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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes R No £

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No R

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer £ Accelerated filer R Non-accelerated filer £

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes £ No R

      As of June 30, 2005, the aggregate market value of the 46,160,947 shares of Class A Limited Voting Common Stock (the “Class A Stock”) and 4,024,457 shares of Class B Common Stock (the “Class B Stock”), for which there is no public market, held by non-affiliates of the registrant was $632,404,974 and $55,135,061, respectively, based upon the closing price ($13.70) on the New York Stock Exchange composite tape on such date for the Class A Stock, into which Class B 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 then controlling Class B 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 February 28, 2006, there were outstanding 58,477,342 shares of Class A Stock and no shares outstanding of Class B Stock.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant's proxy statement for the 2006 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

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 authenticated 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, jewelry and collectibles. The Company also conducts art-related financing activities through its Finance segment and is engaged, to a lesser extent, in licensing activities.

      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 which, through its predecessors, had been engaged in the auction business since 1744. In 1988, the Company issued shares of Class A Limited Voting Common Stock, par value $0.10 per share (the “Class A Stock”) to the public. The Class A Stock is listed on the New York Stock Exchange (the “NYSE”). The Company's authorized capital stock also includes Class B Common Stock, par value $0.10 per share (the “Class B Stock”), which is convertible on a share for share basis into Class A Stock. There is no public market for the Class B Stock and, as a result of the transaction discussed below, there are no shares of Class B Stock outstanding.

      On September 7, 2005, the Company entered into a Transaction Agreement (the “Agreement”) with various affiliates of A. Alfred Taubman and his family (the “Shareholders”). Prior to completion of the transactions contemplated by the Agreement, the Shareholders were the Company's largest shareholders, holding in the aggregate 14,034,158 shares of the Company's Class B Stock, representing approximately 62.4% of the aggregate voting power of the Company's capital stock.

      Pursuant to the Agreement, the Company agreed to exchange all 14,034,158 shares of Class B Stock owned by the Shareholders for $168,409,896 in cash and 7.1 million shares of the Company's Class A Stock, (such exchange, the “Transaction”). (See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Recapitalization” under “Mechanics of Effecting the Transaction; Funding.”)

      Completion of the Transaction was not subject to any conditions and it was completed on September 7, 2005. Because the outstanding shares of Class B Stock constituted less than fifty percent of the aggregate voting power of the Company's outstanding common stock following completion of the Transaction, pursuant to the Company's Third Amended and Restated Articles of Incorporation (the “Articles”), following completion of the Transaction each remaining outstanding share of Class B Stock held by a shareholder not a party to the Transaction was automatically converted into one share of Class A Stock without any action on the part of the holder thereof. Therefore, immediately following completion of the Transaction and such conversion, the Company had approximately 57.3 million shares of Class A Stock outstanding (of which the Shareholders owned 7.1 million, or approximately 12.4%) and no shares of Class B Stock outstanding.

      As a result of the Transaction, the dual class super-voting share structure that had been in place since the Company's initial public offering in 1988 was eliminated, allowing for a corporate governance structure that is more consistent with the best practices of public companies. Also, the Company believes that the simplified share structure will enhance share liquidity and increase the Company's strategic and financing flexibility. The Company is also planning to present to shareholders for their approval at the 2006 Annual Meeting of Shareholders a proposal to reincorporate in the State of Delaware.

1

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

      In July 2005, the Company and The Steinmetz Diamond Group announced the creation of Sotheby's Diamonds, a retail jewelry joint venture, which offers jewels of superb quality for sale throughout Asia, Europe and North America.

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.

      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. The Company's auction commission revenues include those earned from the buyer (“buyer's premium revenue”) and those earned from the consignor (“seller's commission revenue”), both of which are calculated as a percentage of the hammer price of property sold at auction. For the years ended December 31, 2005, 2004 and 2003, auction commission revenues accounted for 86%, 77% and 86%, respectively, of the Company's consolidated revenues.

      In certain situations, under negotiated contractual arrangements or when the buyer takes possession of the property purchased at auction before payment is made, the Company is liable to the consignor for the net sale proceeds. (See Note F 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 in the event that the property sells for less than the minimum price, in which event 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 auction commission sharing arrangements with unaffiliated partners. Partners may also assist the Company in valuing and marketing the property to be sold at auction. (See Note P 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

2

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.

      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, jewelry 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 an inventory of fine art. (See Notes B and G of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

      The worldwide art auction market has two principal selling seasons, spring and autumn. Accordingly, the Company's auction business is seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters of each year. Consequently, first and third quarter results of the Auction segment typically reflect lower Net Auction Sales (as defined below in Item 6, “Selected Financial Data”) when compared to the second and fourth quarters and, accordingly, a net loss due to the fixed nature of many of the Company's operating expenses. (See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and Note V 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 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:

3

	•	Recommendations by third parties consulted by the seller;
	•	Relationships and personal interaction between the seller and the firm's staff;
	•	The desire of clients to conduct business with a publicly traded company; and
	•	The availability and extent of related services, such as tax or insurance appraisals and short-term financing.

      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 totals for auction sales, revenues or profits 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.

      The European Court of Justice has ruled that the standard rate of value added sales tax (“VAT”) must be paid on the buyer's premium on works imported into the United Kingdom (the “U.K.”) from outside the European Union (the “E.U.”) and sold at auction. This ruling brings into line the rate of VAT that buyers currently pay on certain lots originating from within the E.U. The Company is in discussions with the U.K. Customs authorities concerning proper implementation of the Court's decision. Although the Company will continue to analyze the ultimate impact of the Court's decision, management believes the decision will not have a material effect on the Company's business. (See statement on Forward Looking Statements.)

      Beginning on February 14, 2006, under U.K. law, subject to certain conditions and exceptions, living artists are entitled to receive a resale royalty (referred to as the “droit de suite” or “DDS”) each time their original art works are bought or sold by an art market professional. DDS is a royalty that the Company charges the buyer and is typically calculated on the hammer price (excluding buyer's premium and excluding VAT). The qualifying threshold from which DDS applies in the U.K. is €  1000 (approximately £680 or $1,200). The DDS rate is calculated as a percentage of the hammer price (using a sliding scale from 4% to 0.25%) subject to a maximum royalty payable of €  12,500 (approximately £8,500 or $15,000) for any one work for any one sale. This maximum royalty amount applies to works sold for €  2 million (approximately £1.4 million or $2.4 million) and above. As the royalty will not generally be payable on works sold in the United States (the “U.S.”) or Switzerland and the Company has selling offices in each of these locations, management believes that the imposition of this royalty will not have a material adverse effect on the Company's global business. (See statement on Forward Looking Statements.)

Finance Segment

Description of Business

      The Company's Finance segment 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. Clients who borrow from the Finance segment are often unable to borrow on conventional terms from traditional lenders and are typically not highly interest rate sensitive. The Company's financing activities are conducted through its wholly-owned subsidiaries.

4

      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%. Furthermore, the Finance segment's loans are predominantly 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 and sometimes result in auction consignments. 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 F 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 through a combination of its art expertise and skills in international law and finance, it has the ability to tailor attractive financing packages for clients who wish to obtain liquidity from their art assets.

Discontinued Operations

      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 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. This license agreement is applicable worldwide except in Australia.

5

      In the fourth quarter of 2004, the Company committed to a plan to discontinue its real estate brokerage business in Australia and license the Sotheby's International Realty trademark and certain related trademarks in Australia. The Company expects to consummate a license agreement related to such trademarks some time in 2006.

      SIR and the non-U.S. real estate brokerage operations comprised the Company's former Real Estate segment. For additional information related to the Company's discontinued operations, refer to Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”

Licensing

      As discussed under “Discontinued Operations” above, in conjunction with the sale of SIR, the Company entered into an agreement with Cendant to license the Sotheby's International Realty trademark and certain related trademarks (the “Cendant License Agreement”). The Cendant License Agreement provides for an ongoing license fee during its term based on the volume of commerce transacted under the licensed trademarks. In 2005, the Company earned $1.3 million in license fee revenue related to the Cendant License Agreement. The Company continues to consider additional opportunities to use the Sotheby's brand in businesses where appropriate.

Financial and Geographical Information About Segments

      See Note E 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, 2005, the Company had 1,443 employees with 531 located in North America; 577 in the U.K., 253 in Continental Europe and 82 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, 2005 and 2004.

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

Technology

      Over the past five years, the Company has made substantial investments in information technology designed to improve client service. A new portfolio of enterprise systems anchored by SAP has been deployed across the organization, which has enhanced the quality of information and processing of sales and inventory tracking, as well as data management. The Company's goal is to utilize this investment to continuously improve the services provided to its clients and improve the tools available to management.

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.

6

ITEM 1A: RISK FACTORS

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

The overall strength of the international economy and financial markets

      The art market in which the Company operates is influenced over time by the overall strength of the international economy and financial markets, although this correlation may not be immediately evident in the short-term. The Company's business can be particularly influenced by the economies of the U.S., the U.K., and the major countries or territories of Continental Europe and Asia (principally Japan and China).

Interest rates

      Fluctuations in interest rates influence the Company's cost of funds for borrowings under its credit facility that may be required to finance working capital needs and, in particular, the Finance segment's client loan portfolio.

Government laws and regulations

      Many of the Company's activities are subject to laws and regulations that can have an adverse impact on the Company's business. In particular, export and import laws and cultural patrimony laws could affect the availability of certain kinds of property for sale at the Company's principal auction locations or could increase the cost of moving property to such locations. See also “Auction Segment, Auction Regulations” under Item 1, “Description of Business,” for the possible effects of value added tax laws and laws requiring the payment of resale royalties to living artists upon sale of their works.

Political conditions

      Political conditions in countries in which the Company operates or from which it obtains property for sale may affect the Company's business both through their effect on the economies of those countries and to the extent that they may influence the enactment of legislation that could adversely affect the Company's business.

Foreign currency exchange rate movements

      The Company has operations throughout the world, with approximately 58.6% of its revenues from continuing operations coming from outside of the U.S. for the year ended December 31, 2005. Accordingly, fluctuations in exchange rates can have a significant impact on the Company's results of operations. (See “Use of Non-GAAP Financial Measures—Impact of Foreign Currency Translations” under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”)

Seasonality of the Company's auction business

      The worldwide art auction market has two principal selling seasons, spring and autumn. Accordingly, the Company's revenues and operating income may be affected as described under “Seasonality” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Competition

      Competition in the art market is intense, including competition both with other auctioneers and with art dealers. See “Auction Segment—The Art Market and Competition” under Item 1, “Description of Business,” for a discussion of the factors that may affect the Company's ability to compete successfully in its business.

7

The amount and quality of property being consigned to art auction houses

      The amount and quality of property being consigned to art auction houses are influenced by a number of factors not within the Company's control. Many major consignments, and specifically single-owner sale consignments, become available as a result of the death or financial or marital difficulties of the owner, all of which are unpredictable. This, plus the ability of the Company to sell such property, can cause auction and related revenues to be highly variable from period to period.

The demand for fine arts, decorative arts, and collectibles

      The demand for fine arts, decorative arts, and collectibles is influenced not only by overall economic conditions, but also by changing trends in the art market as to which kinds of property and the works of which artists are most sought after and by the collecting preferences of individual collectors, all of which can be unpredictable.

Qualified personnel

      The Company's business is largely a service business in which the ability of its employees to develop and maintain relationships with potential sellers and buyers of works of art is essential to the Company's success. Moreover, the Company's business is both complicated and unique, making it important to retain key specialists and members of management. Accordingly, the Company's business is highly dependent upon its success in attracting and retaining qualified personnel.

Demand for art-related financing

      The Company's Finance segment is dependent on the demand for art-related financing, which can be significantly influenced by overall economic conditions and by the often unpredictable financial needs of owners of major art collections.

Value of artworks

      The art market is not a highly liquid trading market, as a result of which the valuation of artworks is inherently subjective and the realizable value of artworks often varies over time. Accordingly, the Company is at risk both as to the value of art held as inventory and as to the value of artworks pledged as collateral for Finance segment loans.

U.K. Pension Plan

      Future costs related to the Company's U.K. defined benefit pension plan are heavily influenced by changes in interest rates and investment performance in the debt and equity markets, both of which are unpredictable. (See “Critical Accounting Estimates—Pension Benefits” under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”)

Income taxes

      The Company operates in many tax jurisdictions throughout the world. Variations in taxable income in the various jurisdictions in which the Company does business can have a significant impact on its effective tax rate. (See Note K of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

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 Company acquired the York Property in July 2000. During the first quarter of 2001, the Company completed the construction of a six-story addition to 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

8

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 Notes H and L of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”) The York Property is home to the Company's North American auction salesrooms and its principal North American exhibition space. In December 2005, the Company completed the consolidation of its New York warehouse space into the York Property in order to reduce premises costs in North America. The Company also leases office and exhibition space in several other major cities throughout the U.S.

      The Company's U.K. operations (primarily Auction) are centered at New Bond Street, London, where the main salesrooms, exhibition space and administrative offices of Sotheby's U.K. are located. The Company owns a portion of the New Bond Street premises, and a portion is leased under long-term leases. The lease related to a small portion of the New Bond Street complex is due to expire in September 2007 and, as a result, the Company will lose exhibition and office space. To compensate for this loss of space, the Company is planning a refurbishment of the New Bond Street premises. This refurbishment is expected to cost approximately $10 million and will take place in 2006 and 2007.

      In the U.K., the Company also leases space for its specially dedicated middle market auction salesroom at Olympia, a building located in Kensington, West London. In addition, the Company leases warehouse space at King's House in West London and owns land and a building at Billingshurst, West Sussex (the “Sussex Property”), which previously housed an auction salesroom. The Company is in advanced negotiations for the sale of vacated parts of the Sussex Property. The completion of the sale is conditional upon the receipt of planning permission for redevelopment of the land for sale. The Company is not certain when the sale of the Sussex Property will be completed. (See Note O 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 as part of its ongoing efforts to manage infrastructure and other overhead costs. Where appropriate, management will continue to make any necessary changes to address the Company's premises requirements.

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 statement on Forward Looking Statements.) (See Note O 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 2005.

9

PART II

Market Information

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

      The Company's authorized capital stock also includes Class B Stock, which is convertible on a share for share basis into Class A Stock. There is no public market for the Class B Stock and there are no shares of Class B Stock outstanding. (See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Recapitalization.”)

      Per share cash dividends, if any, would be equal for the Class A Stock and Class B Stock.

      The quarterly price ranges on the NYSE of the Class A Stock for 2005 and 2004 are as follows:

      The number of holders of record of Class A Stock as of February 27, 2006 was 2,069.

      Pursuant to the Company's senior secured credit agreement, dividend payments, if any, must be paid solely out of 40% of the Company's net income arising after June 30, 2005 and computed on a cumulative basis (see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”). The Company did not pay any dividends during 2005 and 2004. Management will continue to evaluate whether the payment of future dividends (or the repurchase of a portion of the outstanding Class A Stock) is appropriate based upon the Company's future earnings, operating cash flows and debt levels.

10

Equity Compensation Plans

      The following table provides information as of December 31, 2005 with respect to shares of the Company's Class A 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”):

11

ITEM 6: SELECTED FINANCIAL DATA

      The following table provides selected financial data (in thousands of dollars, except per share data) for the Company's continuing operations. See Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for further information related to discontinued operations.

12

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

Seasonality

      The worldwide art auction market has two principal selling seasons, spring and autumn. Accordingly, the Company's auction business is seasonal, with peak revenues and operating income generally occurring in the second and fourth quarters of each year. Consequently, first and third quarter results of the Auction segment typically reflect lower Net Auction Sales (as defined above in Item 6, “Selected Financial Data”) when compared to the second and fourth quarters and, accordingly, a net loss due to the fixed nature of many of the Company's operating expenses. (See Note V of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for information on the Company's quarterly results for the years ended December 31, 2005 and 2004.)

Critical Accounting Estimates

      The preparation of financial statements and related disclosures in conformity with GAAP (as defined below under “Use of Non-GAAP Financial Measures”) 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. In addition, management believes that the following are the most critical accounting estimates that may affect the Company's financial condition and/or results of operations.

13

		If the estimated realizable value of any underlying collateral and/or the ability of borrowers in the Company's client loan portfolio to repay 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 minimal and the data used by management to develop the allowance for credit losses has been reliable in developing historically accurate estimates.
		(See Note F 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 (see Note P of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”), defaults by purchasers after consignors have been paid and the honoring of purchasers' claims. 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. From time-to-time in the past, adjustments have been required to reduce the net realizable value of the Company's inventory to reflect changes in management's judgments about the art market in general and the value of individual items held in inventory. Due to the unpredictability of the art market, which is an important factor in valuing individual works of art, it is possible that such adjustments will be required in the future.
(4)		Investments—The Company uses the equity method to account for its investment in AMA. The carrying value of this investment is based on an estimate of the fair value of the underlying inventory of fine art owned by the Partnership, which is carried at the lower of cost or market value. This estimate is based on judgments about the art market in general and the value of individual items in AMA's inventory. If the market value of this inventory were to decline, the Company would be required to record a loss in the Auction segment to reduce the carrying value of the Company's investment in AMA. Although historical inventory losses relating to AMA have been infrequent, due to the unpredictability of the art market, which is an important factor in valuing individual works of art, it is possible that such adjustments may be required in the future.
		(See Note G of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)
(5)		Pension Benefits—The pension obligations related to the Company's U.K. defined benefit pension plan (the “U.K. 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.

14

		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. The discount rate used to calculate the $4.4 million in net periodic pension cost related to the U.K. Pension Plan for the year ended December 31, 2005 was 5.4%. A hypothetical increase or decrease of 0.1% in this assumption (i.e., from 5.4% to 5.5% or from 5.4% to 5.3%) would result in a decrease or increase in net periodic pension cost of approximately $0.6 million. As of the date of the most recent actuarial valuation (September 30, 2005), the discount rate used to calculate the $248.9 million projected benefit obligation related to the U.K. Pension Plan was 4.9%. A hypothetical increase or decrease of 0.1% in this assumption (i.e., from 4.9% to 5% or from 4.9% to 4.8%) would result in a decrease or increase in the projected benefit obligation of approximately $5 million.
		The assumption for the expected long-term return on plan assets is based on expected future appreciation, as well as dividend and interest yields available in equity and bond markets as of the plan's measurement date and weighted according to the composition of invested plan assets. The long-term return on plan assets used to calculate the $4.4 million in net periodic pension cost related to the U.K. Pension Plan for the year ended December 31, 2005 was 7.75% per annum. A hypothetical increase or decrease of 0.25% in this assumption (i.e., 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. The assumption for future compensation increases used to calculate the $4.4 million in net periodic pension cost related to the U.K. Pension Plan for the year ended December 31, 2005 was 4.75% per annum. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 4.75% to 5% or from 4.75% to 4.5%) would result in an increase or decrease in net periodic pension cost of approximately $0.5 million. As of the date of the most recent actuarial valuation (September 30, 2005), the assumption for future compensation increases used to calculate the $248.9 million projected benefit obligation related to the U.K. Pension Plan was 4.5% per annum. A hypothetical increase or decrease of 0.25% in this assumption (i.e., from 4.5% to 4.75% or from 4.5% to 4.25%) would result in an increase or decrease in the projected benefit obligation of approximately $2.1 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 $54 million at December 31, 2005. These unrecognized losses will be systematically recognized as an increase in future net periodic pension cost 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 2006, the Company expects the amortization of such unrecognized losses to increase by approximately $1.1 million when compared to 2005 (from $2.1 million to $3.2 million); significantly contributing to the $1.7 million expected overall increase in costs related to the U.K. Pension Plan. In accordance with SFAS No. 87, the market-related value of plan assets was derived using a method that adjusts for 20% of the last five years' actual gains and losses.
		(See Note N of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for a description of the U.K. Pension Plan, as well as the Company's other material pension arrangements.)

15

(6)		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 Note O of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)
(7)		Settlement Liabilities—In conjunction with the settlement of certain civil litigation related to the investigation by the Antitrust Division of the U.S. Department of Justice (the “DOJ”), in May 2003 the Company issued to the class of plaintiffs vendor's commission discount certificates (“Discount Certificates”) with a face value of $62.5 million. The Discount Certificates are fully redeemable in connection with any auction conducted by the Company or Christie's in the U.S. or in the U.K. and may be used to satisfy consignment charges involving vendor's commission, risk of loss and/or catalogue illustration. The court determined that the $62.5 million face value of the Discount Certificates had a fair market value of not less than $50 million, which represents the amount recorded by the Company as settlement liabilities in the third quarter of 2000. 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, 2005, the outstanding face value of unused Discount Certificates that the Company could be required to redeem was $50.7 million and the carrying value of such Discount Certificates reflected in the Consolidated Balance Sheets was approximately $47 million. This carrying value represents management's estimate of future Discount Certificate redemptions between December 31, 2005 and May 14, 2008. However, due to the unpredictability of Discount Certificate redemption activity, actual future redemptions could be materially less than management's estimate, which would result in the reversal of any remaining liability upon the expiration of the Discount Certificates on May 14, 2008.
		(See Note Q of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)
(8)		Income Taxes—At December 31, 2005, the Company had net deferred tax assets of $61 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 $24.9 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.”)

16

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 Financial Condition and Results of Operations (“MD&A”) are financial measures presented in accordance with GAAP and also on a non-GAAP basis.

      Specifically, in MD&A, the Company makes reference to Adjusted EBITDA, which is defined as income from continuing operations excluding income tax expense, net interest expense, and depreciation and amortization expense, as well as costs associated with the termination of the GE Capital Credit Agreement in 2005 and one-time license fee revenues and transaction costs in 2004 related to the Company's license agreement with Cendant. Management believes that Adjusted EBITDA provides a useful supplemental performance measure of the Company's operations and financial performance. Management also believes that EBITDA-based measures are used by many investors, equity analysts and rating agencies as a measure of the Company's financial performance. It is important to note that Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies and should not be considered as an alternative to income from continuing operations determined in accordance with GAAP.

      Additionally, 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 from the prior year.

      Management also utilizes these non-GAAP financial measures in analyzing its operating results. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is presented in the “Overview” and “Impact of Foreign Currency Translations” sections below.

17

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

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

Overview

      The Company's results for the year ended December 31, 2005 reflect the continuing strength of the international art market as Net Auction Sales and Private Sales (both defined below) remained strong. In 2005, income from continuing operations increased 1% to $63.2 million even though 2004 results included one-time license fee revenues of $45.6 million earned in conjunction with the consummation of the Cendant License Agreement (see “License Fee Revenues” below). The Company's strong financial performance in 2005 was largely the result of a significant improvement in auction commission margins. Management currently anticipates a continuation of the strong international art market and is encouraged by the Company's sales results to date in the first quarter of 2006. (See statement on Forward Looking Statements.)

      The Company's results from continuing operations for the years ended December 31, 2005 and 2004 are summarized below (in thousands of dollars):

      Legend:

18

      Please see below for a more detailed discussion of the significant factors impacting the Company's results from continuing operations for the year ended December 31, 2005.

      The following is a reconciliation of Adjusted EBITDA (see “Use of Non-GAAP Financial Measures” above) to income from continuing operations for the years ended December 31, 2005 and 2004 (in thousands of dollars):

Impact of Foreign Currency Translations

      For the year ended December 31, 2005, income from continuing operations before taxes decreased $5.7 million, or 6%, to $90.9 million, when compared to the prior year. During 2005, the unfavorable impact of foreign currency translations on income from continuing operations before taxes was approximately $2.4 million. Excluding the unfavorable impact of foreign currency translations, income from continuing operations before taxes decreased $3.3 million, or 3%, to $93.3 million for the year ended December 31, 2005 (see “Use of Non-GAAP Financial Measures” above). In 2005, the unfavorable impact of foreign currency translations on income from continuing operations before taxes consists of the following (in thousands of dollars):

Recapitalization

      On September 7, 2005, the Company entered into a Transaction Agreement (previously defined as the “Agreement”) with various affiliates of A. Alfred Taubman and his family (previously defined as the “Shareholders”). Prior to completion of the transactions contemplated by the Agreement, the Shareholders were the Company's largest shareholders, holding in the aggregate 14,034,158 shares of the Company's Class B Stock, representing approximately 62.4% of the aggregate voting power of the Company's capital stock.

      Pursuant to the Agreement, the Company agreed to exchange all 14,034,158 shares of Class B Stock owned by the Shareholders for $168,409,896 in cash and 7.1 million shares of the Company's Class A Stock, (such exchange, previously defined as the “Transaction”). Completion of the Transaction was not subject to any conditions and it was completed on September 7, 2005. Because the outstanding shares of Class B Stock constituted less than fifty percent of the aggregate voting power of the Company's outstanding common stock following completion of the Transaction, pursuant to the Company's Third Amended and Restated Articles of Incorporation (previously defined as the “Articles”), following completion of the Transaction each remaining outstanding share of Class B Stock held by shareholders not a party to the Transaction was automatically converted into one share of Class A Stock without any action on the part of the holder thereof. Therefore, immediately following completion of the Transaction and such conversion, the Company

19

had approximately 57.3 million shares of Class A Stock outstanding (of which the Shareholders owned 7.1 million, or approximately 12.4%) and no shares of Class B Stock.

      The Company's Board of Directors appointed a Special Committee to carefully examine all details of the Transaction. The Special Committee consisted of four disinterested Directors who, after careful deliberation and negotiation, and based on the advice of independent legal and financial advisors retained by the Special Committee, unanimously recommended that the Company's Board of Directors approve the Transaction.

      As a result of the Transaction, the dual class super-voting share structure that had been in place since the Company's initial public offering in 1988 was eliminated; allowing for a corporate governance structure that is more consistent with the best practices of public companies. Also, the Company believes that the simplified share structure will enhance share liquidity and increase the Company's strategic and financing flexibility. The Company is also planning to present to shareholders for their approval at the 2006 Annual Meeting of Shareholders a proposal to reincorporate in the State of Delaware.

      The Transaction is expected to have a favorable impact on earnings per share in periods subsequent to September 30, 2005. (See statement on Forward Looking Statements.)

      Mechanics of Effecting the Transaction; Funding—Under the terms of the Agreement, the Transaction was effected by means of: (1) the Shareholders voluntarily converting, on a one-for-one basis pursuant to the Articles, 7.1 million shares of Class B Stock into shares of Class A Stock, and (2) the Company acquiring the remaining shares of Class B Stock owned by the Shareholders for aggregate cash consideration of $168,409,896. The Company funded the cash portion of the consideration plus direct transaction and financing costs with then existing cash balances and $100 million in borrowings under a new credit facility (see “Liquidity and Capital Resources” below and Note J of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for information related to the Company's credit arrangements).

      The total cost to acquire the Class B Stock owned by the Shareholders of $177.2 million (including $8.8 million in direct transaction costs) was accounted for as a treasury stock transaction in the third quarter of 2005, with common stock and additional paid-in capital being reduced by $177.1 million. Additionally, the Company ascribed $100,000 of the cost to the Standstill and the Restrictions on Transfer (as described below) based on their fair value as determined by an independent valuation expert. Such amount was expensed as incurred within Other Expense in the period of the Transaction.

      Standstill—In the Agreement, each Shareholder agreed to a customary standstill lasting until the earlier of (1) the fourth anniversary of the Transaction or (2) 30 days after the date on which (a) the Shareholders, together with their affiliates, own, in the aggregate, securities representing less than ten percent of the Company's total outstanding voting power and (b) no affiliate of any Shareholder is a member of the Board of Directors of the Company (however, if such 30th day would otherwise occur on or before the second anniversary of the Transaction, such 30th day would not be deemed to occur until such second anniversary). The terms of the Standstill generally state that, each Shareholder shall not (unless requested by the Company): (1) acquire or propose to acquire ownership of or the ability to vote any securities or other property of the Company or any of its subsidiaries or (2) act to seek to control or influence the management, Board of Directors, shareholders, business, operations or policies of the Company.

      Restrictions on Transfer—In the Agreement, each Shareholder agreed that, prior to the second anniversary of the Transaction, such Shareholder would not transfer any shares of Class A Stock or any economic interest therein, except to an affiliate of such Shareholder in connection with tax or estate-planning transactions, or, to the extent permitted by law, for sales of shares of Class A Stock in any three month period, that when aggregated with sales by all other shareholders in such period, would not exceed the greater of one percent of the outstanding shares of Class A Stock or the average weekly trading volume of the Class A Stock during the four weeks preceding such sale.

20

      Registration Rights—In the Agreement, the Company agreed that, following the second anniversary of the Transaction and on not more than two occasions, the Shareholders would have the right to require the Company to file a registration statement under the federal securities laws registering the sale of all or a portion of the shares of Class A Stock owned by the Shareholders that are not otherwise freely tradable, provided that the market value of the securities proposed to be sold exceeds specified thresholds. The Company has the right to defer the filing of such registration statement under certain circumstances. The Company also agreed to allow the Shareholders to participate in any registration statement proposed to be effected by the Company following the second anniversary of the Transaction, subject to certain restrictions.

      The Company agreed to pay all expenses incurred in connection with such registration, other than any underwriting discounts or commissions, and also agreed to indemnify each Shareholder from losses incurred as a result of material misstatements or omissions in such registration statement (other than those that are the responsibility of the Shareholders, losses incurred by the Company as a result of which would be subject to indemnification from the Shareholders).

Revenues

      For the years ended December 31, 2005 and 2004, revenues from continuing operations consist of the following (in thousands of dollars):

Auction and Related Revenues

      For the year ended December 31, 2005, auction and related revenues increased $58.9 million, or 13%, to $502 million, when compared to the prior year. This improvement is almost entirely due to a $58.2 million, or 15%, increase in auction commission revenues. The significant factors contributing to the improvement in auction commission revenues are explained in more detail below.

      Auction Commission Revenues—The higher level of auction commission revenues during 2005 is principally due to a 14% improvement in auction commission margin (from 16.4% to 18.7%) and, to a much lesser extent, a slight increase in Net Auction Sales. See “Auction Commission Margin” and “Net Auction Sales” below for a detailed discussion of these key performance indicators. The overall increase in auction commission revenues was partially offset by the unfavorable impact of foreign currency translations, which decreased auction commission revenues by approximately $5 million during the year.

21

      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.

      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) 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 of the change. 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.

      As discussed above, for the year ended December 31, 2005, auction commission margin increased 14% (from 16.4% to 18.7%) when compared to the prior year principally due to the following factors:

      Net Auction Sales—For the year ended December 31, 2005, Net Auction Sales increased $26.9 million, or 1%, to $2.4 billion, when compared to the prior year. This increase is attributable to the following factors:

      These increases in Net Auction Sales in 2005 are largely offset as prior year results include the May 2004 sale of property from the Greentree Foundation, which totaled $189.4 million and for which there was no comparable event in the current year. To a lesser extent, the comparison to the prior year is unfavorably influenced by a $46.7 million decrease in various-owner sales of Impressionist art primarily due to several high-value works sold in the November 2004 Impressionist sale in New York for which there were no comparable works sold in the same sale in 2005. Also partially offsetting the overall increase in Net Auction Sales versus the prior year is a $30 million decrease in various-owner American Paintings sales, which, in 2004, included the sale

22

of John Singer Sargent's “Group of Parasols (A Siesta)” for $21 million. There was no comparable picture sold at auction in the current year American Paintings sales.

      Private Sales Commissions—The level of private sales commissions earned by the Company in any period is typically variable. In 2005, private sales commissions remained at a historically high level totaling $21.2 million, representing a slight decrease compared to the prior year even though 2004 results included private sales commissions related to the landmark private sale of the Forbes Collection of Faberge.

      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 success of the Company in selling property acquired in connection with auction guarantees, as well as the supply of quality property available for investment and resale and the demand by buyers for such property. For the year ended December 31, 2005, principal activities increased $0.6 million, or 24%, to $3.2 million, when compared to the prior year primarily due to slightly more favorable auction guarantee experience and a lower level of inventory writedowns.

License Fee Revenues

      For the year ended December 31, 2005, license fee revenues decreased $44.3 million to $1.4 million, when compared to the prior year as 2004 results include $45.6 million in one-time license fee revenues earned in conjunction with the consummation of the Cendant License Agreement (see Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). In 2005, license fee revenues includes $1.3 million in ongoing license fees earned as a result of Cendant's continued use of the Company's licensed trademarks.

Other Revenues

      For the year ended December 31, 2005, other revenues increased $2.2 million, or 28%, to $10.1 million, when compared to the prior year principally due to a $2.4 million, or 41%, improvement in Finance segment revenues resulting from a 24% increase in the average loan portfolio balance (from $82.5 million to $102.6 million). This increase is due in part to the availability of capital to fund new loans and marketing efforts to increase client loan activity. As discussed in more detail below under “Liquidity and Capital Resources,” management expects to continue to look for opportunities to expand the Finance segment's client loan portfolio. (See statement on Forward Looking Statements.) The comparison of 2005 Finance segment revenues to the prior year is unfavorably influenced by $1 million in interest income recognized in the second quarter of 2004 as a result of the collection of a disputed client loan, for which there was no comparable event in the current year.

Expenses

      For the years ended December 31, 2005 and 2004, expenses from continuing operations consist 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

23

period is generally dependent upon the volume and composition of the Company's auction offerings. For example, direct costs attributable to 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, 2005, direct costs of services increased $10.2 million, or 19%, to $65.8 million when compared to the prior year principally due to the higher number and type of single-owner sales during the period. Specifically, in 2005, direct costs include expenses related to significant off-premises single-owner sales for which there were no comparable events in the prior period, including the sale of property from the Royal House of Hanover in Germany ($4.8 million); the sale of cars and memorabilia at Ferrari headquarters in Maranello, Italy ($1.5 million) and the Easton Neston house sale in Northamptonshire, U.K. ($0.8 million). Also contributing to the higher level of direct costs in 2005 are increases of $2 million and $1.9 million related to sales conducted during the period in Asia and the U.K. (excluding the Easton Neston sale discussed above), respectively. These increases are generally consistent with the higher level of Net Auction Sales achieved in those regions. The overall increase in direct costs is partially offset by the favorable impact of foreign currency translations, which decreased direct costs by approximately $0.8 million during the year.

Salaries and Related Costs

      For the years ended December 31, 2005 and 2004, salaries and related costs consist of the following (in thousands of dollars):

      Legend:

       * Represents a change in excess of 100%.

      ** Principally includes the cost of temporary labor and overtime.

      In recent years, the Company's compensation strategy has evolved towards having greater variability in pay, dependent upon the Company's profitability. Also, the Company's equity compensation strategy has evolved towards a preference for restricted stock as opposed to stock options. The $10 million, or 6%, increase in salaries and related costs during 2005 reflects this change in strategy as the significant drivers of this increase are higher levels of incentive bonus costs and restricted stock compensation expense. Also contributing to the increase versus the prior year is a 3% increase in full-time salaries, principally due to limited salary and headcount increases in 2005, and increased employee benefit costs. The overall increase in salaries and related costs for the period is partially offset by lower Option Exchange costs, as well as the favorable impact of foreign currency translations, which decreased salaries and related costs by approximately $1.3 million during the year. See discussion below for a more detailed explanation of certain of these factors.

      Incentive Bonus Costs—For the year ended December 31, 2005, incentive bonus costs increased $4.6 million, or 18%, to $30.5 million, when compared to the prior year. This increase is attributable to the Company's strong financial performance during 2005, even when compared to the prior year's results from continuing operations which included one-time license fee revenues of $45.6 million earned in conjunction with the consummation of the Cendant License Agreement (see “License Fee Revenues” above).

24

      Stock Compensation Expense—For the year ended December 31, 2005, stock compensation expense related to restricted stock shares granted pursuant to the Restricted Stock Plan (excluding shares issued in conjunction with the Exchange Offer discussed below) increased $2.6 million when compared to the prior year. This increase is primarily due to the amortization of stock compensation expense associated with restricted stock shares granted in 2005. Excluding shares issued in conjunction with the Exchange Offer discussed below, stock compensation expense related to the Restricted Stock Plan for the year ended December 31, 2006 is expected to be approximately $5 million. This amount relates to restricted stock shares granted through March 16, 2006. The Company anticipates granting additional shares of restricted stock in 2006, which would result in additional stock compensation expense. (See statement on Forward Looking Statements.)

      (See “Future Impact of Recently Issued Accounting Standards” below for information relating to the Company's adoption of SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006.)

      (See Note M of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for information related to the Restricted Stock Plan.)

      Employee Benefits—For the year ended December 31, 2005, employee benefits increased $1.6 million, or 8%, to $20.9 million, when compared to the prior year. The higher level of employee benefits for the period is primarily due to a $1.7 million, or 61%, increase in costs related to the U.K. Pension Plan (see Note N of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). To a lesser extent, the increase in employee benefits is attributable to incremental profit-sharing costs of $0.8 million related to the Company's U.S. pension plans, reflecting the Company's strong financial performance for 2005 (see “Incentive Bonus Costs” above), as well as increased other benefit costs attributable to limited salary and headcount increases and market inflation for such costs. In the prior year, certain contributions to the Company's U.S. pension plans were determined as a fixed percentage of an employee's eligible compensation rather than via a profit-sharing formula. Also unfavorably impacting the comparison to the prior year is a $0.9 million one-time charge for retirement benefits in Germany. The overall increase in employee benefit costs in 2005 is largely offset by a $2.8 million decrease in severance costs.

      As discussed above under “Critical Accounting Estimates,” during the three-year period from 2000 to 2002, actual asset returns for the U.K. Pension Plan were less than management's assumed rate of return on plan assets, principally contributing to unrecognized net losses of approximately $54 million at December 31, 2005. These unrecognized losses will be systematically recognized as an increase in future net periodic pension cost in accordance with SFAS No. 87, “Employers' Accounting for Pensions.” In 2006, management currently anticipates an increase of approximately $1.7 million in costs related to the U.K Pension Plan principally due to higher amortization of such unrecognized losses. (See statement on Forward Looking Statements.)

      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. In 2005, compensation expense related to the Exchange Offer decreased $3.1 million, or 41%, to $4.6 million, as prior year results include $2.2 million of expense recognized in the first quarter of 2004 representing the one-time cash payment made to employees upon acceptance of the Exchange Offer on March 31, 2004. The comparison to the prior period is also favorably influenced by lower amortization of stock compensation related to the issuance of 1.1 million restricted shares as a result of the Exchange Offer, the expense relating to which is being amortized over a graded four-year vesting period. The amortization of stock compensation expense related to the Exchange Offer is expected to be approximately $2.5 million and $1.2 million for the years ended December 31, 2006 and 2007, respectively. (See statement on Forward Looking Statements.)

25

General and Administrative Expenses

      For the year ended December 31, 2005, general and administrative expenses increased $2.2 million, or 2%, to $114.9 million, when compared to the prior year. This increase is largely attributable to the following factors:

      The overall increase in general and administrative expenses for the year ended December 31, 2005 is partially offset by the following factors:

Depreciation and Amortization Expense

      For the year ended December 31, 2005, depreciation and amortization expense decreased $1.8 million, or 7%, to $22.1 million when compared to the prior year principally due to the timing and rate of capital spending on depreciable assets, as well as $0.3 million in accelerated depreciation expense recognized in the third quarter of 2004 for assets retired as a result of the consolidation

26

of the Company's New York warehouse space into its headquarters building at 1334 York Avenue in New York.

Net Interest Expense

      For the year ended December 31, 2005, net interest expense decreased $2.5 million, or 8%, to $27.7 million, when compared to the prior year. This decrease is largely attributable to a $2.4 million improvement in interest income resulting from higher average balances of cash and short-term investments, as well as higher interest rates due in part to a change in investment composition during the first nine months of the year. To a lesser extent, the decrease in net interest expense versus the prior year is attributable to lower amortization of the discount associated with the DOJ antitrust fine, which was being paid over a five-year period. The final payment of $15 million owed under the fine was paid by the Company on February 6, 2006 and the liability to the DOJ was extinguished (see Note Q of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”). The overall improvement in net interest expense in 2005 is partially offset by an increase of $0.9 million in credit facility borrowing costs primarily as a result of higher average borrowings outstanding during the period largely due to the funding requirements for new client loans, as well as decreased cash balances resulting from the Transaction described under “Recapitalization” above. (See “Liquidity and Capital Resources” below and Note J of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for information on the Company's credit arrangements.)

Termination of GE Capital Credit Agreement

      On September 7, 2005, in connection with the Transaction described above under “Recapitalization,” the Company terminated its senior secured credit agreement with General Electric Capital Corporation (the “GE Capital Credit Agreement”). As a result of the termination of the GE Capital Credit Agreement, the Company incurred a $1 million termination fee and wrote off approximately $2.1 million in related arrangement fees, which were previously being amortized over the term of the agreement. These charges are combined and reflected as a separate caption in the Consolidated Income Statement for the year ended December 31, 2005. (See “Liquidity and Capital Resources” below and Note J of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data,” for information related to the Company's credit arrangements.)

Cumulative Effect of a Change in Accounting Principle

      In March 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within the control of the entity. FIN 47 was effective no later than the end of fiscal years ending after December 15, 2005. The Company adopted FIN 47 effective December 2005 and accordingly recorded an after-tax charge of approximately $1.1 million ($1.6 million, pre-tax), or $0.02 per diluted share, as a cumulative effect of a change in accounting principle in the Consolidated Income Statement for the year ended December 31, 2005. This charge relates primarily to those lease agreements that require the Company to restore the underlying facilities to their original condition at the end of the leases. The Company was uncertain of the timing of payment for these asset retirement obligations; therefore a liability was not previously recognized in the financial statements under GAAP. On a prospective basis, this accounting change requires recognition of these costs ratably over the lease term. The adoption of FIN 47 initially resulted in a non-cash addition to Properties of $1 million with a corresponding increase in long-term liabilities. The assets as of December 31, 2005 were

27

$0.2 million, consisting of gross assets of $1 million less accumulated depreciation of $0.8 million. The asset retirement obligation as of December 31, 2005 was $1.8 million, consisting of a liability of $1 million and accretion expense of $0.8 million. In future periods, when cash is paid upon the settlement of the asset retirement obligation, the payments will be classified as a component of operating cash flow in the Consolidated Statements of Cash Flows.

Provision for Income Taxes

      The effective tax rate related to continuing operations was approximately 31.4% in 2005, compared to approximately 36.2% in 2004. The overall decrease in the effective tax rate in 2005 from 2004 is primarily the result of a $7.1 million benefit arising from the release of valuation allowances in 2005 related to the Company's U.S. Federal and certain foreign tax operating loss carryovers, as well as the tax rate differential between U.S. and foreign jurisdictions as more of the Company's earnings in 2005 arose overseas in jurisdictions with tax rates lower than in the U.S. These items are partially offset by the impact of the Company's repatriation of earnings accumulated outside the U.S. under its domestic reinvestment plan as discussed in more detail below, as well as increased passive income arising overseas.

      In October 2004, the President signed the American Jobs Creation Act of 2004 (the “AJCA”). The AJCA creates a temporary incentive for companies to repatriate earnings accumulated outside the U.S. by allowing them to reduce taxable income by 85% of certain eligible dividends received from non-U.S. subsidiaries by the end of 2005 at an effective tax rate of 5.25%.

      On November 7, 2005, the Company's Chief Executive Officer and Board of Directors approved a domestic reinvestment plan to repatriate up to $72.4 million of foreign earnings under the AJCA during the fourth quarter of 2005. These foreign earnings were previously considered to be indefinitely reinvested outside of the U.S. The Company repatriated approximately $72.4 during the fourth quarter of 2005 and accordingly, the Company recorded income tax expense of $3.8 million. Planned uses of the repatriated funds include domestic expenditures relating to capital asset costs and investments, as well as other permitted activities.

      (See Item 1A, “Risk Factors,” and Note K of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”)

Discontinued Operations

      For information related to Discontinued Operations, see Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”

28

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

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. 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):

      Legend:

      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 Net 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 was 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 Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for information related to the Company's discontinued real estate brokerage business.)

      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.

29

Revenues

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

      Legend:

      * Represents a change in excess of 100%.

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

      Net Auction Sales—For the year ended December 31, 2004, Net Auction Sales increased $879 million, or 60%, to $2,334.9 million, when compared to the same period in the prior year. During 2004, the favorable impact of foreign currency translations on Net Auction Sales was approximately $94.2 million. Excluding the favorable impact of foreign currency translations, Net Auction Sales increased $784.7 million, or 54%, to $2,240.7 million for the year ended December 31, 2004.

      The significant increase in Net Auction Sales during 2004 reflects the continued recovery of the international art market, as well as improved global economic conditions when compared to

30

the prior year. Specifically, the overall increase in Net Auction Sales for the year ended December 31, 2004 was favorably influenced by:

      Auction Commission Margin—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 auction commission sharing arrangements with partners, whereby the Company reduces its financial exposure under the auction guarantee in exchange for sharing in the auction commissions with unaffiliated partners. At certain times, the partners will also assist the Company in valuing and marketing the property to be sold at auction. These factors significantly contributed to a $30.8 million increase in auction commissions owed or paid by the Company to unaffiliated third parties.

      Private Sales Commissions—For the year ended December 31, 2004, private sale commissions increased $16.1 million to $21.5 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 included the landmark private sale of the Forbes Collection of Faberge. Also favorably influencing the comparison of private sale commissions to the prior year were several significant private sales for which there were no comparable events in the prior year.

      Principal Activities—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 was 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.

31

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 Note D of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data” for information related to the license agreement with Cendant and the International Options.)

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 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 the 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 marked the end of a four-year trend in which the Finance segment's average loan portfolio decreased by approximately 56%. The decrease over this period 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.

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

      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.

32

      The increased level of direct costs was 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.

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 in salaries and related costs for 2004 versus the prior year is indicative of the evolution in the Company's compensation philosophy whereby a greater proportion of employee compensation is variable, dependent upon the Company's profitability. 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 was consistent with the Company's substantial improvement in overall 2004 results versus the prior year and also reflected performance-based compensation awarded principally in the first quarter of 2004 in connection with the high level of private sale transactions during the period. The increase in incentive bonus costs for 2004 is indicative of the evolution in the Company's compensation philosophy discussed above whereby a greater proportion of employee compensation is variable, dependent upon the Company's profitability.

      Option Exchange Program—As explained in more detail in the discussion of 2005 results above, 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 (previously defined as the “Exchange Offer”). The Exchange Offer was tendered during the first half of 2004. 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

33

conjunction with the Exchange Offer was approximately $2.2 million and was expensed in full upon acceptance on March 31, 2004.

      Employee Benefits—For the 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 was 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 which took effect throughout 2003.

      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 which took effect throughout 2003.

      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).

General and Administrative Expenses

      For the year ended December 31, 2004, general and administrative expenses increased $15.9 million, or 16%, to $112.7 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 $10.7 million, or 11%, to $107.5 million.

      In 2004, the overall increase in general and administrative expenses was principally due to an $8.4 million increase in professional fees, which was largely attributable to the following factors:

      The overall increase in professional fees for 2004 was partially offset by a $1.2 million decrease in settlement administration costs and legal fees associated with certain civil antitrust litigation (see Notes B and Q of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data”).

34

      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.

      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 was 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.

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 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 million, respectively, related to the 2002 Restructuring Plan.

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 Q of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and

35

Supplementary Data”). These increases were partially offset by a $2 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 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.

Provision for Income Taxes

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

FINANCIAL CONDITION AS OF DECEMBER 31, 2005

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

      For the year ended December 31, 2005, total cash and cash equivalents decreased $22.1 million primarily due to the factors discussed below.

      Cash Provided by Operating Activities—Net cash provided by operating activities of $58.8 million for the year ended December 31, 2005 is principally due to the cash flow generated from the Company's income from continuing operations during the period and, to a much lesser extent, the collection of $12.5 million in cash related to an amount due from the Company's partner in an auction guarantee; partially offset by the following:

      Cash Provided by Investing Activities—Net cash provided by investing activities of $52.9 million for the year ended December 31, 2005 is largely due to $433.2 million in proceeds received from the maturity of short-term investments during the period and, to a lesser extent, the collection of $164.9 million in client loans, a $4 million decrease in restricted cash and $3.7 million in cash distributions received from an equity investee. These investing cash inflows are partially offset by the funding of $323.2 million in short-term investments, the funding of $214.9 million in new client loans and $14.9 million in capital expenditures.

      Cash Used by Financing Activities—Net cash used by financing activities of $133.5 million for the year ended December 31, 2005 is principally due to $177.2 million in cash used to fund the repurchase of common stock in the transaction described under “Recapitalization” above and the

36

repayment of $140 million in credit facility borrowings; partially offset by $174.5 million of credit facility borrowings (of which $100 million was used to fund a portion of the stock purchase described in the previous sentence) and, to a much lesser extent, $9.3 million in proceeds received from the exercise of stock options.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

      The following table summarizes the Company's material contractual obligations and commitments as of December 31, 2005: