INVESTMENT SECURITIES AVAILABLE FOR SALE. At June 30, 2003, New Valley had investment securities available for sale of $19,276. New Valley classifies investments in debt and marketable equity securities as either available for sale or held to maturity. Investments classified as available for sale are carried at fair value, with net unrealized gains and losses included as a separate component of stockholders' equity. Realized gains and losses are included in other income. The cost of securities sold is determined based on average cost. Gains are recognized when realized in New Valley's consolidated statement of operations. Losses are recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair value. New Valley's policy is to review its securities on a regular basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. If it is determined that an other-than-temporary decline exists in one of New Valley's marketable securities, it is New Valley's policy to record a realized loss on such investment in the Company's consolidated statements of operations. In 2002, New Valley recorded a write down of $6,776 related to other-than-temporary declines of its investment securities. During the six months ended June 30, 2003, New Valley had net increases to unrealized gains on investment securities of $6,824, which have been included in accumulated other comprehensive income in the Company's consolidated statement of changes in stockholders' equity.

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

LONG-TERM INVESTMENTS. At June 30, 2003, New Valley had long-term investments of $2,408, representing investments in various limited partnerships. The principal business of the limited partnerships is investing in real estate and investment securities. These long-term investments are illiquid, and the value of the investments is dependant on the performance of the underlying partnership and its management by the general partners. In assessing potential impairment for these investments, New Valley considers the external markets for these types of investments as well as the forecasted financial performance of its investees. If these forecasts are not met, New Valley may have to recognize an impairment charge in its consolidated statements of operations.

INCOME TAXES. The year 2000 was the only year out of the last five in which New Valley has reported net income. New Valley's losses during these and prior years have generated federal tax net operating loss, or NOL, carry forwards of approximately $161,000 as of June 30, 2003 and capital loss carry forwards of $6,000, which expire at various dates from 2006 through 2023. New Valley also has approximately $13,500 of alternative minimum tax credit carry forwards as of June 30, 2003, which may be carried forward indefinitely under current U.S. tax law. Generally accepted accounting principles require that New Valley record a valuation allowance against the deferred tax asset associated with these loss carry forwards if it is "more likely than not" that New Valley will not be able

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

to utilize it to offset future taxes. Due to the size of the loss carry forwards in relation to New Valley's history of unprofitable operations and to the continuing uncertainties surrounding its operations as it seeks to acquire additional operating companies, New Valley has not recognized any of this net deferred tax asset. New Valley currently provides for income taxes only to the extent that it expects to pay cash taxes (primarily state taxes and the federal alternative minimum tax) for current income.

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

                                              THREE MONTHS ENDED JUNE 30,           SIX MONTHS ENDED JUNE 30,
                                              --------------------------           --------------------------
                                                2003               2002               2003               2002
                                              -------            -------            -------            -------
Real estate:
    Revenues                                  $ 1,777            $   237            $ 3,576            $   661
    Expenses                                    1,117              1,003              2,387              1,499
    Other (loss) income                          (174)             8,909               (891)             8,909
                                              -------            -------            -------            -------
    Operating income before
       taxes and minority interests           $   486            $ 8,143            $   298            $ 8,071
                                              =======            =======            =======            =======

Corporate and other:
    Revenues                                  $   142            $ 1,495            $   586            $ 3,355
    Expenses                                    2,541              3,067              5,766              6,279
    Other loss                                     (5)              (394)               (12)              (398)
                                              -------            -------            -------            -------
    Operating loss before taxes
       and minority interests                 $(2,404)           $(1,966)           $(5,192)           $(3,322)
                                              =======            =======            =======            =======

THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002

Consolidated total revenues were $1,919 for the three months ended June 30, 2003 versus $1,732 for the same period last year. The increase in revenues of $187 was attributable primarily to additional rental revenues from the acquisition of the two commercial office buildings in Princeton, N.J. in December 2002 offset by decreased gains on the sale of investments of $957 and the absence of rental revenue from New Valley's remaining U.S. shopping center, which was disposed of in May 2002.

Revenues from real estate operations for the three months ended June 30, 2003 increased by $1,540 primarily due to additional rental revenues from the acquisition of the two office buildings in December 2002, offset by the absence of rental revenue from New Valley's remaining shopping center disposed of in May 2002. Expenses of the real estate operations increased $114 in the 2003 period due primarily to higher expenses as a result of the acquisition of the office buildings offset by the expenses associated with the shopping center and expenses associated with the closing of BrookeMil's Russian operations. New Valley recorded gains on sale of real estate in the second quarter of 2002 of $8,484 in connection with the April 2002 sale of BrookeMil and $425 from the

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

disposal of the remaining U.S. shopping center. New Valley also recorded $767 in additional general and administrative expenses in the second quarter of 2002 related to the closing of its Russian operations. The expenses consisted principally of employee severance.

Other income from real estate activities in 2003 consisted of equity losses from non-consolidated real estate businesses of $174. The losses resulted from losses of $112 related to Douglas Elliman Realty, LLC and $62 related to New Valley's investment in Koa Investors, which owns the former Kona Surf Hotel in Kailua-Kona, Hawaii. Koa Investors' loss primarily represents management fees. Koa Investors capitalizes all costs related to the acquisition and development of the property. New Valley's equity loss in Douglas Elliman Realty, LLC includes New Valley's portion ($725) of amortization associated with Douglas Elliman, LLC's customer contracts outstanding at the acquisition date.

For the three months ended June 30, 2003, New Valley's revenues of $142 related to corporate and other activities consisted of interest and dividend income of $142. For the same period in the prior year, revenues related to corporate and other activities were $1,495, which consisted of net gains on investments of $957 and interest and dividend income of $538. The decrease in interest income is due primarily to lower interest rates and lower cash balances in 2003 versus 2002.

Corporate and other expenses of $2,541 for the three months ended June 30, 2003 consisted primarily of employee compensation and benefits of $1,436 and legal expense of $417. Corporate and other expenses of $3,067 for the second quarter of 2002 consisted primarily of employee compensation and benefits of $1,616 and legal expense of $484.

New Valley recorded a $388 charge for the three months ended June 30, 2002 related to a provision for loss on its net investment in its 72.7% subsidiary, ThinkCorp Holdings Corporation, formerly known as Thinking Machines Corporation. In June 1999, ThinkCorp Holdings sold substantially all of its assets, consisting of its Darwin(R) software and services business, to Oracle Corporation. The purchase price included a contingent payable of $20,300 based on sales by Oracle of the Darwin product above specified sales targets during a three-year period. Based on Oracle having informed ThinkCorp Holdings that the specified sales targets for the 2000 and 2001 periods were not achieved and the overall market conditions in the U.S. computer industry, New Valley determined it was more likely than not that it would not recover its investment in ThinkCorp Holding. Oracle subsequently advised ThinkCorp Holdings that the specified sales target for 2002 was likewise not met.

There was no income tax for the three months ended June 30, 2003 and 2002. The effective tax rate does not bear a customary relationship with pre-tax accounting income principally as a consequence of the change in the valuation allowance relating to deferred tax assets.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002

Consolidated total revenues were $4,162 for the six months ended June 30, 2003 versus $4,016 for the same period last year. The increase in revenues of $146 was attributable primarily to additional rental revenues from the acquisition of the two commercial office buildings in Princeton, N.J. in December 2002 offset by decreased gains on the sale of investments of $2,069 and the absence of rental revenue from New Valley's remaining U.S. shopping center, which was disposed of in May 2002.

Revenues from real estate operations for the six months ended June 30, 2003 increased by $2,915 primarily due to additional rental revenues from the acquisition of the two office buildings in December 2002, offset by the absence of rental revenue from New Valley's remaining shopping center disposed of in May 2002. Expenses of the real estate operations increased $888 in the 2003 period due primarily to higher expenses as a result of the acquisition of the office buildings offset by the expenses associated with the shopping center and expenses associated with the closing of BrookeMil's Russian operations. New Valley recorded gains on sale of real estate in the second quarter of 2002 of $8,484 in connection with the April 2002 sale of BrookeMil and $425 from the disposal of the remaining U.S. shopping center. New Valley also recorded $767 in additional general and administrative expenses in the second quarter of 2002 related to the closing of its Russian operations. The expenses consisted principally of employee severance.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Other income from real estate activities in 2003 consisted of equity losses from non-consolidated real estate businesses of $891. The equity losses resulted from $689 of losses associated with Douglas Elliman Realty, LLC and $202 related to New Valley's investment in Koa Investors, which owns the former Kona Surf Hotel in Kailua-Kona, Hawaii. Koa Investors' loss primarily represents management fees. Koa Investors capitalizes all costs related to the acquisition and development of the property. New Valley's equity loss in Douglas Elliman Realty, LLC includes New Valley's portion ($725) of amortization associated with Douglas Elliman, LLC's customer contracts outstanding at the acquisition date.

For the six months ended June 30, 2002, New Valley's revenues of $586 related to corporate and other activities consisted of net gains on investments of $163 and interest and dividend income of $423. For the same period in the prior year, revenues related to corporate and other activities were $3,355, which consisted of net gains on investments of $2,232 and interest and dividend income of $1,123. The decrease in interest income is due primarily to lower interest rates and lower cash balances in 2003 versus 2002.

Corporate and other expenses of $5,766 for the six months ended June 30, 2003 consisted primarily of employee compensation and benefits of $3,039 and legal expense of $1,188. Corporate and other expenses of $6,279 for the six months ended June 30, 2002 consisted primarily of employee compensation and benefits of $3,237 and legal expense of $893. The increase in corporate expense was primarily due to expenses related to a proposed acquisition by New Valley which was not consummated.

New Valley recorded a $388 charge for the six months ended June 30, 2003 related to a provision for loss on its net investment in ThinkCorp Holdings.

There was no income tax for the six months ended June 30, 2003 and 2002, respectively. The effective tax rate does not bear a customary relationship with pre-tax accounting income principally as a consequence of the change in the valuation allowance relating to deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2003, New Valley's cash and cash equivalents decreased from $82,113 to $67,499 due primarily to the $9,500 investment in Douglas Elliman Realty, LLC and cash used for operations of $5,695.

Cash used for operating activities for the six months ended June 30, 2003 was $5,695 compared with cash provided from operating activities for the six months ended June 30, 2002 of $11,300. The difference is primarily due to the receipt of $17,551 in the first quarter of 2002 from the settlement of a lawsuit offset by a decrease in payables, primarily associated with the payment of closing expenses in 2002 related to the December 2001 sale of Western Realty Investments.

The lawsuit settlement resulted from litigation which arose out of the insurers' participation in a program of insurance covering the amount of fuel in the Westar IV and V communication satellites owned by New Valley's former Western Union satellite business, which was sold in 1989. The two satellites, each of which was launched in 1982 with an expected ten-year life, had shortened lives due to insufficient fuel. In the settlement, New Valley received payment of $17,551 from the insurers in March 2002 for the shortened lives of the two satellites.

Cash used for investing activities for the six months ended June 30, 2003 was $7,252 compared to cash provided from investing activities of $20,062 for the six months ended June 30, 2002. The difference is primarily attributable to the sale of BrookeMil for $20,461, net of closing expenses, in 2002, the $9,500 investment in Douglas Elliman Realty, LLC in 2003 and the differences in net sales of marketable securities and long-term investments of $1,844 in 2003 versus $2,568 in 2002, offset by the issuance of a note receivable to Ladenburg Thalmann Financial Services Inc. of $2,500 in 2002.

On December 13, 2002, New Valley completed the acquisition of two commercial office buildings in Princeton, N.J. for an aggregate purchase price of $54,258. To finance a portion of the purchase price for the office buildings,

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

New Valley borrowed on the closing date $40,500 from HSBC Realty Credit Corporation (USA). The loan has a term of four years, bears interest at a floating rate of 2% above LIBOR, and is secured by a first mortgage on the office buildings, as well as by an assignment of leases and rents. Principal is amortized to the extent of $54 per month during the term of the loan. The loan may be prepaid without penalty and is non-recourse against New Valley, except for various specified environmental and related matters, misapplications of tenant security deposits and insurance and condemnation proceeds, and fraud or misrepresentation by New Valley in connection with the indebtedness.

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

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

New Valley holds a 50% interest in the former Kona Surf Hotel in Kailua-Kona, Hawaii. Following a major renovation, the property is scheduled to reopen in late 2004 as a Sheraton resort. New Valley is required to make additional investments of $6,600 at June 30, 2003 in the project. New Valley is also required to make additional investments in another limited partnership of up to $979 at June 30, 2003.

In March 2002, New Valley lent $2,500 to Ladenburg Thalmann Financial Services, the Company's majority-owned subsidiary until December 2001 which acquired Ladenburg Thalmann & Co. Inc. from New Valley in May 2001. The loan, which bears interest at 1% above the prime rate, was due on the earlier of December 31, 2003 or the completion of one or more equity financings where Ladenburg Thalmann Financial Services receives at least $5,000 in total proceeds. In July 2002, Ladenburg Thalmann Financial Services borrowed an additional $2,500 from New Valley on the same terms. In November 2002, New Valley agreed, in connection with a $3,500 loan to Ladenburg Thalmann Financial Services by an affiliate of its clearing broker, to extend the maturity of the notes to December 31, 2006 and to subordinate the notes to the repayment of the loan.

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

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

New Valley has received a notice of proposed assessment from a state taxing authority related to the years ended December 31, 1994 and 1995. If the state taxing authority were to prevail, New Valley would owe approximately $6,900, including interest, at June 30, 2003. New Valley intends to vigorously

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

oppose the proposed assessment. An initial administrative hearing has been scheduled for October 2003. If New Valley is unsuccessful in the initial administrative hearing, it may request an additional administrative hearing prior to challenging the notice of proposed assessment in court. No assurances can be given that New Valley will prevail in this matter. New Valley believes it has fully provided for any amounts due in its consolidated financial statements as of June 30, 2003.

As of June 30, 2003, New Valley had $656 of prepetition bankruptcy-related claims and restructuring accruals including claims for lease rejection damages and for unclaimed monies that certain states are seeking on behalf of money transfer customers. The remaining claims may be subject to future adjustments based on potential settlements or decisions of the court.

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

Cash flows used in financing activities were $1,667 for the six months ended June 30, 2003 and $12,171 for the six months ended June 30, 2002. The 2003 amount primarily consists of the repurchase of 318,572 of New Valley's Common Shares for $1,346 in 2003. The 2002 amount primarily consists of the repayment of the participating loan to Apollo in connection with the sale of BrookeMil.

On October 5, 1999, New Valley's Board of Directors authorized the repurchase of up to 2,000,000 Common Shares from time to time on the open market or in privately negotiated transactions depending on market conditions. As of August 13, 2003, New Valley had repurchased 1,185,615 shares for approximately $4,695.

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" was issued. SFAS No. 146 requires that liabilities for costs associated with an exit activity or disposal of long-lived assets be recognized when the liabilities are incurred and can be measured at fair value. SFAS No. 146 is effective for the Company for any exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not impact on New Valley's consolidated financial statements.

In November 2002, Financial Accounting Standards Board Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under the guarantee. Guarantors will also be required to meet expanded disclosure obligations. The initial recognition and measurement provisions of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for annual and interim financial statements that end after December 15, 2002. The adoption of this statement did not impact on New Valley's consolidated financial statements.

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company is currently analyzing the provisions of SFAS No. 149 to determine if there will be any impact of adoption, but does not believe that there will be any material impact on its consolidated financial statements.

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

MARKET RISK

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

EQUITY PRICE RISK

New Valley held investment securities available for sale totaling $19,276 at June 30, 2003. Adverse market conditions could have a significant effect on the value of New Valley's investments.

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

INTEREST RATE RISK

As of June 30, 2003, New Valley's outstanding debt consisted of a non-recourse mortgage note payable with a variable interest rate, which increases the risk of fluctuating interest rates. New Valley's exposure to market risk includes interest rate fluctuations in connection with its variable rate borrowing, which could adversely affect its cash flows. As of June 30, 2003, New Valley had no interest rate caps or swaps. Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), New Valley's annual interest expense could increase or decrease by approximately $400.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

New Valley and its representatives may from time to time make oral or written "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including any statements that may be

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

contained in the foregoing "Management's Discussion and Analysis of Financial Condition and Results of Operations", in this report and in other filings with the Securities and Exchange Commission and in its reports to stockholders, which represent New Valley's expectations or beliefs with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties and, in connection with the "safe-harbor" provisions of the Private Securities Litigation Reform Act, New Valley has identified under "Risk Factors" in Item 1 of New Valley's Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of New Valley.

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