Overview

The following discussion should be read in conjunction with "Selected Financial Data" and Wellsford's consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.

Business and Plan of Liquidation

Recent Events

On October 11, 2006, Wellsford announced that it entered into a definitive merger agreement with Reis and Merger Sub and that the merger was approved by the independent members of Wellsford's board of directors. At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. The per share value of Wellsford common stock, for purposes of the merger, has been established at $8.16 per share, resulting in an implied equity value for Reis of approximately $90,000,000, including Wellsford's 23% ownership interest in Reis.

Plan of Liquidation

On May 19, 2005, the Wellsford board of directors approved the Plan and on November 17, 2005, Wellsford's stockholders ratified the Plan. The Plan contemplates the orderly sale of each of Wellsford's remaining assets, which are either owned directly or through Wellsford's joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permitted Wellsford's board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval. The initial liquidating distribution of $14.00 per share was made on December 14, 2005 to stockholders of record on December 2, 2005. If the merger is consummated and the Plan is terminated, it will be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized as a return of capital for Wellsford stockholders at that time to taxable dividend income. Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income.

Wellsford contemplated that approximately 36 months after the approval of the Plan, any remaining assets and liabilities would be transferred into a liquidating trust. The liquidating trust would continue in existence until all liabilities have been settled, all remaining assets have been sold and proceeds distributed and the appropriate statutory periods have lapsed. The creation and operation of a liquidating trust would only occur if the merger does not close and the Plan is not terminated.

For all periods preceding stockholder approval of the Plan on November 17, 2005, Wellsford's financial statements are presented on the going concern basis of accounting. As required by GAAP, Wellsford adopted the liquidation basis of accounting as of the close of business on November 17, 2005. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate.

Wellsford's net assets in liquidation at December 31, 2006 and 2005 were:

                                                              December 31,
                                                          2006             2005

   Net assets in liquidation                          $ 57,596,000     $ 56,569,000
   Per share                                          $       8.67     $       8.74
   Common stock outstanding at each respective date      6,646,738        6,471,179

The reported amounts for net assets in liquidation present development projects at estimated net realizable values at each respective date after giving effect to the present value discounting of estimated net proceeds therefrom. All other assets are presented at estimated net realizable value on an undiscounted basis. The

amount also includes reserves for future estimated general and administrative expenses and other costs and for cash payments on outstanding stock options during the liquidation. There can be no assurance that these estimated values will be realized or that future expenses and other costs will not be greater than recorded estimated amounts. Such amounts should not be taken as an indication of the timing or amount of future distributions to be made by Wellsford if the merger is not consummated and if the Plan were to continue (see the Liquidation Basis of Accounting disclosure below).

If the Plan is not terminated, the timing and amount of interim liquidating distributions (if any) and the final liquidating distribution will depend on the timing and amount of proceeds Wellsford will receive on the sale of the remaining assets and the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that there will be any interim liquidating distributions before a final liquidating distribution if the Plan were not terminated.

The termination of the Plan would result in the retention of Wellsford's cash balances and subsequent cash flow from the sales of residential development assets for working capital and re-investment purposes after the consummation of the merger. Such cash would not be distributed to Wellsford's stockholders in the form of a liquidating distribution as had been contemplated under the Plan.

The following paragraphs summarize certain of the material actions and events which have occurred regarding the Plan and certain decisions of Wellsford's board of directors.

In March 2004, Wellsford reported that its board of directors authorized and retained Lazard, to advise Wellsford on various strategic financial and business alternatives available to it to maximize stockholder value. The alternatives included a recapitalization, acquisitions, disposition of assets, liquidation, the sale or merger of Wellsford and other alternatives that would keep Wellsford independent.

In March 2005, the Wellsford board of directors authorized the marketing of the three residential rental phases of Palomino Park. In the second quarter of 2005, Wellsford engaged a broker to market these phases. In August 2005, Wellsford entered into an agreement to sell these phases for $176,000,000, subject to, among other things, stockholder approval of the Plan. The sale closed on November 22, 2005.

The following transactions, which are consistent with the intent of the Plan, occurred prior to the November 17, 2005 approval of the Plan by the Wellsford stockholders: (1) in September 2005, Wellsford's interest in its Wellsford/Whitehall joint venture was redeemed for approximately $8,300,000;
(2) by May 2005, Wellsford retired $12,680,000 of tax exempt bond financing;
(3) in April 2005, Wellsford redeemed its outstanding $25,775,000 of debentures; and (4) in November 2004, Wellsford received $15,000,000 for its interest in Second Holding.

Selected Significant Accounting Policies

Management has selected the following accounting policies which it believes are significant in understanding Wellsford's activities, financial position and operating results.

Basis of Presentation

Liquidation Basis of Accounting

With the approval of the Plan by the stockholders, Wellsford adopted the liquidation basis of accounting effective as of the close of business on November 17, 2005. The liquidation basis of accounting will continue to be used by Wellsford until such time that the Plan is terminated. If the stockholders of Wellsford approve the issuance of additional shares of Wellsford's common stock and the merger is consummated, then Wellsford would change from the liquidation basis of accounting to the going concern basis of accounting upon the effective termination of the Plan.

Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. The

valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the Plan and dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan are expected to differ from the amounts shown herein because of the inherent uncertainty and will be greater than or less than the amounts recorded. Such differences may be material. In particular, the estimates of Wellsford's costs will vary with the length of time it operates under the Plan. In addition, the estimate of net assets in liquidation per share, which except for projects under development, does not incorporate a present value discount. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the Plan is in effect, and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the accompanying Statements of Net Assets in Liquidation, or the price or prices at which Wellsford's common stock has traded or is expected to trade in the future. If the Plan is terminated, no additional liquidating distributions will be made.

If the merger with Reis is consummated, Wellsford's assets, liabilities and future operations will be presented on a going concern basis of accounting with assets being reported at the lower of historical cost, as adjusted for activity, or market.

Valuation Assumptions

Under the liquidation basis of accounting, the carrying amounts of assets as of the close of business on November 17, 2005, the date of the approval of the Plan by Wellsford's stockholders, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan, were adjusted to estimated settlement amounts. Such value estimates were updated by Wellsford as of December 31, 2006. The following are the significant assumptions utilized by management in assessing the value of assets and the expected settlement amounts of liabilities included in the Statements of Net Assets in Liquidation at December 31, 2006 and 2005.

Net Assets in Liquidation

Real estate assets under development are primarily reflected at net realizable value which is based upon Wellsford's budgets for constructing and selling the respective project in the orderly course of business. Sales prices are based upon contracts signed to date and budgeted sales prices for the unsold units, homes or lots. Sales prices are determined in consultation with the respective third party companies who are the sales agent for the project, where applicable. Costs and expenses are based upon Wellsford's budgets. In certain cases, construction costs are subject to binding contracts. Wellsford has assumed that existing construction financing will remain in place during the respective projects' planned construction and sell out. Anticipated future cost increases for construction are assumed to be funded by the existing construction lenders and Wellsford at the present structured debt to equity capitalization ratios. Wellsford would be required to make additional equity contributions. For two projects, Wellsford has assumed that construction loans will be obtained at currently existing LIBOR spreads and customary industry debt to equity capitalization levels. The expected net sales proceeds are discounted on a quarterly basis at 17.5% to 26% annual rates to determine the estimated net realizable value of Wellsford's equity investment. The effect of changes in values of real estate assets under development was a net decrease of approximately $3,079,000 from December 31, 2005 to December 31, 2006. The net decrease results primarily from the sale of condominium units and homes and changes in the values of real estate under development, partially offset by the shortening of the discount period due to the passage of time.

Wellsford reports operating income on the Consolidated Statements of Changes in Net Assets in Liquidation which is comprised primarily of interest and other income earned on invested cash during the reporting periods.

The estimated net realizable value of Wellsford's interests in Reis is derived from an approximate $90,000,000 equity value of Reis, based upon the merger terms for valuation purposes at December 31, 2006 and offers Reis received from potential purchasers during prior reporting periods.

Assets of Wellsford's deferred compensation plan at December 31, 2005 were included in restricted cash and investments and were primarily stated at their respective market values, which equaled the related deferred compensation liability. The assets and liabilities were transferred as part of the Beekman transaction, as set forth below, in January 2006.

For the period November 18, 2005 to December 31, 2005, the Beekman assets were presented at Wellsford's aggregate cost which equaled its net realizable value. On January 27, 2006, a company which was owned by Jeffrey Lynford, Mr. Lowenthal, the principal of Wellsford's joint venture partner in the East Lyme project, and others acquired the Beekman project for an amount equal to costs and expenses incurred by Wellsford.

Cash, deposits and escrow accounts are presented at face value. Wellsford's remaining assets are stated at estimated net realizable value which is the expected selling price or contractual payment to be received, less applicable direct costs or expenses, if any. The assets that have been valued on this basis include receivables, certain joint venture investments and other investments.

Mortgage notes and construction loans payable, construction payables, accrued expenses and other liabilities and minority interests are stated at settlement amounts.

Reserve for Estimated Costs During the Liquidation Period

Under the liquidation basis of accounting, Wellsford is required to estimate and accrue the costs associated with implementing and completing the Plan. These amounts can vary significantly due to, among other things, the timing and realized proceeds from sales of the projects under development and sale of other assets, the costs of retaining personnel and others to oversee the liquidation, including the cost of insurance, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation of Wellsford's operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, Wellsford has accrued the projected costs, including corporate overhead and specific liquidation costs of severance and retention bonuses, professional fees, and other miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of Wellsford's remaining assets. Also, Wellsford has not recorded any liability for any cash operating shortfall that may result at the projects under development during the anticipated holding period because management currently expects that projected operating shortfalls could be funded from the overall operating profits derived from the sale of homes and condominium units and interest earned on invested cash. These projections could change materially based on the timing of any such anticipated sales, the performance of the underlying assets and changes in the underlying assumptions of the cash flow amounts projected as well as other market factors as discussed in the Risk Factors Section of this annual report on Form 10-K. These accruals will be adjusted from time to time as projections and assumptions change.

The following is a summary of the changes in the Reserve for Estimated Costs During the Liquidation Period:

                                                          For the Year Ended December 31, 2006
                                                 Balance at            Adjustments           Balance at
                                              December 31, 2005       and Payments        December 31, 2006

Payroll, benefits, severance and retention
costs                                        $        11,963,000      $  (2,981,000 )    $         8,982,000
Professional fees                                      4,715,000         (1,155,000 )              3,560,000
Other general and administrative costs                 7,379,000         (1,619,000 )              5,760,000

Total                                        $        24,057,000      $  (5,755,000 )    $        18,302,000

                                                    For the Period November 18, 2005 to December 31, 2005
                                               Balance at               Adjustments                Balance at
                                            November 18, 2005           and Payments           December 31, 2005

Payroll, benefits, severance and
retention costs                            $        12,368,000        $       (405,000 )      $         11,963,000
Professional fees                                    4,837,000                (122,000 )                 4,715,000
Other general and administrative costs               7,562,000                (183,000 )                 7,379,000

Total                                      $        24,767,000        $       (710,000 )      $         24,057,000

If the merger is consummated, a substantial portion of the reserve for Estimated Costs During the Liquidation Period will be reversed upon the reinstatement of the going concern basis of accounting.

Reserve for Option Cancellations

At March 31, 2006, Wellsford accrued a liability for cash payments that could be made to option holders for the amount of the market value of Wellsford's common stock in excess of the adjusted exercise prices of outstanding options as of March 31, 2006. This liability has been adjusted to reflect the net cash payments to option holders made during the period from March 31, 2006 through December 31, 2006, the impact of the exercise of 175,559 options by an officer in November 2006 and the change in the market price of Wellsford's common stock during such period. The remaining reserve for option cancellations is approximately $2,633,000 at December 31, 2006. The estimate for option cancellations could materially change from period to period based upon (1) an option holder either exercising the options in a traditional manner or electing the net cash payment alternative and (2) the changes in the market price of the Company's common stock. At each period end, an increase in the Company's common stock price would result in a decline in net assets in liquidation, whereas a decline in the stock price would increase the Company's net assets in liquidation.

Going Concern Basis of Accounting

For all periods preceding the approval of the Plan on November 17, 2005, Wellsford's financial statements are presented on the going concern basis of accounting. Such financial statements reflect the historical basis of assets and liabilities and the historical results of operations related to Wellsford's assets and liabilities for the period from January 1, 2005 to November 17, 2005 and the year ended December 31, 2004.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Wellsford and its majority-owned and controlled subsidiaries and include the assets and liabilities contributed to and assumed by Wellsford from the Residential Properties Trust, from the time such assets and liabilities were acquired or incurred, respectively, by the Residential Properties Trust. Investments in entities where Wellsford does not have a controlling interest were accounted for under the equity method of accounting. These investments were initially recorded at cost and were subsequently adjusted for Wellsford's proportionate share of the investment's income (loss) and additional contributions or distributions through the date of adoption of the liquidation basis of accounting. Investments in entities where Wellsford does not have the ability to exercise significant influence are accounted for under the cost method. All significant inter-company accounts and transactions among Wellsford and its subsidiaries have been eliminated in consolidation.

Variable Interests

During 2003, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 46R "Consolidation of Variable Interest Entities", or FIN 46R. Wellsford evaluates its investments and subsidiaries to determine if an entity is a voting interest entity or a variable interest entity, or VIE, under the provisions of FIN 46R. An entity is a VIE when (1) the equity investment at risk is not sufficient to permit the entity from financing its activities without additional subordinated financial support from other parties or
(2) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity or investment is deemed to be a VIE, an enterprise that absorbs a majority of the expected losses of the VIE or receives a majority of the residual returns is considered the primary beneficiary and must consolidate the VIE. The following table and footnotes identify Wellsford's VIEs:

                                                     VIE at
                                                  December 31,          Requires
                   Entity(a)                     2006      2005      Consolidation

   Non-qualified deferred compensation trust      N/A       Yes           Yes   (b )
   Reis                                           Yes       Yes            No   (c )
   Wellsford Mantua, LLC                          Yes       Yes           Yes   (d )
   Claverack Housing Ventures, LLC                Yes       Yes           Yes   (e )
   Beekman interests                              N/A       Yes            No   (f )

(a) For additional information regarding these entities, see Footnote 11 of Wellsford's consolidated financial statements.

(b) The non-qualified deferred compensation trust, which we refer to as the Rabbi Trust or Deferred Compensation Plan, was a VIE as it does not have its own equity. Wellsford was the primary beneficiary of the Rabbi Trust as the assets would be subject to attachment in a bankruptcy. Wellsford consolidated the assets and liabilities of the Rabbi Trust at December 31, 2005 and 2004, as well as for periods prior to the issuance of FIN 46R as appropriate under other existing accounting literature. During the first quarter of 2006, the assets and liabilities of the Rabbi Trust were transferred upon the sale of Beekman (see footnote (f) below).

(c) Reis is a VIE because as of the last capital event for that entity in 2002 (the triggering event for VIE evaluation purposes), it was determined that Reis did not have sufficient capital to support its business activities at that time. Consolidation of Reis is not required by Wellsford as it would not be the primary beneficiary.

(d) Wellsford Mantua is a VIE as the venture does not have sufficient equity to support its operations as Wellsford provides 100% of the financing to this entity and the owners have deminimus equity in the entity. Wellsford is the primary beneficiary and consolidates this entity.

(e) Claverack, an entity in which Wellsford owns a 75% interest in equity and profits (except if returns exceed 35% per annum as defined) is considered a VIE, since the original capital is insufficient to support its contemplated activities. Claverack is consolidated, even though the two members share business decisions equally, since Wellsford would be the primary beneficiary of profits or absorber of losses. At December 31, 2006 and 2005, Claverack had $452,000 and $62,000, respectively, of restricted cash and was subject to $449,000 of construction debt at December 31, 2005 which debt was jointly guaranteed by Wellsford and the principal of its joint venture partner.

(f) The Beekman contract deposit interest was determined to be a VIE, however, since Wellsford's investment was a mortgage interest, Wellsford has no GAAP equity in the entity and would not be the primary bearer of losses, consolidation was not appropriate. Wellsford sold Beekman in January 2006.

Real Estate, Other Investments, Depreciation, Amortization and Impairment

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

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

equipment. Depreciation and amortization expense was approximately $3,887,000 and $4,637,000, for the period January 1, 2005 to November 17, 2005 and for the year ended December 31, 2004, respectively, and included approximately $238,000 of amortization for certain costs previously capitalized to Wellsford's investments in joint ventures during the year ended December 31, 2004. No amortization was recorded in 2005 as such capitalized costs related to the investments in joint ventures were fully amortized in 2004.

Wellsford has historically reviewed its real estate assets, investments in joint ventures and other investments for impairment (1) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable for assets held for use and (2) when a determination is made to sell an asset or investment. Under the liquidation basis of accounting, Wellsford will evaluate the fair value of real estate assets owned and under construction and make adjustments to the carrying amounts when appropriate.

Revenue Recognition

Sales of real estate assets, including condominium units and single family homes, and investments are recognized at closing subject to receipt of down payments and other requirements in accordance with applicable accounting . . .