UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

SOTHEBY'S HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

(248) 646-2400
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes R No £

      As of June 30, 2004, the aggregate market value of the 45,121,917 shares of Class A Limited Voting Common Stock (the “Class A Common Stock”) and 1,738,232 shares of Class B Common Stock (the “Class B Common Stock”), for which there is no public market, held by non-affiliates of the registrant was $720,145,795 and $27,742,183, respectively, based upon the closing price ($15.96) on the New York Stock Exchange composite tape on such date for the Class A voting stock, into which Class B Common Stock is freely convertible on a share-for-share basis. For these calculations, the common stock of each class beneficially owned by the registrant's controlling Class B Common Stock shareholder, directors and executive officers were treated as shares owned by affiliates; such inclusion, however, should not be construed as an admission that any such person is an “affiliate” of the registrant.

      As of March 1, 2005, there were outstanding 46,117,297 shares of Class A Common Stock and 18,118,218 shares of Class B Common Stock, freely convertible into 18,118,218 shares of Class A Common Stock. There is no public market for the registrant's Class B Common Stock, which is held by affiliates and non-affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant's proxy statement for the 2005 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

PART I

ITEM 1: DESCRIPTION OF BUSINESS

Company Overview

      Sotheby's Holdings, Inc. (together with its subsidiaries, unless the context otherwise requires, the “Company”) is one of the world's two largest auctioneers of fine art, decorative arts and collectibles. The Company offers property through its worldwide Auction segment in approximately 70 collecting categories, among them fine art, decorative arts, jewelry and collectibles. In addition to auctioneering, the Auction segment is engaged in a number of related activities, including the purchase and resale of art and other collectibles and the brokering of private purchases and sales of art and collectibles. The Company also conducts art-related financing activities through its Finance segment.

      The Company was incorporated in Michigan in August 1983. In October 1983, the Company acquired Sotheby Parke Bernet Group Limited, which was then a publicly held company listed on the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited and which, through its predecessors, had been engaged in the auction business since 1744. In 1988, the Company issued shares of Class A Common Stock to the public. The Class A Common Stock is listed on the New York Stock Exchange (the “NYSE”).

      In the fourth quarter of 2003, the Company committed to a plan to sell its domestic real estate brokerage business, Sotheby's International Realty, Inc. (“SIR”), as well as most of its real estate brokerage offices outside of the United States (the “U.S.”). On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant Corporation (“Cendant”). In conjunction with the sale, the Company entered into an agreement with Cendant to license the Sotheby's International Realty trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option. Initially, this license agreement was applicable to Canada, Israel, Mexico, the U.S. and certain Caribbean countries. Also in conjunction with the sale, Cendant received options to acquire most of the other non-U.S. offices of the Company's real estate brokerage business and to expand the license agreement to cover the related trademarks in other countries outside the U.S., excluding Australia and New Zealand (the “International Options”). The International Options were exercised by Cendant during 2004. Additionally, in the fourth quarter of 2004, the Company committed to a plan to sell its real estate brokerage business in Australia. SIR and the non-U.S. real estate brokerage operations comprised the Company's former Real Estate segment. For additional information related to these transactions, refer to Note C of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”

Auction Segment

Description of Business

      The purchase and sale of works of art in the international art market are primarily effected through numerous dealers, the major auction houses, the smaller auction houses and also directly between collectors. Although dealers and smaller auction houses generally do not report sales figures publicly, the Company believes that dealers account for the majority of the volume of transactions in the international art market.

      The Company and Christie's International, PLC (“Christie's”), a privately held auction house, are the two largest art auction houses in the world.

      The Company auctions a wide variety of property, including fine art, decorative art, jewelry and collectibles. Most of the objects auctioned by the Company are unique items, and their value, therefore, can only be estimated prior to sale. The Company's principal role as an auctioneer is to identify, evaluate and appraise works of art through its international staff of specialists; to stimulate purchaser interest through professional marketing techniques; and to match sellers and buyers through the auction process.

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      In its role as auctioneer, the Company generally functions as an agent accepting property on consignment from its selling clients. The Company sells property as agent of the consignor, billing the buyer for property purchased, receiving payment from the buyer and remitting to the consignor the consignor's portion of the buyer's payment after deducting the Company's commissions, expenses and applicable taxes. In certain situations, the Company releases property sold at auction to buyers before receiving payment. In such situations, the Company pays the consignor the net sale proceeds for the released property at the time payment is due, even if the Company has not received payment from the buyer. (See Note E of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      From time to time in the ordinary course of business, the Company will guarantee to consignors a minimum price in connection with the sale of property at auction (an “auction guarantee”). The Company must perform under its auction guarantee only in the event that the property sells for less than the minimum price and, therefore, the Company must pay the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the guarantee must be paid, but the Company has the right to recover such amount through the future sale of the property. Generally, the Company is entitled to a share of the excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, the Company reduces its financial exposure under auction guarantees through sharing arrangements with unaffiliated partners. (See Note Q of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      Beginning in June 2002, the Company conducted Internet auctions through its website, sothebys.com, pursuant to the terms of a strategic alliance with eBay, Inc. (“eBay”) whereby sothebys.com online auctions were incorporated into the eBay marketplace. In February 2003, the Company and eBay entered into an agreement to discontinue separate online auctions on sothebys.com, effective April 30, 2003. Subsequent to that date, the Company's Internet activities have focused on promoting its live auctions. (See Note T of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      In addition to auctioneering, the Auction segment is engaged in a number of related activities, including the purchase and resale of art and other collectibles and the brokering of private purchases and sales of art and collectibles. For example, the Company has a 50% equity interest in Acquavella Modern Art (“AMA”), a partnership between a wholly-owned subsidiary of the Company and Acquavella Contemporary Art, Inc. The assets of AMA consist principally of art inventory. (See Notes B and G of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      The Company's auction business is seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters of each year as a result of the traditional spring and fall art auction seasons. Consequently, the Auction segment typically reports operating losses in the first and third quarters of each year. (See Item 7, “Management's Discussion and Analysis of Results of Operations,” and Note W of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

The Auction Market and Competition

      Competition in the international art market is intense. A fundamental challenge facing any auctioneer or dealer is to obtain high quality and valuable property for sale. The Company's primary auction competitor is Christie's.

      The owner of a work of art wishing to sell it has four principal options: (1) sale or consignment to, or private sale by, an art dealer; (2) consignment to, or private sale by, an auction house; (3) private sale to a collector or museum without the use of an intermediary; or (4) for certain categories of property (in particular, collectibles) consignment to, or private sale through, an internet-based service. The more valuable the property, the more likely it is that the owner will

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consider more than one option and will solicit proposals from more than one potential purchaser or agent, particularly if the seller is a fiduciary representing an estate or trust. A complex array of factors may influence the seller's decision. These factors, which are not ranked in any particular order, include:

      It is not possible to measure with any particular accuracy the entire international art market or to reach any conclusions regarding overall competition because dealers and auction firms frequently do not publicly report annual sales totals and the amounts reported are not verifiable.

Auction Regulation

      Regulation of the auction business varies from jurisdiction to jurisdiction. In many jurisdictions, the Company is subject to laws and regulations that are not directed solely toward the auction business, including, but not limited to, import and export regulations, cultural patrimony laws and value added sales taxes. Such regulations do not impose a material impediment to the worldwide business of the Company but do affect the market generally, and a material adverse change in such regulations could affect the business. In addition, the failure to comply with such local laws and regulations could subject the Company to civil and/or criminal penalties in such jurisdictions. The Company has a Compliance Department to provide training to Company employees and to audit the Company's compliance with many of these laws and regulations.

      A recent ruling by the European Court of Justice proposed that the standard rate of value added sales tax must be paid on the buyer’s premium on works imported into the U.K. from outside the European Union and sold at auction. Although the Company continues to analyze the ultimate impact of the proposed rule, management believes the proposed rule will not have a material effect on the Company's business. (See statement on Forward Looking Statements.)

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Finance Segment

Description of Business

      The Company provides certain collectors and dealers with financing generally secured by works of art that the Company either has in its possession or permits the borrower to possess. The Company's financing activities are conducted through its wholly-owned direct and indirect subsidiaries.

      The general policy of the Finance segment is to make secured loans at loan to value ratios (principal loan amount divided by the low auction estimate of the collateral) of 50% or lower. The Company will also lend at loan to value ratios higher than 50%. All of the Finance segment's loans are variable interest rate loans.

      The Company generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a “consignor advance”); and (2) general purpose term loans to collectors or dealers secured by property not presently intended for sale (a “term loan”). The consignor advance allows a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process. Term loans allow the Company to establish or enhance mutually beneficial relationships with dealers and collectors. Term loans are generally made with full recourse against the borrower. In certain instances, however, term loans are made with recourse limited to the works of art pledged as security for the loan. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company's ability to realize on its collateral may be limited or delayed by the application of such laws.

      Under certain circumstances, the Company also makes unsecured loans to collectors and dealers. In certain of these situations, the Company finances the purchase of works of art by certain art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold by the dealer or at auction with any profit or loss shared by the Company and the dealer. Interest income related to such unsecured loans is reflected in the results of the Finance segment, while the Company's share of any profit or loss is reflected in the results of the Auction segment.

      (See Notes B and E of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      The Company funds its financing activities generally through operating cash flows supplemented by credit facility borrowings. (See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Note J of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

The Finance Market and Competition

      A considerable number of traditional lending sources offer conventional loans at a lower cost to borrowers than the average cost of those offered by the Company. Additionally, many traditional lenders offer borrowers a variety of integrated financial services such as wealth management services, which are not offered by the Company. Few lenders, however, are willing to accept works of art as sole collateral as they do not possess the ability both to appraise and to sell works of art within a vertically integrated organization. The Company believes that its financing alternatives are attractive to clients who wish to obtain liquidity from their art assets.

Factors Affecting Operating Results and Liquidity

      See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Operating Results and Liquidity.”

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Financial and Geographical Information About Segments

      See Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for financial and geographical information about the Company's segments.

Personnel

      As of December 31, 2004, the Company had 1,411 employees with 513 located in North America; 568 in the United Kingdom (the “U.K.”), 249 in Continental Europe and 81 in Asia. The Company regards its relations with its employees as good. The table below provides a breakdown of the Company's employees as of December 31, 2004 and 2003.

      Employees classified within “All Other” principally relate to the Company's central corporate and information technology departments.

Website Address

      The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K through a hyperlink from its website, www.sothebys.com, to www.shareholder.com/bid/edgar.cfm, a website maintained by an unaffiliated third-party service. Such reports are made available on the same day that they are electronically filed with or furnished to the Securities and Exchange Commission.

ITEM 2: PROPERTIES

      The Company's North American Auction and Finance operations, as well as its corporate offices, are headquartered at 1334 York Avenue, New York, New York (the “York Property”). The York Property, which is approximately 400,000 square feet, is home to the Company's North American auction salesrooms. The Company also currently leases warehouse space at one other location in Manhattan, New York and leases office and exhibition space in several other major cities throughout the U.S.

      The Company acquired the York Property in July 2000. During the first quarter of 2001, the Company completed the construction of a six-story addition and renovation of the York Property, which expanded the Company's auction, warehouse and office space in New York City and enabled the Company to consolidate many of its New York City operations. On February 7, 2003, the Company sold the York Property and entered into an agreement to lease it back from the buyer for an initial 20-year term, with options to extend the lease for two additional 10-year terms. (See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Notes H and L of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      In July 2004, management initiated the consolidation of the Company's New York warehouse space into the York Property in order to reduce premises costs in North America. This consolidation is currently underway and is currently expected to be completed during the first half of 2005.

      The Company's U.K. operations (primarily auction) are centered at New Bond Street, London, where the main salesrooms and administrative offices of Sotheby's U.K. are located. The New Bond Street premises are approximately 200,000 square feet. The Company owns a portion of the

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New Bond Street premises, and a portion is leased under long-term leases. The Company also leases approximately 50,000 square feet at Olympia, a building located in Kensington, West London. The Olympia facility, which commenced operations in September 2001, is a specially dedicated middle market auction salesroom. In addition, the Company leases warehouse space at King's House in West London and owns land and a building in Sussex (the “Sussex Property”), which previously housed an auction salesroom. The Company is in the process of selling the Sussex Property. (See Note P of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      The Company also leases space primarily for auction operations in various locations throughout Continental Europe, including salesrooms in Amsterdam, The Netherlands; Geneva and Zurich, Switzerland; Milan, Italy; and Paris, France; in Asia, including Hong Kong and Singapore; and in Australia.

      In management's opinion, the Company's worldwide premises are adequate for the current conduct of its business. However, management continually analyzes its worldwide premises for both its current and future business needs in an effort to reduce overhead costs. Where appropriate, management will continue to make any necessary changes to address the Company's business needs.

ITEM 3: LEGAL PROCEEDINGS

      The Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie's for auction services during the period 1993 to 2000.

      The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business.

      Management does not believe that the outcome of any of the pending claims or proceedings described above will have a material adverse effect on the Company's business, results of operations, financial condition and/or liquidity.

      (See Notes P and R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted to a vote of the Company's shareholders during the fourth quarter of 2004.

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PART II

Market Information

      The principal U.S. market for the Company's Class A Common Stock is the NYSE (symbol: BID).

      The Company also has Class B Common Stock, convertible on a share for share basis into Class A Common Stock. There is no public market for the Class B Common Stock. Per share cash dividends, if any, would be equal for the Class A Common Stock and Class B Common Stock.

      The quarterly price ranges on the NYSE of the Class A Common Stock for 2004 and 2003 are as follows:

      The number of holders of record of Class A Common Stock as of March 1, 2005 was 2,159. The number of holders of record of Class B Common Stock as of March 1, 2005 was 88.

      The Company's credit facility has a covenant that prohibits it from making dividend payments. (See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Note J of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”) The Company did not pay any dividends during 2004 and 2003.

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Equity Compensation Plans

      The following table provides information as of December 31, 2004 with respect to shares of the Company's common stock that may be issued under its existing equity compensation plans, including the Sotheby's Holdings, Inc. 1987 Stock Option Plan (the “1987 Stock Option Plan”), the Sotheby's Holdings, Inc. 1997 Stock Option Plan (the “1997 Stock Option Plan”), the Sotheby's Holdings, Inc. 2003 Restricted Stock Plan (the “Restricted Stock Plan”) and the Sotheby's Holdings, Inc. Stock Compensation Plan for Non-Employee Directors (the “Directors Stock Plan”):

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ITEM 6:  SELECTED FINANCIAL DATA

      The following table provides selected financial data for the Company. In the fourth quarter of 2003, the Company committed to a plan to sell SIR, its domestic real estate brokerage business, as well as most of its real estate brokerage offices outside of the U.S. On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant. Additionally, in the fourth quarter of 2004, the Company committed to a plan to sell its real estate brokerage business in Australia. This business is the only remaining component of the Company's former Real Estate segment. Accordingly, the income statement and per share data for all periods presented below represents only results from the Company's continuing operations.

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

      Note D (“Segment Reporting”) of Notes to Consolidated Financial Statements should be read in conjunction with this discussion.

Seasonality

      The worldwide art auction market has two principal selling seasons, spring and fall. Accordingly, first and third quarter results of the Auction segment typically reflect lower Aggregate Auction Sales (as defined below) and a loss from operations due to the fixed nature of many of the Company's operating expenses. (See Note W of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

Use of Non-GAAP Financial Measures

      GAAP refers to generally accepted accounting principles in the United States of America. Included in Management's Discussion and Analysis of Results of Operations are financial measures presented in accordance with GAAP and also on a non-GAAP basis. When material, the Company excludes the impact of changes in foreign currency exchange rates when comparing current year results to the prior year. Consequently, such period-to-period comparisons are provided on a constant dollar basis by eliminating the impact of changes in foreign currency exchange rates since the prior year. Management believes the use of this non-GAAP financial measure provides a more meaningful discussion and analysis of material fluctuations in the Company's operating results. Additionally, management utilizes this non-GAAP financial measure in analyzing its operating results.

Critical Accounting Estimates

      The preparation of financial statements and related disclosures in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may ultimately differ from management's original estimates as future events and circumstances sometimes do not develop as expected. Note B of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Management believes that the following are the most critical accounting estimates that may affect the Company's financial condition and/or results of operations.

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(2)		Allowance for Credit Losses—The Company is required to estimate the collectibility of its notes receivable balances, which are related to the client loan portfolio of the Finance segment. A considerable amount of judgment is required in assessing the collectibility of these loans, including judgments about the estimated realizable value of any underlying collateral and the current creditworthiness and financial condition of a borrower. Management evaluates specific loans when it becomes aware of a situation where a borrower may not be able to repay the loan. The amount of the required allowance is based on the facts available to management and is reevaluated and adjusted as additional information is received.
		Secured loans that may not be collectible from the borrower are analyzed based on the current estimated realizable value of the collateral securing each loan. Reserves are established for secured loans that management believes are under-collateralized, and with respect to which the under-collateralized amount may not be collectible from the borrower. To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations where the borrower becomes subject to bankruptcy or insolvency laws, the Company's ability to realize on its collateral may be limited or delayed by the application of such laws. Unsecured loans are analyzed based on management's estimate of the current collectibility of each loan, taking into account the creditworthiness and financial condition of the borrower. A reserve is also established for probable losses inherent in the remainder of the loan portfolio based on historical data related to loan write-offs. If the estimated realizable value of any underlying collateral and/or the creditworthiness of borrowers in the Company's client loan portfolio were to deteriorate, additional allowances may be required resulting in an adverse impact on the Company's operating results. However, historical losses relating to the Company's client loan portfolio have been infrequent and the data used by management to develop the allowance for credit losses has been reliable in developing historically accurate estimates.
		(See Note E of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)
(3)		Inventory—Inventory consists principally of objects obtained incidental to the auction process, primarily as a result of the failure of guaranteed property to sell at auction at or above the minimum price guaranteed by the Company, defaults by purchasers after the consignor has been paid and the honoring of purchasers' claims. To a lesser extent, inventory also includes objects purchased for investment purposes. Inventory is valued at the lower of cost or management's estimate of net realizable value. This estimate is based on management's judgments about the art market in general and the value of individual items held in inventory. If the market value of this inventory were to decline, the Company would be required to evaluate whether to record a loss in the Auction segment to reduce the carrying value of the inventory. However, historical subsequent adjustments to the net realizable value allowances have been minimal. (See Note F of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)
(4)		Pension Benefits—The pension obligations related to the Company's U.K. defined benefit pension plan are developed from an actuarial valuation. Inherent in this valuation are key assumptions and estimates, including the discount rate, expected long-term return on plan assets, future compensation increases, and other factors, which are updated on an annual basis. In determining these assumptions and estimates, management considers current market conditions, market indices and other relevant data. The discount rate assumption represents the approximate weighted average rate at which the Company's pension obligations could be effectively settled and is based on a hypothetical portfolio of high-quality corporate bonds with maturity dates approximating the length of time remaining until individual benefit payment dates. As of the date of the most recent valuation of the U.K. defined benefit pension plan, a hypothetical increase or decrease in the discount rate assumption of 0.1% (e.g., from 5.4% to 5.5% or from 5.4% to 5.3%) would result in: (1) a decrease or increase in net periodic pension cost of approximately $0.6 million and (2) a decrease or increase in the projected benefit obligation of approximately $5.5 million.

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		The assumption for the expected long-term return on plan assets is based on dividend and interest yields available on equity and bond markets as of the plan's measurement date and weighted according to the composition of invested plan assets. As of the date of the most recent valuation of the U.K. defined benefit pension plan, a hypothetical increase or decrease in the expected long-term return on plan assets of 0.25% (e.g., from 7.75% to 8% or from 7.75% to 7.5%) would result in a decrease or increase in net periodic pension cost of approximately $0.5 million.
		The assumption for future compensation increases is established after considering historical data for the Company and current economic data for inflation, as well as management's expectations for future salary growth. As of the date of the most recent valuation of the U.K. defined benefit pension plan, a hypothetical increase or decrease in the assumption for future salary increases of 0.25% (e.g., from 4.75% to 5% or from 4.75% to 4.5%) would result in: (1) an increase or decrease in net periodic pension cost of approximately $0.5 million and (2) an increase or decrease in the projected benefit obligation of approximately $1.9 million.
		During the three-year period from 2000 to 2002, actual asset returns were less than the Company's assumed rate of return on plan assets, principally contributing to unrecognized net losses of approximately $77.5 million at December 31, 2004. These unrecognized losses will be systematically recognized as an increase in future net periodic pension expense in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers' Accounting for Pensions.” Unrecognized losses in excess of 10% of the greater of the market-related value of plan assets or the plan's projected benefit obligation are recognized over a period of approximately 14 years, which represents the average remaining service period of active employees expected to receive benefits under the plan. In 2005, the Company currently expects the amortization of such unrecognized losses to be approximately $2.2 million. In accordance with SFAS No. 87, the market-related value of plan assets reflects changes in the fair value of plan assets over a five-year period.
		(See Note N of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for a description of the U.K. defined benefit pension plan, as well as the Company's other pension arrangements.)
(5)		Legal and Other Contingencies—The Company is subject to legal proceedings, lawsuits and other claims. Management is required to assess the likelihood of any adverse judgments or outcomes in these matters, as well as potential ranges of probable losses. A determination of the amount of reserves, if any, required for these contingencies is based on a careful analysis of each individual exposure with, in some cases, the assistance of outside legal counsel. The required reserves may change in the future due to new developments in each matter or a change in settlement strategy. (See Notes P and R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)
(6)		Income Taxes—At December 31, 2004, the Company had net deferred tax assets of $67.7 million primarily resulting from net operating loss carryforwards and deductible temporary differences, which will reduce taxable income in future periods over a number of years. Included in this net deferred tax asset is a valuation allowance of $33.8 million to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. In assessing the need for the valuation allowance management considers, among other things, its projections of future taxable income and ongoing prudent and feasible tax planning strategies. If the Company's projections of future taxable income and other positive evidence considered in evaluating the need for a valuation allowance prove, with the benefit of hindsight, to be inaccurate, it will be more difficult to support the realization of these deferred tax assets. As a result, an additional valuation allowance may be required, which would have an adverse impact on the Company's results. Conversely, should management determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would have a favorable impact on the Company's results in the period such determination was made. (See Note K of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

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Overview

      During 2004, the recovery in the international art market, which began in the fourth quarter of 2003, continued and the Company experienced significantly better results when compared to the prior year. Management currently expects the strength of the international art market to continue and is encouraged by its strong first quarter 2005 auction sales results to-date, as well as by the level of consignments for the upcoming spring auction season. However, despite management's optimism, Auction segment results for the first half of 2005 may not reach the level achieved during the same period in the prior year as we do not expect another private sale such as the landmark private sale of the Forbes Collection of Faberge in February 2004, or a replication of the May 2004 single-owner sale of property of the Greentree Foundation, both as discussed in more detail below. (See statement on Forward Looking Statements.)

      The Company's pre-tax results from continuing operations for the years ended December 31, 2004 and 2003 are summarized below (in thousands of dollars):

      The improvement in the Company's results from continuing operations during 2004 was due to increased auction and related revenues principally resulting from a significant improvement in auction sales during the spring and fall auction seasons, as well as a higher level of private sale commissions. Also favorably influencing the comparison of 2004 results to the prior year is a $45 million one-time license fee earned in the first quarter of 2004 in conjunction with the sale of the Company's domestic real estate brokerage business, as well as significantly lower employee retention costs and restructuring charges. The overall improvement in the Company's full year results was partially offset by increased incentive bonus costs and costs associated with the Company's option exchange program, as well as higher professional fees and employee benefit costs.

      For the year ended December 31, 2004, the Company's pre-tax income from discontinued operations was $38.8 million; a significant improvement when compared to the same period in 2003 when the Company's discontinued operations had pre-tax income of approximately $9.4 million. This improvement was largely due to a pre-tax gain of $32 million recognized principally on the sale of the Company's discontinued domestic real estate brokerage business. (See “Sale of Real Estate Brokerage Business” below and Note C of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      Please refer to the discussion below for a more detailed discussion of the significant factors impacting the Company's results for the year ended December 31, 2004.

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Impact of Foreign Currency Translations

      For the year ended December 31, 2004, income from continuing operations before taxes increased $133.7 million to $96.7 million, when compared to the same period in the prior year. During 2004, the favorable impact of foreign currency translations on income from continuing operations before taxes was approximately $4.3 million. Excluding the favorable impact of foreign currency translations, income from continuing operations before taxes increased $129.4 million to $92.4 million for the year ended December 31, 2004.

      During 2004, the favorable impact of foreign currency translations on income from continuing operations before taxes was comprised of the following (in thousands of dollars):

Sale of Real Estate Brokerage Business

      In the fourth quarter of 2003, the Company committed to a plan to sell SIR, its domestic real estate brokerage business, as well as most of its real estate brokerage offices outside of the U.S. On February 17, 2004, the Company consummated the sale of SIR to a subsidiary of Cendant. In conjunction with the sale, the Company entered into an agreement with Cendant to license the Sotheby's International Realty trademark and certain related trademarks for an initial 50-year term with a 50-year renewal option (the “License Agreement”). Initially, the License Agreement was applicable to Canada, Israel, Mexico, the U.S. and certain Caribbean countries. Also in conjunction with the sale, Cendant received options to acquire most of the other non-U.S. offices of the Company's real estate brokerage business and to expand the License Agreement to cover the related trademarks in other countries outside the U.S., excluding Australia and New Zealand (the “International Options”). The International Options were exercised by Cendant during 2004.

      The total consideration paid by Cendant at closing for SIR's company-owned real estate brokerage business and affiliate network, as well as the License Agreement and the International Options was $100.7 million, consisting of $98.9 million in cash and the assumption of a $1.8 million note payable. Net cash proceeds from the sale, after deducting $4.9 million in transaction costs, were $94.0 million. In addition to the consideration received at closing, the License Agreement provides for an ongoing license fee during its term based on the volume of commerce transacted under the licensed trademarks. (See “Liquidity and Capital Resources” below for a discussion of the Company's expected use of the proceeds received at closing.)

      The consideration received at closing was allocated among each of the following components based on a valuation of their respective fair values: (i) SIR's company-owned real estate brokerage business and affiliate network, (ii) the License Agreement and (iii) the International Options. Based on this valuation, $55.1 million was allocated to SIR's company-owned real estate brokerage business and affiliate network, $45 million was allocated to the License Agreement and $0.6 million was allocated to the International Options.

      As a result of the sale of the real estate brokerage business and affiliate network to Cendant, the Company recognized a pre-tax gain of $32 million, which is recorded within income from discontinued operations before taxes in the Consolidated Income Statements. As a result of this gain, the Company utilized approximately $14.2 million of the net deferred tax asset related to its net operating loss carryforwards.

      The $45 million of proceeds allocated to the License Agreement represents a one-time non-refundable upfront license fee received by the Company as consideration for entering into the License Agreement. The Company has no significant future performance obligations associated with the non-refundable upfront license fee. As a result, the Company recognized license fee

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revenue of $45 million in the first quarter of 2004, which is classified within the continuing operations section of the Consolidated Income Statements. This classification is consistent with how the Company will report ongoing license fees earned during the term of the License Agreement, as well as license fee revenue earned in the future from other potential licensing opportunities. As a result of this one-time license fee, the Company utilized approximately $15.2 million of the net deferred tax asset related to its net operating loss carryforwards during the first quarter of 2004. The Company incurred transaction costs of approximately $2.2 million related to the consummation of the License Agreement principally in the first quarter of 2004, which are recorded within general and administrative expenses in the Consolidated Income Statements.

      Similar to the license fee received by the Company in connection with the License Agreement, the $0.6 million of proceeds allocated to the International Options represents a one-time non-refundable upfront license fee received by the Company for Cendant's use of the Sotheby's International Realty trademarks in countries outside the U.S. (excluding Australia and New Zealand). As a result of the exercise of the International Options by Cendant discussed above, the Company recognized license fee revenue of $0.6 million in the fourth quarter of 2004, which is classified within the continuing operations section of the Consolidated Income Statements. This classification is consistent with how the Company will report ongoing license fees earned as a result of Cendant's use of the trademarks.

      In the fourth quarter of 2004, the Company committed to a plan to sell its real estate brokerage business in Australia. This business is the only remaining component of the Company's former Real Estate segment. Accordingly, the assets and liabilities of the Australia real estate brokerage business are classified as held for sale in the Consolidated Balance Sheets, and its operating results are reported as discontinued operations in the Consolidated Income Statements. The Australia real estate brokerage business is not material to the Company's results of operations, financial condition or liquidity.

      (See Note C of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

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Revenues

      For the years ended December 31, 2004 and 2003, revenues from continuing operations consisted of the following (in thousands of dollars):

Auction and Related Revenues

      For the year ended December 31, 2004, auction and related revenues increased $134.1 million, or 43%, to $443.1 million, when compared to the same period in the prior year. During 2004, the favorable impact of foreign currency translations on auction and related revenues was approximately $21.3 million. Excluding the favorable impact of foreign currency translations, auction and related revenues increased $112.8 million, or 37%, to $421.8 million for the year ended December 31, 2004.

      The increased level of auction and related revenues in 2004 was principally due to higher auction commission revenues, as well as increased private sale commissions and, to a lesser extent, increased catalogue subscription revenues and principal activities. Each of the significant factors impacting the overall change in auction and related revenues for the year is explained in more detail below.

      Auction Commission Revenues—For the year ended December 31, 2004, auction commission revenues increased $109.6 million, or 40%, to $383.1 million, when compared to the same period in the prior year. During 2004, the favorable impact of foreign currency translations on auction commission revenues was approximately $18.8 million. Excluding the impact of favorable foreign currency translations, auction commission revenues increased $90.8 million, or 33%, to $364.3 million for the year ended December 31, 2004.

      The higher level of auction commission revenues during 2004 was largely attributable to a significant increase in property sold at auction; partially offset by a decrease in auction commission

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margin. See “Aggregate Auction Sales” and “Auction Commission Margin” below for a detailed discussion of these key performance indicators.

Aggregate Auction Sales—For the year ended December 31, 2004, Aggregate Auction Sales increased $1,003.9 million, or 59%, to $2,694.5 million, when compared to the same period in the prior year. During 2004, the favorable impact of foreign currency translations on Aggregate Auction Sales was approximately $109.6 million. Excluding the favorable impact of foreign currency translations, Aggregate Auction Sales increased $894.3 million, or 53%, to $2,584.9 million for the year ended December 31, 2004.

The significant increase in Aggregate Auction Sales during 2004 reflects the continued recovery of the international art market, as well as improved global economic conditions when compared to the prior year. Specifically, the overall increase in Aggregate Auction Sales for the year ended December 31, 2004 was favorably influenced by:

      Auction Commission Margin—Auction commission margin represents total auction commission revenues as a percentage of Net Auction Sales. Typically, auction commission margins are higher for lower value works of art or collections, while higher valued property earns lower margins.

      For the year ended December 31, 2004, the Company experienced a 13% decrease in auction commission margin when compared to the same period in the prior year. This decrease was principally due to the fact that a significant portion of the increase in Net Auction Sales was at the high-end of the Company's business where auction commission margins are traditionally lower. Several of the Impressionist and Contemporary collections offered during the spring and fall seasons carried lower auction commission margins than comparable sales in the recent past. This was primarily due to the competitive environment, as well as the Company's decision to reduce its auction guarantee risk through sharing arrangements with partners, whereby the Company reduces its financial exposure under the auction guarantee in exchange for sharing in the auction commissions with the partner. At certain times, the partner will also assist the Company in valuing and marketing the property to be sold at auction. Both of these factors significantly contributed to a $30.8 million increase in auction commissions owed or paid by the Company to unaffiliated third parties.

      Effective January 1, 2005, the Company increased its buyer's premium charged on certain auction sales. In salesrooms in the U.S., the buyer's premium is now 20% of the hammer (sale)

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price on the first $200,000 and 12% of any remaining amount over $200,000. In foreign salesrooms, these U.S. dollar thresholds were translated into an appropriate fixed local currency amount upon the effective date. Previously, the buyer's premium charged on auction sales was generally 20% of the hammer (sale) price on the first $100,000 and 12% of any remaining amount over $100,000. The Company expects this change to the buyer's premium rate structure to result in an increase in 2005 auction commission revenues (see statement on Forward Looking Statements). On January 17, 2005, the Company's increase in buyer's premium rates was matched by Christie's.

Private Sale Commissions—For the year ended December 31, 2004, private sale commissions increased $17.2 million to $22.5 million when compared to the same period in the prior year. The higher level of private sale activity for the period reflects the traditionally variable nature of such sales, as well as management's expanded efforts in this area. Most significantly, 2004 results include the landmark private sale of the Forbes Collection of Faberge. Also favorably influencing the comparison of private sale commissions to the prior year is the February 2004 sale of Raphael's “Madonna of the Pinks” to the National Gallery in London, as well as several other significant private sales for which there were no comparable events in the prior year.

Principal Activities—Principal activities consist mainly of gains or losses on sales of inventory, income or loss related to auction guarantees and gains or losses related to the sales of loan collateral, as well as any decreases in the carrying value of the Company's inventory. The level of principal activities in a period is largely attributable to the level of auction guarantees issued by the Company, as well as the economic environment, the supply of quality property available for investment and resale and the demand by buyers for such property.

For the year ended December 31, 2004, principal activities increased $0.8 million, or 42%, to $2.6 million when compared to the same period in the prior year. This increase was partially due to a $1.8 million gain recognized in May 2004 on the sale of a painting purchased by the Company for investment purposes, for which there was no comparable event in the prior year. Also favorably impacting the comparison of principal activities to the prior year is a $0.8 million improvement in results from the sale of property purchased in partnership with art dealers. Generally, property purchased pursuant to such partnerships is sold directly by the dealer or at auction with any net profit or loss shared by the Company and the dealer. The overall increase in principal activities in 2004 was partially offset by less favorable auction guarantee experience during the year, which reduced principal activities by approximately $1.1 million.

License Fee Revenues

      In the first quarter of 2004, the Company recognized revenue of $45 million related to a one-time license fee received as consideration for entering into an agreement with Cendant to license the Sotheby's International Realty trademark and certain related trademarks. Additionally, in the fourth quarter of 2004, the Company recognized $0.6 million of license fee revenue as a result of Cendant's exercise of the International Options. (See “Sale of Real Estate Brokerage Business” above and Note C of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

Other Revenues

      For the year ended December 31, 2004, other revenues decreased $0.5 million, or 6%, when compared to the same period in the prior year. During 2004, the favorable impact of foreign currency translations on other revenues was approximately $0.4 million. Excluding the favorable impact of foreign currency translations, other revenues decreased $0.9 million, or 10%, for the year ended December 31, 2004. This decrease was principally due to a reduction in art education revenues resulting from the sale of the Company's U.K. art education business on September 30, 2003, partially offset by a $0.4 million, or 7%, increase in Finance segment revenues, as discussed in more detail below.

      Finance Segment Revenues—For the year ended December 31, 2004, the overall increase in Finance segment revenues was principally due to $1 million in interest income recognized in the

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second quarter of 2004 as a result of the collection of a disputed client loan, for which there was no comparable event in the prior year; partially offset by the impact of a 5% decrease in the average loan portfolio balance and lower interest rates charged on certain significant client loans. See “Average Loan Portfolio” below for a detailed discussion of this key performance indicator.

      Average Loan Portfolio—For the year ended December 31, 2004, the Finance segment's average loan portfolio balance decreased $4.0 million, or 5%, when compared to the same period in the prior year. Although this represents only a marginal decrease when compared to the prior year, 2004 marks the continuation of a four-year trend in which the Finance segment's average loan portfolio decreased by approximately 56%. This decrease was principally due to the limited availability of cash to fund new loans prior to the initiation of the GE Capital Credit Agreement and the consummation of the sale of the Company's domestic real estate brokerage business in the first quarter of 2004. The Company's present intention is to expand the Finance segment's loan portfolio. Management is now actively marketing the Finance segment's loan program to potential new clients and is considering partnership arrangements with unaffiliated third parties in order to generate growth. (See “Liquidity and Capital Resources” and statement on Forward Looking Statements.)

Expenses

      For the years ended December 31, 2004 and 2003, expenses from continuing operations consisted of the following (in thousands of dollars):

Direct Costs of Services

      Direct costs of services consist largely of catalogue production and distribution costs, as well as sale marketing costs and corporate marketing expenses. The level of direct costs incurred in any period is generally dependent upon the volume and composition of the Company's auction sales. For example, direct costs attributable to the sale of single-owner collections are typically higher than those associated with various-owner sales mainly due to higher promotional costs for catalogues, special events and traveling exhibitions.

      For the year ended December 31, 2004, direct costs increased $9.9 million, or 22%, to $55.5 million, when compared to the same period in the prior year. During 2004, the unfavorable impact of foreign currency translations on direct costs was approximately $2.9 million. Excluding the unfavorable impact of foreign currency translations, direct costs increased $7.0 million, or 15%, to $52.6 million for the year ended December 31, 2004.

      The increased level of direct costs is consistent with the higher level of sales activity, and in particular single-owner sales, during 2004. For example, direct costs for the year ended December 31, 2004 included $1.2 million in catalogue production, advertising and promotional costs related to single-owner sales of property from the Greentree Foundation, for which there was no comparable sale in the prior year. The overall increase in direct costs for the year was partially offset by $0.9 million in cost reductions achieved as a result of the elimination of direct costs associated with the Company's former e-commerce and U.K. art education activities.

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Salaries and Related Costs

      For the years ended December 31, 2004 and 2003, salaries and related costs consisted of the following (in thousands of dollars):

      For the year ended December 31, 2004, salaries and related costs increased $34.0 million, or 24%, to $177.6 million, when compared to the same period in the prior year. During 2004, the unfavorable impact of foreign currency translations on salaries and related costs was approximately $8.7 million. Excluding the impact of unfavorable foreign currency translations, salaries and related costs increased $25.3 million, or 18%, to $168.9 million for the year ended December 31, 2004. This increase was principally due to significantly higher incentive bonus costs. Additionally, costs associated with the Company's option exchange program, a higher level of employee benefit costs and increased payroll taxes significantly contributed to the overall increase for the year. These increases were partially offset by lower full-time salaries (excluding the unfavorable impact of foreign currency translations).

      The overall variance versus the prior year is indicative of an evolution in the Company's compensation philosophy whereby a greater proportion of employee compensation is variable, dependent upon the Company's profitability. This trend will continue in 2005, as discussed below under “Incentive Bonus Costs,” and as recent changes take effect for the Sotheby's, Inc. Retirement Savings Plan, a defined contribution pension plan qualified under Section 401(k) of the Internal Revenue Code of 1986. (See Note N of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for a more detailed discussion of the Sotheby's, Inc. Retirement Savings Plan.)

      See discussion below for a more detailed explanation of each of the factors that contributed to the unfavorable variance versus the prior year.

      Incentive Bonus Costs—For the year ended December 31, 2004, incentive bonus costs increased $15.5 million, when compared to the same period in the prior year. The significant increase in incentive bonus costs is consistent with the Company's substantial improvement in overall results versus the prior year and also reflects performance-based compensation awarded principally in the first quarter of 2004 in connection with the high level of private sale transactions during the period. This increase is indicative of an evolution in the Company's compensation philosophy whereby a greater proportion of employee compensation is variable, dependent upon the Company's profitability. This trend will continue in 2005 as effective January 1, 2005 the Compensation Committee of the Company's Board of Directors (the “Compensation Committee”) approved, subject to shareholder approval, the adoption of the Executive Bonus Plan (the “EBP”). The EBP provides eligible key executives with the opportunity to earn performance bonuses based on certain targeted levels of the Company's financial performance. Target performance goals under the EBP will be established annually and measured in terms of designated levels of net income or other financial performance criteria as determined by the Compensation Committee. The Company intends that performance bonuses will generally be payable under the EBP only if the Company's financial plan for that year, as approved by the Company's Board of Directors, has been achieved.

      For any performance bonus awarded under the EBP, an amount equal to 50% of the performance bonus will be payable in cash in a lump sum payment with the remaining 50%

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payable as an award of restricted stock granted under the Restricted Stock Plan. Restricted stock shares granted under the EBP will vest ratably after each of the first, second and third years following the date of grant. On February 7, 2005, the Compensation Committee approved the formula by which any performance bonus awarded under the EBP will be determined for the year ended December 31, 2005.

      Option Exchange Program—In February 2003, the Compensation Committee approved an exchange offer of cash or restricted stock for certain stock options held by eligible employees under the 1997 Stock Option Plan (the “Exchange Offer”). The Exchange Offer was tendered during the first half of 2004.

      As a result of the Exchange Offer, approximately 5.6 million stock options were cancelled and 1.1 million shares of restricted stock were issued. The restricted stock shares were issued pursuant to the Restricted Stock Plan upon acceptance of the Exchange Offer at the closing market price of the Company's Class A Common Stock on that date and resulted in the recording of deferred compensation expense and additional paid-in capital of approximately $14 million. The amount recorded as deferred compensation expense is being amortized to salaries and related costs over the restricted stock's four-year graded vesting period.

      For the year ended December 31, 2004, the Company recognized stock compensation expense of $5.5 million related to the Exchange Offer. The cash payment made in conjunction with the Exchange Offer was approximately $2.2 million and was expensed in full upon acceptance on March 31, 2004. The amortization of stock compensation expense related to the Exchange Offer is expected to be approximately $4.7 million, $2.5 million and $1.2 million for the years ended December 31, 2005, 2006 and 2007, respectively. (See statement on Forward Looking Statements.)

      (See Note M of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for a more detailed discussion of the 1997 Stock Option Plan and the Restricted Stock Plan.)

      Employee Benefits—For year ended December 31, 2004, employee benefits increased $4.2 million, or 27%, when compared to the same period in the prior year. The higher level of employee benefits in 2004 was due in part to a $1.9 million increase in severance costs principally due to termination benefits paid as a result of headcount reductions in Continental Europe and North America. Also unfavorably impacting the comparison of employee benefits to the prior year is a $1.6 million increase in costs related to the Company's U.K. defined benefit pension plan (see Note N of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”), as well as increased medical and pension benefit costs for U.S. employees. The overall increase in employee benefits for 2004 was partially offset by lower benefits costs achieved as a result of headcount reductions taking effect throughout 2003.

      In 2005, management currently anticipates an increase of approximately $2.6 million in costs related to the U.K. defined benefit pension plan principally due to higher interest costs and the amortization of unrecognized losses in accordance with SFAS No. 87. (See “Critical Accounting Estimates” above and statement on Forward Looking Statements.)

      As a result of the recent unfavorable trend in employee benefit costs in the U.S., effective January 1, 2005, management implemented changes to certain of its health and retirement benefit plans in an effort to contain costs in this area. For example, certain of the Company's contributions to its pension plans for U.S. employees will now be determined at the Company's discretion and will vary depending on the Company's profitability. Previously, such contributions were determined as a fixed percentage of an employee's eligible compensation.

      Full-Time Salaries—For the year ended December 31, 2004, full-time salaries increased $2.2 million, or 2%, to $98.4 million, when compared to the same period in the prior year. During 2004, the unfavorable impact of foreign currency translations on full-time salaries was approximately $5.2 million. Excluding the unfavorable impact of foreign currency translations, full-time salaries decreased $3 million, or 3%, to $93.2 million. The lower level of full-time salaries (excluding the unfavorable impact of foreign currency translations) was principally due to savings achieved as a result of headcount reductions taking effect throughout 2003.

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      Payroll Taxes—For the year ended December 31, 2004, payroll taxes increased $2.7 million, or 25%, when compared to the same period in the prior year. This increase was principally due to incremental payroll taxes incurred as a result of the higher level of incentive bonus costs, as well as payroll taxes related to the option exchange program.

      Stock Compensation Expense—For the years ended December 31, 2004 and 2003, the Company recognized stock compensation expense of $1.1 million and $0.4 million, respectively, related to restricted stock shares granted pursuant to the Restricted Stock Plan (excluding shares issued in conjunction with the Exchange Offer discussed above). In 2005, the amortization of stock compensation expense related to such restricted stock is expected to be approximately $3.7 million. (See statement on Forward Looking Statements.)

General and Administrative Expenses

      For the year ended December 31, 2004, general and administrative expenses increased $17.1 million, or 18%, to $110.8 million, when compared to the same period in the prior year. During 2004, the unfavorable impact of foreign currency translations on general and administrative expenses was approximately $5.2 million. Excluding the unfavorable impact of foreign currency translations, general and administrative expenses increased $11.9 million, or 13%, to $105.6 million.

      In 2004, the overall increase in general and administrative expenses was principally due to a $9.6 million increase in professional fees, which was largely attributable to the following factors:

      Also unfavorably impacting the comparison to the prior period was a $3.6 million increase in non-recurring client goodwill gestures, authenticity claims and litigation settlements, as well as a $1.4 million increase in travel and entertainment costs principally due to the higher level of business opportunities during the year. Additionally, for the year ended December 31, 2004, property taxes related to the Company's headquarters building at 1334 York Avenue in New York increased $1.1 million as a result of a tax reassessment that became effective on July 1, 2004. As a result of this reassessment, property taxes related to the York Property will increase by a similar amount in 2005. (See statement on Forward Looking Statements.)

      The overall increase in general and administrative expenses for the year was partially offset by an insurance recovery of approximately $4 million recorded in the second quarter of 2004 related to the collateral underlying a loan for which the Company recorded a loan loss reserve of $9 million in the fourth quarter of 2000 and subsequently wrote off in the first quarter of 2001. To a lesser extent, the comparison of general and administrative expenses to the prior year is also favorably impacted by the recovery of $1 million in previously paid real estate taxes in the U.K. recorded in the third quarter of 2004, as well as $0.9 million in cost savings achieved as a result of the discontinuation of the Company's former e-commerce and U.K. art education activities.

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Depreciation and Amortization Expense

      For the year ended December 31, 2004, depreciation and amortization expense decreased $1.5 million, or 6%, to $23.8 million, when compared to the same period in the prior year. During 2004, the unfavorable impact of foreign currency translations on depreciation and amortization expense was approximately $0.6 million. Excluding the unfavorable impact of foreign currency translations, depreciation and amortization expense decreased $2.1 million, or 8%, to $23.2 million. This decrease was principally due to the impact of fixed assets that became fully depreciated in 2003 and 2004, partially offset by the impact of capital expenditures in those periods.

Retention Costs

      In 2001 and 2002, the Company implemented retention programs that provided cash awards payable to certain key employees upon fulfillment of full-time employment through certain dates. All amounts related to the retention programs were amortized over the corresponding contractual service periods. For the years ended December 31, 2004 and 2003, the Company recognized retention costs of $0.3 million and $8.5 million, respectively.

      The final cash payment of $0.4 million due under the retention programs was made in January 2004 and, as a result, the retention programs have concluded.

Net Restructuring Charges

      During the fourth quarter of 2002, management approved plans to further restructure the Auction segment, as well as to carry out additional headcount reductions in certain corporate departments (the “2002 Restructuring Plan”). The goal of the 2002 Restructuring Plan was to improve profitability through further cost savings and other strategic actions. Net annual cost savings achieved as a result of the 2002 Restructuring Plan were approximately $17 million. For the years ended December 31, 2004 and 2003, the Company recorded net restructuring charges of $0.1 million and $5.0 million, respectively, related to the 2002 Restructuring Plan. (See Note T of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

Special Charges

      For the years ended December 31, 2004 and 2003, the Company recorded special charges of $1.9 million and $3.1 million, respectively, primarily for settlement administration costs and legal fees related to the investigation by the Antitrust Division of the U.S. Department of Justice (the “DOJ”), other governmental investigations and the related civil antitrust litigation. (See Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for information related to special charges.)

Net Interest Expense

      For the year ended December 31, 2004, net interest expense was essentially unchanged when compared to the same period in the prior year as increases of approximately $0.7 million to both interest expense and interest income largely offset each other.

      The increase in interest expense was primarily due to $1.8 million in additional interest expense related to the York Property capital lease obligation that was initiated in February 2003, as well as an additional $1.1 million in interest expense related to the vendor's commission discount certificates issued as part of the U.S. Antitrust Litigation settlement in May 2003 (see Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). These increases were partially offset by a $2.0 million reduction in interest expense associated with the Company's credit facility principally resulting from lower average outstanding borrowings.

      The increase in interest income was primarily attributable to higher average cash balances throughout the year and slightly higher interest rates, partially offset by $0.7 million in interest

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income recorded in the prior year related to a delinquent client account that was determined to be collectible, for which there was no comparable event in the current year.

Income Tax Expense (Benefit)

      The effective tax rate for continuing operations was approximately 36% in 2004, compared to approximately 30% in 2003. The change in the effective tax rate was primarily attributable to non-deductible payments related to the antitrust settlement, changes in the valuation allowance related to foreign taxes and stock option deductions, permanent disallowances of employee compensation and certain other one time adjustments. (See Notes K and R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

      Aggregate Auction Sales—For the year ended December 31, 2003, Aggregate Auction Sales totaled $1,690.7 million, a decrease of $83.6 million, or 5%, when compared to 2002. During 2003, the favorable impact of foreign currency translations on Aggregate Auction Sales was approximately $89.8 million. Excluding the favorable impact of foreign currency translations, Aggregate Auction Sales decreased $173.4 million, or 10%, to $1,600.9 million.

      The lower level of Aggregate Auction Sales during 2003 was primarily due to a $103.9 million, or 44%, decline in Aggregate Auction Sales attributable to single-owner collections and an $85.7 million, or 41%, decrease in results from the spring Impressionist and Contemporary sales in New York, both in part attributable to global economic uncertainties related to the build up to the war in Iraq. The comparison of Aggregate Auction Sales to the prior year was also negatively influenced by a significant decrease in results from the July Old Master Paintings sale in London, which in 2002 included the sale of Sir Peter Paul Rubens' masterpiece “The Massacre of the Innocents” for $77 million and for which there was no comparable painting sold in 2003. Additionally, the comparison of Aggregate Auction Sales to the prior year was unfavorably impacted by the discontinuation on April 30, 2003 of separate online auctions on sothebys.com as part of the 2002 Restructuring Plan, which resulted in a $27.9 million decrease in Aggregate Auction Sales in 2003 (see Note T of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”).

      These decreases were partially offset by a $112.0 million improvement in 2003 in fourth quarter various-owner Aggregate Auction Sales principally attributable to a late-year recovery in the international art market. Specifically, Aggregate Auction Sales for the fourth quarter of 2003 reflected an $80.1 million, or 48%, increase in results from the fall Impressionist and Contemporary sales in New York, as well as improved results from the December Old Master Paintings sale in London.

      Auction and Related Revenues—Auction and related revenues increased $12.2 million, or 4%, to $309.0 million in 2003 when compared to 2002. During 2003, the favorable impact of foreign currency translations on auction and related revenues was $18.4 million. Excluding the favorable impact of foreign currency translations, auction and related revenues decreased $6.2 million, or 2%, to $290.6 million in 2003. This decrease was principally due to a $4.2 million decline in principal activities, as well as a $3.6 million decrease in private treaty revenues. The decline in principal activities was mainly due to a lower level of auction guarantees issued in 2003, as well as a $1.1 million writedown recorded in the fourth quarter of 2003 for inventory purchased for resale. Despite the significant decrease in Aggregate Auction Sales in 2003, the revenue decreases discussed above were partially offset by a $1.7 million, or 1%, increase in auction commissions principally due to improved commission margins resulting from a change in the buyer's premium rate structure that became effective in January 2003, higher vendor's commission rates, reduced shared and introductory auction commissions and a favorable change in sales mix.

      Other Revenues—Other revenues decreased $2.4 million, or 22%, to $8.4 million in 2003 when compared to 2002. This decrease was principally due to a $1.5 million decrease in revenues from the Company's U.K. art education business, which was sold in September 2003, as well as a $0.7

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million, or 12%, decline in revenues from the Finance segment. The decline in Finance revenues was primarily due to a 6% decrease in the average loan portfolio balance, slightly lower interest rates and decreased loan facility fees. The decrease in the average loan portfolio balance was primarily due to a conservative loan policy in response to an uncertain economy in the early part of 2003 and limited capital availability.

      Direct Costs of Services—Direct costs of services decreased $7.0 million, or 13%, to $45.6 million in 2003 when compared to 2002. During 2003, the unfavorable impact of foreign currency translations on direct costs was approximately $3.2 million. Excluding the unfavorable impact of foreign currency translations, direct costs decreased $10.2 million, or 19%, to $42.4 million in 2003. This decrease was largely attributable to $5.1 million in savings achieved in marketing costs principally due to management's efforts to reduce discretionary spending in response to the lower level of Aggregate Auction Sales and the discontinuation on April 30, 2003 of separate online auctions on sothebys.com as part of the 2002 Restructuring Plan (see Note T of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). Additionally, 2003 results reflected a $2.6 million reduction in catalogue production costs primarily resulting from a lower number of lots offered at auction, as well as the Company's catalogue savings initiatives, which were gradually implemented throughout most of 2002. The comparison of direct costs to 2002 was also favorably impacted by the significant decrease in sales of single-owner collections, which are typically more expensive due to higher catalogue production, sale promotion and exhibition costs.

      Salaries and Related Costs—Salaries and related costs increased $4.3 million, or 3%, to $143.5 million in 2003 when compared to 2002. During 2003, the unfavorable impact of foreign currency translations on salaries and related costs was approximately $7.5 million. Excluding the unfavorable impact of foreign currency translations, salaries and related costs decreased $3.2 million, or 2%, to $136.0 million in 2003. This decrease was largely due to savings achieved in the Auction segment as a result of the 2002 Restructuring Plan (see Note T of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”) and management's other cost containment efforts. These savings were partially offset by approximately $1.7 million in additional compensation expense that became effective in July 2003, as well as $0.7 million for one-time payments made to a group of key employees in July 2003. Also unfavorably impacting the comparison to 2002 was an increase of approximately $1.7 million in costs related to the Company's defined benefit pension plan for U.K. employees (see Note N of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). Additionally, salaries and related costs for 2003 reflected increased incentive bonus costs of $1.4 million, employee termination benefits of $1.0 million related to further headcount reductions and stock compensation expense of $0.4 million related to the Restricted Stock Plan (see Note M of Notes to Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data”).

      General and Administrative Expenses—General and administrative expenses increased $4.1 million, or 5%, to $93.7 million in 2003 when compared to 2002. During 2003, the unfavorable impact of foreign currency translations on general and administrative expenses was $4.6 million. Excluding the unfavorable impact of foreign currency translations, general and administrative expenses decreased $0.5 million, or 1%, to $89.1 million. This decrease was largely attributable to savings of $3.1 million achieved in travel and entertainment expenses principally due to headcount reductions resulting from the Company's restructuring plans and management's other efforts to reduce discretionary spending. Also favorably impacting the comparison to the prior period was $1.8 million in savings achieved in computer systems development expenses and telecommunications costs, as well as a $0.9 million reduction in other general and administrative expenses. These favorable variances were partially offset by a $2.2 million increase in professional fees, a $1.9 million increase in facility related expenses and a $0.7 million increase in insurance costs. The increase in professional fees was principally due to costs incurred related to the implementation of Section 404 of the Sarbanes-Oxley Act and professional fees related to the Exchange Offer for which there were no comparable expenses in the prior year. The increase in facility related expenses was principally due to the commercial rent tax associated with the York

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Property capital lease (see Notes H and L of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”), as well as higher heating costs for the York Property as a result of colder temperatures in the winter of 2003. Also unfavorably impacting the comparison to the prior year was slightly unfavorable bad debt experience in 2003, which resulted in an adverse impact on general and administrative expenses of approximately $0.7 million.

      Depreciation and Amortization Expense—Depreciation and amortization expense increased $3.5 million, or 16%, to $25.3 million in 2003 when compared to 2002. During 2003, the unfavorable impact of foreign currency translations on depreciation and amortization expense was $0.7 million. Excluding the unfavorable impact of foreign currency translations, depreciation and amortization expense increased $2.8 million, or 13%, to approximately $24.6 million. The increase was principally due to incremental amortization expense associated with the York Property capital lease asset recorded in February 2003.

      Retention Costs—In 2003 and 2002, the Company recognized expense of $8.5 million and $22.6 million, respectively, related to the Company's former employee retention programs. (See Note S of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      Net Restructuring Charges—In 2003 and 2002, the Company recorded net restructuring charges of $5.0 million and $2.0 million, respectively, related to its restructuring plans. (See Note T of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      Special Charges—In 2003 and 2002, the Company recorded special charges of $3.1 million and $41.0 million, respectively, related to the investigation by the DOJ, other governmental investigations and the related civil antitrust litigation. (See Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      Net Interest Expense—Net interest expense increased $10.2 million in 2003 when compared to 2002. This increase was primarily due to $16.1 million in interest expense resulting from the capital lease obligation recorded in February 2003 in conjunction with the sale-leaseback transaction involving the York Property (see Notes H and L of Notes to Consolidated Financial Statements Item 8, “Financial Statements and Supplementary Data,” for additional information related to the sale-leaseback transaction), as well as $1.8 million for the amortization of interest expense related to the vendor's commission discount certificates issued in June 2003 as part of the U.S. Antitrust Litigation settlement (see Note R of Notes to Consolidated Financial Statements Item 8, “Financial Statements and Supplementary Data”). These increases were partially offset by a $7.5 million reduction in interest expense associated with the Company's credit facility principally as a result of decreased average outstanding borrowings and lower amortization of arrangement and amendment fees.

      Income Tax Benefit—The effective tax benefit rate for continuing operations was approximately 29.7% in 2003, compared to approximately 25.7% in 2002. The increase in the tax benefit rate was primarily attributable to the fact that in 2002 the fine paid to the European Commission and a portion of the International Antitrust Litigation settlement were not tax deductible. This increase was partially offset by permanent disallowances of compensation, as well as certain one time adjustments in 2003 that decreased the effective tax benefit rate by approximately 4%. (See Notes K and R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      Discontinued Operations—In 2003, income from discontinued operations before taxes increased $1.3 million, or 17%, when compared to 2002. The improvement when compared to the prior year was primarily due to a $3.1 million, or 8%, increase in revenues from the Company's then existing domestic real estate brokerage operations principally due to higher sales volume resulting from a 10.7% increase in unit sales and a 2.1% increase in the average selling price; partially offset by decreased commission retention rates due to a greater portion of sales completed by senior agents who earned a higher share of the gross commission. The higher level of revenues in 2003 was

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partially offset by higher salaries and related costs, including a $0.4 million increase in incentive bonus costs and higher general and administrative costs primarily attributable to higher rent and facility related charges.

FINANCIAL CONDITION AS OF DECEMBER 31, 2004

      This discussion should be read in conjunction with the Company's Consolidated Statements of Cash Flows (see Item 8, “Financial Statements and Supplementary Data”).

      For the year ended December 31, 2004, total cash and cash equivalents related to the Company's continuing and discontinued operations increased $81.6 million primarily due to the factors discussed below.

      Net cash provided by operations was $146.1 million for the year ended December 31, 2004 and was principally due to the Company's income from continuing operations during the period, and a $28.2 million increase in accounts payable, accrued liabilities and other liabilities. The increase in accounts payable, accrued liabilities and other liabilities was mainly attributable to a higher accrual of incentive bonus costs related to the significant improvement in the Company's full year results. Cash provided by operations was also significantly influenced by a $208.7 million increase in due to consignors, partially offset by a $172.5 million increase in accounts receivable, both principally due to auction sales occurring during the fall auction season and the timing of the settlements of such sales. These cash inflows from operations were partially offset by a $19.3 million increase in inventory principally due to properties subject to auction guarantees totaling $20.1 million that did not sell at auction in the fall auction season, as well as a $10.8 million decrease in settlement liabilities. The decrease in settlement liabilities was principally due to a $6 million payment made in February 2004 to fund a portion of the fine payable to the DOJ, as well as the redemption of $4.8 million of Discount Certificates (see Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). Also contributing to the use of cash in operating activities was a $14.8 million increase in prepaid expenses and other current assets principally attributable to the recording of a $12.5 million receivable due from the Company's partner in an auction guarantee.

      Net cash used by investing activities was $55.4 million for the year ended December 31, 2004 and was principally due to the purchase of $110 million in short-term investments, the funding of consignor advances during the period and $13.5 million in capital expenditures; partially offset by $53.9 million in proceeds received from the sale of the Company's domestic real estate brokerage business on February 17, 2004 (see “Sale of Real Estate Brokerage Business” above and Note C of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”) and the collection of maturing client loans during the period.

      Net cash used by financing activities was $10.2 million for the year ended December 31, 2004 and was principally due to the net repayment of credit facility borrowings, partially offset by proceeds received from the exercise of stock options.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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

      The vendor's commission discount certificates (the “Discount Certificates”) that were distributed as part of the U.S. Antitrust Litigation settlement (see Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”) are fully redeemable in connection with any auction that is conducted by the Company or Christie's in the U.S. or the U.K. The Discount Certificates may be used to satisfy consignment charges involving vendor's commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. As of December 31, 2004, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $57 million.

      In February 2005, the Company extended the lease expiration date related to the lease for its middle market auction salesroom at Olympia in Kensington, West London from June 2006 to June 2015. This extension will result in an increase of approximately $22 million in total operating lease obligations.

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OFF-BALANCE SHEET ARRANGEMENTS

Auction Guarantees

      From time to time in the ordinary course of business, the Company will guarantee to consignors a minimum price in connection with the sale of property at auction. The Company must perform under its auction guarantee only in the event that the property sells for less than the minimum price and, therefore, the Company must pay the difference between the sale price at auction and the amount of the auction guarantee. If the property does not sell, the amount of the auction guarantee must be paid, but the Company has the right to recover such amount through the future sale of the property. Generally, the Company is entitled to a share of the excess proceeds if the property under the auction guarantee sells above a minimum price. In addition, the Company is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. In certain situations, the Company reduces its financial exposure under auction guarantees through sharing arrangements with unaffiliated partners.

      As of December 31, 2004, the Company had outstanding auction guarantees totaling approximately $6.9 million, the property relating to which had a mid-estimate sales price (1) of $7.8 million. The property related to such auction guarantees is being offered at auctions during the first half of 2005. As of December 31, 2004, $1.7 million of the guaranteed amount had been advanced by the Company and was recorded within notes receivable and consignor advances in the Consolidated Balance Sheets (see Note E of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”).

      As of March 2, 2005, the Company had outstanding auction guarantees totaling approximately $22.1 million, the property relating to which had a mid-estimate sales price (1) of $24.4 million. The Company's financial exposure under these auction guarantees is reduced by $2.3 million as a result of sharing arrangements with unaffiliated partners. The property related to such auction guarantees is being offered at auctions in the first half of 2005. As of March 2, 2005, $3.1 million of the guaranteed amount had been advanced by the Company, of which the Company will record its $2.0 million share within notes receivable and consignor advances.

      (See Note Q of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

Lending Commitments

      In certain situations, the Company's Finance segment enters into legally binding arrangements to lend, primarily on a collateralized basis and subject to certain limitations and conditions, to potential consignors and other individuals who have collections of fine art or other objects. Unfunded commitments to extend additional credit were approximately $9.7 million at December 31, 2004. (See Note E of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

DERIVATIVE INSTRUMENTS

      The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances. Generally, such intercompany balances are centrally funded and settled through the Company's global treasury function. The Company's objective for holding such derivative instruments is to minimize foreign currency risks using the most effective methods to eliminate or reduce the impacts of these exposures.

      The forward exchange contracts entered into by the Company are used as economic cash flow hedges of the Company's exposure to short-term foreign currency denominated intercompany

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balances. Such forward exchange contracts are typically short-term with settlement dates no more than one month from their inception. These contracts are not designated as hedging instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and are recorded in the Company's Consolidated Balance Sheets at fair value, which is based on referenced market rates. Changes in the fair value of the Company's forward exchange contracts are recognized currently in earnings and are generally offset by the revaluation of the underlying intercompany balances in accordance with SFAS No. 52, “Foreign Currency Translation.”

      As of December 31, 2004 and 2003, the Consolidated Balance Sheets included $30,000 and $0.3 million, respectively, recorded within prepaid expenses and other current assets reflecting the fair value of the Company's outstanding forward exchange contracts on those dates.

      (See Note O of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

CONTINGENCIES

      Legal Actions—The Canadian Competition Bureau is continuing to conduct an investigation regarding anti-competitive practices relating to commissions charged by the Company and Christie's for auction services. In the opinion of management, this investigation is not expected to have a material adverse effect on the Company's business, results of operations, financial condition and/or liquidity. (See Part I, Item 3, “Legal Proceedings” and Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      The Company also becomes involved, from time to time, in various claims and lawsuits incidental to the ordinary course of its business. In the opinion of management, any such claims are not expected to have a material adverse effect on the Company's business, results of operations, financial condition and/or liquidity.

      Gain Contingency—During the third quarter of 2004, the Company signed an agreement for the sale of land and buildings at Billingshurst, West Sussex in the U.K. known as the Sussex Property. The completion of the sale is conditional upon the receipt of planning permission for redevelopment of part of the site. If completed, the sale of the Sussex Property would result in a pre-tax gain in the range of approximately $5 to $6 million. The Company expects this contingency to be resolved some time in 2005.

      (See “Off-Balance Sheet Arrangements” above for a discussion of the Company's outstanding auction guarantees.)

LIQUIDITY AND CAPITAL RESOURCES

      As discussed in more detail above, on February 17, 2004, the Company consummated the sale of SIR, its domestic real estate brokerage business, and received net cash proceeds of approximately $94.0 million. (See “Sale of Real Estate Brokerage Business” above and Note C of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”) On March 4, 2004, the Company used existing cash balances to repay the remaining $20 million in borrowings outstanding under the senior secured term facility of its former credit agreement (the “Amended and Restated Credit Agreement”). Additionally, on March 4, 2004, the Company entered into a new senior secured credit agreement with General Electric Capital Corporation (the “GE Capital Credit Agreement”). The GE Capital Credit Agreement is available through March 4, 2007 and provides for borrowings of up to $200 million provided by an international syndicate of lenders.

      Borrowings under the GE Capital Credit Agreement are available for the funding of the Company's ordinary working capital requirements and general corporate needs. The Company paid arrangement fees of $3.0 million related to the GE Capital Credit Agreement, which are being amortized to interest expense over the three-year term of the agreement. The Company's

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obligations under the GE Capital Credit Agreement are secured by substantially all of the assets of the Company, as well as the assets of its subsidiaries in the U.S. and the U.K.

      The GE Capital Credit Agreement contains financial covenants requiring the Company to not exceed a specified level of annual capital expenditures and to have a quarterly fixed charge coverage ratio of not less than 1.0. In December 2004, the GE Capital Credit Agreement was amended to increase the permitted amount of annual capital expenditures from $10 million to $15 million. The GE Capital Credit Agreement also has certain non-financial covenants and restrictions, including one that prohibits the Company from making dividend payments. The Company is in compliance with its covenants.

      At the option of the Company, borrowings under the GE Capital Credit Agreement generally bear interest equal to: (i) 1.25% plus the higher of the Prime Rate or the Federal Funds Rate plus 0.5%, or (ii) LIBOR plus 2.75%. Beginning on March 31, 2005, on a quarterly basis, the applicable interest rate charged for borrowings under the GE Capital Credit Agreement will be adjusted up or down depending on the Company's performance under the quarterly fixed charge coverage ratio tests. Due to the Company's favorable 2004 operating results, management anticipates a 0.25% decrease in the cost of funds under the GE Capital Credit Agreement in 2005.

      As of December 31, 2004, the Company had no outstanding borrowings under the GE Capital Credit Agreement.

      The Company generally relies on operating cash flows supplemented by borrowings to meet its liquidity requirements. With the cash proceeds received upon the consummation of the sale of SIR and borrowings available under the GE Capital Credit Agreement, the Company has considerably more liquidity and financial flexibility than it has had in the recent past. It is the Company's present intention to use this additional liquidity to expand its loan portfolio. (See statement on Forward Looking Statements.)

      The Company currently believes that operating cash flows, current cash balances and borrowings available under the GE Capital Credit Agreement will be adequate to meet its short-term and long-term commitments, operating needs and capital requirements through March 4, 2007. Subsequent to March 4, 2007, management anticipates that the Company will extend or renew the GE Capital Credit Agreement or obtain other forms of long term financing. (See statement on Forward Looking Statements.)

      The Company's short-term operating needs and capital requirements include peak seasonal working capital requirements, other short-term commitments to consignors, the potential funding of the Company's client loan portfolio and the funding of capital expenditures, as well as the short-term commitments to be funded prior to January 1, 2006 included in the table of contractual obligations above. Additionally in 2005, the Company currently expects to contribute between $13 million to $18 million to the U.K. defined benefit pension plan. Of the amount expected to be contributed to the U.K. defined benefit plan in 2005, approximately $10 million to $15 million would be a discretionary contribution in addition to the $3 million contribution agreed by management and the plan's trustees. (See statement on Forward Looking Statements.)

      The Company's long-term operating needs and capital requirements include the potential funding of the Company's client loan portfolio and the funding of capital expenditures beyond the next twelve months and through March 4, 2007, as well as the funding of the Company's long-term contractual obligations and commitments included in the table of contractual obligations above through March 4, 2007.

      In addition to the short-term and long-term operating needs and capital requirements described above, the Company is obligated to fund the redemption of the Discount Certificates distributed as part of the U.S. Antitrust Litigation settlement (see Note R of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). As discussed above, the Discount Certificates are fully redeemable in connection with any auction that is conducted by the Company or Christie's in the U.S. or the U.K. The Discount Certificates may be used to satisfy consignment charges involving vendor's commission, risk of loss and/or catalogue illustration. The Discount Certificates will expire on May 14, 2008 and cannot be

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redeemed subsequent to that date; however, any unused Discount Certificates may be redeemed for cash at their face value at any time between May 15, 2007 and May 14, 2008. As of December 31, 2004, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was approximately $57 million.

FACTORS AFFECTING OPERATING RESULTS AND LIQUIDITY

      Operating results from the Company's Auction and Finance segments, as well as the Company's liquidity, are significantly influenced by a number of factors, many of which are not within the Company's control. These factors, which are not ranked in any particular order, include:

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	•	The demand for art-related financing;
	•	The uncertainty in future costs related to the Company's U.K. defined benefit pension plan, as well as the impact of any decline in the equity markets or decrease in interest rates on its assets and obligations;
	•	The impact of the variability in taxable income between the various jurisdictions where the Company does business on its effective tax rate; and
	•	The ability of the Company to utilize its deferred tax assets.

FORWARD LOOKING STATEMENTS

      This Form 10-K contains certain forward looking statements; as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, relating to future events and the financial performance of the Company. Such statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performance will differ materially from such predictions. Major factors which the Company believes could cause the actual results to differ materially from the predicted results in the forward looking statements include, but are not limited to, the factors listed under “Factors Affecting Operating Results and Liquidity” above, which are not ranked in any particular order.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company continually evaluates its market risk associated with its financial instruments and forward exchange contracts during the course of its business. The Company's financial instruments include cash and cash equivalents, restricted cash, short-term investments, notes receivable, consignor advances, credit facility borrowings, long-term debt, the fine payable to the DOJ and the settlement liability related to the Discount Certificates issued in connection with the U.S. Antitrust Litigation. (See Note B of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for information on the fair value of these financial instruments.)

      The Company believes that its interest rate risk is minimal as a hypothetical 10% increase or decrease in interest rates is immaterial to the Company's cash flow, earnings and fair value related to financial instruments. (See statement on Forward Looking Statements.)

      The Company utilizes forward exchange contracts to manage exposures related to foreign currency risks, which primarily arise from short-term foreign currency denominated intercompany balances. Changes in the fair value of the Company's forward exchange contracts are generally offset by the revaluation of the underlying intercompany balances in accordance with SFAS No. 52, “Foreign Currency Translation.” At December 31, 2004, the Company had $40.9 million of notional value forward exchange contracts outstanding. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under such contracts. The Company is exposed to credit-related losses in the event of nonperformance by the two counterparties to its forward exchange contracts, but the Company does not expect any counterparties to fail to meet their obligations given their high credit ratings. (See “Derivative Instruments” above and Note O of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      At December 31, 2004, a hypothetical 10% strengthening or weakening of the U.S. dollar relative to all other currencies would result in a decrease or increase in cash flow of approximately $10.4 million.

FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

      In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires the recognition of compensation expense equal to the fair value of stock options or other share-based payments. The standard is effective for the Company on July 1, 2005. The Company will adopt SFAS No. 123(R) using the

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modified prospective method, which will result in the amortization of stock compensation expense related to unvested stock options outstanding on the date of adoption, as well as any stock options granted subsequent to that date. The Company currently measures stock-based compensation related to its employee stock option plans using the intrinsic value approach under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company currently expects the adoption of FASB 123(R) to result in the recording of compensation expense in the range of $0.5 million to $1.0 million in 2005 related to unvested stock options outstanding on the date of adoption.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      See the discussion under this caption contained in Item 7.

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ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
SOTHEBY'S HOLDINGS, INC.
New York, New York

      We have audited the accompanying consolidated balance sheets of Sotheby's Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2004. Our audits also included the consolidated financial statement schedule provided as Item 15(d). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sotheby's Holdings, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
New York, New York
March 16, 2005

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SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED INCOME STATEMENTS
(Thousands of dollars, except per share data)

See accompanying Notes to Consolidated Financial Statements

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SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

See accompanying Notes to Consolidated Financial Statements

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SOTHEBY'S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)