Transfers and Exchanges.........................................3

Section 6. Duration and Exercise of Warrants; Redemption of Warrants;
Exercise Price; Right of Warrant Holders......................................3

Section 7. Optional Reduction of Exercise Price..........................................5

Section 8. Payment of Taxes..............................................................6

Section 9. Mutilated or Missing Warrant Certificates.....................................6

Section 10. Reservation of Shares.........................................................6

Section 11. Obtaining of Governmental Approvals and Stock Exchange Listings...............6

Section 12. Adjustment of Exercise Price and Number of Warrant Shares Purchasable.........7

Section 13. Fractional Shares............................................................10

Section 14. Notices to Warrant Holders...................................................10

Section 15. Merger, Consolidation or Change of Name of Warrant Agent.....................12

Section 16. Warrant Agent................................................................12

</TABLE>

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

* This Table of Contents does not constitute a part of this Agreement or
have any bearing upon the interpretation of any of its terms or provisions.

<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Section 17. Change of Warrant Agent......................................................15

Section 18. Issuance of New Warrant Certificates.........................................15

Section 19. Notices to Company and Warrant Agent.........................................15

Section 20. Identity of Transfer Agent...................................................16

Section 21. Supplements and Amendments...................................................16

Section 22. Successors...................................................................16

Section 23. Termination..................................................................16

Section 24. Governing Law................................................................17

Section 25. Benefits of This Agreement...................................................17

Section 26. Counterparts.................................................................17

</TABLE>

EXHIBIT A. Form of Warrant Certificate

ii
<PAGE> 4

WARRANT AGREEMENT dated as of June 4, 1999, between New
Valley Corporation, a Delaware corporation (the "COMPANY"), and American Stock
Transfer & Trust Company, a New York limited purpose trust company (the
"WARRANT AGENT").

WHEREAS, the Company will effect a plan of recapitalization
on the date hereof whereby, among other things, each issued and outstanding
$15.00 Class A Increasing Rate Cumulative Senior Preferred Share, par value
$.01 per share (the "CLASS A SENIOR PREFERRED SHARES"), $3.00 Class B
Cumulative Convertible Preferred Share, par value $.10 per share (the "CLASS B
PREFERRED SHARES"), and Common Share, par value $.01 per share (the "COMMON
SHARES"), is to be reclassified and changed into a number of Common Shares and
a number of warrants (the "WARRANTS"), each Warrant entitling the holder
thereof to purchase one Common Share of the Company (the Common Shares issuable
upon exercise of the Warrants being referred to herein as the "WARRANT
SHARES");

WHEREAS, pursuant to the plan of recapitalization, each Class
A Senior Preferred Share is to be changed into 20 Common Shares and one
Warrant, each Class B Preferred Share is to be changed into 1/3 of a Common
Share and 3/10 of a Warrant, and each Common Share is to be changed into 1/10
of a Common Share and 3/10 of a Warrant; and

WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to act, in connection
with the issuance of certificates evidencing the Warrants (the "WARRANT
CERTIFICATES") and other matters as provided herein;

NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:

Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment. So long as any of the Warrant Certificates are
outstanding, there may be an authenticating agent appointed by the Warrant
Agent which shall be authorized to act on behalf of the Warrant Agent to
countersign Warrant Certificates issued upon exchange and register of transfer
thereof, and Warrant Certificates so countersigned shall be entitled to the
benefits of this Warrant Agreement and shall be valid for all purposes as if
countersigned by the Warrant Agent hereunder. Whenever reference is made in
this Warrant Agreement to the countersignature of the Warrant Agent, such
reference shall be deemed to include countersignature on behalf of the Warrant
Agent by such agent. The agent appointed hereunder shall be entitled to the
same rights, privileges and indemnities as the Warrant Agent under SECTION 16
and shall satisfy such requirements as are applicable to a successor to the
Warrant Agent under SECTION 17. The Warrant Agent has initially appointed
American Stock Transfer & Trust Company as authenticating agent.

Section 2. WARRANT CERTIFICATES. The Warrants shall be
evidenced by Warrant Certificates. The text of each Warrant Certificate (and
the Forms of Exercise and Assignment to be set forth on the reverse thereof)
shall be substantially in the form set forth in EXHIBIT A attached hereto and
may have such identification, designation and information thereon as the

<PAGE> 5

Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any applicable law or with
any rule or regulation under such law or with any rule or regulation of the
National Association of Securities Dealers, Inc. or any stock exchange on which
the Warrants may be listed, or to conform to usage.

Section 3. EXECUTION AND COUNTERSIGNATURE OF WARRANT
CERTIFICATES. The Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or one of its Vice Presidents,
under its corporate seal reproduced thereon attested by its Secretary or one of
its Assistant Secretaries. The signature of any such officer on any Warrant
Certificate may be manual or facsimile. Warrant Certificates bearing the manual
or facsimile signatures of individuals who were at any time the proper officers
of the Company shall bind the Company notwithstanding that such individuals, or
any of them, ceased to be such officers prior to the countersignature and
delivery of such Warrant Certificate or were not such officers at the date of
this Agreement.

Each Warrant Certificate shall be countersigned by the manual
signature of an authorized officer of the Warrant Agent and shall not be valid
for any purpose unless so countersigned. The Warrant Agent is hereby authorized
to countersign Warrant Certificates for issuance pursuant to any provision of
this Agreement.

Each Warrant Certificate shall be dated the date of its
countersignature by the Warrant Agent.

Section 4. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
Following the execution of this Agreement, Warrant Certificates representing
17,898,629 Warrants shall be countersigned, issued and delivered by the Warrant
Agent upon written order of the Company signed by its Chairman of the Board,
its President, one of its Vice Presidents, its Treasurer, its Secretary or one
of its Assistant Secretaries.

From time to time, the Warrant Agent shall countersign and
deliver Warrant Certificates in required denominations to the persons entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided in SECTION 9 hereof, no Warrant Certificates
shall be issued except (i) Warrant Certificates initially issued hereunder for
the number of Warrant Shares equal to the number of Warrants represented
thereby, (ii) Warrant Certificates issued upon the partial exercise of any
Warrant to evidence the portion of such Warrant not exercised, (iii) Warrant
Certificates issued upon any transfer or exchange of Warrants, and (iv) Warrant
Certificates representing 584,000 warrants issuable upon exercise of
outstanding stock options.

The Warrants will be separately transferable upon issuance.

2
<PAGE> 6

Section 5. REGISTRATION; TRANSFERS AND EXCHANGES. The Company
shall maintain at the principal office of the Warrant Agent in New York a
register for the registration of the Warrant Certificates and of their transfer
from time to time (the "WARRANT REGISTER").

The Company and the Warrant Agent may deem and treat the
registered holder of each Warrant Certificate as the absolute owner thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for the purpose of any exercise thereof, any distribution to the
holder thereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.

Each Warrant Certificate shall be transferable, in whole or
in part, on the Warrant Register, upon surrender of the Warrant Certificate to
the Company at the principal office of the Warrant Agent in New York, or at
another office or agency to be maintained by the Company, together with a
written assignment of the Warrant Certificate on the Form of Assignment set
forth on the reverse thereof or in other form satisfactory to the Warrant
Agent, duly executed by the registered holder thereof or his duly appointed
legal representative, and together with funds to pay any transfer taxes payable
in connection with such transfer. Upon such surrender and payment, a new
Warrant Certificate, in the name of the assignee and in the denomination or
denominations specified in such instrument of assignment, shall be issued and
delivered. If less than all of the Warrant Certificate is being transferred, a
new Warrant Certificate or Certificates shall be issued for the portion of the
Warrant Certificate not being transferred. The Warrant Certificate surrendered
shall be cancelled by the Warrant Agent.

A Warrant Certificate may be divided or combined with other
Warrant Certificates upon surrender thereof to the Company at the principal
office of the Warrant Agent as set forth above, or at another office or agency
to be maintained by the Company, together with a written notice specifying the
names and denominations in which new Warrant Certificates are to be issued,
signed by the registered holder thereof or his duly appointed legal
representative, and together with the funds to pay any transfer taxes payable
in connection with such transfer. Upon such surrender and payment, a new
Warrant Certificate or Certificates shall be issued and delivered in accordance
with such notice. The Warrant Certificate surrendered shall be cancelled by the
Warrant Agent.

The Company shall make no service or other charge in
connection with any such transfer or exchange of Warrant Certificates, except
for any transfer taxes payable in connection therewith.

Warrant Certificates cancelled by the Warrant Agent pursuant
to any provision of this Agreement shall be destroyed by it unless the Company
directs their return to the Company. The Warrant Agent shall furnish to the
Company written confirmation of the destruction of the Warrant Certificates so
cancelled.

Section 6. DURATION AND EXERCISE OF WARRANTS; REDEMPTION OF
WARRANTS; EXERCISE PRICE; RIGHT OF WARRANT HOLDERS. (a) The Warrants may be
exercised during the period commencing on the effective date of the Company's
Registration Statement covering the Warrant Shares underlying the Warrants (the
"EFFECTIVE Date") and terminating five years thereafter, or if such day is a
day on which banking institutions in the State of New York are authorized by
law to close, then on the next succeeding day which shall not be such a day
(such date of expiration being herein referred to as the "EXPIRATION DATE"). If

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<PAGE> 7

the Effective Date has not occurred by the date of this Agreement, the Company
shall cause notice of such Expiration Date to be delivered, as soon as
reasonably practicable after such date is established, to the Warrant Agent, in
accordance with SECTION 19, and to the registered holders of Warrant
Certificates, in accordance with SECTION 14. Each Warrant may be exercised on
any business day on or prior to the close of business on the Expiration Date.
The Expiration Date may be extended by the Company in its sole discretion from
time to time by a notice given to the Warrant Agent and mailed to the
registered holders of the Warrant Certificates as provided in SECTION 14. After
the close of business on the Expiration Date, unexercised Warrants will become
wholly void and of no value.

(b) The Company may elect by written notice given as
hereinafter provided (the "REDEMPTION NOTICE") to redeem the Warrants at a
price of $.01 per Warrant if, at any time after June 4, 2002, the third
anniversary of the effective time of the plan of recapitalization, the average
reported closing price or bid price of a Common Share, as reported on Nasdaq or
the Bulletin Board or by the National Quotation Bureau or on a national
securities exchange, as the case may be, exceeds $12.50 for any 20 consecutive
trading days ending within 5 days prior to the date of the Redemption Notice
(such date of the Redemption Notice being referred to herein as the "REDEMPTION
NOTICE DATE"). The Redemption Notice shall specify the date of redemption as
fixed by the Company (the "REDEMPTION DATE"), which date shall be not less than
30 days following the Redemption Notice Date. The Redemption Notice shall also
be given to the Warrant Agent as provided in SECTION 19.

(c) Subject to the provisions of this Agreement, the holder
of each Warrant shall have the right to purchase from the Company (and the
Company shall issue and sell to such holder) one fully paid and nonassessable
Warrant Shares at the exercise price at the time in effect hereunder (the
"EXERCISE PRICE"), upon surrender to the Company at the principal office of the
Warrant Agent of the Warrant Certificate evidencing such Warrant, with the Form
of Exercise on the reverse thereof duly filled in and signed, and upon payment
of the Exercise Price in lawful money of the United States of America by
certified or official bank check payable to the order of the Company. The
Exercise Price, as of the initial issuance of the Warrants, shall be $12.50.
The Exercise Price and the number of Warrant Shares purchasable upon exercise
of a Warrant shall be subject to adjustment as provided in SECTION 12.

Subject to SECTION 8, upon such surrender of a Warrant
Certificate and payment of the Exercise Price at the time in effect hereunder,
the Warrant Agent shall cause to be issued and shall deliver to or upon the
written order of the registered holder of such Warrant Certificate and in such
name or names as such registered holder may designate a certificate for the
Warrant Share or Warrant Shares issuable upon the exercise of the Warrant or
Warrants evidenced by such Warrant Certificate. Such certificate shall be
deemed to have been issued and any person so designated to be named therein
shall be deemed to have become the holder of record of such Warrant Share or
Warrant Shares as of the date of the surrender of such Warrant Certificate and
payment of the Exercise Price.

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<PAGE> 8

The Warrants evidenced by a Warrant Certificate shall be
exercisable, at the election of the registered holder thereof, either as an
entirety or from time to time for part only of the number of Warrants evidenced
by the Warrant Certificate. In the event that less than all of the Warrants
evidenced by a Warrant Certificate surrendered upon the exercise of Warrants
are exercised, a new Warrant Certificate or Certificates shall be issued for
the remaining number of Warrants evidenced by the Warrant Certificate so
surrendered. All Warrant Certificates surrendered upon exercise of Warrants
shall be cancelled by the Warrant Agent.

The Warrant Agent shall deposit to the account of the Company
all monies received by the Warrant Agent in payment of the Exercise Price of
any Warrant. The Warrant Agent shall account promptly to the Company with
respect to the exercise of Warrants.

(d) No Warrant holder, as such, shall be entitled to vote or
to receive dividends or shall otherwise be deemed to be the holder of Common
Shares for any purpose, nor shall anything contained herein or in any Warrant
Certificate be construed to confer upon any Warrant holder, as such, any of the
rights of a stockholder of the Company or any right to vote upon or give or
withhold consent to any action of the Company (whether upon any reorganization,
issuance of securities, reclassification or conversion of Common Shares,
consolidation, merger, sale, lease, conveyance, or otherwise), receive notice
of meetings or other action affecting stockholders (except for notices
expressly provided for in this Agreement) or receive dividends or subscription
rights, until such Warrant Certificate shall have been surrendered for exercise
accompanied by full and proper payment of the Exercise Price as provided in
this Agreement and the Warrant Shares thereunder shall have become issuable and
until such person shall have been deemed to have become a holder of record of
such Warrant Shares. If on the date of surrender of such Warrant Certificate
and payment of such Exercise Price, the transfer books for the Warrant Shares
shall be closed, certificates for the Warrant Shares shall be issuable on the
date on which such books shall next be open (whether before, on, or after the
Expiration Date) and until such date the Company shall be under no duty to
deliver any certificate for such Warrant Shares. No holder of Warrants shall,
upon the exercise of Warrants, be entitled to any dividends if the record date
with respect to payment of such dividends shall be a date prior to the date
such Warrant Shares became issuable upon the exercise of such Warrants.

Section 7. OPTIONAL REDUCTION OF EXERCISE PRICE. The Company
shall have the right, at any time, voluntarily to reduce the then current
Exercise Price to such amount (the "REDUCED EXERCISE PRICE") and for such
period or periods of time which may be through the close of business on the
Expiration Date (the "REDUCED EXERCISE PRICE PERIOD") as may be deemed
appropriate by the Board of Directors of the Company. Notice of any such
Reduced Exercise Price and Reduced Exercise Price Period shall be given to the
registered holders of Warrants in the manner provided in SECTION 14 and to the
Warrant Agent in the manner provided in SECTION 19. After the termination of
the Reduced Exercise Price Period, the Exercise Price shall be such Exercise
Price which would have been in effect, as adjusted pursuant to SECTION 12, had
there been no reduction in the Exercise Price pursuant to the provisions of
this SECTION 7. Any adjustment in the Exercise Price pursuant to SECTION 12
during the Reduced Exercise Price Period shall also be made in the Reduced
Exercise Price in the manner specified in SECTION 12.

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<PAGE> 9

Section 8. PAYMENT OF TAXES. The Company shall pay all taxes,
if any, attributable to the initial issuance of the Warrant Certificates;
PROVIDED, HOWEVER, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer of the Warrants after
their initial issuance or with respect to the exercise thereof and the Company
shall not be required to issue or deliver such certificates unless or until the
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.

Section 9. MUTILATED OR MISSING WARRANT CERTIFICATES. In case
any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed,
the Company may in its discretion issue, and the Warrant Agent may countersign,
in exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, and in lieu of and in substitution for the Warrant Certificate
lost, stolen or destroyed, a new Warrant Certificate of like tenor and
representing an equivalent number of Warrants, but only upon receipt of
evidence satisfactory to the Company and the Warrant Agent of such loss, theft
or destruction of such Warrant Certificate and indemnity or bond, if requested,
also satisfactory to them. Applicants for such substitute Warrant Certificates
shall also comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe.

Section 10. RESERVATION OF SHARES. The Company will at all
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Shares or its authorized and
issued Common Shares held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
full number of Warrant Shares deliverable upon the exercise of all outstanding
Warrants.

Before taking any action which would cause an adjustment
pursuant to SECTION 12 reducing the Exercise Price below the then par value (if
any) of the Warrant Shares issuable upon exercise of the Warrants, the Company
will take any action which may, in the opinion of its counsel (which may be
counsel employed by the Company), be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares at the
Exercise Price as so adjusted.

The Company covenants that all Warrant Shares which may be
issued upon the exercise of Warrants will, upon issuance, be fully paid and
nonassessable and free from all taxes, liens, charges and security interests
with respect to the issue thereof.

The Warrant Agent is authorized to make requisition from time
to time from a transfer agent for the Common Shares (including the Company if
then acting as a transfer agent) stock certificates required to honor exercises
of outstanding Warrants. The Company hereby authorizes its present and any
future such transfer agent to comply with all such requests. The Company will
supply such transfer agent with duly executed stock certificates for such
purpose and will itself provide or otherwise make available any cash which may
be payable as provided in SECTION 13 of this Agreement.

Section 11. OBTAINING OF GOVERNMENTAL APPROVALS AND STOCK
EXCHANGE LISTINGS. The Company will in good faith and as expeditiously as
possible take all action which may be necessary to obtain and keep effective

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<PAGE> 10

any and all permits, consents and approvals of governmental agencies and
authorities, and will make any and all filings under Federal and State
securities laws, necessary in connection with the issuance, distribution and
transfer of Warrant Certificates, the exercise of the Warrants, and the
issuance, sale, transfer and delivery of Shares upon exercise of the Warrants.
The Company will use its best efforts to have the Warrant Shares which are
issuable upon the exercise of the Warrants quoted on any securities exchanges
on which the then outstanding Common Shares are listed.

Section 12. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF
WARRANT SHARES PURCHASABLE. The Exercise Price and the number of Warrant Shares
purchasable upon the exercise of each Warrant are subject to adjustment from
time to time as provided in this SECTION 12.

(a) In the event the Company shall at any time after the date
of this Agreement issue any Common Shares as a stock dividend to the holders of
Common Shares, subdivide, combine or reclassify the outstanding Common Shares
into a greater or lesser number of Common Shares (any such sale, issuance,
subdivision or combination being herein called a "CHANGE OF SHARES"), then, and
thereafter upon any future Change of Shares, the Exercise Price in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent) determined by multiplying the
Exercise Price in effect immediately prior to the Change of Shares by a
fraction, the numerator of which shall be the number of Common Shares
outstanding immediately prior to the Change of Shares, and the denominator of
which shall be the sum of the number of Common Shares outstanding immediately
following the Change of Shares. Such adjustment shall be made successively
whenever such an issuance is made.

(b) The Company may elect, upon any adjustment of the
Exercise Price hereunder, to adjust the number of Warrants outstanding in lieu
of the adjustment in the number of Warrant Shares purchasable upon the exercise
of each Warrant as hereinabove provided (the "WARRANT ADJUSTMENT"). Following a
Warrant Adjustment, each Warrant outstanding after such adjustment shall
continue to represent the right to purchase one Common Share. Each Warrant held
of record prior to such adjustment of the number of Warrants shall become that
number of Warrants (calculated to the nearest tenth) determined by multiplying
the number one by a fraction, the numerator of which shall be the Exercise
Price in effect immediately prior to such adjustment and the denominator of
which shall be the Exercise Price in effect immediately following the Warrant
Adjustment. Upon each Warrant Adjustment, the Company shall, as promptly as
practicable, cause to be distributed to each registered holder of Warrant
Certificates on the date of such Warrant Adjustment Warrant Certificates
evidencing, subject to SECTION 13 hereof, the number of additional Warrants to
which such holder shall be entitled as a result of such adjustment or, at the
option of the Company, cause to be distributed to such holder in substitution
and replacement for the Warrant Certificates held by such holder prior to the
date of the Warrant Adjustment (and upon surrender thereof, if required by the
Company) new Warrant Certificates evidencing the number of Warrants to which
such holder shall be entitled after such adjustment.

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<PAGE> 11

(c) In the event the Company shall pay cash dividends or
distributions in cash on all Common Shares, the Exercise Price for the Warrants
in effect on the record date of the dividend payment shall be reduced by the
amount of the cash dividend or distribution in cash the Warrant holder would
have been entitled to receive had such holder exercised its Warrants
immediately prior to such date. The foregoing adjustment shall be made
successively immediately following any cash dividend or distribution in cash
payment.

(d) In case the Company shall issue rights, options or
warrants to all holders of Common Shares entitling them (for a period expiring
within 45 calendar days after the date of issuance) to subscribe for or
purchase Common Shares (or securities exchangeable for or convertible into
Common Shares) at a price per Common Share (or having an exchange value or a
conversion price per Common Share, if a security exchangeable for or
convertible into Common Shares) less than the current market price per Common
Share (as defined in SECTION 12(J)), on the record date mentioned below, the
Exercise Price to be in effect after such record date shall be determined by
multiplying the Exercise Price in effect immediately prior to the record date
by a fraction, the numerator of which shall be the number of Common Shares
outstanding on the record date plus the number of Common Shares which the
aggregate offering price of the total number of Common Shares so to be offered
(or the aggregate initial exchange value or conversion price of the
exchangeable or convertible securities so to be offered) would purchase at the
current market price and the denominator of which shall be the number of Common
Shares outstanding on the record date plus the number of additional Common
Shares to be offered for subscription or purchase (or for which or into which
the exchangeable or convertible securities so to be offered are initially
exchangeable or convertible). In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the
value of that consideration shall be as determined by the Board of Directors of
the Company. Common Shares owned by or held for the account of the Company
shall not be deemed outstanding for the purpose of that computation. The
foregoing adjustment shall be effective as of immediately following the record
date and shall be made successively whenever a record date is fixed. In the
event that such rights, options or warrants are not so issued, the Exercise
Price shall again be adjusted to be the Exercise Price that would then be in
effect if such record date had not been fixed, but such subsequent adjustment
shall not affect the number of shares issued upon any exercise of Warrants
prior to the date such subsequent adjustment is made. On the termination of any
right to convert or exchange securities convertible into Common Shares, the
Exercise Price shall be immediately readjusted to such amount as would have
obtained had the adjustment made upon the granting or issuance of such rights,
options or warrants been made upon the basis of the issuance or sale of only
the number of Common Shares actually issued pursuant to such rights, options or
warrants.

(e) In the event the Company shall fix a record date for the
making of a distribution to all holders of Common Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of indebtedness or assets
(other than cash dividends or cash distributions) each holder of Warrants shall
be entitled to participate in such distribution upon the exercise of such
holder's Warrants on a basis that the Company determines in its good faith
discretion to be fair and appropriate.

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<PAGE> 12

(f) Upon each adjustment of the Exercise Price pursuant to
this SECTION 12, other than an adjustment pursuant to paragraph (c) hereof, the
total number of Common Shares purchasable upon the exercise of each Warrant
shall (subject to the provisions contained in paragraph (b) hereof) be such
number of shares (calculated to the nearest hundredth) purchasable at the
Exercise Price in effect immediately prior to such adjustment multiplied by a
fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Exercise Price in effect immediately after such adjustment.

(g) In any case in which this SECTION 12 shall require that
any adjustment in the Exercise Price be made effective as of immediately after
a record date for a specified event, the Company may elect to defer until the
occurrence of the event the issuing to the holder of any Warrant exercised
after that record date the Common Shares and other capital stock of the
Company, if any, issuable upon the exercise over and above the Common Shares
and other capital stock of the Exercise Price in effect prior to such
adjustment; PROVIDED, however, that the Company shall deliver to the holder a
due bill or other appropriate instrument evidencing the holder's right to
receive such additional shares upon the occurrence of the event requiring such
adjustment.

(h) In case of any reclassification, capital reorganization
or other change of outstanding Common Shares, or in case of any consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding Common Shares), or in case of any sale or conveyance to
another corporation of the property of the Company as, or substantially as, an
entirety (other than a sale/leaseback, mortgage or other financing
transaction), the Company shall cause effective provision to be made so that
each holder of a Warrant then outstanding shall have the right thereafter, by
exercising such Warrant, to purchase the kind and number of shares of stock or
other securities or property (including cash) receivable upon such
reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance by a holder of the number of Common Shares that
might have been purchased upon exercise of such Warrant immediately prior to
such reclassification, capital reorganization or other change, consolidation,
merger, sale or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this SECTION 12. The Company shall not effect any
such consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the successor (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the Warrant Agent, the obligation to deliver to the holder of
each Warrant such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase and the
other obligations under this Agreement. The foregoing provisions shall
similarly apply to successive reclassifications, capital reorganizations and
other changes of outstanding Common Shares and to successive consolidations,
mergers, sales or conveyances.

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<PAGE> 13

(i) For the purposes of adjustments required by paragraph (d)
above, the Common Shares (or securities exchangeable for or convertible into
Common Shares) which the holder of any rights, options, or warrants shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of sale, issuance or distribution of such securities
and the consideration, if any, received by the Company therefor shall be deemed
to be the consideration received by the Company for such securities, plus the
consideration or premiums stated in such securities to be paid for the Common
Shares (or securities exchangeable for or convertible into Common Shares)
covered thereby.

(j) For the purpose of any computation under paragraph (d)
above, the current market price per Common Share on any date shall be deemed to
be the average of the daily closing prices per Common Share for 15 consecutive
trading days commencing 20 trading days before such date. The closing price for
each day shall be the last sale price regular way or, in case no such sale
takes place on such day, the average of the closing bid and asked prices
regular way, in either case on Nasdaq or the Bulletin Board or by the National
Quotation Bureau or on a national securities exchange, as the case may be.

(k) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such price; PROVIDED, HOWEVER, that any adjustments which by reason of this
SECTION 12(K) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this SECTION
12 shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be.

(l) For the purpose of this SECTION 12, the term "COMMON
SHARES" or "SHARES OF COMMON SHARES" shall mean (i) the class of stock
designated as the Common Shares of the Company at the date of this Agreement
(after giving effect to the plan of recapitalization), or (ii) any other class
of stock resulting from successive changes or reclassification of such shares
consisting solely of changes in par value, or from par value to no par value,
or from no par value to par value.

Section 13. FRACTIONAL SHARES. The Company shall not be
required to issue fractions of Warrant Shares upon exercise of the Warrants or
to distribute Share Certificates which evidence fractional Warrant Shares. If a
holder of Warrants exercises more than one Warrant at the same time, the
Warrant Shares issuable shall be based on the total number of Warrants to be
exercised at such time. In lieu of fractional Warrant Shares, there shall be
paid to the registered holders of Warrant Certificates at the time such
Warrants are exercised an amount in cash equal to the same fraction of the
current market price of the Warrant Shares as determined pursuant to SECTION
12(J).

Section 14. NOTICES TO WARRANT HOLDERS. (a) Except in the
case of an adjustment pursuant to SECTION 7 or SECTION 12(C), whenever the
number of Warrant Shares purchasable upon the exercise of each Warrant or the
Exercise Price is adjusted as provided herein, the Company within 20 days
thereafter shall (i) cause to be filed with the Warrant Agent a certificate of

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<PAGE> 14

the Company signed by its Chairman of the Board, its President or one of its
Vice Presidents setting forth the number of Warrant Shares purchasable upon the
exercise of each Warrant and the Exercise Price for such Warrant Shares after
adjustment and setting forth in reasonable detail the method of calculation and
the facts upon which the calculations are based, which certificate shall be
conclusive evidence of the correctness of the matters set forth therein, and
(ii) cause notice of such adjustment to be mailed by first-class mail, postage
prepaid, to each registered holder of a Warrant Certificate at his address
appearing on the Warrant Register. Where appropriate, such notice may be mailed
in advance and included as a part of any notice required to be mailed under any
other provision of this SECTION 14.

(b) Upon the fixing of a date for redemption, as provided in
SECTION 6, the establishing of the Exercise Date, as provided in SECTION 6, or
the fixing of a Reduced Exercise Price and Reduced Exercise Price Period, as
provided in SECTION 7, the Company shall cause notice of such redemption or
Reduced Exercise Price and Reduced Exercise Price Period, as the case may be,
to be mailed by first-class mail, postage prepaid, to each registered holder of
a Warrant Certificate at his address appearing on the Warrant Register.

(c) Upon the declaration of cash dividends or distributions
in cash on all Common Shares, as provided in SECTION 12(C), the Company shall
cause notice of such payment to be given to the Warrant Agent and to each
registered holder of a Warrant Certificate in such manner as the Company
determines to be fair and appropriate, including by public announcement of the
declaration of the dividend or distribution.

(d) In case:

(i) the Company shall authorize the issuance to all
holders of Common Shares of rights or warrants to subscribe for or
purchase Common Shares or of any other subscription rights or
warrants; or

(ii) the Company shall authorize the distribution to
all holders of Common Shares or shares of its stock (other than Common
Shares) evidences of indebtedness or assets (other than cash dividends
or distributions in cash); or

(iii) of any consolidation or merger to which the
Company is a party and for which approval by holders of Common Shares
is required, or of the conveyance or transfer of the properties and
assets of the Company substantially as an entirety, or of any
reclassification or change of Common Shares (other than a change in
par value, if any, or as a result of a subdivision or combination); or

(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company; or

(v) the Company proposes to take any other action
which would require an adjustment of the Exercise Price pursuant to
SECTION 12;

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<PAGE> 15

then the Company shall cause to be filed with the Warrant Agent and shall cause
notice of the proposed action and the record date for the determination of
holders of Common Shares entitled to vote on such matter to be mailed to each
of the registered holders of the Warrant Certificates at his address appearing
on the Warrant Register, at least 20 days (or 10 days in any case specified in
clauses (i) or (ii) above) prior to such record date, by first-class mail,
postage prepaid, which notice shall state (i) the date as of which the holders
of record of Common Shares to be entitled to receive any such rights, warrants
or distribution are to be determined, or (ii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up is expected to become effective, and the date as of which it is
expected that holders of record of Common Shares shall be entitled to exchange
their Common Shares for securities or other property, if any, deliverable upon
such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up. The failure to give any notice required
by this SECTION 14(C) or any defect therein shall not affect the legality of
any such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up, or the vote upon any action.

Section 15. MERGER, CONSOLIDATION OR CHANGE OF NAME OF
WARRANT AGENT. Any corporation into which the Warrant Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Warrant Agent shall
be a party, or any corporation succeeding to the corporate trust business of
the Warrant Agent, shall be the successor to the Warrant Agent hereunder
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, provided that such corporation would be eligible for
appointment as a successor Warrant Agent under the provisions of SECTION 17. In
case at the time such successor to the Warrant Agent shall succeed to the
agency created by this Agreement, and in case at that time any of the Warrant
Certificates shall have been countersigned but not delivered, any such
successor to the Warrant Agent may adopt the countersignature of the original
Warrant Agent; and in case at that time any of the Warrant Certificates shall
not have been countersigned, any successor to the Warrant Agent may countersign
such Warrant Certificates either in the name of the predecessor Warrant Agent
or in the name of the successor Warrant Agent; and in all such cases such
Warrant Certificates shall have the full force provided in the Warrant
Certificates and in this Agreement.

In case at any time the name of the Warrant Agent shall be
changed and at such time the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignature under its
prior name, and in case at that time any of the Warrant Certificates shall not
have been countersigned, the Warrant Agent may countersign such Warrant
Certificates either in its prior name or in its changed name, and in all such
cases such Warrant Certificates shall have the full force provided in the
Warrant Certificates and in this Agreement.

Section 16. WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed on it by this Agreement, upon the following
terms and conditions, all of which the Company and the holders of Warrants, by
their acceptance thereof, shall be bound:

(a) The statements contained herein and in the Warrant
Certificates shall be taken as statements of the Company, and neither
the Warrant Agent nor any of its stockholders, officers, directors,
employees or agents assumes any responsibility for the correctness of

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<PAGE> 16

any of the same except such as describe the Warrant Agent or action
taken or to be taken by it. Neither the Warrant Agent nor any of its
stockholders, officers, directors, employees or agents assumes any
responsibility with respect to the distribution of the Warrant
Certificates except as herein provided.

(b) Neither the Warrant Agent nor any of its stockholders,
officers, directors, employees or agents shall be responsible for any
failure of the Company to comply with any of the covenants contained
in this Agreement or in the Warrant Certificates to be complied with
by the Company.

(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and neither
the Warrant Agent nor any of its stockholders, officers, directors,
employees or agents shall incur any liability or responsibility to the
Company or to any holder of any Warrant Certificate in respect of any
action taken, suffered or omitted by any of them hereunder in good
faith and in accordance with the opinion or the advice of such
counsel.

(d) Whenever in the performance of its duties under this
Agreement the Warrant Agent shall deem it necessary or desirable that
any fact or matter be proved or established by the Company prior to
taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a
certificate signed by the Chairman, President or a Vice President of
the Company and delivered to the Warrant Agent; and such certificate
shall be full authorization to the Warrant Agent for any action taken
or suffered in good faith by it under the provisions of this Agreement
in reliance upon such certificate.

(e) Neither the Warrant Agent nor any of its stockholders,
officers, directors, employees or agents shall incur any liability or
responsibility to the Company or to any holder of any Warrant
Certificate for any action taken in reliance on any Warrant
Certificate, certificate of shares, notice, resolution, waiver,
consent, order, certificate, or other paper, document or instrument
believed to be genuine and believed to have been signed, sent or
presented by the proper party or parties.

(f) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the
execution and performance of this Agreement, to reimburse the Warrant
Agent for all expenses, taxes and governmental charges and other
charges of any kind and nature reasonably incurred by the Warrant
Agent in the execution and performance of this Agreement and to
indemnify the Warrant Agent, its stockholders, officers, directors,
employees and agents and their respective heirs, personal
representatives, administrators, executors, successors and assigns and
save each of them harmless against any and all liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution and performance of this Agreement
except as a result of its negligence or bad faith.

13
<PAGE> 17

(g) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other
action likely to involve expense unless the Company shall furnish the
Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred, but this provision shall not affect
the power of the Warrant Agent to take such action as it may consider
proper, whether with or without any such security or indemnity.

(h) Except as otherwise required by law, the Warrant Agent,
and any stockholder, director, officer or employee of the Warrant
Agent, may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with
or lend money to the Company or otherwise act as fully and freely as
though they were not the Warrant Agent under this Agreement, or a
stockholder, director, officer or employee of the Warrant Agent, as
the case may be. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company, or for any other legal
entity.

(i) The Warrant Agent shall act hereunder solely as Agent for
the Company, and its duties shall be determined solely by the
provision hereof. Neither the Warrant Agent nor any of its
stockholders, officers, directors, employees or agents shall be liable
for anything which it may do or refrain from doing in connection with
this Agreement except for its own negligence or bad faith.

(j) The Warrant Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from the Chairman, President or a Vice President of the
Company and to apply to such officers for advice or instructions in
connection with the Warrant Agent's duties, and neither it nor any of
its stockholders, officers, directors, employees or agents shall be
liable for any action taken or suffered or omitted by it in good faith
in accordance with instructions of any such officer.

(k) Neither the Warrant Agent nor any of its stockholders,
officers, directors, employees or agents shall at any time be under
any duty or responsibility to any holder of any Warrant Certificate to
make or cause to be made any adjustment of the Exercise Price, the
number of the Warrant Shares or other securities or property
deliverable as provided in this Agreement, or to determine whether any
facts exist which may require any of such adjustments or with respect
to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. Neither the Warrant
Agent nor any of its stockholders, officers, directors, employees or
agents shall be accountable with respect to the validity or value or
the kind or amount of any Warrant Shares or of any securities or
property which may at any time be issued or delivered upon the
exercise of any Warrant or at the expiration of the period during
which the Warrants are exercisable for any unexercised Warrant or with
respect to whether any such Warrant Shares or other securities will
when issued be validly issued and fully paid and nonassessable, and
makes no representation with respect thereto.

14
<PAGE> 18

Section 17. CHANGE OF WARRANT AGENT. The Warrant Agent may
resign and be discharged from its duties under this Agreement after giving 30
days prior written notice to the Company. The Warrant Agent may be removed by
the Company by like notice to the Warrant Agent. If the office of Warrant Agent
becomes vacant by resignation, removal, incapacity to act, or otherwise, the
Company shall appoint a successor to the Warrant Agent (which may be the
Company). If the Company shall fail to make such appointment within a period of
30 days after it has been notified in writing of such incapacity or resignation
by the Warrant Agent or by the registered holder of a Warrant Certificate, then
the registered holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a successor to the Warrant Agent.
Pending appointment of a successor to the Warrant Agent, either by the Company
or by such a court, the duties of the Warrant Agent shall be carried out by the
Company. Any successor Warrant Agent whether appointed by the Company or by
such a court shall be a bank or trust company, in good standing, incorporated
under the laws of the United States of America or of a state of the United
States of America, and must have at the time of its appointment as Warrant
Agent a combined capital and surplus of at least $500,000. After appointment,
the successor Warrant Agent shall be vested with the same powers, rights,
duties and responsibilities as if it had been originally named as Warrant Agent
without further act or deed; but the former Warrant Agent shall deliver and
transfer to the successor Warrant Agent any property at the time held by it
hereunder and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. The Company shall cause notice of the
appointment of any successor Warrant Agent to be mailed by first-class mail,
postage prepaid, to each registered holder of a Warrant Certificate at his
address appearing on the Warrant Register. Failure to give any notice provided
for in this SECTION 17, or any defect therein, shall not, however, affect the
legality or validity of the appointment of a successor Warrant Agent.

Section 18. ISSUANCE OF NEW WARRANT CERTIFICATES.
Notwithstanding any of the provisions of this Agreement or of the Warrants to
the contrary, the Company may, at its option, issue new Warrant Certificates
evidencing Warrants in such form as may be approved by its Board of Directors
to reflect any adjustment or change in the Exercise Price and the number or
kind or class of shares of stock or other securities or property purchasable
under the Warrant Certificates made in accordance with the provisions of this
Agreement.

Section 19. NOTICES TO COMPANY AND WARRANT AGENT. Any notice
pursuant to this Agreement to be given by the Warrant Agent or by the
registered holder of any Warrant Certificate to the Company shall be
sufficiently given if sent by first-class mail, postage prepaid, addressed to
the Company as follows:

New Valley Corporation
100 S.E. Second Street
Miami, Florida 33131
Attention: General Counsel

(or to such other address as the Company may have furnished in writing to the
Warrant Agent for this purpose).

15
<PAGE> 19

Any notice pursuant to this Agreement to be given by the
Company or by any registered holder of any Warrant Certificate to the Warrant
Agent shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed to the Warrant Agent as follows:

American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Corporate Trust Department

(or to such other address as the Warrant Agent may have furnished in writing to
the Company for this purpose).

Section 20. IDENTITY OF TRANSFER AGENT. Forthwith upon the
appointment of any subsequent transfer agent for Common Shares, or any other
shares of the Company's capital stock issuable upon the exercise of the
Warrants, the Company will file with the Warrant Agent a statement setting
forth the name and address of such subsequent transfer agent.

Section 21. SUPPLEMENTS AND AMENDMENTS. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement without
the approval of any holders of Warrant Certificates in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, to make any necessary
changes as required by SECTIONS 6, 7 or 12, or to make any other provisions in
regard to matters or questions arising hereunder which the Company may deem
necessary or desirable and which shall not adversely affect the interests of
the holders of the Warrant Certificates. The Warrants may otherwise be amended
only if the Company has obtained the consent of the holders of Warrants
representing a majority of Warrant Shares issuable upon exercise of all
outstanding Warrants, provided, HOWEVER, that no such action may increase the
Exercise Price of the Warrants or decrease the number of Warrant Shares
issuable upon exercise of each Warrant without the written consent of the
holders of Warrants representing at least 662/3% of the Warrant Shares issuable
upon exercise of all outstanding Warrants. Until an amendment becomes
effective, such consent of the holders of Warrant Certificates shall bind all
subsequent holders. Once such amendment becomes effective, it shall bind all
holders of Warrant Certificates.

Section 22. SUCCESSORS. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.

Section 23. TERMINATION. This Agreement shall terminate at
the close of business on the Expiration Date. Notwithstanding the foregoing,
this Agreement will terminate on any earlier date when all Warrants have been
exercised or redeemed. The provisions of SECTION 16 shall survive such
termination.

16
<PAGE> 20

Section 24. GOVERNING LAW. This Agreement and each Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State.

Section 25. BENEFITS OF THIS AGREEMENT. Nothing in this
Agreement shall be construed to give to any person or corporation other than
the Company, the Warrant Agent and the registered holders of the Warrant
Certificates any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of
the Company, the Warrant Agent and the registered holders of the Warrant
Certificates.

Section 26. COUNTERPARTS. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.

17
<PAGE> 21

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.

NEW VALLEY CORPORATION

By: /s/ Richard J. Lampen
------------------------------------
Name: Richard J. Lampen
Title: Executive Vice President

AMERICAN STOCK TRANSFER & TRUST COMPANY

By: /s/ Herbert Lemmer
------------------------------------
Name: Herbert Lemmer
Title: General Counsel

18
<PAGE> 22
EXHIBIT A

[FORM OF WARRANT CERTIFICATE]

[FACE]

EXERCISABLE ONLY ON OR AFTER EFFECTIVE DATE
(AS PROVIDED IN THE
WARRANT AGREEMENT REFERRED TO BELOW)

No. W-

_______Warrants

WARRANT CERTIFICATE

NEW VALLEY CORPORATION

This Warrant Certificate certifies that or registered
assigns is the registered holder of Warrants (the "WARRANTS") expiring
____________ (or such earlier or later date as may be fixed under the
circumstances set forth in the Warrant Agreement and described on the reverse
hereof) to purchase Common Shares of New Valley Corporation, a Delaware
corporation (the "COMPANY"). Each Warrant entitles the holder to purchase from
the Company one fully paid and nonassessable Common Share of the Company at the
exercise price (the "EXERCISE PRICE") at the time in effect under the Warrant
Agreement ($12.50 per share, at the time of the initial issuance of the
Warrants), payable in lawful money of the United States of America by certified
or official bank check payable to the order of the Company, upon surrender of
this Warrant Certificate and payment of such Exercise Price to the Company at
the principal office of the Warrant Agent in New York, or at another office or
agency to be maintained by the Company, but only subject to the conditions set
forth herein and in the Warrant Agreement; PROVIDED, HOWEVER, that no fractional
shares shall be issued on exercise of this Warrant and that the number or kind
of shares (or in certain events other property) purchasable upon exercise of the
Warrants and the Exercise Price referred to on the reverse hereof may as of the
date of this Warrant Certificate have been, or may after such date be, adjusted
as a result of the occurrence of certain events, as more fully provided in the
Warrant Agreement.

No Warrant may be exercised after the close of business on
______________ or such earlier or later date as may be fixed under the
circumstances set forth in the Warrant Agreement and described on the reverse
hereof (the "EXPIRATION DATE").

<PAGE> 23

Reference is hereby made to the further provisions of this
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.

This Warrant Certificate shall not be valid unless
countersigned by the Warrant Agent (or an authenticating agent of the Warrant
Agent appointed pursuant to SECTION 1 of the Warrant Agreement) by the manual
signature of one of its authorized officers.

IN WITNESS WHEREOF, NEW VALLEY CORPORATION has caused this
Instrument to be signed manually or in facsimile by its Chairman of the Board,
President or a Vice President and by its Secretary or an Assistant Secretary
and a facsimile of its corporate seal to be imprinted hereon.

NEW VALLEY CORPORATION

By:
------------------------------------
Name:
Title:

Countersigned:

- --------------------------------------
as Warrant Agent

By:
-----------------------------------
Authorized Officer

OR
- --------------------------------------
as Warrant Agent

By:
-----------------------------------
as Authenticating Agent

By:
-----------------------------------
Authorized Officer

Void after ___________ or such earlier or later date as may
be fixed under the circumstances set forth in the Warrant Agreement and
described on the reverse hereof.

<PAGE> 24

[FORM OF WARRANT CERTIFICATE]

[REVERSE]

NEW VALLEY CORPORATION

The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to a Warrant Agreement
dated as of June 4, 1999 (the "WARRANT AGREEMENT"), duly executed and delivered
by the Company to American Stock Transfer & Trust Company, Warrant Agent (the
"WARRANT AGENT"), which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "HOLDERS" or "HOLDER" meaning the registered holders or registered
holder) of the Warrants, and a copy of which Warrant Agreement will be
available at the office of the Secretary of the Company for inspection by
holders of Warrants during normal business hours.

The holder of Warrants evidenced by this Warrant Certificate
may exercise them by surrendering the Warrant Certificate, with the Form of
Exercise set forth hereon properly completed and executed, together with
payment of the Exercise Price at the time in effect, to the Company at the
principal office of the Warrant Agent in New York. In the event that upon any
exercise of Warrants evidenced hereby the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his assignee a new Warrant Certificate evidencing the
number of Warrants not exercised.

The Company may elect by written notice given as hereinafter
provided (the "REDEMPTION NOTICE") to redeem the Warrants at a price of $.01
per Warrant if, at any time after June 4, 2002, the third anniversary of the
effective date of the plan of recapitalization, the average closing price or
bid price of a Common Share, as reported on NASDAQ or the Bulletin Board or by
the National Quotation Bureau or on a national securities exchange, as the case
may be, exceeds $12.50 for any 20 consecutive trading days ending within five
days prior to the date of the Redemption Notice (such date of the Redemption
Notice being referred to herein as the "REDEMPTION NOTICE DATE"). Copies of the
Redemption Notice shall be mailed to the registered holders of the Warrant
Certificates as provided in SECTION 14. The Company must provide at least 30
days' notice to the holders of the Warrants prior to redemption of the
Warrants.

The Expiration Date may be extended by the Company in its
sole discretion from time to time by a notice given to the Warrant Agent and
mailed to the registered holders of the Warrant Certificates.

The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price may, subject to certain conditions, be
adjusted and under certain circumstances the Warrant may become exercisable for
securities or other assets other than the shares referred to on the face
hereof. If the Exercise Price is adjusted, the Warrant Agreement provides that
the number of Common Shares purchasable upon the exercise of each Warrant shall
be adjusted in certain circumstances.

<PAGE> 25

This Warrant Certificate is transferable, in whole or in
part, on the register maintained by the Company at the principal office of the
Warrant Agent for such purpose, upon surrender of this Warrant Certificate at
the office of the Warrant Agent, or at another office or agency to be
maintained by the Company, together with a written assignment of the Warrant
Certificate, on the Form of Assignment set forth hereon or in other form
satisfactory to the Warrant Agent, duly executed by the holder or his duly
appointed legal representative, and together with funds to pay any transfer
taxes payable in connection with such transfer. Upon such surrender and
payment, a new Warrant Certificate shall be issued and delivered, in the name
of the assignee and in the denomination or denominations specified in such
instrument of assignment. If less than all of this Warrant Certificate is being
transferred, a new Warrant Certificate or Certificates shall be issued for the
portion of this Warrant Certificate not being transferred.

This Warrant Certificate may be divided or combined with
other Warrant Certificates upon surrender hereof to the Company at the
principal office of the Warrant Agent, or at another office or agency to be
maintained by the Company, together with a written notice specifying the names
and denominations in which new Warrant Certificates are to be issued, signed by
the holder hereof or his duly appointed legal representative, and together with
the funds to pay any transfer taxes payable in connection with such transfer.
Upon such surrender and payment, a new Warrant Certificate or Certificates
shall be issued and delivered in accordance with such notice.

The Company shall make no service or other charge in
connection with any such transfer or exchange of this Warrant Certificate,
except for any transfer taxes payable in connection therewith.

The Company and the Warrant Agent may deem and treat the
registered holder hereof as the absolute owner of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise or conversion hereof, any distribution
to the holder hereof, and for all other purposes, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.

2
<PAGE> 26

[FORM OF EXERCISE]

(To be executed upon exercise of Warrant)

The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase Common Shares
and herewith tenders payment for such Common Shares to the order of New Valley
Corporation in the amount of $ in accordance with the terms hereof.
The undersigned requests that a certificate for such Common Shares be registered
in the name of whose address is . If said number of Common
Shares is less than all of the Common Shares purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of the Common Shares be registered in the name of whose
address is and that such Warrant Certificate be delivered to whose
address is .

Dated: Signature:
-------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)

- ---------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)

Signature Guaranteed:

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

<PAGE> 27

[FORM OF ASSIGNMENT)

(To be executed to transfer the Warrant Certificate)

FOR VALUE RECEIVED hereby sells, assigns and
transfers unto whose address is this Warrant Certificate,
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint attorney to transfer the within Warrant
Certificate on the books of the within-named Corporation, with full power of
substitution.

Dated: Signature:
-------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)

- ---------------------------
(Insert Social Security or
Taxpayer Identification
Number of Holder)

Signature Guaranteed:

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

<PAGE> 1
Exhibit 10(h)(ii)

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (the "AGREEMENT") is entered into as of
May 18, 1999, by and between Oracle Corporation, a Delaware corporation
("BUYER") and Thinking Machines Corporation, a Delaware corporation ("SELLER").

RECITALS

Seller is engaged in the business of developing, marketing,
licensing, supporting and providing related services for Darwin (as defined in
Section 1.1 below) (collectively, the "Business"). Buyer desires to acquire
from Seller, and Seller desires to sell to Buyer, substantially all of the
assets of the Business on the terms and subject to the conditions set forth in
this Agreement.

AGREEMENT

In consideration of the mutual agreements, representations, warranties
and covenants set forth below, Buyer and Seller agree as follows:

1. DEFINITIONS.

1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:

(a) "DARWIN" means the computer software product described in
SCHEDULE 1.1(A), including any and all source and object codes, binaries,
supplements, modifications, updates, corrections and enhancements to past and
present versions of such product, shipping versions of such product and
versions of such product under development, in each case as existing as of the
Closing Date; and any and all English and foreign language versions of past and
present versions of such products, shipping versions of such products and
versions of such product under development, in each case as existing as of the
Closing Date.

(b) "AFFILIATE" means, with respect to any Person, a Person
directly or indirectly controlling or controlled by or under common control
with such Person.

(d) "ASSIGNMENT AND ASSUMPTION AGREEMENT" as defined in
Section 3.2(a).

(e) "ASSUMED LIABILITIES" as defined in Section 2.2.

(f) "CLOSING" means the consummation of the transactions
contemplated hereby.

(g) "CLOSING DATE" means the date of the Closing.

<PAGE> 2

(h) "CODE" means the Internal Revenue Code of 1986, as
amended.

(i) "CONFIDENTIALITY AGREEMENT" as defined in Section
4.13(a).

(j) "COPYRIGHTS" means the copyrights, copyright
applications, pending applications, registrations, supplemental registrations
and recordings and all rights thereon.

(k) "CUSTOMER LISTS" means all customer lists maintained by
Seller relating to Darwin or the service and support of Darwin.

(l) "CUSTOMER SUPPORT MATERIALS" means any and all customer
support materials, including, without limitation, support training materials,
support bulletins (including, without limitation, copies of any and all
information on electronic bulletin boards), and any and all data contained in
Seller's customer support organization computer system relating to Darwin.

(m) "DAMAGES" as defined in Section 10.2.

(n) "DOCUMENTATION" as defined in Section 2.1(i).

(o) "EARN-OUT PAYMENTS" as defined in Section 2.4.

(p) "EARN-OUT PERIOD" as defined in Schedule 2.4.

(q) "EMBEDDED PRODUCTS" as defined in Section 4.8(a)(iii).

(r) "EMPLOYEES" as defined in Section 7.1(a).

(s) "END-USER LICENSES" as defined in Section 4.8(a)(ii).

(t) "ENGINEERING INFORMATION" means any and all design and
code documentation, methodologies, processes, trade secrets, design
information, product information, formulae, routines, engineering
specifications, technical manuals and data, drawings, inventions, technology,
know-how, techniques, engineering work papers, works-in-progress, works of
authorship and programmer's notes.

(u) "ERISA" as defined in Section 2.3(f).

(v) "ESCROW AGENT" as defined in Section 2.4.

(w) "ESCROW CONSIDERATION" as defined in Section 2.4.

(x) "ESCROW TERMINATION DATE" as defined in Section 10.1.

(y) "FACILITIES" as defined in Section 4.16(a).

(z) "GAAP" means generally accepted accounting principles of
the United States as set forth by the Financial Accounting Standards Board.

2
<PAGE> 3

(aa) "GOVERNMENTAL AUTHORIZATIONS" means the permits,
authorizations, consents or approvals of any Governmental Entity which are a
condition to the lawful consummation of the transactions contemplated hereby
listed on SCHEDULE 1.1(K) to this Agreement.

(bb) "GOVERNMENTAL ENTITY" means any court, or any federal,
state, municipal or other governmental authority, department, commission,
board, agency or other instrumentality (domestic or foreign).

(cc) "HAZARDOUS" as defined in Section 4.16(b).

(dd) "HAZARDOUS SUBSTANCE" as defined in Section 4.16(b).

(ee) "INDEMNIFIED PERSON" as defined in Section 10.2.

(ff) "INDEMNIFIED PERSONS" as defined in Section 10.2.

(gg) "INITIAL PAYMENT" as defined in Section 2.4.

(hh) "INTELLECTUAL PROPERTY RIGHTS" means Patent rights
(including without limitation claims against third Persons for infringement
whether or not heretofore asserted) Copyrights, trade secret rights, Trademark
rights, design rights, rights of priority, rights in Engineering Information,
Moral Rights and any other similar tangible or intangible proprietary rights
existing under judicial or statutory law of any country in the world, or under
any treaty.

(ii) "INVENTORIES" as defined in Section 2.1(b).

(jj) "LIEN" means any mortgage, pledge, lien, security
interest, option, license, covenant, condition, restriction, encumbrance,
charge or other third-party claim of any kind.

(kk) "MARKETING OR USER MATERIALS" means any and all customer
and marketing materials relating to Darwin, including, without limitation,
product documentation, sale and marketing collateral, white papers, product
data sheets known as "Software Product Descriptions," performance benchmark
reports, customer training materials, sales training materials and sales
presentation materials.

(ll) "MATERIAL ADVERSE EFFECT" with respect to a Person means
any event, change or effect that is materially adverse to the condition
(financial or otherwise), properties, assets, liabilities, business,
operations, results of operations of such Person and its Affiliates, taken as a
whole.

(mm) "MORAL RIGHTS" means any rights to claim authorship of
any inventions, improvements, works of authorship and other innovations of any
kind, computer software (whether or not they are eligible for patent,
copyright, trademark, trade secret or other legal protections) ("INNOVATION"),
to object to or prevent any modification of any Innovation, to withdraw from

3
<PAGE> 4

circulation or control the publication or distribution of any Innovation, and
any similar right, existing under judicial or statutory law of any country in
the world, or under any treaty, regardless of whether or not such right is
called or generally referred to as a "moral right".

(nn) "NET FEES" as defined in Schedule 2.4.

(oo) "NONSTANDARD SUPPORT AGREEMENTS" as defined in Section
4.8(l).

(pp) "NON-TRANSFERRED EMPLOYEE" as defined in Section 7.3.

(qq) "OFFICER'S CERTIFICATE" as defined in Section 10.3.

(rr) "PATENTS" means all patents, patent applications,
divisional applications, continuing applications, or reissue patents related
thereto, and any and all foreign patents and patent applications corresponding
thereto or relying thereon for its filing or convention date.

(ss) "PERMITS" as defined in Section 2.1(j).

(tt) "PERSON" means an individual, corporation, partnership,
association, trust, government or political subdivision or agent or
instrumentality thereof, or other entity or organization.

(uu) "PURCHASED ASSETS" as defined in Section 2.1.

(vv) "REQUIRED CONSENT" as defined in Section 4.6(a).

(ww) "RESTRICTED BUSINESS" as defined in Section 6.14(a)(i).

(xx) "RETAINED FED RIGHTS" as defined in Section 4.8(f).

(yy) "SELLER INTELLECTUAL PROPERTY" as defined in Section
4.8(a).

(zz) "SELLER'S KNOWLEDGE" OR "SELLER'S BEST KNOWLEDGE" means
the actual knowledge of Robert L. Doretti and Robert J. LaBossiere, as well as
the knowledge such officers would have had after due inquiry of those employees
of Seller with principal responsibility for the specific matter as to which
Seller is making the representation and warranty and appropriate internal
follow-up on the responses received from such employees as is reasonable in
light of the facts and circumstances, regardless of whether such "due inquiry"
was made.

(aaa) "STANDARD SUPPORT AGREEMENTS" as defined in Section
4.8(l).

(bbb) "SUPPORT AGREEMENTS" as defined in Section 4.8(l).

(ccc) "TARGET NET FEES" as defined in Schedule 2.4.

(ddd) "TAXES" means all taxes, however denominated, including
any interest, penalties or other additions to tax that may become payable in
respect thereof, (i) imposed by any federal, territorial, state, local or

4
<PAGE> 5

foreign government or any agency or political subdivision of any such
government, for which Buyer could become liable as successor to or transferee
of the Business or the Purchased Assets or which could become a charge against
or lien on any of the Purchased Assets, which taxes shall include, without
limiting the generality of the foregoing, all sales and use taxes, ad valorem
taxes, excise taxes, business license taxes, occupation taxes, real and
personal property taxes, stamp taxes, environmental taxes, real property gains
taxes, transfer taxes, payroll and employee withholding taxes, unemployment
insurance contributions, social security taxes, and other governmental charges,
and other obligations of the same or of a similar nature to any of the
foregoing, which are required to be paid, withheld or collected, or (ii) any
liability for amounts referred to in (i) as a result of any obligations to
indemnify another person.

(eee) "TERRITORY" as defined in Section 6.14(a).

(fff) "TESTING MATERIALS" means any and all Engineering
Information relating to testing and correcting defects in Darwin (including,
without limitation, regression tests, test beds, test plans, software defect
database and historical defect data) and other documents and materials, which
are necessary or used to maintain, enhance and correct errors in Darwin and to
provide customer technical support.

(ggg) "THIRD PERSON INTELLECTUAL PROPERTY" as defined in
Section 4.8(a)(iii).

(hhh) "TOXIC" as defined in Section 4.16(b).

(iii) "TRADEMARKS" means the common law trademarks, trademark
applications, trademark registrations, trade names, service marks, trade
styles, trade dress and such unregistered rights as may exist through use and
foreign counterparts thereof.

(jjj) "TRANSFERRED AGREEMENTS" as defined in Section 2.1(c).

(kkk) "TRANSFERRED EMPLOYEE" as defined in Section 7.1(a).

2. SALE AND PURCHASE

2.1 TRANSFER OF ASSETS. Subject to the terms and conditions of this
Agreement, Seller shall sell, assign, grant, transfer, and deliver to Buyer, or
to any Affiliate of Buyer designated by Buyer, and Buyer shall purchase and
accept from Seller as of the Closing Date, free and clear of all Liens, the
following tangible and intangible assets, wherever located, as the same shall
exist on the Closing Date (the "PURCHASED ASSETS"):

(a) all tangible personal property and leases of and other
interests in tangible personal property used in connection with the Business,
including, without limitation, the items listed on SCHEDULE 2.1(A)(I), except
for those items listed on the Excluded Assets List as set forth on SCHEDULE
2.1(A)(II);

(b) all raw materials, work-in-process, finished goods,
supplies and other inventories of the Business (the "INVENTORIES");

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(c) all rights under contracts, agreements, leases and other
interests in real and personal property, licenses, commitments, sales and
purchase orders and other instruments listed on SCHEDULE 2.1(C) (collectively,
the "TRANSFERRED AGREEMENTS");

(d) that portion of cash and accounts receivable for which a
customer has paid or pays Seller relating to support, maintenance or service
obligations under the Transferred Agreements with respect to a service term
which includes any period after the Closing Date, as set forth on SCHEDULE
2.1(D). Such proportionate amount shall be determined by allocating the portion
of the service term through the Closing Date and the remainder of such service
term, based on the number of days included in each.

(e) all of Seller's rights, claims, credits, causes of action
or rights of set-off against third parties relating to the Purchased Assets,
including, without limitation, unliquidated rights under warranties;

(f) Darwin;

(g) all Intellectual Property Rights that are related to,
used in, or derived from Darwin, including without limitation all:

(i) Copyrights in and to the Purchased Assets,
including, without limitation, the items set forth on SCHEDULE 2.1(G)(I);

(ii) Trademarks, including without limitation the
trademarks Darwin and Thinking Machines, as well as the domain names
ThinkingMachines.com and Think.com, and all goodwill associated therewith;

(iii) Patents, including without limitation, those
identified and set forth on SCHEDULE 2.1(G)(III);

(iv) Engineering Information; and

(v) Moral Rights;

(h) all documentation, whether in hard copy or electronic
format, that is used in, derived from or relates to Darwin (the
"DOCUMENTATION"), including, without limitation, Testing Materials, Marketing
or User Materials, Customer Support Materials, Customer Lists, list of former
or prospective suppliers and all personnel records of Transferred Employees;

(i) all permits, authorizations, consents and approvals of
any Governmental Entity affecting or relating in any way to the Business,
including without limitation, the items listed on SCHEDULE 2.1(I), but
specifically excluding, the qualification of Seller to do business in any state
(the "PERMITS");

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(j) all computer software programs, data and associated
licenses used in connection with the Business; and

(k) all goodwill associated with the Business or the
Purchased Assets, together with the right to represent to third parties that
Buyer is the successor to the Business.

2.2 TRANSFER OF LIABILITIES. Subject to the terms and conditions of
this Agreement, Buyer or an Affiliate of Buyer designated by Buyer agrees,
effective as of the Closing Date, to assume the following liabilities (the
"ASSUMED LIABILITIES"):

(a) The liabilities and obligations of Seller relating to the
time period after the Closing Date arising under the Transferred Agreements,
including but not limited to product support and maintenance obligations under
such Transferred Agreements, other than the liabilities attributable to any
failure by Seller to comply with the terms thereof;

2.3 EXCLUDED LIABILITIES. Except for those liabilities expressly
assumed by Buyer, Buyer shall not assume and shall not be liable for, and
Seller and its Affiliates shall retain and remain solely liable for and
obligated to discharge, all of the debts, contracts, agreements, commitments,
obligations and other liabilities of any nature whatsoever of Seller and its
Affiliates, whether known or unknown, accrued or not accrued, fixed or
contingent, including without limitation, the following:

(a) Any product warranty claims (i) by a distributor or
reseller relating to any Purchased Assets shipped by Seller or any of its
Affiliates to such distributor or reseller on or prior to the Closing Date or
(ii) by an end-user relating to any Purchased Assets shipped by Seller or any
of its Affiliates to such end-user on or prior to the Closing Date;

(b) Any liability for breaches by Seller or any of its
Affiliates on or prior to the Closing Date of any contract or any other
instrument, agreement, contract or purchase order or any liability for payments
or amounts due under any Transferred Agreement or any other instrument,
agreement, contract or purchase order on or prior to the Closing Date;

(c) Any liability or obligation for Taxes attributable to or
imposed upon Seller or any of its Affiliates, or attributable to or imposed
upon the Purchased Assets, for any period (or portion thereof) through the
Closing Date, including, without limitation, any Taxes attributable to or
arising from the transactions contemplated by this Agreement;

(d) Any liability or obligation for or in respect of any
loan, other indebtedness for money borrowed, or account payable of Seller or
any of its Affiliates, including any such liabilities owed to Affiliates of
Seller;

(e) Any liability or obligation arising as a result of any
legal or equitable action or judicial or administrative proceeding initiated at
any time, to the extent relating to any action or omission on or prior to the
Closing Date by or on behalf of Seller or any of its Affiliates, including,
without limitation, any liability for infringement of intellectual property
rights, breach of product warranty, injury or death caused by products, or
violations of federal or state securities or other laws;

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(f) Any liability or obligation arising on or prior to the
Closing Date out of any "employee benefit plan," as such term is defined by the
Employee Retirement Income Security Act of 1974 ("ERISA") or other employee
benefit plans;

(g) Any liability or obligation for making payments of any
kind (including as a result of the sale of Purchased Assets or as a result of
the termination of employment by Seller of employees, or other claims arising
out of the terms and conditions of employment with Seller, or for vacation or
severance pay or otherwise) to employees of Seller or in respect of payroll
taxes for employees of Seller;

(h) Any liability of Seller incurred in connection with the
making or performance of this Agreement and the transactions contemplated
hereby;

(i) Any liability of Seller arising out of the violation of
or failure to comply with any environmental regulations applicable to any
aspect of the Business; and

(j) Any costs or expenses of Seller incurred in connection
with shutting down, deinstalling and removing equipment not purchased by Buyer,
and the costs associated with all contracts and agreements not assumed by
Buyer.

2.4 PURCHASE PRICE. Subject to the performance by Seller of all of its
obligations under this Agreement (including, without limitation, delivering all
documents required to be delivered) at the Closing, in consideration of the
acquisition of the Purchased Assets under Section 2.1, Buyer agrees (i) to pay
Seller four million, three hundred thousand dollars ($4,300,000) (the "INITIAL
PAYMENT"), (ii) to deliver to the Escrow Agent (the "ESCROW AGENT") four
hundred thousand dollars ($400,000) (the "ESCROW CONSIDERATION") as set forth
in Section 2.5 below, and (iii) to pay Seller the earn-out payments to the
extent and as set forth in SCHEDULE 2.4 (the "EARN-OUT PAYMENTS"), subject to
Section 2.5 and Section 10.6. The Initial Payment shall be paid in cash by wire
transfer at the Closing.

2.5 HOLDBACK. Notwithstanding any investigation of the Business of
Seller made by or on behalf of the Buyer, at the Closing the Escrow
Consideration shall be delivered by Buyer directly to the Escrow Agent for
deposit in accordance with the terms of the Escrow Agreement in substantially
the form attached hereto as EXHIBIT A.

2.6 RECORDS; INSPECTION. Buyer shall keep books of account and records
that are accurate in all material respects pertaining to the license activities
and revenues of Buyer relating to Darwin and the license revenues from its
distributors (including the Relative Value Percentage for each application or
product into which Darwin has been embedded or incorporated) to the extent such
records are required in the ordinary course of Buyer's business or in
accordance with GAAP principles. No more than once during any twelve (12) month
period, Seller, at Seller's sole expense, shall be entitled to employ an
independent Certified Public Accountant who is not compensated based on the
results of the audit, and who is acceptable to Buyer (which acceptance shall

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not be unreasonably withheld), to inspect such books of account and records
upon reasonable notice to Buyer, and at a reasonable time during normal
business hours for the purpose of verifying the fees payable to Seller pursuant
to this Agreement. Unless necessary to establish Seller's right to payment of
the Purchase Price payable hereunder, Seller's auditor shall hold all
information obtained in strict confidence; shall not disclose such information
to any other person or entity without Buyer's prior written consent; and shall
not disclose to Seller any information regarding Buyer's business other than
any noncompliance by Buyer with the fee payment provisions hereof.

2.7 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated among the Purchased Assets as provided in SCHEDULE 2.7 to be prepared
by Buyer for purposes of complying with the requirements of Section 1060 of the
Code and the regulations thereunder. Buyer and Seller agree to each prepare and
file on a timely basis with the Internal Revenue Service (and applicable state
tax authorities) substantially identical and supplemental Internal Revenue
Service Forms 8594 (and corresponding state tax forms) consistent with Buyer's
allocation of the Purchase Price. If any Tax authority challenges such
allocation, the party receiving notice of such challenge shall give the other
prompt written notice thereof and the parties shall cooperate in order to
preserve the effectiveness of such allocation.

3. CLOSING

3.1 CLOSING. Subject to the terms and conditions of this Agreement,
the Closing shall take place on such date, as soon as practicable after all
conditions precedent in Sections 8 and 9 have been satisfied or waived, as the
parties may agree, but in any case no later than May 31, 1999.

3.2 ACTIONS AT THE CLOSING. At the Closing, Seller shall deliver the
Purchased Assets to Buyer, Buyer shall deliver the Initial Payment to Seller
and deliver the Escrow Consideration to the Escrow Agent, and Buyer and Seller
shall take such actions and execute and deliver such agreements, bills of sale,
and other instruments and documents as necessary or appropriate to effect the
transactions contemplated by this Agreement in accordance with its terms,
including without limitation the following:

(a) OTHER AGREEMENTS; ARRANGEMENTS. Seller shall deliver to
Buyer a General Bill of Sale in mutually acceptable form and an Assignment and
Assumption Agreement in mutually acceptable form (each an "ASSIGNMENT AND
ASSUMPTION AGREEMENT") with respect to each Transferred Agreement assigned to
Buyer, duly executed by Seller, assigning to Buyer all of Seller's right, title
and interest in and to the Assets.

(b) PURCHASE PRICE. Buyer shall deliver the Initial Payment
to the Seller in accordance with Section 2.4 and the Escrow Consideration to
the Escrow Agent in accordance with Sections 2.4 and 2.5.

(c) TITLE. Seller shall provide reasonable evidence of valid
title to such of the Purchased Assets as Buyer may reasonably request in
writing prior to the Closing, in form and substance reasonably satisfactory to
Buyer.

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(d) THIRD PARTY CONSENTS AND ASSIGNMENTS. Seller shall
deliver to Buyer any assignments, and any required consents to assignment, that
it has obtained in respect of the Transferred Agreements, duly executed by
parties having the authority to so assign or consent to assign, in form and
substance as Buyer shall reasonably request, as well as written confirmation
from such third parties that the Transferred Agreements are in good standing.

(e) SELLER DOCUMENTS. At the Closing, Seller shall deliver to
Buyer any and all documents required to satisfy the conditions set forth in
Section 8 of this Agreement and any other closing documents reasonably
requested by Buyer.

(f) BUYER DOCUMENTS. At the Closing, Buyer shall deliver to
Seller any and all documents required to satisfy the conditions set forth in
Section 9 of this Agreement and any other closing documents reasonably
requested by Seller.

(g) POST-CLOSING ACTIONS. Subsequent to the Closing Date,
Seller shall, and shall cause any Affiliate of Seller to, from time to time
execute and deliver, upon the request of Buyer, all such other and further
materials and documents and instruments of conveyance, transfer or assignment
as may reasonably be requested by Buyer to effect, record or verify the
transfer to and vesting in Buyer of Seller's and any of Seller's Affiliates'
right, title and interest in and to the Purchased Assets, free and clear of all
Liens, in accordance with the terms of this Agreement.

4. REPRESENTATIONS AND WARRANTIES OF SELLER.

Each representation and warranty set forth below is qualified by any
exception or disclosures set forth in the Seller Disclosure Schedule attached
hereto, which exceptions specifically reference the Section(s) to be qualified.
In all other respects, each representation and warranty set out in this Section
4 is not qualified in any way whatsoever, will not merge on Closing or by
reason of the execution and delivery of any agreement, document or instrument
at the Closing, will remain in force on and after the Closing Date, is given
with the intention that liability is not confined to breaches discovered before
Closing, is separate and independent and is not limited by reference to any
other representation or warranty or any other provision of this Agreement, and
is made and given with the intention of inducing the Buyer to enter into this
Agreement. Seller represents and warrants to Buyer as follows:

4.1 ORGANIZATION, STANDING AND POWER. Seller is a corporation, duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Seller has the requisite corporate power and
authority and all necessary permits, authorizations, consents, and approvals of
all Governmental Entities to own, lease and operate its properties and to carry
on the Business as now being conducted and as proposed to be conducted, except
where the failure to have such power, authority and governmental approvals
would not, individually or in the aggregate, have a Material Adverse Effect on
the Business. Seller is duly qualified or licensed as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except where the failure to be
so qualified or licensed and in good standing that would not, individually or
in the aggregate, have a Material Adverse Effect on the Business.

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4.2 AUTHORITY. The execution and delivery of this Agreement (and all
other agreements and instruments contemplated under this Agreement) by Seller,
the performance by Seller of its obligations hereunder and thereunder, and the
consummation by Seller of the transactions contemplated hereby and thereby have
been duly authorized by all necessary action by the Board of Directors and,
before the Closing, shall be duly authorized by the shareholders of Seller, and
no other act or proceeding on the part of or on behalf of Seller or its
shareholders is necessary to approve the execution and delivery of this
Agreement and such other agreements and instruments, the performance by Seller
of its obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby. The signatory officers of Seller
have the power and authority to execute and deliver this Agreement and all of
the other agreements and instruments to be executed and delivered by Seller
pursuant hereto, to consummate the transactions hereby and thereby contemplated
and to take all other actions required to be taken by Seller pursuant to the
provisions hereof and thereof.

4.3 EXECUTION AND BINDING EFFECT. This Agreement has been duly and
validly executed and delivered by Seller and constitutes, and the other
agreements and instruments to be executed and delivered by Seller pursuant
hereto, upon their execution and delivery by Seller, will constitute (assuming,
in each case, the due and valid authorization, execution and delivery thereof
by Buyer), legal, valid and binding agreements of Seller, enforceable against
Seller in accordance with their respective terms, except as enforceability may
be limited by bankruptcy, insolvency, moratorium, or other laws affecting the
enforcement of creditors' rights generally or provisions limiting competition,
and by equitable principles.

4.4 CONSENTS AND APPROVALS OF GOVERNMENTAL ENTITIES. Other than the
Governmental Authorizations there is no requirement applicable to Seller to
make any filing, declaration or registration with, or to obtain any permit,
authorization, consent or approval of, any Governmental Entity as a condition
to the lawful consummation by Seller of the transactions contemplated by this
Agreement and the other agreements and instruments to be executed and delivered
by Seller pursuant hereto or the consummation by Seller of the transactions
contemplated herein or therein.

4.5 NO VIOLATION. Neither the execution, delivery and performance of
this Agreement and all of the other agreements and instruments to be executed
and delivered pursuant hereto, nor the consummation of the transactions
contemplated hereby or thereby, will, with or without the passage of time or
the delivery of notice or both, (a) conflict with, violate or result in any
breach of the terms, conditions or provisions of the Certificate of
Incorporation or Bylaws of Seller, (b) conflict with or result in a violation
or breach of, or constitute a default or require consent of any Person (or give
rise to any right of termination, cancellation or acceleration) under, any of
the terms, conditions or provisions of any contract, notice, bond, mortgage,
indenture, license, franchise, permit, agreement, lease or other instrument or
obligation to which Seller is a party or by which Seller or any of the
Purchased Assets may be bound, (c) violate any statute, ordinance or law or any
rule, regulation, order, writ, injunction or decree of any Governmental Entity

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applicable to Seller or by which any properties or assets of Seller may be
bound, or (d) result in any cancellation of, or obligation to repay, any grant,
loan or other financial assistance received by Seller from any Governmental
Entity. No "bulk sales" legislation under any applicable Commercial Code
applies to the transactions contemplated by this Agreement.

4.6 CONSENTS. SECTION 4.6 of the Seller Disclosure Schedule sets forth
each agreement, contract or other instrument binding upon Seller requiring a
consent as a result of the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated hereby (each a
"REQUIRED CONSENT").

4.7 ASSETS GENERALLY.

(a) The Purchased Assets include all properties, tangible and
intangible, and only such properties currently used by Seller in operating the
Business and necessary for Buyer to market, license, implement, support,
modify, enhance, upgrade and maintain the Purchased Assets in a manner
substantially equivalent to the manner in which Seller has operated the
Business prior to and through the Closing Date. Other than the Required
Consents and the Governmental Approvals, no licenses or other consents from, or
payments to, any other Person are or will be necessary for Buyer to operate the
Business and use the Purchased Assets in the manner in which Seller has
operated the same.

(b) Seller holds good and marketable title, license or
leasehold interest to all of the Purchased Assets and has the complete and
unrestricted power and the unqualified right to sell, assign and deliver the
Purchased Assets to Buyer. Upon consummation of the transactions contemplated
by this Agreement, Buyer will acquire good and marketable title, license or
leasehold interest to the Purchased Assets free and clear of any Liens, and
there exists no restriction on the use or transfer of the Purchased Assets. No
Person other than Seller has any right or interest in the Purchased Assets,
including the right to grant interests in the Purchased Assets to third
parties, except for Purchased Assets licensed or leased from third parties
which are set forth in the Seller Disclosure Schedule and identified as such.

(c) None of the Purchased Assets that constitute tangible
personal property is held under any lease, security agreement, conditional
sales contract, Lien, or other title retention or security arrangement.

(d) Seller has not entered into any agreement that restricts
Buyer's right to sell, resell, license or sublicense any of the Purchased
Assets or engage in the Business nor, to Seller's Knowledge, (i) do any such
restrictions exist or (ii) will any such restrictions be imposed on Buyer as a
consequence of the transactions contemplated by this Agreement or by any
agreement referenced in this Agreement.

(e) All of the Purchased Assets are in good operating
condition and repair, as required for their use in the Business as presently
conducted, reasonable wear and tear excepted, and conform to all applicable
laws, except where the failure to so conform would not result in a Material
Adverse Effect, and no notice of any violation of any law relating to any of
the Purchased Assets or Assumed Liabilities has been received by Seller.

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4.8 INTELLECTUAL PROPERTY.

(a) Seller owns, or is licensed or otherwise possesses
legally enforceable rights to use, all Intellectual Property Rights material to
the conduct of its Business as currently conducted, including without
limitation all such Intellectual Property Rights registered in the name of
Seller ("SELLER INTELLECTUAL PROPERTY"). Seller has taken reasonable measures
to protect the proprietary nature of each item of Seller Intellectual Property
that it considers confidential, and to maintain in confidence all trade secrets
and confidential information that it presently owns or uses, except where the
failure to own, license or possess legally enforceable rights to use such
Seller Intellectual Property would not, individually or in the aggregate,
reasonably be expected to result in a material loss of benefits or a material
loss to the Business.

(i) Section 4.8(a)(i) of the Seller Disclosure
Schedule lists, as of the date hereof, all patents and patent applications and
all trademarks, registered copyrights, trade names and service marks owned by,
or licensed exclusively to, Seller or any of its Affiliates and which are
currently used in connection with the Business, including the jurisdictions in
which each item of such Seller Intellectual Property has been issued or
registered or in which any such application for such issuance or registration
has been filed.

(ii) Section 4.8(a)(ii) of the Seller Disclosure
Schedule lists all users of Darwin. Except as otherwise expressly set forth in
this Agreement or the Seller Disclosure Schedule, neither Seller nor any of its
Affiliates has granted to any person or entity, and no person or entity, other
than Seller (including, without limitation, any independent contractors who
have performed services related to the Business), holds any rights in any of
the Seller Intellectual Property. Neither Seller nor any of its Affiliates has
granted to any person or entity, and no person or entity, other than Seller
(including, without limitation, any independent contractors who have performed
services related to the Business), holds any licenses to use, practice,
produce, distribute, license, sublicense or sell any of the Seller Intellectual
Property. All of the authorized users of Darwin listed in the Seller Disclosure
Schedule are authorized to use Darwin pursuant to non-exclusive object code
licenses granted for use of Darwin (the "End-User Licenses").

(iii) Section 4.8(a)(iii) of the Seller Disclosure
Schedule lists, as of the date hereof, all written licenses, sublicenses and
other agreements to which Seller is a party and pursuant to which Seller is
authorized to use any third Person Intellectual Property Rights, including
software, opensource, freeware or shareware ("THIRD PERSON INTELLECTUAL
PROPERTY") which is incorporated in Darwin or used in connection with the
Business, or any material product or service currently under development
("EMBEDDED Products").

(iv) Section 4.8(a)(iv) of the Seller Disclosure
Schedule lists, as of the date hereof, all written agreements or other
arrangements under which Seller has provided or agreed to provide source code
of Darwin or any product used in the Business to any third Person.

Seller has made available to Buyer correct and
complete copies of all Patents (owned by Seller), and all licenses, sublicenses
and agreements referred to in this Section 4.8(a), each as amended to date.
Except for retail purchases of software, Seller is not a party to any oral

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license, sublicense or agreement which, if reduced to written form, would be
required to be listed in Section 4.8 of the Seller Disclosure Schedule under
the terms of this Section 4.8(a).

(b) With respect to each item of Seller Intellectual Property
that Seller owns: (i) other than common law trademarks, and subject to such
rights as have been granted by Seller under non-exclusive license agreements
and joint development agreements entered into by Seller (copies of which have
previously been made available or disclosed in writing to Buyer), Seller
possesses all right, title and interest in and to such item; and (ii) such item
is not subject to any outstanding judgment, order, decree, stipulation or
injunction that materially interferes with the conduct of the Business as
currently conducted.

(c) Except as set forth in Section 4.8 of the Seller
Disclosure Schedule, with respect to each item of Third Person Intellectual
Property listed in Section 4.8(a)(iii): (i) the license, sublicense or other
agreement covering such item is legal, valid, binding, enforceable and in full
force and effect with respect to Seller, and, to Seller's Knowledge, is legal,
valid, binding, enforceable and in full force and effect with respect to each
other party thereto; (ii) Seller is not in material breach or default
thereunder, and, to Seller's Knowledge, no other party to such license,
sublicense or other agreement is in material breach or default thereunder, and,
to Seller's Knowledge, no event has occurred which with notice or lapse of time
would constitute a material breach or default by Seller or permit termination,
modification or acceleration thereunder by the other party thereto; (iii) to
Seller's Knowledge, the underlying item of Third Person Intellectual Property
is not subject to any outstanding judgment, order, decree, stipulation or
injunction to which Seller is a party or has been specifically named that
materially interferes with the conduct of the Business as currently conducted,
nor, to Seller's Knowledge, subject to any other outstanding judgment, order,
decree, stipulation or injunction that materially interferes with the conduct
of the Business as currently conducted.

(d) Except as set forth in Section 4.8 of the Seller
Disclosure Schedule, as of the date hereof, Seller has not (i) been named in
any suit, action or proceeding as to which it has been served with process
which involves a claim of infringement or misappropriation of any Intellectual
Property Right of any third Person or (ii) received any written notice alleging
any such claim of infringement or misappropriation. Seller has made available
to Buyer correct and complete copies of all such suits, actions or proceedings
or written notices. To Seller's Knowledge, except as set forth in Section 4.8
of the Seller Disclosure Schedule, the manufacturing, marketing, licensing or
sale of the products or the performance of the services offered by Seller do
not currently infringe, and have not infringed, any Intellectual Property Right
of any third person (other than patent rights) or, to Seller's Knowledge, any
patent rights of third parties; and, to the knowledge of Seller, none of Seller
Intellectual Property rights are being infringed by activities, products or
services of any third person.

(e) Except as set forth in Section 4.8 of the Seller
Disclosure Schedule, the execution and delivery of this Agreement by Seller,
and the consummation of the transactions contemplated hereby (including,
without limitation, the incorporation of any technology covered by any
Intellectual Property Rights in any product of Buyer or an Affiliate of Buyer)

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will not breach, violate or conflict with any instrument or agreement governing
any Intellectual Property Rights necessary or required for, or used in, the
conduct of the Business as presently conducted and will not cause the
forefeiture or termination of any such Intellectual Property Rights or in any
way impair the right of Buyer or any of its affiliates to use, sell, license or
dispose of, or to bring any action for the infringement of, any such
Intellectual Property Right or portion thereof.

(f) Except for Embedded Products for which Seller has valid
non-exclusive licenses which are disclosed in Section 4.8 of the Seller
Disclosure Schedule and which are adequate for Seller's business as presently
conducted, and except for usual and customary rights retained by the United
States government with respect to Intellectual Property Rights developed under
research contracts with the federal government (the "RETAINED FED RIGHTS"),
Seller is the sole and exclusive owner or the licensee of, with all right,
title and interest in and to all Seller Intellectual Property (free and clear
of any liens or encumbrances), and has sole and exclusive rights (and is not
contractually obligated to pay any compensation to any third Person in respect
thereof) to the use and distribution thereof or the material covered thereby in
connection with the services or products in respect of which Seller
Intellectual Property is being used, except where the failure to have such
rights would not reasonably be expected to result in a material loss of
benefits or loss to the Business. To Seller's Knowledge, the United States
government has never exercised, and Seller has no notice that the government
intends to exercise, its rights to use or provide to others the use of the
Retained Fed Rights with respect to any Seller Intellectual Property in a
manner that would be material to Seller's non-governmental Business. The
Retained Fed Rights do not materially interfere with the conduct of the
Business.

(g) Seller has made available to Buyer copies of Seller's
standard forms of End-User Licenses. Except as disclosed in Section 4.8 of the
Seller Disclosure Schedule (which describes the material variations from the
standard form of End-User License), as of the date hereof, Seller has not
entered into any End-User Licenses which contain terms materially different
than as set forth in the standard forms of such agreements made available to
Buyer.

(h) Seller has taken reasonable security measures to
safeguard and maintain the secrecy, confidentiality and value of, and its
property rights in, all Seller Intellectual Property. All officers, employees
and consultants of Seller who have access to proprietary information or Seller
Intellectual Property have executed and delivered to Seller an agreement
regarding the protection of proprietary information and the assignment to
Seller of all Intellectual Property Rights arising from the services performed
for Seller by such persons. To Seller's Knowledge, no current or prior
officers, employees or consultants of Seller claim any ownership interest in
any Seller Intellectual Property as a result of having been involved in the
development of such property while employed by or consulting to Seller, or
otherwise. Except as set forth in Section 4.8 of the Seller Disclosure Schedule
and except for the Embedded Products, all Seller Intellectual Property has been
developed by employees or consultants of Seller (or its predecessor), within
the course and scope of their employment or consulting agreement.

(i) No government funding or university or college facilities
were used in the development of Darwin and Darwin was not developed pursuant to
any contract or other agreement with any person or entity except pursuant to
contracts or agreements listed in Section 4.8 of the Seller Disclosure
Schedule.

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(j) Section 4.8 of the Seller Disclosure Schedule lists all
warranty claims (including any pending claims) related to Darwin and the nature
of such claims, except for customary product support and maintenance, that are
pending or were made within the past twelve months. Except as set forth in
Section 4.8 of the Seller Disclosure Schedule, Seller has not made any material
oral or written representations or warranties with respect to its products or
services.

(k) Except as set forth in Section 4.8 of the Seller
Disclosure Schedule, Seller has not been in violation of, and is in compliance
with, the Export Administration Act of 1979, as amended, and all regulations
promulgated thereunder.

(l) As part of the Seller Disclosure Schedule, Seller has
provided Buyer a list (including names, addresses, contact names, telephone
numbers as well as the termination date and next renewal date of the
agreement), which is complete in all material respects, of all agreements or
other arrangements pursuant to which Seller is obligated to provide support
services (such agreements, as supplemented below, are referred to collectively
as the "SUPPORT Agreements"). Except for the nonstandard support agreements
specified in Section 4.8(l) of the Seller Disclosure Schedule (the "NONSTANDARD
SUPPORT AGREEMENTS"), all of the Support Agreements are in all material
respects in the form of the agreement identified as the Standard Support
Agreement set forth in the Seller Disclosure Schedule (the "STANDARD SUPPORT
AGREEMENT"). Neither the Standard Support Agreement nor any other agreement
would obligate Buyer after the Closing Date to provide any improvement,
enhancement, change in functionality or other alteration to the performance of
Darwin. The versions of the products currently supported by Seller are set
forth in the Seller Disclosure Schedule. Prior to the Closing, Seller will
supplement the Seller Disclosure Schedule with any addresses, contact names and
telephone numbers omitted from the initial Seller Disclosure Schedule to
include: (i) all Standard Support Agreements entered into between the date
hereof and the Closing; (ii) any Nonstandard Support Agreements which were
inadvertently omitted from the Seller Disclosure Schedule and that do not,
individually or in the aggregate, add to the Buyer's costs for the provision of
support services, other than in a DE MINIMIS respect; and (iii) all Nonstandard
Support Agreements that were entered into between the date hereof and the
Closing with the written consent of the Buyer. Section 4.8(l) of the Seller
Disclosure Schedule sets forth and indicates the agreements with source code
escrow provisions relative to Darwin or other products used in the Business.
Neither Seller nor its Affiliates has granted any third party the right to
furnish support or maintenance services with respect to Darwin to any other
third party.

(m) All fees to maintain Seller's rights in the Intellectual
Property Rights, including, without limitation, patent and trademark
registration and prosecution fees and all professional fees in connection
therewith pertaining to the Intellectual Property Rights due and payable on or
before the Closing Date, have been paid by Seller.

4.10 INVENTORIES. All of the Inventories are and will be items of a
quality usable or salable in the ordinary and usual course of business. The
value of the Inventories is set forth on Section 4.10 of the Seller Disclosure
Schedule and reflects an inventory valuation policy of Seller which is
consistent with industry practice and which is in accordance with GAAP,
consistently applied.

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4.11 ACCOUNTS RECEIVABLE. All accounts receivable, notes receivable
and other receivables included in the Purchased Assets as reflected on the
Seller Disclosure Schedule are valid, genuine and fully collectible in the
aggregate amount thereof, subject to normal and customary trade discounts less
any reserves for doubtful accounts as reflected on the Seller Disclosure
Schedule.

4.12 LICENSES AND PERMITS. Seller does not hold, and is not required
by any applicable law or regulation of any Governmental Entity to hold, any
governmental licenses, registrations, permits or authorizations pertaining to
the Purchased Assets or the conduct of the Business.

4.13 EMPLOYEES.

(a) SCHEDULE 4.13 sets forth the names, home addresses,
compensation levels, share option positions, if any, and job titles of all
Employees. All employees, consultants, officers, directors and shareholders of
Seller or any of Seller's subsidiaries or Affiliates that have had access to
the Purchased Assets are parties to a written agreement (a "CONFIDENTIALITY
AGREEMENT"), under which each such person or entity (i) is obligated to
disclose and transfer to Seller, without the receipt by such person of any
additional value therefor (other than normal salary or fees for consulting
services), all inventions, developments and discoveries which, during the
period of employment with or performance of services for Seller, he or she
makes or conceives of either solely or jointly with others, that relate to any
subject matter with which his or her work for Seller may be concerned, or
relate to or are connected with the Business, products or projects of Seller,
or involve the use of the time, material or facilities of Seller, and (ii) is
obligated to maintain the confidentiality of proprietary information of Seller.
To Seller's Knowledge, none of Seller's employees, consultants, officers or
directors is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would conflict with
their obligation to promote the interests of Seller or, with respect to the
Transferred Employees, Buyer with regard to the Business or the Purchased
Assets or that would conflict with the Business or the Purchased Assets. To
Seller's Knowledge, neither the execution nor the delivery of this Agreement,
nor the carrying on of the Business by its employees and consultants or, with
respect to the Transferred Employees, by Buyer, will conflict with or result in
a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such persons or
entities are now obligated. It is currently not necessary nor will it be
necessary for Seller or, to the extent that it carries on the Business as the
Business has been conducted prior to the Closing Date, for Buyer to utilize in
the Business any inventions of any of such persons or entities (or people it
currently intends to hire) made or owned prior to their employment by or
affiliation with Seller, nor is it or will it be necessary to utilize any other
assets or rights of any such persons or entities (or people it currently
intends to hire) made or owned prior to their employment with or engagement by
Seller, in violation of any registered patents, trade names, trademarks or
copyrights or any other limitations or restrictions to which any such persons

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or entity is a party or to which any of such assets or rights may be subject.
To Seller's Knowledge, none of Seller's employees, consultants, officers or
directors who has had knowledge or access to information relating to the
Purchased Assets has taken, removed or made use of any proprietary
documentation, manuals, products, materials, or any other tangible item from
his or her previous employer relating to the Purchased Assets by such previous
employer which has resulted in Seller's access to or use of such proprietary
items included in the Purchased Assets, and, to Seller's Knowledge, Seller will
not gain access to or make use of any such proprietary items in the Business,
except to the extent that any such activities would not have a Material Adverse
Effect on the Purchased Assets or the Business.

(b) Seller is not a party to a collective bargaining
agreement with any trade union, Seller's employees are not members of a trade
union certified as a bargaining agent with Seller and no proceedings to
implement any such collective bargaining agreement or certifications are
pending.

(c) No present or former employee, consultant or contractor
to Seller or any Seller Affiliate holds any rights of ownership in any
Purchased Asset.

4.14 EMPLOYEE BENEFIT AND COMPENSATION PLANS. Buyer will incur no
liability with respect to, or on account of, and Seller will retain any
liability for, and on account of, any employee benefit plan of Seller, any of
its Affiliates or any predecessor employer of any employee, including, but not
limited to, liabilities to such employees under all employee benefit schemes,
incentive compensation plans, bonus plans, pension and retirement plans,
vacation, profit-sharing plans (including any profit-sharing plan with a
cash-or-deferred arrangement) share purchase and option plans, savings and
similar plans, medical, dental, travel, accident, life, disability and other
insurance and other plans or arrangements, whether written or oral and whether
"qualified" or "non-qualified," or to any employee as a result of termination
of employment by Seller as contemplated by this Agreement. Seller has complied
with all of its obligations (including obligations to make contributions) in
respect of the pension funds of which its employees are members, there is no
outstanding liability of Seller or any of its Affiliates to any such funds and
all such funds are fully funded to meet all potential claims for benefits by
any and all such employees and any former employee.

4.15 COMPLIANCE WITH LAW. The operation of the Business has been
conducted in all material respects in accordance with all applicable laws,
regulations and other requirements of Governmental Entities having jurisdiction
over the same.

4.16 ENVIRONMENTAL.

(a) Seller's operation of the Business and ownership of the
Purchased Assets are, and have been, in compliance in all material respects
with all applicable environmental laws, permit requirements, use restrictions,
and waste control requirements, and no releases of any hazardous substance
requiring notification to a Governmental Entity have occurred on or in the
vicinity of any of the Purchased Assets or any plants, offices, land,
manufacturing or other facilities currently or formerly owned, operated,
leased, managed, used, controlled or occupied by Seller in connection with the
Business (the "Facilities"); and no hazardous substances are used on or in the

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vicinity of any of the Purchased Assets or the Facilities, except in compliance
in all material respects with applicable law. There is no environmental action,
suit, proceeding or investigation pending, or, to Seller's Knowledge,
threatened against or affecting any of the Purchased Assets or the Facilities
which could materially and adversely affect the Business or the Purchased
Assets or the Facilities, and no governmental entity has served upon Seller any
notice claiming any outstanding violation of any environmental statute,
ordinance or regulation or noting the need for any repair or redemption with
respect to the Purchased Assets or the Facilities, requesting data or access,
requiring testing or other investigation relating to environmental conditions,
or requiring any change in the Purchased Assets or the Facilities or in
Seller's means or methods of conducting the Business.

(b) For purposes of this Agreement, the term "HAZARDOUS
SUBSTANCE" shall mean any substance which is listed or otherwise defined as
"hazardous" or "toxic" under applicable law; as well as any petroleum product
or nuclear materials; and the term "APPLICABLE LAW" as used in this Section
4.16 shall include any local, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials.

4.17 LITIGATION; OTHER CLAIMS.

(a) There are no claims, actions, suits, inquiries,
proceedings, or investigations against Seller, or any of its officers,
directors or shareholders, relating to the Business, the Purchased Assets or
Seller's employees which are currently pending or, to Seller's Knowledge,
threatened, at law or in equity or before or by any Governmental Entity, or
which challenges or seeks to prevent, enjoin, alter or materially delay any of
the transactions contemplated hereby, nor is Seller aware of any basis for such
claims, actions, suits, inquiries, proceedings, or investigations; and no
Governmental Entity has at any time challenged or questioned the legal right of
Seller to manufacture, offer or sell any of its products or services in the
present manner or style thereof.

(b) There are no grievance or arbitration proceedings pending
or threatened, and there are no actual or threatened strikes or work stoppages
with respect to the Business, the Purchased Assets or Seller's employees, nor
is Seller aware of any basis for such proceedings or events.

4.18 DEFAULTS. Seller is not in default under or with respect to any
judgment, order, writ, injunction or decree of any court or any Governmental
Entity which could reasonably be expected to have a Material Adverse Effect on
the Business or any of the Purchased Assets. There does not exist any default
by Seller or, to Seller's Knowledge, by any other Person, or event that, with
notice or lapse of time, or both, would constitute a default, under any
agreement entered into by Seller as part of the operations of the Business
which could reasonably be expected to have a Material Adverse Effect on the
Business or the Purchased Assets, and no notices of breach thereof have been
received by Seller.

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4.19 SCHEDULES. The schedules describing the Purchased Assets are
complete and accurate and describe the assets in the possession of, or used by
Seller in connection with the Business. The property listed in such Schedules
constitutes all of the tangible and intangible property necessary for the
conduct by Seller of the Business.

4.20 FULL DISCLOSURE. Seller is not aware of any facts pertaining to
the Purchased Assets which affect the Business or the Purchased Assets in a
materially adverse manner or which will in the future affect the Business or
the Purchased Assets in a materially adverse manner. Neither this Agreement nor
any other agreement, exhibit, schedule or officer's certificate being entered
into or delivered pursuant to this Agreement contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make
the statements contained in such document not misleading.

4.21 BROKERS AND FINDERS. Neither Seller nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fee, commission or finder's fee in connection with
the transactions contemplated by this Agreement.

4.22 BUSINESS. From December 31, 1998 to the date of this Agreement,
there has not been any material adverse change in the Business, or in the
condition, financial or otherwise, of the Business, or in the Purchased Assets,
or any damage, destruction or loss, whether or not covered by insurance, which
has materially adversely affected the Business or the Purchased Assets. As of
the Closing Date, there shall have been no material adverse change in Seller's
ability to operate the Business on the Closing Date as compared with such
ability on the date of this Agreement.

4.23 YEAR 2000. The current versions of Darwin, including, without
limitation, any time-and-date-related codes, data entry features and internal
subroutines thereof, are designed (a) to automatically accommodate the change
in the date from December 31, 1999 to January 1, 2000 without negatively
affecting Darwin's performance; and (b) to accurately accept, reflect and
calculate all dates that are relevant to Darwin's performance, PROVIDED THAT
all products (for example, hardware, software and firmware) used with the
Purchased Assets properly exchange date data with the Purchased Assets.

4.24 FAIR CONSIDERATION; NO FRAUDULENT CONVEYANCE. The sale of the
Purchased Assets pursuant to this Agreement is made in exchange for fair and
equivalent consideration. Based on the amount of the Initial Payment, at the
time of transfer and obligation incurred under this Agreement, Seller will not
be insolvent, as that term is defined under applicable fraudulent transfer law,
and will not be rendered insolvent by the sale, transfer and assignment of the
Purchased Assets pursuant to the terms of this Agreement. Seller is not
entering into this Agreement or any of the other agreements referenced in this
Agreement with the intent to defraud, delay or hinder its creditors and the
consummation of the transactions contemplated by this Agreement, and the other
agreements referenced in this Agreement, will not have any such effect. The
transactions contemplated in this Agreement or any agreements referenced in
this Agreement will not constitute a fraudulent conveyance, or otherwise give
rise to any right of any creditor of Seller to any of the Purchased Assets
after the Closing.

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4.25 INSURANCE. The Seller Disclosure Schedule lists all insurance
policies and fidelity bonds covering the Purchased Assets. There is no claim by
Seller pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies and
bonds. All premiums due and payable under all such policies and bonds have been
paid and Seller is otherwise in material compliance with the terms of such
policies and bonds (or other policies and bonds providing substantially similar
insurance coverage). There is no threatened termination of, or material premium
increase with respect to, any of such policies.

4.26 BULK SALES LAW. Seller is not required to make any Bulk Sales Law
filings in connection with the transaction contemplated in this Agreement or
any agreements referenced in this Agreement.

5. REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer represents and warrants to Seller as follows:

5.1 ORGANIZATION. Buyer is a corporation duly formed and validly
existing under the laws of Delaware and has full corporate power and authority
and the legal right to execute and deliver this Agreement and all of the other
agreements and instruments to be executed and delivered by Buyer pursuant
hereto, and to consummate the transactions contemplated hereby and thereby.

5.2 AUTHORITY. The execution and delivery of this Agreement (and all
other agreements and instruments contemplated hereunder) by Buyer, the
performance by Buyer of its obligations hereunder and thereunder, and the
consummation by Buyer of the transactions contemplated hereby and thereby have
been duly authorized by all necessary action by the Board of Directors of
Buyer, and no other act or proceeding on the part of Buyer or its stockholders
is necessary to approve the execution and delivery of this Agreement and such
other agreements and instruments, the performance by Buyer of its obligations
hereunder and thereunder and the consummation of the transactions contemplated
hereby and thereby. The signatory officers of Buyer have the power and
authority to execute and deliver this Agreement and all of the other agreements
and instruments to be executed and delivered by Buyer pursuant hereto, to
consummate the transactions hereby and thereby contemplated and to take all
other actions required to be taken by Buyer pursuant to the provisions hereof
and thereof.

5.3 EXECUTION AND BINDING EFFECT. This Agreement has been duly and
validly executed and delivered by Buyer and constitutes, and the other
agreements and instruments to be executed and delivered by Buyer pursuant
hereto, upon their execution and delivery by Buyer, will constitute (assuming,
in each case, the due and valid authorization, execution and delivery thereof
by Seller), legal, valid and binding agreements of Buyer, enforceable against
Buyer in accordance with their respective terms, except as enforceability may
be limited by bankruptcy, insolvency, moratorium, or other laws affecting the
enforcement of creditors' rights generally or provisions limiting competition,
and by equitable principles.

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5.4 CONSENT AND APPROVALS. There is no requirement applicable to Buyer
to make any filing, declaration or registration with, or to obtain any permit,
authorization, consent or approval of, any Governmental Entity as a condition
to the lawful consummation by Buyer of the transactions contemplated by this
Agreement and the other agreements and instruments to be executed and delivered
by Buyer pursuant hereto, except for filings the failure of making which would
not have a Material Adverse Effect on the transactions contemplated hereby.

5.5 NO VIOLATION. Neither the execution, delivery and performance of
this Agreement and of all the other agreements and instruments to be executed
and delivered pursuant hereto, nor the consummation of the transactions
contemplated hereby or thereby, will, with or without the passage of time or
the delivery of notice or both, (a) conflict with, violate or result in any
breach of the terms, conditions or provisions of the Certificate of
Incorporation or Bylaws of Buyer, (b) conflict with or result in a violation or
breach of, or constitute a default or require consent of any Person (or give
rise to any right of termination, cancellation or acceleration) under, any of
the terms, conditions or provisions of any notice, bond, mortgage, indenture,
license, franchise, permit, agreement, lease or other instrument or obligation
to which Buyer is a party or by which Buyer or any of its properties or assets
may be bound, where such conflict, violation, breach, default or consent would
have a Material Adverse Effect on the business or assets of the Buyer, or (c)
violate any statute, ordinance or law or any rule, regulation, order, writ,
injunction or decree of any Governmental Entity applicable to Buyer or by which
any of its properties or assets may be bound where such violation would have a
Material Adverse Effect on the business or assets of the Buyer.

6. COVENANTS.

6.1 ACCESS TO INFORMATION.

(a) Prior and subsequent to the Closing, Seller will permit
Buyer to make a full and complete investigation of the Purchased Assets and to
receive from Seller all information of Seller relating to the Purchased Assets
or reasonably related to Seller's conduct of the Business, subject to the
confidentiality obligations of Buyer prior to the Closing set forth in Section
6.18 hereof. Without limiting this right, Seller will give to Buyer and its
accountants, legal counsel, and other representatives full access, during
normal business hours, at a mutually agreeable location arranged in advance, to
all of the books, records, files, documents, properties, and contracts of
Seller relating to the Purchased Assets or reasonably related to Seller's
conduct of the Business, subject to the confidentiality obligations of Buyer
prior to the Closing set forth in Section 6.18 hereof, and allow Buyer and any
such representatives to make copies thereof, all of which shall be made
available in an organized fashion and so as to facilitate an orderly review.
This Section 6.1 shall not affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the transactions contemplated by this Agreement. Seller shall
maintain and make available the information and records specified in this
Section 6.1(a) in the ordinary course of Seller's business and document
retention policies, as if the transactions contemplated by this Agreement had
not occurred.

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(b) At all times following the Closing, each party shall
provide the other party (at such other party's expense) with such reasonable
assistance, including the provision of available relevant records or other
information and reasonable access to and cooperation of any employees, as may
be reasonably requested by either of them in connection with the preparation of
any financial statement or tax return, any audit or examination by any taxing
authority, or any judicial or administrative proceeding relating to liability
for Taxes.

6.2 THIRD PARTY CONSENTS. Seller and Buyer shall use commercially
reasonable efforts to obtain, within the applicable time periods required, all
Required Consents, waivers, permits, consents and approvals and to effect all
registrations, filings and notices with or to third parties or Governmental
Entities which are necessary to consummate the transactions contemplated by
this Agreement so as to preserve all rights of, and benefits to, the Buyer in
the Purchased Assets.

6.3 CERTAIN NOTIFICATIONS. At all times prior to the Closing, Seller
and Buyer shall promptly notify the other party in writing of the occurrence of
any event which will result, or has a reasonable prospect of resulting, in the
failure to satisfy any of the conditions specified in Section 8 or Section 9 of
this Agreement.

6.4 COMMERCIALLY REASONABLE EFFORTS. Seller shall use commercially
reasonable efforts (i) to cause to be fulfilled and satisfied all of the
conditions to the Closing set forth in Section 8 below, (ii) to cause to be
performed all of the matters required of it at the Closing and (iii) to cause
the Transferred Agreements to be assigned to Buyer.

6.5 SELLER'S CONDUCT OF THE BUSINESS PRIOR TO CLOSING. During the
period from the date of this Agreement to the Closing Date, Seller will conduct
the Business in its ordinary and usual course, consistent with past practice,
and will use all reasonable efforts to preserve intact all rights, privileges,
franchises and other authority of the Business, to retain the employees
associated with the Business, and to maintain favorable relationships with
licensors, licensees, suppliers, contractors, distributors, customers, and
others having relationships with the Business. Seller shall promptly notify
Buyer of any event or occurrence or emergency not in the ordinary course of
business, and any material event involving the Business or the Purchased
Assets. Without limiting the generality of the foregoing, and except as
approved in writing by Buyer in advance, prior to the Closing, Seller:

(a) will not sell, dispose of or encumber any of the
Purchased Assets or license any Purchased Assets to any Person except for
end-user, nonexclusive object code licenses entered into in the normal course
of business consistent with past practice;

(b) will not engage in any special promotion which promotes
the licensing of the Purchased Assets with highly discounted terms;

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(c) will not enter into any agreements or commitments
relating to the Business, except on commercially reasonable terms in the
ordinary course of business of the Business;

(d) will comply in all material respects with all laws and
regulations applicable to the Business;

(e) will not enter into any agreement with any third party
for the distribution of any of the Purchased Assets;

(f) will not change, other than product development in the
ordinary course of business, or announce any change to the products or services
sold by the Business except with Buyer's written consent or at Buyer's request;

(g) will not willfully violate (and will use all commercially
reasonable efforts not to otherwise violate), amend or otherwise change in any
way the terms of any of the Contracts;

(h) will not commence a lawsuit related to or involving the
Purchased Assets other than (i) for the routine collection of bills; (ii) for
injunctive relief on the grounds that Seller has suffered immediate and
irreparable harm not compensable in money damages, provided that Seller has
obtained the prior written consent of Buyer, such consent not to be
unreasonably withheld; or (iii) for a breach of this Agreement;

(i) will not assign, sell or otherwise convey to any third
party, without obtaining Buyer's prior written consent, any of its accounts
receivable prior to the Closing Date;

(j) will not create, incur or assume (i) any borrowings under
capital leases, or (ii) any obligation which would in any material way affect
the Business, the Purchased Assets or Buyer's ability to conduct the Business
in substantially the same manner and condition as conducted by Seller on the
date of this Agreement (provided, however, that Seller may continue to borrow
money from its Affiliate New Valley Corporation under its existing line of
credit with such corporation);

(k) will not change in any manner the compensation of, or
agree to provide additional benefits to, or enter into any employment agreement
with, any employee;

(l) will maintain insurance coverage in amounts adequate to
cover the reasonably anticipated risks of the business conducted with the
Purchased Assets;

(m) will not acquire or agree to acquire by merging or
consolidating with, or by purchasing any assets or equity securities of, or by
any other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or agree
to acquire any assets which are material, individually or in the aggregate, to
the Business;

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(n) will use reasonable efforts to assist Buyer in employing
after the Closing Date those employees to whom offers of employment are made by
Buyer, and will not (and will cause its Affiliates not to) solicit such
employees to remain in the employ of Seller or any of its Affiliates after the
Closing Date; and

(o) will not expand the use of the Purchased Assets within
the organization of Seller.

6.6 NO OTHER BIDS. Until the earlier to occur of (a) the Closing or
(b) the termination of this Agreement pursuant to its terms, Seller shall not,
and Seller shall not authorize any of its officers, directors, employees or
other representatives to, directly or indirectly, (i) initiate, solicit or
encourage (including by way of furnishing information regarding the Business or
the Purchased Assets) any inquiries, or make any statements to third parties
which may reasonably be expected to lead to any proposal concerning the sale of
Seller, the Business or the Purchased Assets (whether by way of merger,
purchase of capital shares, purchase of assets or otherwise), or (ii)
negotiate, engage in any substantive discussions, or enter into any agreement,
with any Person concerning the sale of all or any part of the Business or the
Purchased Assets (whether by way of merger, purchase of capital shares,
purchase of assets or otherwise).

6.7 TAX RETURNS. Seller shall, to the extent that failure to do so
could adversely affect the Business or the Purchased Assets following Closing,
(a) continue to file in a timely manner all returns and reports relating to
Taxes, and such returns and reports shall be true, correct and complete and
shall be subject to the review and consent of Buyer which consent shall not be
unreasonably withheld, and (b) be responsible for and pay when due any and all
Taxes.

6.8 POST-CLOSING ACCESS TO INFORMATION. If, after the Closing Date, in
order properly to operate the Business or prepare documents or reports required
to be filed with governmental authorities or Buyer's financial statements, it
is necessary that Buyer obtain additional information within Seller's
possession relating to the Purchased Assets or the Business, Seller will
furnish or cause its representatives to furnish such information to Buyer to
the extent it is available or can be obtained through commercially reasonable
efforts. Such information shall include, without limitation, all agreements
between Seller and any Person relating to the Business. Seller shall maintain
and make available, or cause to be maintained and made available, the
information and records specified in this Section 6.8 for a period of five (5)
years after the Closing Date.

6.9 POST-CLOSING COOPERATION. Seller agrees that, if reasonably
requested by Buyer, it will cooperate with Buyer, at Buyer's expense, in
enforcing the terms of any agreements between Seller and any third party
involving the Business, including without limitation terms relating to
confidentiality and the protection of Intellectual Property Rights. In the
event that Buyer is unable to enforce its Intellectual Property Rights against
a third party as a result of a rule or law barring enforcement of such rights
by a transferee of such rights, Seller agrees to reasonably cooperate with
Buyer by assigning to Buyer such rights as may be required by Buyer to enforce
its Intellectual Property Rights in its own name. If such assignment still does
not permit Buyer to enforce its Intellectual Property Rights against the third

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party, then Seller agrees to initiate proceedings against such third party in
Seller's name, provided that Buyer shall be entitled to participate in such
proceedings and; provided further that Buyer shall be responsible for the
expenses of such proceedings.

6.10 NO POST-CLOSING RETENTION OF COPIES. Immediately after the
Closing, Seller shall deliver to Buyer or destroy copies of Purchased Assets in
Seller's possession that are in addition to copies delivered to Buyer as part
of the Closing, whether such copies are in paper form, on computer media or
stored in another form.

6.11 PUBLIC ANNOUNCEMENTS. On and prior to the Closing Date, Buyer and
Seller shall advise and confer with each other prior to the issuance of any
reports, statements or releases concerning this Agreement (including the
exhibits and schedules hereto) and the transactions contemplated herein.
Neither Buyer nor Seller will make any public disclosure prior to the Closing
or with respect to the Closing unless both parties agree on the text and timing
of such public disclosure; PROVIDED, HOWEVER, that nothing contained herein
shall prevent either party at any time from furnishing any information to any
Governmental Entity.

6.12 POST-CLOSING ACTIONS. Subsequent to the Closing Date, Seller
shall, from time to time, execute and deliver, upon the request of Buyer, all
such other and further materials and documents and instruments of conveyance,
transfer or assignment as may reasonably be requested by Buyer to effect,
record or verify the transfer to, and vesting in Buyer, of Seller's right,
title and interest in and to the Purchased Assets, free and clear of all Liens,
in accordance with the terms of this Agreement.

6.13 FUTURE AGREEMENTS. In the event Seller enters into any material
agreement between the date of this Agreement and the Closing that relates
primarily to the Business, at the request of Buyer, Seller agrees to include
any such agreement within the Transferred Agreements.

6.14 NON-COMPETITION AGREEMENT.

(a) In consideration of the Buyer entering into this
Agreement, Seller undertakes that through a three (3) year period after the
Closing Date and anywhere in the world (the "TERRITORY") neither it nor any
Affiliate (other than the Affiliates listed on SCHEDULE 6.14 (A)) of it will:

(i) participate, assist or otherwise be directly or
indirectly involved or concerned, financially or otherwise, as a member,
shareholder, unitholder, director, consultant, adviser, contractor, principal,
agent, manager, beneficiary, partner, associate, trustee, financier or
otherwise in any business or activity which is the same as or substantially
similar to the Business or any material part of it (a "RESTRICTED BUSINESS");

(ii) solicit, canvass, induce or encourage directly
or indirectly any employee of Buyer to leave the employment of Buyer;

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(iii) solicit, canvass, approach or accept any offer
from any person or entity who was at any time during the 24 months immediately
preceding the Closing Date a customer or supplier of the Business with a view
to establishing a relationship with or obtaining the patronage of that person
or entity in a Restricted Business;

(iv) interfere or seek to interfere, directly or
indirectly, with any relationship between Buyer and any client, customer,
employee or supplier of the Business.

(b) If any of the separate and independent covenants and
restraints referred to in clause (a) of this Section 6.14 are or become invalid
or unenforceable for any reason then that invalidity or unenforceability will
not affect the validity or enforceability of any other separate and independent
covenants and restraints.

(c) If any prohibition or restriction contained in clause (a)
of this Section 6.14 is judged to go beyond what is reasonable in the
circumstances, but would be judged reasonable if that activity was deleted or
that period or area was reduced, then the prohibitions or restrictions apply
with that activity deleted or period or area reduced by the minimum amount
necessary.

(d) Seller acknowledges that:

(i) the prohibitions and restrictions contained in
clause (a) of this Section 6.14 are reasonable and necessary; and

(ii) Seller has received valuable consideration for
agreeing to the covenants in clause (a) of this Section 6.14.

(e) Seller and Buyer acknowledge and agree that it will be
difficult to compute the amount of damage or loss to Buyer if Seller violated
any of their agreements under this Section 6.14, that Buyer will be without an
adequate legal remedy if Seller violated the provisions of this Section 6.14,
and that any such violation may cause substantial irreparable injury and damage
to Buyer not fully compensable by monetary damages. Therefore, Seller and Buyer
agree that in the event of any violation by Seller of this Section 6.14, Buyer
shall be entitled (i) to recover from Seller monetary damages (subject to the
limitations of Section 10 hereof), (ii) to obtain specific performance,
injunctive or other equitable relief, of either a preliminary or permanent
type, and (iii) to seek any other available rights or remedies at law or in
equity which may be exercised concurrently with the rights granted hereunder.

6.15 PERMITS. Seller will assist Buyer in obtaining any licenses,
permits or authorizations required for carrying on the Business but which are
not transferable.

6.16 TAXES. Seller shall be responsible for paying, shall promptly
discharge when due, and shall reimburse, indemnify and hold harmless Buyer
from, any sales or use, transfer, real property gains, excise, stamp, or other
similar Taxes arising from, imposed on or attributable to the transactions
contemplated by this Agreement.

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6.17 CONFIDENTIALITY. The Confidential Disclosure Agreement for
Strategic Matters dated March 8, 1999 between Buyer and Seller is hereby
incorporated by reference into this Agreement and shall survive any termination
of this Agreement.

6.18 REIMBURSEMENT FOR EXPENSES. Buyer agrees that it will reimburse
Seller at Closing for an amount equal to Seller's costs and expenses relating
to the Business and incurred in the ordinary course of business from and after
the date which commences fourteen (14) calendar days after execution of this
Agreement (such initial fourteen day period, the "Seller's Expense Period") and
through the Closing; provided, however, that: (i) Buyer's obligations shall in
no circumstances exceed an aggregate of $140,000 for each successive seven day
period commencing after the Seller's Expense Period and ending on or before the
Closing (provided that such maximum amount shall be prorated for any partial
seven day period ending on or prior to the Closing); (ii) Buyer's obligations
shall only apply with respect to expenses or costs that Seller can demonstrate
by written evidence have been expended during such period (such payment
obligation, the "Reimbursement Obligation"); (iii) the Reimbursement Obligation
shall be limited to reimbursement for salary expense, payroll taxes, health,
dental and general business insurance, telephone expense, temporary workers and
consultants, travel and entertainment expense, service and maintenance expense,
marketing expense, shipping expense, rental expense, and reasonable
miscellaneous expenses not to exceed $7,000 in any seven day period commencing
after the Seller's Expense Period; and (iv) Buyer shall have no obligation to
pay such Reimbursement Obligation in the event this Agreement is terminated
pursuant to Section 11 hereof. Seller shall deliver a certificate of the Chief
Financial Officer and Chief Executive Officer certifying that the written
evidence supporting the Reimbursement Obligation is true and correct as of the
Closing Date.

6.19 NO FUTURE IMPEDIMENT TO BUYER'S USE OF DARWIN. Seller will not
enforce any Intellectual Property Rights obtained in the future so as to limit
Buyer's use of Darwin, any new version of Darwin, or successor version of
Darwin.

6.20 POST-CLOSING TERMINATION OF CERTAIN NON-TRANSFERRED AGREEMENTS.
As soon as practicable following the Closing, Seller agrees to terminate all
agreements listed on Schedule 4.8(a)(ii) that are not Transferred Agreements or
already expired pursuant to their terms.

6.21 DELIVERY OF LICENSE AGREEMENTS. Seller shall use commercially
reasonable efforts to deliver to Buyer, within 45 days following the Closing,
license agreements, containing Buyer's standard terms, relating to purchase
orders with the following customers: Axios Data Analysis Systems Corporation
and Omnitel Pronto Italia S.p.A. Upon Buyer's review, and approval, such
licenses shall be assigned to Buyer.

7. EMPLOYEE MATTERS

7.1 TRANSFERRED EMPLOYEES.

(a) OFFER OF EMPLOYMENT. Subject to and in accordance with
the provisions of this Section 7, Buyer may offer employment to any or all of
the employees who are employed by Seller in the Business as of the date of this

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Agreement (the "EMPLOYEES"). Seller agrees that it will cooperate with Buyer to
identify those employees of Seller who are necessary for the conduct the
Business. Prior to the Closing, Buyer, after notice to Seller as to the timing
and method of contact, shall have the right to contact any or all of the
Employees for the purposes of making offers of employment with Buyer (or any
Affiliate designated by Buyer) after the Closing Date and receiving written
acceptances of such employment (in each case contingent on consummation of the
transactions contemplated by this Agreement). Upon Closing, Buyer (or any
Affiliates designated by Buyer) shall hire those Employees to whom it has made
an offer in accordance with this Section 7.1 and who accept such offer in the
manner and within the time frame reasonably established by Buyer. Each such
Employee who is employed by Seller on the Closing Date and who actually
transfers to employment with Buyer (or any Affiliate designated by Buyer) at or
after the Closing Date as a result of an offer of employment made by Buyer is
hereafter referred to as a "TRANSFERRED EMPLOYEE." Transferred Employees shall
not include any person on a disability leave of more than twenty-six (26)
weeks. On a periodic basis following the date of this Agreement and prior to
the Closing, Buyer shall advise Seller of its intentions with respect to the
employees it desires to extend or has extended offers to and the general status
of discussions with such employees. Notwithstanding such periodic disclosures
made to Seller, Buyer shall not be obligated to hire any employee unless an
offer of employment is subsequently made to, and accepted by, such employee; in
addition, Buyer shall have no obligation to hire any employees of Seller after
the Closing Date.

(b) TRANSITION. The employment by Seller of the Transferred
Employees shall end at the close of business on the Closing Date and the
employment of the Transferred Employees by Buyer shall commence at 12:01 a.m.
on the day after the Closing Date. The terms of employment with Buyer (or
Buyer's Affiliates) shall be as mutually agreed to between each Transferred
Employee and Buyer (or Buyer's Affiliate, as the case may be), subject to the
provisions of this Section 7.1. Between the date of this Agreement and the
Closing Date, Seller will provide each Transferred Employee with the same level
of compensation as that currently provided by Seller. Buyer shall have no
obligation with respect to payments of salary, compensation, wages, health or
similar benefits, commissions, bonuses (deferred or otherwise), severance,
stock or stock options or any other sums due to any Transferred Employee that
accrued before the Closing Date. Seller will be fully responsible for all
amounts payable to any employee, including (without limitation) all termination
payments, redundancy compensation, severance pay, accrued vacation pay and
other amounts payable in respect of the termination of employment of any
employee in connection with the sale of the Purchased Assets to the Buyer. In
addition, Seller will be fully responsible for all amounts owing to Transferred
Employees prior to Closing.

(c) RETENTION OF EMPLOYEES PRIOR TO CLOSING. Seller agrees to
use reasonable efforts to retain the Employees as employees of the Business
until the Closing Date, and to assist Buyer in securing the employment after
the Closing Date of those Employees to whom Buyer (or Affiliate designated by
Buyer) makes or intends to make offers of employment under subsection (a)
above. Seller shall not transfer any Employee to employment with Seller outside

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of the Business prior to the Closing or without the consent of Buyer. Seller
shall notify Buyer promptly if, notwithstanding the foregoing, any Employee
terminates employment with Seller after the date of this Agreement but prior to
the Closing.

7.2 COMPENSATION AND BENEFITS OF TRANSFERRED EMPLOYEES. Coverage for
Transferred Employees under Buyer's compensation and benefit plans and other
programs shall commence as of 12:01 a.m. on the day after the Closing Date.
Buyer shall be free to establish its own employee benefit plans; Buyer shall
have no obligation to offer benefit plans of the same type or with terms
similar to or better than the terms of Seller's current employee benefit plans.
To the extent permitted by Buyer's benefit programs, Buyer shall use reasonable
efforts to give each Transferred Employee credit for such Transferred
Employee's years of most recent continuous service with Seller (and its
predecessor) for purposes of determining participation and benefit levels under
all of Buyer's vacation policies and benefit plans and programs.

7.3 OTHER EMPLOYEES OF THE BUSINESS. With respect to each employee of
the Business as of the Closing Date who is not a Transferred Employee (each a
"NON-TRANSFERRED EMPLOYEE"), Seller agrees to either terminate such
Non-Transferred Employee's employment with Seller, effective prior to the
Closing or offer such Non-Transferred Employee continued employment with Seller
other than in the Business. Seller further acknowledges that the
Non-Transferred Employees shall not be employees of Buyer after the Closing.

7.4 NO RIGHT TO CONTINUED EMPLOYMENT OR BENEFITS. No provision in this
Agreement shall create any third party beneficiary or other right in any Person
(including any beneficiary or dependent thereof) for any reason, including,
without limitation, in respect of continued, resumed or new employment with
Seller or Buyer (or any Affiliate of Seller or Buyer) or in respect of any
benefits that may be provided, directly or indirectly, under any plan or
arrangement maintained by Seller, Buyer or any Affiliate of Seller or Buyer.
Except as otherwise expressly provided in this Agreement, Buyer is under no
obligation to hire any employee of Seller, provide any employee with any
particular benefits, or make any payments or provide any benefits to those
employees of Seller whom Buyer chooses not to employ.

7.5 NO SOLICITATION OR HIRE BY SELLER. For a period of one year after
the Closing, Seller will not solicit any Transferred Employee for employment.
For purposes of this Section 7.5, the term "solicit" shall not include the
following activities by Seller: (i) advertising for employment in any bulletin
board (including electronic bulletin boards), newspaper, trade journal or other
publication available for general distribution to the public without specific
reference to any particular employees; (ii) participation in any hiring fair or
similar event open to the public not targeted at Buyer's employees; and (iii)
use of recruiting or employee search firms that have been instructed by Seller
not to target any Transferred Employee.

8. CONDITIONS TO BUYER'S OBLIGATIONS

The obligations of Buyer under this Agreement are subject to the
fulfillment, prior to or on the Closing Date, of each of the following
conditions, all or any of which may be waived by Buyer in writing, except as
otherwise provided by law:

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8.1 REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE; CERTIFICATE.

(a) The representations and warranties of Seller contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date with the same effect as though such representations and warranties
had been made or given again at and as of the Closing Date;

(b) Seller shall have performed and complied in all material
respects with all of its agreements, covenants and conditions required by this
Agreement to be performed or complied with by them prior to or on the Closing
Date;

(c) The conditions set forth in this Section 8 shall have
been fulfilled or satisfied, unless otherwise waived in writing by Buyer; and

(d) Buyer shall have received a certificate, dated as of the
Closing Date, signed and verified by an officer of Seller on behalf of Seller
certifying to the matters set forth in Sections 8.1(a), 8.1(b) and 8.1(c)
above.

8.2 CONSENTS. All Governmental Authorizations, Required Consents and
consents required to transfer the Transferred Agreements to Buyer on the terms
and conditions provided to Seller, without change as a result of the transfer
to Buyer, shall have been obtained. The Required Consent provided by New Valley
Corporation shall also contain an acknowledgment that the sale of the Purchased
Assets pursuant to this Agreement is made in exchange for fair and equivalent
consideration.

8.3 NO PROCEEDINGS OR LITIGATION.

(a) No preliminary or permanent injunction or other order
shall have been issued by any Governmental Entity, nor shall any statute, rule,
regulation or executive order be promulgated or enacted by any Governmental
Entity which prevents the consummation of the transactions contemplated by this
Agreement.

(b) No suit, action, claim, proceeding or investigation
before any Governmental Entity shall have been commenced and be pending against
any of the parties, or any of their respective Affiliates, associates, officers
or directors, seeking to prevent transactions contemplated by this Agreement,
including, without limitation, the sale of the Purchased Assets or asserting
that the sale of the Purchased Assets would be illegal or create liability for
damages or which may have a Material Adverse Effect on the Business or the
Purchased Assets.

8.4 DOCUMENTS. This Agreement, the exhibits and schedules attached
hereto, and any other instruments of conveyance and transfer and all other
documents to be delivered by Seller at the Closing and all actions of Seller
required by this Agreement and the exhibit agreements, or incidental thereto,
and all related matters, shall be in form and substance reasonably satisfactory
to Buyer and Buyer's counsel and shall be in full force and effect.

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8.5 GOVERNMENTAL FILINGS. The parties shall have made any required
filing with Governmental Entities in connection with this Agreement and the
exhibit agreements, and any approvals related thereto shall have been obtained
or any applicable waiting periods shall have expired. If a proceeding or review
process by a Governmental Entity is pending in which a decision is expected,
Buyer shall not be required to consummate the transactions contemplated by this
Agreement until such decision is reached or rendered, notwithstanding Buyer's
legal ability to consummate the transactions contemplated by this Agreement
prior to such decision being reached or rendered.

8.6 NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the financial condition or results of operations of the
Business on the Closing Date as compared with the date of this Agreement.

8.7 EMPLOYEES. Buyer shall have received firm employment commitments
from Employees that Buyer, in its sole discretion, deems to be sufficient in
number, seniority and quality.

8.8 LEGAL OPINIONS. Buyer shall have received a legal opinion from
Hill & Barlow, legal counsel to Seller, dated the Closing Date, in a form
satisfactory to Buyer.

8.9 SHAREHOLDER APPROVAL. This Agreement and the transactions it
contemplates shall have been approved and adopted by such vote of the holders
of the outstanding shares of Seller's capital stock entitled to vote thereon as
is required to approve such transactions, and shall have otherwise been
approved as required by law and the charter documents of Seller.

8.10 ESCROW AGREEMENT. Buyer and Seller shall have entered into an
Escrow Agreement in substantially the form attached hereto as EXHIBIT A, and
such agreement shall remain in full force and effect.

8.11 RELEASE OF SECURITY INTERESTS. Buyer shall have received written
evidence of the release of the following liens on the Purchased Assets: (i) New
Valley Corporation's lien pursuant to the Revolving Line of Credit and Security
Agreement dated January 26, 1999 and the Secured Promissory Note dated January
26, 1999 and (ii) EOP-New England Executive Park LLC's lien pursuant to the
Office Lease Agreement, dated September 4, 1998.

8.12 SUPPORT AGREEMENT. Buyer and Seller shall have entered into a
Support Agreement in a form that is acceptable to both parties, and such
agreement shall remain in full force and effect.

9. CONDITIONS TO SELLER'S OBLIGATIONS

The obligations of Seller under this Agreement are subject to the
fulfillment, prior to or on the Closing Date, of each of the following
conditions, all or any of which may be waived in writing by Seller, except as
otherwise provided by law:

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9.1 REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE.

(a) The representations and warranties of Buyer contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date with the same effect as though such representations and warranties
had been made or given again at and as of the Closing Date;

(b) Buyer shall have performed and complied in all material
respects with all of its agreements, covenants and conditions required by this
Agreement to be performed or complied with by them prior to or on the Closing
Date; and

(c) Seller shall have received a certificate, dated as of the
Closing Date, signed and verified by an officer of Buyer on behalf of Buyer
certifying to the matters set forth in Sections 9.1(a) and 9.1(b) above.

(d) Seller shall have received a legal opinion from Oracle
in-house counsel, dated the Closing Date, substantially in the form attached
hereto as SCHEDULE 9.1(D).

(e) This Agreement and the transactions it contemplates shall
have been approved and adopted by such vote of the holders of outstanding
shares of Seller's Series A preferred stock, $10.00 par value, entitled to vote
thereon as is required to approve such transactions.

(f) Buyer shall have satisfied its Reimbursement Obligation.

9.2 NO PROCEEDINGS OR LITIGATION.

9.3 DOCUMENTS. This Agreement, any other instruments of conveyance and
transfer and all other documents to be delivered by Buyer to Seller at the
Closing and all actions of Buyer required by this Agreement or incidental
thereto, and all related matters, shall be in form and substance reasonably
satisfactory to Seller and Seller's counsel.

9.4 GOVERNMENTAL FILINGS. The parties shall have made any filing
required with Governmental Entities, and any approvals shall have been obtained
or any applicable waiting periods shall have expired. If a proceeding or review
process by a Governmental Entity is pending in which a decision is expected,
Seller shall not be required to consummate the transactions contemplated by
this Agreement until such decision is reached or rendered, notwithstanding
Seller's legal ability to consummate the transactions contemplated by this
Agreement prior to such decision being reached or rendered.

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10. ESCROW AND INDEMNIFICATION

10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All covenants to be
performed prior to the Closing Date, and all representations and warranties in
this Agreement or in any instrument delivered pursuant to this Agreement shall
survive the consummation of the transactions contemplated hereby and continue
for a two (2) year period following the Closing Date (the "ESCROW TERMINATION
DATE"); PROVIDED that if any claims for indemnification have been asserted with
respect to any such representations, warranties and covenants prior to the
Escrow Termination Date, the representations, warranties and covenants on which
any such claims are based shall continue in effect until final resolution of
any claims, and PROVIDED, FURTHER, that representations, warranties and
covenants relating to Taxes shall survive until 30 days after expiration of all
applicable statutes of limitations relating to such Taxes. All covenants to be
performed after the Closing Date shall continue indefinitely, except with
respect to those covenants with specified terms which shall survive only for
the term of such covenant.

10.2 INDEMNIFICATION. Subject to the limitations set forth in this
Section 10, from and after the Effective Time, Seller shall protect, defend,
indemnify and hold harmless Buyer and Buyer's Affiliates, officers, directors,
employees, representatives and agents (each of the foregoing Persons is
hereinafter referred to individually as an "INDEMNIFIED PERSON" and
collectively as "INDEMNIFIED PERSONS") from and against any and all losses,
costs, damages, liabilities, fees (including without limitation reasonable
attorneys' fees) and expenses (collectively, the "DAMAGES"), that any of the
Indemnified Persons incurs or as to which any Indemnified Person has made a
specific written claim for indemnification on or prior to the Escrow
Termination Date as set forth in the Escrow Agreement, by reason of or in
connection with (i) any claim, demand, action or cause of action alleging
misrepresentation, breach of, or default in connection with, any of the
representations, warranties, covenants or agreements of the Seller contained in
this Agreement, including any exhibits or schedules attached hereto and (ii)
notwithstanding anything contained herein to the contrary, any claim, demand or
cause of action relating to any Year 2000 time-and-date related codes, data
entry features or any internal subroutines thereof with respect to any version
of Darwin delivered to Omnitel Pronto Italia S.p.A. or MCI Telecommunications
on or prior to the Closing Date in connection with (a) the Omnitel Pronto
Italia S.p.A. Purchase Order, dated September 7, 1998, and its related license
agreement, and (b) the MCI Telecommunications Software License Agreement, dated
January 21, 1999. Damages in each case shall be net of the amount of any
insurance proceeds and indemnity and contribution actually recovered by Buyer
and net of any actual net tax refunds or reductions in taxes payable by Buyer
as a result of the circumstances giving rise to the Damages.

10.3 DAMAGES THRESHOLD. Notwithstanding the foregoing, Buyer may not
receive any amount of the Escrow Consideration from the Escrow Fund unless and
until a certificate signed by an officer of Buyer (an "OFFICER'S CERTIFICATE")
identifying Damages in the aggregate amount in excess of $100,000 has been
delivered to the Escrow Agent and such amount is determined pursuant to this

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Section 10 to be payable, in which case Buyer shall receive Escrow
Consideration equal in value to the full amount of such Damages without
deduction. In determining the amount of any Damages attributable to a breach,
any materiality standard contained in a representation, warranty or covenant of
Seller shall be disregarded.

10.4 ESCROW PERIOD. Subject to the following requirements, the Escrow
Consideration (or such portion thereof as is required pursuant to the Escrow
Agreement) shall be retained by the Escrow Agent until the Escrow Termination
Date. Upon the Escrow Termination Date, the Escrow Agent shall deliver to the
Seller all remaining Escrow Consideration PROVIDED, HOWEVER, that the amount of
Escrow Consideration, which, in the reasonable judgment of Buyer, subject to
the objection of the Escrow Agent, is necessary to satisfy any unsatisfied
claims specified in any Officer's Certificate delivered to the Escrow Agent
prior to the Escrow Termination Date with respect to facts and circumstances
existing on or prior to the Escrow Termination Date shall remain in the
possession of the Escrow Agent until such claims have been resolved. As soon as
all such claims have been resolved, any remaining Escrow Consideration not
required to satisfy such claims shall be distributed to the Seller.

10.5 METHOD OF ASSERTING CLAIMS. All claims for indemnification by the
Buyer or any other Indemnified Person pursuant to this Section 10 shall be made
in accordance with the provisions of the Escrow Agreement.

10.6 RIGHT TO SET OFF. Indemnifiable amounts owed Buyer by Seller
shall be, at Buyer's election, offset by or credited against future Earn-Out
Payments owed by Buyer to Seller pursuant to Section 2.4.

10.7 LIMITATION ON LIABILITY. Buyer hereby acknowledges that, from and
after the Closing, its sole and exclusive remedy for any and all claims
relating to a breach of a representation or warranty contained in this
Agreement (except for claims involving fraud), shall be pursuant to the
indemnification provisions set forth in this Section 10 and shall not exceed
the aggregate of the Initial Payment, the Escrow Consideration, plus any
Earn-Out Payments paid to Seller.

11. TERMINATION.

11.1 TERMINATION OF AGREEMENT. This Agreement may be terminated at any
time prior to the Closing:

(a) By mutual written consent of Buyer and Seller;

(b) By either party, if the other party goes into
liquidation, has an application or order made for its winding up or
dissolution, has a resolution passed or steps taken to pass a resolution for
its winding up or dissolution, becomes unable to pay its debts as and when they
fall due, or has a receiver, receiver and manager, administrator, liquidator,
provisional liquidator, official manager or administrator appointed to it or
any of its assets; or

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(c) By Buyer or Seller if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement; or

(d) By either party if the Closing does not occur by May 31,
1999.

11.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination
of this Agreement by any or all of the parties pursuant to Section 11.1,
written notice shall be given to each other party specifying the provision of
Section 11.1 pursuant to which such termination is made and this Agreement
shall become void and there shall be no liability on the part of Buyer or
Seller (or their respective officers, directors, partners or Affiliates),
except as a result of any breach of this Agreement by such party. In the event
that either party terminates this Agreement in breach of this Section 11 or
breaches this Agreement in a manner that causes the other party to terminate
this Agreement, the non-breaching party shall be entitled to an amount equal to
One Hundred Thousand Dollars ($100,000) as liquidated damages in lieu of all
claims, actions or remedies, at law or in equity, which such party may have
against the breaching party arising out of such breach.

12. MISCELLANEOUS.

12.1 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
or waived with the written consent of the parties or their respective
successors and assigns. Any amendment or waiver effected in accordance with
this Section 12.1 shall be binding upon the parties and their respective
successors and assigns.

12.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

12.3 GOVERNING LAW; JURISDICTION. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law. Each of the parties to this Agreement consents to the exclusive
jurisdiction and venue of the courts of the state and federal courts of San
Mateo County, California with respect to disputes relating to this Agreement.

12.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.

12.5 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

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12.6 NOTICES. Any notice required or permitted by this Agreement shall
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed facsimile, or
forty-eight (48) hours after being deposited in the regular mail as certified
or registered mail (airmail if sent internationally) with postage prepaid, if
such notice is addressed to the party to be notified at such party's address or
facsimile number as set forth below, or as subsequently modified by written
notice, and (a) if to Buyer:

General Counsel
500 Oracle Parkway, Mailstop 5op7
Redwood Shores, CA 94065
Facsimile Number: (650) 506-7114

with a copy to:

Donald M. Keller, Jr., Esq.
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Facsimile Number: (650) 233-8386

or (b) if to Seller:

Robert Doretti
Thinking Machines Corporation
1600 New England Executive Park
Burlington, MA 01803
Facsimile Number: (781) 238-3450

with a copy to:

Charles Dougherty, Esq.
Hill & Barlow
One International Place
Boston, MA 02110
Facsimile Number: (617) 428-3500

12.7 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith, in order to maintain the economic position
enjoyed by each party as close as possible to that under the provision rendered
unenforceable. In the event that the parties cannot reach a mutually agreeable
and enforceable replacement for such provision, then (i) such provision shall

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be excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of the
Agreement shall be enforceable in accordance with its terms.

12.8 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein are the product of both of the parties hereto, and constitute the entire
agreement between such parties pertaining to the subject matter hereof and
thereof, and merge all prior negotiations and drafts of the parties with regard
to the transactions contemplated herein and therein. Any and all other written
or oral agreements existing between the parties hereto regarding such
transactions are expressly canceled.

12.9 ADVICE OF LEGAL COUNSEL. Each party acknowledges and represents
that, in executing this Agreement, it has had the opportunity to seek advice as
to its legal rights from legal counsel and that the person signing on its
behalf has read and understood all of the terms and provisions of this
Agreement. This Agreement shall not be construed against any party by reason of
the drafting or preparation thereof.

12.10 INTERPRETATION. This Agreement, including any exhibits, addenda,
schedules and amendments, has been negotiated at arm's length and between
persons sophisticated and knowledgeable in the matters dealt with in this
Agreement. Each party has been represented by experienced and knowledgeable
legal counsel. Accordingly, any rule of law (including California Civil Code
Section 1654) or legal decision that would require interpretation of any
ambiguities in this Agreement against the party that has drafted it is not
applicable and is waived. The provisions of this Agreement shall be interpreted
in a reasonable manner to effect the purposes of the parties and this
Agreement.

12.11 ABSENCE OF THIRD-PARTY BENEFICIARIES. No provisions of this
Agreement, express or implied, are intended or shall be construed to confer
upon or give to any Person other than the parties hereto, any rights, remedies
or other benefits under or by reason of this Agreement unless specifically
provided otherwise herein, and except as so provided, all provisions hereof
shall be personal solely between the parties to this Agreement.

12.12 EXPENSES. Each of the parties agrees to pay its own expenses in
connection with the transactions contemplated by this Agreement, including
without limitation legal, consulting, accounting and investment banking fees,
whether or not such transactions are consummated.

[Signature pages follow]

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This Agreement has been duly executed and delivered by the duly
authorized officers of Seller and Buyer as of the date first above written.

ORACLE CORPORATION

By: /s/ Gary L. Bloom
--------------------------------------------
Name: Gary L. Bloom

Title: Executive Vice President,
System Products Division

THINKING MACHINES CORPORATION

By: /s/ Robert L. Doretti
--------------------------------------------
Name: Robert L. Doretti
Title: Chief Executive Officer and President

39
<PAGE> 40
SCHEDULE 2.4

EARN-OUT PAYMENTS

FOR PURPOSES OF SCHEDULE 2.4, THE "TARGET NET FEES" SHALL MEAN THE FOLLOWING
NET FEES GENERATED IN THE TWELVE-MONTH PERIODS SET FORTH BELOW:

TWELVE-MONTH PERIOD ENDED NOVEMBER 30, TARGET NET FEES
-------------------------------------- ---------------
2000 $5 MILLION

2001 $10 MILLION

2002 $21 MILLION

EARN-OUT PAYMENTS.

1. Subject to Buyer's right to offset the Earn-Out Payments in the event
of Seller's breach of its representations, warranties or covenants under the
Agreement (or agreements attached as Exhibits thereto), Buyer agrees to pay
Seller the Earn-Out Payments set forth below in Section 2 based on Net Fees.

(a) "NET FEES" shall mean (i) license fees recognized by Buyer in
accordance with GAAP from its licensees and distributors for Darwin (including
any New Releases or Natural Successors to Darwin made or developed after the
Closing Date), net of any returns, adjustments, third party license fees (if
any), shipping costs, or sales, use or other similar taxes paid or (ii) in the
event that all or any portion of Darwin is embedded or incorporated into an
application or other product of Buyer, the Relative Value Percentage multiplied
by the license fees recognized by Buyer in accordance with GAAP from its
licensees and distributors for such application or product, net of any returns,
adjustments, third party license fees (if any), shipping costs, or sales, use
or other similar taxes paid.

(b) "NEW RELEASES" shall mean any releases of Darwin created on or
after the Closing.

(d) "RELATIVE VALUE PERCENTAGE" shall mean the percentage of relative
value Darwin (or portion thereof) contributes to such product, when considering
such product as a whole, as determined by Oracle's internal allocation
procedures, provided such allocation reasonably reflects the relative value of
Darwin to such product. For example, if it is determined that the Relative
Value Percentage of Darwin, as embedded in an application is 5% of such
application's total value, and the license fee for such application is $100,
the Net Fees for such license would equal $5 (i.e. 5% x $100).

(e) Seller understands and acknowledges that Oracle generally makes
subsequent releases of its products available to licensees at no additional
license fee, provided such licensee has ordered "Technical Support" for the
relevant time period (a "Subsequent Release License"). Notwithstanding anything
else contained in this Schedule 2.4, no Earn-Out Payments or other charge shall
be payable by Oracle with respect to any Subsequent Release License provided as
part of such Technical Support for any licenses of Darwin, New Releases and/or
Natural Successors or any application or other product into which Darwin has
been embedded or incorporated.

<PAGE> 41

2. (a) EARN-OUT PAYMENTS. Provided that actual aggregate Net Fees EXCEED the
Target Net Fees for the corresponding twelve-month period ending November 30,
2000 through November 30, 2002 (the "EARN-OUT PERIOD"), Buyer will pay Seller
an earn out equal to 15% percent of the amount by which the actual Net Fees
exceed the Target Net Fees for a specified twelve-month period. For example, if
the Net Fees in the period ended November 30, 2001 equal $22 million, then,
assuming no other adjustment, set off or credit is applicable, Seller would be
entitled to receive an additional $1,800,000 (i.e. 15% x ($22M - $10M)). No
Earn-Out Payments will be owed for any Net Fees recognized by Buyer after the
Earn-Out Period.

(b) All such payments shall be made within sixty (60) days following the
end of each twelve-month period and shall relate to the amounts due with
respect to each such completed twelve-month period. A written report showing
the Net Fees for such twelve-month period and the calculation of the Earn-Out
Payment shall accompany such payments. In addition, within 60 days after the
end of each of Buyer's fiscal quarters, Buyer shall provide Seller with a
written report showing the Net Fees for such quarter.

3. ALLOCATION OF NET FEES. In the event that Buyer or its distributors license
Darwin with other Buyer products or services for a single price, Net Fees from
such license shall equal the total Net Fees received by Buyer from the license
multiplied by a fraction A/(A+B), where A equals the list price of Darwin
licensed separately and B equals the list price of the other products or
services, provided such allocation reasonably reflects the relative value of
Darwin to the other Buyer products. For example, if Buyer licensed a set of
products for a single price of $360 (after giving effect to a discount), where
the list price of Darwin is $100, and the list price of all other products is
$300, then Net Fees for that transaction shall equal $90 (i.e. 100/(100+300) x
$360). If Darwin is bundled in a site license or package deal, and fees for
Darwin are not distinguishable from fees for other Oracle products that are
part of the site license or package deal, the Net Fees for Darwin shall be
based on the fee allocation made by Oracle's internal procedures, provided such
allocation reasonably reflects the relative value of Darwin to the other Oracle
products.

4. MAXIMUM AGGREGATE PAYMENT. Notwithstanding anything to the contrary herein,
the total aggregate Earn-Out Payments payable hereunder shall not exceed
$20,300,000.

<PAGE> 1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Amendment No. 1 to the Registration
Statement (File No. 333-79837) on Form S-1 of our reports dated March 19, 1999
relating to the financial statements and financial statement schedule of New
Valley Corporation which appear in such Registration Statement. We also consent
to the references to us under the heading "Experts" in such Registration
Statement.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Miami, Florida
June 14, 1999

<PAGE> 1

Exhibit 23(b)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we consent to the use of our report dated
January 23, 1998 in this Amendment No. 1 to the registration statement on Form
S-1 of New Valley Corporation, relating to the consolidated balance sheet of
Thinking Machines Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' investment and cash
flows for the year ended December 31, 1997 and the period from February 8, 1996
(inception) to December 31, 1996.

/s/ Arthur Andersen LLP

Arthur Andersen LLP

Boston, Massachusetts
June 10, 1999