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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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PART I

Item 1. Business.

Wellsford Real Properties, Inc. (and subsidiaries, collectively, the “Company”) was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust (the “Trust”). On May 30, 1997, the Trust merged (the “Merger”) with Equity Residential Properties Trust (“EQR”). Immediately prior to the Merger, the Trust contributed certain of its assets to the Company and the Company assumed certain liabilities of the Trust. Immediately after the contribution of assets to the Company and immediately prior to the Merger, the Trust distributed to its common shareholders all of the outstanding shares of the Company owned by the Trust.

The Company is a real estate merchant banking firm headquartered in New York City which acquires, develops, finances and operates real properties, constructs for-sale single family home and condominium developments and organizes and invests in private and public real estate companies. The Company’s activities can be categorized into three strategic business units (“SBUs”) within which it executes its business plans. A brief description of the Company’s investments held in each SBU at December 31, 2004 follows.

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See the accompanying consolidated financial statements for certain financial information regarding the Company’s segments.

During March 2004, the Company retained an investment banking firm, Lazard Frères & Co. LLC, to advise the Company on various strategic financial and business alternatives available to it to maximize shareholder value. Such alternatives under consideration include: acquisitions of businesses or development assets, dispositions of assets, recapitalization, liquidation, returning excess cash to stockholders, privatization of the Company, sale or merger of the Company and other alternatives that would keep the Company independent.

During 2004 and into 2005, Wellsford/Whitehall has continued to sell assets and in the fourth quarter of 2004 the Company sold its ownership interest in a joint venture which purchased debt instruments (“Second Holding”). Simultaneously, the Company has been focusing its efforts on residential development opportunities. Developing for-sale housing could potentially allow for the Company to utilize a portion of its unused net operating loss carryforwards against income generated from the sale of these homes. The Company continues to seek additional ways to utilize its tax asset. Additionally, the Company is contemplating uses of its cash which could include retiring debt and returning cash to common stockholders.

On March 10, 2005, the Company notified EQR of its intent to redeem in cash its outstanding $25,000,000 of Convertible Trust Preferred Securities. The Company expects to complete the redemption during March 2005.

The Company’s executive offices are located at 535 Madison Avenue, New York, New York, 10022; telephone, (212) 838-3400; web address, www.wellsford.com; e-mail, [email protected]. To access the Company’s other documents filed with the Securities and Exchange Commission, visit www.wellsford.com. The Company has 16 employees as of December 31, 2004.

Commercial Property Activities

Since August 1997, the Company’s commercial property activities have primarily consisted of its interest in Wellsford/Whitehall, a joint venture by and among the Company, various entities affiliated with the Whitehall Funds (“Whitehall”) and private real estate funds sponsored by The Goldman Sachs Group, Inc. (“Goldman Sachs”). The Company’s interest in Wellsford/Whitehall was 35.21% and 32.59% at December 31, 2004 and 2003, respectively. The managing member (“WP Commercial”) is a Goldman Sachs and Whitehall affiliate.

Wellsford/Whitehall was originally organized as a private real estate operating company which would lease and re-lease space, perform construction for tenant improvements, expand buildings, re-develop properties and based on general and local economic conditions and specific conditions in the real estate industry, sell properties for an appropriate price.

At December 31, 2004, Wellsford/Whitehall owned and operated 17 properties (including 10 office properties, five net-leased retail properties and two land parcels), totaling approximately 1,773,000 square feet of improvements, primarily located in New Jersey. During January 2005, Wellsford/Whitehall sold 13 properties aggregating 1,285,000 square feet (seven office properties, one land parcel and five net-leased retail properties, see below). The remaining four properties (three office properties and one land parcel) are expected to be sold during 2005.

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The Company’s investment in Wellsford/Whitehall, which is accounted for on the equity method, was approximately $4,229,000 and $14,616,000 at December 31, 2004 and 2003, respectively. The Company’s share of (losses) from Wellsford/Whitehall was approximately $(10,437,000), $(36,473,000) and $(1,292,000) for the years ended December 31, 2004, 2003 and 2002, respectively.

On January 27, 2005, Wellsford/Whitehall completed the sale of a portfolio of seven office properties and a land parcel for approximately $72,000,000, after selling and other costs. The properties, which aggregate approximately 1,231,000 square feet, are all located in New Jersey. Substantially all of the net proceeds from the sale and unrestricted cash and certain related reserve funds aggregating approximately $5,000,000, were used to retire existing debt. In addition, Wellsford/Whitehall also closed on the sale of five retail stores for an aggregate sales price of $17,100,000, after selling costs on January 21, 2005. The net proceeds from the sale of the retail stores of approximately $1,300,000, after the payment of related debt, will be used by Wellsford/Whitehall for working capital purposes. Wellsford/Whitehall recorded an impairment charge of approximately $21,069,000 on the assets relating to both transactions during the fourth quarter of 2004, of which the Company’s share was approximately $7,419,000.

During July 2004, Wellsford/Whitehall completed a transaction whereby it transferred six of its Massachusetts properties (aggregating 891,000 square feet), which were subject to mortgage debt of approximately $64,200,000 (“Nomura Loan”), along with a land parcel, related restricted cash balances aggregating $6,428,000, cash and certain other consideration to a newly formed partnership which includes the New England family (the “Family”) that owned an aggregate 7.45% equity interest in Wellsford/Whitehall (the “Family Partnership”), in redemption of the Family’s equity interests in Wellsford/Whitehall (the “Redemption Transaction”). As a result of the Redemption Transaction, Wellsford/Whitehall recorded a loss of approximately $4,306,000 during the third quarter of 2004, of which the Company’s share was approximately $1,403,000. The Company’s equity interest in Wellsford/Whitehall was increased as a result of the Redemption Transaction in July 2004 to 35.21% from 32.59% at December 31, 2003.

At the time of the Redemption Transaction, there was an elimination of an existing tax indemnity which Wellsford/Whitehall had to the Family’s members. The economic effect of this tax indemnity restricted most future asset sales through 2007 and required a minimum amount of non-recourse debt on Wellsford/Whitehall’s balance sheet; such restrictions no longer remain.

Annually, after the preparation of budgets for the following year and as part of the financial statement closing process, Wellsford/Whitehall performs evaluations for impairment on all of its real estate assets. As part of the fiscal 2003 evaluation, Wellsford/Whitehall recorded an impairment charge of approximately $114,700,000 related to 12 assets in the portfolio during the fourth quarter of 2003. The provision was not the result of a change in the intended use of such assets. However, it was the result of several factors, including, but not limited to, a continued deterioration of and outlook for the suburban office submarkets where Wellsford/Whitehall’s properties are situated. Specifically, these included decreasing market rents, slower absorption trends and greater tenant concession costs. The Company’s share of this impairment charge was approximately $37,377,000 in 2003 and as a result, the Company wrote-off related unamortized warrant costs on the Company’s books of approximately $2,644,000.

At December 31, 2002, in anticipation of the sales of three properties, Wellsford/Whitehall recorded impairment provisions aggregating approximately $1,351,000 as the expected sale prices net of selling expenses were less than the carrying amount of such properties. The Company’s share of these impairments was approximately $440,000 in 2002 and as a result, the Company wrote-off related unamortized warrant costs on the Company’s books of approximately $284,000.

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During the years ended December 31, 2004, 2003 and 2002, Wellsford/Whitehall completed the following disposition transactions (there were no purchases of assets by Wellsford/Whitehall during these periods):

The following table summarizes the long-term debt at Wellsford/Whitehall:

In April 2004, Wellsford/Whitehall executed an amended agreement with General Electric Capital Corporation ("GECC"), to extend the loan maturity to December 31, 2006, adjust the interest rate to LIBOR plus 3.25% per annum and provide for a $16,000,000 line of credit to fund certain capital improvements, subject to certain conditions, through December 31, 2005 (the "GECC Facility"). Excess cash flow, as defined, from the properties collateralizing the GECC Facility can only be used for capital expenditures for such properties. The properties collateralizing the GECC Facility consisted of eight office properties in New Jersey and one in Massachusetts in April 2004. As a result of the sale of certain New Jersey properties in January 2005, the GECC Facility balance was reduced to $36,906,000 which is collateralized by the three remaining unsold office buildings.

From March 2004 to July 2004, the managing member of Wellsford/Whitehall withheld a portion of its scheduled monthly debt service payments on the Nomura Loan and met with the special servicer to present and discuss various potential debt term alternatives. The portion of the scheduled payments not being made related to the amount by which the debt service due each month exceeded the aggregate rent receipts of the six Massachusetts properties, which were payable directly into a lockbox with the lender and were insufficient as a result of low occupancy at these properties. The special servicer agreed to waive default interest in connection with the nonpayment and restructured the Nomura Loan with the Family Partnership which acquired the six properties as described above.

During March 2004, the Company and Whitehall agreed to provide up to $8,000,000 to Wellsford/Whitehall through March 31, 2005 (of which the Company's share is 35% or $2,800,000). The Company does not expect that it will be required to fund any amount under this commitment.

WP Commercial provides management, construction, development and leasing services to Wellsford/Whitehall based on an agreed upon fee schedule. WP Commercial receives an administrative management fee of 93 basis points on a predetermined value for each asset in the Wellsford/Whitehall portfolio. As Wellsford/Whitehall sells

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assets, the basis used to determine the fee is reduced by the respective asset's predetermined value six months after the completion of such sales. The fees earned by WP Commercial related to this service were approximately $3,715,000, $4,604,000 and $5,826,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

WP Commercial also provides similar services (to those described above) to a separate venture formed by Whitehall as well as other affiliates of Whitehall and to third parties, including tenants of Wellsford/Whitehall and new owners of properties disposed of by Wellsford/Whitehall.

Whitehall pays the Company fees with respect to assets disposed of by Wellsford/Whitehall and for certain acquisitions of real estate made by certain other affiliates of Whitehall. Such fees aggregated $46,000, $430,000 and $29,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

A buy/sell agreement of equity interests between the Company and Whitehall can be exercised by either partner after December 31, 2003 with respect to the Wellsford/Whitehall venture (the "Buy/Sell Agreement"). The nature of the Buy/Sell Agreement allows for either the Whitehall funds, as a group, or the Company to provide notice that it intends to purchase the non-initiating partner's interest at a specific price per unit. The non-initiating partner may either accept that offer or instead may reject that offer and become the purchaser at the initially offered price. The terms of the GECC Facility allow for the continuance of such debt as long as the Company or Whitehall has ultimate decision-making authority over the management and operations of Wellsford/Whitehall. As of the date of this report, neither partner has exercised its buy/sell right under the Buy/Sell Agreement.

Debt and Equity Activities

The Company, through the Debt and Equity Activities SBU, primarily makes debt investments directly, or through joint ventures, predominantly in real estate related assets and investments.

At December 31, 2004, the Company had the following investments in the Debt and Equity Activities SBU: (i) a debt investment of $1,032,000; (ii) an equity investment of approximately $2,190,000 in Clairborne Fordham, a company initially organized to provide $34,000,000 of mezzanine construction financing for a high-rise condominium project in Chicago, which currently owns and is selling the remaining unsold components of this project; (iii) approximately $6,790,000 invested in Reis, a real estate information and database company; and (iv) a $450,000 investment in Wellsford Mantua, a company organized to purchase land parcels for rezoning, subdivision and creation of environmental mitigation credits.

Debt Investments

Guggenheim Loan

In July and August 1998, the Company invested a total of approximately $2,100,000 for an approximate 4.20% equity interest in The Liberty Hampshire Company, L.L.C. ("Liberty Hampshire"), a venture which structures, establishes and provides management and services for special purpose finance companies formed to invest in financial assets, including Second Holding (see below). In December 2000, the Company sold this interest to the majority owner of Liberty Hampshire for $5,160,000 and recorded a gain of approximately $2,500,000. The Company received $1,032,000 of cash and a note for the remaining balance of $4,128,000 which bears interest at 8.25% per annum, is due in December 2005 and has scheduled annual principal and interest payments (the "Guggenheim Loan"). The balance of the Guggenheim Loan was $1,032,000 and $3,096,000 at December 31, 2004 and 2003, respectively. Interest revenue was approximately $173,000, $259,000 and $302,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

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277 Park Loan

In April 1997, the Company and a predecessor of Bank of America originated an $80,000,000 loan (the "277 Park Loan") to entities which own substantially all of the equity interests (the "Equity Interests") in the entity which owns a 1,750,000 square foot office building located in New York City (the "277 Park Property"). The Company advanced $25,000,000 pursuant to the 277 Park Loan.

During September 2003, the 277 Park Loan was prepaid by the borrowers and pursuant to the terms of the loan, WRP received a yield maintenance penalty of $4,368,000 which is included in interest revenue for the year ended December 31, 2003. This note would have provided for $767,000 of interest revenue in the fourth quarter of 2003 and $3,042,000 for future annual periods to May 2006 for both the Debt and Equity Activities SBU and the Company's consolidated statement of operations. The 277 Park Loan bore interest at 12.00% per annum with a stated maturity of May 2007. The 277 Park Loan was secured primarily by a pledge of the Equity Interests owned by the borrowers and thus was junior to a first mortgage loan on the 277 Park Property. Interest revenue was approximately $6,643,000 and $3,042,000 for the years ended December 31, 2003 and 2002, respectively, with the 2003 period amount including the $4,368,000 yield maintenance penalty.

Equity Investments

Second Holding

Second Holding is a joint venture special purpose finance company, organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade rated other asset-backed securities. The other asset-backed securities that Second Holding purchased may have been secured by, but not limited to, leases on aircraft, truck or car fleets, bank deposits, leases on equipment, fuel/oil receivables, consumer receivables, pools of corporate bonds and loans and sovereign debt. It was Second Holding's intent to hold all securities to maturity. Many of the securities owned by Second Holding were obtained through private placements.

The Company's initial net contribution to Second Holding was approximately $24,600,000 to obtain an approximate 51.09% non-controlling interest in Second Holding, with Liberty Hampshire owning 10% and an affiliate of a significant shareholder of the Company, the Caroline Hunt Trust Estate, (which owns 405,500 shares of the Company at December 31, 2004 and 2003 ("Hunt Trust")) together with other Hunt Trust related entities, owning the remaining approximate 39% interest.

During the latter part of 2000, an additional partner was admitted to the venture who committed to provide credit enhancement through April 2010 by issuing an insurance policy (through one of its affiliates) for the payment of principal and interest on the junior subordinated bond issue of $100,000,000. The parent company of this partner announced during 2003 that its subsidiary (the partner of Second Holding) will no longer write new credit enhancement business, however, it would continue to support its existing book of credit enhancement business. This partner was entitled to 35% of net income as defined by agreement, while the other partners, including the Company, shared in the remaining 65%. The Company's allocation of income was approximately 51.09% of the remaining 65%.

During the second quarter of 2004, the partner providing the credit enhancement requested that the management of Second Holding not purchase any further long-term investments and Second Holding accordingly suspended such acquisitions. During the third quarter of 2004, the partners evaluated alternatives available to Second Holding in addition to holding existing assets through respective maturities and then retiring related debt. As a consequence of not purchasing additional assets, operating income, fees earned and cash flows received by the Company from such fees declined during 2004.

In November 2004, the Company completed the sale of its interest in Second Holding for $15,000,000 in cash. Since the Company was willing to entertain and execute an agreement at this price, and based upon the

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evaluation of other alternatives, the Company determined it was appropriate, under the accounting literature for equity method investees, to record a $9,000,000 impairment charge to the carrying amount of its investment in Second Holding during the third quarter of 2004.

The Company accounted for its investment in Second Holding on the equity method of accounting as its interests were represented by two of eight board seats with one-quarter of the vote on any major business decisions. The Company's investment was approximately $29,167,000 at December 31, 2003. The Company's share of (loss) income from Second Holding's operations was approximately $(4,790,000), $1,640,000 and $723,000 for the eleven months ended November 30, 2004 (date of sale) and for the years ended December 31, 2003 and 2002, respectively. The loss in the year ended December 31, 2004 is the result of a$12,930,000 net impairment charge taken by Second Holding (of which the Company's share was $6,606,000) relatedto the write-down of one of its investments during the first quarter of 2004, offset by a partial recovery when the investment was sold in the second quarter of 2004. The net fees earned by the Company, which were based upon total assets of Second Holding, amounted to approximately $751,000, $930,000 and $646,000 for the years ended December 31, 2003 and 2002, respectively.

Clairborne Fordham

In October 2000, the Company and Prudential Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance Company, organized Clairborne Fordham, a venture in which the Company has a 10% interest. The Company's investment in Clairborne Fordham, which is accounted for on the equity method, was $2,190,000 and $3,186,000 at December 31, 2004 and 2003, respectively.

Upon its organization, Clairborne Fordham provided an aggregate of $34,000,000 of mezzanine construction financing (the "Mezzanine Loan") for the construction of Fordham Tower, a 50-story, 227 unit, luxury condominium apartment project to be built on Chicago's near northside ("Fordham Tower"). The Mezzanine Loan, which matured in October 2003, bore interest at a fixed rate of 10.50% per annum with provisions for additional interest to PREI and the Company and was secured by a lien on the equity interests of the owner of Fordham Tower. The Company could earn fees from PREI's additional interest based upon certain levels of returns on the project. Such additional interest had not been accrued by the Company or Clairborne Fordham through the maturity of the Mezzanine Loan, nor had any fees been accrued by the Company.

The Mezzanine Loan was not repaid at maturity and as of October 2003, an amended loan agreement was executed. The amended terms provided for extending the maturity to December 31, 2004, the placement of a first mortgage lien on the project, no interest to be accrued after September 30, 2003 and for the borrower to add to the existing principal amount the additional interest due Clairborne Fordham at September 30, 2003 of approximately $19,240,000. In lieu of interest after September 30, 2003, Clairborne Fordham was to participate in certain additional cash flows, as defined, if earned from net sales proceeds of the Fordham Tower project.

The amended loan agreement provided for a $3,000,000 additional capital contribution by the borrower and use of an existing cash collateral account to pay off an existing construction loan and any unpaid construction costs. Also, the amended loan agreement provided for an initial principal payment and all proceeds after project costs to be first applied to payment in full of the loan and the additional interest to Clairborne Fordham before any sharing of project cash flow with the borrower. Payments of $5,125,000 and $7,823,000 were made to Clairborne Fordham during the fourth quarter of 2003 and for the period January 1, 2004 to September 15, 2004, respectively, of which the Company's share was $510,000 and $782,000, respectively.

On September 15, 2004, Clairborne Fordham executed an agreement with the owners of Fordham Tower pursuant to which Clairborne Fordham obtained title to the remaining unsold components of the project (which included 18 unsold residential units, the 188 space parking garage and 12,000 square feet of retail space). Additionally, Clairborne Fordham agreed to distribute the first $2,000,000 of sale proceeds to the former owner. No gain or loss was recognized by Clairborne Fordham or the Company as a result of the transfer. During the period September 15, 2004 to December 31, 2004, Clairborne Fordham sold the retail space and three residential units and realized approximately $8,677,000 of net proceeds before the $2,000,000 payment to the former

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owner. Clairborne Fordham distributed approximately $5,655,000 to the venture members including approximately $566,000 to the Company during the period September 15, 2004 to December 31, 2004. Undistributed proceeds were retained by Clairborne Fordham for working capital purposes. It is the intention of Clairborne Fordham to complete the orderly sale of the remaining components.

The following table details the Company's share of income from Clairborne Fordham:

Other Investments

Reis, Inc.

The Company has direct and indirect equity investments in a real estate information and database company, Reis, a provider of real estate market information to institutional investors. At December 31, 2004 and 2003, the Company's aggregate investment in Reis, which is accounted for under the cost method, was approximately $6,790,000 (approximately 21.6% of Reis' equity on an as converted basis at December 31, 2004). The president and primary common shareholder of Reis is the brother of Mr. Lynford, the Chairman, President and Chief Executive Officer of the Company. Mr. Lowenthal, the Company's former President and Chief Executive Officer, who currently serves on the Company's Board of Directors, has served on the board of directors of Reis since the third quarter of 2000. Messrs. Lynford and Lowenthal have and will continue to recuse themselves from any investment decisions made by the Company pertaining to Reis.

Value Property Trust

During 2004 and 2003, the Company sold the remaining properties acquired as part of the February 1998 merger with Value Property Trust ("VLP"). In July 2003, the Salem, New Hampshire property was sold for a net sales price of approximately $4,200,000 and the Company utilized $22,000 of an existing impairment reserve recorded in 2000. During April 2004, the Company sold the Philadelphia, Pennsylvania property for net proceeds of approximately $2,700,000. As a result of the sale of the Philadelphia, Pennsylvania property, the Company reversed approximately $625,000 of impairment reserves recorded in 2000. During June 2004, the Company recognized approximately $184,000 of proceeds which had been placed in escrow from the sale of the Salem, New Hampshire property, as a result of the expiration of a contingency period. The contingent proceeds and the reversal of the impairment reserve were reflected in income from discontinued operations during the second quarter of 2004 and the year ended December 31, 2004. These transactions were the completion of the sales process of the VLP properties owned by the Company.

Wellsford Mantua

During November 2003, the Company made an initial $330,000 investment in the form of a loan, in a company organized to purchase land parcels for rezoning, subdivision and creation of environmental mitigation credits .. The loan is secured by a lien on a leasehold interest in a 154 acre parcel in West Deptford, New Jersey which includes at least 64.5 acres of wetlands and a maximum of 71 acres of developable land. During 2004, the Company made additional advances aggregating $120,000 to Wellsford Mantua. The balance of the Company's loan to Wellsford Mantua was $450,000 and $330,000 at December 31, 2004 and 2003, respectively. The Company consolidates Wellsford Mantua and its investment is primarily included in construction in process on

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the consolidated balance sheet at December 31, 2004 and 2003. The Company has committed $246,000 of capital in addition to the loan to Wellsford Mantua.

Residential Activities

Palomino Park

The Company has an 85.85% interest as managing owner in Palomino Park, a five phase, 1,707 unit multifamily residential development in Highlands Ranch, a southern suburb of Denver, Colorado. Three phases (Blue Ridge, Red Canyon and Green River) aggregating 1,184 units are operational as rental property. The 264 unit Silver Mesa phase has been converted into condominiums (sales commenced in February 2001 and through December 31, 2004, the Company sold 262 units). The 259 unit Gold Peak phase is being developed as for-sale condominiums on the remaining land. At December 31, 2004, a subsidiary of EQR owned the remaining 14.15% interest.

With respect to EQR's 14.15% interest in the corporation that owns Palomino Park, there exists a put/call option between the Company and EQR related to one-half of such interest (7.075%). In February 2005, the Company informed EQR of its intent to exercise this option at a purchase price of approximately $2,000,000. Any transaction for the remaining interest would be subject to negotiation between the Company and EQR. Additionally, EQR is the beneficiary of certain rights of first offer on the Blue Ridge and Red Canyon phases at Palomino Park.

In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park (the "Palomino Park Bonds"). Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. The Palomino Park Bonds had an outstanding balance of $12,680,000 at December 31, 2004 and 2003 and were collateralized by four phases at Palomino Park. On January 3, 2005, the Palomino Park Bonds were paid down by $2,275,000 in order to release the Gold Peak phase from the bond collateral. In June 2000, the Company obtained a five-year letter of credit from Commerzbank AG to secure the Palomino Park Bonds. This letter of credit, which expires in May 2005, replaced an expiring letter of credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such guarantee also expires in May 2005. The Company expects to repay the balance of this obligation prior to the expiration of these enhancements.

In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed at a cost of approximately $41,600,000. At that time, the Company obtained a $34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first mortgage on Blue Ridge. The Blue Ridge Mortgage matures in December 2007 and bears interest at a fixed rate of 6.92% per annum. Principal payments are based on a 30-year amortization schedule.

In November 1998, Phase II, the 304 unit phase known as Red Canyon, was completed at a cost of approximately $33,900,000. At that time, the Company acquired the Red Canyon improvements and the related construction loan was repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon Mortgage matures in December 2008 and bears interest at a fixed rate of 6.68% per annum. Principal payments are based on a 30-year amortization schedule.

In October 2000, Phase III, the 264 unit phase known as Silver Mesa, was completed at a cost of approximately $44,200,000. The Company made the strategic decision to convert Silver Mesa into condominium units and sell them to individual buyers. In conjunction with this decision, the Company prepared certain units to be sold and continued to rent certain of the remaining unsold units during the sell out period until the inventory available for sale had been significantly reduced and additional units were required to be prepared for sale. In conjunction with this decision, the Company made a payment of $2,075,000 to reduce the outstanding balance on the tax-exempt bonds in order to obtain the release of the Silver Mesa phase from the Palomino Park Bond collateral and obtained a $32,000,000 loan which was collateralized by the unsold Silver Mesa units and matured in December 2003 (the "Silver Mesa Conversion Loan"). During May 2003, the Company repaid the remaining unpaid principal balance of the Silver Mesa Conversion Loan with proceeds from Silver Mesa unit sales and available cash.

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Sales of condominium units at the Silver Mesa phase of Palomino Park commenced in February 2001 and 262 units have been sold through December 31, 2004. The following table provides information regarding sales of Silver Mesa units:

As the Company sold Silver Mesa units, rental revenue, the corresponding operating expenses and cash flow from the units being rented diminished. Rental revenue from the Silver Mesa phase was approximately $51,000, $702,000 and $1,462,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

In December 2001, Phase IV, the 424 unit phase known as Green River, was completed at a cost of approximately $56,300,000. In February 2003, the Company obtained a $40,000,000 permanent loan secured by a first mortgage on Green River (the “Green River Mortgage”). The Green River Mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per annum. Principal payments are based on a 30-year amortization schedule. The proceeds of the Green River Mortgage were used to repay the construction loan for the Green River phase.

During 2004, the Company made the decision to commence the development of the fifth and final phase, known as Gold Peak. Gold Peak will be comprised of 259 condominium units to be built in sections on the remaining 29 acre land parcel at Palomino Park. The Company is in the process of obtaining construction financing from a financial institution. Initial unit deliveries and sales are expected to commence in the fall of 2005.

Other Developments

East Lyme

The Company has a 95% ownership interest as managing member of a venture to construct and sell 101 single family homes in East Lyme, Connecticut. After initially purchasing the land for $6,200,000 in June 2004, the Company executed an agreement with a homebuilder (the “Homebuilder”) who will construct and sell the homes for this project and will be a 5% partner in the project along with receiving other consideration. The Company extended a loan to the Homebuilder of $157,500 at a rate of 6% per annum which was used by the Homebuilder to finance one-half of his 5% investment in East Lyme. The loan matures upon the termination of the development agreement, which is expected to be in 2009.

The Company obtained construction financing in the aggregate amount of $21,177,000 (to be drawn upon as costs are expended) bearing interest at LIBOR + 2.15% per annum and maturing in December 2007 with two one-year extensions at the venture’s option (the “East Lyme Construction Loan”). The balance of the East Lyme Construction Loan was approximately $361,000 at December 31, 2004. The completion of the initial homes and sales are expected to occur in 2006.

The Company has a right of first refusal from the seller of the East Lyme land on an adjacent parcel of land which could be used to develop 60 single family homes.

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Claverack

During November 2004, the Company invested $2,250,000 for a 75% ownership interest in a joint venture that owns approximately 300 acres, currently zoned for 13 single family home lots, in Claverack, New York. Claverack is capitalized with $3,000,000 of capital, the Company’s share of which was contributed in cash and the 25% partner’s contribution was the land, subject to liabilities, at a net value of $750,000. The land is subject to a $484,000 mortgage which was assumed by the joint venture (the balance of this mortgage was $465,000 at December 31, 2004, bears interest at a rate of 7% per annum and matures in February 2010 (the “Claverack Mortgage”)). At the closing, an aggregate of approximately $866,000 owed to affiliates of the 25% partner was paid from the amount contributed by the Company. The intent is for Claverack to obtain an increase in the number of developable residential lots, improve the land, obtain construction financing and construct and sell single family homes. The Company expects that initial homes will be completed and sold during 2006.

Beekman

The Company has entered into contracts to purchase two contiguous land parcels in Beekman, New York. The acquisition of one 10 acre parcel closed on February 15, 2005 for a purchase price of $650,000. The purchase of the other 14 acre parcel is conditioned upon zoning approval to build a minimum of 60 residential condominium units. The current intent is to construct and sell a minimum of 125 residential condominium units on the parcels.

Segment Financial Information

See Footnote 13 to the Company’s consolidated financial statements for additional information regarding the Company’s segments.

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Item 2. Properties.

The following property information is presented by SBU.

Commercial Properties Activities

As of December 31, 2004, Wellsford/Whitehall owned and operated 17 properties, including 10 office properties, five net-leased retail properties and two land parcels, totaling approximately 1,773,000 square feet of improvements, of which 1,644,000 square feet is held for sale at December 31, 2004. The following table sets forth certain information related to all of these properties at December 31, 2004:

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Leases for the Wellsford/Whitehall properties typically provide for step-ups in base rent periodically over the term of a lease and pass throughs to tenants of their pro rata share of increases in certain expenses (real estate taxes and operating expenses) over a base year. Leases generally provide for improvement allowances for all or a portion of the tenant's initial construction of its premises.

Three tenants of the properties held for sale contributed approximately 28% of rental revenue for the year ended December 31, 2004 that is included in discontinued operations.

Debt and Equity Activities

Clairborne Fordham

On September 15, 2004, Clairborne Fordham obtained title to the remaining unsold components of Fordham Tower and at December 31, 2004, these components consisted of 15 residential units and the 188 space parking garage. It is the intention of Clairborne Fordham to complete the orderly sell-out of the remaining components.

Wellsford Mantua

The Company, through its investment in Wellsford Mantua, has an investment in the form of a loan secured by a lien on a leasehold interest in a 154 acre parcel in West Deptford, New Jersey which includes at least 64.5 acres of wetlands and a maximum of 71 acres of developable land.

Residential Activities

Palomino Park

The Company owns and operates the following multifamily rental properties at Palomino Park:

The typical lease term of tenants’ leases at Palomino Park range from six to fourteen months. Security deposits are generally required for all leases.

The Company has developed and is developing the following Palomino Park phases as for-sale condominiums:

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Other Developments

The Company owns or has ownership interests in the following other residential development projects at December 31, 2004:

The Company is not presently a party in any material litigation.

Not applicable.

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PART II

Market Information

The Company's common shares are traded on the American Stock Exchange under the symbol "WRP". The approximate number of holders of record of the common shares and class A-1 common shares (collectively, "Common Shares" or "Common Stock") were approximately 700 and 1, respectively, as of December 31, 2004. The high and low closing sales prices for the Common Shares on the American Stock Exchange and the dividends declared for the years ended December 31, 2004 and 2003 are as follows:

Dividends

The Company did not declare or distribute any dividends during 2004 or 2003.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table details information for each of the Company's compensation plans at December 31, 2004:

Issuer Purchases of Equity Securities

The Company had an aggregate of 1,229,837 shares available to be repurchased during 2004 from Board of Director authorized repurchases; such authorizations were made during 2000 and 1999. No shares of common stock have been repurchased by the Company since April 2000. If the Company is to repurchase any shares in the future, it will obtain new authorization from the Board of Directors of the Company at such time.

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The following tables set forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements included as a separate section of this annual report on Form 10-K starting at page F-1.

(amounts in thousands, except per share data)

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Overview

The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company’s Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K.

Selected Significant Accounting Policies

Management has selected the following accounting policies which it believes are significant in order to understand the Company’s activities, financial position and operating results.

Principles of Consolidation and Financial Statement Presentation. The consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries. The accompanying consolidated financial statements include the assets and liabilities contributed to and assumed by the Company from the Trust, from the time such assets and liabilities were acquired or incurred, respectively, by the Trust. Such financial statements have been prepared using the historical basis of the assets and liabilities and the historical results of operations related to the Company’s assets and liabilities. Investments in entities where the Company does not have a controlling interest are accounted for under the equity method of accounting. These investments are initially recorded at cost and are subsequently adjusted for the Company’s proportionate share of the investment’s income (loss), additional contributions or distributions. Investments in entities where the Company does not have the ability to exercise significant influence are accounted for under the cost method. All significant inter-company accounts and transactions among the Company and its subsidiaries have been eliminated in consolidation.

The Company evaluates its investments and subsidiaries to determine if an entity is a voting interest entity or a variable interest entity (“VIE”) under the provisions of FIN46R. An entity is a VIE when (i) the equity investment at risk is not sufficient to permit the entity from financing its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity or investment is deemed to be a VIE, an enterprise that absorbs a majority of the expected losses of the VIE or receives a majority of the residual returns is considered the primary beneficiary and must consolidate the VIE. The following table and footnotes identify the Company’s VIEs:

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Real Estate, Other Investments, Depreciation, Amortization and Impairment. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Costs incurred for significant repairs and maintenance that extend the usable life of the asset or have a determinable useful life are capitalized. Ordinary repairs and maintenance are expensed as incurred. The Company expenses all lease turnover costs for its residential units such as painting, cleaning, carpet replacement and other turnover costs as such costs are incurred.

Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis, principally 27.5 years for residential buildings and improvements and two to twelve years for furnishings and equipment.

The Company reviews its real estate assets, investments in joint ventures and other investments for impairment (i) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable for assets held for use and (ii) when a determination is made to sell an asset or investment.

Real Estate – Residential Units Available for Sale. The Company’s residential units available for sale are recorded at the lower of historical cost or market value based upon current conditions. As units are sold, the Company records cost of sales based upon relative sales values. Sales price concessions are recognized as a reduction in sales revenues as individual units are sold. Advertising costs are expensed as incurred.

Revenue Recognition. Commercial properties were leased under operating leases. Rental revenue from office properties were recognized on a straight-line basis over the terms of the respective leases. Residential units are leased under operating leases with typical terms of six to fourteen months and such rental revenue is recognized monthly as tenants are billed. Interest revenue is recorded on an accrual basis over the life of the loan. Prepayment penalties on mortgages receivable are recorded as interest revenue in the period that such fees are earned. Fee revenues are recorded in the period earned, based upon formulas as defined by agreement for management services or upon asset sales and purchases by certain joint venture investments. Sales of real estate assets and investments are recognized at closing, subject to receipt of down payments and other requirements in accordance with applicable accounting guidelines.

Income Taxes. The Company accounts for income taxes under Statement of Financial Accounting Standard (“SFAS”) No. 109 “Accounting for Income Taxes.” Deferred income tax assets and liabilities are determined based upon differences between financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are estimated to be in effect when the differences are expected to reverse. Valuation allowances with respect to deferred income tax assets are recorded when deemed appropriate and adjusted based upon periodic evaluations.

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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 periods. Actual results could differ from those estimates.

Accounting Pronouncements Not Yet Adopted. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123 (“SFAS No. 123R”). SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123R must be adopted no later than July 1, 2005. Early adoption is permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123R during the third quarter of 2005. The Company does not anticipate that adoption of SFAS No. 123R will have a material impact on its results of operations or its financial position as it has previously adopted the prospective method of transition under SFAS No. 148 and all options outstanding have fully vested by December 31, 2004.

Results of Operations

Comparison of the year ended December 31, 2004 to the year ended December 31, 2003

The change in net (loss) per share, basic and diluted from a (loss) in 2003 of $(7.11) per share to a (loss) in 2004 of $(5.06) per share, is attributable to a current period (loss) of $(32,703,000), whereas in the 2003 period, the (loss) was $(45,859,000).

The loss in the 2004 period is primarily attributable to (i) a $9,000,000 impairment charge recorded by the Company at September 30, 2004 related to the sale of its interest in Second Holding, (ii) the Company’s net $6,606,000 share of a write-down of one of Second Holding’s investments during the first quarter of 2004 and (iii) the Company’s share of losses aggregating $10,437,000 from Wellsford/Whitehall including a loss from operations, a loss of $1,403,000 recorded in the third quarter of 2004 relating to the Redemption Transaction and impairment provisions relating to assets held for sale at December 31, 2004 aggregating $7,400,000, offset by the gain from a single asset sale in March 2004 of $1,700,000.

The 2003 loss is primarily attributable to an impairment provision by the Wellsford/Whitehall venture and related charges during the fourth quarter of 2003. Annually, after the preparation of budgets for the following year and as part of the financial statement closing process, Wellsford/Whitehall performs evaluations for impairment on all of its real estate assets. As part of the fiscal 2003 evaluation, Wellsford/Whitehall recorded an impairment charge of approximately $114,700,000 related to 12 assets in the portfolio during the fourth quarter of 2003. The provision was not the result of a change in the intended use of such assets. However, it was the result of several factors including, but not limited to, a continued deterioration of and outlook for the suburban office submarkets where Wellsford/Whitehall’s properties are situated. Specifically, these included decreasing market rents, slower absorption trends and greater tenant concession costs. The Company’s share of this impairment charge was approximately $37,377,000 in 2003. Additionally, as a result of the Wellsford/Whitehall charge, the Company wrote-off the balance of unamortized warrant costs of $2,644,000 related to Wellsford/Whitehall and determined at that time that it was not appropriate to carry the balance of the net deferred tax asset attributable to NOL carryforwards and recorded a valuation allowance of $6,680,000 in the fourth quarter of 2003.

Rental revenue decreased $890,000. This decrease is due to the impact of rent concessions in excess of the 2003 period at all phases of Palomino Park ($992,000) and the gradual elimination of rental operations at the Silver Mesa phase resulting from unit sales and all units being classified as sales inventory by December 31, 2003, whereas more units were being rented during the 2003 period as compared to the 2004 period ($651,000), offset by increased average physical occupancy of 93% for 2004 from 90% for 2003 at the Blue Ridge, Red Canyon and Green River phases at Palomino Park ($753,000).

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Revenues from sales of residential units and the associated cost of sales from such units were $12,288,000 and $10,131,000, respectively, from 53 Silver Mesa unit sales during 2004 and were $12,535,000 and $10,708,000, respectively, from 56 sales during the corresponding 2003 period. The average pre-tax income from 2004 unit sales was approximately $8,100 greater per unit than in the corresponding 2003 period as a result of a reduced commission rate on the units sold, revised downward estimates of total project costs in 2004 and no interest costs included in cost of sales in 2004 as the outstanding debt balance was repaid in May 2003.

Interest revenue decreased $6,254,000. This decrease is due to reduced interest of $6,729,000 on loans from lower average outstanding loan balances in the 2004 period as compared to the 2003 period (including $2,275,000 related to the loss of revenue during the 2004 period and the receipt of a $4,368,000 yield maintenance penalty from the 277 Park Loan prepayment in September 2003) and $40,000 of non-recurring income earned in 2003 in excess of 2004 amounts, offset by increased interest earned on cash and U.S. Government securities of $515,000 from a higher average outstanding investable cash and securities balance during the current period versus the comparable 2003 period.

Fee revenue decreased $563,000. Asset disposition fees payable by Whitehall derived from Wellsford/Whitehall sales amounted to $46,000 during 2004, as compared to fees of $430,000 earned in the 2003 period. The Company’s management fees for its role in the Second Holding investment decreased $179,000 for the 2004 period from the 2003 period. Fee revenue during the current period was impacted by changes in the amount of assets under management by Second Holding as a result of the 2004 decision not to purchase any new assets and allow the run-off of existing investments and by the sale of the Company’s interest in the venture in November 2004.

Property operating and maintenance expense decreased $108,000. This decrease is primarily the result of a decline in operating expenses for the Silver Mesa phase from continuing unit sales during 2003 and 2004 of $427,000 (see sales discussion above), offset by the effect of net increases for property operating and maintenance expenses at the other phases of Palomino Park of $246,000 (including increases in replacements, advertising, payroll and utility costs, offset by decreases in certain maintenance cost categories) and period costs in 2004 for the consolidated development projects of $73,000.

The decrease in real estate taxes of $106,000 is primarily attributable to reduced taxes from fewer Silver Mesa units from continuing sales ($77,000) and reduced taxes on the Gold Peak land from a lower assessment and the commencement in September 2004 of capitalizing taxes to the project basis during development ($35,000).

Depreciation and amortization expense decreased $3,900,000. This decrease is primarily attributable to the Company expensing $4,021,000 of unamortized warrant costs in 2003, including the remaining unamortized balance of $2,644,000 which was written-off at December 31, 2003 in connection with the impairment charge recorded by Wellsford/Whitehall with no comparable expense in the 2004 period. The decrease is additionally impacted by no depreciation expense recorded on the Silver Mesa units as all of the units were transferred from operations to residential units available for sale during 2003 ($103,000), offset by additional amortization related to the Clairborne Fordham venture recorded during 2004 ($160,000) and the write-off of unamortized Second Holding basis differences of $68,000 upon the sale of the Company’s investment in November 2004.

Aggregate interest expense increased $1,665,000. This increase is attributable to interest expense and deferred cost amortization on $25,775,000 of Debentures during the period of $2,100,000 as a result of the adoption of FIN46R and the de-consolidation of the Convertible Trust Preferred Securities, as previously described, whereas such expense was treated as a distribution in the 2003 period. The increase is also attributable to the Green River phase as the 2004 period includes interest for the entire period at a higher fixed rate on a larger average outstanding balance on the permanent financing, whereas during the 2003 period, there was a lower variable interest rate on a lower amount of construction financing until the permanent financing was in place in February 2003 ($62,000). In addition, the 2004 period had a higher average base interest rate on the Palomino Park Bonds as compared to the 2003 period ($50,000) due to rising interest rates during 2004. These increases were offset by lower average outstanding principal balances with respect to the other Palomino Park phases’ loans ($60,000) and capitalized interest of $490,000 in 2004 with only $3,000 capitalized in the 2003 period. The

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Company began the capitalization of interest on its new residential developments upon the determination that such developments would be commenced (East Lyme capitalization began in June 2004 upon acquisition of the land, Gold Peak capitalization began in September 2004 and Claverack capitalization began in November 2004 upon formation of the venture when our 25% partner contributed the land).

General and administrative expenses increased $2,680,000 as described below:

The principal reasons for the increase in the cash component of general and administrative expenses are the costs to retain an investment banker ($1,000,000), increased fees for both the 2004 annual audit and the new Sarbanes-Oxley Act internal control evaluation requirements to our principal independent accountants ($660,000), a contractual payment to the Chairman of the Company upon the sale of Second Holding ($643,000) and other additional costs for compliance with the Sarbanes-Oxley Act, including the costs of another accounting firm to assist the Company in this process.

The Company recognized a (loss) of $(23,715,000) during the year ended December 31, 2004 from its joint venture investments as compared to a loss of $(34,429,000) in 2003. An analysis of the change follows:

Minority interest changed $3,000 to a benefit of $88,000 in the 2004 period from a benefit of $85,000 in the 2003 period, primarily attributable to the formation of two development entities with minority partners who share in each respective development project's current period losses ($32,000) and a minority interest benefit

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related to the consolidation of an entity in accordance with the provisions of FIN46R ($29,000), offset by a reduction in the minority interest benefit for Palomino Park ($58,000).

The change in income tax expense to a benefit of $130,000 in 2004 compared to an expense of $7,135,000 in 2003 results primarily from the Company recording an increased valuation allowance against deferred tax assets in 2003.

The change in after tax cost of the Convertible Trust Preferred Securities results from classifying this expense for the 2004 period into interest expense as a result of the adoption of FIN46R (see interest expense discussion).

Income from discontinued operations, after taxes, reflects the reclassification of the revenue and expenses from the two VLP properties in the Debt and Equity Activities SBU as a result of the change in classification to held for sale at June 30, 2003. The income from discontinued operations, net of taxes, was $725,000 and $20,000 for the years ended December 31, 2004 and 2003, respectively. The change between the two periods is primarily attributable to the sale of the remaining property during April 2004, at which time, the Company recognized a reversal of an impairment reserve upon the completion of that sale and recognized contingent proceeds from a 2003 property sale during 2004, the sum of which aggregated $809,000. That amount was partially offset by the loss of operating income between the periods and the effect of state income taxes.

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

The change in net loss per share, basic and diluted of $6.59 per share from a loss in 2002 of $(0.52) per share to a loss in 2003 of $(7.11) per share, is attributable to a current period loss of $(45,859,000), whereas in the 2002 period, the loss was $(3,372,000). The 2003 loss includes charges aggregating $(46,701,000) attributable to an impairment provision by the Wellsford/Whitehall venture and related charges during the fourth quarter of 2003 as previously described in the comparison of the year ended December 31, 2004 to the year ended December 31, 2003.

Rental revenue decreased $849,000. This decrease is due to the impact of rent concessions in excess of the 2002 period at all phases of Palomino Park ($1,510,000) and reduced rental operations at the Silver Mesa phase resulting from unit sales and fewer units being rented in the 2003 period as compared to the 2002 period ($762,000), offset by commenced operations at the Green River phase at Palomino Park effective January 1, 2002 as such revenues in the fiscal 2003 period are in excess of the 2002 period ($975,000) and increased average physical occupancy and other tenant fee increases at the Blue Ridge and Red Canyon phases at Palomino Park ($448,000).

Revenues from sales of residential units and the associated cost of sales from such units were $12,535,000 and $10,708,000, respectively, from 56 Silver Mesa unit sales during 2003 and were $10,635,000 and $9,544,000, respectively, from 48 sales during the 2002 period. The average pre-tax income from 2003 unit sales was approximately $9,900 greater per unit than in the corresponding 2002 period as a result of sales of higher priced and larger units, a reduced commission rate on the units sold and declining interest costs included in cost of sales as the average outstanding debt balance was being reduced over the periods until its ultimate repayment in May 2003.

Interest revenue increased $3,355,000. This increase is due to the receipt of a yield maintenance penalty of $4,368,000 from the prepayment of the 277 Park Loan at September 30, 2003, offset by reduced interest of $948,000 earned on loans from lower average outstanding loan balances in the 2003 period as compared to the 2002 period (including $767,000 related to the loss of revenue during the fourth quarter of 2003 from the 277 Park Loan), as well as reduced interest earned on cash and securities of $65,000 from the net effect of lower base interest rates and a higher average outstanding investable cash and securities balance during the current period versus the comparable 2002 period.

Fee revenue increased $684,000. Asset disposition fees payable by Whitehall derived from Wellsford/Whitehall sales amounted to $430,000 during 2003, with only $29,000 earned in the 2002 period. Additionally, the

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Company's management fees for its role in the Second Holding investment increased $283,000 from the growth of assets under management in that venture from 2002 to 2003.

Property operating and maintenance expense decreased $80,000. This decrease is primarily the result of refunds for water charges by the municipality for Palomino Park coupled with the Company absorbing lower utility costs in 2003 because of a 90% average physical occupancy compared to 86% in the 2002 period and payroll reductions from a smaller property operating staff, offset in part by additional tenant replacement and advertising costs and rising insurance premiums.

The increase in real estate taxes of $6,000 is primarily attributable to higher assessments and rates in the 2003 period as compared to the 2002 period for the Blue Ridge, Red Canyon and Green River phases at Palomino Park ($73,000), offset by reduced taxes on the Gold Peak land from a lower 2003 assessment ($44,000) and reduced taxes from the sale of Silver Mesa units ($23,000).

Depreciation and amortization expense increased $3,273,000. This increase is attributable to the Company expensing $4,021,000 of unamortized warrant costs in 2003, including the write-off of the remaining $2,644,000 balance relating to the Wellsford/Whitehall venture as a result of an impairment charge taken by Wellsford/Whitehall during the fourth quarter of 2003, whereas in 2002 the expense was $758,000 including an impairment related adjustment of $284,000 in that period, additional Green River depreciation as the final sections of this phase were put in service during the 2002 period ($194,000) and fixed asset additions for the other Palomino Park phases and corporate office assets ($101,000), offset by a declining depreciation basis resulting from the transfer of Silver Mesa units from operations to residential units available for sale during both periods ($285,000).

Property management expenses decreased $127,000. Such decrease is primarily due to the reduction in contractual management fees beginning October 1, 2002 from a 3% annual fee of gross receipts to a 2% annual fee for the Palomino Park operational phases, in addition to a decrease in net rental revenues in the 2003 period (see above rental revenue discussion). If the fee had remained at 3% for the comparable 2003 period, the decrease would have been $109,000 less.

Interest expense increased $733,000. This increase is primarily attributable to the Green River phase as the 2003 period includes interest at a higher fixed rate from February 2003 on permanent financing, whereas in the 2002 period, the variable interest rate and the average outstanding balance on the construction financing were both lower than the 2003 amounts ($855,000). In addition there was a higher average base interest rate on the Palomino Park Bonds in the 2003 period as compared to the 2002 period ($14,000). These increases were partially offset by reduced interest expense from a lower average outstanding principal balance and a lower base interest rate on the Silver Mesa Conversion Loan, which was fully repaid in May 2003 ($71,000) and lower average outstanding principal balances with respect to the other Palomino Park phases ($56,000).

General and administrative expenses decreased $976,000 as described below:

The principal reason for the decline in the cash component of general and administrative expenses is lower payroll and payroll related costs for 2003.

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The Company realized a loss aggregating $(34,429,000) in 2003 from its joint venture investments as compared to a loss of $(209,000) in 2002. An analysis of the decrease follows:

Minority interest changed $42,000 from a benefit of $43,000 in the 2002 period to a benefit of $85,000 in the 2003 period, primarily attributable to a larger loss for Palomino Park in 2003 as compared to the 2002 period.

Income taxes changed from a benefit of $1,322,000 in 2002 to a provision of $7,135,000 in 2003 primarily from the Company increasing the valuation allowance to reflect the portion of the deferred tax asset relating to the benefit of net operating loss carryforwards that the Company determined would not be realizable in the next three years as a result of the significant loss reported by the Wellsford/Whitehall venture and a loss in 2002 in which the tax benefit from an estimated carryback of losses was partially offset by minimum state and local taxes.

The change in after tax cost of the Convertible Trust Preferred Securities results from not having available any tax benefit in 2003 whereas there was a 34% tax benefit in 2002.

Income from discontinued operations after taxes reflects the reclassification of the revenue and expenses from the two VLP properties in the Debt and Equity Activities SBU as a result of the change in classification to held for sale at June 30, 2003. The net reclassified amounts were $20,000 and $90,000 for the years ended December 31, 2003 and 2002, respectively. The decrease is primarily attributable to the sale of one of the two properties held for sale in July 2003.

Income Taxes

The Company has recorded net deferred tax liabilities of approximately $248,000 and $548,000 at December 31, 2004 and 2003, respectively, which are included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. The primary reason for the reduction is the realization of operating losses in 2004.

Management has determined that valuation allowances of approximately $53,628,000 and $41,953,000 at December 31, 2004 and 2003, respectively, are necessary. The increase in the valuation allowance results from

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minor tax benefit being ascribed to the Company's 2004 loss. The valuation allowance at December 31, 2004 primarily relates to deferred compensation provisions, the tax basis of the Company's investment in Wellsford/Whitehall and NOL and capital loss carryforwards. The Company expects to realize its remaining deferred tax asset of approximately $3,348,000 at December 31, 2004 primarily through the recognition of existing deferred tax capital gains, the significantly lower tax basis of its Palomino Park assets and operating taxable income.

At December 31, 2004, the Company has available net operating loss carryforwards of approximately $67,876,000 which will expire between 2007 and 2024. As a result of certain limitations under Section 382 of the Internal Revenue Code as it applies to the VLP acquisition, the Company may only use $6,200,000 of such NOL carryforwards in each year. Any amount not utilized in a year may be carried forward to subsequent years. Approximately $35,000,000 could be utilized in 2005 to offset Federal taxable income including amounts realized in 2004 which are not subject to limitations. In addition, the Company has $12,900,000 of available net capital loss carryforwards expiring in 2009, which can be utilized against future capital gains including gains, if any, on the sale of real estate properties.

Liquidity and Capital Resources

Consolidated for the Company

The Company expects to meet its short-term liquidity requirements, such as operating expenses, the January 2005 $2,275,000 payment on the Palomino Park Bonds and the remaining balance of such bonds prior to the May 2005 credit enhancement expirations, debt service on mortgage notes payable and Debenture distributions, the redemption of the Convertible Trust Preferred Securities, new investments (including the purchase of 50% of the minority interest in the Palomino Park subsidiary for approximately $2,000,000), development costs and joint venture financing requirements (including its share of any financing requirements for Wellsford/Whitehall), generally through its available cash and sales of condominium units, distributions from investments in joint ventures, maturing investments in U.S. Government securities, cash provided by rental and interest revenues and proceeds from construction financings.

The Company expects to meet its long-term liquidity requirements such as maturing mortgages, financing acquisitions, new investments and development costs, financing capital improvements, minority interest distributions, joint venture financing requirements (including its share of any financing requirements for Wellsford/Whitehall) and debt service on mortgage notes payable through the use of available cash, maturing investments in U.S. Government securities, receipt of payments related to notes receivable, sales of condominium units and single family homes, distributions from investments in joint ventures, proceeds from construction financing, refinancings and the issuance of debt. The Company has an aggregate of $93,415,000 of cash and cash equivalents and U.S. Government securities at December 31, 2004 and considers such amounts to be adequate and expects it to continue to be adequate to meet operating requirements both in the short and long terms.

Wellsford/Whitehall

Wellsford/Whitehall expects to meet its short and long-term liquidity requirements, such as financing additional renovations, tenant improvements and leasing costs of its properties, repayments of debt and operating expenses with available cash, operating cash flow from its properties, the modification of terms on existing debt and sales of properties. Wellsford/Whitehall's cash balance was $2,280,000 and restricted cash was $9,730,000 at December 31, 2004.

In April 2004, Wellsford/Whitehall executed an amended agreement with GECC, to extend the GECC Facility maturity to December 31, 2006, adjust the interest rate to LIBOR plus 3.25% per annum and provide for a $16,000,000 line of credit to fund certain capital improvements, subject to certain conditions, through December 31, 2005. Excess cash flow, as defined, from the properties collateralizing the GECC Facility can only be used for capital expenditures for such properties. As a result of the sale of certain New Jersey properties in January 2005,

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the GECC Facility balance was reduced to $36,906,000 which is collateralized by the three remaining unsold office buildings. Such amount represents Wellsford/Whitehall's only outstanding debt as of January 31, 2005.

Material Contractual Obligations

The following table summarizes the Company's material contractual obligations as of December 31, 2004:

Capital Expenditures for Operating Assets and Development Projects

Regarding the Company’s Blue Ridge, Red Canyon and Green River rental phase, the Company expects to incur approximately $575 per unit in apartment preparation costs from turnover of tenant leases during the year ending December 31, 2005, which will be charged to property operating and maintenance expense in the consolidated statements of operations.

The following table describes the current estimated capital expenditure requirements for development projects:

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Gold Peak

During 2004, the Company made the decision to commence the development of the fifth and final phase, known as Gold Peak. Gold Peak will be comprised of 259 condominium units to be built in sections on the remaining 29 acre land parcel at Palomino Park. The Company is in the process of obtaining construction financing from a financial institution. Initial unit deliveries and sales are expected to commence in the fall of 2005. During 2004, the Company spent approximately $560,000 for development costs on this project.

East Lyme

The Company has a 95% interest as managing member of a venture to construct and sell 101 single family homes in East Lyme, Connecticut. After initially purchasing the land for $6,200,000 in June 2004, the Company executed an agreement with the Homebuilder who will construct and sell the homes for this project and will be a 5% partner in the project along with receiving other consideration. The Company obtained construction financing in the aggregate amount of $21,177,000 (to be drawn upon as costs are expended) bearing interest at LIBOR + 2.15% per annum and maturing in December 2007 with two one-year extensions at the venture's option. The East Lyme Construction Loan requires the Company to have minimum shareholders’ equity of $75,000,000. The balance of the East Lyme Construction Loan was approximately $361,000 at December 31, 2004. During 2004, the Company spent approximately $4,479,000 for development costs on this project, excluding the cost of the land.

The Company has a right of first refusal from the seller of the East Lyme land on an adjacent parcel of land which could be used to develop 60 single family homes.

Claverack

During November 2004, the Company invested $2,250,000 for a 75% ownership interest in a joint venture that owns approximately 300 acres, currently zoned for 13 single family home lots, in Claverack, New York. Claverack is capitalized with $3,000,000 of capital, the Company's share of which was contributed in cash and the 25% partner's contribution was the land, subject to liabilities, at a net value of $750,000. The land is subject to a $484,000 mortgage which was assumed by the joint venture (the balance of the Claverack Mortgage was $465,000 at December 31, 2004, bears interest at a rate of 7% per annum and matures in February 2010). At the closing, an aggregate of approximately $866,000 owed to affiliates of the 25% partner was paid from the amount contributed by the Company. The intent is for Claverack to obtain an increase in the number of developable residential lots, improve the land, obtain construction financing and construct and sell single family homes. The Claverack venture has approximately $1,178,000 of cash at December 31, 2004, which is available to be used for project development and other costs until construction period financing is obtained. As of December 31, 2004, Claverack had spent $243,000 for project costs, excluding the value of the land.

Beekman

The Company has entered into contracts to purchase two contiguous land parcels in Beekman, New York. The acquisition of one 10 acre parcel closed on February 15, 2005 for a purchase price of $650,000. The purchase of the other 14 acre parcel is conditioned upon zoning approval to build a minimum of 60 residential condominium units. The current intent is to construct and sell a minimum of 125 residential condominium units on the parcels. During 2004, the Company invested approximately $389,000 on this project.

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Other Items Impacting the Company's Liquidity and Resources

Assessment of Strategic Alternatives

During March 2004, the Company retained an investment banking firm, Lazard Fréres & Co. LLC, to advise the Company on various strategic financial and business alternatives available to it to maximize shareholder value. Such alternatives under consideration include: acquisitions of businesses or development assets, dispositions of assets, recapitalization, liquidation, returning excess cash to stockholders, privatization of the Company, sale or merger of the Company and other alternatives that would keep the Company independent.

During 2004 and into 2005, Wellsford/Whitehall has continued to sell assets and in the fourth quarter of 2004 the Company sold its ownership interest in Second Holding. Simultaneously, the Company has been focusing its efforts on residential development opportunities. Developing for-sale housing could potentially allow for the Company to utilize a portion of its unused net operating loss carryforwards against income generated from the sale of these homes. The Company continues to seek additional ways to utilize its tax asset. Additionally, the Company is contemplating uses of its cash which could include retiring debt and returning cash to common stockholders.

On March 10, 2005, the Company notified EQR of its intent to redeem in cash its outstanding $25,000,000 of Convertible Trust Preferred Securities. The Company expects to complete the redemption during March 2005. The Company’s future earnings and cash flows will be positively impacted from this redemption by approximately $516,000 per quarter or $2,063,000 on an annualized basis, which will be offset by reduced interest income from a lower average cash balance.

REIT Qualification of WCPT

WCPT was established in 1997 to qualify as a real estate investment trust ("REIT") and to own the Company's investment in Wellsford/Whitehall. WCPT has qualified as a REIT through December 31, 2003. During 2004, the Company concluded that WCPT would no longer qualify for REIT status as a result of non-qualifying income exceeding the maximum threshold due to sales of assets by Wellsford/Whitehall. As a result, the Company may be subject in the future to certain additional state taxes related to its interests in the operations of Wellsford/Whitehall. The Company does not believe that there will be a material impact to its operations or cash flows during future periods as a result of WCPT not qualifying as a REIT.

Wellsford/Whitehall

A Buy/Sell Agreement of equity interests between the Company and Whitehall can be exercised by either partner after December 31, 2003 with respect to the Wellsford/Whitehall venture. The nature of the Buy/Sell Agreement allows for either the Whitehall funds, as a group, or the Company to provide notice that it intends to purchase the non-initiating partner's interest at a specific price per unit. The non-initiating partner may either accept that offer or instead may reject that offer and become the purchaser at the initially offered price. The terms of the GECC Facility allow for the continuance of such debt as long as the Company or Whitehall has ultimate decision-making authority over the management and operations of Wellsford/Whitehall. As of the date of this report, neither partner has exercised its buy/sell right under the Buy/Sell Agreement.

Second Holding

In November 2004, the Company completed the sale of its interest in Second Holding for $15,000,000 in cash. Since the Company was willing to entertain and execute an agreement at this price, and based upon the evaluation of other alternatives, the Company determined it was appropriate, under the accounting literature for equity method investees, to record a $9,000,000 impairment charge to the carrying amount of its investment in Second Holding during the third quarter of 2004. After the completion of this transaction, the Company no longer participates in the economics of Second Holding and will not earn or receive management fees from Second Holding in the future.

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Clairborne Fordham

The $34,000,000 mezzanine construction loan provided in October 2000 by Clairborne Fordham (a venture in which the Company has a 10% interest) was not repaid at maturity and as of October 2003, an amended loan agreement was executed. The amended terms provided for extending the maturity to December 31, 2004, the placement of a first mortgage lien on the project, no interest to be accrued after September 30, 2003 and for the borrower to add to the existing principal amount the additional interest due Clairborne Fordham at September 30, 2003 of approximately $19,240,000. In lieu of interest after September 30, 2003, Clairborne Fordham was to participate in certain additional cash flows, as defined, if earned from net sales proceeds of the Fordham Tower project.

The amended loan agreement provided for a $3,000,000 additional capital contribution by the borrower and use of an existing cash collateral account to pay off an existing construction loan and any unpaid construction costs. Also, the amended loan agreement provided for an initial principal payment and all proceeds after project costs to be first applied to payment in full of the loan and the additional interest to Clairborne Fordham before any sharing of project cash flow with the borrower. Payments of $5,125,000 and $7,823,000 were made to Clairborne Fordham during the fourth quarter of 2003 and for the period January 1, 2004 to September 15, 2004, respectively, of which the Company's share was $510,000 and $782,000, respectively.

On September 15, 2004, Clairborne Fordham executed an agreement with the owners of Fordham Tower pursuant to which Clairborne Fordham obtained title to the remaining unsold components of the project (which included 18 unsold residential units, the 188 space parking garage and 12,000 square feet of retail space). Additionally, Clairborne Fordham agreed to distribute the first $2,000,000 of sale proceeds to the former owner. No gain or loss was recognized by Clairborne Fordham or the Company as a result of the transfer. During the period September 15, 2004 to December 31, 2004, Clairborne Fordham sold the retail space and three residential units and realized approximately $8,677,000 of net proceeds before the $2,000,000 payment to the former owner. Clairborne Fordham distributed approximately $5,655,000 to the venture members including approximately $566,000 to the Company during the period September 15, 2004 to December 31, 2004. Undistributed proceeds were retained by Clairborne Fordham for working capital purposes. It is the intention of Clairborne Fordham to complete the orderly sale of the remaining components.

Palomino Park Bonds

In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to fund construction at Palomino Park. Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. The Palomino Park Bonds had an outstanding balance of $12,680,000 at December 31, 2004 and 2003 and were collateralized by four phases at Palomino Park. On January 3, 2005, the Palomino Park Bonds were paid down by $2,275,000 in order to release the Gold Peak phase from the bond collateral. The five-year letter of credit from Commerzbank AG, which secures the Palomino Park Bonds, expires in May 2005. A subsidiary of EQR has guaranteed Commerzbank AG’s letter of credit; such guarantee also expires in May 2005. The Company expects to repay the balance of this obligation prior to the expiration of these enhancements.

In the fourth quarter 2003, after the prepayment of the $25,000,000 277 Park Loan and with no expected near-term replacement of that investment's revenue and income impact, it was anticipated that the Company would not meet the existing debt service ratio requirements under the terms of the agreement with Commerzbank AG for the Palomino Park Bonds during one of the quarterly tests in 2004. In December 2003, the letter of credit was amended to include the effect of offsetting the loss of income from the 277 Park Loan for the six fiscal quarters beginning with the December 31, 2003 quarter.

At December 31, 2003, Wellsford/Whitehall recorded an impairment charge of approximately $114,700,000 related to 12 assets in the portfolio of which the Company’s share was approximately $37,377,000, before a related charge to write-off the remaining unamortized warrant costs on the Company’s books of approximately $2,644,000. During March 2004, the Company received a modification to the terms of the letter of credit

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agreement reducing the minimum net worth requirement to $120,000,000, which includes the $25,000,000 of Convertible Trust Preferred Securities as equity. During June 2004, the Company made the determination that it would not meet the debt service coverage covenant at June 30, 2004. On July 28, 2004, the Company obtained an amendment to the letter of credit agreement eliminating the debt service coverage covenant effective as of June 30, 2004 and continuing through the May 2005 maturity. The Company was in compliance with the remaining covenants at December 31, 2004. As previously discussed, the Company is going to redeem the Convertible Trust Preferred Securities in March 2005. Such redemption will cause the Company not to meet the aforementioned net worth requirement, however, this will be resolved when the Palomino Park Bonds are repaid.

Palomino Park

With respect to EQR's 14.15% interest in the corporation that owns Palomino Park, there exists a put/call option between the Company and EQR related to one-half of such interest (7.075%). In February 2005, the Company informed EQR of its intent to exercise this option at a purchase price of approximately $2,000,000. Any transaction for the remaining interest would be subject to negotiation between the Company and EQR. Additionally, EQR is the beneficiary of certain rights of first offer on the Blue Ridge and Red Canyon phases at Palomino Park.

Silver Mesa

During the year ended December 31, 2004, the Company sold 53 Silver Mesa units and received proceeds, net of selling costs, of approximately $11,454,000. All net proceeds received by the Company from sales of units are available for working capital purposes. As of December 31, 2004, the Company sold 262 of the 264 units in this phase. As a result of the sale of the Silver Mesa units, the Company will not report any meaningful revenue and cost of sales of residential units and related cash flows during 2005 until the Company commences closings on the sale of condominiums and homes at the Gold Peak and East Lyme development projects in late 2005 and 2006.

As the Company sold Silver Mesa units, rental revenue, the corresponding operating expenses and cash flow from the units being rented diminished. Rental revenue from the Silver Mesa phase was approximately $51,000, $702,000 and $1,462,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Capital Commitments to Joint Ventures

At December 31, 2004, the Company had capital commitments of $246,000 relating to the Wellsford Mantua investment. During March 2004, the Company and Whitehall agreed to provide up to $8,000,000 to Wellsford/Whitehall through March 31, 2005 (of which the Company's share is 35% or $2,800,000). The Company does not expect that it will be required to fund any amount to Wellsford/Whitehall under this commitment.

Stock Repurchase Program

The Company had an aggregate of 1,229,837 shares available to be repurchased during 2004 from Board of Director authorized repurchases; such authorizations were made during 2000 and 1999. No shares of common stock have been repurchased by the Company since April 2000. If the Company is to repurchase any shares in the future, it will obtain new authorization from the Board of Directors of the Company at such time.

Changes in Cash Flows

Comparison of the year ended December 31, 2004 to the year ended December 31, 2003

Cash flow from operating activities changed $26,341,000 from $17,190,000 provided in 2003 to $9,151,000 used in 2004. The primary reasons for the change in operating cash flows from 2003 to 2004 include (i) an

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increase in construction in process of $10,299,000 from the acquisition of the East Lyme land and development costs capitalized on the Company’s residential development projects during 2004, (ii) increases to restricted cash primarily for deposits related to development projects ($1,695,000) and cash restricted for use by joint ventures ($1,178,000), (iii) $6,842,000 for deferred tax provisions in 2003 with a $300,000 benefit in 2004 and (iv) reduced depreciation in 2004 of $4,012,000 primarily from fully depreciated unamortized warrant costs for Wellsford/Whitehall. Operating cash flows will continue to be negatively impacted by increases to construction in process until such time as sales of homes and condominiums commence.

Cash provided by investing activities increased $17,862,000 from 2003 to 2004. The increase between these periods is primarily from proceeds from the sale of the Company’s investment in Second Holding in November 2004 for $15,000,000. During 2003, the 277 Park Loan of $25,000,000 was repaid and the Company utilized those proceeds, plus additional cash to purchase $27,500,000 of U.S. Government securities.

Cash flow used in financing activities decreased $2,170,000 from 2003 to 2004. The primary financing activity in 2003 was the $40,000,000 Green River Mortgage, the proceeds from which were used to repay $37,111,000 for a maturing construction loan on the Green River property. Additionally in 2003, the remaining $4,318,000 Silver Mesa Conversion Loan balance was repaid with available cash. During 2004, the Company obtained the East Lyme Construction Loan of which $361,000 was advanced by December 31, 2004. As construction of East Lyme continues, and as the Company obtains construction financing on its other residential development projects in 2005, cash flows to finance these operations will increase until sales of homes and condominiums commence.

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

Cash flows from operating activities increased $11,355,000 from $5,835,000 provided in 2003 to $17,190,000 provided in 2004. The significant components of this change related to the net effect of (i) the increase in the net (loss) of $42,487,000, offset by impairment charges from Wellsford/Whitehall of $37,377,000, (ii) additional depreciation and amortization of $3,174,000 primarily from the amortization of warrant costs related to joint ventures in excess of 2002 amounts, (iii) a deferred tax provision in 2003 of $6,842,000 whereas the 2002 period had a deferred tax credit of $1,225,000, (iv) the effects of selling eight additional residential units at Silver Mesa in 2003 in excess of 2002 of $1,580,000 and (v) additional interest revenue in 2003 of $4,368,000 from the 277 Park Loan prepayment penalty.

Cash provided by investing activities decreased $2,835,000 from 2002 to 2003. The decrease between the periods is primarily due to proceeds received from repayments of notes receivable in 2002 of $6,173,000, whereas during 2003, the cash received of $25,000,000 from the repayment of the 277 Park Loan was offset by cash used to purchase $27,500,000 of U.S. Government securities.

Cash flow used in financing activities decreased $5,786,000 from 2002 to 2003. The primary financing activity in 2003 was the $40,000,000 Green River Mortgage, the proceeds from which were used to repay $37,111,000 for a maturing construction loan on the Green River property. Additionally in 2003, the remaining $4,318,000 Silver Mesa Conversion Loan balance was repaid with available cash. During 2002, the Company repaid $9,034,000 on the Silver Mesa Conversion Loan with proceeds from unit sales.

Environmental

In July 2003, the Company sold the Salem, New Hampshire property. This property had been subject to ground water and surface water monitoring and testing as well as possible surface water contamination, volatile organic chemical migration off of the property and air quality issues. As a condition to the sale, the Company was obligated until July 2004 to pay certain agreed upon expenses for testing and other environmental related costs up to a maximum liability of $250,000. The Company reserved for this liability at the time of closing and placed $250,000 into escrow. This reserve had been reduced to approximately $219,000 by December 31, 2003. The remaining unused balance of $184,000 was recorded into income at June 30, 2004 as a result of the expiration of

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the contingency period and reflected in income from discontinued operations on the statement of operations during the second quarter of 2004 and for the year ended December 31, 2004.

Terrorism Insurance

During November 2002, Congress passed the Terrorism Risk Insurance Act of 2002, which was enacted to help companies obtain terrorism insurance at reasonable rates. As a result, many of the Company's liability insurance carriers including the primary and excess liability carriers, have made such insurance available to the Company. The Company is covered under certain of its current policies which expire on June 30, 2005 and had such insurance for all of 2004. Assets in the Wellsford/Whitehall portfolio were covered under terrorism insurance policies for the year ended December 31, 2004. The Company and Wellsford/Whitehall expect that similar coverage will be available in connection with an all risk policy and will need to make an assessment of the cost benefit of obtaining terrorism insurance in the future.

Inflation/Declining Prices

Substantially all of Wellsford/Whitehall's leases with their tenants provide for separate escalations of real estate taxes and operating expenses over a base amount. In addition, many of the leases provide for fixed base rent increases or indexed escalations (based on the CPI or other measures). The Company believes that inflationary increases in expenses will generally be offset by the expense reimbursements and contractual rent increases described above.

A majority of the leases at Palomino Park are for a term of one year or less which may enable the Company to seek increased rents upon renewal or re-letting of apartment units during an inflationary period. Such short-term leases generally minimize the risk to the Company of the adverse effects of inflation. Conversely, in a period of declining economics, short-term leases pose an increasing risk to the Company of reduced rental revenue and decreased cash flow from lower rents in conjunction with concessions to new and renewal tenants. Palomino Park's operating phases continue to offer significant concessions (approximately three months free rent on a twelve month lease).

Assets in the Wellsford/Whitehall portfolio are subject to similar risks regarding declining economics which may result in reduced rental revenue and decreased cash flow from lower rents and greater concessions to new and renewal tenants.

All of the residential developments that the Company has an interest in are exposed to inflation for the cost of building materials, such as wood, cement and sheetrock. Significant increases in these costs may negatively affect the profitability and cash flows of each project.

Trends

The markets in which the Company owns and operates its assets (or has investments in entities which own and operate assets) are subjected to general and local economic business conditions. Based upon the current economic environment, these conditions may negatively impact the occupancy levels, rents and the amount of concessions at the operating phases of Palomino Park and the sale of residential units at each of the Company's for-sale housing projects, all of which are included in the Residential Activities SBU and the sale of the remaining Fordham Tower residential units in the Debt and Equity Activities SBU. Wellsford/Whitehall, in the Commercial Property Activities SBU, would be similarly impacted by such economic conditions in connection with leasing properties and the ability to sell properties in the portfolio.

Rising insurance premium costs or availability of certain insurance coverages may negatively impact the operating results and cash flows of the Company's assets and SBUs. Energy costs may continue to increase as a result of world and domestic events, also negatively impacting operating results and cash flows. The availability and cost of other natural resources, such as restrictions on the use of water from time to time in the Denver market, could negatively impact operating results and cash flows as well.

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The number and timing of future sales of any residential units by the Company or by its joint ventures could be adversely impacted by increases in interest rates and the availability of credit to potential buyers in 2005, whereas during 2004 and 2003, historically low interest rates may have benefited sales results.

Risks Associated with Forward-Looking Statements

This Form 10-K, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following, which are discussed in greater detail in the “Risk Factors” section of the Company’s registration statement on Form S-3 (file No. 333-73874) filed with the Securities and Exchange Commission (“SEC”) on December 14, 2001, as may be amended, which is incorporated herein by reference: general and local economic and business conditions, which will, among other things, affect demand by tenants for commercial and residential properties, availability and credit worthiness of prospective tenants, lease rents and the availability and cost of financing; future impairment charges as a result of possible continuing declines in the expected values and cash flows of owned properties and investments or changes in the intent with regards to such properties and investments; competition; risks of real estate acquisition, development, construction and renovation including construction delays and cost overruns; inability to comply with zoning and other laws and obtain governmental approvals; vacancies at commercial and multifamily properties; dependence on rental income from real property; the risk of inflation in operating expenses (including, but not limited to, energy, water and insurance) and development costs (including construction materials); the availability of insurance coverages; the inability to obtain construction financing for its development projects; adverse consequences of debt financing including, without limitation, the necessity of future financings to repay maturing debt obligations; inability to meet financial and valuation covenants contained in loan agreements; inability to repay financings; exposure to variable rate based financings; risk of foreclosure on collateral; risks of investments in debt instruments, including possible payment defaults and reductions in the value of collateral; uncertainties pertaining to debt investments, including scheduled interest payments and the ultimate repayment of principal; risks associated with the ability to renew or obtain necessary credit enhancements from third parties for the Palomino Park Bonds; risks of subordinate loans; risks of leverage; inability to find appropriate investment and development opportunities; risks associated with equity investments in and with third parties; risks associated with our reliance on joint venture partners including, but not limited to, the inability to obtain consent from partners for certain business decisions, reliance on partners who are solely responsible for the books, records and financial statements of such ventures, the potential risk that our partners may become bankrupt, have economic or other business interests and objectives which may be inconsistent with those of the Company and our partners being in a position to take action contrary to our instructions or requests; inability and/or unwillingness of partners to provide their share of any future capital requirements; availability and cost of financing; interest rate risks; demand by prospective buyers of condominium, residential and commercial properties; the uncertainties regarding the Buy/Sell Agreement between the Company and Whitehall with respect to the Wellsford/Whitehall venture including, but not limited to, whether either partner will exercise their rights there under, the timing of such exercise and the inability by the ultimate purchaser to meet the financial terms of such transaction; inability to realize gains from the real estate assets held for sale; lower than anticipated sales prices; inability to close on sales of properties; illiquidity of real estate investments; the risks of seasonality and increasing interest rates on the Company’s ability to sell condominium units and single family “for sale” housing; environmental risks; uncertainties as to what decisions and transactions may result from the Company’s current assessment of its strategic business alternatives, which may include, but not be limited to, a recapitalization, acquisitions, dispositions of assets, a liquidation, the sale or merger of the Company and alternatives that would keep the Company independent; and other risks listed from time to time in the Company’s reports filed with the SEC. Therefore, actual results could differ materially from those projected in such statements.

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One of the Company's primary market risk exposures is to changes in interest rates. The Company and its joint venture investments each generally manage this risk by offsetting its investments and financing exposures to the extent possible as well as by strategically timing and structuring its transactions. The investments described below are generally made for long-term investing and not for trading purposes. The following table presents the effect of a 1.00% increase in the base rates on all variable rate notes receivable, investments in securities and debt and its impact on annual net income (loss):