NEW VALLEY CORP, PRE 14A, 1999-02-11

NEW VALLEY CORP
PRE 14A, 1999-02-11
NON-OPERATING ESTABLISHMENTS

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<PAGE> 1
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant /x/
Filed by a Party other than the Registrant / /

Check the appropriate box:

/x/ Preliminary Proxy Statement
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 / /
Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2))

NEW VALLEY CORPORATION
----------------------
(Name of registrant as specified in its charter)

N/A
-------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/x / No fee required

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

4) Proposed maximum aggregate value of transaction:

<PAGE> 2

5) Total fee paid:

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.

1) Amount previously paid:

2) Form, Schedule or Registration Statement No.:

3) Filing party:

4) Date filed:

<PAGE> 3

NEW VALLEY CORPORATION

100 S.E. Second Street
Miami, Florida 33131

________, 1999

To the stockholders of New Valley Corporation:

Enclosed are a notice of annual meeting of stockholders, a
proxy statement/prospectus which also constitutes New Valley's annual report for
the fiscal year ended December 31, 1998, and a proxy for an annual meeting of
stockholders of New Valley. The meeting will take place on __________ _________,
1999, at 11:00 a.m., local time, at The Hyatt Regency Miami, 400 S.E. Second
Avenue, Miami, Florida.

At the meeting, we will ask you to elect directors and vote on
a plan of recapitalization. The Board of Directors believes that the plan of
recapitalization will:

o simplify New Valley's capital structure,

o increase New Valley's net worth and the price of its
securities, and

o improve New Valley's liquidity and make it possible
to have New Valley's securities quoted on NASDAQ.

The plan of recapitalization would change our capital
structure as follows:

o each Class A Senior Preferred Share will be changed
into 20 Common Shares and one warrant to purchase a
Common Share,

o each Class B Preferred Share will be changed into 1/3
of a Common Share and five warrants to purchase a
Common Share,

o each outstanding Common Share will be changed into
1/10 of a Common Share and 3/10 of a warrant to
purchase a Common Share, and

o the number of authorized Common Shares of New Valley
will be reduced from 850,000,000 to 100,000,000.
<PAGE> 4

Details of the plan of recapitalization are set forth in the
accompanying proxy statement/prospectus, which you should read carefully.

AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE PLAN OF RECAPITALIZATION AND UNANIMOUSLY RECOMMENDS
THAT ALL STOCKHOLDERS VOTE FOR THE PLAN.

WE CORDIALLY INVITE YOU TO ATTEND THE ANNUAL MEETING IN
PERSON. TO MAKE SURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, WE
URGE YOU TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. If
you attend the annual meeting in person you may, if you wish, vote personally
even if you have previously returned your proxy. You can request assistance
regarding proxies and related materials from New Valley's proxy solicitor,
Georgeson & Company, Inc., at 1-800-233-2064.

Sincerely,

Bennett S. LeBow

Chairman of the Board of
Directors

YOUR VOTE IS IMPORTANT

PLEASE SIGN, DATE AND RETURN YOUR PROXY

<PAGE> 5

NEW VALLEY CORPORATION

100 S.E. SECOND STREET
MIAMI, FLORIDA 33131

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD _______________, 1999

TO THE STOCKHOLDERS OF NEW VALLEY CORPORATION:

The annual meeting of stockholders of New Valley Corporation,
a Delaware corporation, will take place at The Hyatt Regency Miami, 400 S.E.
Second Avenue, Miami, Florida 33131, on _____________, ____________, 1999, at
11:00 a.m., local time. The meeting will be for the following purposes:

1. To elect five directors by the holders of Common
Shares, Class A Senior Preferred Shares and Class B
Preferred Shares, voting together as a single class.

2. To elect two directors by the holders of Class A
Senior Preferred Shares, voting as a class.

3. To elect two directors by the holders of Class B
Preferred Shares and Class A Senior Preferred Shares,
voting together as a single class.

4. To approve a plan of recapitalization to

o change each Class A Senior Preferred Share into 20
Common Shares and one warrant to purchase a Common
Share,

o change each Class B Preferred Share into 1/3 of a
Common Share and five warrants to purchase a Common
Share,

o change each outstanding Common Share into 1/10 of a
Common Share and 3/10 of a warrant to purchase a
Common Share and

o reduce the number of authorized Common Shares from
850,000,000 to 100,000,000.

5. To transact such other business as may properly come
before the meeting or any postponement or adjournment
thereof.

Every holder of record of shares of the Company at the close
of business on ____________, 1999 is entitled to vote, in person or by proxy.
Each holder of a Class A Senior Preferred Share is entitled to .4645 vote per
share, each holder of a Class B Preferred Share is entitled to .05 vote per
share and each holder of a Common Share is entitled to one vote per share. A
list of stockholders entitled to vote at the meeting will be available to
any stockholder during ordinary business hours, from ____________, 1999 to
_____________, 1999, at the headquarters of the Company at the address above,
for any purpose germane to the annual meeting.

<PAGE> 6

A proxy statement/prospectus, which also constitutes the
Company's annual report for the fiscal year ended December 31, 1998, and form of
proxy are enclosed with this notice.

By order of the Board of
Directors,

BENNETT S. LEBOW

CHAIRMAN OF THE BOARD OF
DIRECTORS

Miami, Florida
_____________, 1999

- -------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT

IT IS IMPORTANT TO RETURN PROXIES PROMPTLY. THEREFORE, WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
- -------------------------------------------------------------------------------

<PAGE> 7

PROXY STATEMENT/PROSPECTUS

NEW VALLEY CORPORATION
FOR AN ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD

ON _________, 1999
AND

1998 ANNUAL SHAREHOLDERS' REPORT

(SUBJECT TO COMPLETION, DATED ________ __, 1999)

THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.

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

This proxy statement/prospectus relates to the election of directors and the
approval of a plan of recapitalization of New Valley Corporation. We are
furnishing it to you as part of the solicitation of proxies by our Board of
Directors for use at the annual meeting of our stockholders. The meeting will
take place at The Hyatt Regency Miami, 400 S.E. Second Avenue, Miami, Florida
33131, on _________, _________________, 1999, at 11:00 a.m., local time.

The plan of recapitalization will change:

o each Class A Senior Preferred Share into 20 Common
Shares and one warrant to purchase a Common Share;

o each Class B Preferred Share into 1/3 of a Common
Share and five warrants to purchase a Common Share;

o each outstanding Common Share into 1/10 of a Common
Share and 3/10 of a warrant to purchase a Common
Share; and

o the number of authorized Common Shares from
850,000,000 to 100,000,000.

YOU SHOULD CONSIDER THE RISKS ASSOCIATED WITH THE PLAN OF RECAPITALIZATION. SEE
"RISK FACTORS" BEGINNING ON PAGE 7.

This document is also a prospectus filed with the Securities and Exchange
Commission covering up to 23,317,261 Common Shares and 17,898,629 warrants to be
issued under the plan of recapitalization.

<PAGE> 8

We are first mailing this proxy statement/prospectus and the accompanying form
of proxy to stockholders on or about _________, 1999.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

_________, 1999.

<PAGE> 9
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BUSINESS AND FINANCIAL INFORMATION
ABOUT THE COMPANY THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. THIS
BUSINESS AND FINANCIAL INFORMATION IS AVAILABLE WITHOUT CHARGE TO HOLDERS OF
SHARES OF THE COMPANY UPON WRITTEN OR ORAL REQUEST TO: NEW VALLEY CORPORATION,
100 S.E. SECOND STREET, MIAMI, FLORIDA 33131, ATTENTION: CORPORATE SECRETARY'S
OFFICE, TELEPHONE NUMBER: (305) 579-8000. IN ORDER TO OBTAIN TIMELY DELIVERY OF
SUCH INFORMATION, ANY WRITTEN OR ORAL REQUEST MUST BE MADE ON OR PRIOR TO
_________, 1999.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. NO ONE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH
DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROXY
STATEMENT/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
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<S> <C>
SUMMARY..............................................................................................1
The Company....................................................................................1
The Meeting....................................................................................1
Election of Directors..........................................................................2
The Plan of Recapitalization...................................................................2
Opinion of Financial Advisor...................................................................3
Who Can Help Answer Your Questions.............................................................4
Comparative Historical and Pro Forma Per Share Data............................................5

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS......................................................6

RISK FACTORS.........................................................................................7
Risks Relating to the Plan of Recapitalization.................................................7
Risks Relating to the Company's Business.......................................................8

ANNUAL MEETING, VOTING AND PROXIES..................................................................11
Voting Rights; Solicitation of Proxies; Attendance of Accountants.............................11

NOMINATION AND ELECTION OF DIRECTORS................................................................13

THE PLAN OF RECAPITALIZATION........................................................................19
Terms of the Plan of Recapitalization.........................................................19
Background of the Plan of Recapitalization....................................................20
Fairness of the Plan of Recapitalization; Recommendation of the Board of Directors............24
Purpose and Reasons for the Plan of Recapitalization..........................................26
Opinion of Financial Advisor..................................................................28
Benefits to Brooke from the Plan of Recapitalization..........................................32
Description of the Warrants...................................................................33
Exchange of Stock Certificates; Fractional Security Procedures................................34
Regulatory Approval Required..................................................................35
Material Federal Income Tax Considerations....................................................36
Absence of Appraisal Rights...................................................................38

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION....................................38
</TABLE>

<PAGE> 10

<TABLE>
<CAPTION>
<S> <C>
SELECTED FINANCIAL DATA.............................................................................46

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............51

BUSINESS............................................................................................65
Ladenburg Thalmann & Co. Inc..................................................................65
BrookeMil Ltd.................................................................................66
New Valley Realty Division....................................................................68
Other Acquisitions and Investments............................................................70
Bankruptcy Reorganization.....................................................................71
Discontinued Operations.......................................................................72
Employees.....................................................................................73
Properties....................................................................................73
Legal Proceedings.............................................................................73

MANAGEMENT..........................................................................................74
Directors and Executive Officers..............................................................74
Security Ownership of Certain Beneficial Owners and Management................................75
Board of Directors and Committees.............................................................80
Executive Compensation........................................................................81
Compensation of Directors.....................................................................82
Employment Agreements.........................................................................82
Compensation Committee Interlocks and Insider Participation...................................84
Certain Relationships and Related Party Transactions..........................................84
Board Compensation Committee Report on Executive Compensation.................................86
Section 16(a) Beneficial Ownership Reporting..................................................88
Performance Graph.............................................................................89

DESCRIPTION OF CAPITAL STOCK........................................................................89

COMPARISON OF STOCKHOLDER RIGHTS....................................................................96

STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING...................................................99

OTHER MATTERS......................................................................................100

LEGAL MATTERS......................................................................................100

EXPERTS............................................................................................100

INDEX TO FINANCIAL STATEMENTS......................................................................F-1

FAIRNESS OPINION............................................................................Appendix A
</TABLE>

ii
<PAGE> 11

SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS
DOCUMENT AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A
MORE COMPLETE UNDERSTANDING OF THE MATTERS TO BE CONSIDERED AT THE ANNUAL
MEETING, INCLUDING THE PLAN OF RECAPITALIZATION, YOU SHOULD READ THE ENTIRE
DOCUMENT CAREFULLY.

THE COMPANY

The Company is engaged:

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

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

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

o 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.

THE MEETING

The annual meeting will take place on _______ ____, 1999, at
The Hyatt Regency Miami, 400 S.E. Second Avenue, Miami, Florida 33131 at 11:00
a.m., local time. You may vote at the annual meeting if you own shares as of the
close of business on ________ __, 1999, the record date. On the record date,
there were outstanding 9,577,624 shares of Common Shares, 1,071,462 shares of
Class A Senior Preferred Shares and 2,790,776 shares of Class B Preferred
Shares. Stockholders will be entitled to one vote at the annual meeting for each
Common Share, .4645 vote for each Class A Senior Preferred Share and .05 vote
for each Class B Preferred Share held.

At the annual meeting, we will ask our stockholders to elect
directors and approve the plan of recapitalization.

-1-
<PAGE> 12

ELECTION OF DIRECTORS

At the meeting, the stockholders will elect seven directors.
Five directors will be elected by the holders of Common Shares, Class A Senior
Preferred Shares and Class B Preferred Shares voting together as a class. Two
directors will be elected by the Class A Senior Preferred Shares, and these
directors will also be elected by the Class A Senior Preferred Shares and the
Class B Preferred Shares, voting as a single class.

If the plan of recapitalization is approved at the annual
meeting, the terms of the directors elected by holders of the Preferred Shares
will end when the plan takes effect. However, the Board of Directors intends at
that time to increase the number of directors on the Board by two, and to
appoint the two directors elected by the holders of Preferred Shares to the new
positions.

THE PLAN OF RECAPITALIZATION

TERMS OF THE PLAN OF RECAPITALIZATION

The plan of recapitalization will make the following changes
to our capital structure:

o each Class A Senior Preferred Share will be changed
into 20 Common Shares and one warrant to purchase a
Common Share;

o each Class B Preferred Share will be changed into 1/3
of a Common Share and five warrants to purchase a
Common Share;

o each outstanding Common Share will be changed into
1/10 of a Common Share and 3/10 of a warrant to
purchase a Common Share; and

o the number of authorized Common Shares will be
reduced from 850,000,000 to 100,000,000.

PURPOSE OF THE PLAN OF RECAPITALIZATION

We are proposing the plan of recapitalization to accomplish
the following goals:

o to simplify the Company's capital structure;

o to increase the Company's net worth;

o to increase the price of the Company's securities;

o to improve the liquidity of the Company; and

-2-
<PAGE> 13

o to enable the Company's securities to qualify as
NASDAQ National Market System securities.

RECOMMENDATION OF THE BOARD OF DIRECTORS

Based on the recommendation of a special committee of
directors not associated with the Company's controlling stockholder, the Board
has determined that the plan of recapitalization is fair to, and in the best
interests of, the Company and its stockholders. The Board has unanimously
approved, and recommends for stockholder approval, the plan of recapitalization.
The Company's officers and directors and the Company's controlling stockholder,
who together may be deemed to beneficially own 42.7% of the Common Shares, 61.1%
of the Class A Senior Preferred Shares and 10.7% of the Class B Preferred
Shares, have indicated that they intend to vote for the plan of
recapitalization.

OPINION OF FINANCIAL ADVISOR

In deciding to approve and recommend the plan of
recapitalization, the Board considered the opinion of its financial advisor,
Pennsylvania Merchant Group, that the plan of recapitalization is fair from a
financial point of view to the current holders of the Company's shares.

BENEFITS TO BROOKE OF THE PLAN OF RECAPITALIZATION

In considering the recommendations of the Board, you should be
aware that Brooke Group Ltd., the controlling stockholder of the Company, has
interests in the plan of recapitalization that are different from your interests
as a stockholder. Under the plan of recapitalization, Brooke will become the
holder of an absolute majority of the Common Shares and, consequently, will be
able to elect all the Company's directors and control its management. This
increase in ownership of Common Shares will make it impossible for a third party
to acquire control of the Company without Brooke's consent, and therefore may
discourage acquisition proposals and depress the price of the Common Shares.
Finally, Brooke will be able to consolidate its financial statements with the
financial statements of the Company for accounting purposes.

DESCRIPTION OF THE WARRANTS

The warrants issued under the plan of recapitalization will
have an exercise price of $12.50 per share subject to adjustments in certain
circumstances. They may be exercised beginning on the effective date of the
Company's registration statement covering the underlying Common Shares for up to
five years from that date. The Company may redeem the warrants at $0.01 per
warrant at any time after the third anniversary of the recapitalization if the
Common Shares trade for a specified period above $12.50 per share.

-3-
<PAGE> 14

PROCEDURES FOR EXCHANGE OF CERTIFICATES

After the plan of recapitalization takes effect, the exchange
agent will send you written instructions for exchanging your stock certificates
for certificates representing the new securities and payment for any fractional
interests that were sold by the exchange agent on your behalf.

REGULATORY APPROVAL REQUIRED

On ________, 1999, the Company and Brooke filed notification
and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, for the plan of recapitalization. The waiting period under the Act
will expire on ____ absent a second request. The Company cannot effect the
recapitalization until the waiting period expires.

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

We expect that the exchange of shares under the plan of
recapitalization will have the following federal income tax consequences:

o the exchange of the Class A Senior Preferred Shares,
Class B Preferred Shares and Common Shares for Common
Shares and warrants will be tax-free to stockholders
although you may have to pay taxes if you receive
cash for fractional shares or warrants; and

o generally, the exercise of warrants for Common Shares
will be tax-free to stockholders.

THE TAX CONSEQUENCES OF THE RECAPITALIZATION TO YOU WILL DEPEND ON YOUR OWN
SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO FULLY UNDERSTAND THE TAX
CONSEQUENCES OF THE RECAPITALIZATION TO YOU.

ABSENCE OF APPRAISAL RIGHTS

We are organized under Delaware law. Under Delaware law,
stockholders will not have appraisal rights in connection with the
recapitalization.

WHO CAN HELP ANSWER YOUR QUESTIONS

If you have questions about the annual meeting or the plan of
recapitalization or desire additional copies of this proxy statement/prospectus,
please contact:

-4-
<PAGE> 15

Georgeson & Company Inc.
Wall Street Plaza, 30th Floor
New York, New York 10005
Banks and Brokers Call Collect : (212) 440-9800
All Others Call Toll-Free: (800) 223-2064

New Valley Corporation
100 S.E. Second Street
Miami, Florida 33131
Attention: Corporate Secretary's Office
Telephone Number: (305) 579-8000

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

The following table shows per share data for the Company on a historical basis
and on a pro forma equivalent basis giving effect to the recapitalization and
the sale of the Company's U.S. office buildings in September 1998. The pro forma
equivalent data are intended to portray the amounts that would be applicable to
a share of each class of the Company's outstanding shares as those shares would
be changed in the recapitalization. The Company did not pay dividends during the
periods shown.

<TABLE>
<CAPTION>
Historical Pro Forma
- ----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Year Ended Nine Months Ended Year Ended
September 30, 1998 December 31, 1997 September 30, 1998 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Shareholders' deficiency)
book value per share
Series A Senior Preferred Shares $92.00
Series B Preferred Shares $ 1.53
Common Shares $(20.12) $ .46
- ----------------------------------------------------------------------------------------------------------------------------------
(Loss) earnings per share from
continuing operations
Series A Senior Preferred Shares $(17.00) $(20.60)
Series B Preferred Shares $ (.28) $ (.34)
Common Shares $(7.81) $(9.68) $ (.09) $ (.10)
- ----------------------------------------- --------------------- --------------------- ---------------------- ---------------------
</TABLE>

-5-
<PAGE> 16

DISCLAIMER REGARDING
FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus contains forward-looking
statements. We may also make written or oral forward-looking statements in our
periodic reports to the Securities and Exchange Commission, in our annual report
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 obligation 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 proxy statement/prospectus.

-6-
<PAGE> 17

RISK FACTORS

RISKS RELATING TO THE PLAN OF RECAPITALIZATION

LOSS OF PREFERENCE OF PREFERRED SHARES

In the recapitalization, the Preferred Shares will be
reclassified into Common Shares and warrants. As a result, current holders of
the Preferred Shares will no longer be entitled to a fixed dividend or
liquidation amount or priority over any other class of security holders. Holders
of Class A Senior Preferred Shares will no longer be entitled to have their
shares redeemed in 2003. Instead, current holders of Preferred Shares will
hold the most junior securities issued by the Company and warrants to acquire
additional shares of the same type, with no right to receive a fixed amount of
dividends or in liquidation at any specific times. Holders of Preferred Shares
will lose their right to accrued dividends which, as of September 30, 1998,
totaled $204.1 million, or $190.44 per share, for the Class A Senior Preferred
Shares and $158.9 million, or $56.94 per share, for the Class B Preferred
Shares. In addition, holders of Preferred Shares will lose their fixed
liquidation preference equal to an aggregate of $107,146,200, or $100 per share,
for the Class A Senior Preferred Shares and an aggregate of $69,769,400, or
$25.00 per share, for the Class B Preferred Shares.

DILUTION OF HOLDERS OF COMMON SHARES

The reclassification of the shares will greatly increase the
total number of Common Shares outstanding while decreasing the number of such
shares held by the current holders of Common Shares. This will dilute the
economic and voting rights of current holders. After the recapitalization,
Common Shares held by these holders, assuming no exercise of the warrants, will
represent only 4.1% of the Company's voting power, compared with 93.9% at
present, and 4.1% of the Company's residual equity, compared with 100% at
present.

BENEFITS OF RECAPITALIZATION TO BROOKE

Brooke has certain interests in the plan of recapitalization
that are different from those of other stockholders. As a result of the
recapitalization and assuming that no warrant holder exercises its warrants,
Brooke will increase its ownership of the outstanding Common Shares from 42.3%
to 55.1% and its total voting power from 42% to 55.1%. As holder of an absolute
majority of the Common Shares, Brooke will be 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 will make 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.

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<PAGE> 18

At present, if a class vote of the Class A Senior Preferred
Shares is required, the vote must include the affirmative vote of either 80% of
the outstanding Class A Senior Preferred Shares or a simple majority of all the
Class A Senior Preferred Shares voting, excluding shares beneficially owned by
Brooke and certain related persons. After the plan of recapitalization takes
effect, there will be no provisions requiring the vote of a majority of holders
other than Brooke.

Finally, as a result of the increase in beneficial ownership,
Brooke will be able to consolidate the financial statements of the Company into
its financial statements for accounting purposes (although not for tax
purposes). The Company has been informed by Brooke that Brooke presently carries
its investment in the Company at $0. Brooke has informed the Company that it
believes that the plan of recapitalization will increase Brooke's net equity by
approximately $60 million pro forma at September 30, 1998.

INTERESTS OF FINANCIAL ADVISOR

Pennsylvania Merchant Group, the financial advisor that
advised the Company and rendered its opinion as to the fairness of the plan of
recapitalization, may have a conflict of interest because certain associated
persons and customers of Pennsylvania Merchant Group hold a substantial number
of Class A Senior Preferred Shares and Class B Preferred Shares.

UNCERTAIN VALUE OF AND MARKET FOR COMMON SHARES

Because the recapitalization will make far-reaching changes in
the Company's capital structure, 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 over 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.

UNCERTAIN VALUE OF AND MARKET FOR THE WARRANTS

The Company will seek to have the warrants 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 the applicable
listing requirements. Even if the warrants are quoted, the liquidity of their
trading market is uncertain. There also is a risk that the price of the Common
Shares will not reach the strike price of the warrants.

RISKS RELATING TO THE COMPANY'S BUSINESS

After the recapitalization, the current holders of Preferred
Shares will no longer be senior to the holders of Common Shares. Therefore, the
holders of Preferred Shares may be

-8-
<PAGE> 19

more exposed to the business risks of the Company than they are currently. A
discussion of certain of these risks follows.

CONTINUING LOSSES AND NET WORTH DEFICIT; HIGH LEVERAGE AND FIXED CHARGE COVERAGE
DEFICIT

The Company has experienced losses from continuing operations
for four of the last five years and for the first nine months of 1998. The
Company had a stockholders' deficiency of $192.7 million as of September 30,
1998. The Company had outstanding debt in the amount of $55.1 million as of
September 30, 1998, and its earnings have been inadequate to cover fixed charges
for the two most recent years and the nine months ended September 30, 1998. 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.

RISKS RELATING TO THE INDUSTRIES IN WHICH THE COMPANY OPERATES

Each of the Company's operating businesses, Ladenburg,
BrookeMil, New Valley Realty division and Thinking Machines Corporation, 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

-9-
<PAGE> 20

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.

RELIANCE OF THINKING MACHINES ON NEW STRATEGY AND SINGLE
PRODUCT. Thinking Machines is much smaller and has much less capital than many
firms in the industry and at this time does not generate any material revenue.
Thinking Machines adopted a new business strategy at the end of 1996 and
disposed of its parallel processing computer sales and service business, and
currently develops only one software product. There is a risk that the new
strategy will not succeed, and that Thinking Machines will not be able to
commercialize its sole product. As a software developer, Thinking Machines is
heavily dependent on key employees. Loss of these key employees could harm
Thinking Machines.

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 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:

o political or diplomatic developments;

o regional tensions;

o currency repatriation restrictions;

o foreign exchange fluctuations;

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

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

o 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

-10-
<PAGE> 21

in the Kremlin sites, BrookeMil agreed with the City of Moscow to invest an
additional $1.2 million in 1999 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.

OTHER ACTIVITIES OF MANAGEMENT

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.

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.

ANNUAL MEETING, VOTING AND PROXIES

This proxy statement/prospectus is being furnished to the
holders of shares as part of the solicitation of proxies by the Board of
Directors for use at the Company's annual meeting of stockholders.

VOTING RIGHTS; SOLICITATION OF PROXIES; ATTENDANCE OF ACCOUNTANTS

Every holder of record of $15.00 Class A Increasing Rate
Cumulative Senior Preferred Shares ($100 liquidation), $.01 par value, $3.00
Class B Cumulative Convertible Preferred Shares, $.10 par value, and Common
Shares, $.01 par value, at the close of business on ____________ __, 1999 is
entitled to notice of the annual meeting. Holders may vote, in person or by
proxy, .4645 vote for each Class A Senior Preferred Share, .05 vote for each
Class B Preferred Share and one vote for each Common Share held by such holder.
At the record date, the Company had outstanding 1,071,462 Class A Senior
Preferred Shares, 2,790,776 Class B Preferred Shares and 9,577,624 Common
Shares, in each case excluding treasury shares. The approximate date on which
this proxy statement/prospectus and accompanying notice and proxy are first
being mailed to stockholders is _____________, 1999. This document also
constitutes the Company's annual report for the year ended December 31, 1998.

Any stockholder giving a proxy in the form accompanying this
proxy statement/prospectus has the power to revoke the proxy before its
exercise. A proxy can be revoked by delivering an instrument of revocation at or
before the annual meeting to the

-11-
<PAGE> 22

Secretary or Assistant Secretary of the Company, by delivering a duly executed
proxy bearing a date or time later than that of the proxy being revoked, or by
being present and voting in person at the annual meeting. Mere attendance at the
annual meeting will not revoke a proxy. Abstentions and shares held of record by
a broker or its nominee that are voted on any matter are included in determining
the number of votes present. Broker shares that are not voted on any matter will
be excluded in determining whether a quorum is present.

All proxies received and not revoked will be voted as
directed. If no directions are specified, the proxies will be voted FOR the
election of the Board's nominees as specified in Board Proposals 1, 2 and 3
below and FOR the plan of recapitalization as specified in Board Proposal 4
below. Under Board Proposals 1, 2 and 3, the nominees receiving a plurality of
the votes cast will be elected as directors. However, under Board Proposal 2,
the First Amended Joint Chapter 11 Plan of Reorganization of the Company, as
amended, mandates that the nominees must also receive the affirmative vote of
either 80% of the outstanding Class A Senior Preferred Shares, or a simple
majority of all Class A Senior Preferred Shares voting, excluding Class A Senior
Preferred Shares beneficially owned directly or indirectly by Brooke and certain
related persons. These related persons are:

o Mr. LeBow, his parents, his parents' lineal
descendants, any of their spouses and any trust for
the benefit of any of these persons;

o Brooke, BGLS Inc. or any entity that is, directly or
indirectly, controlled by one or more of the persons
or trusts described in the first bullet point, or of
which any of the persons is a director, officer,
general partner, trustee or a person who acts in a
similar capacity; and

o any entity in which one or more of the persons or
entities described in the two bullet points above own
individually or in the aggregate 5% or more of the
voting power or economic interest, or for a trust or
estate, 5% or more of the beneficial interest.

The plan of recapitalization is subject to the approval by:

o the majority of the outstanding shares;

o at least two-thirds of the outstanding Class A Senior
Preferred Shares, voting as a class, and either a
simple majority of all Class A Senior Preferred
Shares voting, excluding shares beneficially owned by
Brooke and the related persons listed above, or 80%
of the outstanding Class A Senior Preferred Shares;
and

o at least two-thirds of the outstanding Class B
Preferred Shares, voting as a class.

-12-
<PAGE> 23

THE COMPANY'S OFFICERS AND DIRECTORS AND BROOKE, WHO TOGETHER
MAY BE DEEMED TO BENEFICIALLY OWN 43.1% OF THE COMMON SHARES, 61.1% OF THE CLASS
A SENIOR PREFERRED SHARES AND 11.3% OF THE CLASS B PREFERRED SHARES, HAVE
INDICATED THAT THEY INTEND TO VOTE FOR THE PLAN OF RECAPITALIZATION.

To determine the existence of a simple majority of all Class A
Senior Preferred Shares voting thereon (excluding shares beneficially owned by
Brooke), shares as to which authority is withheld, abstentions and broker shares
that are not voted will not be counted in determining the number of votes cast.
In calculating all other votes relating to Board Proposals 2 and 4, shares as to
which authority is withheld, abstentions and broker shares that are not voted
will have the effect of a vote against Proposals 2 and 4. An affirmative vote of
the majority of the votes present at the annual meeting is necessary for
approval of any other matters to be considered at the annual meeting.

PricewaterhouseCoopers LLP has been the independent auditors
for the Company since 1993 and will serve in that capacity for the 1999 fiscal
year unless the Board of Directors deems it advisable to make a substitution. It
is expected that one or more representatives of such firm will attend the annual
meeting and be available to respond to appropriate questions. These
representatives will be given an opportunity to make statements at the annual
meeting if they so desire.

NOMINATION AND ELECTION OF DIRECTORS

The Company's By-Laws provide that the number of directors
will be not more than nine and not less than three as will be determined from
time to time by the Board. The Board currently consists of seven directors. Two
of the current directors were directors at the date of confirmation of the
Company's bankruptcy plan in 1994 and four were appointed under the bankruptcy
plan, and all such directors were re-elected at each annual meeting of
stockholders thereafter. Two of these directors are deemed under the bankruptcy
plan to have been elected by the holders of the Class A Senior Preferred Shares,
voting as a class, and by the holders of the Class A Senior Preferred Shares and
the Class B Preferred Shares, voting together as a single class, as a result of
the dividend arrearages on these shares. The special provisions of the
bankruptcy plan applicable to the election of the preferred shareholder
designees expired at the 1997 annual meeting. As a result of continuing dividend
arrearages on the Preferred Shares, the Board has continued to nominate these
designees, and these designees have continued to serve, as the nominees for
election as directors by the holders of the Preferred Shares under the
Certificate of Incorporation. The present term of office of all directors will
expire at the annual meeting.

-13-

<PAGE> 24

BOARD PROPOSAL 1 -- NOMINEES FOR ELECTION AS DIRECTORS BY HOLDERS OF COMMON
SHARES, CLASS A SENIOR PREFERRED SHARES AND CLASS B
PREFERRED SHARES

Provided a quorum is present, directors are elected by a
plurality of the votes cast, to serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified. The
nominees for election as directors by holders of Common Shares, Class A Senior
Preferred Shares and Class B Preferred Shares, voting together as a class, under
Board Proposal 1 are listed below. Although each nominee presently intends to
serve, if any nominee is unable or unwilling to serve the Board may nominate a
substitute. In that case the persons named as proxies in the accompanying proxy
card will vote for the election of the substitute nominee.

THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR ELECTION OF
THE NOMINEES NAMED BELOW.

The following table sets forth, as to each of the nominees
under Board Proposal 1, certain information as of the record date. Each nominee
is a citizen of the United States of America.

-14-
<PAGE> 25
<TABLE>
<CAPTION>

NAME AND 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 of the
100 S.E. Second Street Company
Miami, FL 33131

Howard M. Lorber 50 President and Chief 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 Company
100 S.E. Second Street
Miami, FL 33131

Arnold I. Burns 68 Managing Director, Arnold and November 1994
Arnhold and S. Bleichroeder, Inc. 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 Thalmann
1209 Orange Street Group Inc.
Wilmington, DE 19801
</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.

-15-
<PAGE> 26
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. From June 1990 until August 1994, he was
Chairman of the Board or a director of SkyBox International, Inc., Brooke's
former indirect wholly-owned subsidiary. SkyBox was a producer, marketer and
distributor of collectible sports and trading cards and related products.

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 interim President and Chief Executive Officer of PC411, 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 PC411 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.

-16-
<PAGE> 27
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.

BOARD PROPOSAL 2 -- NOMINEES FOR ELECTION AS DIRECTORS BY HOLDERS OF CLASS A
SENIOR PREFERRED SHARES

The Certificate of Incorporation provides that when six
quarterly dividends, whether or not consecutive, payable on the Class A Senior
Preferred Shares are in arrears, the holders voting as a class are entitled to
elect two directors. More than six quarterly dividends payable on the Class A
Senior Preferred Shares are in arrears. At September 30, 1998, the cumulative
compounded amount of dividend arrearages on the Class A Senior Preferred Shares
was $204.1 million or $190.44 per share.

However, under the Company's bankruptcy plan, whenever the
Certificate of Incorporation provides for the vote of the holders of the Class A
Senior Preferred Shares acting as a single class, such vote must include the
affirmative vote of either 80% of the outstanding Class A Senior Preferred
Shares, or a simple majority of all Class A Senior Preferred Shares voting
thereon, excluding Class A Senior Preferred Shares beneficially owned by Brooke
and related persons. Accordingly, the nominees for election as directors by
holders of Class A Senior Preferred Shares must be elected by a vote which meets
these requirements.

Whenever all arrears in dividends on the Class A Senior
Preferred Shares have been paid and dividends for the current quarterly dividend
period have been declared and set apart for payment, the right of the holders of
the Class A Senior Preferred Shares to elect additional directors will cease.
The terms of office of directors elected by the holders of the Class A Senior
Preferred Shares will terminate and the size of the Board will be reduced
accordingly. If a vacancy occurs among the directors elected by the holders of
the Class A Senior Preferred Shares, the Board will elect a successor to serve
until the next meeting of stockholders upon the nomination of the remaining
direct or elected by such holders or the successor of such remaining director.

As discussed above, the Preferred Shareholder designees were
deemed under the bankruptcy plan to have been elected by the holders of the
Preferred Shares under the Certificate of Incorporation as a result of the
dividend arrearages. The special provisions of the plan applicable to the
election of these designees expired at the 1997 annual meeting. As a result of
the continuing dividend arrearages on the Preferred Shares, the Board has
continued to nominate

-17-
<PAGE> 28
the designees, and the designees have continued to serve, as nominees for
election as directors by the holders of the Class A Senior Preferred Shares and
as nominees for election as directors by the holders of all Preferred Shares as
described below. Although the terms of these directors will end when the
recapitalization takes effect, the Board intends immediately thereafter to
increase the number of directors by two, and to appoint these directors to the
new positions.

THE BOARD RECOMMENDS THAT HOLDERS OF THE CLASS A SENIOR
PREFERRED SHARES VOTE FOR THE NOMINEES NAMED BELOW.

The following table sets forth, as to each of the nominees
under Board Proposal 2, certain information as of the record date. Each nominee
is a citizen of the United States of America.

<TABLE>
<CAPTION>
DIRECTOR
NAME AND ADDRESS AGE PRINCIPAL OCCUPATION SINCE
- ----------------------------------- ------- ----------------------------------------------------
<S> <C> <C> <C>
Henry C. Beinstein 55 Executive Director, November 1994
Schulte Roth & Zabel LLP Schulte Roth & Zabel LLP
900 Third Avenue
New York, NY 10104

Barry W. Ridings 46 Managing Director, November 1994
BT Alex. Brown Incorporated BT Alex. Brown Incorporated
1290 Avenue of the Americas
New York, NY 10104
</TABLE>

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, 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.

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

BOARD PROPOSAL 3 -- NOMINEES FOR ELECTION AS DIRECTORS BY HOLDERS OF CLASS A
SENIOR PREFERRED SHARES AND CLASS B PREFERRED SHARES

Under the Certificate of Incorporation, when six quarterly
dividends, whether or not consecutive, on the Class B Preferred Shares are in
arrears, the holders of Class B Preferred Shares and Class A Senior Preferred
Shares, voting together as a single class, are entitled to elect two directors.
No dividends on the Class B Preferred Shares have been paid since 1988.

-18-
<PAGE> 29

As of September 30, 1998, more than six quarterly dividends payable on the Class
B Preferred Shares were in arrears. At September 30, 1998, the cumulative
compounded amount of dividend arrearages on the Class B Preferred Shares was
$158.9 million or $56.94 per share.

Under the Certificate of Incorporation, directors are elected
by a plurality of the votes cast, to serve until the earlier of the date on
which dividend arrearages have been eliminated, or the next annual meeting.
Whenever all arrears in dividends on the Class B Preferred Shares have been paid
and dividends for the current quarterly dividend period have been declared and
set apart for payment, the right of the holders of the Class B Preferred Shares
to elect additional directors will cease. The terms of office of all persons
elected as directors by them will terminate and the size of the Board will be
reduced accordingly. If a vacancy occurs among the directors elected by the
holders of the Class B Preferred Shares, a successor will be elected by the
Board to serve until the next meeting of the stockholders upon the nomination of
the remaining director elected by such holders or the successor of such
remaining director.

Messrs. Beinstein and Ridings, both of whom have served as the
Preferred Shareholder designees, are the nominees for election as directors by
holders of Class B Preferred Shares voting together as a single class with the
Class A Senior Preferred Shares. They are also nominees for election as
directors by the holders of the Class A Senior Preferred Shares under "Board
Proposal 2" above. Although the terms of these directors will end when the
recapitalization takes effect, the Board intends immediately thereafter to
increase the number of directors of the Board by two, and to appoint these
directors to these new positions. For information on these nominees, see "-
Board Proposal 2" above.

THE BOARD RECOMMENDS THAT HOLDERS OF THE PREFERRED SHARES VOTE
FOR ELECTION OF THE NOMINEES NAMED IN THIS BOARD PROPOSAL 3.

THE PLAN OF RECAPITALIZATION

TERMS OF THE PLAN OF RECAPITALIZATION

The plan of recapitalization would:

o reclassify each Class A Senior Preferred Shares into
a share of temporary new preferred stock that
immediately will be redeemed for 20 Common Shares and
one warrant to purchase a Common Share,

o reclassify each Class B Preferred Share into a share
of temporary new preferred stock that immediately
will be redeemed for 1/3 of a Common Share and five
warrants to purchase a Common Share, and

o reclassify each outstanding Common Share into a share
of temporary new preferred stock that immediately
will be redeemed for 1/10 of a Common Share and 3/10
of a warrant to purchase a Common Share.

-19-
<PAGE> 30

The use of the temporary preferred shares is necessary because, under Delaware
law, the Company may not reclassify the Preferred Shares directly into Common
Shares and warrants. The Company intends that certificates for the newly issued
temporary preferred shares will not actually be sent to the Company's
stockholders, but that instead the appropriate number of Common Shares and
warrants will be issued and delivered directly to stockholders.

Holders of Series B Preferred Share and Common Share options
outstanding before the recapitalization who exercise these options after the
recapitalization will receive the Common Shares and warrants they would have
received if they had exercised their options immediately before the
recapitalization and held Series B Preferred Shares or Common Shares at that
time. The aggregate exercise price for such options will remain unchanged.

The plan would also decrease the number of authorized Common
Shares from 850,000,000 to 100,000,000, to reduce franchise taxes the Company
pays on its authorized Common Shares.

The Company intends to implement the plan of recapitalization
if it is approved by the Company's stockholders. However, the Company reserves
the right to abandon the plan of recapitalization if it determines that, based
on changes in the economy, the business of the Company or other factors, the
recapitalization would not be in the best interests of the Company and its
stockholders.

BACKGROUND OF THE PLAN OF RECAPITALIZATION

The Company, which was the first telegraph company in the
United States, was originally organized under the laws of New York in 1851 and
operated for many years under the name "Western Union Corporation." The
telegraph industry was regulated, and consequently the Company had a capital
structure appropriate to a regulated utility; the predictable cash flow of the
telegraph business allowed the Company to service substantial fixed income
securities. The Company was also able to develop a highly profitable business
through its wholly-owned subsidiary Western Union Financial Services Company,
Inc., which provided domestic and international money transfer services, bill
payment services, telephone cards, money orders and bank card services. With the
decline of the telegraph industry, this became the core business of the Company.
Ultimately, however, the decline of the telegraph industry resulted in the
Company being unable to service its debt, and on November 15, 1991 an
involuntary petition under Chapter 11 of the Bankruptcy Code was commenced
against the Company. On March 31, 1993, the Company consented to the entry of an
order for relief placing it under the protection of Chapter 11.

On November 1, 1994, the bankruptcy court entered an order
confirming the Company's bankruptcy plan. The bankruptcy plan provided for:

-20-

<PAGE> 31

o the sale of Western Union Financial Services and
certain other Company assets related to its money
transfer business,

o payment in cash of all allowed claims, payment of
post-petition interest in the amount of $178 million
to certain creditors,

o a $50 per share cash dividend to the holders of Class
A Senior Preferred Shares,

o a tender offer by the Company for up to 150,000
shares of Class A Senior Preferred Shares at a price
of $80 per share, and

o the reinstatement of all of the Company's equity
interests.

On November 15, 1994, the Company sold all of the common stock
of Western Union Financial Services and other assets related to the money
transfer business to First Financial Management Corporation for $1,193 million.
Of this price, $893 million was cash and $300 million represented 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. As a result of the sale, the Company was able to
pay approximately $550 million on account of allowed prepetition claims and
emerge from bankruptcy.

While the Company had managed to eliminate all of its debt in
the bankruptcy proceedings, it recognized that its capital structure needed to
be further modified to be appropriate for the future business plans of the
Company and to improve the liquidity of the Company's securities. The Company
also recognized the need to reduce the significant accrued and unpaid dividends
on the Preferred Shares.

In an attempt to improve the trading market for its stock, the
Company sought several times to have its equity securities quoted on the
National Association of Securities Dealers Automated Quotation System. In
addition, in 1996, the Company effected a one-for-20 reverse stock split of the
Common Shares with the hope that this would allow the Company to satisfy
criteria for quotation on NASDAQ. However, the applications were rejected
because the Company failed to satisfy certain requirements, including the
minimum bid price requirements and the minimum net tangible asset requirements.

In late 1996, the Company was approached by certain holders of
Preferred Shares who asked the Company to consider a recapitalization. The
holders proposed the recapitalization to address concerns relating to:

o the inability of the Company to have the Common
Shares and Preferred Shares traded on NASDAQ;

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<PAGE> 32

o the mandatory redemption of the Class A Senior
Preferred Shares in 2003 and their high liquidation
value;

o the accrued and unpaid dividends on the Preferred
Shares;

o the inability of the Company to pay dividends to the
holders of the Class B Preferred Shares due to the
dividend arrearage on the Class A Senior Preferred
Shares; and

o the resulting negative net worth of the Company and
the illiquidity of its securities.

The Company considered a recapitalization under which the
holders of the Preferred Shares would be allowed to exchange their Preferred
Shares for either subordinated debt or Common Shares. Further discussions
concerning this plan were held between management and the holders of Preferred
Shares from time to time through the first half of 1997, and management reviewed
certain financial and legal issues. Because of concerns over the Company's
assuming additional debt, the potential negative tax consequences to recipients
of such debt and various additional corporate issues, the Company determined not
to proceed on this basis.

In the middle of 1997, management and the holders of Preferred
Shares discussed a separate proposal under which the holders of Preferred Shares
would receive only Common Shares in exchange for their Preferred Shares.
Following occasional discussions with these holders, management was concerned
about the tax consequences of such a proposal, and also expressed uncertainty as
to whether the holders of Preferred Shares would approve such a transaction.

On December 8, 1997, the Board of Directors was advised that
management continued to consider various recapitalization alternatives and that
various corporate and tax issues were being reviewed with the Company's
financial and legal advisers.

In May 1998, management held further discussions with the
holders of Preferred Shares. A proposal was made by these holders under which
the holders of Class A Senior Preferred Shares would receive Common Shares and
the holders of the Class B Preferred Shares would receive warrants.

Management and the holders of Preferred Shares continued
discussions from May to September 1998. On August 9, 1998, the Board was advised
of the discussions. The Board was informed that the proposed transaction would
create a more simple capital structure with one

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<PAGE> 33

class of equity. The Board was advised that the new capital structure could
improve trading of the Common Shares by enabling the Common Shares to be listed
on a national securities exchange or quoted on NASDAQ, would provide a currency
for acquisitions and financing and would potentially permit the Company's market
valuation to better reflect its underlying assets and business. In addition, the
Board was informed that the proposed transaction would permit the Company to
report for financial statement purposes a significant positive shareholders'
equity. The Board discussed various aspects of the proposed recapitalization and
encouraged management to continue pursuing the proposal.

On November 9, 1998, the Board of Directors met and discussed
the terms of the proposed plan of recapitalization. The Board reviewed
information concerning the pro forma effects of the recapitalization, an
analysis of its effect on the voting power and residual equity interests of the
shares held by the three classes of securities and Brooke and a draft financial
analysis prepared by its financial advisor, Pennsylvania Merchant Group.
Pennsylvania Merchant Group advised the Board that based on its preliminary
financial analysis of the recapitalization, it would opine that the plan of
recapitalization was fair. While the Board agreed that a recapitalization would
be in the best interests of the Company, it determined that additional
considerations needed to be addressed by the Board and its financial advisors
including the relative allocation of value between the different classes of
stock and the terms of the proposed warrants. The Board then determined to form
a special committee of independent directors not associated with Brooke to
review the terms of the plan of recapitalization and to consider possible
alternatives with management, legal counsel, and Pennsylvania Merchant Group and
to make a recommendation concerning the recapitalization to the Board. The
committee consisted of Messrs. Beinstein, Burns and Ridings.

On December 10, 1998, the special committee met with its own
counsel, Proskauer Rose LLP, management and Company counsel, Milbank, Tweed,
Hadley & McCloy LLP, and discussed the terms of the proposed plan of
recapitalization and the presentation made by Pennsylvania Merchant Group at the
November 9, 1998 Board meeting. The special committee considered various
possible modifications to the terms of the plan of recapitalization to align the
interests of the holders of the Company's three classes of securities by giving
both Common Shares and warrants to holders of each class, and to increase the
value of the proposed warrants. The special committee also considered various
legal issues concerning the proposed plan of recapitalization.

On February 1, 1999, the special committee met to discuss
further the plan of recapitalization and the modifications considered at the
December 10, 1998 special committee meeting. The special committee also
considered possible alternatives to the plan of recapitalization. The special
committee discussed proposed modifications to the plan of recapitalization that
had been made at its request, including extending the period of time before
which the Company could redeem the warrants from two years to three years,
providing for each class of stock to receive both warrants and Common Shares and
revising the amount of consideration to be received by each class of stock.
Pennsylvania Merchant Group reviewed its analysis of the recapitalization and
possible alternative transactions and informed the special committee of its

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<PAGE> 34

preliminary oral opinion (subsequently confirmed in writing) that the amount of
consideration to be received by the stockholders in the plan of recapitalization
was fair, from a financial point of view, to the stockholders. In addition,
representatives of Brooke gave assurances to the special committee that Brooke
was not at the time planning any extraordinary transactions involving the
Company after the recapitalization. After further discussions, the special
committee unanimously agreed to recommend to the Board of Directors that the
Board authorize and approve the plan of recapitalization and submit it for
approval of the Company's stockholders at the 1999 annual meeting.

Immediately following the special committee meeting the Board
held a special meeting at which it determined based upon the recommendation of
the special committee and other factors that the plan of recapitalization is in
the best interests of the Company and its stockholders. The Board unanimously
approved the plan of recapitalization and recommended that the stockholders
approve and adopt the plan of recapitalization.

FAIRNESS OF THE PLAN OF RECAPITALIZATION; RECOMMENDATION OF THE BOARD
OF DIRECTORS

The Board unanimously determined that the terms of the plan of
recapitalization are fair to, and in the best interests of, the Company and its
stockholders and recommended that the Company's stockholders approve and adopt
the plan of recapitalization.

In making its determination, the Board considered various
factors including the following:

o information on the financial condition, results of
operations, business and prospects of the Company, as
well as current conditions and risks involved with
its business;

o the unanimous recommendation of the special committee
of the Board to approve the plan of recapitalization;

o the presentation by management and the opinion of
Pennsylvania Merchant Group that the plan of
recapitalization is fair to the Company's
stockholders from a financial point of view;

o the interests in the recapitalization of Brooke and
its treatment in the same manner as the other holders
of Preferred Shares and Common Shares;

o the potential conflict of interest of Pennsylvania
Merchant Group;

o the required mandatory redemption in 2003 of the
Class A Senior Preferred Shares and the aggregate
liquidation value of the Preferred Shares;

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<PAGE> 35

o the effect of the plan of recapitalization on the
various classes of shares;

o the current negative net worth of the Company and the
illiquidity of its securities;

o historical market prices and recent trading activity
of the equity securities of the Company;

o a detailed review of the terms of the plan of
recapitalization;

o various accounting and tax considerations including
the pro forma information prepared by the Company;

o the expenses associated with the plan of
recapitalization;

o the possibility that the plan of recapitalization
would increase the price of the Common Shares and the
net worth of the Company which may then allow the
Company to have the Common Shares and warrants quoted
on NASDAQ; and

o possible alternatives to the plan of
recapitalization, including the proposal for the
holders of the Preferred Shares to receive only
Common Shares or to elect to receive Common Shares or
debt. The Board weighed the possible benefits of
these proposals against their risks, including the
consequences to the Company's net worth and
liquidity, the likelihood of acceptance by the
holders of Preferred Shares, various accounting
considerations, and the tax consequences of such
proposals. Ultimately, the alternatives were not
considered preferable by the Board because of the
lack of positive impact on the Company's net worth or
liquidity, the unlikeliness of acceptance of the
proposals by the holders of Preferred Shares and the
negative tax consequences.

In addition to the recapitalization, the Board considered
certain alternative transactions as a way of realizing value for the
stockholders. One such alternative was the sale of the Company. Given the
disparate nature of the Company's businesses, the Board considered it unlikely
that a single buyer could be found for the Company as a whole. Accordingly, the
Board concluded that any sale would likely have to be piecemeal. The Board
believed that current conditions in Russia would make it difficult in the near
term to sell the Company's Russian operations at what the Board considers their
true value. Also, under the Company's arrangements with Apollo such a sale would
require Apollo's consent. The Board did not believe sales of the Company's other
operations were likely to result in substantial benefit to the stockholders.

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<PAGE> 36

The Board also considered distributing certain of its
businesses to holders of the Series A Senior Preferred Shares. However, most of
the Company's operations have not been held long enough to permit their spinoff
without tax. The Board considered liquidating its businesses, but concluded that
this would likely result in lower values as well as acceleration of the
Company's liabilities. Accordingly, the Board concluded that none of these
alternatives was as favorable as the recapitalization.

After consideration of these factors, the Board concluded that
no alternative to the plan of recapitalization would be as financially
attractive to the Company or its stockholders. In view of the wide variety of
factors considered in its evaluation of the plan of recapitalization, the Board,
except as disclosed in this proxy statement/prospectus, did not find it
practicable to quantify or otherwise attempt to assign relative weights to
specific factors.

The Board also considered potential negatives with respect to
the recapitalization. These negatives included the overhang of the warrants,
which if exercised would increase the number of Common Shares outstanding by
over 76%. The resulting potential dilution may adversely affect the value of the
Common Shares after the recapitalization and prevent the Company from realizing
some of its objectives in the recapitalization. In addition, the Board
considered that the disparate nature of the Company's businesses might prevent
the market from fully appreciating the Company's values even after the
recapitalization has made the Company's capital structure more appropriate and
easier to analyze. However, the Board concluded that these potential negatives
were outweighed by the advantages of the recapitalization and determined to
proceed.

THE BOARD HAS UNANIMOUSLY APPROVED, AND RECOMMENDS FOR
STOCKHOLDER APPROVAL, THE PLAN OF RECAPITALIZATION. THE BOARD BELIEVES THAT THE
PLAN OF RECAPITALIZATION IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY
AND ITS STOCKHOLDERS. THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PLAN
OF RECAPITALIZATION.

PURPOSE AND REASONS FOR THE PLAN OF RECAPITALIZATION

The Board has determined to propose the plan of
recapitalization to simplify the capital structure of the Company. The Company
believes that its current capital structure is not appropriate for the Company's
current businesses for the reasons stated below.

o The Class A Senior Preferred Shares were originally
intended to be fixed income securities. However, the
Company has not paid regular dividends on them for
ten years and there were $204.1 million of dividend
arrearages as of September 30, 1998. Accordingly, the
Company believes the Class A Senior Preferred Shares
trade more like a residual equity security.

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<PAGE> 37

o The Class A Senior Preferred Shares are mandatorily
redeemable in 2003 at $100 per share plus dividends
accrued to the redemption date. It is not clear how
the Company would finance this redemption.

o The Class B Preferred Shares were also issued as
fixed income securities. However, the Company has not
paid dividends on them for ten years and there were
$158.9 million of dividend arrearages as of September
30, 1998. In addition, the conversion privilege of
the Class B Preferred Shares at a conversion price of
$60.00 per share has essentially no value because of
the low current price of Common Shares.

o The Common Shares were issued to be the Company's
residual equity security. However, because of the
large dividend arrearages on the senior securities,
the Company does not believe the market so views
them.

o The voting rights of the Company's equity securities
do not reflect their economic value. The Common
Shares constitute a much smaller percentage of the
Company's equity than the Preferred Shares, but have
a greater voting power.

o The negative net worth associated with the accrued
dividends, as well as the low price of the Common
Shares, prevents the Common Shares from being quoted
on NASDAQ.

All of these factors contribute to the inability of the financial community and
investing public to effectively value the Company's securities, and also impair
their liquidity.

The plan of recapitalization 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 $300 million on a pro forma basis as of September 30, 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.

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<PAGE> 38

The Company believes the Common Shares will trade at a minimum
bid price sufficient to meet the requirements to be quoted on the NASDAQ Small
Cap Market or the NASDAQ National Market System.

OPINION OF FINANCIAL ADVISOR

On September 25, 1998, the Company retained Pennsylvania
Merchant Group to act as its financial advisor concerning the plan of
recapitalization. Pennsylvania Merchant Group has delivered its written opinion
dated February 1, 1999 to the Board of Directors that, as of the date of such
opinion, and subject to assumptions, factors and limitations set forth in such
opinion as discussed below, the recapitalization was fair from a financial point
of view to the current holders of the Company's shares.

THE FULL TEXT OF THE WRITTEN OPINION OF PENNSYLVANIA MERCHANT
GROUP, WHICH SETS FORTH THE ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN BY PENNSYLVANIA MERCHANT GROUP IN RENDERING ITS
OPINION, IS INCLUDED AS APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS. THE
SUMMARY OF THE OPINION SET FORTH HERE SHOULD BE READ TOGETHER WITH THE FULL TEXT
OF SUCH OPINION.

No limitations were imposed by the Company or the Board on
Pennsylvania Merchant Group as to its investigations or procedures in reaching
its opinion. Pennsylvania Merchant Group was not requested to and did not make
any recommendation to the Board as to the form or amount of consideration to be
offered to the stockholders in the recapitalization. Pennsylvania Merchant
Group's opinion is for the use and benefit of the Board and was rendered to the
Board in connection with its consideration of the recapitalization. The opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the recapitalization. Pennsylvania Merchant Group was
not requested to opine as to, and its opinion does not address, the Company's
underlying business decision to effect the recapitalization.

In arriving at its opinion, Pennsylvania Merchant Group
reviewed and analyzed, among other things,

o the specific terms of the Company's shares;

o the proposed terms of the warrants;

o certain publicly available business and financial
information relating to the Company, including the
Annual Reports to Stockholders and Annual Reports on
Form 10-K for the three years ended December 31,
1997 and certain interim reports to stockholders and
Quarterly Reports on Form 10-Q;

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<PAGE> 39

o certain financial and operating information with
respect to the business, operations and prospects of
the Company furnished by the Company, including
without limitation certain projections prepared by
the Company and Brooke;

o a trading history of the Company's shares for the
three-year period ended January 29, 1999 and the
relationship among the aggregate market value of such
securities; and

o a comparison of the historical financial results and
present financial condition of the Company with those
of other companies that Pennsylvania Merchant Group
deemed relevant.

In addition, Pennsylvania Merchant Group held discussions with senior officers
of the Company concerning the business, operations, properties and prospects of
the Company and its subsidiaries, Ladenburg and BrookeMil, as well as its United
States real estate division, and undertook other analyses and examinations and
considered such other financial, economic and market criteria it deemed
appropriate and relevant.

In rendering its opinion, Pennsylvania Merchant Group assumed
and relied upon and did not independently verify the accuracy, completeness and
fair presentation of all financial and other information, including financial
projections and estimates, that was provided to it or which was publicly
available. Pennsylvania Merchant Group's opinion is conditioned upon such
information, whether written or oral, being complete, accurate and fair in all
material respects. With respect to the projections provided to and discussed
with Pennsylvania Merchant Group by the management of the Company, Pennsylvania
Merchant Group assumed that such projections were reasonably prepared on a basis
reflecting management's best currently available estimates and good faith
judgments as to the future performance of the Company and that the Company will
perform in accordance with all such projections. Pennsylvania Merchant Group did
not conduct a physical inspection of the properties and facilities of the
Company and did not make or obtain any independent evaluations or appraisals of
the assets or liabilities of the Company. The opinion of Pennsylvania Merchant
Group states that it was necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of the
opinion.

In conducting its analysis and arriving at its opinion,
Pennsylvania Merchant Group evaluated the financial impact of the
recapitalization on the holders of the shares by considering certain financial
and other factors it deemed appropriate under the circumstances, including:

o the terms and business and financial aspects of the
recapitalization;

o the Company's current capital structure and the
advantages of a simplified structure;

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<PAGE> 40

o the historical and current markets for the shares
(including float and liquidity) and for securities of
other public companies believed by Pennsylvania
Merchant Group to be comparable to the Company;

o certain of the Company's operating and financial
information, including the financial forecasts
provided by management relating to the Company's
business and prospects;

o publicly available financial data and stock market
performance data of other public companies believed
by Pennsylvania Merchant Group to be comparable to
Ladenburg and New Valley Realty;

o the mandatory redemption requirements on January 1,
2003 with respect to the Class A Senior Preferred
Shares;

o the elimination of the overhang due to the accrual of
the dividends on the Class A Senior Preferred Shares
and the Class B Preferred Shares which amounted to
$204,050,000 and $158,908,000, respectively, as of
September 30, 1998;

o the potential effect of such overhang and complex
capital structure on the Company's stock trading
liquidity and ability to attract research analyst
coverage; and

o the Company's current intention not to pay any
dividends either on the Company's securities prior to
the recapitalization or on the new Common Shares for
the foreseeable future following the
recapitalization.

Based on its review of these factors, Pennsylvania Merchant
Group estimated the combined value of the Company's holdings to equal
approximately $186.9 million net of liabilities. In arriving at fair value,
Pennsylvania Merchant Group relied on the most recent financial data available.
In the case of the Company's Ladenberg and BrookeMil subsidiaries, this data was
as of September 30, 1998. For the Company's New Valley Realty division and for
other investments of the Company, this data was as of December 31, 1998. Fair
value is based solely on the quantitative results of Pennsylvania Merchant
Group's analysis and Pennsylvania Merchant Group believed that it was
inappropriate to, and therefore did not, rely on this value completely.
Pennsylvania Merchant Group also made qualitative judgments concerning the
Company, including among other factors the significant overhang effect of the
warrants and the lack of common factors among the Company's various businesses.
Pennsylvania Merchant Group determined that the combined market value of the
Company's securities before the recapitalization is less than fair value and
believed that the Common Shares outstanding after the recapitalization will
likely be valued at less of a discount to fair value due to, among others, the
factors discussed above.

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<PAGE> 41

Pennsylvania Merchant Group also made an evaluation of other
alternatives available to the Company, including (a) the sale of the Company, or
certain of its assets or divisions, including Ladenburg, BrookeMil and New
Valley Realty; (b) the distribution to stockholders of the Company's ownership
in Ladenburg , BrookeMil and New Valley Realty; and (c) a liquidation of the
Company. In completing its alternatives evaluation, Pennsylvania Merchant Group
considered certain financial and other factors it deemed appropriate under the
circumstances, including:

o Comparable merger and acquisition transactions for
companies in the investment banking and real estate
industries;

o the terms of the Company's agreements with Apollo
Real Estate Fund III, L.P. and the restrictions they
place upon the Company's transfer of its ownership;

o the likelihood of the need for additional financing
for BrookeMil and the availability of such financing
under current market conditions for companies engaged
in business in Russia;

o the inability of a spinoff of Ladenburg or BrookeMil
to qualify as a tax-free spinoff either to
stockholders or the Company due to the length of time
these divisions have been held by the Company;

o the anticipated market value of the divisions
post-spinoff and the likelihood of a significant
trading market developing for the shares of these
divisions; and

o the significant discounts to going concern value the
Company would receive in a liquidation of its assets.

Based on its review of these factors, as well as other factors, Pennsylvania
Merchant Group determined that the recapitalization represents the best
alternative for stockholders.

The factors set forth above do not purport to represent all of
the factors considered by Pennsylvania Merchant Group in rendering its opinion.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial and comparative analysis and
the application of those methods to the particular circumstances, and therefore
such an opinion is not readily susceptible to summary description. Furthermore,
in arriving at its fairness opinion, Pennsylvania Merchant Group did not
attribute any particular weight to any analysis or factor it considered, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Pennsylvania Merchant Group believes that its
analyses must be considered as a whole and that considering any portions of such
analyses and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
the opinion. In its

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<PAGE> 42

analyses, Pennsylvania Merchant Group made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. Any estimates in
the analyses do not necessarily indicate actual values or predict future results
or values, which may be significantly more or less favorable than as set forth
in such analyses. No public company utilized as a comparison is identical to the
Company. An analysis of the results of such a comparison is not mathematical,
rather it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and other
factors, including capital structure, that could affect the public trading value
of the companies to which the Company is being compared. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.

Pursuant to the terms of an engagement letter agreement, dated
September 25, 1998, between Pennsylvania Merchant Group and the Company, the
Company has paid Pennsylvania Merchant Group $200,000 for its opinion. In
addition, the Company has agreed to reimburse Pennsylvania Merchant Group for
its reasonable expenses, including professional and legal fees and
disbursements, incurred in connection with its engagement. The Company has also
agreed to indemnify Pennsylvania Merchant Group and certain related persons
against certain liabilities in connection with its engagement, including certain
liabilities that may arise under the federal securities laws.

In the ordinary course of business, Pennsylvania Merchant
Group actively trades in the equity securities of the Company for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities. Pennsylvania Merchant Group
may have a conflict of interest because certain associated persons and customers
of Pennsylvania Merchant Group hold a substantial number of Class A Senior
Preferred Shares and Class B Preferred Shares.

BENEFITS TO BROOKE FROM THE PLAN OF RECAPITALIZATION

In considering the plan of recapitalization, stockholders
should be aware of the following conflicts of interests under the plan of
recapitalization. The Board was aware of these conflicts and considered them in
determining to approve and recommend the plan of recapitalization.

As a result of the plan of recapitalization and assuming that
no warrant holder exercises its warrants, Brooke will increase its ownership of
the outstanding Common Shares from 42.3% to 55.1%, and its total voting power
from 42% to 55.1%. As holder of an absolute majority of the Common Shares,
Brooke will be able to elect all of the Company's directors and control the
management of the Company. In addition, the increase in Brooke's ownership of
Common Shares will make it impossible for a third party to acquire control of
the Company without the consent of Brooke. This may discourage third parties
from seeking to acquire the Company and may depress the price of the Common
Shares. Representatives of Brooke, however, have given assurances to a special
committee of the Board that Brooke was not at the time planning any
extraordinary transactions involving the Company after the recapitalization.

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<PAGE> 43

At present, when a class vote of the Class A Senior Preferred
Shares is required, the vote must include the affirmative vote of either 80% of
the outstanding Class A Senior Preferred Shares or a simple majority of all the
Class A Senior Preferred Shares voting, excluding shares beneficially owned by
Brooke and related persons. Following the recapitalization, there will be no
provisions requiring the vote of a majority of holders other than Brooke.

Finally, as a result of this increase in beneficial ownership,
Brooke will be able to consolidate the financial statements of the Company into
its financial statements for accounting purposes (although not for tax
purposes). Brooke has informed the Company that it presently carries its
investment in New Valley at $0. Brooke has informed the Company that it believes
that the plan of recapitalization will increase its net equity by approximately
$60 million based on pro forma results at September 30, 1998.

DESCRIPTION OF THE WARRANTS

Under the plan of recapitalization, the Company will issue
warrants to holders of Preferred Shares and Common Shares. The warrants will be
issued in registered form under and be governed by a warrant agreement between
the Company and American Stock Transfer and Trust Company, as warrant agent. Set
forth 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 proxy statement/prospectus is a part.

EXERCISE OF WARRANTS. Each warrant will entitle the holder to
purchase one Common Share at an exercise price of $12.50 per share subject to
adjustment in certain circumstances. The warrants may be exercised on the
effective date of the Company's registration statement covering the underlying
Common Shares and terminating five years thereafter. The Company may redeem the
warrants for $0.01 per warrant on 30 days' notice to the holders if, any time
after 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 may instead be exercised following
such notice and before redemption.

The warrants can be exercised by surrendering properly
endorsed certificates to the warrant agent together with full payment of the
exercise price for each Common Share as to which the warrant is 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 paid on the Common Shares. If the
Company distributes other assets, holders of warrants will be entitled to
participate in the distribution at the time of exercise. 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.

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<PAGE> 44

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.

OTHER MATTERS. The Company is not required to issue any
fractional warrants or any fractional Common Shares upon the exercise of
warrants or the occurrence of adjustments under antidilution provisions.
Instead, the Company will issue cash in lieu of fractional warrants and
fractional shares.

Warrant certificates may be exchanged for new certificates of
different denominations, and may be exercised by presenting them at the office
of the warrant agent, ________.

The warrants do not confer voting or preemptive rights or any
other rights of a stockholder. The Company intends to seek to have the warrants
quoted on NASDAQ.

EXCHANGE OF STOCK CERTIFICATES; FRACTIONAL SECURITY PROCEDURES

After the recapitalization, holders of Common Shares and
Preferred Shares will be required to surrender their share certificates together
with completed transmittal documents to the exchange agent. Stockholders will
then receive certificates representing Common Shares and warrants, and payment
in respect of any fractional interests. The Company does not intend to actually
deliver certificates representing the newly issued temporary preferred shares.
After the recapitalization, certificates representing outstanding shares will be
deemed to represent the securities into which they are changed under the plan of
recapitalization. However, the holders of old certificates will not be able to
trade or vote such securities until they receive the certificates representing
the Common Shares and warrants into which the old shares were changed.

No fractional securities, or certificates representing
fractional securities, will be issued under the plan of recapitalization. For
any stockholder who would have received a fractional security, the fractional
interests will be "bundled" and sold by the exchange agent.

After the recapitalization, the Company will deposit with the
exchange agent a number of Common Shares and warrants equal to the aggregate
number of fractional interests, rounded downwards to the next whole number. The
exchange agent will attempt to sell these securities in brokers' transactions,
and will remit to each holder of fractional interests its pro rata share of the
aggregate proceeds received

-34-
<PAGE> 45

by the exchange agent, net of commissions. The Company will not make any payment
to holders in respect of fractional interests. The Company will not determine or
influence the bid or sale price for such securities. The Company will pay the
exchange agent a flat fee to cover the costs of the fractional interest
procedures.

There is a risk that there will not be a market for the
bundled securities; that the exchange agent will not succeed in selling the
bundled securities; and that the consideration, if any, received by a holder in
exchange for its fractional interest will not equal the corresponding percentage
of the security at prevailing market prices.

Because no fractional securities will be issued, the equity
and voting interest of a stockholder holding fractional interests will be
reduced. Stockholders holding fewer than three Series B Preferred Shares or ten
Common Shares before the recapitalization will cease to be stockholders of the
Company, and thus will no longer participate in future potential earnings and
growth and will not have the right to vote on any corporate matter.

Holdings of less than 100 Common Shares or warrants following
the recapitalization will be treated as odd-lot holdings. Such holdings may be
more difficult to sell, and, in general, brokerage commissions and other costs
of transactions in odd-lot holdings may be higher than the cost of transactions
in excess or in multiples of 100 Common Shares or warrants. Stockholders may
wish to consult with their brokers concerning such potential increased
commissions and other costs in respect to "odd-lot" holdings.

REGULATORY APPROVAL REQUIRED

Because Brooke's percentage ownership of the Common Shares
after the recapitalization will increase, the recapitalization may not occur
until notifications have been filed and certain information has been furnished
to the Federal Trade Commission and the Antitrust Division of the Department of
Justice by the Company and Brooke under the Hart-Scott-Rodino Act and the
applicable waiting period has terminated. On February __, 1999, notification and
report forms were filed by Brooke and the Company under the Act. The waiting
period will expire on ______ absent a second request.

At any time before or after the recapitalization, despite
termination of the waiting period under the Act, the antitrust agencies or any
state could take action under applicable antitrust laws as they deem necessary
or desirable in the public interest. Such action could include seeking to enjoin
the recapitalization or seeking divestiture of assets of the Company or all or a
portion of Brooke's shares. Private parties may also take legal action under
applicable antitrust laws under certain circumstances.

-35-

<PAGE> 46

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

The following discussion describes certain material federal
income tax considerations relating to the plan of recapitalization and
represents the opinion of Milbank, Tweed, Hadley & McCloy LLP. This discussion
is based upon the Internal Revenue Code of 1986, as amended, existing and
proposed regulations thereunder, 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 such change could be retroactive and, accordingly,
could cause the tax consequences to vary substantially from the consequences
described herein. No ruling from the IRS with respect to the matters discussed
herein 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 with 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 (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions, and
tax-exempt entities) who may be subject to special treatment under the federal
income tax laws. This discussion also does not address any tax consequences
under state, local, or foreign laws. The following discussion of certain 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.

EXCHANGE OF EXISTING STOCK FOR COMMON SHARES AND WARRANTS

The exchange of Class A Senior Preferred Shares, Class B
Senior Preferred Shares and outstanding Common Shares for Common Shares and
warrants will be a "tax-free" recapitalization reorganization described in
Section 368(a)(1)(E) of the Code. Thus, except as required by Code Section 305
(discussed in the following paragraphs), under applicable Treasury Regulations
no gain or loss should be recognized by a stockholder who exchanges existing
stock for Common Shares and warrants. The basis of the Common Shares and
warrants received by a holder of existing stock immediately after the exchange
will equal in the aggregate the basis of the existing stock surrendered in the
exchange, reduced, if a stockholder receives cash in lieu of fractional shares
or warrants, by the basis of any existing stock deemed sold for cash, as
described in the following paragraph. The remaining aggregate basis will be
allocated between the Common Shares and the warrants in proportion to their
respective fair market values. The holding period for the Common Shares and the
warrants received in the exchange will include the holding period of the shares
so exchanged, provided the shares were held as capital assets by the holder at
the effective time of the recapitalization.

-36-
<PAGE> 47
A stockholder that receives cash in lieu of fractional Common
Shares or fractional warrants that would otherwise be held as a capital asset
should recognize capital gain or loss in an amount equal to the difference
between the cash received and the stockholder's basis in the fractional Common
Shares or warrants, determined as if the stockholder actually received the
fractional shares or warrants and then sold them. Stockholders who have used the
specific identification method to identify their basis in shares of existing
stock exchanged in the recapitalization should consult their own tax advisors to
determine their basis in the post-recapitalization Common Shares and warrants
received in exchange therefor.

Dividends have accrued but have not been paid on the Class A
Senior Preferred Shares and the Class B Senior Preferred Shares. Regulations
under Code Section 305 provide that a recapitalization will result in a deemed
corporate distribution under Code Section 305(c) if a stockholder owning
preferred stock with dividends in arrears exchanges its stock for other stock
and as a result increases its proportionate interest in the assets or earnings
and profits of the corporation. An increase in a preferred stockholder's
proportionate interest occurs where the fair market value or the liquidation
preference, whichever is greater, of the stock received in the exchange
immediately after the recapitalization exceeds the issue price of the preferred
stock. In that event, the amount of the deemed distribution is the lesser of (a)
the amount by which the fair market value of the stock or the liquidation
preference of the Preferred Shares, whichever is greater, exceeds the issue
price of the Preferred Shares surrendered or (b) the amount of the dividends in
arrears. It is likely, though not certain, that stock for this purpose includes
warrants, so that holders of Preferred Shares may be deemed to receive
distributions if the fair market value of the Common Shares and warrants exceeds
the issue price of the Preferred Shares surrendered. The Common Shares and
warrants have no liquidation preference. The issue price of preferred stock is
generally the fair market of that stock at the time of its issuance. The Company
expects that the fair market value of the Common Shares and warrants received in
exchange for Preferred Shares will be less than the issue price of the Preferred
Shares being exchanged for the Common Shares and warrants. In that event,
holders of Preferred Shares will not be deemed to receive any distributions
under Code Section 305(c). If, contrary to the Company's expectations, holders
of Preferred Shares are deemed to receive a distribution, it is likely that the
distribution will be treated as a dividend to the extent of the Company's
current and accumulated earnings and profits, then as a return of capital to the
extent of the holder's basis in the Preferred Shares exchanged and then as
capital gains. At September 30, 1998, the Company had no accumulated earnings
and profits. The Company is unable to predict as to whether there will be any
current earnings and profits in the future or the year of exchange. The holder's
basis in the Common Shares received in the exchange will be reduced to the
extent the distribution is treated as a return of capital.

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

-37-
<PAGE> 48

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 will generally not have that effect. The
warrants have certain unusual anti-dilution provisions and 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 gains.

EFFECT ON THE COMPANY

The Company believes the recapitalization will not cause the
Company to incur any taxable income or gain. The recapitalization is likely to
cause the Company and Brooke to be treated as members of a single controlled
group within the meaning of Code Section 1563. Members of a controlled group
must share certain tax benefits, such as the benefit of lower brackets in the
graduated tax applicable to corporation. The effects of being required to share
these tax benefits should not be material.

ABSENCE OF APPRAISAL RIGHTS

Under Delaware law, no appraisal rights are available to
stockholders in the recapitalization.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The Pro Forma Condensed Consolidated Statements of Operations
for the nine months ended September 30, 1998 and the year ended December 31,
1997 have been prepared giving effect to the recapitalization and 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 Pro Forma Condensed
Consolidated Balance Sheet as of September 30, 1998 has been prepared giving
effect to the recapitalization. The pro forma financial information should be
read in conjunction with the information set forth under "RISK FACTORS," "THE
PLAN OF RECAPITALIZATION," "BUSINESS - New Valley Realty Division - Sale of
Properties" and the Consolidated Financial Statements, the Unaudited Interim
Condensed Consolidated Financial Statements and the related notes included
elsewhere in this proxy statement/prospectus.

Since there will not be 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 and the sale of the office buildings
had occurred at the beginning of the period presented. The Pro Forma Condensed
Consolidated Balance Sheet as of September 30, 1998 was prepared as if the
recapitalization had occurred on September 30, 1998.

-38-
<PAGE> 49

The pro forma expenses do not reflect non-recurring costs
directly attributed to the plan of recapitalization which will be 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.

-39-
<PAGE> 50

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

Nine Months Ended September 30, 1998
------------------------------------------------------------------
Pro Forma Adjustments
----------------------------------
Sale of Office
Historical Buildings Recapitalization Pro Forma
--------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net...................... $ 7,476 $ 7,476
Commissions...................................... 20,663 20,663
Corporate finance fees........................... 4,541 4,541
Gain on sale of investments, net................. 10,377 10,377
Loss in joint venture............................ (2,233) (2,233)
Real estate leasing.............................. 18,488 $(10,131) (a) 8,357
Gain on sale of real estate...................... 4,682 (4,682) (a) --
Interest and dividends........................... 7,424 7,424
Computer sales and service....................... 499 499
Other income..................................... 6,635 6,635
--------- ----------- ---------

Total revenues............................... 78,552 (14,813) 63,739
-------- ---------- ---------

Cost and expenses:
Operating, general and administrative............ 84,466 (4,794) (a) 79,672
Interest......................................... 11,167 (5,519) (a) 5,648
-------- --------- ---------

Total costs and expenses..................... 95,633 (10,313) 85,320
-------- --------- --------

Loss from continuing operations before income taxes
and minority interests........................... (17,081) (4,500) (21,581)

Income tax provision.................................. 31 31

Minority interests in loss from continuing operations
of consolidated subsidiaries..................... 1,654 -- 1,654
--------- ----------- ---------

Loss from continuing operations....................... (15,458) (4,500) (19,958)

Discontinued operations:
Gain on disposal of discontinued operations...... 7,740 -- 7,740
--------- ----------- ---------

Income from discontinued operations.............. 7,740 -- 7,740
--------- ----------- ---------

Net loss.............................................. (7,718) (4,500) (12,218)

Dividend requirements on preferred shares............. (59,333) -- $ 59,333 (b) --
-------- ----------- -------- ----------

Net loss applicable to Common Shares.................. $ (67,051) $ (4,500) $ 59,333 (b) $ (12,218)
======== ========= ======== ========

</TABLE>

Number of shares used in computation.................. 9,577,624 13,739,637 (b) 23,317,261
========= ==========

Ratio of earnings to fixed charges (c)................ (--) (--)
==== ====
</TABLE>

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

(a) To eliminate the operations of the office buildings.

(b) To adjust for the conversion of outstanding Preferred Shares and Common
Shares to new Common Shares and warrants.

(c) Earnings were inadequate to cover fixed charges by $74,760 and $15,427 for
the nine months ended September 30, 1998 on a historical and pro forma
basis, respectively.

-41-
<PAGE> 52

NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

Year Ended December 31, 1997
------------------------------------------------------------------
Pro Forma Adjustments
----------------------------------
Sale of Office
Historical Buildings Recapitalization Pro Forma
--------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net.......................... $ 16,754 $ 16,754
Commissions.......................................... 16,727 16,727
Corporate finance fees............................... 12,514 12,514
Gain on sale of investments.......................... 20,492 20,492
Real estate leasing.................................. 27,067 $(14,506) (a) 12,561
Computer sales and service........................... 3,947 3,947
Interest and dividends............................... 9,417 (66) (a) 9,351
Other income......................................... 7,650 -- 7,650
-------- ----------- ---------

Total revenues.................................. 114,568 (14,572) 99,996
-------- ------- --------

Costs and expenses:

Selling, general and administrative expenses......... 119,205 (7,444) (a) 111,761
Interest............................................. 16,988 (7,463) (a) 9,525
Write-down of long-term investments ................. 3,796 -- 3,796
-------- ----------- ---------

Total costs and expenses........................ 139,989 (14,907) 125,082
-------- ------- -------

Loss from continuing operations before income taxes...... (25,421) (335) (25,086)

Income tax provision .................................... 186 186
Minority interests in loss from continuing operations

of consolidated subsidiary.............................. 1,347 -- 1,347
-------- ----------- ---------

Loss from continuing operations.......................... (24,260) (335) (23,925)

Discontinued operations:

Gain on disposal of discontinued operations.......... 3,687 -- 3,687
-------- ----------- ---------

Income from discontinued operations............. 3,687 -- 3,687
-------- ----------- ---------

Net loss ................................................ (20,573) (335) (20,238)

Dividend requirements on preferred shares................ (68,475) -- $ 68,475 ( b) --
-------- ----------- ------- -----------

Net loss applicable to Common Shares..................... $ (89,048) $ (335) $ 68,475 (b) $ (20,238)
========== ========= ======= =========

Loss per Common Share (basic and diluted):

Continuing operations............................... $ (9.68) $ (1.03)
Discontinued operations............................. .38 .16
--------- -------
Net loss per Common Share........................... $ (9.30) $ (0.87)
========= ======

Number of shares used in computation.................. 9,577,624 13,739,637 (b) 23,317,261
========= ==========

Ratio of earnings to fixed charges (c)................ (--) (--)
==== ====
</TABLE>

-42-
<PAGE> 53

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

(a) To eliminate the operations of the office buildings.

(b) To adjust for the conversion of outstanding Preferred Shares and Common
Shares to new Common Shares and warrants.

(c) Earnings were inadequate to cover fixed charges by $92,549 and $24,074 for
the year ended December 31, 1997 on a historical and pro forma basis,
respectively.

-43-
<PAGE> 54

NEW VALLEY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

September 30, 1998
-------------------------------------------------
Pro Forma
Adjustments
-----------------
Historical Recapitalization Pro Forma
--------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 25,463 $ 25,463
Investment securities available for sale...................... 26,420 26,420
Trading securities owned...................................... 15,703 15,703
Restricted assets............................................. 1,843 1,843
Receivable from clearing brokers.............................. 1,854 1,854
Other current assets.......................................... 2,581 2,581
--------- ---------
Total current assets..................................... 73,864 73,864
--------- ---------

Investment in real estate, net.................................... 80,479 80,479
Furniture and equipment, net...................................... 10,845 10,845
Restricted assets................................................. 5,767 5,767
Long-term investments, net........................................ 9,689 9,689
Investment in joint venture....................................... 63,713 63,713
Other assets...................................................... 6,524 6,524
--------- ---------
Total assets............................................. $ 250,881 $ 250,881
========= =========

LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)

Current liabilities:

Margin loan payable........................................... $ 1,470 $ 1,470
Current portion of notes payable and other
long-term obligations ..................................... -- --
Accounts payable and accrued liabilities...................... 31,466 $ 600 (a) 32,066
Prepetition claims and restructuring accruals................. 12,379 12,379
Income taxes.................................................. 18,715 18,715
Securities sold, not yet purchased............................ 3,208 3,208
--------- ---------
Total current liabilities................................ 67,238 67,238
--------- ---------
Notes payable..................................................... 55,083 55,083
Other long-term obligations....................................... 20,571 20,571
Redeemable preferred shares....................................... 300,711 (300,711)(b) --
Commitments and contingencies.....................................
Shareholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $158,908 and $0...................... 279 (279) (b) --
Common Shares, $.01 par value; 850,000,000 shares authorized;
9,577,624 and 23,317,261 shares outstanding................ 96 137 (b) 233
Additional paid-in capital.................................... 564,234 300,853 (b) 865,087
Accumulated deficit........................................... (750,145) (600)(a) (750,745)
Unearned compensation on stock options........................ (15) (15)
Accumulated other comprehensive income........................ (7,171) (7,171)
--------- ------------ ---------

</TABLE>

-44-
<PAGE> 55
<TABLE>
<CAPTION>

Total shareholders' equity (deficiency).................. (192,722) 107,389
-------- --------
Total liabilities and shareholders' equity
(deficiency)........................................ $250,881 $250,881
======== ========

Book value per Common Share....................................... $ (20.12) $ 4.60
======== ========
</TABLE>

- ---------------------
(a) To record costs associated with the plan of recapitalization.

(b) To record the plan of recapitalization.

-45-
<PAGE> 56

SELECTED FINANCIAL DATA

The selected financial data presented in the following table
for and as of the end of each year in the five-year period ended December 31,
1997, 1996, 1995, 1994 and 1993 have been derived from the financial statements
of the Company. These financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. Balance Sheets at December
31, 1997 and 1996, 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, 1997, 1996 and 1995 and related notes,
appear elsewhere in this proxy statement/prospectus. The selected financial data
presented in the following table for the nine months ended September 30, 1998
and 1997 are derived from the unaudited financial statements of the Company
appearing elsewhere in this document. In the opinion of the Company's
management, they include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the unaudited financial
information. The results of operations for the nine months ended September 30,
1998 are not necessarily indicative of the results for the full year.

-46-
<PAGE> 57

NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30,
(UNAUDITED)
------------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:(a)
Total revenues .................................. $ 78,552 $ 76,652 $114,568 $130,865 $ 67,730 $ 10,381 $ 3,844
Total costs and expenses(b)...................... 95,633 100,020 139,989 149,454 66,064 26,146 15,034
------ ------- --------- --------- ------- --------- -------

(Loss) income from continuing operations before
income taxes, minority interests, and
extraordinary items.......................... (17,081) (23,368) (25,421) (18,589) 1,666 (15,765) (11,190)
Income tax provision (benefit)................... 31 119 186 300 292 (500) (225)
Minority interests in loss from continuing
operations of consolidated subsidiaries 1,654 1,543 1,347 4,241 -- -- --
------- ------- -------- -------- --------- ---------- ----------

(Loss) income from continuing operations before
extraordinary items.......................... (15,458) (21,944) (24,260) (14,648) 1,374 (15,265) (10,965)
Income from discontinued operations............. 7,740 -- 3,687 7,158 16,873 1,135,706 38,368
------- -------- -------- --------- ------- --------- -------

(Loss) income before extraordinary items......... (7,718) (21,944) (20,573) (7,490) 18,247 1,120,441 27,403
Extraordinary items(c)........................... -- -- -- -- -- (110,500) 8,417
------- -------- ---------- --------------------- --------- -------
</TABLE>

-47-
<PAGE> 58

<S> <C> <C> <C> <C> <C> <C> <C>
Net (loss) income................................ (7,718) (21,944) (20,573) (7,490) 18,247 1,009,941 35,820
Dividend requirements on preferred shares(d)..... (59,333) (50,297) (68,475) (61,949) (72,303) (80,037) (68,706)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased......... -- -- -- 4,279 40,342 -- --
-------- --------- ---------- --------- -------- --------- ---------
Net (loss) income applicable to Common Shares.... $(67,051) $ (72,241) $ (89,048) $ (65,160) $ (13,714) $ 929,904 $ (32,886)
======== ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges(e)............ (--) (--) (--) (--)
==== ==== ==== ====

</TABLE>

-48-
<PAGE> 59
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
(UNAUDITED)
----------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Per common and equivalent share (h):

Basic:
Loss from continuing operations before
extraordinary items.................... $(7.81) $(7.54) $(9.68) $(7.55) $(3.20) $ (10.12) $(8.49)
Discontinued operations.................... .81 -- .38 .75 1.77 120.63 4.09
Extraordinary items........................ -- -- -- -- -- (11.74) .90
Net (loss) income.......................... (7.00) (7.54) (9.30) (6.80) (1.43) 98.77 (3.50)

Diluted:
Loss from continuing operations before
extraordinary items.................... $(7.81) (7.54) $(9.68) $(7.55) $(3.20) $(9.00) $(8.49)
Discontinued operations.................... .81 -- .38 .75 1.77 107.36 4.09
Extraordinary items........................ -- -- -- -- -- (10.45) .90
Net (loss) income.......................... (7.00) (7.54) (9.30) (6.80) (1.43) 87.91 (3.50)

Dividends declared(d)......................... -- -- -- -- -- -- --
Book value.................................... $(20.12) $(13.61)

Balance Sheet Data:
Total assets.................................. $250,881 $441,391 $406,540 $385,822 $1,069,891 $269,483
Long-term obligations......................... 75,654 185,024 170,223 11,967 36,177 19,318
Prepetition claims(f)......................... 12,379 12,611 15,526 33,392 619,833 791,893
Redeemable preferred shares(g)................ 300,711 258,638 210,571 226,396 317,798 329,233
Stockholders' deficiency...................... (192,722) (130,399) (72,364) (30,461) (38,444) (1,020,656)
Working capital (deficiency).................. 6,626 (9,486) 85,610 155,565 284,849 64,695

</TABLE>

-49-
<PAGE> 60
(a) The operating results for 1993 were reclassified to reflect the
discontinued operations of Western Union Data Services Company, Inc. and
Western Union Financial Services Company, Inc. See Note 4 to the
Consolidated Financial Statements.

(b) Includes reorganization (benefit) expense of $(9,706), $(2,044), $22,734
and $9,035 in 1996, 1995, 1994 and 1993, respectively.

(c) Represents extraordinary loss on the extinguishment of debt in 1994 and
extraordinary gain on the early termination of a capital lease in 1993.

(d) The September 30, 1998 and 1997 and December 31, 1997, 1996, 1995, 1994
and 1993 dividend requirements on preferred share amounts include $647,
$502, $692, $417, $521, $4,847 and $3,999, 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 1998, 1997 or 1993. 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.

(e) Earnings were inadequate to cover fixed charges by approximately $74,760,
$72,122, $92,549 and $76,297 for the nine months ended September 30, 1998
and 1997 and the years ended December 31, 1997 and 1996, respectively.

(f) Represents prepetition claims against the Company in its bankruptcy case.
See Note 17 to the Consolidated Financial Statements, Note 8 to the
Unaudited Interim Condensed Consolidated Financial Statements and
"BUSINESS-Legal Proceedings."

(g) Includes cumulative preferred dividends on the redeemable Class A Senior
Preferred Shares of $204,050, $163,302, $117,117, $121,893, $176,761 and
$193,042 at September 30, 1998 and at December 31, 1997, 1996, 1995, 1994
and 1993, respectively. See Note 13 to the Consolidated Financial
Statements and Note 6 to the Unaudited Interim Condensed Consolidated
Financial Statements.

(h) All per share data have been restated to reflect the one-for-20 reverse
stock split completed on July 29, 1996.

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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, the 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:

o 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,

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

o 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,

o the acquisition of BrookeMil in January 1997,

o 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

o 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, $11,724 in 1996 and $3,879 in 1995 relating to its investment in
the common stock of RJR Nabisco Holdings Corp.

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In June 1996, various agreements between High River Limited
Partnership, the Company and Brooke were terminated by mutual consent. Under
these agreements the parties had taken certain actions during late 1995 and
throughout 1996 designed to cause RJR Nabisco to spin off its food business,
Nabisco Holdings Corp. The termination of the High River agreements left in
effect for one year the requirement that the Company make payments to High River
if the Company achieved a profit after deducting certain expenses on the sale of
its shares of RJR Nabisco common stock, if the shares had a higher price at the
end of such year than their purchase price or if Brooke or its affiliates
engaged in certain transactions with RJR Nabisco. Based on the market price of
RJR Nabisco common stock, no amounts were payable by the Company under these
agreements.

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 company 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. The Company entered
into the swap 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, 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 before such date exceeded $34.42, the price of the RJR Nabisco common
stock during a specified period after commencement of the swap, the counterparty
was required to pay the Company an amount in cash equal to the amount of such
appreciation on 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.
If the final price was less than $34.42, the Company was required to pay the
counterparty an amount in cash equal to the amount of such decline on the shares
of RJR Nabisco common stock subject to the swap, offset by the value of any
dividends. However, as 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 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
obligations under the swap and agreed to pledge additional collateral under
certain conditions. The Company marked its obligation under the swap to fair
value with unrealized gains or losses included in income. 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 declared and paid cash dividends on the
Class A Senior Preferred Shares of $40 per share in 1996.

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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 is considering adopting
the plan of recapitalization. The plan of recapitalization, if implemented, will
have a significant effect on the Company's financial position and results of
operations.

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.

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. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company adopted SFAS No. 131 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

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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.

The SEC recently issued rules which will require the Company,
commencing with filings which include financial statements for fiscal year 1998,
to disclose quantitative and qualitative information about derivative financial
instruments, derivative commodity instruments and other financial instruments.
These disclosures are intended to provide investors with information relating to
market risk exposure, including the Company's objectives, strategies and
instruments used to manage exposures. The disclosures are required to be
presented outside of, and not incorporated into, the Company's consolidated
financial statements. This disclosure requirement will be applicable principally
to the Company's Ladenburg broker-dealer subsidiary. The impact of the
implementation of this new disclosure requirement is not yet determinable.

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.

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.

Thinking Machines' payroll processing system is not Year 2000
compliant. Thinking Machines has identified replacements for its payroll system
and anticipates being Year 2000 compliant by mid-1999. Thinking Machines
converted its accounting system to a Year-2000 compliant system in 1998.
Thinking Machines anticipates the costs of these systems will not exceed $50.

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 its Year 2000 plan will be complete by March 1999 and
will cost approximately $350. The cost includes hardware and software upgrades
and replacements as well as consulting and internal soft-dollar personnel costs.

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

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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 May 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 nine months ended September 30, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995, the 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.

NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Broker-dealer:
Revenues.......................... $ 44,712 $38,756 $56,197 $ 71,960 $40,418
Expenses.......................... 55,056 44,758 66,155 72,305 38,943
-------- ------- ------- -------- -------
Operating loss before taxes
and minority interests......... $(10,344) $(6,002) $(9,958) $ (345) $ 1,475
======== ======= ======= ======== =======

Real estate:
Revenues.......................... $ 23,169 $19,664 $27,067 $ 23,559
Expenses.......................... 22,175 25,650 34,894 24,304
-------- ------- ------- --------
Operating income (loss) before
taxes and minority interests... $ 994 $(5,986) $(7,827) $ (745)
======== ======= ======= ========

Computer software:
Revenues.......................... $ 499 $ 3,750 $ 3,947 $ 15,017
Expenses.......................... 5,081 9,774 12,103 30,099
-------- ------- ------- --------
Operating loss before taxes
and minority interests......... $ (4,582) $(6,024) $(8,156) $(15,082)
======== ======= ======= ========

Corporate and other:
Revenues.......................... $ 10,172 $14,482 $27,357 $ 20,329 $27,312
Expenses.......................... 13,321 19,838 26,837 22,746 27,121
-------- ------- ------- -------- -------
Operating loss before taxes
and minority interests......... $ (3,149) $(5,356) $ 520 $ (2,417) $ 191
======== ======= ======= ======== =======

</TABLE>

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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997

Consolidated total revenues were $78,552 for the nine months
ended September 30, 1998 versus $76,652 for the same period during the preceding
year. The increase in revenues of $1,900 is attributable primarily to the gain
on the sale of the office buildings and the increase in revenues of Ladenburg as
a result of higher commissions offset by lower principal transactions and
corporate finance fees.

Ladenburg's revenues for the first nine months of 1998
increased $5,956 as compared to revenues for the first nine months of 1997
primarily due to increased commissions of $9,604 offset by decreases in
principal transactions of $4,791 and corporate finance fees of $3,296.
Ladenburg's expenses for the first nine months of 1998 increased $10,298 as
compared to expenses for the first nine months of 1997 due primarily to an
increase in performance-based compensation expense associated with higher
commissions and an increase in personnel.

Revenues from the real estate operations for the first nine
months of 1998 increased $3,505 due primarily to the gain on the sale of office
buildings of $4,682, offset by the effect of the sale of a shopping center in
the fourth quarter of 1997 and lower revenues associated with BrookeMil.
Expenses of the real estate operations decreased $3,475 due primarily to lower
expenses ($2,558) of BrookeMil resulting from its contribution of Ducat Place II
and Ducat Place III to Western Realty Ducat. A foreign currency loss of $2,256,
which resulted from the devaluation of rubles held in escrow accounts, is
included in BrookeMil's expenses during the 1998 period. The loss should be
offset by lower future expenditures in the development of the Kremlin sites.

Operating expenses of Thinking Machines consisted of costs of
sales of $585, selling, general and administrative expenses of $2,516 and
research and development expenses of $1,980 for the nine months ended September
30, 1998. This compares to costs of sales of $702, selling, general and
administrative expenses of $6,164 and research and development expense of $2,908
for the nine months ended September 30, 1997. The reduction in Thinking
Machines' revenues and operating expenses during the 1998 period reflects the
sale of its parallel processing service business in April 1997.

For the first nine months of 1998, the Company's revenues of
$10,172 related to corporate and other activities consisted primarily of net
gains on investments of $10,377 and interest and dividend income of $1,632
offset by $2,233 of loss in a joint venture. For the 1997 period, the Company's
revenues of $14,482 related to corporate and other activities consisted
primarily of net gains on investments of $8,518 and interest and dividend income
of $3,124.

Corporate and other expenses of $13,321 for the first nine
months of 1998 consisted primarily of employee compensation and benefits of
$6,070 and expenses of non-significant subsidiaries of $2,583. Corporate and
other expenses of $19,838 for the first nine months of 1997 consisted primarily
of employee compensation and benefits of $7,171, expenses of non-significant
subsidiaries of $2,171 and a $3,796 provision for loss on a long-term
investment.

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Income tax expense for the first nine months of 1998 was $31
versus $119 for the first nine months of 1997. The effective tax rate does not
bear a customary relationship to pre-tax accounting income principally because
of the change in the valuation allowance relating to deferred tax assets.

The Company recorded a gain on disposal of discontinued
operations of $7,740 in the 1998 period related to the settlement of a lawsuit
originally brought by the Company's predecessor, Western Union Telegraph
Company.

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 commencement of the
termination of its parallel processing computer sales and service business in
the fourth quarter of 1996.

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.

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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 dividend 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 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 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 money transfer business
were recorded as income from discontinued operations in 1997.

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 which resulted from the Company's money transfer business.

THE YEAR 1996 COMPARED TO 1995

Consolidated total revenues for 1996 were $130,865 compared
with $67,730 for 1995. The increase in revenues of $63,135 is attributable
primarily to the operations of Ladenburg for twelve months in 1996 versus seven
months of 1995, resulting in additional revenues of $31,542, the revenues of
Thinking Machines of $15,017 and the leasing revenues of $23,559 resulting from
the acquisition of the office buildings and eight shopping centers in January
1996.

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Ladenburg's revenues for 1996 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 for 1996 consisted of employee compensation and benefits
of $48,613 and other expenses of $23,692. For 1995, from the date of
acquisition, Ladenburg's revenues consisted of principal transactions of
$18,237, commissions of $9,888, corporate finance fees of $5,942, syndicate and
underwriting income of $1,683 and other income of $4,668. Expenses of Ladenburg
for the same period in 1995 consisted of employee compensation and benefits of
$25,530 and other expenses of $14,588.

In 1996, revenues from the office buildings were $14,707 and
revenues from the shopping centers were $8,852. Expenses of the office buildings
included interest of $7,491 and depreciation of $2,308, while expenses of the
shopping centers included interest of $4,872 and depreciation of $1,314.

Thinking Machines' revenues in 1996 resulted from parallel
processing computer sales of $15,017. 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 expenses of $2,876. In 1996, Thinking Machines wrote down
certain assets, principally inventory, associated with its parallel processing
computer sales and service business to their net realizable value and recorded a
charge of $6,200 for these reserves.

The Company's revenues from corporate and other activities of
$20,329 for 1996 consisted primarily of $12,001 of interest and dividend income,
gain on termination of various service agreements with First Financial of
$1,285, and net gain on investments of $2,528. Corporate interest and dividend
income decreased $4,290 from 1995 due primarily to the reduction in interest
bearing investment securities in 1996. The net gain on investments consisted of
the gain on the sale of the investment securities in 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 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. Corporate expenses for 1995 consisted
primarily of investment expenses of $6,279 and employee compensation and
benefits of $5,464. Also reflected in corporate expense is the reversal of
restructuring accruals of $9,706 in 1996 and $2,044 in 1995 resulting from the
settlement of certain claims at amounts below the accrued liability.

Income tax expense for 1996 was $300 compared to $292 in 1995.
Income tax expense for 1996 related primarily to state income taxes at
Ladenburg. Income tax expense for 1995 represented the alternative minimum tax
rate for federal tax purposes in addition to a blended state income tax rate.

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LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital increased by $16,112 for the
nine months ended September 30, 1998 and decreased by $95,096 for the year ended
December 31, 1997 and $69,955 for the year ended December 31, 1996.

The Company's working capital increased to $6,626 at September
30, 1998 from a working capital deficit at $9,486 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 $95,096 from
$85,610 at December 31, 1996 to a deficit of $9,486 at December 31, 1997 as a
result primarily of the purchase of BrookeMil and net purchases of long-term
investments of $18,707 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 nine months of 1998, the Company's cash and
cash equivalents increased from $11,606 to $25,463 due primarily to the sale of
the office buildings and liquidations of long-term investments offset by capital
expenditures of $18,387 and net sales of investments of $7,934.

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 additions to the
office buildings and shopping centers of $24,496, and to fund operations
($22,699).

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The capital expenditures for the nine months ended September
30, 1998 related principally to the development of the Kremlin sites ($15,171 at
September 30, 1998). BrookeMil also held $809 in cash at September 30, 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.

In June 1998, the Company and Apollo organized Western Realty
Repin to make the Repin loan to BrookeMil. The proceeds from the Repin loan will
be used by BrookeMil for the acquisition and preliminary development of the
Kremlin sites. Through September 30, 1998, Western Realty Repin had advanced
$19,067, of which $14,300 was funded by Apollo, under the loan. 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 of BrookeMil. BrookeMil used a portion of the proceeds to reimburse
the Company for certain expenditures on the Kremlin sites.

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 limit or delay 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 other U.S. real estate holdings 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 September 1998, the Company
made a one-year $950 loan to BGLS, an affiliate of the Company, bearing interest
at 14% per annum.

Cash used for operating activities for the nine months ended
September 30, 1998 decreased to $2,868 compared to $10,144 from the prior year.
The difference is due primarily to cash provided from discontinued operations of
$7,740, a decrease in the Company's loss from continuing operations of $6,486
and an $11,883 decrease in Ladenburg's net trading securities owned for the 1998
period versus a $15,090 increase for the 1997 period. These amounts were offset
by gains on the sale of the office buildings and other long-term investments of
$9,452 in 1998, the non-cash charge of $3,796 to operations in 1997 and
decreases in accrued liabilities resulting principally from the contribution of
Ducat Place II and Ducat Place III to Western Realty Ducat.

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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, a 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 used for operating activities for the year ended December
31, 1996 increased to $22,699 compared to $7,136 for the year ended December 31,
1995. The difference is due primarily to a $25,737 decrease in net income and a
$13,918 decrease in non-cash charges, consisting of a provision for losses on
long-term investments of $10,789 and reversals of restructuring accruals of
$7,662 from 1995 to 1996, offset by increases in depreciation and amortization
of $4,149 and non-cash stock compensation expense of $384. The amount was offset
by increases in net working capital items of $20,482 in 1996 as compared to
1995, due primarily to the payment of $32,517 in income taxes payable in 1995
associated with the prior year's sale of the money transfer business and other
discontinued operations.

Cash flows provided from investing activities for the nine
months ended September 30, 1998 were $113,902 compared to cash flows used for
investing activities of $10,112 for the nine months ended September 30, 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
$17,305 and $20,014 used to acquire the BrookeMil stock in the 1997 period. The
amount is offset by capital expenditures in 1998 of $18,387 compared with $6,208
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 of $18,099.
The above-mentioned items were offset by net purchases of real estate of
$25,760.

Cash flows provided from investing activities for the year
ended December 31, 1996 were $165,856 compared with cash flows used in investing
activities of $200,163 for the year ended December 31, 1995. The difference
resulted from changes in net purchases and sales of investment securities of
$355,151, payment of significantly higher prepetition claims and restructuring
accruals in 1995 of $576,237, purchases and liquidations of long-term
investments of $56,543 and the acquisition of Ladenburg in 1995, offset by
changes in restricted assets of $312,475 and collection of a contract receivable
of $300,000 in 1995. The above-mentioned items were offset by net purchases of
real estate of $25,760 in 1996.

Cash flows used for financing activities increased to $97,177
for the nine months ended September 30, 1998 compared to $20,319 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 $21,500 of notes payable in the 1997
period.

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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.

Cash flows used in financing activities increased to $137,617
for the year ended December 31, 1996 from $117,129 for the prior year. The
difference was attributable primarily to the changes in the Company's margin
loan balance, offset by decreased payments of preferred dividends of $90,743 and
a $37,231 change in the amount of redeemable preferred stock repurchased.

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 September 30, 1998, borrowings under the new credit agreement
totaled $19,949.

Of the $72,500 aggregate purchase price for the shopping
centers acquired by the Company on January 11, 1996 from AP Century I., L.P., AP
Century II, L.P., AP Century III, L.P., AP Century IV, L.P., AP Century V, L.P.,
AP Century VI, L.P., AP Century VIII, L.P., and AP Century IX, L.P., 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

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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 September 30, 1998, the aggregate
principal amount of the promissory notes was $54,801.

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.

Each shopping center note is collateralized by a
purchase-money mortgage and an assignment of leases and rents, and the shopping
center notes covering five of the properties are also secured by mortgages
junior to the purchase-money mortgages and subordinated assignments of leases,
rents and fixtures. With respect to the Richland, Washington shopping center,
the purchase-money mortgage and junior mortgage together with corresponding
assignments "wraps around" and is junior to the senior mortgage, and is in favor
of the applicable partnership. The five shopping center notes covering the
Marathon Shopping Center property, located in Marathon, Florida, the Village
Royale Plaza Shopping Center property, located in Royale Palm Beach, Florida,
the University Place property, located in Lincoln, Nebraska, the Coronado
Shopping Center property, located in Santa Fe, New Mexico, the Holly Farm
Shopping Center property, located in Milwaukee, Oregon, the Washington Plaza
property located in Richland, Washington, the Marysville Towne Center property,
located in Marysville, Washington and the Kanawha Mall property located in
Charleston, West Virginia are cross-collateralized. The other three shopping
center notes may also be cross-collateralized at the option of the applicable
partnerships, provided certain conditions have been met. 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 capital resources will
suffice to fund its currently anticipated cash requirements for 1999, including
the currently anticipated cash requirements of its operating businesses,
investments, commitments, and payments of principal and interest on its
outstanding indebtedness.

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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.

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 has other subsidiaries specializing in merchant
banking, venture capital and investment banking activities on an international
level. Ladenburg Thalmann International, a wholly-owned subsidiary of Ladenburg,
is engaged in corporate finance and capital markets activities in Russia and
Ukraine, seeking mandates to raise capital for local corporate issuers in the
international capital markets. This subsidiary, headquartered in New York City,
has an office in Kiev, Ukraine.

In July 1997, this subsidiary, together with Societe Generale,
formed a fund with an initial capitalization of $90.5 million for investment in
public and private equity securities in Ukraine. The subsidiary's Kiev office
serves as investment advisor to the fund.

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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.

The Company paid Brooke (Overseas) a purchase price of $55
million for the BrookeMil shares, consisting of $21.5 million in cash and the
$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, is being developed as a 450,000 sq. ft. office tower, with
construction anticipated to commence in 1999. The site of the proposed third
phase of the project is currently used by Liggett-Ducat Ltd., an affiliate of
Brooke and BGLS, as the site for its tobacco factory under a use agreement with
BrookeMil, terminable by BrookeMil on 270

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days' notice. In addition, the Company has the right to require Brooke
(Overseas) and BGLS to repurchase this site for the then appraised fair market
value, but in no event less than $13.6 million, during the period Liggett-Ducat
Ltd. operates the factory on such site. Liggett-Ducat Ltd., which is
constructing a new factory on the outskirts of Moscow currently scheduled to be
operational by mid-1999, will vacate the site upon completion of the new
factory.

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 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.

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 September 30, 1998, Apollo had funded $30.55 million of its
investment in Western Realty Ducat.

The ownership and voting interests in Western Realty Ducat
will be 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 cash and incurred 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 own a
substantial amount of debt securities of BGLS and warrants to purchase common
stock of Brooke.

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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 owns an industrial site and manufacturing
facility being constructed on the outskirts of Moscow by a subsidiary of Brooke
(Overseas).

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 94.6% of one site and 52% of the other site at September 30, 1998. 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 September 30, 1998, Western Realty Repin had advanced
$19.07 million, of which $14.3 million was funded by Apollo, under the Repin
loan. This loan is classified in other long-term obligations on the September
30, 1998 condensed consolidated balance sheet included in the Unaudited Interim
Condensed Consolidated Financial Statements appearing elsewhere in this proxy
statement/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 September 30, 1998, BrookeMil had invested $15.17
million in the Kremlin sites and held approximately $809,000 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
$1.2 million in 1999 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

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$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 Bellemead 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.

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 September 30, 1998, 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

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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 an underlying mortgage to a single lender.

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 $4.4 million on the sale. The Company received
approximately $13 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,
designs, develops, markets and supports software offering prediction-based
management solutions under the name LoyaltyStreamTM for businesses such as
financial services and telecommunications providers. This software is designed
to help reduce customer attrition, control costs, more effectively cross-sell or
bundle products or services and manage risks. Incorporated in LoyaltyStream is
DarwinR, 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.

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

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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.

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, Thinking Machines received profit
participation payments totaling $1.2 million.

PC411. At September 30, 1998, the Company owned approximately
48% of the outstanding shares of PC411, a development stage company which
completed an initial public offering with net proceeds of $5.9 million in May
1997. PC411 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 September 30, 1998, long-term
investments consisted primarily of investments in limited partnerships of $9.7
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.

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:

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

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

o 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.

The bankruptcy plan places restrictions on and requires
approvals for certain transactions with Brooke and its affiliates to which the
Company or a subsidiary of, or entity controlled by, the Company is a party.
Subject to certain exceptions for transactions involving less than $1 million in
a year or pro rata distributions on the Company's capital stock, these
transactions must be approved by not less than two-thirds of the entire Board,
including at least one of the directors elected by the holders of the Preferred
Shares. In addition, the Board must obtain a fairness opinion from an investment
banking firm. Under the plan, whenever the Certificate of Incorporation provides
for the vote of the holders of the Class A Senior Preferred Shares, the vote
must include the affirmative vote of either 80% of the outstanding shares of the
class or a simple majority of all shares of the class voting, excluding shares
beneficially owned by Brooke. These provisions of the plan will terminate upon
consummation of the recapitalization.

When the bankruptcy plan became effective, the Company paid
approximately $550 million on account of allowed prepetition claims and emerged
from bankruptcy. At September 30, 1998, the Company's remaining accruals totaled
approximately $12.6 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.

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.

-72-
<PAGE> 83

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 December 31, 1997, the Company had approximately 438
full-time employees of which approximately 382 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 and investment 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.

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<PAGE> 84

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 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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's current directors are listed under "- Board of
Directors and Committees." The table below, together with accompanying text,
presents certain information regarding all current executive officers of the
Company as of the record date. 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............. 60 Chairman of the Board and Chief Executive 1988
Officer

Howard M. Lorber............. 50 President and Chief Operating Officer 1994

Richard J. Lampen............ 45 Executive Vice President and General Counsel 1995

J. Bryant Kirkland III....... 33 Vice President, Treasurer and Chief Financial 1998
Officer

Marc N. Bell................. 37 Vice President, Associate General Counsel and 1998
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 "NOMINATION AND ELECTION OF DIRECTORS."

-74-
<PAGE> 85

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 "NOMINATION AND ELECTION OF 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 PC411 since January 1998 and as a director of PC411 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.

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 any class
of its voting securities as of the record date and as adjusted for the
recapitalization. The number of shares beneficially owned by each beneficial
owner listed above 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 percentage of each class is calculated based on
the total number of shares of each class outstanding on the record date. 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.

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<PAGE> 86

AS ADJUSTED FOR
AS OF RECORD DATE RECAPITALIZATION
------------------------- ------------------------------------------------
NUMBER NUMBER
NUMBER OF PERCENTAGE OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS TITLE OF CLASS SHARES OF CLASS SHARES OF CLASS WARRANTS OF CLASS
- ---------------------------- ---------------- --------- ---------- ------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Bennett S. LeBow Class A Senior 618,326(1) 57.7% -- -- -- --
Brooke Group Ltd. Preferred Shares
BGLS Inc. Class B 250,885(1) 8.9% -- -- -- --
100 S.E. Second Street Preferred Shares
Miami, FL 33131 Common Shares 4,094,253(2) 42.3% 12,849,119 55.1%(5) 3,069,664 17.2%
New Valley Holdings, Inc.
204 Plaza Centre
3505 Silverside Road
Wilmington, DE 19810

Canpartners Class A Senior 57,118(3) 5.3% -- -- -- --
Incorporated Preferred Shares
Canyon Capital Common Shares -- -- 1,142,360 4.9%(6) 57,118 *
Management, L.P
Mitchell R. Julis
Joshua S. Friedman
R. Christian B. Evensen
Suite 200
9665 Wilshire Boulevard
Beverly Hills, CA 90212

ITT Industries, Inc. Common Shares 719,571(4) 7.5% 71,957 *(7) 215,871 1.2%
4 West Red Oak Lane
White Plains, NY 10604

</TABLE>

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

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

(1) Based on Amendment No. 16 to Schedule 13D dated January 30, 1996, filed
jointly by Brooke, BGLS, New Valley Holdings Inc., a direct
wholly-owned subsidiary of BGLS, and Bennett S. LeBow, and Amendment
No. 1 to Schedule 13D dated January 30, 1996, relating to the Class B
Preferred Shares, filed jointly by the foregoing persons except for NV
Holdings. According to the filings, BGLS exercises sole voting power
and sole dispositive power, subject to the pledge described below, over
19,748 Common Shares (less than 1% of such class) and 250,885 Class B
Preferred Shares (approximately 8.9% of such class), and NV Holdings
exercises sole voting power and sole dispositive power, subject to the
pledge, over 3,969,962 Common Shares (approximately 41.5% of such
class) and 618,326 Class A Senior Preferred Shares (approximately 57.7%
of such class).

-76-
<PAGE> 87

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 will be subject to the pledge and must be 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.

(2) Of such Common Shares, 104,543 represent shares which could be acquired
by conversion of the Class B Preferred Shares held by BGLS, as to which
Mr. LeBow disclaims beneficial ownership.

(3) Canyon Capital Management, L.P. is an investment advisor to various
managed accounts. Canpartners Incorporated, its general partner, and
Messrs. Julis, Friedman and Evensen own 100% of Canpartners
Incorporated. The named entities and individuals have reported that, as
of March 20, 1998, they had shared power to vote or to direct the
voting and shared power to dispose or direct the disposition of 57,118
Class A Senior Preferred Shares.

(4) ITT Industries, Inc. (as the successor in interest to ITT Corporation)
reported that, as of May 15, 1991, it had sole power to vote or to
direct the voting and sole power to dispose or direct the disposition
of 719,571 Common Shares.

(5) 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
38.6%.

(6) 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 2.9%.

(7) Assuming exercise of the warrants held by the entity only, the
percentage of class would be 1.2%. Assuming exercise of all outstanding
warrants, the percentage of class would be .7%.

The following table sets forth, as of the record date and as
adjusted for the recapitalization, the beneficial ownership of the Company's
equity securities by each of the Company's directors and nominees, each of the
executive officers named in the Summary Compensation Table below and all

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<PAGE> 88

directors and executive officers as a group. The percentage of each class is
calculated based on the total number of shares of each class outstanding on the
record date. 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.

-78-

<PAGE> 89

AS ADJUSTED FOR
AS OF RECORD DATE RECAPITALIZATION
------------------------- ------------------------------------------------
NUMBER NUMBER
NUMBER OF PERCENTAGE OF PERCENTAGE OF PERCENTAGE
NAME AND ADDRESS TITLE OF CLASS SHARES OF CLASS SHARES OF CLASS WARRANTS OF CLASS
- ---------------------------- ---------------- --------- ---------- ------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Bennett S. LeBow(1)(4) Class A Senior Preferred 618,326 57.7% --- --- --- ---
Shares
Class B Preferred Shares 250,885 8.9% --- --- --- ---
Common Shares 4,094,253 42.3% 12,849,119 55.1%(7) 3,069,664 17.2%

Howard M. Lorber(2)(4) Class A Senior Preferred 36,000 3.4% --- --- --- ---
Shares
Class B Preferred Shares 32,332 1.1% --- --- --- ---
Common Shares 123,846 1.3% 741,815 3.2%(8) 230,773 1.3%

Richard J. Lampen(4) Class A Senior Preferred 0 --- 0 --- --- ---
Shares
Class B Preferred Shares 0 --- 0 --- --- ---
Common Shares 0 --- 0 --- --- ---

Ronald J. Kramer(5) Class A Senior Preferred 0 --- 0 --- --- ---
Shares
Class B Preferred Shares 0 --- 0 --- --- ---
Common Shares 0 --- 0 --- --- ---

Arnold I. Burns(5) Class A Senior Preferred 0 --- 0 --- --- ---
Shares
Class B Preferred Shares 0 --- 0 --- --- ---
Common Shares 0 --- 0 --- --- ---

Henry C. Beinstein(3)(5) Class A Senior Preferred 0 --- 0 --- --- ---
Shares
Class B Preferred Shares 34,500 1.3% --- --- --- ---
Common Shares 14,376 .1% 11,500 *(9) 172,500 1.0%

Barry W. Ridings(5) Class A Senior Preferred 0 --- 0 --- --- ---
Shares
Class B Preferred Shares 0 --- 0 --- --- ---
Common Shares 0 --- 0 --- --- ---

Robert M. Lundgren(6) Class A Senior Preferred 0 --- 0 --- --- ---
Shares
Class B Preferred Shares 0 --- 0 --- --- ---
Common Shares 0 --- 0 --- --- ---

All directors and
executive officers as
a group (9 persons)(1) Class A Senior Preferred 654,326 61.1% --- --- --- ---
Shares
Class B Preferred Shares 317,717 11.3% --- --- --- ---
Common Shares 4,232,475 43.1% 13,602,434 58.3%(10) 3,472,937 19.4%
</TABLE>

- ----------

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

(1) Includes the BGLS shares, the NV Holding shares and 104,543 Common
Shares which could be acquired by conversion of the Class B Preferred
Shares held by BGLS, as to which Mr. LeBow disclaims beneficial
ownership. See footnotes (2) and (3) to the preceding table.

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<PAGE> 90
(2) Mr. Lorber possesses voting power over his Class A Senior Preferred
Shares. All of the Class B Preferred Shares and 110,000 of the Common
Shares represent shares that are subject to employee stock options
exercisable within 60 days of the record date. Of the Common Shares,
375 are held in a Keogh Plan for the benefit of Mr. Lorber and 13,471
Common Shares could be acquired by conversion of the Class B Preferred
Shares.

(3) Includes 2,500 Class B Preferred Shares held in an individual
retirement account for his spouse, as to which shares Mr. Beinstein
disclaims beneficial ownership. Includes 14,376 Common Shares which
could be acquired by conversion of the Class B Preferred Shares. Mr.
Beinstein disclaims beneficial ownership over 1,041 of these Common
Shares, as such shares relate to the Class B Preferred Shares
beneficially owned by his spouse.

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

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

(6) The named individual resigned as an executive officer of the Company in
January 1998.

(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 38.6%.

(8) Assuming exercise of the warrants held by the named individual only,
the percentage of class would be 4.1%. Assuming exercise of all
outstanding warrants, the percentage of class would be 2.4%.

(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 63.4%. Assuming exercise of all
outstanding warrants, the percentage of class would be 41.4%.

BOARD OF DIRECTORS AND COMMITTEES

During 1998, the Board held two meetings. Each director
attended at least 75% of the aggregate number of meetings of the Board and of
each committee of which he was a member held during such period. During that
period, the Executive Committee, currently composed of Messrs. LeBow, as
Chairman, Lorber and Burns, and the Audit Committee, currently composed of
Messrs. Beinstein and Ridings, each met once.

The Executive Committee exercises, in the intervals between
meetings of the Board, all the powers of the Board in the management and affairs
of the Company.

The Audit Committee reviews, with the Company's independent
auditors, the scope and plan of the audit, the adequacy of internal controls and
the preparation of financial statements, and reports and makes recommendations
to the Board with respect to these matters.

In November 1994, the Board determined not to have a separate
compensation committee and to act on compensation matters as a committee of the
whole. The Company does not have a nominating committee.

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<PAGE> 91

In November 1998, the Board appointed a special committee,
composed of Messrs. Beinstein, Burns and Ridings, to review the terms of the
plan of recapitalization. The special committee met twice prior to the
Board's adoption of the plan of recapitalization.

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, 1997, the Company's Chief Executive Officer
and the other executive officers whose cash compensation exceeded $100,000.

SUMMARY COMPENSATION TABLE (1)

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- --------------------------
SECURITIES
RESTRICTED UNDERLYING
NAME STOCK OPTIONS
AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S) (#)
- ------------------------------ ---- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Bennett S. LeBow 1997 $2,000,000 -- -- --
Chairman and Chief Executive 1996 2,000,000 -- -- --
Executive Officer 1995 1,894,823 -- -- --

Howard M. Lorber 1997 $1,400,000 $976,544(2) -- --
President and Chief Operating 1996 1,250,000 300,000 $4,356,000(3) 427,000(4)
Operating Officer 1995 956,376 500,000 -- --

Richard J. Lampen 1997 $650,000 -- -- --
Executive Vice President and 1996 600,000 $100,000 -- --
General Counsel(5) 1995 150,000 100,000 -- --

Robert M. Lundgren(6) 1997 $108,972 -- -- --
Vice President, Chief Financial 1996 90,000 $ 15,000
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

-81-
<PAGE> 92

are identical with all other Class A Senior Preferred Shares issued and
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, 1997, the shares had a
market value of $3.456 million without giving effect to any diminution
in value attributable to the restrictions.

(4) Represents options to purchase 330,000 Common Shares and 97,000 Class B
Preferred Shares granted in 1996.

(5) Mr. Lampen commenced employment with the Company in October 1995. In
1997 and 1996, all of Mr. Lampen's salary and bonus were paid by the
Company, and 25% was subsequently reimbursed to the Company by Brooke.
The table reflects 100% of Mr. Lampen's salary and bonus.

(6) Mr. Lundgren resigned from the Company effective January 14, 1998.

The following table sets forth certain information concerning
unexercised options held by the named executive officers as of December 31,
1998.

AGGREGATED FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1998 OPTIONS AT DECEMBER 31, 1998
----------------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Howard M. Lorber
Class B Preferred Shares 32,332 64,668 $158,427* $316,873*
Common Shares 55,000 275,000 -- --

</TABLE>

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

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

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<PAGE> 93

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. The bankruptcy plan provides that the annual
compensation paid to Mr. LeBow for services rendered in his capacity as an
officer or director of the Company may not exceed $2 million.

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
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. 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.

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<PAGE> 94

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, 1995. Aegis received commissions and other income from the Company and its
affiliates in the aggregate amount of approximately $585,000 during 1995,
$317,000 during 1996, $522,000 during 1997 and $45,171 during the eleven months
ended November 30, 1998. 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 $12,000 during 1995,
$43,000 during 1996, $133,000 during 1997 and $76,632 during the eleven months
ended November 30, 1998, 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 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

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<PAGE> 95

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 BML 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 $571,000 for 1995, $415,000 for 1996, $312,000
for 1997 and $414,166 for the first nine months of 1998.

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 16.8% 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 a
provider of telecommunication services.

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

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<PAGE> 96

participating loan to, payable out of a 30% profits interest in, a company
organized by Brooke (Overseas) that will acquire an interest in an industrial
site and manufacturing facility being constructed on the outskirts of Moscow by
a subsidiary of Brooke (Overseas).

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 1995, 1996, 1997 and the
nine months ended September 30, 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, and from 1985 through October 1995, as
Executive Director of Proskauer Rose LLP, a law firm that has performed services
for the Company. The fees received for these services in 1995, 1996, 1997 and
the nine months ended September 30, 1998 did not exceed five percent of the law
firms' 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 -
Recent Developments - The Company's Investment in RJR Nabisco" and Notes 5 and
18 to the Company's Consolidated Financial Statements.

Brooke paid Messrs. Burns and Ridings, directors of the
Company, $30,000 each for their agreement to be Brooke nominees at the annual
stockholders' meeting of RJR Nabisco held in April 1996. Brooke also entered
into a agreement with each Brooke nominee including Messrs. Burns and Ridings to
indemnify them against losses relating to any claim concerning the solicitation
of proxies in support of the nominees' election at the annual meeting.

Mr. Kramer, a director of the Company, is Chairman and Chief
Executive Officer of Ladenburg, an investment banking firm that was acquired by
the Company in May 1995. On May 31, 1995, under a purchase agreement, the
Company acquired all of the outstanding shares of common stock and other equity
interests of Ladenburg for $26.75 million in cash. The purchase price was based
on the book value of Ladenburg's assets at January 31, 1995. Under the
agreement, Mr. Kramer received approximately $101,000 for his shares of common
stock and other equity interests in Ladenburg, and received a finder's fee at
closing of $800,000, half of which was paid by the Company.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The policy of the Company regarding the compensation of its
executive officers is to maintain a total compensation program competitive with
comparable companies so as to attract and retain highly qualified personnel. The
Company does not currently have a compensation committee. The Board acts on
compensation matters as a committee of the whole.

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<PAGE> 97

In June 1995, the Company entered into employment agreements
with Messrs. LeBow and Lorber after it had engaged an independent executive
compensation advisor to advise as to their compensation. In addition, the
Company had appointed Messrs. Burns, McDermott and Ridings as members of an ad
hoc committee to review the advisor's report and make a recommendation to the
Board on such compensation. The committee evaluated various factors, including
the roles of Messrs. LeBow and Lorber in effecting recent material transactions
entered into by the Company, their prior services to the Company, and the
compensation levels of other senior executive officers at comparable companies
performing comparable services. In determining the appropriate compensation
level for Mr. LeBow's employment agreement, the Board, after a review of such
matters, including the recommendation of the committee and the report of the
advisor, accepted the recommendation of the committee. First, the Board noted
that the bankruptcy plan provides that the compensation paid to Mr. LeBow for
services rendered in his capacity as an officer or director of the Company could
not exceed $2 million per year, and that such restrictions were extensively
discussed during the Company's reorganization proceedings. The Board then
determined, based upon additional recommendations of the committee and the
advisor's report, that:

o the Company had been relying on a temporary exemption
from registration under Rule 3a-2 under the
Investment Company Act of 1940;

o implementation of the Company's strategy of
acquisitions and dispositions in connection would
involve complex matters requiring dedicated senior
management;

o Mr. LeBow possessed substantial experience in
acquiring and managing operating companies;

o the proposed annual compensation level of $2 million
for Mr. LeBow was reasonable compared to the
compensation levels of other chief executive officers
at comparable companies performing comparable
services; and

o Because Mr. LeBow's compensation is limited to $2
million per year under the Joint Plan, as indicated
above, Mr. LeBow does not receive any bonus or other
payment based upon the Company's performance.

In determining the compensation levels of the Company's other
executive officers, the Board reviews such officer's prior experience, including
in acquiring and managing operating companies, and such officer's contribution
to the Company's strategy in that area. The Board also compares the salary of
such officer with the compensation levels of other executive officers performing
comparable services, both in the Company and of comparable companies. The
employment agreements of certain executive officers provide for the payment of
bonuses at the sole discretion of the Board. Based on various factors, Mr.
Lorber was awarded a bonus of $500,000 by the Board for 1997. In addition, under
a January 1998 amendment to his employment agreement, and based on various
factors, Mr. Lorber received an additional bonus of

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<PAGE> 98

$476,544 as reimbursement of taxes payable by him upon vesting of the 1996
restricted stock award.

In 1993, Section 162(m) was added to the Code. This Section
generally provides that no publicly held company may deduct compensation in
excess of $1 million paid in any taxable year to its chief executive officer or
any of its four other highest paid officers unless:

o the compensation is payable solely on account of the
attainment of performance goals;

o the performance goals are determined by a
compensation committee of two or more outside
directors;

o the material terms under which compensation is to be
paid are disclosed to and approved by the
stockholders of the Company; and

o the compensation committee certifies that the
performance goals were met.

This limitation is applicable to compensation paid by the
Company to certain of its executive officers. The effect of the Code Section
162(m) limitation is substantially mitigated by the Company's net operating
losses, although the amount of any deduction disallowed under Code Section
162(m) could increase the Company's alternative minimum tax by up to 2% of such
disallowed amount.

The foregoing report is submitted by the Board of Directors.

Henry C. Beinstein
Arnold I. Burns
Ronald J. Kramer
Richard J. Lampen
Bennett S. LeBow
Howard M. Lorber
Barry W. Ridings

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING

Section 16(a) of the Exchange Act requires the Company's
directors and executive officers, as well as persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of initial
beneficial ownership and changes in beneficial ownership on Forms 3, 4 and 5
with the SEC. These persons are also required by SEC regulations to furnish the
Company with copies of all such reports that they file.

To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and representations that no
other reports were required, during the fiscal year ended December 31, 1997, all
reporting persons have timely complied with all filing requirements applicable
to them.

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<PAGE> 99

PERFORMANCE GRAPH

The following graph compares the total annual return of the
Common Shares, the S&P 500 Index, the S&P SmallCap 600 Index, and the NASDAQ
Composite Index for the five years ended December 31, 1998. The graph assumes
the value of the investment in the Common Shares and each index was $100 on
December 31, 1993 and that all dividends were reinvested. No dividends were paid
on Common Shares in the years indicated below. Because of the Company's
emergence in 1995 from bankruptcy and its subsequent acquisitions and
dispositions, the Company does not believe that it can reasonably identify a
"peer group". In lieu thereof, it has included statistical information on
companies in the S&P 500 Index, the S&P SmallCap 600 Index and the NASDAQ
Composite Index.

[GRAPHIC]

12/93 12/94 12/95 12/96 12/97 12/98
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New Valley Corporation $100 $300 $865 $210 $80 $75
- -----------------------------------------------------------------------------------------------------
S&P 500 $100 $101 $139 $170 $226 $291
- -----------------------------------------------------------------------------------------------------
S&P SmallCap 600 $100 $97 $126 $153 $192 $190
- -----------------------------------------------------------------------------------------------------
NASDAQ Composite $100 $97 $136 $168 $205 $287
- -----------------------------------------------------------------------------------------------------
</TABLE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of
850,000,000 Common Shares, 2,000,000 Class A Senior Preferred Shares, 12,000,000
Class B Preferred 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, Class A Senior Preferred Shares and Class B
Preferred 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 document forms a part.

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

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<PAGE> 100
CLASS A SENIOR PREFERRED SHARES

DIVIDENDS

Holders of Class A Senior Preferred Shares are entitled to
receive, when declared by the Board, but only out of funds legally available
therefor, cumulative cash dividends presently payable at the rate of 19% per
annum. Dividends are payable quarterly in cash, on January 1, April 1, July 1
and October 1, and are cumulative and compounding. The Company may not pay
dividends on any junior stock unless all prior dividends accumulated on the
Class A Senior Preferred Shares have been paid or declared and set aside for
payment. As of September 30, 1998, the accrued dividends per share were $190.44
and the total dividend arrearage on the Class A Senior Preferred Shares was
$204.1 million.

REDEMPTION

The Class A Senior Preferred Shares must be redeemed on
January 1, 2003 at $100 per share plus dividends accrued to the redemption date.
The Class A Senior Preferred Shares are redeemable, at the option of the Board,
in whole or in part, on not more than 60 and not less than 30 days' notice, at
$100 per share plus dividends accrued to the redemption date.

RANKING

The Class A Senior Preferred Shares rank senior to the Class B
Preferred Shares, the Class C Preferred Shares and Common Shares on liquidation
and in respect of dividends.

VOTING RIGHTS

Each Class A Senior Preferred Share is entitled to .4645 of a
vote per share. The Class A Senior Preferred Shares vote on all matters on which
the Common Shares may vote, including elections of directors, voting together as
a single class with the holders of Common Shares and holders of any other class
or series which may similarly be entitled.

The vote of the holders of two-thirds of the outstanding Class
A Senior Preferred Shares, voting as a single class, is required:

o to authorize or create or increase the authorized
number of shares of any class or any security
convertible into shares of any class ranking above
the Class A Senior Preferred Shares as to dividends
or distribution of assets,

o to change the rights of the Class A Senior Preferred
Shares in a manner harmful to the holders of those
shares, or

o to authorize the merger of the Company if such merger
would affect the Class A Senior Preferred Shares in a
way substantially similar to any of the preceding
actions.

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<PAGE> 101

In addition, the vote of the holders of a majority of the
outstanding Class A Senior Preferred Shares is required to increase authorized
Class A Senior Preferred Shares or create or increase the authorized number of
any class of shares or any security convertible into shares of any class ranking
equally with the Class A Senior Preferred Shares as to distributions.

Unless dividends for all past dividend periods have been paid
and the current dividend has been declared and a sum sufficient for payment set
apart, consent of the holders of at least two-thirds of the outstanding Class A
Senior Preferred Shares is required for the Company to purchase or redeem less
than all of the outstanding Class A Senior Preferred Shares.

The bankruptcy plan requires that, whenever a vote of the
holders of Class A Senior Preferred Shares is required, then such vote must
include the affirmative vote of either 80% of the outstanding shares or a simple
majority of all shares of that class voting, excluding shares beneficially owned
by Brooke and certain related persons.

FAILURE TO PAY DIVIDENDS

If dividends on the Class A Senior Preferred Shares are in
default in an amount equal to at least six quarterly dividends, or if the Class
A Senior Preferred Shares are not redeemed when required, the number of
directors must be increased by two and the holders of the Class A Senior
Preferred Shares have a right to elect the two additional directors. This right
expires when these defaults have been cured and dividends for the then current
quarterly period have been declared and set apart. The Company has omitted
dividends on the Class A Senior Preferred Shares since the beginning of the
fourth quarter of 1988. As a result, commencing at the Company's 1990 annual
meeting, the holders of the Class A Senior Preferred Shares, voting as a class,
have elected two directors to the Board.

CLASS B PREFERRED SHARES

DIVIDENDS

Holders of Class B Preferred Shares are entitled to receive,
when declared by the Board, but only out of legally available funds, cumulative
cash dividends payable at the rate of $3 per share per annum. Dividends are
payable quarterly in cash, on January 1, April 1, July 1 and October 1, and are
cumulative and compounding. The Company may not pay dividends on any junior
stock unless all prior dividends accumulated on the Class B Preferred Shares
have been declared and set aside for payment. As of September 30, 1998, the
accrued dividends per share are $56.94 and the total dividend arrearage on the
Class B Preferred Shares is $158.9 million.

OPTIONAL REDEMPTION

The Company may redeem the Class B Preferred Shares at any
time in whole or in part on not more than 60 nor less than 30 days' notice, at
$25 per share plus dividends accrued to the redemption date. However, the
Company may not redeem the shares unless the closing price of Common Shares
equals at least 140% of the conversion price during any 20 trading days

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<PAGE> 102

within a period of 30 consecutive trading days ending on a date not more than
ten days before the date of notice of redemption.

RANKING

The Class B Preferred Shares rank junior to the Class A Senior
Preferred Shares, equally with the Class C Preferred Shares, and senior to the
Common Shares.

LIQUIDATION

In the event of any liquidation, the holders of Class B
Preferred Shares are entitled, before any distribution to the holders of Common
Shares, to an amount equal to $25 per share, together with accrued dividends to
the payment date whether or not earned or declared.

CONVERSION

The Class B Preferred Shares are convertible into Common
Shares, at a conversion price of $60 per share, based on the $25 per share
liquidation preference. The conversion price is subject to adjustment in certain
events, including:

o payment of dividends in Common Shares on any class of
capital stock of the Company,

o the issuance to all holders of Common Shares of
rights or warrants entitling them to subscribe for or
purchase Common Shares at a price per share less than
the current market price,

o subdivisions, combinations and reclassifications of
Common Shares, and

o distributions to all holders of Common Shares of
evidences of indebtedness of the Company or assets
including securities, other than Common Shares,
rights or warrants referred to above and dividends
and distributions paid in cash out of surplus.

Adjustments need not be made unless they result in a
cumulative change in the conversion price of at least 1%. The Company is
permitted to make other reductions in the conversion price it considers
advisable so that an event treated for Federal income tax purposes as a dividend
of stock or stock rights will not be taxable to the recipients. In certain
mergers or transfers of substantially all of the assets of the Company, each
Class B Preferred Share would become convertible only into the kind and amount
of securities and other property receivable in the merger or transfer by a
holder of the number of Common Shares into which such Class B Preferred Share
could have been converted immediately before such merger or transfer. Fractional
Common Shares will not be issued upon conversion, but instead the Company will
pay a cash adjustment based on market price.

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<PAGE> 103

VOTING RIGHTS

Each Class B Preferred Share has .05 of a vote. The Class B
Preferred Shares vote on all matters on which Common Shares may vote, including
elections of directors, voting together as a single class with the holders of
Common Shares and holders of any other class which may similarly be entitled to
vote.

The affirmative vote of the holders of two-thirds of the
outstanding Class B Preferred Shares, voting as a single class, is required:

o to authorize or create or increase the authorized
number of shares of any class or any security
convertible into shares of any class ranking above
the Class B Preferred Shares as to distribution,

o to change the rights of the Class B Preferred Shares
in a manner harmful to the holders, or

o to authorize the merger of the Company if such merger
would affect the Class B Preferred Shares in a way
substantially similar to the preceding actions.

In addition, the vote of the holders of a majority of the
outstanding Class B Preferred Shares is required to approve any increase in the
authorized number of Class B Preferred Shares or the creation or increase in the
authorized number of shares of any class of shares or any security convertible
into shares of any class ranking equally with the Class B Preferred Shares as to
dividends or distribution of assets.

Unless dividends for all past dividend periods have been paid
and the current dividend has been paid or declared and a sum sufficient for
payment set apart, consent of the holders of at least two-thirds of the
outstanding Class B Preferred Shares is required for the Company to purchase or
redeem less than all of the Class B Preferred Shares.

FAILURE TO DECLARE OR PAY DIVIDENDS

If dividends on the Class B Preferred Shares are in default in
an amount equal to at least six quarterly dividends, the number of directors
constituting the Board is increased by two and the holders of the Class B
Preferred Shares, and other classes of preferred stock similarly entitled,
voting together as a single class, may elect two additional directors. This
right expires when such defaults have been cured and dividends for the then
current quarterly period have been declared and set apart. The Company has
omitted dividends on the Class B Preferred Shares since the beginning of the
fourth quarter of 1988. As a result, commencing at the Company's 1990 Annual
Meeting, the holders of the Class B Preferred Shares, voting together with the
Class A Senior Preferred Shares as a single class, have elected two directors to
the Board.

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<PAGE> 104

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
junior to the Class A Senior Preferred Shares, equally with the Class B
Preferred Shares, and senior to the Common Shares in liquidation and in respect
of dividends.

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, including the Preferred Shares, and limitations on the payment of
dividends contained in certain of the Company's outstanding debt instruments.
Holders of Preferred Shares are entitled to dividends for the current and all
prior quarterly periods before any dividend may be declared upon Common Shares
or any other payment on account of, or the setting aside of money for, the
purchase of Common Shares. The Company has not declared a dividend on the Common
Shares since their issuance.

LIQUIDATION RIGHTS

On liquidation of the Company, each Preferred Share is
entitled, before any distribution on Common Shares, to receive its liquidation
preference together with all cumulative dividends for the current and all prior
quarterly periods. After provision has been made for payment of the stated
amounts payable upon liquidation on the Preferred Shares, the remaining net
assets of the Company will be distributed pro rata to the holders of Common
Shares.

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 COMPANY'S SHARES

The shares are quoted on the OTC Electronic Bulletin Board, a
National Association of Securities Dealers sponsored inter-dealer automated
quotation system, under the symbols NVYL for the Common Shares, NVLYA for the
Class A Senior Preferred Shares and NVLYB for the Class B Preferred Shares.

The following table sets forth, for the calendar quarters
indicated, the range of per share prices for the Class A Senior Preferred
Shares, Class B Preferred Shares and the Common Shares. Prices reflect
quotations on the NASD OTC Electronic Bulletin Board and, as to the Common
Shares, have been adjusted for the one-for-20 reverse stock split effective July
29, 1996. 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, the Class A Senior Preferred Shares or the Class B
Preferred Shares for the calendar quarters indicated on the following table, and
the Company does not currently intend to pay a dividend on the Common Shares in
the foreseeable future. On _________, 1999, the last trading price as quoted on
the NASD OTC Electronic Bulletin Board for the Class A Senior Preferred Shares
was $___ per share, for the Class B Preferred Shares was $___ per share, and for
the Common Shares was $___ per share.

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<PAGE> 105

CLASS A SENIOR PREFERRED SHARES

HIGH LOW
---- ---
<S> <C> <C>
1999
First Quarter................................................... $ ___ $ ___

1998
Fourth Quarter.................................................. 100.00 51.00
Third Quarter................................................... 88.00 45.00
Second Quarter.................................................. 96.00 60.00
First Quarter................................................... 99.00 85.00

1997
Fourth Quarter.................................................. 98.25 87.75
Third Quarter................................................... 96.00 85.00
Second Quarter.................................................. 115.00 96.00
First Quarter................................................... 122.00 102.00

</TABLE>

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<PAGE> 106

CLASS B PREFERRED SHARES

HIGH LOW
---- ---
<S> <C> <C>
1999
First Quarter................................................... $ ___ $ ___

1998
Fourth Quarter.................................................. 7.00 1.75
Third Quarter................................................... 2.75 1.75
Second Quarter.................................................. 5.63 2.15
First Quarter................................................... 6.50 3.25

1997
Fourth Quarter.................................................. 4.89 3.00
Third Quarter................................................... 6.00 3.50
Second Quarter.................................................. 9.00 5.00
First Quarter................................................... 9.75 5.75

</TABLE>

COMMON SHARES

HIGH LOW
---- ---
<S> <C> <C>
1999
First Quarter................................................... $ ___ $ ___

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>

COMPARISON OF STOCKHOLDER RIGHTS

CLASS A SENIOR PREFERRED SHARES COMPARED WITH COMMON SHARES AND WARRANTS

DIVIDENDS

Each Class A Senior Preferred Share entitles the holder to
cumulative cash dividends at a fixed rate of 19% per annum before distributions
are made on the Class B Preferred Shares or the Common Shares, and dividend
arrearages of $190.44 per share as of

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<PAGE> 107

September 30, 1998. Each holder of Common Shares is entitled to dividends only
when and as declared by the Board, without limit on the amount but subject to
the rights of any shares ranking senior to the Common Shares. The holder of a
warrant is not entitled to receive any dividends.

REDEMPTION

The Class A Senior Preferred Shares are redeemable at their
liquidation preference plus accrued dividends at any time at the option of the
Board and must be redeemed on January 1, 2003. The Common Shares are not
redeemable under any circumstances. The warrants are redeemable at the option of
the Company at any time following the third anniversary of the effective time of
the plan of recapitalization for $0.01 per warrant if the market price of the
Common Shares exceeds $12.50 per share for a specified period. The warrants will
expire five years from the effective date of the registration statement covering
the underlying Common Shares.

LIQUIDATION RIGHTS

In the event of liquidation, each holder of Class A Senior
Preferred Shares is entitled to receive a fixed liquidation preference equal to
$100 per share, together with accrued dividends, before distributions are made
on the Class B Preferred Shares or the Common Shares. Each holder of Common
Shares will receive a pro rata share of any remaining net assets of the Company
only after all required amounts are paid on all shares ranking senior to the
Common Shares. A holder of a warrant has no right to receive payment upon
liquidation.

VOTING RIGHTS

Each holder of Class A Senior Preferred Shares is entitled to
.4645 of a vote per share and is entitled to vote together with the holders of
Common Shares as a single class upon all matters which holders of Common Shares
are entitled to vote. Each holder of Common Shares is entitled to one vote per
share for all purposes. A holder of a warrant is not entitled to vote on any
matter.

Certain actions require either a majority vote or the vote of
two-thirds of the outstanding Class A Senior Preferred Shares voting as a class.
Also, under the bankruptcy plan, whenever a class vote of the holders of Class A
Senior Preferred Shares is required, the vote must include the affirmative vote
of either 80% of the outstanding shares of that class or a simple majority of
all shares of that class voting, excluding shares beneficially owned by Brooke
and certain related persons. The holders of Common Shares do not have such
special voting rights. Also, the holders of the Class A Senior Preferred Shares
may elect additional directors of the Company in certain circumstances where
dividends have not been paid, whereas the Common Shares holders have no such
special right.

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<PAGE> 108

CLASS B PREFERRED SHARES COMPARED WITH COMMON SHARES AND WARRANTS

DIVIDENDS

Each holder of Class B Preferred Shares is entitled to
cumulative cash dividends at $3 per annum, and accrued and unpaid dividend
arrearage of $56.94 per share, as of September 30, 1998. Each holder of Common
Shares is entitled to cash dividends only when and as declared by the Board,
without limitation on the amount but subject to the rights of any shares ranking
senior to the Common Shares. The holder of a warrant is not entitled to receive
any dividends.

REDEMPTION

The Class B Preferred Shares are redeemable at the option of
the Company at $25.00 per share plus accrued dividends if the market price of
the Common Shares exceeds a specified amount, but otherwise remain outstanding
indefinitely. The Common Shares are not redeemable under any circumstances. The
warrants are redeemable at the option of the Company at any time following the
third anniversary of the effective time of the plan of recapitalization for
$0.01 per warrant if the market price of the Common Shares exceeds $12.50 per
share for a specified period. The warrants will expire five years from the
effective date of the registration statement covering the underlying Common
Shares.

LIQUIDATION RIGHTS

In liquidation, each holder of Class B Preferred Shares is
entitled to receive a liquidation preference of $25 per share, together with
accrued dividends, before distributions are made on the Common Shares. Each
holder of Common Shares will receive a pro rata share of any remaining net
assets of the Company only after all required amounts are paid on all shares
ranking senior to the Common Shares. A holder of a warrant has no right to
receive payment upon liquidation.

VOTING RIGHTS

Each holder of Class B Preferred Shares is entitled to .05 of
a vote per share and may vote on all matters on which the holders of Common
Shares may vote. Certain actions require either a majority vote or the vote of
two-thirds of the outstanding Class B Preferred Shares. Each holder of Common
Shares is entitled to one vote per share for all purposes and have no special
voting rights. A holder of a warrant is not entitled to vote on any matters.

CONVERSION

The Class B Preferred Shares are convertible into Common
Shares at a conversion price of $60 per share based on the $25 per share
liquidation value and otherwise remain outstanding indefinitely, unless redeemed
when the Common Shares have traded at certain levels. The Common Shares have no
conversion rights. The warrants are exercisable at $12.50

-98-
<PAGE> 109

per share during a five-year period commencing on the effective date of the
Company's Registration Statement covering the underlying Common Shares.

CURRENT COMMON SHARES COMPARED WITH NEW COMMON SHARES AND WARRANTS

The Common Shares that will be issued under the plan of
recapitalization will be identical to the Common Shares currently outstanding,
except that a stockholder's holding of Common Shares will be reduced to
one-tenth of the number of Common Shares currently held.

STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING

Proposals of security holders to be included in the Company's
proxy statement for the 2000 annual meeting of stockholders of the Company must
be received by the Company at its principal executive offices, 100 S.E. Second
Street, Miami, Florida 33131, Attention: Marc N. Bell, Secretary, on or before
________, 2000.

If the Company has received written notice on or before
_______, 2000

-99-
<PAGE> 110

that a stockholder intends to present a matter at the 2000 annual meeting, the
Company may not exercise discretionary voting authority on the matter unless it
discloses in its proxy statement the nature of the proposal and how it intends
to exercise its authority.

OTHER MATTERS

A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1998 WILL BE SENT WITHOUT CHARGE TO ANY SECURITY HOLDER
OF THE COMPANY ON WRITTEN REQUEST ADDRESSED TO THE COMPANY'S SECRETARY AT NEW
VALLEY CORPORATION, 100 S.E. 2ND STREET, MIAMI, FLORIDA 33131.

The cost of the solicitation of proxies will be borne by the
Company. The Company has engaged Georgeson & Company, Inc., Wall Street Plaza,
New York, NY 10005, telephone: 212-440-9800, to assist with the solicitation of
proxies for an estimated fee of $8,000, plus reimbursement of out-of-pocket
expenses. Furthermore, Pennsylvania Merchant Group, financial advisor to the
Company, may solicit proxies from stockholders of the Company or may assist the
Company in its solicitation efforts. No additional compensation, above that paid
to Pennsylvania Merchant Group for rendering its fairness opinion and providing
other financial advisory services to the Company, will be paid to Pennsylvania
Merchant Group for its solicitation of proxies, other than reasonable
out-of-pocket expenses. In addition to the use of the mails, directors, officers
and regular employees of the Company may, without additional compensation,
solicit proxies personally or by telephone. The Company will reimburse brokerage
houses, banks and other custodians, nominees and fiduciaries for expenses
incurred in forwarding soliciting material to the beneficial owners of shares.

LEGAL MATTERS

The legality of the Common Shares and warrants to be issued
under the plan of recapitalization, as well as certain tax matters concerning
the plan of recapitalization, 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, 1997 and December 31, 1996 and for each of the
three years in the period ended December 31, 1997 included in this document have
been audited by PricewaterhouseCoopers LLP, independent auditors, as set forth
in their report appearing elsewhere in this document. These statements are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.

-100-
<PAGE> 111

NEW VALLEY CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements

PAGE
----
<S> <C>
Report of Independent Accountants....................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................................... F-4
Consolidated Statements of Changes in Stockholders' Deficiency for the
years ended December 31, 1997, 1996 and 1995................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................................... F-7
Notes to Consolidated Financial Statements.............................................. F-9

UNAUDITED INTERIM FINANCIAL STATEMENTS

Report of Independent Accountants....................................................... F-30
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997.............................................................. F-31
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997.............................................. F-32
Condensed Consolidated Statements of Changes in Stockholders' Deficiency
for the nine months ended September 30, 1998................................... F-33
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 anF-1997.............................................. F-34
Notes to Condensed Consolidated Financial Statements.................................... F-35
</TABLE>

F-1
<PAGE> 112

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of New Valley
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years for the period ended
December 31, 1997. We have also audited the financial statement schedule of New
Valley Corporation (Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1997 and 1996) listed in the index on page 37 of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We did not audit the financial statements of Thinking Machines
Corporation, a consolidated subsidiary, which statements reflect total assets
constituting 1% and 3% of consolidated total assets at December 31, 1997 and
1996, respectively and a net loss (net of minority interest therein)
constituting 25% and 90% of the consolidated net loss for the years ended
December 31, 1997 and 1996, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Thinking Machines Corporation, are based
solely upon the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provides a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of New Valley Corporation
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, 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.

PRICEWATERHOUSECOOPERS LLP

Miami, Florida
March 31, 1998

F-2
<PAGE> 113
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

DECEMBER 31,
-----------------------
1997 1996
-------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 11,606 $ 57,282
Investment securities available for sale.............................. 51,993 61,454
Trading securities owned.............................................. 49,988 29,761
Restricted assets..................................................... 232 2,080
Receivable from clearing brokers...................................... 1,205 23,870
Other current assets.................................................. 3,618 9,273
--------- ---------
Total current assets.............................................. 118,642 183,720
--------- ---------

Investment in real estate, net............................................. 256,645 179,571
Furniture and equipment, net............................................... 12,194 --
Investment securities available for sale................................... -- 2,716
Restricted assets.......................................................... 5,484 6,766
Long-term investments, net................................................. 27,224 13,270
Other assets............................................................... 21,202 20,497
--------- ---------
Total assets...................................................... $ 441,391 $ 406,540
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
Margin loan payable................................................... $ 13,012 $ --
Current portion of notes payable and long-term obligations............ 760 2,310
Accounts payable and accrued liabilities.............................. 57,722 44,888
Prepetition claims and restructuring accruals......................... 12,611 15,526
Income taxes.......................................................... 18,413 18,243
Securities sold, not yet purchased.................................... 25,610 17,143
--------- ---------
Total current liabilities......................................... 128,128 98,110
--------- ---------

Notes payable.............................................................. 173,814 157,941
Other long-term liabilities................................................ 11,210 12,282
Redeemable preferred shares................................................ 258,638 210,571

Commitments and contingencies.............................................. -- --

Shareholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: 1997 - $139,412; 1996 - $115,944.............. 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding............................ 96 96
Additional paid-in capital............................................ 604,215 644,789
Accumulated deficiency................................................ (742,427) (721,854)
Unearned compensation on stock options................................ (158) (731)
Unrealized gain on investment securities.............................. 7,596 5,057
--------- ---------
Total shareholders' equity (deficiency).................................... (130,399) (72,364)
--------- ---------

Total liabilities and shareholders' equity (deficiency)........... $ 441,391 $ 406,540
========= =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-3
<PAGE> 114
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Principal transactions, net.................................. $ 16,754 $ 28,344 $ 18,237
Commissions.................................................. 16,727 17,755 9,888
Corporate finance fees....................................... 12,514 10,230 5,942
Gain on sale of investments.................................. 20,492 10,014 7,078
Real estate leasing.......................................... 27,067 23,559 --
Interest and dividends....................................... 9,417 16,951 21,047
Computer sales and service................................... 3,947 15,017 --
Other income................................................. 7,650 8,995 5,538
--------- --------- --------

Total revenues.......................................... 114,568 130,865 67,730
--------- --------- --------

Costs and expenses:
Selling, general and administrative expenses................. 119,205 140,399 54,216
Interest..................................................... 16,988 17,760 2,102
Recovery of restructuring charges............................ -- (9,706) (2,044)
Write-down of long-term investments ......................... 3,796 1,001 11,790
--------- --------- --------

Total costs and expenses................................ 139,989 149,454 66,064
--------- --------- --------

(Loss) income from continuing operations before income
taxes, minority interests.................................... (25,421) (18,589) 1,666

Income tax provision............................................. 186 300 292
Minority interests in loss from continuing operations of
consolidated subsidiaries.................................... 1,347 4,241 --
--------- --------- --------

(Loss) income from continuing operations......................... (24,260) (14,648) 1,374

Discontinued operations (Note 4):
Income from discontinued operations, net of
income taxes of $480 in 1995............................... -- -- 4,315
Gain on disposal of discontinued operations, net of income
taxes of $1,400 in 1995.................................... 3,687 7,158 12,558
--------- --------- --------

Income from discontinued operations..................... 3,687 7,158 16,873
--------- --------- --------

Net (loss) income................................................ (20,573) (7,490) 18,247

Dividend requirements on preferred shares........................ (68,475) (61,949) (72,303)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased......................... -- 4,279 40,342
--------- --------- --------

Net loss applicable to Common Shares............................. $ (89,048) $ (65,160) $(13,714)
========== ========= ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-4
<PAGE> 115
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Income (loss) per common share (Basic):

Continuing operations ............... $ (9.68) $ (7.55) $ (3.20)
Discontinued operations ............. .38 .75 1.77
------------- ------------- -------------

Net income (loss) .............. $ (9.30) $ (6.80) $ (1.43)
============= ============= =============

Number of shares used in computation .... 9,578,000 9,578,000 9,554,000
============= ============= =============

Income (loss) per common share (Diluted):

Continuing operations ............... $ (9.68) $ (7.55) $ (3.20)
Discontinued operations ............. .38 .75 1.77
------------- ------------- -------------

Net income (loss) .............. $ (9.30) $ (6.80) $ (1.43)
============= ============= =============

Number of shares used in computation .... 9,578,000 9,578,000 9,554,000
============= ============= =============

Supplemental information:
Additional interest expense, absent
the Chapter 11 filing ............. $ 2,314
=============
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-5
<PAGE> 116
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

UNEARNED
CLASS B ADDITIONAL COMPENSATION
PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK UNREALIZED
SHARES SHARES CAPITAL DEFICIT OPTIONS GAINS
------ ------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...................... $ 279 $ 1,887 $692,001 $(732,611)
Net income................................... 18,247
Undeclared dividends and accretion on
redeemable preferred shares................ (53,821)
Purchase of redeemable preferred shares 40,342
Exercise of stock options.................... 29 536
Unrealized gain on investment securities,
net of taxes............................... $2,650
----- ------- -------- --------- ------

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
===== ======== ======== ========= ======= ======
</TABLE>

F-6
<PAGE> 117
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................... $ (20,573) $ (7,490) $ 18,247
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Gain on disposal of business ...................................... (3,687) (7,158) (12,558)
Income from discontinued operations ............................... -- -- (4,315)
Depreciation and amortization ..................................... 9,414 4,757 608
Provision for loss on long-term investments ....................... 3,796 1,001 11,790
Reversal of restructuring accruals ................................ -- (9,706) (2,044)
Stock compensation expense ........................................ 2,934 384 --
Changes in assets and liabilities, net of effects from acquisition:
Increase (decrease) in receivables and other assets.............. 3,184 (13,813) 11,684
Increase (decrease) in income taxes payable and deferred taxes... 170 (2,040) (32,517)
Increase (decrease) in securities sold not yet purchased ........ 8,467 4,096 (9,359)
(Decrease) increase in accounts payable and accrued
liabilities ................................................... (3,954) 7,270 5,223
--------- --------- ---------

Net cash used for continuing operations ................................ (249) (22,699) (13,241)
Net cash provided from discontinued operations ......................... -- -- 6,105
--------- --------- ---------

Net cash used for operating activities ................................. (249) (22,699) (7,136)
--------- --------- ---------

Cash flows from investing activities:
Sale or maturity of investment securities ......................... 45,472 160,088 250,129
Purchase of investment securities ................................. (30,756) (12,825) (458,017)
Sale or liquidation of long-term investments ...................... 2,807 18,292 36,109
Purchase of long-term investments ................................. (18,707) (3,051) (77,411)
Decrease (increase) in restricted assets .......................... 3,130 29,159 341,634
Purchase of furniture and equipment ............................... (3,478) (5,240) --
Purchase of and additions to real estate .......................... (7,454) (24,496) --
Sale of real estate ............................................... 8,718 -- --
Payment of prepetition claims and restructuring accruals .......... (828) (8,160) (584,397)
Payment for acquisitions, net of cash acquired .................... (20,014) 1,915 (25,750)
Collection of contract receivable ................................. -- -- 300,000
Net proceeds from disposal of business ............................ -- 10,174 17,540
--------- --------- ---------

Net cash (used for) provided from investing activities ................. (21,110) 165,856 (200,163)
--------- --------- ---------

Cash flows from financing activities:
Payment of preferred dividends .................................... -- (41,419) (132,162)
Purchase of redeemable preferred shares ........................... -- (10,530) (47,761)
Increase (decrease) in margin loan payable ........................ 13,012 (75,119) 75,119
Payment of long-term notes and other liabilities .................. (62,739) (10,549) (12,890)
Increase in long term borrowings .................................. 19,993 -- --
Issuance of subsidiary stock ...................................... 5,417 -- --
Exercise of stock options ......................................... -- -- 565
--------- --------- ---------

Net cash used for financing activities ................................. (24,317) (137,617) (117,129)
--------- --------- ---------

Net (decrease) increase in cash and cash equivalents ................... (45,676) 5,540 (324,428)
Cash and cash equivalents, beginning of year ........................... 57,282 51,742 376,170
--------- --------- ---------

Cash and cash equivalents, end of year ................................. $ 11,606 $ 57,282 $ 51,742
========= ========= =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-7
<PAGE> 118
NEW VALLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest.............................................................. $ 16,667 $17,482 $ 2,105
Income taxes.......................................................... 116 2,341 33,662

Detail of acquisitions:
Fair value of assets acquired........................................... $ 94,114 $27,301 $59,066
Liabilities assumed..................................................... 74,100 16,701 32,316
-------- -------- --------
Cash paid............................................................... 20,014 10,600 26,750
-------- -------- --------
Less cash acquired...................................................... -- (12,515) (1,000)
-------- -------- --------
Net cash (paid) received for acquisition................................ $(20,014) $ 1,915 $(25,750)
======== ======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements

F-8

<PAGE> 119
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"). All
significant intercompany transactions are eliminated in consolidation.

Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 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 49% and 55% of the
Company's revenues and 39% and 2% of the Company's operating loss from
continuing operations for the years ended December 31, 1997 and 1996,
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.

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 $15.00 Class A Increasing
Rate Cumulative Senior Preferred Shares ($100 Liquidation Value), $.01 par value
per share (the "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 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, 1997, the Company's remaining accruals totaled
$12,611 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.

F-9

<PAGE> 120
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

On October 31, 1995, the Company completed the sale of substantially
all of the assets (exclusive of certain contracts), and conveyed substantially
all of the liabilities, of the Messaging Services Business to FFMC for $20,000,
which consisted of $17,540 in cash and $2,460 in cancellation of intercompany
indebtedness. The sale of the Messaging Services Business was effective as of
October 1, 1995, and the Company recognized a gain on the sale of such business
of $12,558, net of income taxes of $1,400.

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 shareholders' equity (deficit). 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 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, 1997 consisted
primarily of $5,484 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, 1996 consisted primarily of $5,266 pledged as collateral
for a $5,000 letter of credit which is used as collateral for a long-term lease
of commercial office space, and $3,275 pledged as collateral for a letter of
credit which is used as collateral for an insurance policy.

PROPERTY AND EQUIPMENT. Office buildings are depreciated over periods
approximating 40 years, the estimated useful life, using the straight-line
method (see Note 7). Shopping centers are depreciated over periods approximating
25 years, the estimated useful life, using the straight-line

F-10

<PAGE> 121
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

method. Furniture and equipment (including equipment subject to capital leases)
is depreciated over the estimated useful lives, using the straight-line method.
Leasehold improvements are amortized on a straight-line basis over their
estimated useful lives or the lease term, if shorter. The cost and the related
accumulated depreciation are eliminated upon retirement or other disposition and
any resulting gain or loss is reflected in operations. Depreciation and
amortization expense was $9,414, $4,757, and $608 in 1997, 1996, and 1995,
respectively.

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, 1997 are $29,130, $25,796, $21,138, $14,156, $12,341 for
the years 1998, 1999, 2000, 2001 and 2002, respectively, and $30,259 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 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.

F-11

<PAGE> 122
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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 Company believes that adoption of SFAS No. 130 will not have a
material impact on the Company's financial statements.

In October 1997, the AICPA issued SOP 97-2, "Software Revenue
Recognition". SOP 97-2 provides guidance in recognizing revenue on software
transactions when persuasive evidence of an arrangement exists, delivery has
occurred, the vendor's fee is fixed or determinable and collectibility is
probable. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company believes that adoption of SOP
97-2 will not 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 business enterprises report information about operating
segments. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company is currently reviewing its
operating segments disclosures and will adopt SFAS No. 131 in the fourth quarter
of 1998.

The SEC recently issued new rules which will require the Company,
commencing with filings which include financial statements for fiscal year 1998,
to provide disclosure of quantitative and qualitative information relating to
derivative financial instruments, derivative commodity instruments and other
financial instruments. These disclosures are intended to provide investors with
information relating to market risk exposure, including the Company's
objectives, strategies and instruments used to manage exposures. The disclosures
are required to be presented outside of, and not incorporated into, the
Company's consolidated financial statements. This disclosure requirement will be
applicable principally to the Company's Ladenburg Thalmann broker-dealer
subsidiary. The impact of the implementation of this new disclosure requirement
is not yet determinable.

3. ACQUISITIONS

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. 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 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 shareholders 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'
shareholders' equity. 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.

F-12
<PAGE> 123
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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 "BML Shares") of the common stock of BrookeMil Ltd. ("BML") from Brooke
(Overseas) for a purchase price of $55,000, consisting of $21,500 in cash and a
$33,500 9% promissory note of the Company (the "Note"). The BML Shares comprise
99.1% of the outstanding shares of BML, a real estate development company in
Russia. The Note, which was collateralized by the BML Shares, was paid during
1997.

BML 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, BML 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,
BML 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 third phase, Ducat Place III, is planned as a 350,000 sq. ft. mixed-use
complex, with construction anticipated to commence in 1999. 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.

In connection with the Purchase Agreement, certain specified
liabilities of BML aggregating approximately $40,000 remained as liabilities of
BML after the purchase of the BML 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 BML 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 is amortizing the goodwill over a five year period.

The following table presents unaudited pro forma results of continuing
operations as if the acquisition of BML had occurred on January 1, 1996. 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 such date.

<TABLE>
<CAPTION>
Pro Forma
Year Ended December 31, 1996
----------------------------
<S> <C>
Revenue.............................................. $ 133,540
=========

Loss from continuing operations...................... $ (16,811)
=========
Loss from continuing operations applicable
to common shares................................ $ (74,481)
=========
Loss from continuing operations per common share..... $ (7.77)
=========
</TABLE>

In August 1997, BML 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 $20,078.

In February 1998, the Company entered into a joint venture to make real
estate and other investments in Russia to which the real estate assets of BML,
including Ducat Place II and the site for Ducat Place III, will be contributed
(see Note 22).

4. DISCONTINUED OPERATIONS

As noted above, the Company sold the Messaging Services Business
effective October 1, 1995. Accordingly, the financial statements reflect the
financial position and the results of operations of the discontinued operations
of FSI and the Messaging Services Business separately from continuing
operations.

Summarized operating results of the discontinued operations of the
Messaging Services Business for the nine months ended September 30, 1995.

F-13
<PAGE> 124
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<TABLE>
<S> <C>
Revenues........................................... $37,771
======
Operating income................................... $ 4,795
=====
Income before income taxes and minority
interests..................................... $ 4,795
Provision for income taxes......................... 480
Minority interests................................. --
-------
Net income......................................... $ 4,315
=====
</TABLE>

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 began by Western Union Telegraph Company. 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 which resulted from the Company's Money Transfer business.

5. INVESTMENT SECURITIES AVAILABLE FOR SALE

Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had net unrealized gains on sales of
investment securities available for sale of $7,596 ($12,431 of unrealized gains
and $4,835 of unrealized losses) for the year ended December 31, 1997 and $1,347
($6,114 of unrealized gains and $4,767 of unrealized losses) for the year ended
December 31, 1996.

F-14
<PAGE> 125
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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>
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
====== ====== ===== ======

1996
----
Marketable equity securities................... $ 55,429 $ 6,501 $ 476 $ 61,454
Marketable debt securities (long-term)......... 3,685 -- 969 2,716
------ ------- ------ ------
Total securities available for sale............ 59,114 6,501 1,445 64,170
Less long-term portion of investment
securities............................... (3,685) -- (969) (2,716)
------- ------- ----- -------
Investment securities - current portion........ $ 55,429 $ 6,501 $ 476 $ 61,454
====== ===== ====== ======
</TABLE>
Included in marketable debt securities are acquired securities with
a 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.

INVESTMENT IN RJR NABISCO

As of December 31, 1997 and 1996, the Company held 612,650 and
1,741,150, respectively, shares of common stock of RJR Nabisco Holdings Corp.
("RJR Nabisco") with a market value of $22,898 (cost of $18,780) and $59,199
(cost of $53,372), respectively. The Company expensed $100 in 1997, $11,724 in
1996 and $3,879 in 1995 relating to the RJR Nabisco investment.

In June 1996, various agreements between High River Limited Partnership
("High River"), the Company and Brooke were terminated by mutual consent.
Pursuant to these agreements the parties had agreed to take certain actions
during late 1995 and throughout 1996 designed to cause RJR Nabisco to effectuate
a spinoff of its food business, Nabisco Holdings Corp. The termination of the
High River agreements left in effect for one year certain provisions concerning
payments to be made to High River in the event the Company achieved a profit
(after deducting certain expenses) on the sale of the shares of RJR Nabisco
common stock which were held by it or they were valued at the end of such year
at higher than their purchase price or in the event Brooke or its affiliates
engaged in certain transactions with RJR Nabisco. Based on the market price of
RJR Nabisco common stock, no amounts were payable by the Company under these
agreements.

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,

F-15

<PAGE> 126
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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. 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, 1997 DECEMBER 31, 1996
----------------- -----------------
TRADING SECURITIES TRADING SECURITIES
SECURITIES SOLD, NOT YET SECURITIES SOLD, NOT YET
OWNED PURCHASED OWNED PURCHASED
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Common stock................. $ 16,208 $ 4,513 $21,248 $ 5,900
Equity and index options..... 5,290 17,494 6,241 11,243
Other........................ 28,490 3,603 2,272 --
------- ------- ------- ----------
$ 49,988 $ 25,610 $29,761 $17,143
====== ====== ====== ======
</TABLE>

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, 1997 are as follows:

<TABLE>
<CAPTION>
U.S. RUSSIAN
OFFICE OFFICE SHOPPING
BUILDINGS BUILDINGS CENTERS TOTAL
--------- --------- ------- -----
<S> <C> <C> <C> <C>
Land........................................ $ 19,450 $ 19,300 $ 16,087 $ 54,837
Buildings................................... 92,332 66,688 51,430 210,450
-------- --------- -------- --------
Total.................................. 111,782 85,988 67,517 265,287
Less accumulated depreciated................ (4,616) (879) (3,147) (8,642)
-------- --------- -------- --------
Net investment in real estate.......... $107,166 $ 85,109 $ 64,370 $256,645
======== ========= ======== ========
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>

F-16
<PAGE> 127
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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. The Office Building notes bear interest at 7.5%, require principal
amortization over approximately 40 years, with maturity dates ranging from 2006
to 2011. The Office Building notes have fixed monthly principal and interest
payments aggregating $648. 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. In November 1997, the Company sold one of the Shopping
Centers for $5,400 and realized a gain of $1,200.

Required principal payments on the notes payable over the next five
years are $760 in 1998, $5,675 in 1999, $7,243 in 2000, $62,741 in 2001 and $462
in 2002 and $97,300 thereafter.

8. LONG-TERM INVESTMENTS

Long-term investments consisted of investments in the following:
<TABLE>
<CAPTION>

DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Limited partnerships....... $ 27,224 $ 33,329 $ 7,054 $ 7,914
Foreign corporations....... -- -- 2,000 2,000
Joint venture.............. -- -- 3,796 3,796
Other...................... -- -- 420 420
------- ------- -------- --------

Total ..................... $ 27,224 $ 33,329 $13,270 $14,130
====== ====== ====== ======
</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 required under certain limited
partnership agreements to make additional investments up to an aggregate of
$5,740 as of December 31, 1997. 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 shareholders' equity after this offering.

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.

F-17
<PAGE> 128
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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 years ended December 31, 1996 and 1995,
employer contributions to the Plan were approximately $200 in each year,
excluding those made under the deferred compensation feature described above.
The Plan was inactive in 1997.

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 percentage of their pre-tax compensation. The Company
committed to contribute $500 of matching contributions in 1997. The Company did
not make discretionary contributions to these 401(k) plans in 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
September 2000, October 1998 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,
1997:

1998...................................... $ 5,966
1999...................................... 5,597
2000...................................... 5,360
2001...................................... 4,001
2002...................................... 3,795
2003 and thereafter....................... 50,246
--------

Total................................ $ 74,965
========

Rental expense for operating leases during 1997, 1996 and 1995 was
$4,076, $3,914 and $1,677, 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 shareholder of the Company. The suit alleges that
the Company's purchase of the BML Shares constituted a self-dealing transaction
which involved the payment of excessive consideration by the Company. The
plaintiff seeks (i) a declaration that the Company's directors breached their
fiduciary duties, Brooke aided and abetted such breaches and such parties are
therefore liable to the Company, and (ii) unspecified damages to be awarded to
the Company. The Company's time to respond to the complaint has not yet expired.
The Company believes that the allegations 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-18
<PAGE> 129
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

11. FEDERAL INCOME TAX

At December 31, 1997, the Company had $97,444 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, 1997, 1996 and 1995, does
not bear a customary relationship with pre-tax accounting income from continuing
operations principally as a consequence of the change in the valuation allowance
relating to deferred tax assets. The provision for income taxes on continuing
operations differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate (35%) to pretax income from
continuing operations as a result of the following differences:
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Loss) income from continuing operations.................. $(24,074) $(14,348) $1,666
------- ------- ------

(Credit) provision under statutory U.S. tax rates......... (8,426) (5,022) 583
Increase (decrease) in taxes resulting from:
Nontaxable items...................................... 2,603 (224) 543
State taxes, net of Federal benefit................... 55 195 180
Foreign Taxes......................................... 108
Increase (decrease) in valuation reserve.................. 5,846 5,351 (1,014)
------- ------- ------
Income tax provision............................ $ 186 $ 300 $ 292
======= ======= ======
</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>

1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward:
Restricted net operating loss........................... $15,561 $18,675
Unrestricted net operating loss......................... 70,216 65,237
Other..................................................... 17,209 10,399
-------- --------

Total deferred tax assets................................. 102,986 94,311
-------- --------

Deferred tax liabilities:

Other..................................................... (5,542) (3,039)
-------- --------

Total deferred tax liabilities................................ (5,542) (3,039)
-------- --------

Net deferred tax assets....................................... 97,444 91,272
Valuation allowance........................................... (97,444) (91,272)
-------- --------

Net deferred taxes............................................ $ -- $ --
======== ========
</TABLE>

F-19
<PAGE> 130
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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.

As of December 31, 1997, the Company had consolidated net operating
loss carryforwards of approximately $213,000 for tax purposes, which expire at
various dates through 2008. Approximately $38,700 net operating loss
carryforwards constitute pre-change losses and $174,300 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,
--------------------------------------------------
1997 1996
----------------------- -----------------------
LONG-TERM CURRENT LONG-TERM CURRENT
PORTION PORTION PORTION PORTION
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Retiree and disability obligations.............. $ 3,638 $ 2,000 $ 6,774 $1,700
Minority interests.............................. 6,112 -- 4,775 --
Other long-term liabilities..................... 1,460 -- 733 300
------ ------ ------- ------

Total other long-term liabilities............... $ 11,210 $ 2,000 $12,282 $2,000
====== ===== ====== =====
</TABLE>

13. REDEEMABLE PREFERRED SHARES

At December 31, 1997 and 1996, the Company had authorized and
outstanding 2,000,000 and 1,071,462, respectively, of its Class A Senior
Preferred Shares. At December 31, 1997 and 1996, respectively, the carrying
value of such shares amounted to $258,638 and $210,571, including undeclared
dividends of $163,302 and $117,117, or $152.41 and $109.31 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, 1997,
the unamortized discount on the Class A Senior Preferred Shares was $4,918.

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

F-20

<PAGE> 131
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

holders of the Class A Senior Preferred Shares, voting as a class, will have the
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.

Pursuant to the Joint Plan, the Company declared a cash dividend in
December 1994 on the Class A Senior Preferred Shares of $50 per share which was
paid in January 1995. The Company declared and paid cash dividends on the Class
A Senior Preferred Shares of $40 per share in 1996 and $50 per share in 1995.
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 accruals are included in the carrying
amount of redeemable preferred shares, offset by a charge to additional paid-in
capital.

On April 6, 1995, the Company's Board of Directors (the "Board")
authorized the Company to repurchase as many as 200,000 shares of its Class A
Senior Preferred Shares. The Company completed the repurchase for an aggregate
consideration of $18,674 and thereafter, on June 21, 1995, the Board authorized
the Company to repurchase as many as 300,000 additional shares. The Company
repurchased in the open market 33,000 of such shares in July 1995 and 106,400 of
such shares in September 1995 for an aggregate consideration of $24,732. During
the first quarter of 1996, the Company repurchased 72,104 of such shares for an
aggregate consideration of $10,530. The repurchase of the Class A Senior
Preferred Shares increased the Company's additional paid-in capital by $4,279
for the 72,104 shares acquired in 1996 and by $32,984 for the 339,400 shares
acquired in 1995 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 1997 and 1996, the Company recorded $2,934 and
$359, respectively, in compensation expense related to the Award Shares and, at
December 31, 1997 and 1996, the balance of the deferred compensation and the
unamortized discount related to the Award Shares was $6,890 and $8,097,
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 $3.00 Class B Cumulative Convertible Preferred
Shares ($25 Liquidation Value), $.10 par value per share (the "Class B Preferred
Shares"), 12,000,000 shares authorized and 2,790,776 shares outstanding as of
December 31, 1997 and 1996, 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-21
<PAGE> 132
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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 $139,412 and $115,944 at December 31, 1997 and 1996, respectively.
These undeclared dividends represent $49.95 and $41.55 per share as of the end
of each period. No accrual was recorded for such undeclared dividends as the
Class B Preferred Shares are not mandatorily redeemable.

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 $15 in 1997 and $24 in 1996 from these option grants and
recorded deferred compensation of $158 and $755 representing the intrinsic value
of these options at December 31, 1997 and December 31, 1996, 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 1997 and
1996 would have been increased by $316 and $33, respectively. 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.

16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The composition of accounts payable and accrued liabilities is as
follows:
<TABLE>
<CAPTION>

DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Accounts payable and accrued liabilities:
Accrued compensation......................................... $11,202 $10,378
Excise tax payable (a)....................................... 4,400 6,000
Subordinated loan payable (b)................................ 2,500 4,000
Deferred rent................................................ 4,560 4,388
Unearned revenues............................................ 10,163
Taxes (property and miscellaneous)........................... 5,029 2,637
</TABLE>

F-22
<PAGE> 133
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

<S> <C> <C>
Accrued expenses and other liabilities....................... 19,868 17,485
------ ------
Total.................................................... $57,722 $44,888
====== ======
</TABLE>

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

(a) Represents an estimated liability related to excise taxes imposed
on annual contributions to retirement plans that exceed a certain
percentage of annual payroll. The Company intends to vigorously
contest this tax liability. Management's estimate of such amount is
potentially subject to material change in the near term.

(b) Represents a subordinated note payable held by Ladenburg's clearing
broker.

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,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Restructuring accruals(a)....................... $ 8,196 $ 9,024
Money transfer payable(b)....................... 4,415 6,502
----- -----

Total..................................... $12,611 $15,526
====== ======
</TABLE>
- ---------------

(a) Restructuring accruals at December 31, 1997 consisted of $6,907 of
disputed claims, primarily related to leases and former employee
benefits, and $1,289 of other restructuring accruals. In 1997, 1996
and 1995, the Company reversed $0, $9,706 and $2,044, respectively,
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, 1997, 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
(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 $312, $462 and $571 under this agreement in 1997, 1996 and 1995,
respectively.

F-23
<PAGE> 134
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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. At December 31, 1996, the loan and accrued interest
thereon of $996 was included in other current assets.

Two directors of the Company are or have been affiliated with law firms
that rendered legal services to the Company. The Company paid these firms $568
and $4,141 during 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 $522 and $317 in
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 $133 and $136 in
1997 and 1996, respectively. The broker-dealer, in the ordinary course of its
business, engages in brokerage activities with Ladenburg on customary terms.

As discussed in Note 5, the Company has entered into certain other
agreements with Brooke in connection with its investment in RJR Nabisco.
Further, two directors of the Company were each paid $30 by Brooke during the
fourth quarter of 1995 in connection with their agreement to serve as Brooke
nominees of RJR Nabisco's 1996 annual meeting.

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 BML 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 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, 1997, 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.

F-24
<PAGE> 135
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

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, 1997, Ladenburg had
commitments to purchase and sell financial instruments under futures contracts
of $37,552 and $1,494, 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, 1997:

LONG SHORT
--------- -----------

Equity and index options................. $60,448 $70,500
Financial futures contracts.............. 37,317 1,475

The table below discloses the fair value at December 31, 1997 of these
commitments, as well as the average fair value during the year ended December
31, 1997, based on monthly observations.

<TABLE>
<CAPTION>
DECEMBER 31, 1997 AVERAGE
------------------------ ----------------------
LONG SHORT LONG SHORT
- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C>
Equity and index options.................. $ 5,290 $17,495 $8,850 $18,988
Financial futures contracts............... 37,552 1,494 6,206 1,454
</TABLE>

For the years ended December 31, 1997, 1996 and 1995, the net loss
arising from options and futures contracts included in net gain on
principal transactions was $2,399, $6,012 and $4,504, 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.

F-25
<PAGE> 136
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----

<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........... $ 11,606 $ 11,606 $ 57,282 $ 57,282
Investments available for sale...... 51,993 51,993 64,170 64,170
Trading securities owned............ 49,988 49,988 29,761 29,761
Restricted assets................... 5,716 5,716 8,846 8,846
Receivable from clearing brokers.... 1,205 1,205 23,870 23,870
Long-term investments (Note 8)...... 27,224 33,329 13,270 14,130
Financial liabilities:
Notes payable....................... 174,574 174,574 158,251 158,251
Redeemable preferred shares......... 258,638 102,860 210,571 132,908
</TABLE>

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, 1997 and 1996:
<TABLE>
<CAPTION>

BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
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 7,454 466 1,385 10,932

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. SUBSEQUENT EVENTS

WESTERN REALTY. In February 1998, the Company and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, 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 and Apollo agreed to
contribute up to $58,000.

Under the terms of the agreement governing Western Realty, the
ownership and voting interests in Western Realty will be held equally by Apollo
and the Company. Apollo will be entitled to a preference on

F-26

<PAGE> 137
NEW VALLEY CORPORATION AND SUBSIDIARIES

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

distributions of cash from Western Realty to the extent of its investment,
together with a 15% annual rate of return, and the Company will then be entitled
to a return of $10,000 of BML-related expenses incurred 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
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 will generally required the unanimous consent of
the Board of Managers. Accordingly, the Company will account for its
non-controlling interest in Western Realty on the equity method.

On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made a $11,000 loan (the "Loan) to Western Realty. The Loan, which bears
interest at the rate of 15% per annum and is due September 30, 1998, is
collateralized by a pledge of the Company's shares of BML. Upon completion of
the transfer of Ducat Place II and the satisfaction of other conditions under
the LLC Agreement, the Loan and the accrued interest thereon will be converted
into a capital contribution by Apollo to Western Realty and the BML pledge
released.

Western Realty will seek to make additional real estate and other
investments in Russia. The Company and Apollo have agreed to invest, through
Western Realty or another equity, up to $25,000 in the aggregate for the
potential development of a real estate project in Moscow. In addition, Western
Realty has agreed to acquire for $20,000 a 30% profits interest in a company
organized by Brooke (Overseas) which will, among other things, acquire an
interest in an industrial site and manufacturing facility being constructed on
the outskirts of Moscow by a subsidiary of Brooke (Overseas).

F-27

<PAGE> 138
Schedule III

NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
Gross Amount Carried
Cost At Close of Period
Initial Cost Capitalized ----------------------------------
Description ------------------------- Net of Buildings and Accumulated
And Location Encumbrances Land Building Deletions Land Improvements Total Depreciation
------------ ------------ ---- -------- --------- ---- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Building:
Bernards Township, NJ $ 43,838 $ 10,059 $ 38,432 $ -- $ 10,059 $ 38,432 $ 48,491 $ 1,922
Bernards Township, NJ 10,283 2,342 9,172 -- 2,342 9,172 11,514 452
Troy, MI 22,384 -- 23,581 -- -- 23,581 23,581 1,179
Troy, MI 22,798 7,049 21,147 -- 7,049 21,147 28,196 1,057
Ducat Place I -- -- 5,561 (5,561) -- -- -- --
Ducat Place II 20,078 5,700 59,300 7,031 5,700 66,331 72,031 879
Ducat Place III -- 13,600 -- 357 13,600 357 13,957 --
-------------------------------------------------------------------------------------------------------
119,381 38,750 157,193 1,827 38,750 159,020 197,770 5,496
-------------------------------------------------------------------------------------------------------
Shopping Centers:
Tri Cities, WA 5,919 2,981 7,692 -- 2,981 7,692 10,673 500
Santa Fe, NM 8,331 3,233 6,423 4 3,233 6,427 9,660 409
Portland, OR 4,875 949 6,374 (1,725) 722 4,876 5,598 330
Marathon, FL -- 624 3,299 (3,923) -- -- -- --
Seattle, WA 10,717 3,354 9,069 35 3,354 9,104 12,458 552
Charleston, WV 11,238 2,510 10,516 174 2,510 10,690 13,200 522
Royal Palm Beach, FL 8,539 2,032 7,867 7 2,032 7,874 9,906 510
Lincoln, NE 5,182 1,254 4,750 18 1,254 4,768 6,022 323
-------------------------------------------------------------------------------------------------------
54,801 16,937 55,990 (5,410) 16,086 51,431 67,517 3,146
-------------------------------------------------------------------------------------------------------
$ 174,182 $ 55,687 $213,183 $ (3,583) $ 54,836 $ 210,451 $265,287 $ 8,642
=======================================================================================================

<CAPTION>
Date Date Depreciable
Constructed Acquired Life
- ----------- -------- ----

1991 Jan 1996 40
1994 Jan 1996 40
1987 Jan 1996 40
1990 Jan 1996 40
1993 Jan 1997 40
1997 Jan 1997 40
1997 Jan 1997 40

1980 Jan 1996 25
1964 Jan 1996 25
1978 Jan 1996 25
1972 Jan 1996 25
1988 Jan 1996 25
1985 Jan 1996 25
1985 Jan 1996 25
1984 Jan 1996 25

</TABLE>

F-28
<PAGE> 139
NEW VALLEY CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(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 12/31/95 $ -- $ -- $ -- $ --
--------- ----------- --------- ---------

Additions during period
Acquisitions through foreclosure -- -- -- --
Other acquisitions 36,387 148,322 184,709 --
Improvements -- 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 $ 19,300 $ 64,861 $ 84,161 --
Improvements, etc. -- 7,454 7,454 --
Depreciation expense -- -- -- $ 5,197
--------- ----------- --------- ---------
Total additions 19,300 72,315 91,615 5,197
--------- ----------- --------- ---------

Deductions during period:
Cost of real estate sold 624 8,897 9,521 177
--------- ----------- --------- ---------

Balance at 12/31/97 $ 54,836 $ 210,451 $ 265,887 $ 8,642
--------- ----------- --------- ---------

</TABLE>

F-29
<PAGE> 140

REPORT OF INDEPENDENT PUBLIC ACCOUNTS

To the Board of Directors of
Thinking Machines Corporation:

We have audited the accompanying consolidated balance sheets of
Thinking Machines Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' investment
and cash flows for the year ended December 31, 1997 and for the period from
February 8, 1996 (inception) to December 31, 1996. 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 audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thinking
Machines Corporation and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the year ended
December 31, 1997 and the period February 8, 1996 (inception) to December 31,
1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has been unable to generate significant
revenue and has incurred recurring losses from its operations. These factors,
among others, as described in Note 1, create substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

ARTHUR ANDERSON LLP

Boston, Massachusetts
January 23, 1998

F-30
<PAGE> 141

NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 25,463 $ 11,606
Investment securities available for sale ....................... 26,420 51,993
Trading securities owned ....................................... 15,703 49,988
Restricted assets .............................................. 1,843 232
Receivable from clearing brokers ............................... 1,854 1,205
Other current assets ........................................... 2,581 3,618
---------- ----------
Total current assets ...................................... 73,864 118,642
---------- ----------

Investment in real estate, net ..................................... 80,479 256,645
Furniture and equipment, net ....................................... 10,845 12,194
Restricted assets .................................................. 5,767 5,484
Long-term investments, net ......................................... 9,689 27,224
Investment in joint venture ........................................ 63,713 --
Other assets ....................................................... 6,524 21,202
---------- ----------
Total assets .............................................. $ 250,881 $ 441,391
========== ==========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Margin loan payable ............................................ $ 1,470 $ 13,012
Current portion of notes payable and other long-term obligations -- 760
Accounts payable and accrued liabilities ....................... 31,466 57,722
Prepetition claims and restructuring accruals .................. 12,379 12,611
Income taxes ................................................... 18,715 18,413
Securities sold, not yet purchased ............................. 3,208 25,610
---------- ----------
Total current liabilities ................................. 67,238 128,128
---------- ----------

Notes payable ...................................................... 55,083 173,814
Other long-term obligations ........................................ 20,571 11,210
Redeemable preferred shares ........................................ 300,711 258,638

Commitments and Contingencies ...................................... -- --

Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $158,908 and $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 ..................................... 564,234 604,215
Accumulated deficit ............................................ (750,145) (742,427)
Unearned compensation on stock options ......................... (15) (158)
Accumulated other comprehensive income ......................... (7,171) 7,596
---------- ----------

Total stockholders' deficiency ............................ (192,722) (130,399)
---------- ----------

Total liabilities and stockholders' deficiency ............ $ 250,881 $ 441,391
========== ==========
</TABLE>

See accompanying Notes to Quarterly Condensed Consolidated Financial Statements

F-31
<PAGE> 142

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

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net ........................... $ (860) $ 6,131 $ 7,476 $ 11,857
Commissions ........................................... 6,510 4,235 20,663 11,059
Corporate finance fees ................................ 259 3,555 4,541 8,202
Gain on sale of investments, net ...................... 1,815 1,466 10,377 8,518
Loss in joint venture ................................. (1,746) -- (2,233) --
Real estate leasing ................................... 4,767 7,079 18,488 19,664
Gain on sale of real estate ........................... 4,682 -- 4,682 --
Interest and dividends ................................ 2,033 2,554 7,424 6,677
Computer sales and service ............................ 40 70 499 3,750
Other income .......................................... 1,940 1,614 6,635 6,925
----------- ----------- ----------- -----------

Total revenues .................................... 19,440 26,704 78,552 76,652
----------- ----------- ----------- -----------

Cost and expenses:
Operating, general and administrative ................. 25,109 29,553 84,466 84,090
Interest .............................................. 3,555 4,229 11,167 12,134
Provision for loss on long-term investment ............ -- -- -- 3,796
----------- ----------- ----------- -----------

Total costs and expenses .......................... 28,664 33,782 95,633 100,020
----------- ----------- ----------- -----------

Loss from continuing operations before income taxes
and minority interests ................................ (9,224) (7,078) (17,081) (23,368)

Income tax provision ....................................... 10 24 31 119

Minority interests in loss from continuing operations
of consolidated subsidiaries .......................... 495 528 1,654 1,543
----------- ----------- ----------- -----------

Loss from continuing operations ............................ (8,739) (6,574) (15,458) (21,944)

Discontinued operations:
Gain on disposal of discontinued operations ........... 6,860 -- 7,740 --
----------- ----------- ----------- -----------

Income from discontinued operations ................... 6,860 -- 7,740 --
----------- ----------- ----------- -----------

Net loss ................................................... (1,879) (6,574) (7,718) (21,944)

Dividend requirements on preferred shares .................. (20,743) (17,567) (59,333) (50,297)
----------- ----------- ----------- -----------

Net loss applicable to Common Shares ....................... $ (22,622) $ (24,141) $ (67,051) $ (72,241)
=========== =========== =========== ===========

Loss per Common Share (basic and diluted):
Continuing operations ................................. $ (3.08) $ (2.52) $ (7.81) $ (7.54)
Discontinued operations ............................... 0.72 -- .81 --
----------- ----------- ----------- -----------
Net loss per Common Share ............................. $ (2.36) $ (2.52) $ (7.00) $ (7.54)
=========== =========== =========== ===========

Number of shares used in computation ....................... 9,577,624 9,577,624 9,577,624 9,577,624
=========== =========== =========== ===========
</TABLE>

See accompanying Notes to Quarterly Condensed Consolidated Financial Statements

F-32
<PAGE> 143

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

<TABLE>
<CAPTION>
Unearned
Class B Compensation
Preferred Common Paid-In Accumulated on Stock Unrealized
Shares Shares Capital Deficit Options Gain
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 .......... $ 279 $ 96 $ 604,215 $(742,427) $ (158) $ 7,596
Net loss ......................... (7,718)
Undeclared dividends and accretion
on redeemable preferred shares . (39,838)
Unrealized gain on investment
securities ..................... (14,767)
Adjustment to unearned
compensation on stock options .. -- -- (143) -- 143 --
--------- --------- --------- --------- --------- ---------

Balance, September 30, 1998 ......... $ 279 $ 96 $ 564,234 $(750,145) $ (15) $ (7,171)
========= ========= ========= ========= ========= =========
</TABLE>

See accompanying Notes to Quarterly Condensed Consolidated Financial Statements

F-33
<PAGE> 144

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

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (7,718) $ (21,944)
Adjustments to reconcile net loss to net cash
used for operating activities:
Income from discontinued operations ....................................... (7,740) --
Loss in joint venture ..................................................... 2,233 --
Depreciation and amortization ............................................. 5,472 6,635
Provision for loss on long-term investment ................................ -- 3,796
Gain on sales of real estate and liquidation of long-term investments ..... (9,452) --
Stock based compensation expense .......................................... 2,215 2,213
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Decrease (increase) in receivables and other assets .................... 39,804 (6,881)
Increase in income taxes payable ....................................... 409 86
(Decrease) increase in accounts payable and accrued liabilities ........ (35,831) 5,951
---------- ----------

Net cash used for continuing operations ........................................ (10,608) (10,144)
Net cash provided from discontinued operations ................................. 7,740 --
---------- ----------

Net cash used for operating activities ......................................... (2,868) (10,144)
---------- ----------

Cash flows from investing activities:
Sale or maturity of investment securities ................................. 21,286 37,697
Purchase of investment securities ......................................... (13,352) (20,999)
Sale or liquidation of long-term investments .............................. 25,895 2,807
Purchase of long-term investments ......................................... (8,590) (11,404)
Sale of real estate, net of closing costs ................................. 111,292 --
Purchase of real estate ................................................... (18,387) (6,208)
Sale of other assets ...................................................... 226 5,561
Payment of prepetition claims ............................................. (676) (1,199)
Return of prepetition claims paid ......................................... -- 1,396
Decrease in restricted assets ............................................. (1,894) 2,251
Cash transferred to joint venture ......................................... (487) --
Other ..................................................................... (1,411) --
Payment for acquisitions, net of cash acquired ............................ -- (20,014)
---------- ----------

Net cash provided from (used for) investing activities ......................... 113,902 (10,112)
---------- ----------

Cash flows from financing activities:
Increase in margin loan payable, net ...................................... (11,541) --
Sale of subsidiary's common stock ......................................... -- 5,417
Proceeds from participating loan .......................................... 14,300 --
Proceeds from notes payable ............................................... -- 19,993
Repayment of notes payable to related party ............................... -- (21,500)
Repayment of notes payable ................................................ (99,373) (20,703)
Repayment of other obligations ............................................ (563) (3,526)
---------- ----------

Net cash used for financing activities ......................................... (97,177) (20,319)
---------- ----------

Net increase (decrease) in cash and cash equivalents ........................... 13,857 (40,575)
Cash and cash equivalents, beginning of period ................................. 11,606 57,282
---------- ----------

Cash and cash equivalents, end of period ....................................... $ 25,463 $ 16,707
========== ==========
</TABLE>

See accompanying Notes to Quarterly Condensed Consolidated Financial Statements

F-34
<PAGE> 145

NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED QUARTERLY CONSOLIDATED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

1. PRINCIPLES OF REPORTING

The consolidated financial statements include the accounts of New Valley
Corporation and Subsidiaries (the "Company"). The consolidated financial
statements as of September 30, 1998 presented herein have been prepared
by the Company without an audit. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial position as of September 30, 1998 and
the results of operations and cash flows for all periods presented have
been made. Results for the interim periods are not necessarily
indicative of the results for an entire year.

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

These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K, as amended, for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission (Commission File No. 1-2493).

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). 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 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 not
have a material impact on the Company's financial statements.

In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance that the carrying value of software developed or
obtained for internal use is assessed based upon 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 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 business enterprises report information about
operating segments. SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. The Company is
currently reviewing its operating segment disclosures and will adopt
SFAS No. 131 in the fourth quarter of 1998.

F-35
<PAGE> 146

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 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. WESTERN REALTY

On January 31, 1997, the Company entered into a stock 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 "BML Shares")
of the common stock of BrookeMil Ltd. ("BML") from Brooke (Overseas) for
a purchase price of $55,000, consisting of $21,500 in cash and a $33,500
9% promissory note of the Company (the "Note"). The BML Shares comprise
99.1% of the outstanding shares of BML, a real estate development
company in Russia. The Note, which was collateralized by the BML Shares,
was paid during 1997.

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
September 30, 1998, Apollo had funded $30,550 of its investment in
Western Realty Ducat.

The ownership and voting interests in Western Realty Ducat will be 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 $16,300 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.

F-36
<PAGE> 147

Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $26,300
participating loan to, and payable out of a 30% profits interest in, a
company organized by Brooke (Overseas) which, among other things, owns
an industrial site and manufacturing facility being constructed on the
outskirts of Moscow by a subsidiary of Brooke (Overseas).

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 94.6% of one site and 52% of the other site at
September 30, 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 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 September 30, 1998, Western Realty Repin has advanced $19,067
(of which $14,300 was funded by Apollo) under the Repin Loan to BML,
which is classified in other long-term obligations on the condensed
consolidated balance sheet at September 30, 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 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 September 30, 1998, BML had invested $15,171 in the Kremlin Sites
and held $809, 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 in 1998 and $22,000 in 1999 in the development of the property.

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.

F-37
<PAGE> 148

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 separate component
of stockholders' deficiency. The Company had realized gains on sales of
investment securities available for sale of $191 and $5,725 for the
three and nine months ended September 30, 1998, respectively.

The components of investment securities available for sale at September
30, 1998 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments ..... $ 10 $ -- $ -- $ 10
Marketable equity securities 30,396 364 6,181 24,579
Marketable ................. -- 1,831 -- 1,831
warrants
Marketable debt securities . 3,185 -- 3,185 --
---------- ---------- ---------- ----------

Investment securities ...... $ 33,591 $ 2,195 $ 9,366 $ 26,420
========== ========== ========== ==========
</TABLE>

4. LONG-TERM INVESTMENTS

At September 30, 1998, long-term investments consisted primarily of
investments in limited partnerships of $9,689. The Company believes the
fair value of the limited partnerships exceeds its carrying amount by
approximately $2,500 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company recognized gains of $1,624 and $4,652 on liquidations of
investments of certain limited partnerships for the three and nine
months ended September 30, 1998, respectively. The Company's investments
in limited partnerships are illiquid and the ultimate realizations of
these investments are subject to the performance of the underlying
partnership and its management by the general partners. The Company sold
an interest in a limited partnership in September, 1998 and may sell or
liquidate certain other limited partnership interests in the future. Any
sale of such interests would be subject to the approval of the general
partner.

In the first quarter of 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 for the three month period. The Company's estimates
of the fair value of its long-term investments are subject to judgment
and are not necessarily indicative of the amounts that could be realized
in the current market.

F-38
<PAGE> 149

5. REAL ESTATE

On September 28, 1998, the Company completed a sale to institutional
investors of four commercial office buildings (the "Office Buildings")
located in Troy, Michigan and Bernards Township, New Jersey for an
aggregate purchase price of $112.4 million before closing adjustments
and expenses. The Company received approximately $13.0 million in cash
from the transaction before closing adjustments and expenses. The Office
Buildings were subject to approximately $99.0 million 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 other U.S. real estate holdings in the future.

6. INCOME FROM DISCONTINUED OPERATIONS

The Company recorded a gain on disposal of discontinued operations of
$6,860 and $7,740 for the three and nine months ended September 30, 1998
related to the settlement of a lawsuit originally initiated by the
Company's predecessor, Western Union Telegraph Company.

7. REDEEMABLE PREFERRED SHARES

At September 30, 1998, the Company had authorized and outstanding
2,000,000 and 1,071,462, respectively, of its Class A Senior Preferred
Shares. At September 30, 1998 and December 31, 1997, respectively, the
carrying value of such shares amounted to $300,711 and $258,638,
including undeclared dividends of $204,050 and $163,302 or $190.44 and
$152.41 per share. As of September 30, 1998, the unamortized discount on
the Class A Senior Preferred Shares was $7,090.

For the three and nine months ended September 30, 1998, the Company
recorded $757 and $2,215 in compensation expense, respectively, related
to certain Class A Senior Preferred Shares awarded to an officer of the
Company in 1996. At September 30, 1998, the balance of the deferred
compensation and the unamortized discount related to these award shares
was $3,396 and $2,628, respectively.

8. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS

The undeclared dividends cumulatively amounted to $158,908 and $139,412
at September 30, 1998 and December 31, 1997, respectively. These
undeclared dividends represent $56.94 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.

9. CONTINGENCIES

LITIGATION

F-39
<PAGE> 150

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.

PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS

The prepetition claims remaining as of September 30, 1998 of $12,379 may
be subject to future adjustments depending on pending discussions with
the various parties and the decisions of the Bankruptcy Court.

F-40
<PAGE> 151
Appendix A

[PENNSYLVANIA MERCHANT GROUP LETTERHEAD]

February 1, 1999
Board of Directors
New Valley Corporation
100 S.E. Second Street
Miami, FL 33131

Gentlemen:

Pennsylvania Merchant Group ("PMG") has been retained to provide certain
financial advisory services to the Board of Directors (the "Board") of New
Valley Corporation ("New Valley") in connection with the proposed
recapitalization of New Valley (the "Recapitalization") pursuant to which (i)
each share of Class A Senior Preferred Shares will be exchanged and redeemed for
20 Common Shares of New Valley and one warrant to purchase Common Shares, having
terms described in the preliminary Proxy Statement relating to the
Recapitalization (the "Proxy"), (ii) each share of Class B Preferred Shares will
be exchanged and redeemed for 1/3 Common Shares and five warrants to purchase
Common Shares, and (iii) New Valley intends to reclassify each of the then
outstanding Common Shares into .1 Common Shares and .3 warrants. You have
requested our opinion as to the fairness, from a financial point of view, to the
shareholders of New Valley of the consideration to be received by them in the
Recapitalization.

We have reviewed the drafts of the Proxy furnished to us. In conducting our
analysis and arriving at our opinion as expressed herein, we have held
discussions with certain senior officers of New Valley concerning the business,
operations and prospects of New Valley and its subsidiaries Ladenburg Thalmann &
Co. Inc. ("Ladenburg") and BrookeMil Ltd. ("BML"), as well as its United States
real estate division ("New Valley Realty" and collectively, the "Businesses")
and have also reviewed and analyzed, certain publicly available business and
financial information relating to New Valley as well as certain financial
forecasts and other data for the Businesses which were provided to or otherwise
discussed with us by the management of New Valley. We also reviewed certain
reports prepared by management of New Valley relating to securities of certain
publicly-traded and privately-held companies held by New Valley, as well as New
Valley's interests in certain limited partnerships. We also reviewed, among
other things, current and historical market prices and trading volumes of the
Class A Senior Preferred Shares, the Class B Preferred Shares and the Common
Shares. Based upon this information, we have made certain estimates as to the
trading prices of the Common Shares immediately following the Recapitalization.
We also analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of New Valley. In addition to the
foregoing, we conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we deemed appropriate in
arriving at our valuation.

In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or

<PAGE> 152

The Board of Directors
February 1, 1999

otherwise reviewed by or discussed with us. With respect to financial forecasts,
appraisals and other information and data provided to or otherwise reviewed by
or discussed with us, we have been advised by the management of New Valley that
such information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of New Valley. We
have not made any independent evaluations or appraisals of the assets,
liabilities (contingent or otherwise) or reserves of New Valley nor have we made
any physical inspection of the properties or assets of New Valley. Our opinion
is necessarily based upon information available to us, and financial, stock
market and other conditions and circumstances existing and disclosed to us, as
of the date hereof.

Based on, and subject to, the foregoing, it is our opinion as investment
bankers, that the consideration to be received by the shareholders in the
Recapitalization is, from a financial point of view, fair. In arriving at our
opinion, we have not taken into account any tax considerations regarding the
Recapitalization and their potential effects on the financial interests of such
shareholders.

PMG has been engaged to render certain financial advisory services to New Valley
in connection with the proposed recapitalization and will receive a fee for our
services, a significant portion of which is contingent upon the delivery of this
opinion. In the ordinary course of our business, we and our affiliates may
actively trade or hold the securities of New Valley for our own account or for
the account of our customers and, accordingly, may at any time hold a long or
short position in such securities. Our opinion may not be published or otherwise
used or referred to, nor shall any public reference to PMG be made, without our
prior written consent, except that such opinion may be included in the Proxy.

Very truly yours,

PENNSYLVANIA MERCHANT GROUP

<PAGE> 153

[FORM OF PROXY]

PROXY CARD

NEW VALLEY CORPORATION

1999 ANNUAL MEETING OF STOCKHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned is the record holder of $15.00 Class A Increasing Rate
Cumulative Senior Preferred Shares ($100 Liquidation Value), par value $.01 per
share, of New Valley Corporation, a Delaware corporation, and hereby appoints
each of Marc N. Bell and J. Bryant Kirkland III, and each of them, with full
power of substitution, for and in the name of the undersigned, to represent and
to vote, as designated below, all Class A Senior Preferred Shares that the
undersigned is entitled to vote if personally present at the 1999 Annual Meeting
of Stockholders of the Company to be held at The Hyatt Regency Miami, 400 S.E.
Second Avenue, Miami, Florida 33131 on [_______ _________, ________], 1999, at
11:00A.M., local time, and at any adjournment or postponement thereof. The
undersigned hereby revokes any previous proxies with respect to the matters
covered by this Proxy.

(Please mark with an "X" in the appropriate boxes)

1. Election of Bennett S. LeBow, Howard M. Lorber, Richard J. Lampen, Arnold
I. Burns and Ronald J. Kramer as directors whose terms expire in 2000.

/ / FOR all nominees listed above / / WITHHOLD AUTHORITY
(except as marked to the to vote for all of the
contrary below) nominees listed above

(INSTRUCTION: To withhold authority to vote for one or more but not all of the
nominees, mark FOR above and print the name(s) of the person(s) with respect to
whom you wish to withhold authority in the space provided below.)

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

2. Election of Henry C. Beinstein and Barry W. Ridings as directors
representing the holders of the Class A Senior Preferred Shares, whose
terms expire in 2000.

/ / FOR all nominees listed above / / WITHHOLD AUTHORITY
(except as marked to the to vote for all of the
contrary below) nominees listed above

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

3. Election of Henry C. Beinstein and Barry W. Ridings as directors
representing the holders of the Class A Senior Preferred Shares and the
$3.00 Class B Cumulative Convertible Preferred Shares, whose terms expire
in 2000.

<PAGE> 154

/ / FOR all nominees listed above / / WITHHOLD AUTHORITY
(except as marked to the to vote for all of the
contrary below) nominees listed above

(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE.)

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

4. Approval of a Plan of Recapitalization to (i) change each Class A Senior
Preferred Share into 20 Common Shares and one warrant to purchase a Common
Share, (ii) change each Class B Preferred Share into 1/3 of a Common Share
and five warrants to purchase a Common Share, (iii) change each
outstanding Common Share into 1/10 of a Common Share and 3/10 of a warrant
to purchase a Common Share and (iv) reduce the number of authorized Common
Shares from 850,000,000 to 100,000,000.

/ / FOR / / AGAINST / / ABSTAIN

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

5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR AT ANY ADJOURNMENT OR
POSTPONEMENT THEREOF.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE POSTAGE-PAID
ENVELOPE ENCLOSED.

This Proxy, when properly executed, will be voted in the manner marked
herein by the undersigned stockholder. IF NO MARKING IS MADE, THIS PROXY WILL BE
DEEMED TO BE A DIRECTION TO VOTE FOR THE COMPANY'S NOMINEES LISTED IN ITEMS 1, 2
AND 3, FOR THE PLAN OF RECAPITALIZATION SET FORTH IN ITEM 4, AND FOR THE
AUTHORIZATION SET FORTH IN ITEM 5.

Please date and sign this proxy exactly as your name
appears hereon.

------------------------------
(Signature) (Date)

------------------------------
(Signature, if held jointly)

------------------------------
(Title)

When shares are held by joint tenants, all joint tenants should sign. When
signing as attorney-in-fact, executor, administrator, trustee, guardian,
corporate officer or partner, please give full title. If shares are held by a
corporation, please sign in corporate name by the president or other authorized
officer. If shares are held by a partnership, an authorized person should sign
in the partnership's name.

<PAGE> 155

[FORM OF PROXY]

PROXY CARD

NEW VALLEY CORPORATION

1999 ANNUAL MEETING OF STOCKHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned is the record holder of $3.00 Class B Cumulative
Convertible Preferred Shares ($25 Liquidation Value), par value $.10 per share,
of New Valley Corporation, a Delaware corporation, and hereby appoints each of
Marc N. Bell and J. Bryant Kirkland III, and each of them, with full power of
substitution, for and in the name of the undersigned, to represent and to vote,
as designated below, all Class B Preferred Shares that the undersigned is
entitled to vote if personally present at the 1999 Annual Meeting of
Stockholders of the Company to be held at The Hyatt Regency Miami, 400 S.E.
Second Avenue, Miami, Florida 33131 on [_______ _________, __________], 1999, at
11:00 A.M., local time, and at any postponement or adjournment thereof. The
undersigned hereby revokes any previous proxies with respect to the matters
covered by this Proxy.

(Please mark with an "X" in the appropriate boxes)

1. Election of Bennett S. LeBow, Howard M. Lorber, Richard J. Lampen, Arnold
I. Burns and Ronald J. Kramer as directors whose terms expire in 2000.

/ / FOR all nominees listed above / / WITHHOLD AUTHORITY
(except as marked to the to vote for all of the
contrary below) nominees listed above

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

3. Election of Henry C. Beinstein and Barry W. Ridings as directors
representing the holders of the Class B Preferred Shares and the $15.00
Class A Increasing Rate Cumulative Senior Preferred Shares, whose terms
expire in 2000.

/ / FOR all nominees listed above / / WITHHOLD AUTHORITY
(except as marked to the to vote for all of the
contrary below) nominees listed above

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

4. Approval of a plan of recapitalization to (i) change each Class A Senior
Preferred Share into 20 Common Shares and one warrant to purchase a Common
Share, (ii) change each

<PAGE> 156

Class B Preferred Share into 1/3 of a Common Share and five warrants to
purchase a Common Share, (iii) change each outstanding Common Share into
1/10 of a Common Share and 3/10 of a warrant to purchase a Common Share
and (iv) reduce the number of authorized Common Shares from 850,000,000 to
100,000,000.

/ / FOR / / AGAINST / / ABSTAIN

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

5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR AT ANY POSTPONEMENT
OR ADJOURNMENT THEREOF.

(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE.)

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE POSTAGE-PAID
ENVELOPE ENCLOSED.

This Proxy, when properly executed, will be voted in the manner marked
herein by the undersigned stockholder. IF NO MARKING IS MADE, THIS PROXY WILL BE
DEEMED TO BE A DIRECTION TO VOTE FOR THE COMPANY'S NOMINEES LISTED IN ITEMS 1
AND 3, FOR THE PLAN OF RECAPITALIZATION SET FORTH IN ITEM 4, AND FOR THE
AUTHORIZATION SET FORTH IN ITEM 5.

Please date and sign this proxy exactly as your name
appears hereon.

------------------------------
(Signature) (Date)

------------------------------
(Signature, if held jointly)

------------------------------
(Title)

<PAGE> 157

[FORM OF PROXY]

PROXY CARD

NEW VALLEY CORPORATION

1999 ANNUAL MEETING OF STOCKHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned is the record holder of Common Shares, par value $.01
per share, of New Valley Corporation, a Delaware corporation, and hereby
appoints each of Marc N. Bell and J. Bryant Kirkland III, and each of them, with
full power of substitution, for and in the name of the undersigned, to represent
and to vote, as designated below, all Common Shares that the undersigned is
entitled to vote if personally present at the 1999 Annual Meeting of
Stockholders of the Company to be held at The Hyatt Regency Miami, 400 S.E.
Second Avenue, Miami, Florida 33131 on [_______ ____________, _________], 1999
at, 11:00 A.M., local time, and at any postponement or adjournment thereof. The
undersigned hereby revokes any previous proxies with respect to the matters
covered by this Proxy.

(Please mark with an "X" in the appropriate boxes)

1. Election of Bennett S. LeBow, Howard M. Lorber, Richard J. Lampen, Arnold
I. Burns and Ronald J. Kramer as directors whose terms expire in 2000.

/ / FOR all nominees listed above / / WITHHOLD AUTHORITY
(except as marked to the to vote for all of the
contrary below) nominees listed above

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

4. Approval of a plan of recapitalization to (i) change each Class A Senior
Preferred Share into 20 Common Shares and one warrant to purchase a Common
Share, (ii) change each Class B Preferred Share into 1/3 of a Common Share
and five warrants to purchase a Common Share, (iii) change each
outstanding Common Share into 1/10 of a Common Share and 3/10 of a warrant
to purchase a Common Share and (iv) reduce the number of authorized Common
Shares from 850,000,000 to 100,000,000.

/ / FOR / / AGAINST / / ABSTAIN

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

5. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, OR AT ANY POSTPONEMENT
OR ADJOURNMENT THEREOF.

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE POSTAGE-PAID
ENVELOPE ENCLOSED.

<PAGE> 158

This Proxy, when properly executed, will be voted in the manner marked
herein by the undersigned stockholder. IF NO MARKING IS MADE, THIS PROXY WILL BE
DEEMED TO BE A DIRECTION TO VOTE FOR THE COMPANY'S NOMINEES LISTED IN ITEM 1,
FOR THE PLAN OF RECAPITALIZATION SET FORTH IN ITEM 4, AND FOR THE AUTHORIZATION
SET FORTH IN ITEM 5.

(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE.)

Please date and sign this proxy exactly as your name
appears hereon.

------------------------------
(Signature) (Date)

------------------------------
(Signature, if held jointly)

------------------------------
(Title)